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The District’s economy contracted by 0.5%, or approximately $500 million, in each of the last two years. While sequestration and a generally tight federal budgetary environment have reduced the contribution the federal government normally makes to the District’s economy, our research indicates that the primary cause of the decline in economic growth has been a general lack of confidence on the part of the people who make hiring and investment decisions in the District.

Business Confidence Graphic

Economic Growth DC will be unveiling a mechanism for measuring business confidence in the District in the first half of 2015 called the DC Business Confidence Index (DCBCI). It will be a composite of multiple economic indicators such as retail sales, housing starts, business licenses issued, bankruptcies, venture capital invested, unemployment and a number of other monthly indicators. The Index will be scored on a scale of 1 to 100 with 50.1 and above indicating expectations of economic expansion. It will be published quarterly starting in the third quarter of 2015.

Our research further indicates that the lack of confidence is primarily the result of the perception on the part of business owners and managers of a difficult business climate. We hear this repeatedly in our discussions with people who own, manage, and conduct business in the District.

The business climate, also expressed as the cost and the ease of doing business in a particular jurisdiction, are primarily products of the regulatory system. The District, while not alone in having a difficult regulatory environment (see this article for an overview of the U.S. regulatory climate: Download PDF — Daily Beast-Philip K. Howard on the Need for Radical Regulatory Reform), has had years of hyper-regulation that have made the costs of compliance, in terms of both time and money expended, very difficult for all but the largest of businesses. This time and expense spent on compliance is time and money not spent building a business and hiring new employees.

There are tremendous growth opportunities available to the District in terms of making the city a better, easier and less expensive place to do business. The benefits of these changes will flow through the economy to every DC resident in the form of better services and lower prices, but they can only be realized if the new administration is willing to commit to reforming the District government itself in almost every respect.

One of the best ways to begin the process of reforming the regulatory system is to have a detailed understanding of how much your existing and proposed regulations cost the broader economy in terms of lost economic activity and job creation. These are factors that can be measured and Economic Growth DC has proposed a bill, called the Regulatory Review and Amendment Act of 2015 that will help District policymakers understand the economic costs that an individual regulation will or has imposed on District residents and businesses.

See a draft of the proposed legislation here: DC Regulatory Review Act Draft 1.

Changed Priorities Ahead

The level of reform that’s required to push the District’s economy closer to realizing its potential for growth is enormous. It will be a time and manpower intensive effort that will stretch for years, but it is undoubtedly the best opportunity the District has for achieving the robust economic growth that the District’s most vulnerable residents need to achieve a modicum of economic security.

Growth doesn’t solve every problem, but without it we solve none of them.

 

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At Economic Growth DC, we believe vigorous regulatory reform is the key to reigniting the growth of the District’s economy. Making the District a better, easier, and less expensive place to do business is the single best mechanism for building the confidence of the people who make hiring and investment decisions in the District. It’s also the height of good government. In this seminal article in the Daily Beast, Philip K. Howard lays out beautifully the consequences of what good intentioned hyper-regulation has wrought at all levels of government.

Please note, we are not advocating for massive, across-the-board deregulation, but there is an urgent need to reform the way we regulate almost everything. Anyone who’s interested in good government should read this closely. Let’s start where almost everyone agrees there is a driving need — reform of the criminal justice system.

Download PDF — Daily Beast-Philip K. Howard on the Need for Radical Regulatory Reform

Link to Daily Beast-Philip K. Howard on the Need for Radical Regulatory Reform

 

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“The basic premise of our organization is the District’s economy needs to grow significantly faster in order to create the number and kinds of jobs we’ll need over the next generation. Faster growth is required to increase the incomes of District residents, and we need it to produce the amount of tax revenue we’ll need to do the things the District says it wants to do in areas like affordable housing, homelessness and Medicaid. The research, programs, and initiatives we undertake are short, medium, and long term efforts to facilitate faster economic growth and the job creation that comes with it.” — Dave Oberting, Executive Director

agenda

Our current priorities are:

