Does Washington, D.C. create value?

In recent remarks on the Senate floor, Senator Mike Lee (R-UT) contended:

There is a reason that six of the 10 wealthiest counties in the United States are suburbs of Washington, D.C.–a city that produces almost nothing of actual economic value.

This assertion prompted a fact check from the Washington Post’s Glenn Kessler. Kessler grants that Lee is correct in that “six of the 10 wealthiest counties are suburbs of Washington, D.C.” But he goes on to contend:

There’s not really an economic concept that equates to “tangible economic value,” at least as Lee seems to be suggesting. Thus it is hard to disaggregate activity ultimately benefiting from the federal government.

I think most economists would disagree. There is, indeed, an economic concept that distinguishes between “tangible economic value” and the lack thereof. The idea is called rent-seeking.

First, consider how people profit from voluntary exchange. If two parties voluntarily exchange, both expect to gain from the interaction. The consumer expects to gain some value from the product that is in excess of what he pays (otherwise he wouldn’t part with his money). And the producer expects to receive some price in excess of her costs, including the opportunity cost of doing something else with the product (otherwise, she wouldn’t part with the product). The sum of this consumer and producer surplus is called “economic surplus” and it is at the heart of economics. Indeed, it is at the heart of human progress.

Sometimes, however, the producer is the exclusive producer of the particular product. Her exclusivity could be natural (only Michael Jordan could do what he could do), or it could be contrived (by law, only the USPS is allowed to deliver non-urgent mail). Whether natural or contrived, exclusivity permits a producer to capture a larger share of economic surplus than she otherwise would. This above-normal producer surplus is a payment in excess of what would be necessary to bring the good to market. Economists call it an economic rent (and it has nothing to do with apartments).

Significant problems arise when exclusivity is contrived. One problem is that people will invest valuable resources–time, money, effort–into convincing those with political power to grant them an exclusivity. People will lobby. They will donate to campaigns. They will make products that politicians like instead of products that consumers like. All of this is potentially wasteful and it is called rent seeking.

It isn’t easy to measure the losses from rent seeking (though a few have tried). But I suspect this is exactly what Senator Lee had in mind. After all, Washington, D.C. Is the place people go to seek rent. Want to force people to buy your product? Go to Washington and seek an individual mandate. Want to make your competitors’ product more expensive than your own? Go to Washington and seek tariffs of up to 250 percent on foreign producers. Want to raise the production costs of your competitors? Go to Washington and seek a production standard that plays to your competitive advantage.

Rent seeking is hardly a fringe concept. Professors Roger Congleton, Arye Hillman and Kai Konrad have just released a two-volume anthology of rent seeking research called 40 Years of Research on Rent Seeking (I know; not cheap). They report that the EconLit database has over 401 academic journals and books with “rent seeking” in the title and that a Google Scholar search produces 1,500 papers include the term.

Mr. Kessler is right that much of what happens in D.C. is not rent seeking. But his assertion that only 40 percent of the region’s gross product came from government spending is hardly convincing. That isn’t just a “big chunk.” It’s a mammoth chunk. Moreover, it misses the fact that a lot of “private” economic activity in the region is still related to rent-seeking. See, for example, the K-Street corridor.

These critiques aside, the fact check missed a nice opportunity to educate the public on an important concept at the core of modern economics.

2 thoughts on “Does Washington, D.C. create value?

  1. George

    Good point about rent seeking. But do you really think Senator Lee was talking about that? Most of the recent DC-bashing based on the area’s recent prosperity has been part of emotional pleas to shrink the federal government.

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