New Geography

Author: Eamon Moynihan

  • Book Review: “The Fate of the States: The New Geography of American Prosperity” by Meredith Whitney

    In December 2010, Meredith Whitney, the financial analyst, appeared on 60 Minutes, where she predicted that the United States would see between 50 and 100 defaults of municipal bonds. Since she was one of the earliest analysts to predict the financial meltdown, publishing a research report in October 2007 that said that because of mortgage losses Citigroup might have to cut its dividend, it was not surprising that her statement attracted a great deal of attention, but also significant pushback from industry representatives, who insisted that municipal bonds were safe.  This book, "Fate of the States: The New Geography of American Prosperity" is her effort to elaborate on that call.    

    Whitney begins her analysis with a review of the housing bubble and banking crisis, which by now is well trod ground, but she does so in a highly informed and balanced way.  Where some commentators want to place most of the blame on government, others on Wall Street, and yet others on the Federal Reserve Bank for keeping interest rates too low for too long, she argues that everyone behaved badly.  The self-destructive behavior that she witnessed on the part of many banks and financial institutions during this period remains an enduring and puzzling part of the story.   

    Readers of New Geography will be familiar with two of the themes that she articulates.  One is the rise of a zone of prosperity from the Gulf Coast through the heartland and up to North Dakota that has been built on pro-active energy policy and strong global demand for agricultural commodities.  A second theme she articulates is the striking disparity in the cost of living between states like California and New Jersey compared with far more affordable states like Texas.  Low cost states, she says, will continue to attract new investment and jobs.

    In arguably the core section of the book, she explains how the housing bubble interacted with banking and government to create what she calls “The Negative Feedback Loop from Hell.”  By way of background, it should be noted that the underlying economics of banking are unusual.   As economist Joseph Stiglitz demonstrated in the 1980s, the price of money does not necessarily clear markets.  Instead, banks often employ credit rationing in order to control risk.  As she argues, this is exactly what happened in the states where the housing bubble inflated the most. These are the states where the subsequent economic decline was the greatest.    

    As Whitney shows, it was also these states, where government officials handed out the most generous pay packages, including large back loaded pensions. On top of that, these states often piled on the most government debt, which nearly doubled between 2000 and 2010.  The result has been significant retrenchment on core government services, from police and fire protection to public education. In her view, this is the negative feedback loop from hell, and the reason that she believes that fiscal stress will continue for a long period of time.

    As the fight for limited resources works itself out, she believes that besides government there will be three parties at the negotiating table. Two are straightforward enough: the bondholders, who expect to be paid back the money they lent, and the public sector employees, who expect to receive the pensions they were promised. But she also sees a third party. Writing shortly before the bankruptcy in Detroit, she presciently recognized that citizens will also have a claim on resources, arguing that they need and deserve the services that government is supposed to provide.

    Although the sub title of the book mentions geography, Whitney largely dismisses what a contemporary textbook on economics and geography calls the “who, why, and where of the location of economic activity.” This is not surprising. There are probably few people who are aware that this branch of economics even exists.  (Among professional economists, more attention has been paid in recent years with the advent of New Economic Geography as championed by Paul Krugman, although, ironically, empirical research indicates that key elements of  of Krugman’s theoretical work are almost certainly wrong.)

    While Whitney rightly focuses on the economic growth that distinguishes many of the states in the central corridor of the country, she cites data that shows that most economic activity continues to occur elsewhere.  She observes, “These so-called flyover states contributed 25 percent of U.S. GDP in 2011, up from 23 percent in 1999.” That is nearly a 10 percent increase, but obviously from a lower base. A current and highly visible example of the importance of geography is the huge growth in the number of warehouses along the New Jersey Turnpike, as engineering projects deepen New York harbor and expand the Panama Canal. Access to water will always be important.    

    Additionally, I would argue that the issues that Whitney addresses cannot be fully understood without taking into account the challenges that continue to face older industrial cities. All economies must constantly re-invent themselves. In the case of cities with a large industrial legacy, however, intrinsic market failures caused by asymmetric and imperfect information have made redevelopment significantly more difficult.  Theoretical and empirical work in recent years has also shown that joint and several liability under U.S. environmental law undermines efficient price discovery for properties that once had an industrial use.      

    These issues aside, Whitney has written a book that is both provocative and necessary. Clearly, certain states have instituted policies that are far more effective at attracting business and new residents. At the same time, other states appear unable to reform. Perhaps her central insight is that problems associated with debt can take on a life of their own. Therefore, her message is clear. States that properly manage their debt and pension obligations will enjoy a prosperous future. States that do not will encounter severe problems.  Investors and public sector employees take note.