Economic Growth DC

  1. Regulatory Reform – Reducing the cost and increasing the ease of doing business in the District of Columbia are two of Economic Growth DC’s primary goals. Both the cost and the ease of doing business are products primarily of the regulatory process. Reducing the complexity of our regulatory system and reducing the cost of compliance would provide an immediate boost to economic growth. We will take advantage of every opportunity to move towards a simpler, smarter regulatory architecture.
  2. Regulatory Review Act – Having a better understanding of what individual regulations cost the economy in terms of lost economic activity and slower job growth is the foundation of a smarter regulatory system. The Regulatory Review Act would require the Chief Financial Officer to conduct an economic analysis on any proposed regulation over a certain value that would calculate the cost that particular regulation would impose on the private economy. It would also allow for a retrospective review and amendment process for older regulations. We would like to get this legislation introduced early in 2015.
  3. Tax Reform — A Tax Revision Commission organized by Mayor Vincent Gray and led by former Mayor Anthony Williams conducted a comprehensive review of the District’s tax framework over the past 18 months. They recommended a number of changes to the tax code that were subsequently adopted into legislation championed by Council Chairman Phil Mendelson. The most important of these changes lowered income tax rates on moderate to middle income DC residents. We believe this should be the beginning of the tax revision process, not the end. Our basic tax philosophy is we should incentivize work by lowering the tax on it. We will advocate in the coming year for more progress on our tax code.
  4. District of Columbia National Disaster Insurance Protection Act – If passed, this federal legislation would empower the District to compete with off-shore jurisdictions to keep insurance company catastrophe reserves in the U.S. by providing tax incentives for such funds to be maintained in the District of Columbia. This legislation would open the door to the creation of thousands of high-paying jobs in the region and billions of dollars in new economic activity.
  5. Labor Law Changes — The District’s labor laws contain perverse incentives that encourage District businesses to relocate to the suburbs upon reaching a certain size and a certain number of employees. We’d like to work with the Council to reform our labor law system to make it more competitive with Virginia and other parts of the country. These reforms will be especially important as the technology start-ups the District has invested so much in begin to mature and start hiring serious numbers of people. These changes can be made at very little cost to the District and without sacrificing important employee protections.
  6. Improving Access to Super Fast Internet – Google has said it will provide fiber optic speed internet access to any jurisdiction that deregulates access to fiber. Making the appropriate changes is likely to jumpstart the installation and adoption of fiber optic speed internet access. Higher speed internet access increases employee productivity. Increased productivity is a prerequisite for faster growth.
  7. Fostering Micro-Manufacturing — The District has historically been locked out of the manufacturing industry due to high real estate costs and lack of space. There is a new industry taking shape that would allow the District to become a specialty manufacturing center in its own right. Micro-manufacturing, using 3D printers, is the fastest growing form of manufacturing in the country. They are largely small businesses who’ve used this amazing technology to make a wide variety of products. We’d like to propose legislation that would clear out some of the regulatory and zoning barriers that would enable this industry to take root and prosper in the District. 3D printer technicians do not need a college degree and the jobs generally pay $15-20 per hour. We should be moving quickly to establish a legal and a streamlined regulatory framework for fostering the growth of this industry.
  8. Science and Engineering Campus – The District intends to become the premier technology center on the east coast. If you look at the other tech hotbeds around the country — Silicon Valley, Boston, and Austin — the one thing they all have in common is a massive research institution like Stanford, MIT, and the University of Texas.  These institutions produce not just the technology graduates that start companies, but the technology itself that can be commercialized.  The City of New York and Cornell University have partnered to build a massive technology campus on Roosevelt Island in NYC. Mayor Michael Bloomberg called it easily the best tool NY will have for accelerating future economic growth. A smaller version of idea has been proposed for St. Elizabeth’s, but the District should think bigger. It should involve a name-brand research partner like Stanford, Carnegie-Mellon or Georgia Tech.
  9. Crowdfunding — This technology provides important access to capital for District start-ups and small businesses. The District has proposed rules to govern crowdsourcing transactions. We’ll work to see these rules implemented as quickly as possible.
  10. Attract Venture Capital Firms — Increasing the amount of venture capital funding that flows into the District is key to our long-term growth. The District is actively fostering early stage technology firms with investments in things like 1776. Our startup community is moving towards a critical mass of invest-able companies, but we won’t attract significantly more venture funding if the people who make those investments are not physically in the District. We’ll be proposing an incentive package to entice the largest venture firms like Kleiner Perkins, Andresssen Horiwitz, Sequoia and Graylock to set up shop in the District proper.
  11. Anacostia River — We support the efforts of the United for a Healthy Anacostia River Coalition — Lack of development on the banks of the Anacostia is the most visible effect of the deadly chemicals that have been poured into the Anacostia for decades. We consider the cleanup of the Anacostia to be an important economic initiative. We will help the Coalition wherever we can.
  12. Small Business Survey – We are in the process of constructing a survey that we plan to ask small business owners to complete to highlight current economic conditions in the District for small businesses and the  public policy challenges they face. We have begun the process of identifying the small business owners we’d like to target and we’ve begun formulating the questionnaire. We would like to have this survey in the field by the middle of 2015.
  13. Advisory Board — We made provisions in our bylaws for an Advisory Board in addition to our board of directors. We have begun the process of recruiting candidates from various facets of DC political and economic life.
  14. Fundraising — Ongoing.

