The Gold Rush

by Dave Schuler on April 13, 2010

During the California Gold Rush of 1848 to 1857, California produced an average of 76 tons of gold per year. A little back of the envelope calculation suggests to me that the total gross value of the gold that was mined during the gold rush in today’s dollars is around $27 billion. During that period 300,000 people flocked to the gold fields in search of riches. The 49ers were pikers by comparison with the gold rush that’s going on right now.

Every day well over 400,000 people commute from the collar suburbs into Washington, DC. It’s the new gold rush and it dwarfs anything the gold-seekers who rushed to the gold fields of California or the Yukon ever dreamt of.

Today of the ten richest counties in America six are in the Washington, DC metropolitan area. The are Loudon and Fairfax counties in Virginia, Howard County in Maryland, Fairfax city in Virginia, Arlington County in Virginia, and Montgomery County in Maryland. The unemployment rate in the DC metro area is 6.2%, far below the national unemployment rate.

The incomes of federal employees are booming:

Since December 2007, when the current downturn began, the ranks of federal employees earning $100,000 and up has skyrocketed. According to a recent analysis by USA Today, federal workers making six-figure salaries – not including overtime and bonuses – “jumped from 14 percent to 19 percent of civil servants during the recession’s first 18 months.’’ The surge has been especially pronounced among the highest-paid employees. At the Defense Department, for example, the number of civilian workers making $150,000 or more quintupled from 1,868 to 10,100. At the recession’s start, the Transportation Department was paying only one person a salary of $170,000. Eighteen months later, 1,690 employees were drawing paychecks that size.

I think we can see a pattern emerging here and it goes far beyond the federal government. Consider the unemployment rates in the largest metropolitan areas in the country. Here in Illinois for example while the statewide unemployment rate is 12% and the unemployment rate in the Chicago metropolitan rate is consistent with that at 11.4%. The unemployment rate in Springfield is notably lower at 10.1%. Missouri’s statewide unemployment rate is 9.5%, St. Louis’s unemployment rate is 11%, while Jefferson City’s unemployment rate is 7.9%. Wisconsin’s statewide unemployment rate is 9.7%, Milwaukee’s unemployment rate is 9.6%, Madison’s unemployment rate is 6.7%.

Lest you think that the issue identified here is small town vs. major metropolitan area, the Massachusetts statewide unemployment rate is 10% and Springfield, MA’s is 11% while Boston, the state capital’s, is 8.9%.

I recognize that this phenomenon can’t be attributed to federal and state employees alone. There are lobbyists, consultants, general hangers-on, and the people in service industries who support them to consider, too. They all add up to the reality that rent-seeking is now the only real growth industry.

Under normal circumstances I wouldn’t be overly concerned about it. I don’t envy others their wealth. But the federal and state governments need a strong private sector to prosper and that isn’t the case right now. I think there’s a lot to be concerned about.

{ 4 trackbacks }

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{ 13 comments… read them below or add one }

Jeff Medcalf April 13, 2010 at 12:56 pm

I live in Fairfax County, and commute around DC to Montgomery County. (As an aside, Howard County is more like Baltimore than DC.) The private sector here are almost seen as pariahs by the government types. Worst of all are the private sector people providing services to government agencies. Guess what I do?

Dave Schuler April 13, 2010 at 1:04 pm

Would it be proper for me to address you as “Mr. Pariah” or can I just call you “Pariah”?

steve April 13, 2010 at 1:51 pm

Bad management. We are now relying on politicians to cut spending, which neither party does. We need to build in some systemic changes that automatically help. As we have discussed before, change govt. pensions to defined contribution. Tie contracts to some combination of inflation and state debt so that salary increases can be delayed (better than layoffs during a recession). Otherwise, IIRC, non-defense discretionary spending, as a percentage of GDP/budget has not varied a lot. It is entitlement spending, Medicare, that is the problem.

At the state level, I would do the same as above. As the economy recovers, I would definitely concentrate on spending issues first. Cutting taxes first just leads to debt.

We obviously need better job creation than we had in the last ten years. Tax cuts did not do that much. I think that Mandel’s work on innovation is probably on the trail of part of our issue. I also think, looking at some more income/wealth distribution data recently, that we have put way to much of our capital into the hands of too few people. With the bottom 50% controlling only about 2.5% of our wealth, the old way of starting a small business, borrowing from family and using personal savings, means we are shutting out future entrepreneurs from a large segment of our population.

Steve

Sam April 13, 2010 at 2:10 pm

Over at political calculations he makes a pretty good case that one of the biggest sources of “income inequality” is government salaries. Adding in lobbying and people whose income is solely from government makes that case even more compelling.

PD Shaw April 13, 2010 at 2:47 pm

I don’t buy Dave’s thesis as applied to states. The zip code in Illinois with the highest reported incomes are all in the Chicago area, headed by Northbrook at $725,371. The highest zip code in the Springfield area is at $62,206. Not the stuff of gold rushes.

Sorry to get too Illinois specific, but there areas of Rockford, Peoria, and Decatur with higher reported incomes than Springfield, yet these cities also have the highest unemployment rates in the state. These are traditional manufacturing towns, so I assume the higher wages are union-influenced, which in turn is probably less attractive for new business start-ups.

Anyway, as far as Springfield’s relatively lower unemployment rate, I would point to healthcare, and indirectly the construction jobs created by healthcare; they’re the only ones creating new jobs. The healthcare sector is going to be the largest employer in Springfield within a few years, if not the end of this one.

