The federal governments relentless expansion has made Washington, D.C., Americas real Second City.
The Washington, D.C., region has long been considered recession-proof, thanks to the remorseless expansion of the federal government in good times and bad. Yet its only now—as D.C. positively booms while most of the country remains in economic doldrums—that the scale of Washingtons prosperity is becoming clear. Over the past decade, the D.C. area has made stunning economic and demographic progress. Meanwhile, Americas current and former Second Cities, population-wise—Los Angeles and Chicago—are battered and fading in significance. Though Washington still isnt their match in terms of population, its gaining on them in terms of economic power and national importance.
Illustrations by Arnold Roth
In fact, were witnessing the start of Washingtons emergence as Americas new Second City. Whether thats a good thing for America is another question.
Washington is an artificial capital, a city conjured into existence shortly after the Revolutionary War. Its location was the result of political horse-trading. Virginia congressmen agreed to let the federal government assume the states war debts, even though Virginia itself was already paid up; in exchange, the new capital would be located in the South.
The citys early boosters hoped that its location on the Potomac River would help it grow into a commercial as well as a political capital, but that didnt happen. While other cities got state backing for their business endeavors—a good example is the Erie Canal, built by New York State, which benefited New York City enormously—Washington was run by a Congress more interested in national affairs than in local ones. The city stagnated at first. Its growth finally picked up during the Civil War, but it wasnt until the Great Depression and World War II, with their expansion of the role of the government in American life, that Washington grew prosperous. During the war, average family income there was higher than in New York or Los Angeles.
It was also a heavily black city—by 1957, the countrys first major city with a black majority. But back in the 1870s, Congress, motivated by racist fears of black votes, had replaced the citys elected mayors with a board of commissioners appointed by the U.S. president. That change, coming just a few years after black males had won the right to vote in Washington local elections, hobbled the citys ambitions and set the stage for its troubled legacy in race relations. It wasnt until 1973, when the civil rights movement had made the disenfranchisement of the citys blacks untenable, that D.C. regained local control. Unfortunately, a number of factors—including the 1968 riots after Martin Luther King, Jr.s assassination and a series of disastrous urban policies enacted by the federal government—set the stage for the emergence of political opportunists, including the infamous Mayor Marion Barry. During his tenure in the 1980s, unchecked corruption, ineptly delivered city services, soaring crime, horrendous public schools, financial chaos, and racial tensions made the city a byword for dysfunction nationally. So did the 1990 video that caught Barry smoking crack in a hotel room.
Nevertheless, the metropolitan area surrounding Washington continued to grow and thrive. And when the 2000s arrived, the expansion of the federal government not only catapulted the region into a new league of success but also transformed the troubled city at its center.
During the first decade of the twenty-first century, the Washington metropolitan area overachieved on a variety of measurements versus its peer metro areas—that is, the rest of the ten largest metros in the country, plus the San Francisco Bay Area (which federal classifications divide into two, neither of which would make the Top Ten on its own). Among these regions, Washington ranked fourth in population growth from 2000 to 2010, trailing only the three Sunbelt boomtowns of Atlanta, Dallas, and Houston (see The Texas Growth Machine). Washington is currently the seventh most populous metropolitan area in America.
The region has performed even more impressively on the jobs front. Since 2001, Washington has enjoyed the lowest unemployment rate of its peer group. Over the course of the entire decade, it ranked second in job growth, trailing only Houston. That wasnt just because of the federal agencies and gigantic contractors of Washington stereotype. The region has also been a hotbed of entrepreneurship—much of it, to be sure, dependent on federal dollars. During the 2000s, it had 385 firms named to the Inc. 500 lists of fastest-growing companies in America, according to Kauffman Foundation research—by far the most of any metro area. From 2000 through 2011, according to rankings developed by Praxis Strategy Group, Washingtons low-profile but powerful tech sector had the countrys second-highest job growth, after Seattles. The region is also one of Americas top life-sciences centers.
Then theres economic output. During the 2000s, per-capita GDP grew faster in Washington than in any of its peer regions except the Bay Area. Today, Washingtons per-capita GDP is the countrys second-highest—again, after the Bay Area. Unlike Washington, however, the Bay Area hemorrhaged jobs over the course of the decade. Related to Washingtons impressive output is its astonishing median household income, the highest of any metro area with more than 1 million people. A remarkable seven of the ten highest-income counties in America are in metro Washington. And during the 2000s, per-capita income rose in Washington faster than in any of its peer metros.
Finally, Washingtons population is the best-educated in America. Almost half of all adults in the Washington region have college degrees, the highest proportion of any metro area with more than 1 million people. The same is true of graduate degrees: almost 23 percent of Washingtonians hold them.
The regions success relates to two larger points. The first involves the fact that prosperous urban regions in America are increasingly divided into two kinds. Some, like the Bay Area, embrace a vertical model of success, generating increases in economic output and per-capita income with stagnant or declining population and jobs. Others, like Dallas, are horizontal, featuring growth in population and jobs but stagnant or declining output and income. But Washington is an exception: it is the only metropolitan area with a population of at least 1 million that achieves the best of both worlds, combining Dallas-style population and job growth with the fabulous output and wealth of a San Francisco. In that respect, it is a city without peer in America.