Economic Growth DC Foundation

  1. Code4Life — Is an after-school program created in partnership with technology giant Accenture that teaches DCPS  and charter school middle-school students basic computer programming. The program is designed to put District students on a pathway to a high-wage occupation that does not necessarily require a college degree. The program launched successfully at KIPP NE Academy this fall. We are currently planning our expansion to three additional schools in February.
  2. Re-entry Job Placement Program — The Foundation is working on the development and implementation of an ex-offender job placement program similar to one that was originally developed in Newark, NJ through a partnership between Mayor Corey Boooker and the Manhattan Institute. The Newark program has experienced real success with its rapid attachment to work job placement model designed to get returning citizens into the workforce quickly. They have experienced a much higher employment and retention rate than typical ex-offender efforts, as well as lower rates of recidivism. At his point, it looks like the program will require substantial private funding.
  3. Decriminalization – The District decriminalized marijuana in 2014. That action should be the beginning of a sustained campaign to reduce the over-criminalization of DC’s civil society. We will advocate for the formation of a commission which will be responsible for making recommendations for the reduction of certain felonies to misdemeanors, and misdemeanors to civil infractions. Over-criminalization is not unique to the District. At the federal level, there are over 3,000 criminal offenses, and over 300,000 regulations that carry criminal penalties. This is a phenomenon at both the local and national levels that should be rolled back.   
  4. Modern Entrepreneurship Program – This program is essentially a venture capital fund for minority micro-entrepreneurs. The twist is experienced business professionals associated with two U.S. AID contractors with considerable development experience overseas will embed with these entrepreneurs for up to a year. The intensive management assistance is designed to lower the risk profile of these investments. This program also requires private funding.
  5. Leadership Development Training Class — In partnership with the DC Leadership Development Council, the Foundation seeks to launch a high-school level leadership development training class for high-potential students at DCPS high schools. This class is scheduled to begin in the fall of 2014. The Foundation will administer and underwrite the program. The DC Leadership Devel0pment Council will assemble the curriculum and and provide the instructors.
  6. Job Placement Coordinator Training – The District provides the bulk of its job training and youth development programs through non-profit social service providers. Each of those providers has at least one person that is responsible for placing their program’s graduates into jobs upon completion of that training. The Foundation uses its private sector job placement expertise to offer free instruction to any of these placement coordinators interested in professional development. This training helps placement coordinators become more effective at what they do, thereby increasing the number of people who are placed into jobs at the conclusion of their training.
  7. Research – We are currently seeking a Director of Education Policy. This individual will be responsible for organizing and analyzing education policy research that is of interest to EGDCF, as well as conducting original research focused on blended learning and improving educational outcomes. If you would be interested in being considered, please forward your resume to resumes@egdcfoundation.org.
  8. Apprenticeships – The Foundation is working with several partners, including organized labor, to implement a much broader use of apprenticeships. Germany is an excellent example of how to use apprenticeships aggressively to provide higher levels of skill. Apprenticeships are not just for the construction trades. There are dozens of professions ripe for the use of apprenticeships.
  9. Office of Military Preparedness — The military is an excellent career opportunity for District youth. We will be encouraging DCPS to open an Office of Military Preparedness to coordinate the efforts of the various junior ROTC programs, as well as with the various military recruiting commands. The military should be given greater access to students and guidance counselors.
  10. DCPS Debate Tournament — In partnership with the DC Urban Debate League, the Foundation will organize underwrite a formal a debate tournament for DCPS and charter school students in September of 2014. We feel that organized debate teaches several skills critical to career success including critical thinking, problem solving, effective communications, and collaboration as part of a team.
  11. Workforce Development Repository – This is a research project the foundation is interested in. The idea is to catalog all of the job training programs that are in operation around the country and rank them in terms of the success they have placing graduates into high value added jobs.
  12. Industry Focus Groups – Job training is not nearly as employer driven as it should be in the District. Industry focus groups would provide a framework for employers in similar industries to come together and be more pro-active about the design and execution of job training programs. The Foundation is interested in coordinating several focus groups to facilitate the design and delivery of better training.
  13. Fundraising — All of these efforts require financial support from interested individuals and institutions. EGDCF is a 501(c)(3) charitable foundation. All contributions are fully tax-deductible as charitable gift. If you’d like to support the foundation or any specific program, CLICK HERE.

For more information on the Foundation’s activities, visit its website at http://egdcfoundation.org.

 

 

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A Tax Revision Commission, created by Mayor Vincent Gray and under the direction of former Mayor Anthony Williams, recently undertook a comprehensive analysis of the District’s tax system. The Commission made dozens of recommendations for changes to that system. Many of these changes were adopted into law under the leadership of Council Chairman Phil Mendelson. In our mind, the most important of these changes was a reduction in the individual income tax rates for moderate to middle income DC residents.

Along with regulatory policy, tax policy is the most effective tool at the DC government’s disposal for making the District’s economy more competitive, for advancing the District’s economic interests, and for promoting prosperity for its residents. We believe the Commission’s work should be the beginning of our tax reform efforts, not the end. With that in mind, here are our principles of sound tax policy:

 

1. Simplicity — The tax code should be easy for the average DC resident to understand, and it should minimize the costs of compliance. Tax complexity adds costs to the taxpayer, but does not increase tax receipts. For the DC government, the tax system should be easy to administer, and should help foster efficient, low-cost administration.

 

2. Transparency — The DC tax system should be accountable to residents. Taxes and tax policy should be visible and not hidden from taxpayers. Changes in tax policy should be highly publicized and open to public debate. The Tax Revision Commission did an excellent job on transparency and the District should maintain this trend as it moves toward further improvements to the system.

 

3.  Economic Neutrality – The purpose of the tax system is to raise needed revenue for core functions of government, not to control the lives of DC residents or micromanage the economy. The tax system should exert minimal impact on the spending and decision making of individuals and businesses. The system should be broad-based, utilize a low overall tax rate with few, if any, loopholes and avoid multiple layers of taxation through tax pyramiding.

 

4. Equity & Fairness – While a tax system should be progressive, a system designed to “soak the rich,” is ultimately self-defeating. One need only look next door to the state of Maryland to see the effects of a tax system that becomes overly dependent on high income earners. The tax system should not be used to bestow special favors on any particular group of taxpayers.

 

5. Reliability – A high-quality tax system should be stable, providing certainty in taxation, revenue flows, and financial planning for individuals and businesses.

 

6. Pro-Growth – A comparatively lower tax burden can be a tool for a state’s private sector economic development by retaining and attracting productive economic activity. Effective competitiveness in a tax system is best achieved through economically neutral policies.

 

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Council Chairman Phil Mendelson recently took an important step towards greater transparency and accountability for the District government when he mandated that an economic impact analysis be performed on proposed legislation in the new Council period.

Measuring the impact your policy prescriptions will have on the District’s economy, and understanding the effects your legislation will have on job creation are critical components of good government. This analysis will lead to better decision making.

