Federal Washington cashes in on connections; In Washington, opportunities and rewards are distributed according to what you can do, not whom you know?

Federal Washington cashes in on connections

By Charles Lane, Tuesday, January 7, 9:10 AM

This is a tale of a city that is really two cities. In some parts of town, gleaming office-retail complexes rise, home prices reach into the millions and people routinely spend tens of thousands of dollars per year to send their children to private schools.Yet within this same municipality, about one in five households lives in poverty. Many single parents go to bed worrying about how to feed their children or protect them from crime and substandard public-school educations.

This is not Bill de Blasio’s New York. It is Washington, D.C., where the gap between top earners and everyone else is actually greater than that in New York, according to a 2011 Census Bureau report.

Indeed, Washington’s Gini coefficient, a widely used measure of income inequality, is the largest of any U.S. city with more than 500,000 residents except for Atlanta.

Certainly the politicians returning to the nation’s capital for an election-year debate over income inequality should spare some time and attention for the maldistribution going on right outside the doors of Congress. Not only is the gap between rich and poor worse in the District than almost anywhere else, it is arguably less defensible and more instructive.

Americans generally, and quite properly, don’t resent rich people just for being rich. We distinguish between those who exploit connections or insider knowledge to make money and those who get rich by developing extraordinary artistic talents, starting new businesses or inventing useful products.

The former earn our contempt. The latter earn our admiration: Even President Obama, launching his campaign against income inequality last month, paused to acknowledge that “we expect them to be rewarded handsomely.”

A large number of Washington’s top earners fit into the less productive category. Many of them specialize in trading on their connections to D.C.’s biggest “industry,” the federal government. As of 2012, lobbying for tax breaks, contracts, exclusive licenses, subsidies and the like was a $3.3 billion-a-year industry, according to the Center for Responsive Politics.

The average salary of the CEOs — chief lobbyists — of the 30 biggest industry trade associations, including incentives and deferred compensation, was $2.34 million in 2010, according to Bloomberg News.

More than a few of these people used to be governors, senators or members of the House, where they acquired the access that they now sell to the highest bidder. They are accompanied by a small army of former executive and legislative branch staffers who have gone through the revolving door from government to what Washingtonians euphemistically call “the private sector.”

Economists have a name for this sort of behavior: rent-seeking. In economic parlance, “rent” means the profit from gaining control over existing sources of wealth as opposed to creating new ones.

Washington lobbying, and the government-sponsored privileges it secures for various interest groups, is rent-seeking in its purest and most pernicious form. Various societies have grown free and prosperous by many different methods; dividing up existing wealth according to political connections is not one of them.

Washington’s revolving door is hardly the only example of rent-seeking in our society, to be sure. A good deal of Wall Street activity fits the definition.

Rent-seeking is not necessarily unproductive. One reason inventors create new products is to patent them, a form of government protection that entitles one to years of royalty payments.

Still, too many of our public institutions — from Congress to big-city school systems — have been captured by rent-seeking interest groups. Wall Street hedge funds have their carried-interest exemption in the tax code. Farmers are making record incomes yet still benefit from government incentives to grow corn for ethanol. Real estate agents defend the mortgage-interest deduction, even though the benefits go disproportionately to ­upper-income homeowners. Green-energy subsidies and tax credits generally favor the well-to-do.

The good news is that, entrenched as special interests and their various special subsidies may be, it is probably more realistic to resist or undo rent-seeking than it is to undo the global forces of trade and technology that have increased income inequality in every developed nation.

Americans neither want nor need to guarantee a low Gini coefficient. What we do have a right to expect, however, is that, to the greatest extent possible, this society’s opportunities and rewards are distributed according to what individuals can do, not whom they know.

Instead of worrying about how much money rich people make, we should focus more on how they make it.