You see it used a lot in liberal blogs, etc.
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I have explained this before but I think it's worth repeating once in a while since the term is actually fairly common in the blogosphere. Greg is right that it stems from the notorious Sally Quinn article about the Clintons. But it's more than that. It's shorthand for the permanent DC ruling class who have managed to convince themselves that they are simple, puritanical, bourgeois burghers and farmers, even though they are actually celebrity millionaires influencing the most powerful government on earth.
It's about their phoniness, their pretense of speaking for "average Americans" when it's clear they haven't the vaguest clue even about the average Americans who work in their local Starbucks or their drive their cabs. (Think Tim Russert, good old boy from Buffalo, lately of Nantucket.)It's about their intolerable sanctimony and hypocritical provincialism, pretending to be shocked about what they all do, creating social rules for others which they ignore themselves.
The village is really "the village" an ersatz small town like something you'd see in Disneyland. And to those who argue that Versailles is the far better metaphor, I would just say that it is Versailles --- a very particular part:
http://digbysblog.blogspot.com/2009/10/le-hameau-de-la-potomac-by-digby-i-have.html