Now the question is what should an economic impact analysis analyze? Here are some guidelines:

An economic impact analysis typically measures or estimates the change in economic activity between two scenarios: one assuming an economic event, such as a change in public policy, happens, and one assuming it does not.

Economic impact analyses generally study macroeconomic effects. These are the big variables that affect the entirety of the economy. The classic example is tax rates. Tax rates affect the behavior of every business and every resident in the city.

It’s critical that an economic impact analysis be limited to measuring the effects the various legislative provisions of a bill will have on the private economy as a whole.

Another important factor is simplicity. Economic analysis can get sideways in a hurry the more variables you add. The likely methodology for these analyses will be economic simulation modeling. These models can vary widely in complexity. It’s important that these models be kept as simple as possible.

The economist who is assigned to conduct the economic impact analysis by the District government should be given only two missions:

  1. Analyze the value-added impact of the major provisions of the assigned bill. Value-added impact calculates the expected increase (or decrease) in state domestic product (SDP) that a change from current law will have on the District’s economy. SDP is the terminology used by the Bureau of Economic Analysis to represent the sum total of goods and services produced by a state in a given time period. DC is a state for the purposes of measuring SDP. In short, tell us what this law will do to economic activity. Will it induce more or less of it? Will it add to SDP or subtract from it?
  2. And tell us what the provisions of this law mean in terms of job creation. Will this law induce changes in behavior that would cause business owners and managers to increase or decrease the number of people they employ?

Mechanisms for maintaining the independence, impartiality and credibility of the analysis will be crucial to maintaining the integrity of the work. They will have to be built into the function. The question of who employs these analysts will be critical to the perception of the independence of the work.

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In his reporter’s notebook several months ago, NBC4 reporter and dean of the local press corps, Tom Sherwood, wrote that the District’s economy is “firing on all cylinders.” Unfortunately, that statement is somewhat unsupported by the facts and the reality is somewhat more complicated.

All the shiny new restaurants and the plethora of construction cranes have distracted us from what are some fundamental problems with the DC economy.

One serious impediment to taking action is that the economic forces at work in the District have created the illusion of broad-based prosperity, which has bred a fair amount of complacency. The sad truth is thousands and thousands of District residents have not benefited at all from the economic boom of the last 15 years. This reality is reflected in, among other things, a 39% poverty rate for African-Americans living in the District.

Here’s a snapshot of some of the economic and demographic factors driving the District’s economy:

  1. Population — The District’s’ population has grown from 601,767 in 2010 to 646,449 in 2013, which represents an increase of almost 15,000 new residents per year.  There is no doubt that is good news, but according to the Office of the Chief Financial Officer, the boom is expected to decrease markedly from 13,400 new residents annually to 5,400 by 2017. Why is this the case? The CFO points to a slowdown in the construction of new housing units and a slowdown in job growth. The spiraling cost of housing, driven by the lack of supply, is another deterrent to moving to the District that grows every day.
  2. Population by Age — With a median age of 33.7 years, the District is younger than many other states, but the fastest growing segment of its population is residents over 60. As this group continues to age, they’ll put a strain on the healthcare system. Spending more money on health and less on things like innovation will be a drag on growth.
  3. Economic Growth –After growing at a rate of about 2.2% annually for a decade, the growth of the District’s economy slowed to the point that it tipped into what is technically a recession in 2013. The economy declined from $105.99 to $105.47 billion. The rate of growth of the District’s economy needs to accelerate significantly to give us a chance to resolve the broader issues affecting our economy.
  4. Wages – Wage growth in the District has been flat to negative in real terms in recent years for anyone lacking a college degree. Only an economy that grows considerably faster will create the number and kinds of jobs that are necessary to take the slack out of the labor market and put upward pressure on wages.
  5. Diversification – The District derives almost 35% of its economy from federal and local government spending. The national average for the 50 states is 11.5%. Reorienting our economy away from government spending — through the growth of new technologies like additive manufacturing — is a strategic imperative. The federal budget will be under pressure for at least the next generation. The District cannot expect the federal government to continue to carrry us through difficult times.
  6. Unemployment – The headline unemployment rate has decreased slowly but steadily since 2010, when it reached 11.5%. It currently sits at 7.4%, but that number is not representative of the true unemployment picture in the District. The U6 unemployment rate (a broader measure of unemployment that includes people working part-time involuntarily and those who’ve given up looking for a job altogether) is 13.9%. That’s 82% higher that the headline unemployment rate.  When you extrapolate that figure by wards, you arrive at a true unemployment  picture east of the Anacostia river, in the 30% range. The only real chance the District has to push the U6 rate down to a more reasonable number is through faster growth and a vastly improved job training system. If you’re interested in learning more about the true unemployment picture in the District, see this post.
  7. Commercial Real Estate – The District raises the largest percentage of its local tax revenue from commercial real estate. That market is slowing as described in this report from the Downtown Business Improvement District 2013 State of Downtown – All Sections. Among other things, it projects the District will need 7 million less square feet of office space than it has today. This will have wide ranging implications if we are not able to successfully convert commercial space into residential.
  8. Education – Decades of poor educational outcomes and the slow pace of reform also act as a drag on economic growth. When DC residents are ready to enter the workforce, but don’t have the basic skills required to perform their duties, it slows hiring by reducing the pool of available workers. Poor education also lowers productivity gains and productivity is highly correlated with economic growth.
  9. Housing Affordability – Housing in the District has become increasingly less affordable. Businesses that might want to move here sometimes don’t because they want their employees to be close by and if most of their employees can’t afford District housing, they less likely to be based here. Only a significant increase in the supply of housing will fix this issue. For more information on the effects of housing unaffordability, click here.

