The final revenue report from the District’s outgoing Chief Financial Officer, Nat Gandhi, should ring some alarm bells for DC’s economic policymakers. While Gandhi projects surplus tax revenues of $19.8 million for this fiscal year, and $42.7 million for next year, he also reports that job growth in the District is slowing. Gandhi attributes this, in part, to the effects of sequestration on government employment, but there are other huge factors at play as well.
As reported by the Washington Post, Gandhi stated that private sector hiring has, “recently been barely able to offset the public sector decline.” He also points out that fewer DC residents are employed than they were last year. This is a, “recent and distressing development and seems somewhat at odds with continued population growth.”
Economic Growth DC believes fostering faster job creation is the most important and urgent task facing the District government. Job growth is a helpful byproduct of and function of economic growth. The private sector portion of the District’s economy just isn’t growing fast enough to create the number of and kinds of jobs that lead to widely shared prosperity. The chart below illustrates the District’s real rate of growth for the past decade. While sequestration has played a role in restraining hiring, it’s not the largest culprit. The biggest drag on the District’s economy is a less than favorable business climate. It causes employers to be more cautious and to take fewer risks as it relates to investment and hiring. Economic Growth DC believes that getting growth into the 3.5% to 4.5% range, and keeping it there, is the District’s #1 strategic imperative.
Slow growth almost always leads to slower job creation and leaves us with higher unemployment rates than we would otherwise have. The chart below illustrates the District’s unemployment situation. It will take many years and more resources to bring the District to full-employment in all eight wards, but it will never happen without faster growth.
The fact that the District’s economy is too dependent on federal and local government spending is reflected in Gandhi’s report. If the District did not depend on government spending for 35% of its economy, the impacts of sequestration and other government mischief would be far less pronounced. Economic Growth DC believes that growing the private sector portion of our economy, so that the District relies on government spending for only 17% of its economy by 2023, is the District’s 2nd strategic imperative.
As mentioned, faster and broader job creation requires faster economic growth. Significantly faster economic growth can only be achieved with a better business climate. The Gray administration has done several things to improve the business climate. We believe the administration understands the District’s imperatives and has been working steadily towards achieving them. But, we need for things to change more dramatically, more quickly. Here are some of the measures District government can take to foster a better business climate:
1) Tax rates that are lower rather than higher foster faster growth: lowering the business tax rate is an obvious measure that would put more money in the hands of private sector enterprises for investment and hiring. However, lowering the individual income tax rate may be even more important because most small business owners (through S corps, partnerships and sole proprietorships, a/k/a pass through entities) are taxed at individual rates. Roughly 50% of all the jobs in the District are created by small businesses. Giving these business owners rate relief would provide more capital for investment that leads to job creation. The mayor should be commended for creating the DC Tax Revision Commission that recently recommended certain income tax changes. We understand it was hard to come to consensus with eleven diverse commissioners, but we’re hoping that the Mayor and Chairman Evans will be more bold in recommending more substantial rate reductions.
2) Less complex, less burdensome regulations and simpler government: Economic Growth DC is not from the total deregulation school of thought. There is such a thing as under-regulation, as evidenced by the mortgage crisis that led to the recession, but there is also such a thing as over-regulation (and the District does that too). We believe the District government has an important role to play in maintaining a level playing field from a regulatory standpoint. We would like to see the District regulate more smartly, with a lighter and less intrusive footprint. Certainty is a term that’s overused in some circles, but there is a basic truth to it. Businesses need certainty for planning purposes. They need to know what their costs will be a year from now and five years from now in order to make capital spending and hiring plans. A less complicated regulatory regime would increase confidence and reduce compliance costs. Again, the Gray administration should be commended for putting together a Regulatory Reform Task Force that has been looking at some elements of our regulatory scheme for the last several months. We encourage them to be bold as well.
3) Unlock innovation: government policy does not create innovation, nor should it try. We’ve seen how that turns out with the likes of Solyndra. The government should do what it does best — fund the basic research and development that leads to innovation — but leave the actual innovating to the private sector. Mayor Gray made the growth and development of our nascent technology industry part of his five-year economic development strategy. Frankly, the best thing the DC government can do to foster innovation and growth in our technology industry is to stay out of the way — much like government has largely kept its hands off of the internet. The internet is the best platform in the world for innovation precisely because governments have purposely avoided regulating it.
4) Foster creative destruction: Creative destruction is one of the primal forces of capitalism. It is the continual invention of new industries and new companies, and the destruction of old ones. One of the most vivid examples of this is what Apple did to the owners of Blackberry (Research in Motion, or RIM) with the iPhone. Apple changed the paradigm with a true smart phone and Blackberry just couldn’t keep up. A lot of Blackberry folks lost their jobs, but they’ve gone on to other jobs with more efficient companies. The iPad is doing to the desktop/laptop computer industry what the iPhone did to Blackberry. While painful for some, this process always leads to net job growth.
The best local example of creative destruction is what Uber and its peers have done to the taxicab industry. Since Uber added choice and competition to the local transportation system with its revolutionary software, cab companies and other transportation providers have had to improve their service and operations or face going out of business. About four months after Uber came to DC, we received a post card from DuPont Cab informing us that they had just implemented a new dispatching service and that they are available to meet all our transportation needs. I’d never received a notice like that from any DC cab company in years past. That was not a coincidence, but an example of creative destruction at work.
The right course of regulatory action is almost the exact opposite of what the DC Taxicab Commission has been doing up to this point. The commission acts as if its job is to protect the taxi industry from competition. In reality, the District’s job is to allow creative destruction to do its thing. Will some cab companies go out of business? Sure, but we don’t see any regulators rushing to save RIM or Dell. Another thing the District can do to create a better business climate is make it easier for District companies to go out of business and get through the bankruptcy process as quickly as possible. Failure will be painful for some, and creative destruction is bad for the companies that can’t compete, but the overall process is crucial to faster growth and net job creation.