    Eamon Moynihan is the Managing Director for Public Policy at EcoMax Holdings, a specialty finance company that focuses on the redevelopment of previously used properties.

  • Review: Driving Detroit, The Quest for Respect in the Motor City

    For more than a century, the city of Detroit has been an ideological and at times actual battleground for decidedly different views about the economy, labor and the role of government.  At one time it was the center of a can-do entrepreneurialism that helped launch the American automobile industry.  By 1914, for example, no fewer than 43 start-up companies were manufacturing automobiles in the city and surrounding region.  Following a wave of sit-down strikes that began almost immediately after FDR’s landslide victory in 1936, the economic character of the city changed dramatically.  Detroit soon became the quintessential union town, producing in the first decades after World War II the closest facsimile of Social Democracy that the United States has ever seen and in all likelihood will ever see again.    

    Detroit also specialized in race riots.  In 1943, for example, a brawl that broke out at a popular getaway on a Sunday evening in June quickly escalated into mob attacks that resulted in the death of nine whites and 25 blacks.  Because the white police force could not or would not restrain the violence, the mayor asked the governor to call in federal troops.  Twenty four years and one month later in 1967, another Sunday riot broke out.  This time most of the violence occurred between black residents and the police and National Guard.  The death toll was similar, 10 whites and 33 blacks.  Property damage, on the other hand, was far more extensive.  Before the week was out, President Johnson appointed the Kerner Commission to make sense of the conflict and the growing unrest that was afflicting numerous cities all across America. 

    The next major event in the history of Detroit occurred in 1973, when Coleman Young was elected as the city’s first African-American mayor.   He would go on to serve five terms.  While clearly a reflection of the changing demographics in Detroit, Young also personified the city’s long history of union activism, having first gained prominence in the early 1950’s as the leader of the National Negro Labor Council.  In the early 1980’s, in response to persistent economic decline, Young also led the fight to increase the city’s income tax, which included a tax on commuters.  This signaled an important shift in progressive politics in Detroit and elsewhere.  Rather than trying to wring additional revenue from private sector shareholders, labor and its political allies would now focus on the public sector as the preferred vehicle for income redistribution.

    In Driving Detroit: The Quest for Respect in the Motor City, George Galster employs a multi-layered technique to bring the history of the city to life and help explain its current economic predicament.  The title, for example, invokes the R&B classic “Respect” released by Aretha Franklin in 1967.  Lyrics from other popular songs are also quoted, as well as a steady stream of poems by local Detroit poets.  In addition, Galster weaves the stories of select individuals and families into the broader narrative that he constructs.  At the very end, we learn that among the people we have gotten to know are his German-American parents and their forebears.   And finally, Galster, who is the Clarence Hilberry Professor of Urban Affairs at Wayne State University, tries to explain the development of the city and region through what he calls geology, but in urban economics would more commonly be called geography.  This may be the book’s most interesting contribution.

    Galster emphasizes respect, which he defines as a combination of physical, social and psychological needs, because he argues that for many people in Detroit, for a long period of time, these needs were not adequately met.  This was true for blacks, who faced racial prejudice.  It was also true for factory workers, who historically had to endure dangerous working conditions, the monotony of the assembly line, and cyclical unemployment.  The labor movement helped soften the sharper edges of factory work, but Galster shows that it was far less successful at promoting racial harmony.  In part, this was a function of history.  The largest boom in Detroit occurred during World War II, when the city was dubbed the Arsenal of Democracy.  Because immigration had been stopped in the 1920’s, many of the new transplants came from the old South, often bearing well practiced well animosities.  Solidarity in this context was difficult to achieve.   

    Along with the burden of history, another major challenge that Detroit faces today, surprisingly enough, is geography.  In traditional terms, Detroit was an excellent place to build a city, located on a river that has never flooded and soon reaches Lake Erie.  But in modern times, the local topography has proven something of a curse in disguise.  Galster calls this topography a “featureless plain.”   From the beginning, the city and region grew in a land extensive way.   Assembly line manufacturing contributed to lower land use density, because efficiency required large, one story buildings.   Typically, these factory buildings were interspersed among residential communities.  This arrangement made for an attractive and prosperous lifestyle, but with de-industrialization, Detroit has not been able to fall back on a vibrant “old city” that could attract new and creative businesses.

    So what kind of future can Detroit expect?  Galster does not address this question directly, but clearly he appreciates the magnitude of the challenges at hand.  The phenomena that characterize the metropolitan region are not unique, he says, but “Greater Detroit is distinguished by the intense degrees of all these phenomena and their special origins.”  So perhaps the best take-away of Galster’s analysis is that the experience of Detroit should not be used to reach broad conclusions about the prospects of older industrial cities in general.  Rather, it should be used as a cautionary case study.  Detroit cannot alter its topography, but it can address problems like political chauvinism and sub-standard governance that Galster demonstrates have clearly had a negative impact on the business climate.  Progress here in combination with a low cost-of-living and the revolution in natural gas production might then make it possible to attract the investment that the economy needs to re-invent itself.   Certainly that would be the best case scenario.

    Eamon Moynihan is Managing Director for Public Policy at EcoMax Holdings, a specialty finance company that focuses on the redevelopment of previously used properties. 

  • High Cost of Living Drives New York’s Fiscal Deficit with Washington

    Between now and the end of the year, a hot political topic here in New York will be whether to let the Bush tax cuts expire for people in the highest income bracket, as the Obama administration proposes, or whether to extend those cuts for everyone. Advocates taking the latter position will correctly argue that higher rates will be especially harmful to New York, because of the large number of wealthy people, who live here.

    What is not likely to be discussed, however, is that because of the exorbitant cost of living in New York and the surrounding suburbs, federal taxes take a supersized bite out of the incomes of all New Yorkers, who in the vast majority are not wealthy at all. The result is that here in New York City, which is arguably the poorest city in America when it comes to what people can actually afford, we end up subsidizing other states and localities, where people pay less to Uncle Sam, even as they enjoy a higher standard of living than we do.

    How could this be? The answer is that because New York and the surrounding suburbs are so expensive, businesses have to pay higher salaries to recruit people to work for them. According to the ERI Economic Research Institute, a leading data survey company that helps corporate clients set compensation packages and calculate the cost of doing business throughout the United States and elsewhere, these higher salary costs are substantial.

    They calculate, for example, that a typical registered nurse in metropolitan New York earns $82,712 versus a national average of $65,464. In the case of an accountant, they calculate a figure of $74,388 versus a national average of $58,712. In the case of an administrative assistant, as they define those job responsibilities, they calculate a figure of $59,243 versus $47,961 nationally. And finally, they also provide data for someone working as a janitor. Here the figure they calculate is $38,142 versus $31,220.

    Sounds great. Who doesn’t want a higher salary? But unfortunately, it’s not that simple. The problem is that the IRS doesn’t care how much you can actually buy with your hard earned dollars. They just want to see the number printed on your W-2. And as we all know, the more you make, the more you pay.

    For the average registered nurse in New York, filing as an individual, and assuming no special deductions or one-time credits, the tax bite amounts to $14,381 versus $10,219 for the average registered nurse in the rest of the country. An accountant here pays $12,444 versus $8,531 nationally. For an administrative assistant, the figure is $8,656 versus $5,844. And in the case of a janitor, the figure is $3,899 versus $2,864.

    But wait, it gets worse than that. Based on data from the federal Bureau of Economic Analysis, it turns out that the cost of living in the New York metropolitan area is significantly higher than the difference in salaries alone would indicate. According to their data, the cost of living here is 45 percent higher than in the rest of the country or approximately twice the difference in salaries.

    Yes, employers have to pay more to recruit people to work here in New York, but they don’t have to make up the whole difference. Economists refer to this as money illusion, which is their way of saying that people find it difficult to distinguish between the nominal value of money and the true purchasing power of that money in the marketplace.

    If we recalculate salaries to take into account the cost of living, it turns out that the federal tax premium that New Yorkers have to pay is even greater. Thus, if the tax bite were to reflect the actual standard of living for a registered nurse in New York, the real tax would be $8,106 instead of the actual tax of $14,381 or a difference of $6,275. For an accountant, the difference would be $5,775. For an administrative assistant, it would be $4,352, and for a janitor, $1,778.

    The lessons here are clear. In the short term, New York’s Congressional delegation needs to restrain efforts to raise taxes in Washington, D.C., because the impact here will be greater than elsewhere. And in the longer term, we need to determine why the cost of living in New York is so high and then implement the reforms necessary to fix the problem and give New Yorkers a standard of living that is competitive with rest of America.

  • High Cost of Living Leaves Some States Uncompetitive

    Late this spring, when voters in California emphatically rejected tax increases to close the state budget gap, they sent a clear message to state policymakers. They were tired of California’s high taxes, which according to the non-partisan Tax Foundation, consumed 10.5 percent of state per capita income last year. This compared with a national average of 9.7 percent, making California the sixth most heavily taxed state in the nation.

    But if Californians were tired of paying an additional 0.8 percent of their income in state and local taxes, what would they make of research by economists at the federal Bureau of Economic Analysis that estimated that the cost of living in California, based on 2006 data, was a whopping 29.1 percent above the national average? Obviously, from an economic point of view, the state’s high cost of living has a much greater impact on the average person’s standard of living than taxes do.

    Cost of living is not an issue that we typically think about, when it comes to voting and politics. That needs to change. Cost of living estimates provide a valuable tool for making accurate comparisons of economic performance. Moreover, they provide the best available, if indirect, measure of the costs imposed by regulation. And with Congress debating potentially dramatic changes in how we regulate energy and health care, costs of this kind clearly deserve close scrutiny.

    Let’s begin with economic performance, starting with California. According to 2006 census estimates from the American Community Survey, the median household income in California was $56,645. In terms of ranking, that made California the sixth most prosperous state in the nation. But how did California fare, once the cost of living was taken into account? The answer is not very well. The economists who published the 2006 data, Bettina Aten and Roger D’Souza, did not deflate income data by the full 29.1 percent when calculating the real effect of cost of living. Rather, they exempted certain components of income, such as government transfer payments. Using this attenuated calculation, real median household income in California in 2006 was $47,988. In terms of ranking, that dropped California down to 31st place. (Were the data deflated by the full 29.1 percent, the state would have fallen all the way to 48th place.)

    California is not the only state afflicted with an exorbitant cost of living. Bluer than blue New York State, according to the Aten and D’Souza data, had an even higher cost of living, estimated at 31.8 percent above the national average. And not surprisingly, it fared particularly badly, once the cost of living was taken into account. Again using an attenuated calculation, the median household income in New York dropped from $51,384 in nominal dollars down to $42,744 in cost of living adjusted dollars. In terms of rankings, this dropped New York from 17th place down to 49th place. (Were the data deflated by the full 31.8 percent, the state would have fallen to last place, almost 10 percent lower than the next poorest state, Mississippi.)

    What cost of living estimates taketh away from some, however, they also giveth to others. Consider, for example, Utah and Minnesota. In the case of Utah, median household income in 2006 stood at $51,309 in nominal terms. But according to the Aten and D’Souza estimates, the cost of living in Utah was 13.5 percent below the national average. Using the attenuated calculation, cost of living adjusted income in Utah was $57,147, the second highest in the nation.

    In the case of Minnesota, median household income in 2006 stood at $54,023 in nominal terms. But according to the Aten and D’Souza estimates, the cost of living was 7.4 percent below the national average. The attenuated calculation put the Minnesota a cost of living adjusted income at $57,140, third highest in the nation.

    As a general rule, the states with the lowest cost of living are states in the South and to a lesser degree the Mountain West. Among the states of the Old South, only Virginia had a cost of living above the national average. Dynamic states like North Carolina had a cost of living 13.1 percent below the national average. In Georgia, the figure was 12.1 percent. In the Mountain West, Idaho had a cost of living 17.3 percent below the national average. In New Mexico, the figure was 16.5 percent.


    Besides affecting the true measure of economic performance, cost of living differentials have other, important implications as well. Federal taxes are one example. Consider New York. For years, it has been recognized that New York State sends more in taxes to Washington, D.C. than it receives back in the form of federal outlays. Recently, there has been some disagreement about the size of this deficit, but in the past it was generally agreed that it amounted to approximately two percent of Gross State Product. If New Yorkers were truly rich, this would not be a great burden. But as shown already, that is not the case. By failing to control its cost of living, New York ends up subsidizing other states that in real terms are doing much better.

    Another implication of cost of living differentials has to do with population. All things being equal, people will live where they can maximize their standard of living. Not surprisingly, states that have seen the largest population growth in recent decades tend to be those with a low cost of living, notably in the South and in the Mountain West. On the other hand, states with a high cost of living have typically seen population growth lag. This is particularly true among certain Northeastern states that should have boomed, if nominal income were the best guide of how well a state is doing. Examples include Massachusetts, Connecticut and to a lesser degree, New Jersey, which has the second highest median household income in the nation.

    In sum, the cost of living says a great deal about a state, its politics and its future.

    Eamon Moynihan is the Director of the Cost of Living Project in New York. The purpose of the project is make New York City and State more competitive, with a particular focus on the costs imposed by regulation. A former government official at both the City and State level, he most recently served as Deputy Secretary of State for Public Affairs and Policy Development. An interactive website for the project can be accessed at thecostoflivingproject.org.