The Independent Market Observer

7/29/13 – Washington, DC: Not Just the Financial Capital of the U.S.

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 29, 2013 10:18:28 AM

and tagged Politics and the Economy

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The other day, a Commonwealth colleague of mine who works outside of the investment groups asked about a point I had made a couple of years ago—that Washington, DC, had become the financial capital of the United States, in addition to the governmental capital. “Is that still the case, post-crisis?” he wanted to know.

I believe it is, and for reasons that extend beyond those that obtained in the crisis. While DC has largely exited the banking system and the auto industry, the role of the government in the economy has only grown. Part of this is politically driven, and therefore subject to debate, but part is structural, reflecting a growing change in how the economy works.

I’ve pointed out before that the original name of the discipline we now know as economics is “political economy.” As we increasingly shift to an economy driven by intangibles, the reintroduction of politics becomes even less avoidable. A wonderful example of this is the ongoing evolution of the TV content industry. Looking back to when I was a boy, there were three networks—heavily regulated, effectively an oligopoly, but competing within those limits. Over the past 20 years or so, we’ve seen the emergence of the Fox network—groundbreaking in its day, as the first to challenge the Big 3 oligopoly—then the rise of cable, with HBO and MTV and their imitators, and now the rise of Netflix and TiVo.

At the surface, the breakup of the oligopoly and the wide availability of content from other sources seems a clear victory for the market over regulation. Looking beneath the surface, it’s not so clear.

First, the oligopoly has moved, not disappeared. Where, before, the content was limited and regulated, and the delivery method (broadcast) was relatively wide open, now the content is wide open and the delivery method (TV cable companies) is an oligopoly. The negotiation these days isn’t what gets on the networks but what gets on the cable systems.

The ultimate question here is who pays for the content. Before, it was the advertisers. Now, it is a mix of the cable systems and advertising. Take either of those out of the equation, and TV programming disappears as a business. Control at either the content-creator level or the distribution level allows the content creators to get paid. Remove that control and the business model becomes much less clear.

Which brings us back to Washington, DC. Current revenue models are under attack. Advertising is threatened by ad-skippers, while cable systems are under threat from noncable delivery models, such as the start-up Aereo. The technical details aren’t important, as they can and will be replicated in many ways; what’s important is the idea of the disconnect between the programming and the payment. Without some kind of control over delivery, whether at the content-generation level or the distribution level, how do creators get paid?

Back in the VCR era, the Supreme Court ruled that individuals can record and replay shows as legal fair use, and all of the subsequent developments have relied on that decision, as laid out in a good New York Times article today. That ruling was well supported and welcomed, but we may have gotten to a point where a difference of degree is a difference in kind. To maintain control of its distribution, Fox is now threatening to stop broadcasting altogether and go only to cable. The ability of a major industry to get paid for its work depends on the laws created and interpreted in Washington, DC. As more and more of the economy hinges on intellectual property and other intangibles, the more dependent it becomes on laws that regulate those intangibles.

As a result, major industries are being controlled from Washington, DC, based on interpretation of laws. People are used to seeing political involvement in the financial industry, for example, but the expanded role of politics in TV is fairly new. This is also the case with many other industries—notably health care—and we’ll begin to see more of them fall within that net.

Far from withdrawing, Washington is consolidating its position as not only the capital of the financial industry, but potentially of many other industries as well. To the extent that noneconomic factors influence business decisions, growth may well suffer. Expect more mud ahead.

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