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When people look around the District of Columbia, they see dozens of construction cranes, 300 shiny new restaurants and they inevitably think the District’s economy must be growing by leaps and bounds. They would be wrong. Especially for those District residents at the lower end of the education and income spectrum, things are not good.

For insight into what’s really going on with the District’s economy, we’ve assembled and analyzed a mountain of economic data. Click below to see the full presentation.

DC Economic Conditions Presentation 7-28-15 – Economic Growth DC

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In a previous post, Where to Start with Regulatory Reform, we made the case for changing the incentives that govern the way regulators are measured and compensated. Today, we offer a starting point for the District’s regulatory reform efforts:

The Problem

In a Washington Post article dated July 10th about Aetna’s withdrawal from the DC health insurance exchange, well-respected health policy consultant Bob Laszewski had this to say:

 

“The District has never been thought of as an attractive market. It’s not a state — it’s one city, one moderate-sized city, and it’s also known for extreme regulation. When you have a small market that gives a lot of regulatory trouble, for insurers, it’s like why bother?”

 

Aetna said why bother. Who knows how many other organizations have said as much when considering whether to do business in the District over the last decade. Yes, we’re a relatively small market, but we have a high level of disposable income. The profit-making opportunities should outweigh the lack of overall size of the market.

We believe the District government should be making a public and serious effort to make the District a better, easier and less expensive place to do business. The area in which we have the most control over the cost and ease of doing business in DC is our regulatory system. The District government should undertake a highly visible effort to reform the way we regulate almost everything.

Keep in mind, the District’s economy has grown at an average rate of only 1.28% since 2007, and it grew at a rate of 0.47% over the last two years. All of the most important challenges we face — a real unemployment rate in double digits, an increase in extreme poverty, growth in inequality, and a homelessness crisis — can all be traced directly back to slow growth.

How to fix it

Only the deep, structural reform and modernization of the way we regulate will create the framework from which our economy can break loose from the bonds of slow growth and meet the needs of all its citizens.

 

red tape ii

 

 

The work of modernizing the District’s regulatory architecture will be painful and slow. It’s technical in nature and requires the help of subject matter experts in a range of disciplines. It is not glamorous by any means, which is why most politicians don’t like to touch it. But it has to be done, and somebody’s got to do it. It’s time to man the barricades.

One of the keys to any regulatory reform is changing the incentives for regulators. As it stands, a regulator is compensated and measured based on how many rules get written. We’ve got to stop measuring process and start measuring outcomes.

Where to start

We’ve targeted four areas as being particularly ripe for reform:

  1. Labor Markets — As described in this op-ed in the Washington Business Journal, the District’s labor market has become sclerotic and inflexible. The op-ed calls for the creation of a labor market commission similar in scope to the tax revision commission that recently overhauled the District’s tax system.
  1. Telecommunications — Telcom companies are heavily regulated by the FCC, including the infamous Title II regulations originally designed for the regulation of the railroads. DC’s local telcom market is as competitive as it’s ever been. The time has come to overhaul the PSC and the way it regulates telecommunications companies that do business in the District.
  1. Healthcare —  If there were a more favorable regulatory climate, the District’s health market is large enough to warrant being here. Simplifying the way we regulate both insurers and healthcare providers will attract more of both.
  1. Criminal Justice — From decriminalization through sentencing reform, there is strong bipartisan support for the reform of the criminal justice system. Oftentimes you have to dig to find the moral basis for regulatory reform. When it comes to the criminal justice system, it’s there for everyone to see.

Over the next few months, Economic Growth DC will be establishing committees of experts in each of these subject areas who will come together to produce recommendations for reforms. If you are an expert in any of these subject areas and would like to contribute to our efforts, contact us at regulatoryreform@economicgrowthdc.org.

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658,893 people call the District of Columbia home. Approximately 60,000 of those residents have at least one criminal conviction and have spent at least some time in prison. It is believed that 50-55% of that group is unemployed. The number is a little lower for women, and a little higher for men, but in that range.

Image result for criminal justice reform

 

Economic Growth DC has a number of organizational goals. One of those is to bring the unemployment rate in the District down to under 5% in all eight wards. This will take some work because in the predominately African-American parts of the District, the real unemployment rate is more like 20%. In order to make a serious push towards 5%, you have to be able to do something about finding jobs for returning citizens.

