Why Washington is America’s bubble city

Like many national capitals, Washington, D.C., is often accused of being insulated from the economic realities of the rest of the country. In colloquial terms, it is frequently referred to as a bubble city.

If Washington is indeed sheltered from the discipline and competition that pervades the rest of the country, then serious questions need to be asked about its ability to make decisions for the nation and whether the country would be better served with decisions being made more locally.

Examining the economic data for cities like Washington can be challenging because there is such a high rate of people working in the city but who live nearby in other states, such as Maryland and Virginia.

Three indicators overcome this commuting challenge and illustrate how the Washington economy is different: business creation, employment, and jobs available to the unemployed.

Business creation measures the annual net creation of businesses in a state (or district) after accounting for business startups and failures. It mitigates the commuting problem experienced with other data because the business location is independent of where workers and owners reside.

In the decade preceding the recession, Washington ranked 20th among the 50 states and the District in per capita business creation. However, Washington becomes nothing less than an anomaly once the recession takes hold.

In 2008, it ranked first, with 26.4 businesses created (net of failures) on a per capita basis, compared with a national average of -9.1. In 2009, it ranked first again and was one of only three jurisdictions to record a net gain in business creation. Washington recorded a gain in businesses of 11.7 per capita, compared with a national average of -42.6.

Washington is also unique with respect to employment, which again is independent from where workers live. From 2000 to 2006, Washington ranked 14th in employment gains.

Between 2007 and 2010, however, Washington jumped to second place, increasing total employment by 2.4 percent, while the nation’s overall employment dropped by 4.8 percent. Washington was able to add jobs while most of the country was shedding them.

The last measure illustrating the unique nature of Washington’s economy is the comparison of unemployed workers to available jobs. Since 2008, Washington has ranked first out of all the major U.S. metropolitan areas, with about one unemployed worker per available job. Nationwide the ratio of unemployed workers to jobs available was 4.3 in 2009.

These three indicators show how Washington’s economy behaves differently than the rest of the country’s. Put simply, Washington is insulated from many of the economic disciplines and constraints that affect the rest of the country, and particularly during times of recession.

What drives the Washington economy is different than what fuels the rest of the country’s economy. Washington’s economy is generally linked to the public sector or government.

Even the private-sector jobs in Washington are directly or indirectly dependent on government. Thus, when government expands, Washington prospers.

Indeed, an interesting statistic that highlights this effect is how employment in Washington responds to unified government, which has historically been linked to expansionary government.

Ninety-five percent of employment growth in Washington since 1939 has occurred during periods of one-party rule of the Congress (both Houses) and the White House.

This insulation from economic reality means that those making and enforcing the laws are not subject to the costs and effects of their tax and regulatory decisions. It seems both reasonable and logical to demand that only a limited set of decisions be made by those in such an insular environment. In many ways this is exactly what the Constitution demands.

History and experience instruct us that the best decisions are made closest to those affected; individuals, families, and businesses make the best decisions for themselves.

When collective action through government is required, it is best done at the local or county level. If laws are needed at a higher level, the country is best served by relying on the states, which act as laboratories and centers of experimentation.

The last resort should be national policies from Washington that necessitate a one-size-fits-all approach for the country and are clearly made within an insulated environment.

Michael Noffsinger is a research intern at the Pacific Research Institute (www.pacificresearch.org) in San Francisco.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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