Steve Verdon April 13, 2010 at 4:56 pm

PD,

You are shifting to income when Dave specifically made a post on unemployment rates….why?

Oh and health care, as Dave would say, a government handmaiden industry.

0/2 mate, sorry.

PD Shaw April 13, 2010 at 9:40 pm

Steve,

Dave’s post is partly premised on income of federal employees and the wealth growing in the D.C. area. I don’t find evidence of such growth at the state levels, primarily because the states are broke and can’t print their own currency. Are you suggeting that there is a gold rush in Sacramento? I believe my mayor has been to D.C. to meet Obama 2-3 times, no doubt to beg for money; I wonder if he’s met the governor that many times.

Michael Reynolds April 14, 2010 at 12:23 am

The stock market does not seem to believe there’s a problem with the private sector right now. I’m hearing more about a robust V-shaped recovery — and not from liberals. What I’m hearing is that corporate profits are driving stock prices higher. Obviously stocks aren’t going up because of government jobs in Washington or Springfield.

Drew April 14, 2010 at 12:42 pm

“With the bottom 50% controlling only about 2.5% of our wealth, the old way of starting a small business, borrowing from family and using personal savings, means we are shutting out future entrepreneurs from a large segment of our population.”

As someone who deals with these people every day, I say balls. They are much more focused on the taxation of their potential endeavor.

“The stock market does not seem to believe there’s a problem with the private sector right now.”

Its a fair point, and a conundrum, for me at least. But corporate profits seem to be driven so much right now by keeping the payrolls low and -my words- transitory inventory replenishment.. Further, the PE ratio would indicate that the equity markets have gotten ahead of themselves, and a victim of yield chase right now; more than fundamental value. And just wait until people start taking profits ahead of the cap gains increase.

“I’m hearing more about a robust V-shaped recovery — and not from liberals.”

Who? Larry Kudlow and the perma-bulls at CNBC??

For some balance, read the (admittedly) perma-bears at zerohedge. Also, they have better data.

steve April 14, 2010 at 1:39 pm

“As someone who deals with these people every day, I say balls.”

I had the distinct impression you were a bit further up the chain. You are financing the people who are starting small, 3 to 4 person workplaces? The kind that are starting in an empty garage? $40,000-$50,000 loans?

Steve

Drew April 14, 2010 at 5:19 pm

Steve -

I deal with entrepreneurs. Period.

We generally buy companies with revenues of appx. $30MM up to about $200MM, although we just closed one at $350MM, an outlier.

But you have no idea, dozens of solicitations a day (email), and several meetings a month, with people who want money for their business vision.

But when you speak with them, they care not one whit about getting the money. The world is flush with capital. What they talk about is do they get to keep 10%, 25%, 50% of what they produce. And they try to drive their personal economic deal with equity providers based on those considerations, in particular options (normal tax treatment) vs equity grants (cap gains treatment).

Guess what they want? But that may change.

What you are referencing is “microbusinesses,” generally – wrt equity – financed by “angel capital.” Don’t kid yourself that similar considerations don’t pertain.

However, if I recall correctly, you are in the medical field. Its a standing joke that when you can’t raise capital from real businessmen you go to the doctors and dentists……..they are notoriously the worst investors on the face of the earth, in fact the easy pickings among the angel investors.

At the risk of sounding arrogant, please feel free to run any proposed investment by you……..by me. Again, I’m not arrogant, but I’ve just seen about every investment thesis known to man. This isn’t rocket science, but it is experience based.

Steve Verdon April 14, 2010 at 5:26 pm

I believe Dave’s point isn’t that one will necessarily get fabulously wealthy off of government employment, but that it is displacing private employment. The pay is becoming comparable to that of the private sector even including benefits (particularly retirement benefits). Typically government positions have been lower pay with at best similar benefits. Thus, looking at countis, cities, or even states with high incomes isn’t going to tell you much, IMO. Instead you’d want to look at employment rates for private and public sectors by city or county or state if they are available. As such, I think Dave is on the right course and you are on the wrong one.

I don’t find evidence of such growth at the state levels, primarily because the states are broke and can’t print their own currency.

It hasn’t always been that way. California was doing quite well…so much so in fact that the public employees have generous compensation and benefits packages. Not that one would get rich…well not too rich. But when you have a defined benefits retirement program its a good, good deal. Former LA police chief Bernard Parks pulls in some serious green due to his retirement benefits. So do lots of other retired public employees.

Still it will be interesting to see what happens since as you point out states are broke. Now what will happen to these defined benefits programs? There isn’t enough money to keep funding them. The states do have the power to tax though, so they do have very deep pockets like the Feds. They just lack the option of monetizing the debt. And what happens if a state really does end up bankrupt, I’m willing to bet that the Feds move in and they can monetize the state’s debts although the results would be regretable.

You still haven’t convinced me.

steve April 15, 2010 at 7:31 am

Drew- I agree, doctors are notoriously bad investors. The things I see people doing surprises me at times. I am fairly conservative in my personal investments, and TBH, my wife does most of it as she is smarter than I am (first in her class).

Anyway, the part of the cycle I am thinking about is what takes place even before the angels arrive. (At least by my reading, people dont usually put family and friends in the angel class.) It’s the part where people use savings and family help out. I think that lack of wealth in the bottom 50% makes it more difficult for people to get to the point where they talk with angels, let alone someone like you.

I was also thinking even smaller scale. The people who want to start a welding shop, a bakery or glass making shop, that kind of thing. Lack of family wealth plus the costs of health care are constraints.

Steve

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