 

Estimated U6 Unemployment Rate by Ward

 

That basic premise has led us down some interesting roads as it relates the criminal justice system. For instance:

  • You would be shocked at how many people are let out of prison without basic identification — no driver’s license, no birth certificate, no social security card, no nothing. And, because of new federal rules, it has become more difficult to obtain identification upon release. You often need a utility bill in your name to prove residence, but if you’re homeless or living with your aunt, you can’t produce a utility bill. In almost all cases, you have to provide proof of identity, usually in the form of a driver’s license, to get a job. It’s like the government inadvertently said we’re going to make it as difficult as possible for a returning citizen to find work.
  • The criminal justice system has provided a mechanism for a person who’s served their time to go thru a court supervised process to get that conviction expunged or sealed. But, we’ve made it so difficult, cumbersome and expensive to go through that process that almost no one does. One of the main ways a returning citizen is denied a job is because of the criminal background check. Here we have this process authorized by the constitution that legally permits a person to clean up their record — something that would go further towards helping them find work than almost any other measure —  and yet we’ve made it so convoluted that it’s next to impossible.
  • We’ve discovered that the average person is likely to commit at least one crime a day because we have managed to criminalize just about everything. At the federal level, there are over 3,000 criminal offenses, and over 300,000 regulations that carry criminal penalties. That’s just flat out of control. The need for broad decriminalization in the District, and around the country, is compelling.
  • The U.S. has 5% of the world’s population and 25% of the world’s prisoners. One of the significant reasons for that is mandatory minimum sentencing. During the “war on crime” we took away a judge’s discretion on sentencing. It’s time to return that responsibility to the bench.
  • The conditions where most District residents are incarcerated are deplorable. That’s why we have an entire DC government agency, the Criminal Information Council, that does nothing but inspect and report on conditions in prisons where DC residents are held. Improving the quality of programming while in prison, specifically job training , is a key to reducing recidivism.
  • Next to a job and a place to live, mental health care is the most vital need of returning citizens. The overuse of solitary confinement can cause serious and long-lasting mental health problems. We have to do a lot better at identifying and treating PTSD and all of the other mental problems that prison invites.

What is it we plan to do about all this? At the policy level, we will continue to work an these various elements of criminal justice reform with an eye towards making it easier for returning citizens to obtain and keep a job.

At a programmatic level, we don’t think it’s realistic to expect large numbers of returning citizens to find work without active assistance. By making use of our job placement industry experience, we have proposed a program that will create a small team of job placement professionals who will do nothing but place returning citizens into employment. The business plan can be found here: Operation Capstone

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State-level GDP figures for 2014 were released on June 10th. Click below to see how the District’s $105.02 billion economy is broken down by industry. Economic Growth DC is working with the District’s Office of Tax & Revenue to properly define, classify, and calculate the District’s “technology” sector, as well as the “creative economy.” The industries highlighted in red represent ones that could potentially be classified as “technology.”

DC Economy By Industry 2014

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The DC Board of Elections held a hearing this past Thursday to debate the appropriateness of a proposed ballot measure that would, if approved, increase the District’s minimum wage to $15 per hour. While there is no valid legal reason to keep the measure off the ballot, there are a plethora of policy and practical concerns that should be considered.

 

$15 Minimum Wage

 

Firstly, the minimum wage, in general, is a flawed policy that was created to cover up a much greater government failure. If you’re an adult resident of the District, and you’re earning $10.50 an hour, then we, as a society, have failed you.

Somewhere along the spectrum of our education and job training systems, we have failed to transmit to you the skills that you need to command a middle-skill, middle-income job. We’ve also failed to provide to you a sufficient number of those middle-class job opportunities.

What the District owes you is the opportunity to acquire a set of skills that permit you to earn a middle-class living. To a certain extent, the minimum wage interferes with that by restricting the number of entry-level jobs in DC that provide that crucial first step into the job market.

Also consider:

  • Increasing the minimum wage is bad for low-skill workers because it will reduce the number of minimum wage jobs available in the District. An increase in the minimum is good for some workers, but it’s catastrophic for the DC residents who lose their jobs altogether, and then find it harder to obtain a new job.
  • Of the minimum wage jobs that do exist in the District, about 30% of them are held by DC residents. Should the minimum wage in DC rise to $15 per hour and the minimum wage in Virginia remain at $7.25 and $11.50 in Maryland, that figure could shrink to as little as 15% as DC workers are displaced by better qualified out-of-state workers.
  • Realize that labor is a perfectly normal good. It’s susceptible to the laws of supply and demand. When the cost of labor goes up, the demand for labor goes down. It’s not the “theory” of supply and demand. It’s a law, just like gravity.
  • A $15 minimum wage will accelerate a process already in motion — automation. As labor costs rise, businesses are incentivized to substitute technology for labor. McDonald’s is installing ordering kiosks and Applebee’s is using tablets to reduce labor costs.
  • A $15 minimum would hurt teenagers trying to enter the job market. They will be competing with older, more experienced workers and will lose out on the opportunity to get crucial early work experience.
  • There is a popular theory that increases in the minimum wage increase labor productivity by increasing employee satisfaction and retention. But the definition of an increase in productivity is that it requires fewer inputs (hours of labor) to produce the same amount of output. Any productivity increases would be negated by the fewer number of hours required to complete that work.
  • If labor costs increase without a corresponding increase in revenue, or a decrease in other costs, someone has to lose. The business owner will probably absorb a portion of those additional costs, but they’re going to squeeze savings from somewhere else. If you can’t raise prices because of competitive pressures, that means other costs will have to be cut. In most businesses, labor accounts for as much as half of all costs. This is how workers lose hours and jobs.
  • If enough costs cannot be squeezed from existing operations, small businesses with low margins, like retail stores, are susceptible to being driven out of business. This is happening regularly in jurisdictions that have adopted a $15 minimum such as San Francisco and Seattle.

 

Going out of business

 

Most importantly from a policy perspective, a minimum wage ballot measure is a usurpation of a core function of the legislature. Setting the minimum wage is one of the central prerogatives of an elected legislature. Considering that this ballot measure also indexes the minimum wage to inflation, once the District council gives this power up, it’s gone forever.

If this ballot measure makes the ballot, the DC electorate should reject it because it is ultimately not in the best interests of low-skill workers. If the electorate doesn’t reject it,  the Council should overrule it because setting the minimum wage is the proper role of the legislature.

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Our executive director, Dave Oberting, and Ed Levin, a labor lawyer with the law firm of Saul Ewing LLP, wrote an op-ed in today’s Washington Business Journal calling for a comprehensive reform of our labor markets.

The District government has intervened in the labor market at least half a dozen times in the past two years. The aggregate impact of those interventions has been to make it more difficult, more expensive, and more risky to hire anyone.

The folks behind these laws take a micro-view of the labor market. They’re asking themselves what they can do to make it easier for an individual District resident to find a job. This is a noble endeavor, but the unintended consequence is it makes it more difficult for everyone to find work by reducing the total number of jobs available in the District.

Click below to see the op-ed:

WBJ Op-Ed: Reduce Jobs in DC? Easy!

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Our executive director, Dave Oberting, will be appearing on The Kojo Nnamdi Show on Monday, 7/6 at noon. He will be appearing with Ed Lazere, the executive director of the DC Fiscal Policy Institute, and they will be discussing taxes and the DC economy. WAMU is 88.5 FM on your radio, or you can listen live online by clicking here: WAMU 88.5 FM

If you’re able to tune in, be sure to send us your feedback. You can email Dave at dave.oberting@economicgrowthdc.org.

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As part of her $12.9 billion budget request, Mayor Bowser proposed to raise the District’s sales tax rate by 0.25%. That bump would have raised $22 million in FY 2016 or about 0.17% of the total budget.

The mayor also proposed a 4 percentage point increase (from 18% to 22%) in the the parking tax that would have raised $9.9 million in 2016, or 0.07% of the total budget.

Image result for tax increases

Neither tax increase would have a material impact on revenue nor the economy, other than to offer a small encouragement to shop and park less, so why was it important for the DC Council to reject them? In a word — stability.

Tax rates affect the behavior of every District resident and every business. A stable tax system allows families and small business owners to plan more than twelve months in advance.

Rejecting this tiny tax increase sends a giant message to the people who make investment, hiring and spending decisions in DC. It will increase the confidence of businesses and consumers, clearing the way increased capital spending and consumption.

Chairman Mendelson and the Council should be congratulated for using some foresight. It’s not something governments are known for.

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Just a side note on the budget: DC approved a $12.9 billion budget. The District has 658,893 residents. New York City, with a population of 8,406,000, passed a $78.5 billion budget. That equates to per capita government spending in DC of $19,578. New York, a city of similar political disposition with about the same level of services, will spend $9,338 per person. Where, exactly, does our tax money go?

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To no one’s surprise, poverty is not spread evenly throughout the District of Columbia. Only six percent of the District’s white residents live in poverty. For Hispanics, the rate is 23% and for African-American District residents it’s 39%.

The most important statistic in all of the poverty debate is this one: according to Dr. Harry Holzer of the McCourt School of Public Policy at Georgetown University, of the 88,773 people over the age of 16 living in poverty in DC, only 1.9% had a full-time job at some point throughout the year, while 64% did not work at all.

The District doesn’t have a “poverty” problem, per se. It has an unemployment and underemployment problem, of which poverty is a symptom.

The elusive “solution” to poverty is actually pretty obvious: work — meaningful, decent, and full-time work to be sure, but work itself is how poverty ends.

Our public discourse tends to trend towards who’s to blame for the existing state of affairs, but the causes are many, varied and ultimately irrelevant. The only thing that matters is how it gets fixed.

Deep Poverty        Estimated U6 Unemployment Rate by Ward

Our answer comes in three parts that are not a mystery:

1) The District’s economy grew at a rate of 1.55% in 2014. While better than the 0.61% contraction that took place in 2013, it’s not fast enough to take on the District’s high level of unemployment. The number one task of the new administration, and the thing that most requires their attention is implementing a policy framework that permits the private sector to grow faster. This can and should be fixed in the short-term. Improvements in tax policy, regulatory policy, more flexible labor laws and even the facilitation of the birth of new industries are within reach. Aggressive moves in each area are required to jump-start the creation of jobs at all skill levels.

 

2) Too many District residents lack the skills required to acquire and maintain a full-time, middle-skill, middle-wage job. This is a medium-term project, but the best tool we have for transmitting the skills that District residents need to command a middle-class job is our long neglected workforce development system. It is frankly the best anti-poverty tool we have.

Some improvements in the system have been made over the last four years, but we need to move farther, faster. Instead of complaining that the workforce is unskilled, the corporate sector needs to drive the design of, supervise, facilitate, and to some degree, fund an improved job training system. As the pace of  job creation increases in the short-term it places a higher premium on residents with competitive skills.

 

3) As a longer-term proposition, we need a more radical reconstruction of our K-12 education system. Dating back to Mayor Fenty’s takeover of the schools and the tenure of Michelle Rhee, the energy required for dramatic improvement has been there, but the results have not. According to Ken Archer of Greater Greater Washington, if you take a closer look at the city’s test scores, you see, “stagnant or downward trajectory for black, Hispanic, low-income, English language learner, and special education students in the last five years.”

This is a recipe for the perpetuation of inter-generational poverty. Until the city grapples with this reality and commits to more drastic action, the long-term trajectory of poverty will not change. By the time a faster growing economy is producing more jobs,and an improved workforce system is producing higher-skilled District residents, we must graduate 100% of our high school students and they must be ready for post-secondary training/education and a productive career.

Throwing more money at a broken system is the definition of insanity. We need a fundamental shift in the way we approach poverty. Work, work-readiness and work supports represent the future of our anti-poverty efforts.

 

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DC Real GDP 2006-2014

 

The chart above illustrates the District’s economy in real chained dollars. That’s economist speak for dollars that have been adjusted for inflation. It and the chart below reflect the fact that the District’s growth has been slow and uneven over most of the last decade.

 

DC Real GDP Growth Rates 2007-2014

 

The economy grew from $103.41 billion to $105.02 billion in 2014. That represents a rate of growth of 1.55%. That’s better than the 0.61% contraction that took place in 2013, and better than the 1.28% average annual growth rate since 2006, but it’s well below what is considered healthy by most economists. And it’s certainly not fast enough to make a dent in the District’s high unemployment and growing rate of poverty.

Estimated U6 Unemployment Rate by Ward     Deep Poverty

 

In addition, the BEA used fuller and more precise measurements of the economy to go back and revise downward the size of the District’s economy in prior years. Yes, the economy has returned to growth, but it’s marginally smaller than we thought it was last year.

Interestingly, the District did outperform both Maryland (0.83% growth), and Virginia (0.02% growth). In fact, Terry McAuliffe’s Virginia is about twenty bucks away from a recession.

Click here to see the statistics on what the District has missed out on during the last decade of slow/no growth in terms of jobs and income. Hint — it adds up to approximately 51,000 private sector jobs, 7,000 District government jobs, and $4 billion in lost annual income for DC residents.

It is within the District government’s power to shift its economy into a higher gear, but it will require intense focus and smarter policy. The work of the tax revision commission should be the beginning of tax reform, not the end, and we need to add to it a vigorous overhaul of the way the District regulates almost everything.

Additionally, our labor markets have become more rigid and inflexible over the last decade. It’s become more difficult, more expensive, and more risky to hire anyone. Our labor market is ripe for reform and modernization. Those aren’t the only necessary steps, but they’re a start.

Should this “lost decade” continue, here’s what the average District resident can expect:

  • Fewer jobs
  • Many fewer good jobs
  • Less affordable housing
  • Less housing, period
  • Fewer new restaurants
  • Fewer new retail stores
  • Fewer new companies created in the District
  • Fewer companies moving to the District
  • A less dynamic District
  • More income inequality
  • Less economic inclusion
  • Less tax revenue
  • A corresponding reduction in social services
  • Less upward mobility
  • Less opportunity for promotion and advancement
  • Less of the Streetcar project
  • Fewer improvements to Metro
  • Fewer new bus routes
  • Higher taxes
  • Higher fees
  • Bye bye budget surpluses
  • More crime
  • More violent crime
  • More traffic
  • Fewer new parks and green space
  • Fewer small retail businesses
  • Slower population growth or contraction
  • Lower graduation rates
  • As Jimmy Carter would say, a general malaise
  • There are sure to be more. Let us know  what we’ve missed at growth@economicgrowthdc.org

Click here to see the alternative: A Pro-Growth Agenda