My apologies, first, for the hiatus in columns last week – I was moving from Vienna, VA., a suburb of Washington DC to Poughkeepsie NY, a semi-suburb (it’s 73 miles away) of New York. Many have clearly regarded this as an eccentric choice, and much of the motivation stems from things like hating the Washington summer more than the Poughkeepsie winter that are personal to each of us. Nevertheless, there is also a philosophical background for the move, in that I believe the rapid growth of the Washington area to be profoundly unhealthy.

Washington’s unhealthiness has been highlighted during the Great Recession, for example by the housing market. Other regions of the country suffered a severe real estate price decline in 2006-09, except for a few places such as Houston that had not previously enjoyed a boom. The Washington area enjoyed an extraordinary 150% price gain in 2000-06 according to the S&P Case-Shiller data, third after the Miami and Los Angeles areas and more than Phoenix, San Francisco or Las Vegas. Unlike those other regions, however, its price decline in 2006-09 was considerably less, 33% compared to 47% in Miami, 56% in Las Vegas and 42% in Los Angeles. Then after 2009, the recovery in Washington was considerably stronger than in other areas, with prices now up 10% from the bottom and still continuing to rise while house prices in most other areas decline.

The explanation, of course, is that Washington is not on the same economic cycle as the rest of the country. There was some pretence in the late 1990s that northern Virginia had developed a substantial tech sector, but the reality was that most of the sector was either evanescent (like AOL) or highly dependent upon government contracting or, like MicroStrategy, both. The reality is that when government expands, Washington does well, and vice versa.

You can see this in its local real estate market also. There is very little housing dating from the 1920s, a major real estate boom era around most East Coast cities, but a period of well-run, economical government. Conversely, there is a vast amount of housing, generally rather small and unattractive with very mean rooms, dating from the New Deal and wartime 1930s and 1940s. The 1960s, genesis of the two houses we lived in around Vienna, produced the Great Society and another housing boom of rather larger houses, most of them shoddily built. Then the 1980s was another period of recession, when Washington house prices were far below those around New York and little building took place. Finally the Bush years, stretching into the Obama years, saw a massive building boom and the apotheosis of the Washington area McMansion – huge, shoddily built and packed tightly together on the suddenly expensive land.

Whereas the modest and unattractive 1940s housing was inhabited mostly by government bureaucrats when first built, as were the larger 1960s offerings and some of the more reasonable sized modern housing stock, the true market for McMansions was not those working in government, let alone private sector entrepreneurs but the parasites, the swarm of lobbyists (whose numbers doubled under the supposedly limited-government Bush) and lawyers who have come to dominate the big money around Washington. Like Detroit in 1900-1915, Washington in recent years has been a boomtown, and the creaking infrastructure and monstrous traffic delays are the result of this.

The other special feature of Washington life is the nature of its inhabitants. They have far higher academic qualifications than the rest of mankind, even those lucky residents of the up-market suburbs around New York and San Francisco. Fairfax County, Virginia has 55% college graduates, compared with 41% in Westchester County, New York and 51% in Marin County, California. Fairfax residents would argue that this factor justifies them in having the nation’s highest average household income — $107,000, compared with a mere $79,000 in Westchester and $90,000 in Marin.

Washington area residents will argue that their greater qualifications justify their higher earnings, but from inspection the percentage of college graduates is not sufficiently higher in Fairfax than in the very affluent Marin County for any such premium to be justified. Furthermore, there is no living cost differential that would justify the income differential; indeed rather the opposite as the average owner-occupied residence in Marin is valued at $514,600 compared to $233,000 in Fairfax. Fairfax County real estate is overpriced – this was another reason for leaving the place – but is nothing like as lunatic economically as the fancier bits of California – or indeed south-east England.

