Wednesday, November 28, 2012

How legit is the DC area boom?

Scott Sumner and Josh Wojnilower link to a Glenn Reynolds post on how federal power props up the DC area economy (that's tricky to nail down in and of itself, which is important to realize - to a large extent this means most people south of Baltimore, north of Richmond, west of Annapolis, and east of West Virginia - that whole area is on the same growth trajectory).

To a certain extent this is clearly true. But I'd push back a little on this. Certainly the federal government got the ball rolling on growth in the area (it was a swamp before they came in, after all), but the bigger point is that the federal government makes the region more stable/less cyclical. That is obviously really nice. But take it from someone who pays a mortgage with a federal salary: the federal government is not a growth industry right now. I haven't talked about it on here because I've never been in the mood to read comments about how it would be better if a bunch of federal employees were shown the door, but we have real concerns about whether Kate's employing agency will even exist if sequestration goes through (to say nothing about the pay freeze that's been in place for a couple years now). The graph below (indexed to the peak of the cycle - spike is obviously Census) illustrates the point. The federal government is stable to be sure, but not some kind of robust contributor to the region right now except insofar as we're talking about its acyclicality.

FRED Graph

The article mentions Tysons, which is a mess to drive through right now from construction.

That is not the result of the federal government's power.

So what is it?

Self-sustaining growth to a large extent. There's a lot of tech firms and medical research in this region, and it's also just an up and coming population hub that's nice to live in. Why is that the case? Certainly the feds had a role. Tech firms got into this position of self-sustaining growth because defense contractors moved in over the last fifty years. The health sector got into this position of self-sustaining growth because NIH was here. That's all true - I'm not trying to deny the role of the federal government. I'm just pointing out that although it's due to a federal spark, the growth in this region is self-sustaining. Could it survive if the federal government vanished tomorrow? Of course not. New York City would be in trouble if Wall Street vanished tomorrow too, though. It's part of the ecosystem - just tearing it out would be a big problem. But there's clearly more to New York City's economic vibrancy than Wall Street.

One other point: in a balance-sheet recession where one of the most important items on the balance sheets in question are homes, a little acyclicality in the housing market can go a long way toward paving the way towards steady recovery. In other words, it may not be so much that federal power is propping us up as it is that the federal government's presence prevented the sort of balance sheet problems for Washington area households that could have kept us mired in continuously depressed labor markets. It's not the federal power is growing - it's that it did not shrink at a very critical time for area households.


  1. Nice follow up on the story, especially regarding acyclicality. Thinking about the balance sheet idea, another aspect to consider is the significantly above average salaries in the region. A quick glance at Wikipedia's List of highest-income counties in the United States shows dominance of the top 10 and 20 by DC suburbs. While one could argue the federal pay scale is not excessive, the government's presence likely plays a role. Given median incomes that are well above-average, DC area residents likely have less debt and pay lower rates, which makes helps the housing market.

    1. It also crosses my mind that public schools in the Maryland and Virginia suburbs rank in the upper echelon of the country, which encourages more families to stay or move this direction.


All anonymous comments will be deleted. Consistent pseudonyms are fine.