 

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Attached below are the public comments on the proposed merger of Exelon and Pepco submitted to the Public Service Commission by our executive director Dave Oberting. There is no compelling reason to prohibit the merger. Exelon is the lowest, by far, emitter of CO2 among the 25 largest power companies in the U.S. To the extent that Pepco will have the opportunity to introduce more low carbon energy into its energy mix, the merger is a net gain for District consumers, District businesses and the environment.

Economic Growth DC Exelon-Pepco Proposed Merger Comments — Public Service Commission of DC

Over the longer term, Economic Growth DC is on record as being in support of Space Based Solar Power as the best solution to our energy, climate and national security difficulties. This technology is about 30-40 years away and will cost in the neighborhood of $2 trillion. It will be driven first, as most things are, by military necessity. It will then be commercialized as a joint venture with private energy companies of all kinds.

CNN Space-Based Solar Power Article

 

 

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There is a link below to a new op-ed that was published this morning in the Washington Business Journal. It was co-written by our executive director Dave Oberting and Dr. Stephen Fuller of the Center for Regional Analysis at George Mason University.

It details some of the difficulties facing the District’s economy, but it is also clear that there are many opportunities to implement pro-growth policies over the next several years that would benefit every DC resident.

Viewpoint: Economic Advice for the New Mayor

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Over the Thanksgiving holiday, Economic Growth DC stumbled upon what could be the greatest website ever created: The Economics of Seinfeld. These are basic economic concepts illustrated through the magic of Seinfeld. This first clip addresses incentives. Newman wants the post office to transfer him to Hawaii because the air is so dewey sweet you don’t even have to lick the stamps. Jerry wants Newman out of his life, so he is incentivized to join forces with Newman and help Newman get his transfer.

We all respond to both economic and non-economic incentives every day. Most people want to get paid and so they get up and go to work every day. That’s the most basic economic incentive there is. Making a higher salary and having fun are the economic and non-economic incentives to attend college.

Governments have decided that one of the best ways to get people to stop smoking is to raise the cost of smoking by applying punitive tax rates to a pack of cigarettes. Forget about whether this encourages the creation of a black market for cigarettes, high taxes serve as a disincentive to smoke. This is the Laffer curve at work. The same priniciple applies to income tax rates. If you want less work, attach a high tax rate to it and you’ll get less of it. If you want more work to be performed, provide incentives to work by lowering the tax on it.

We never really imagined we would have a good reason to post Seinfeld clips on our website, but those reasons have arrived: