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In his July 4th notebook, 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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It is ultimately futile to attempt to overturn the laws of supply and demand. The cost of housing in the District of Columbia is going to continue to rise until it hits a point at which demand levels off. Adding to the supply of as many different kinds of housing as possible, as quickly as possible is good policy. But no amount of rent control or housing subsidies are going to reverse this inexorable tide. Unpleasant to hear, but grounded in reality.

A better approach is to take the typical rent subsidized tenant and help them build their skill set, through improved adult education and job training, so that they can command a job that empowers them to pay market rent.

It might even be sensible policy to take some or most of the money we spend on housing affordability and re-direct it towards more intensive, employer driven job training.

We have searched high and low for solutions to the high cost of housing. We hear politicians and candidates talk about it constantly, but no one has offered a plausible solution based on trying to contain the price of rent or home ownership. This has been a major problem for fifteen years. Some really smart minds have been working on it to no avail. Maybe we haven’t found a solution because there isn’t one, at least in the conventional sense.

As a city, we should take the time to calculate where our scarce resources are best invested. How long would it take to build X amount of “affordable” housing, versus how long would it take to up-skill the percentage of the population that is now dependent on a declining stock of affordable housing? We think the issues are ripe for a rational policy debate. The question is, can we hold one?

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EGDC Stacked Logo

Dear Friends of EGDC — A truly wonderful summer in Washington is coming to an end and the holidays are in sight. Our charitable organization, the Economic Growth DC Foundation is launching what we’re calling our end of year fundraising sprint.

Between now and the end of the year, our goal is to raise $150,000 to support the roll-out of our programming. The letter of update attached provides a brief description of all three programs. You can find more information about the foundation in general and our programming on the foundation’s website at http://egdcfoundation.org/programs.

As a registered 501(c)(3) (see attached exemption letter), all donations to the foundation are fully tax-deductible as a charitable gift. We will email you a gift receipt immediately upon receipt of your contribution.

No donation is too small. Our system can accept contributions as small as $1. Please go to http://egdcfoundation.org/donate to show your support.

Letter of Introduction-Update for Friends of Economic Growth DC

Federal Exemption Letter Economic Growth DC Foundation

 

Sincerely,

Dave Oberting

Chair

Economic Growth DC Foundation

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We’d like to thank the Community Foundation for the National Capital Region and the Cafritz Foundation for funding the attached study conducted by the Urban Institute and the Metropolitan Washington Council of Governments. The idea of bringing some empirical research to the debate over affordable housing is most welcome:

Housing Security in the Washington Region — Community Foundation Study

Broadly, the study concludes that there is a distinct lack of affordable housing in the District of Columbia and the metro region. The first response is probably, “duh,” but we’d like to take a few minutes to point out some of the other effects that the spiraling cost of housing have on the District’s economy:

1) A slow down in population growth: Population growth has been slowing steadily in recent years. In 2010, 14,999 people relocated to to the District. In 2012, that number had dropped to 13,022. The Office of the Chief Financial Officer predicts the number will slow to approximately 5,000 over the next few years. The cost of housing has become a major barrier to a decision to move to the District. Especially for young people who face spiraling rents and a job market that’s deceptively weak, the unaffordability of housing incentivizes young adults to look for alternatives to DC, such as Austin, TX.

 

2) A slow down in home buying: The price appreciation that’s good for those of us who already own homes in the District puts a home purchase further out of reach for the average buyer.

 

3) A slow down in family formation: When young adults can’t afford housing, or when they spend an increasing percentage of their income on housing, they put off major life events like getting married and having kids.

 

4) A slow down in enrollment rates at DC schools: If fewer DC residents, especially younger residents, can afford a home, or even rent, the result of the slow down in family formation is fewer students matriculating into DC schools. This will put financial pressure on DCPS and could lead to additional school closings.

 

5) A slow down in business relocations: Employers want to be located where it’s convenient for their employees to get to work. If a company is considering relocating to the District to take advantage of its proximity to the federal government, or its highly-skilled workforce, the decision to locate in the District proper versus the suburbs will be influenced by housing affordability.

 

6) A slow down in new business creation: If more and more of a DC resident’s annual income is devoted to housing, less of it is available for the risk taking that’s required to start a new enterprise. Housing unaffordability ultimately crowds out new capital and business formation.

 

7) A slow down in job creation: Most District jobs are created by small businesses that operate as what’s known in the tax world as pass-through entities. That means the profits of the enterprise flow through to the owner and are paid as ordinary income. If that business owner is caught in a spiral of housing price appreciation, that represents less money available for business expansion and hiring.

Like any relatively free market, the DC housing market sends price signals. The signal its been sending for the past decade is “build more housing.” There may be a glut of luxury apartments that is moderating rental prices at the high end, but a healthy market creates a robust supply of many types of housing at different price points.

The only upside to housing unaffordability is perverse. It will eventually reduce demand, which will slow the rise in rents and home prices, thus bringing the market more into equilibrium. We can sit and wait for that to happen, and it already has to some degree, or we can build, build, and build some more.

Send us your feedback at letters@economicgrowthdc.org.

 

 

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Operation Capstone is the name we’ve given to a plan we’ve devised to address the problem of high unemployment for DC residents returning from incarceration. Approximately 4,000 individuals return to the District from incarceration every year and there are approximately 60,000 ex-offenders residing in the District. Approximately 30,000 of the District’s returning citizens are unemployed. Finding work for this population is both a public safety issue and a moral imperative.

Our program is designed to place approximately 1,500 returning citizens per year and was inspired by a job placement project in Newark, NJ. It was a joint venture between former Mayor Corey Booker and the Manhattan Institute. The three people most directly responsible for conceiving, building and implementing the Newark program have agreed to meet with anyone interested in a similar program for the District.

Our guests will explain the origins of their program, the “rapid attachment to work” model they’ve developed and will tell us how they’ve achieved placement rates considerably higher than other efforts around the country.

The call is open to the public and will take place on September 18th at 1:00pm.

The conference call dial-in number is 712.432.1500 and the participant code is 31353#.

If you are interested in employment issues as they pertain to ex-offenders, please feel free to join the call.

Operation Capstone

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Job creation Just Ahead

 

Thank you for your continued interest in and support of Economic Growth DC and its charitable foundation. Many of you have already suggested ways in which we can improve our efforts and our message. We appreciate the input. We’ve found, through trial and error, that the best way to give someone a full-overview of what we do as an organization is the attached letter. It’s not too long, but it will give you a good feel for what we do.

Letter of Introduction-Update for Friends of Economic Growth DC

Don’t hesitate to contact us with any questions or comments. You can email us info@economicgrowthdc.org

If you have questions right now, or would like to know more about how you can get involved, call us:

 

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Economic Growth DC’s principals went to business school. Writing a business plan is just part of the drill, but we’ve always been frustrated because almost no one reads past the executive summary. That’s probably because it’s usually 40 pages of words and charts. We’ve been looking for a mechanism to tell the story in a more concise and visually appealing way. We ended up with what amounts to a business plan consolidated into a two page chart. We think it does a good job of explaining the policy areas in which we work — technology, education, workforce development, and healthcare — and what we’re trying to accomplish. It details some of the programming we intend to run through the charitable foundationm plus details on how the 501(c)(4) will be organized and run.

Economic Growth DC Combined Business Plan 9-1-14

If you have questions or would like to know more about how you can get involved, email us at questions@economicgrowthdc.org, or you can call us:

 

 

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By Dave Oberting

In a July 18th press release, the Vincent Gray administration announced that the unemployment rate in the District dropped 0.1% — from 7.5% to 7.4%. This number is known as the U3, or headline, unemployment rate. It has declined steadily, if slowly, since the bottom of the recession.

However, the U3 rate tells only part of the story with regard to the true unemployment situation in the District. The full picture is more dire and requires a more muscular policy response.

If you dig deeper into the unemployment figures, here’s what you’ll find:

As mentioned, the headline rate is 7.4%. This rate represents only the total number of DC residents, as a percentage of the civilian labor force, who are unemployed and actively looking for a job.

This rate leaves out two important categories of DC residents — those who are working part-time involuntarily and those who have given up looking for a job altogether out of frustration.

These categories are captured in what’s known as the U6 unemployment rate. It incorporates these two categories and provides a more complete, but still somewhat deceiving, picture of the District’s unemployment situation.

The U6 rate is published quarterly, not monthly, so as of the end of Q1, the U6 rate for the entire District was 13.9%. This rate, however, is not spread evenly throughout the District. High income wards like 2 & 3 have virtually no unemployment at all, as evidenced by their respective 3.3% and 1.7% U3 unemployment rates.

The District doesn’t currently calculate the U6 rate by wards, most likely because the Bureau of Labor Statistics doesn’t generate a large enough sample size. Having a better understanding of the U6 rate is important enough to warrant the District conducting its own monthly survey to assemble this data.

Below, we present what we believe to be a more accurate analysis of the true unemployment picture in the District.

**Note: At the time of this writing, 8/14/14, the only ward level unemployment data available on the DOES website is from 2012. This is odd because more up to data has been released since then. It appears DOES has taken this data down for some reason. We have December, 2013 data posted on our website, which we’ll use for this exercise.