As I have remarked before in these columns the Washington area is a kind of anti-Hollywood. Whereas Hollywood is full of people with room-temperature IQs but attractive looks and winsome personalities, the Washington area is full of PhD-credentialed trolls. Thus not only are the academic qualifications of Fairfax County not sufficiently superior to those of Marin County to justify their higher earnings, but Washington-area people are often seriously lacking in other qualifications that make for a commercially successful existence, such as looks, charm, salesmanship and workaholism. Plenty of insurance, real estate and used car salesmen lack substantial academic qualifications, but are nevertheless sufficiently well endowed in other respects to make very large amounts of money indeed, whatever their defects would be as GS-15s.

Washington is thus a region whose inhabitants are paid more than their qualifications are worth, do particularly well in recessions, and often lack the qualities that make them attractive to others. It is thus not surprising that they have little empathy with the travails of those outside Washington whose lives are entangled in the maelstrom of this very serious and damaging recession.

• Far from maintaining sound monetary and fiscal policies, which would enable ordinary businesses to recover their footing and begin to grow again, they pursue a chimera of negative real interest rates and gigantic budget deficits that produces high bureaucrat employment, a surface health in financial markets, and long-term unemployment for everyone else.
• Far from realizing that in a globalized world market, less skilled and older workers are especially vulnerable, they persistently refuse to enforce immigration laws, producing a large illegal immigrant population that can satisfy Fairfax County’s insatiable demand for maids and gardeners, while driving down wages and job opportunities for low-skill labor to Third World levels.
• Far from attempting to relieve burdens on small business and allow them to produce the jobs that are needed, they produce a series of health, environmental and labor regulation schemes that impose massive additional costs on the businesses that produce the country’s wealth.

These impositions are not particularly generated by one or other political faction; they are the result of Washington’s cocooning from the rest of its countrymen. Washington insiders like Newt Gingrich, who has lived within the Beltway for thirty years, cross party lines to support these economically damaging schemes. Conversely a few “blue dog” Democrats whose ties remain outside Washington oppose them, like Joe Manchin (D.-W.Va.) who while campaigning for his West Virginia Senate seat took a shotgun to a copy of his own party’s cockamamie environmental legislation.

It is not surprising that outsiders find U.S. politics dysfunctional; it is dominated by a pampered super-class of lobbyists, lawyers, most politicians and senior bureaucrats, all of which are not only protected from the economic forces that afflict the rest of the economy but actually benefit, both relatively and in absolute terms, from hard times in the U.S. economy as a whole and the “stimulus” schemes for which they provide an excuse. The same effect can be seen in Brussels, when I knew it in the 1970s a very pleasant modestly wealthy capital of a small country with good restaurants, a fine banking system and legendarily affluent “Belgian dentists” who were the major investing force behind the early Eurobond market. Needless to say, Brussels is today richer per capita, but its wealthy now are not dentists but bureaucrats, lawyers and lobbyists, sleek, pampered and utterly cut off from the people for whom they invent damaging regulations.

The idea, pioneered by the Founding Fathers, of a capital city inhabited only by statesmen and bureaucrats, without any other significant economic base, is a very dangerous one. While government is small, it produces the quirky charm of nineteenth century Washington or 1949-99 Bonn – lacking as they did most big-city amenities, they were universally detested by their inhabitants, who left them at weekends whenever possible. However as government grows, it becomes itself a sufficiently large employer to finance a major city – with amenities like the Kennedy Center and the Washington Metro that can easily be paid for by beyond-Beltway taxpayers who gain no benefit from them. Eventually they become bureaucrat Xanadus, like Brasilia, Napyidaw (Burma) or Astana (Kazakhstan) in which government, freed from significant outside pressure, can indulge its fantasies at the expense of a people kept safely remote.

My new abode, New York’s Dutchess County, is only half as rich as Fairfax County, with commensurately lower house prices (yippee!) and only half the proportion of university graduates. While it has a couple of large businesses and several colleges, most of its richest inhabitants are successful used car dealers and realtors, whose depredations extend only to their customers. I look forward eagerly to its modest amenities.

-0-

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)