By Dave Oberting
The technical definition of a recession is two consecutive quarters of negative GDP growth. If DC were a country, it would be in recession.
Real GDP data (real GDP adjusts for inflation) from the Bureau of Economic Analysis indicates that the District’s economy contracted in 2013 to $105.47 billion from $105.99 billion in 2012. This $520 million decline over the course of four quarters in 2013 means that the District’s economy is technically in recession.
If DC’s economy had performed at its historical norm (2.25%) for the past decade, the economy would have increased to $107.84 billion. So while the paper loss was $520 million, the District actually dug itself a $2.5 billion hole.
This revelation should sound alarm bells in DC policymaking circles.
An attempt will be made to blame the contraction on last year’s government shutdown, but that connection is murky. The shutdown certainly had an economic impact on the District’s economy, but how big that impact was is difficult to quantify.
Regardless of the final numbers, it is another glaring example of why we need to diversify our economy away from government spending. The District currently derives a whopping 35% of its economy from government spending. The national average among the 50 states is 11%.
The overall negative impact of the shutdown is likely to be small. It was a short shutdown and the District government stayed open. It’s highly improbable that the shutdown accounts for the full $2.5 billion in lost economic activity.
A more likely scenario for explaining the contraction is the deterioration of the business climate that’s been building for over a year now. When you combine an aggressive increase in the minimum wage with a completely redundant wage theft bill (which is really just a solution in search of a problem), and the incredibly destructive ban the box bill — just to name three — the District has dramatically increased the costs and risks of doing business here directly and in terms of compliance costs.
The activists behind both the wage theft bill and ban the box are seeking a right to sue DC businesses over small dollar amount disputes that can be easily resolved using the regulatory powers granted under current law. Should a private right to action be included, legal and liability insurance burdens will increase significantly — accompanied by an utterly predictable slow down in job creation.
All three of these initiatives leave significantly fewer resources available for investment in things like new restaurants, information technology, and most importantly — job creation. Factor in the fear and uncertainty of not knowing what’s coming next, and you’ve accounted for most of last year’s $2.5 billion drop..
Most importantly for the typical DC resident, this perception of increased risk and lack of confidence jeopardizes a resident’s chance of finding a new job. Employees are a business’s biggest asset and its biggest liability, often at the same time. When the cost of carrying an employee jumps, employers will either hire less, seek out more aggressive ways to automate processes, outsource more functions or a combination of the three.
Whatever the combination of factors is, the outcome for many DC residents will be catastrophic. And as usual, the worst consequences of bad public policy will be felt by low wage/low skill workers and other disadvantaged residents. In the case of ban the box, the community that will suffer most are African-American men.
All three initiatives will end up harming the various groups they purport to help. The minimum wage will hurt by restricting the number of minimum wage jobs available in the District. Wage theft and ban the box both create a perception that hiring anyone is more risky. When something appears to be more risky (in this case hiring), that thing happens less.
The minimum wage, the wage theft bill, and ban the box bill have all been championed by a relatively small group of activists with outsized influence at the Council. Each item has been in the works for well over a year. Some of those same activists are clamoring for an even more aggressive increase in the minimum wage.
Expectations of higher costs have forced businesses to adjust their plans for the future. In our conversations with business owners and managers, many of them have pulled back on plans for expansion. They have become much more cautious in making investment decisions and are seeking to reduce their risk exposure.
We also have no means of calculating the opportunity cost related to how many would be entrepreneurs chose not to start a business in the District in the first place over the past twelve months.
As mentioned, when something is perceived to be risky, you get less of it. In 2013, that translated into a decrease in economic activity. The way it will be manifested in 2014 is with a slower pace of job creation and reduced tax collections.
Ultimately, why it happened is less important than the fact that it did. The imperative is figuring out how to fix it and making sure it doesn’t happen again.
Fixing it requires the adoption of a broad based pro-growth strategy. The first item on that agenda is a Hippocratic oath for local politicians. A public promise by the Council and various regulatory agencies to do no additional harm to DC’s economy by imposing more burdens on DC businesses would be an important first step in restoring confidence.
Secondly, the District needs to be much more aggressive about reforming its regulatory regime. The Regulatory Reform Task Force did a laudable job in dealing with the regulatory issues under its purview, like business licensing, but we need to be considerably more assertive about removing the regulatory burdens that depress investment and hiring in the private economy.
Finally, the District should consider, right away, a more aggressive reduction in both business and individual income tax rates, and other fees associated with operating in the District. The District cannot print money. Keynesian stimulus is not an option. That means income tax rate reductions (even temporary ones) are the best tools the District has for stimulating economic activity. Now is the time to implement them before the downturn begins to feed on itself.
As far as individual rates are concerned, a broader rate decrease affecting all DC workers who pay income taxes and who benefit from the earned income tax credit would put a significant amount of money back in the pockets of DC residents. Most of that money will be spent quickly at District businesses. A more aggressive business income tax rate reduction is considered by many economists to be the most stimulative economic policy a local government can enact. It quickly provides more income for investment and hiring.
The District has two options as it relates to what is technically speaking this recession: it can stay the course (which apparently includes regularly imposing more burdens/costs on local employers), or it can use this opportunity to move publicly, loudly and firmly towards a more growth oriented approach.
We’ve often said economic growth doesn’t solve every problem, but without it we’ll solve none of them. This is the perfect example. A recession can either be a time of panic, or it can present historic opportunities to make substantive changes in economic policy.
Let’s hope District policymakers grasp the urgency of the situation and seize the opportunity, as the fiscal impacts of this contraction will manifest themselves in 2014. We project that budget surpluses will be slim to non-existent this year. If surpluses do appear, the strongest case to be made is for returning that money immediately to taxpayers.
Dave Oberting is the Executive Director of Economic Growth DC, a political and economic advocacy organization focused on the District and its economy. Follow Economic Growth DC on Twitter @GrowthDC. Email Dave at email@example.com.