Big Government Boomtowns

Remember company towns? From Detroit to Wolfsburg, Germany, home to Volkswagen, they used to be places where you could count on a job for life. Now, they are mostly places where you count your unemployment checks. But as the global economy shrinks (we should brace for "the worst performance in most of our lifetimes," said IMF managing director Dominique Strauss-Kahn last week), and the public sector expands to cope with the fallout, there's a new kind of boomtown—the government town.

In places like Brasília, Ottawa, Brussels and Washington, not only are new jobs being created, but home sales are rising, incomes are up, car dealerships are full, and new malls, shops, luxury hotels and gyms can't be built fast enough. "High wages and job stability make the market in a public-sector city like Brasília look irresistible and practically recession-proof," says Carlos Jereissati Filho, chef of the São Paulo–based Iguatemi Shopping Center Company, which is building a new $80 million high-end mall in Brasília with 200 shops, including Louis Vuitton and Zegna.

Other developers agree and are voting with their feet. Even though commercial-real-estate projects in Belgium are faltering, bureaucrats in Brussels just gave the thumbs-up to a new €8 million aqua gym and fitness studio to be used by European Commission members. The commission this month also announced plans for an architectural revamp, funded by its own coffers, of the entire EU quarter where it occupies more than 50 buildings.

Similar trends are brewing in North American government towns. Last year, home building nose-dived throughout Canada—except in Ottawa, where industry is scant and one in five workers draws a government paycheck. In the Canadian capital the resale price for condos jumped nearly 12 percent in 2008 and 5.7 percent for single-family homes. No wonder, given that federal employees enjoy a 41 percent wage premium over private-sector workers. As Toronto Star columnist Jim Travers wrote recently, "Hard times arrive here in mink slippers."

Ditto Washington, where 28 percent of the District's paychecks are cut by the various layers of the federal bureaucracy. While the private sector has shed 4.6 million jobs since December 2007, when the economic contraction began, the federal government has hired 200,000 workers, according to the Bureau of Labor Statistics. The new administration will likely create another 400,000 temporary jobs and 180,000 permanent ones. No wonder D.C., without a factory in sight, was the nation's second-fastest-growing job market (after Alaska) in 2008.

Perhaps the biggest prosperity bubble of all is in Brasília, where more than 50 percent of jobs depend directly or indirectly on the state. The Brazilian economy will be lucky to grow at all this year, but Brasília is booming. Wages are already four times the national average and are predicted to grow again this year. In December and January, as national car sales were flat, new car sales in Brasília jumped 20 percent. Home sales rose 25 percent last year and are expected to climb another 20 percent in 2009 compared with a 15 percent drop nationally.

Of course, no one claims that government towns provide some sort of pathway out of recession. If that were the case, Iceland and the Baltic states would be in the black instead of on their knees. In fact, worries over fiscal bloating are stoking debate in boardrooms and policy circles across the world. While most private companies are slashing or freezing wages, public servants are looking forward to increases of 2 percent or above this year. The distortions are particularly glaring in Canada, where the few industries that are still hiring (high tech and energy) compete on unequal terms for talent with government, where wages, pensions and perks are still growing. A recent survey by the Canadian Federation of Independent Businesses showed that local, provincial and federal governments offered far better wage and benefits packages than the private sector for equivalent jobs. "At the federal level, the premium is 41 percent," says the Federation's Danielle Smith. "That plus 100 percent job stability is why people prefer to seek jobs in the public sector."

All this may come to a crashing halt as High Street's crisis eventually reaches government coffers, bleeding the tax base and forcing officials to tighten belts. It's worth remembering that the last time Britain sank into depression back in the 1930s, every staffer in the entire public sector, from cabinet ministers on down, was forced to take a pay cut of between 10 and 20 percent.

But don't tell that to those facing today's wintry job market. If once every grad student dreamed of becoming a derivatives-slinging financial cowboy, now many ache to become bureaucrats. In China, where the state has long played a central role in employment, there's a growing bull market in civil-service exams. A record 775,000 people sat for civil-service exams in China in 2008—130,000 more than in 2007. "My classmates want to joint the public sector," admitted Yu Shui, who takes night classes at Beijing's premier business academy, the School of Economic Management. "It's safer than the private sector." As Deng Xiaoping said, to get rich is glorious, no matter how you do it.

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