The second point to emphasize is the sheer scale of Washingtons performance. If you consider the claim that its becoming Americas new Second City an exaggeration, note that its huge recent growth has brought its economic size much closer to Chicagos—not just in per-capita terms but in absolute ones, too. Back in 2001, Chicagos economy was 52 percent bigger than Washingtons; by the end of the decade, the gap had shrunk to 24 percent. Similarly, in 2000, total personal income was 62 percent greater in Chicago than in Washington—a difference that had dwindled to 31 percent by the end of 2010. Chicago has just 16 percent more people with college degrees than Washington does. And Washington has more people with graduate degrees than Chicago does and is closing in on Los Angeles.
None of these measurements, by the way, includes nearby Baltimore. The combined Washington-Baltimore area is now the fourth-largest in the country, with about a million fewer people than Chicago. In roughly 15 years, if current growth rates hold, Washington-Baltimore will pass the 10-million-person threshold necessary to be counted as a megacity.
It isnt just the Washington metropolitan region thats thriving. The current boom is accomplishing something that previous ones didnt: transforming the city itself, the District of Columbia. The Districts population grew during the 2000s for the first time since 1950. It suffers less from the problems that once tarnished its image: strained race relations, high crime, ineptly delivered public services, local financial crises. Many city services, such as planning and transportation, have been heavily professionalized and are even touted nationally as innovative models.
True, corruption, especially in real-estate deals, remains alive and well. A parade of local politicians, including current mayor Vincent Gray, is under a cloud, and even Marion Barry is still around as a city council member. But with a torrent of investment, new residents, and prosperity flooding in, it hardly seems to matter. The District grew by more than 1,000 new residents per month between 2010 and 2011. It ended the 2011 fiscal year with a budget surplus of $240 million and the 2012 fiscal year with a surplus of $140 million. In the past, people put up with a dysfunctional city government so that they could be near the federal one. Today, by contrast, the District is a desirable place to live in its own right, much like Manhattan or San Francisco.
This trend is affecting every aspect of urban life. Real estate has been thriving, of course. Washington has the nations lowest office-vacancy rate, along with some of its highest commercial rents. Last January, the Association of Foreign Investors in Real Estate put Washington in third place on its list of top global cities for foreign investment, behind only New York and London.
Residential real estate is also booming. People seem to have a hidden assumption that every house in the District will eventually be crowding $1 million, wrote Megan McArdle in the Daily Beast in September (adding, however, that this doesnt seem possible to me). Rents are high, with lower-cost apartments disappearing rapidly as investors pay current residents as much as $10,000 to move out so that their apartments can be rented to others at higher rates. In 2011, buoyed by robust demand, builders broke ground on more than 15,000 new apartment units throughout the Washington region. Much of the building is taking place in the District, noted the Washington Post, adding that the vast majority are Class A units aimed at young professionals eager to live in walkable communities near shopping and public transportation.
As that statement implies, the apartment boom is driven by a surge in younger residents, especially in the regions core. The District owes almost all its population growth to people in their twenties and thirties; 48 percent of its households are single-person, a nationwide high. Whats attracting these upscale young? At warp speed, Washington has become a New Yorkstyle urban playground and employment market. As Time recently reported,
every week brings fresh evidence of continuing prosperity: a new restaurant, a new nightclub, another restored 19th century townhouse in a previously dodgy neighborhood selling for $1 million or more. Start-ups are hiring through Craigslist, and just opened lobbying firms have no trouble collaring clients. Storefronts that stood abandoned five years ago fill with pricey gourmet-food shops.
Similarly, Ross Douthat observed in the New York Times that
over the [last] decade. . . . the changes to Washington have been staggering to watch. High-rises have leaped up, office buildings have risen, neighborhoods have been transformed. Streets once deserted after dusk are now crowded with restaurants and bars. A luxurious waterfront area is taking shape around the stadium that the playoff-bound Nationals call home. Million-dollar listings abound in neighborhoods that 10 years ago were transitional at best.
But Washington isnt Portland, a youth mecca where, the quip goes, young people go to retire. Geographer Jim Russell notes that Washingtons young talent is super-ambitious. They are driven to succeed in a very competitive talent market. Jobs on Capitol Hill or in high-profile nonprofits are highly coveted and hard to land. Like New York, Washington is one of the worlds toughest arenas, a place where the best and brightest come to prove themselves.
They arent just white hipsters, either. The Washington metro area is 26.4 percent black, Number Eight in the country among metros with more than a million people. Stereotypes of the city dwell on its black underclass and its history of electing black nationalist politicians like Barry. But the area has a large black middle class as well—above all, in Prince Georges County, just across the Maryland state line. That county is over 65 percent black, and its median household income is $70,700, making it the highest-income majority-black county in the United States.
