Is the government making Washington rich? (In charts, of course)

September 25, 2012

Of the 10 richest counties in America, seven are in the D.C. area. To some pundits, that looks like strong evidence of crony capitalism. "Whence comes this wealth? Mostly from Washington’s one major industry: the federal government," Ross Douthat writes in the New York Times. "Not from direct federal employment…but from the growing armies of lobbyists and lawyers, contractors and consultants, who make their living advising and influencing and facilitating the public sector’s work."

It's a good theory. But only part of it holds up.

First thing's first — is Washington actually doing well relative to the rest of the country? Yes, and it's doing better and better. The average wage in the D.C. metro region has skyrocketed relative to the average of metro regions:

 In 1969, the first year for which the Bureau of Economic Analysis has figures, wages in the D.C. area were 12 percent higher than the national average. In 2010, they were 36.1 percent higher.

But most of the usual suspects that could explain this phenomenon don't check out. For example, the District's growth doesn't seem to have resulted from businesses flocking to lobby for favorable regulations. If that were the case, you'd expect Washington's wage increase to occur in tandem with an increase with regulation. But regulation has not, to the best of our estimates, increased much in recent decades.

Measuring the size of the federal regulatory burden is tricky, but Michael Mandel at the Progressive Policy Institute has an interesting approach. He uses estimates of people employed as regulators, as counted by George Washington University's Susan Dudley and and Washington University's Melinda Warren, and measures that number as a share of total private sector employment. The idea is to get a sense of how many regulators we have relative to the number of people they're regulating.

Sure enough, regulation, measured this way, has gone way up in recent decades. But this is largely because of a huge increase in the number of homeland security regulators, a category that is dominated by TSA personnel at airports, customs personnel at airports and ports, and so forth. The term "regulator" seems like a stretch for those positions. If you factor those jobs out, regulation actually hasn't increased much at all*:


The number of non-homeland security regulators, as a share of total private employment, went up only 8 percent between 1970 and 2010, and actually fell between 1980 and 2010.  Regulation, then, seems unlikely to attract the kind of private interest that would account for the District's economic luck.

So regulation isn't causing Washington's rise. Is government spending? Not per se; the size of the government has stayed roughly constant, as a percent of GDP, since 1969. The D.C. wage premium, by contrast, has tripled. You'd expect private industry to flock to the District when there's a bigger federal budget pie to be divvied up. But the pie isn't growing:

Perhaps that pie is being divvied up in a different way -- say, with more of it going to contractors and less of it going to federal employees. But that doesn't check out either. The share of spending going to contractors has fallen from nearly 5 percent of GDP in 1982 to 3.32 percent in 2007**:

So it doesn't look like anything has changed in the behavior of the government that would spur additional Washington-centered growth. Have the kind of people working in the District changed? There's no doubt that Washington is more educated, on average, than a typical city:

 

But that hasn't really changed much. Between 2005 and 2011, Washington's wage premium grew 18 percent. If education were driving the wage premium, you'd expect the District to be getting more educated as the wage premium grows. But its level of education, relative to the rest of the county, hasn't budged:

What has changed, though, is the amount businesses spend trying to influence that government. The growth in inflation-adjusted lobbying spending, as measured by OpenSecrets, tracks the D.C. wage premium's rise since the 1990s quite well***.

Each million dollars spent on lobbying is associated with a $3.70 increase in the D.C. wage premium. Correlation isn't causation, obviously, but it seems improbable that the $1.7 billion increase in lobbying between 1998 and 2010 wouldn't increase wages in the D.C. area. And though lobbying alone is not a huge industry, its growth most likely grew in concert with other influence-peddling activities. The rise of influence-peddling more broadly, more than just lobbying, is likely what's driving this correlation.

But why would businesses spend more on lobbying when there are fewer contracting dollars to go around, and no increase in the amount of regulation they want to fight? Because they're in an arms race. That was the conclusion of University of North Carolina political scientist Frank Baumgartner and his coauthors in Lobbying and Policy Change: Who Wins, Who Loses, and Why. The book, the most expansive study of lobbying in the U.S. ever conducted, found that most of the time, nothing changes due to lobbying, not because it doesn't matter but because effective lobbies on each side of a given issue fight each other to a draw.

You saw this a few years ago when the credit card and retail companies went to the mattresses over a new rule meant to reduce fees on retailers that accept debit cards. The banks hired 118 former government officials to lobby for them, the retailers countered with 124 of their own, and at the end of the day the rule was left unchanged. The system worked as Baumgartner found it does: everyone works tirelessly for months and spends millions if not billions of dollars, and then nothing happens.

It's all very nice if you live in Washington. That $1.7 billion in new lobbying money can pay a lot of salaries for restaurant workers, gardeners, and other service workers in the area. But it does suggest that Washington's economic gain may be coming at the rest of the country's expense.

Further reading:

Frank Baumgarter et al. Lobbying and Policy Change: Who Wins, Who Loses, and Why.

Zack Carter and Ryan Grim of Huffington Post on the debit card battle.

Ross Douthat on DC's income stats.

Michael Mandel on measuring regulation.

Will Wilkinson on "makers and takers" in Washington.

Matt Yglesias on how the price of influence has gone up.

* Many thanks to Susan Dudley for providing me with year-by-year employment data for homeland security personnel.

** Procurement cost numbers are from the Federal Procurement Data System's archived procurement reports, which to the best of my knowledge does not include data past 2007. This is the worst government data Web site I've even encountered, and that is saying something. Proceed with caution.

*** R-squared is 0.926 and the correlation is statistically significant at a 99.9 percent confidence level.`

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Brad Plumer | September 25, 2012