U3 Rate as  of December 2013

W1 = 5.9%

W2 = 3.3%

W3 = 1.7%

W4 = 5.5%

W5 = 9.4%

W6 = 6.9%

W7 = 11.6%

W8 = 17.7%

Estimated U6 Rate

The District’s U6 rate is 87% higher than its U3 rate. We used that ratio (1.87:1) to calculate our estimate of the current U6 rate by wards:

W1 = 11.03%

W2 = 6.17%

W3 = 3.18%

W4 = 10.33%

W5 = 17.65%

W6 = 12.90%

W7 = 21.78%

W8 = 33.24%

While these numbers are estimates, they do offer a more realistic picture of unemployment in the District.

The combined 27.51% U6 rate east of the Anacostia river, as well as Ward 5’s 17.65% rate constitutes an unemployment emergency bordering on a crisis in the predominantly African-American portions of the District. It cannot continue indefinitely. These issues require a more serious response by a serious DC government.

We should also pay attention to the quality of the jobs being created in the District. Nationally in June, the majority of jobs created across the country were part-time jobs. Specifically 500,000 full-time jobs were lost and 800,000 part-time jobs were created. There is no reason to think the District is different from other jurisdictions.

Also note this 2013 State of Downtown Report - 2013 State of Downtown – All Sections, published bt the Downtown Business Improvement District. It claims that there has been no significant growth in DC private employment since August. The report covers only downtown, but if there is no job growth there, what does that mean for the rest of the District?

We already produce too many low-skill, low-wage jobs in the District and not enough middle-skill, middle wage jobs. This situation cannot be rectified without faster economic growth.

The District’s economy actually contracted by .005% in 2013 from $105.99 billion to $105.47 billion. There is no reason to believe we’ve emerged from that recession this year. The District government must implement policies that are more conducive to faster economic growth. That is the only way we’ll create the numbers and kinds of jobs required to address this crisis. Better educational opportunities and better job training are important longer-term goals, but the immediate priority is an economy that grows faster and the  job creation that comes with it.

Dave Oberting is the executive director of Economic Growth DC, a political and economic advocacy organization focused on the District and its economy. Follow him on Twitter @GrowthDC or email him at dave.oberting@economicgrowthdc.org.

 

 

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By Dave Oberting

A “corporate inversion” takes place when an American company merges with a foreign enterprise and reincorporates in that company’s home country in order to minimize its U.S. tax bill. This is driven primarily by our country’s unwillingness or inability to reform at least the corporate tax code. U.S. corporate marginal tax rates are among the highest in the world. While inversions are an unfortunate development, the maneuver was entirely predictable based on our current tax code. There are however, more pernicious forces at work, which we’ll explore below.

The inversion problem will not be solved by coercion. What we need to do in the short run is make the U.S. a better, easier and less expensive place to do business. We’ll improve the business climate by completing a real tax and regulatory overhaul. This may require one party control of Congress and the White House, but it shouldn’t. Anyone who’s been following along knows the outlines of a successful deal — broader base, lower rates, no loopholes, fewer exemptions. The regulatory piece would include reform of our immigration system to prepare for the day when we have a deficit of working age residents. A functional and more effective Congress would recognize the long-term risks and act with some foresight.

There is a longer-term trend loosely linked to corporate inversions that has larger implications and is potentially far more dangerous than a few inversions: as this article by Dr. George Friedman at Stratfor points out, what many have called the “hollowing out of the middle class” is real and it may be happening faster than we think. We think it also represents a hidden rationale for moving overseas.

Through the elimination of millions of good jobs here in the U.S. due to automation and globalization, the median U.S. wage has declined by $4,000 to $49,103 since 2000. The median means half of incomes are above that figure and half below. This in turn means many millions of households have slipped into the lower-middle class or worse.

Median Income Chart

It’s possible within a decade or two that we could have a majority of U.S. households that are unable to afford the amazing assortment of high-value products and services U.S. companies make — from financial services products, to cars, to smart phones. We could be on the road to a significant degree of cannibalization of what is currently the largest consumer market in the world. If the purchasing power of that market is substantially diminished, it becomes less important to U.S. companies and the need to be U.S. based declines.

If you’re GE and you sell a lot of washing machines, but the number of washing machines you sell in the U.S. is declining, but skyrocketing in Asia, Singapore becomes a comparatively more attractive place to base your business. Companies want to be close to their most important customers.

So it seems, in the long run, globalization, automation and the managerial revolution that’s taken place over the last thirty years that has made American producers dramatically more efficient and productive, has seriously damaged its largest market. This could provide an additional incentive to American companies to move out of the country.

How do we rectify the situation?