Immigrants, too, have been flourishing in Washington. By the end of 2010, nearly 22 percent of the metropolitan areas population was foreign-born, up from 17.3 percent in 2000—the biggest increase among the ten largest American metro areas. A lot of these immigrants are Latino, as in many American cities. But Washingtons immigrant base is highly diverse. For example, tens of thousands of Indian immigrants, many of them tech entrepreneurs, live near Dulles International Airport, in an area that the Atlantic has labeled the Silicon Valley of the East. The region also attracts immigrants from East Asian and African countries, such as Korea, Vietnam, and Ethiopia. Many are highly educated. We have a lot of really highly skilled, really highly educated immigrants in technical fields, George Mason Universitys Lisa Sturtevant told the Washington Examiner last year. And, Russell adds, D.C. is a global talent market increasingly on par with New York and London. It is drawing the cream of the crop from around the world, and they are paid top dollar.
The international origins of both talent and investment in Washington signal something new: its becoming an important global city. In a globalizing world, capitals count for less than global business centers, journalist Richard Longworth wrote in 2009, adding that Washington, a one-dimensional company town if there ever was one, never made anyones list of global cities. That view of Washington is increasingly dated. Yes, its still a government town, but its the town of the most important government there is, and that distinction matters. Washington is home to a massive number of embassies and international institutions, of course. Almost 1,500 foreign correspondents from 113 countries are based there, giving Washington a global news-media reach on par with New Yorks. Even domestically, the news media industry has consolidated into Washington, along with New York, writes Matthew Yglesias in Slate. A recent meta-analysis of various surveys by economist Richard Florida ranked Washington the Number Three global city in America, behind only New York and Chicago.
But what solidifies Washingtons emerging status as Americas new Second City isnt its economic performance or its emerging global-city profile. Both of those are secondary effects of the real change in Washington: the increasingly intrusive control of the federal government over American life.
Traditionally, Washington thrived through a leaky bucket model, redirecting some of the gigantic money flow through the federal pipeline to itself. The 2000s were an especially good time for the region, as two wars, plus 9/11-related defense and homeland-security procurement, fueled the boom. These days, about a third of the Washington-area economy depends on the federal government. But with $16 trillion in national debt and large deficits projected as far as the eye can see, the gravy train may be coming to a halt. Some, like Steven Cochrane of Moodys Analytics, think that fiscal retrenchment would spell the end of D.C.s new prosperity. The days of Washington being the leader in terms of job growth and economic strength are really over, Cochrane told the Washington Post in early 2011. I think theres no way that [the pace of job growth] could be kept up any longer, particularly now that the federal government is undergoing pretty strict [budget] scrutiny.
The leaky-bucket model may indeed be nearing its limits. But Washington has discovered a new way to extract value from the federal government, based not just on spending but on an ever-expanding regulatory state. An array of programs—the Sarbanes-Oxley and Dodd-Frank acts governing finance; the governments auto-industry takeover; the EPAs declaration that carbon dioxide is a pollutant—takes regulation to new levels of detail and intrusiveness, even extending to the micromanagement of particular companies. The trend began long before President Obama took office, but its quintessence is Obamacare, an annexation by the federal government of one-sixth of the American economy via 2,000 pages of byzantine legislation, not counting the thousands of pages of implementing regulations still to come.
All this intrusion emanates from the legislative and especially the regulatory machinery in Washington. The city has become, in effect, the Brussels of America. So a wider and wider variety of businesses and organizations must be located there to lobby the government that decides their fate. (According to the Center for Responsive Politics, total spending on lobbying rose from $1.6 billion in 2000 to $3.3 billion in 2011.) These firms pay local taxes. So do their workers, who also buy houses, patronize stores, pay tuition at private schools, employ local doctors and lawyers, and so on. The regulatory superstate is turbocharging Washingtons local economy.
This new basis for prosperity could pay huge dividends to the region. The model here might be the defense industry, which has already centralized many operations in the area. Northrop Grumman, for example, recently moved its headquarters from Los Angeles to Washington. Boeing shifted its headquarters from Seattle to Chicago to be closer to defense operations and customers in Washington. Other industries, such as health insurance, may follow suit. Even if they dont relocate to D.C. entirely, theyll need to be represented there. City Journal contributing editor Joel Kotkin has speculated that when everything from zoning [to] the location of industrial plants and healthcare is under Washingtons control, the capital could conceivably even emerge as a challenger to New Yorks two century reign as the countrys most important city. The mere fact that such heresy can be uttered illustrates Washingtons new power.
So Washington can boast demographic and economic growth, a highly educated workforce, an emerging elite-global-city profile, and regulatory hegemony that ensures that America will continue to pay it tribute, even if the federal government manages to restrain its spending. This looks like a winning recipe locally, and it gives the region a legitimate claim to be Americas new Second City.
But its a loser for America. Even more than the old leaky-bucket system did, the regulatory superstate depends on inflicting pain on the rest of the country, pain that only Washington itself can relieve—if you pay up and have the right connections, that is. Washingtons fortunes and Americas are increasingly at odds. The region is prospering because its becoming something that would have horrified the Founders: an imperial capital on the Potomac.