D.C. Wealth: How billions in federal contracting dollars helped D.C. become one of the nation's wealthiest areas

Aug 16, 2011

Billions in federal contracting dollars helped D.C. become one of the nation's wealthiest areas. Washingtonians now enjoy the highest median household income of any metropolitan area in the country, and five of the top 10 jurisdictions in America - Loudoun, Howard and Fairfax counties, and Falls Church and Fairfax City - are here, census data shows. But nowhere is that windfall more concentrated than Great Falls, Va.

Join economic adviser, Ric Edelman, who is also a Great Falls, Va., resident, to chat about how the economy has prospered around the District. He'll be chatting Tuesday, Aug. 16 at noon ET.

Have a question? Ask now.

I'm happy to chat with you about recent goings-on in the financial world -- or any other aspect of your personal finances. Thanks for joining us today!

How did the D.C. area get so rich?

There are several reasons. First, we're home to the federal government. The Pentagon is here, too. As a result, a large portion of all federal spending occurs in our area. Second, being our nation's capital, we attract lots of tourists -- a big boost to our economy. We've also built large biotech, telecom and government contracting communities -- all drawn to our area by the above. Finally, we have 3 airports! And did I mention our geographic location - near Philly, NY, mountains and the ocean - all make this a great place to live. Economically, we're blessed, no doubt about it.

Just wait till we get government spending under control...Great Falls will be one of the first places to experience a crash. Most of these businesses basically take advantage of the government and also their lack of responsible spending.

I'm not sure I agree with any of your premises...that we will experience a crash, or that Great Falls is particularly susecptible to one. But if you feel that way and own property in GF, you should sell now.

I bought my townhouse in 1998. At one time, its value was three times more than what I paid, now it is only double. But with that said, my income never came close to three times what I was making in 1998, it isn't even double. In many ways, I feel like the poor neighbor in a community that on today's income I couldn't afford to live. If the housing prices go up, should income go up at the same pace or am I looking at things the wrong way?

It's always hard to complain that your house is worth twice as much as what you paid for it. Still....

You're right that, fundamentally, housing prices and incomes are, and need to be, linked. When that link is broken, bad things happen - as we saw in the past 10 years.

As a financial advisor, what are your thoughts on a financial strategy of buying a diverse portfolio and letting it ride (except for possibly selling stock losers when there are tax benefits in doing so) until you need it? Don't most investors wind up losing too much in brokerage fees to what constant buying and selling worthwhile in the long run?

You are correct, on all counts. Instead of trying to guess which investment will do well next, simply buy all investments. Then, rebalance periodically - because each investment will perform differently over time. This helps you protect your profits while reducing your risks. It also takes the guesswork out of investing. But it's a boring (although successful) approach - and that's why most investors don't follow this method. That's unfortunate, because as you point out, investors merely reduce their returns, increase their risks, pay more in taxes and incur higher trading costs. All for no benefit.

Do you expect future spending cuts impacting housing and the economy in the DC/VA/MD area?

Until we see what the "supercommittee" of Congress proposes, it's difficult to predict. Ultimately, we will experience a reduction in spending - either voluntarily now (by act of Congress) or later by compulsion when we run out of the cash to sustain current levels of spending. If we reduce spending a little now, voluntarily, the impact will be minor and not very noticeable. Might even help. But if we wait until later, it will be much more painful. It's like applying the brakes on a car. You can do it gently over a mile, or wait until you actually hit the wall. Either way, you'll come to a stop. One hurts more than the other. But the one that hurts more also allows you to enjoy higher speeds for a bit longer - hence the temptation to delay braking.

In regards to the Great Falls article today, what % of residents are wealthy due to the federal government? A small sample size for sure, but of the 10 familes I know who live there, only 2 have/had any connection what so ever to the government.

No one gets wealthy working for the government. But lots of people get wealthy indirectly - providing services to the government, or supporting others who support the government.

Why does I pay taxes on dividends I reinvest but never see only to see the stock value decline. Why did I pay taxes on money I no longer have, and shouldn't there be someway to get that tax money back?

Yes, you will get money back when you sell the investment. That's because reinvesting the dividends increases your "cost basis" - and later this reduces your taxable profit, or provides a taxable loss (which is how you get the taxes back). But the rules are slanted to favor the government: you pay the taxes now (and only get the money back later), and if indeed you are owed a refund, the amount of refund you can get back is limited per year, while taxes on gains are unlimited. Quite unfair.

Great falls and surrounding areas have always been wealthy. Of late other communities across the country have declined due to economic circumstances. It seems to like this focus on the DC area is more of a ginned up issue to feed in the anti-government agenda: First attack government employees, now contractors who provide goods and services?

Yes, GF has always been wealthy - because it was the gentry who could afford contryside homes back in the day. But GF is no longer a endge community like it was 100 years ago - or even 30 years ago. Today, it's almost central, and as a result, its population has grown dramatically. With growth comes a reduction in per capita wealth. It's still at or near the top, but not like it once was. Your point is accurate: you don't create wealth by destroying the wealth of those who have it.

Er.... they're government contract jobs, so their wages are paid out of taxes, so how is that different from, say, Obama injecting stimulus into the economy by building infrastructure?

This is one of the arguments being made on Capitol Hill. It goes: "government taxes people, and spends the money. As it spends, it creates jobs. So what's the problem?" The problem, some argue, is that the government spends the money inefficiently, and denies those who have the money the ability to decide for themselves how that money is spent. This argument holds that those who have the money - Americans - are the best arbiters of how to spend it, and the more of it we have (meaning the less that's taxed), the more we'll spend.

I enjoyed chatting with you - and invite you to join me this Saturday morning on my radio show, 10am to noon on AM630 WMAL Radio, or visit me at www.ricedelman.com Thanks!


In This Chat
Ric Edelman
Barron’s has seven times (2004–2010) ranked Ric Edelman among America’s 100 top financial advisors. In 2009 and 2010, Ric was ranked the #1 independent financial advisor in the nation by Barron's*. In 2004, Ric was inducted into the Financial Advisor Hall of Fame, ranked the #1 advisor in the nation by Research Magazine for his focus on the individual client and ranked #42 on Registered Rep magazine’s list of “America’s Top 50 Advisors.” Inc. magazine three times named the firm the fastest-growing privately-held financial planning firm in the country. Ric received an honorary doctorate from Rowan University in 1999, and in 2007 was inducted into the Rowan University Public Relations Student Society of America Hall of Fame.
Recent Chats
  • Next: