New Geography

Author: Roger Selbert

  • Denmark, and the US, in 2010

    Denmark is a good microcosm. It holds lessons for us here in the States, good and bad. I felt that way when I first lived there in 1971, when I researched my doctoral dissertation there in 1977, and I feel that way now.

    Denmark is a mixed-economy (free market competition with a large public sector), social welfare, multi-party democratic country that, because of its small size and international exposure, is affected more quickly and deeply by social, economic and political forces at work in the Western (and wider) world. It was a founding NATO member (1949) and the first Nordic member of the European Union (which it joined, simultaneously with Britain and Ireland, on New Year’s Day 1973). For such a small, homogenous country, it has amazing social, economic and political diversity (for example, over the past 36 years some 15 different political parties have at one time or another garnered representation in Folketinget, the Danish Parliament).

    Denmark has had, and continues to have, an outsized global influence relative to its size, whether in diplomacy, design, architecture, or quality manufacturing. Denmark gets a lot of things right. The standard of living is high, and so is the quality of life. As for the Danes themselves, both the famous and anonymous, they display an unmistakable national character combined with healthy individualism. (The unwritten law of Danish culture commands that one is not to draw attention to oneself, but it’s liberally violated!)

    The US is also a mixed-economy, social welfare, multi-party, democratic, diverse nation. There is an undeniable leftist political orientation among elites, media, academia, government and public policy professionals in both countries. What lessons can we learn from recent developments in Denmark? Like the US, Denmark has gone through, and is going through, economic, financial, real estate, employment, debt and deficit problems of unanticipated severity. And like the US, responsible parties have taken their eye off the ball.

    My colleague and partner Jorn Thulstrup, owner, CEO and publisher of News ex-press, a daily compilation of Danish news media presented in English for the diplomatic community in Copenhagen (among other clients), recently wrote a sharply critical report on the hangover left in Denmark by the Climate Conference. He states:

    The COP15 Climate Conference held in Copenhagen in December, fuelled by political and economic special interests and enthusiastically embraced by naive Danish journalists, preoccupied people in this country far more than the rest of the world. For a lengthy period of time, leading Danish politicians and commentators seemed to be suffering from the illusion that, in terms of climate and energy, Denmark could rule the world. A widespread perception flourished that Denmark, as host of COP15, could create some kind of platform to market Danish technology, especially wind energy and enzymes used in the production of bio-ethanol.

    But eventually, as expected, the concluding “Copenhagen Accord” failed to live up to the exaggerated expectations and only confirmed that the skeptics were right at least about the politics: the climate conference was a ritual event without meaning or influence.

    Preoccupation with meaningless things is not costless. Hosting the Climate Conference cost Denmark billions of kroner, but the indirect costs were even more serious: it tied up official government business, cabinet ministers and security forces for such a long time, and to such an extent, that many serious political and economic issues – like how to get the economy growing again – were neglected.

    Denmark deservedly prides itself on its quality of life, which includes a low crime rate. But while Copenhagen was free of the widespread destruction and vandalism that many had feared during the climate conference, the devotion of overwhelming police resources to COP15 over the past two years has actually been accompanied by an increased crime rate generally.

    The failure of COP15 is disappointing, if not unexpected. But the global economic crisis has left its mark throughout this country too. Years of budget surpluses have been transformed into deficits, in the necessary effort to prevent a collapse of the financial sector and limit growing unemployment. The government is now focused on the domestic agenda, with the top priority to restore economic growth, aiming to secure a political platform that will lead to victory at the next general election. Sound familiar?

    Small country, big ideas
    Another more serious problem is Denmark’s inability to compete, writes Thulstrup. Major wage hikes at home and devaluations abroad have made Danish goods and services too expensive. Unfortunately, Danish workers haven’t been able to compensate with increased productivity – in fact, quite the opposite. Possibly, as a society, the crisis was not taken seriously enough. Things went well for years and it appeared, after years of balance of payments and budget surpluses, that the country was capable of managing any setback. Also sound familiar?

    Every year or so some international poll shows that Danes are the “world’s happiest people.” (It would be more accurate to say “most contented,” or, if I’m feeling mischievous, “resigned to their situation”!) But the problem, writes Thulstrup, is that they are no longer very industrious. Studies, reports and commissions have been warning for years of the lack of qualified manpower.

