Eds, Meds, and the Tax Base

From my summer visit to Providence, RI. A property owner expressing some doubts about the tax exempt status of Brown University.

Most people support some form of  Eds and Meds as an economic development strategy. As they should – hospitals and universities are generally very desirable employers that pay respectable wages.  Yet the strategy has its limits. I took this picture in Providence, RI this past summer – it was taken near the state capitol building, so the owner of that parcel of land was likely trying to make a pretty explicit point to policymakers. I don’t know the politics of the land owner or the nuances of Providence’s fiscal situation, but I thought the image does capture the tension that tax-exempt entities like universities can generate in cities with a narrow tax base. Most cities would love to have a Brown University.  Most cities would also want some needed tax revenue. Since health care and higher education are some of the few current growth industries, that is certain to pose some challenging policy decisions in coming years.

DC: One region that isn’t experiencing austerity

On the occasions I’ve been to the DC/Northern Virginia region, it seems like another world, where the recession is a purely abstract topic. New construction, numerous openings for high-paying jobs, and the stability provided by presence of the federal government seem to generate a general sense of optimism throughout the area. The DC region is doing massively better than the rest of the nation, particularly post-recession.

“In 1969, the first year for which the Bureau of Economic Analysis has figures, wages in the D.C. area were 12 percent higher than the national average. In 2010, they were 36.1 percent higher.” – Dylan Matthews

As of July 2012, the unemployment rate for the DC Metropolitan Statistical Area was 5.6, a full 3 percentage points lower than the national average of 8.6. It’s easy to see how policy makers in DC determined to avoid contemplating a grim economic situation could convince themselves that things aren’t that bad – when they look around their immediate surroundings, things aren’t that bad. DC is booming.

However, it’s worth considering whether DC’s massive wealth is good for the rest of the country. Setting aside the consequences of an insulated and oblivious  political class, (obvious to observers of any partisan persuasion),  there are other considerations. Citizens of struggling Rust Belt cities might rightfully wonder why say, the National Institutes of Health has to to be located in Bethesda, which in additional to the boon from hosting an employment center for several thousand high paid professionals, then gets to further benefit from agglomeration effects from the research as the area becomes a biomedical hub. Ryan Avent in The Economist argues that this is precisely what happened in the DC region:

“From the 1930s to the 1950s, government (primarily military) spending and research in the Bay Area helped seed a cluster of technology firms that became Silicon Valley. Not coincidentally, that same era was a period of enormous growth in Washington and its suburbs, which attracted highly skilled scientists and engineers to the area by the thousands. Such clusters, once in place, stick around thanks to economies of scale. There are positive spillovers to locating in the cluster—productivity is higher, labour markets are deep and liquid, ideas are communicated more effectively—which mean that as the cluster grows larger it becomes more attractive to workers and businesses. That makes it difficult for upstart clusters to dislodge and replace the older centres.

Some of the growth and wealth in Washington, in other words, is a residue from earlier eras of government-driven agglomeration; the cluster, built decades ago, now generates more wealth as the return to skilled clusters rises for reasons of technology or globalisation.”

Imagine a different history, where NIH is located in Cleveland. Case Western Reserve and other regional universities develop as a major feeder programs for the biomedical profession and the region weathers the post-industrial economic shock waves far more adroitly as Cleveland becomes a major biomedical hub.

Matt Steinglass suggests something a bit more drastic:

“One strategy for escaping this dynamic that has traditionally been employed by national rulers is to move the capital to a new location, usually one built from scratch. That seems implausible and expensive in the modern economy, but maybe we could try putting Congress on the road and just sending them to a new convention centre in a different state every two years, on sort of a Mongol Golden Horde or Dothraki model. It might not actually decrease the amount corporations spend on lobbying; the lobbyists would probably just follow them around. But it might be easier for less wealthy businesses and civil-society groups to rent office space in Boise than in Washington, and could help keep property values reasonable in the Washington metropolitan area, if that’s the problem we’re trying to solve here.”

I’m not sure about uprooting the entire federal government, but it’s worth discussing whether some federal agencies should be dispersed throughout the country. Locate the EPA in Denver, Agriculture in St. Louis,  Labor in Pittsburgh, etc.  I know it’s not likely to happen anytime soon, but it’s worth considering. Concentrating wealth and power in DC any further doesn’t seem especially necessary.