Here’s an answer we give quite frequently: with the faster economic growth that’s required to create the number and kinds of middle-income jobs we’ll need in the first half of the 21st century, a radically improved and employer-driven job training system, and much more dramatic gains in all forms of education — K-12, higher ed, technical training, vocational education, apprenticeships and other forms work-driven education.

Education and workforce development are core government functions. We must get much better at providing more Americans with the knowledge, skills and abilities required to to earn a real middle-class wage.

We should also remember the wisdom of Henry Ford. He paid his employees enough so that they would be able to afford the cars his company made. There’s no way to coerce employers into paying higher wages — the minimum wage is not even close to a real living wage — but, if our education and workforce systems produce citizens that are prepared for and capable of higher-skill work, the good jobs will be there.

Loss of Middle Income Jobs

As to the question of how corporate inversions might impact DC, most of our largest private sector employers are healthcare companies and government contractors. It will be much more difficult for them to invert, but it’s not outside the realm of possibility especially if we don’t change course.

Dave Oberting is the executive director of Economic Growth DC, a political and economic advocacy organization focused on the District and its economy. Follow him on Twitter @GrowthDC, and write to him at dave.oberting@economicgrowthdc.org.

 

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By Dave Oberting

The real unemployment rate in certain parts of the District is over 30%. This may sound fantastic to some, but it’s a realistic estimate. Hands down, the most important issue in November’s mayoral election is jobs – especially jobs in the predominantly African-American parts of the city. For that matter, the second and third most important issues are jobs and jobs — especially good, middle-class, middle-income jobs that we don’t’ seem to be creating much at all anymore.

News flash: you are not qualified to be the Mayor of Washington, DC if you cannot articulate how and why a job gets created. You are also not qualified to be the mayor of DC if you cannot, or will not, lay out a concrete set of policies that you will implement to enable faster private sector job growth.

This may sound strange, but a job normally only gets created as a last resort. When the demand for your company’s product or service exceeds your ability to deliver that product or service with existing resources, that business owner is forced to make one of the following decisions: a) turn away business; b) improve the productivity of existing staff — through a more efficient process or the implementation of technology; or c) hire a new worker.

Job creation Just Ahead

A typical business owner is loathe to turn away business, but they will only hire a new worker when they’ve maxed out productivity gains. Job creation only occurs when demand cannot be met by gains in productivity. It’s not good enough to have an economy where demand narrowly exceeds supply. It has to be growing fast enough to outrun gains in productivity for serious job growth to take place. Since 2013 in the District of Columbia, it has not.

If job creation is driven by increased demand, shouldn’t the District government be spending the majority of its time and efforts encouraging and facilitating growth in what the economists call aggregate demand? A would-be mayor must have a plan for doing exactly that. The next time you see a mayoral candidate on the street, ask them how they intend to stimulate aggregate demand. The answer will tell you a lot.

In times of economic trouble, the Keynesian school of economics calls for the government to stimulate demand by pumping borrowed money into the economy through deficit spending. Economists have argued about whether deficit spending stimulates demand/job growth ad nauseam, but in the District, the argument is moot. We are required by law to spend no more than we bring in each year.

Then what is left for a municipal government to do? Simple. Restore the confidence of the electorate. Yes, we said confidence. Give both businesses and consumers a sense of reassurance that it’s safe to invest and spend.

The District’s economy contracted in 2013 for a couple of reasons. The definition of a contraction is that that economic output declines from one period to the next. The District’s economy produced $520 million less in 2013 than it did in 2012. We attribute this partially to the government shutdown, but it seems the average District consumer was not convinced that tomorrow will be better than today. It also seems the average business was not convinced that demand for its goods and services tomorrow will exceed the demand for them today.

This caused both to pull back in 2013 — consumers on spending and businesses on investment. We call that a shortfall in aggregate confidence. The real danger is these processes feed on one another and can spiral in the wrong direction.

For the District’s economy to right itself, both businesses and consumers must have confidence in the new mayor’s stewardship of the economy. A would-be mayor has no chance of restoring that confidence if they cannot articulate a credible plan for accelerating economic growth and the faster job growth that comes with it.

Consumers and businesses want a mayor with the knowledge and experience that’s necessary to manage a $106 billion economy. Businesses want to be assured that the new mayor will protect them from the imposition of additional burdens and mandates, and consumers just want to know that things are getting better.

Should we trust that one of the major mayoral candidates has what it takes? Not until they can lay out a platform credible enough to inspire the magic word – C-O-N-F-I-D-E-N-C-E.

We're Hiring

 

Dave Oberting is the Executive Director of Economic Growth DC, a non-profit political and economic advocacy organization focused on the District. Follow them on Twitter @GrowthDC.