    Denmark has a high workforce participation rate, due to the share of women that work outside the home, but is a laggard in actual hours worked. It’s a case of short working days, long holidays, and a high amount of sick leave. Students take too long to become qualified and too many people retire early – at the state’s expense. More and more fail to contribute anything to production and are being supported by fewer and fewer. A third of working-age adults – the potential labor force – is out of work, compared to just one in four eight years ago. And it’s going to get worse in the coming years. Thulstrup expects very little change in Denmark in 2010, in terms of economic growth. .

    That also sounds depressingly familiar.

    What about “flexicurity,” the Danish labor market scheme that seeks to combine employer flexibility (the ability to hire and fire easily) with employee security (publicly-funded job retraining)? Robert Kuttner praises flexicurity in Foreign Affairs (March/April 2008), while conceding that Danish conditions are unique and not applicable elsewhere. Thulstrup says flexicurity keeps the official Danish unemployment rate artificially low by forcing into job training, and then counting as employed, many people whose employment prospects are meager. In this way and others, he says, the system is susceptible to waste, fraud and abuse. Additionally, its costs are exorbitant: an “astonishing” 4.5% of GDP (as per Kuttner).

    Big country, perverse ideas
    We have taken our eye off the ball here in the States too. Over the past year our liberal elites have been consumed with climate control, health-care reform and public-sector pump-priming, when they should have been focusing on creating the conditions for private sector economic growth. We are now faced with the specter of laws, regulations and taxes that are unwanted and harmful, more expensive energy, and slower economic growth than would otherwise occur. That’s a shame, because economic growth is an all-purpose salve that cures a multitude of ills, and an all-purpose social lubricant that hides a multitude of sins.

    The essence of all of this is the matter of incentives.

    The lesson we should be learning from Denmark is that preoccupation with ritual, meaningless and nonsensical things is not costless. The cost of not working is greater than imagined over time. Misallocation of resources is not just wasteful and expensive, it does violence to the general welfare, not to mention common sense.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

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  • Demographics May Be Destiny, but Mind the Assumptions

    Demographic projections have become an essential tool of national, state and local governments, international agencies, and private businesses. The first step in planning for the future is to get a picture of what the terrain is going to look like when you get there. That’s mainly what I do for clients, audiences and subscribers, and demographics provide the frame (like assembling all the straight-edge pieces of a jigsaw puzzle first). But here’s the thing about projections: a small change at an inflection point, or the inclusion (or exclusion) of salient variables, can result in big changes to the future you are trying to describe. So like all treatments of the future, everything depends on the underlying assumptions, and the salience of the variables chosen for inclusion.

    Demographics and Depression?
    For example, a couple of recent essays on demographic trends start with different assumptions, consider different variables, and come to wildly divergent conclusions. David Goldman, associate editor at First Things, says the housing market has collapsed, and will remain in depression, because of the dearth of two-parent families with children.

    Goldman asserts that only a a policy to restore the traditional family to a central position in American life can work to save the housing market. Without this, he says, ”we cannot expect to return to the kind of wealth accumulation that characterized the 1980s and 1990s.“

    Goldman’s argument centers on the idea that the US housing market is driven by one variable: two-parent families with children. And since that variable has not been growing, neither can housing demand. Yet, obviously, other household types besides two-parent families with children desire, can afford, and live in detached houses. Indeed, 55.2% of all single-person households owned homes in 2007, up from 49% in 1990.

    There is also a large population of empty-nest households (people who have already raised their kids), but who choose to continue to live in houses. Other demographic trends that will contribute to the continued preference for detached houses: increased longevity, better health, later childbearing, more home-based businesses, the presence of “delayed launch” kids (or those who boomerang to live at home before “final launch”), or a desire to have room for grandkids to visit. There is also the reality that many people will not want to move because of proximity of neighbors, churches, clubs and work.

    One must also note that foreign immigration and domestic migration, even under lowest-variable projections, will still be substantial in coming decades, fueling housing demand.

    In addition, other demographic trends suggest family and household formations will, once employment and income conditions improve, again provide a demand for houses. For example, there are more people entering their 20s now than in any time since the 1960s and early 1970s. True, we have just passed through a period of slow growth in family-age household formation, but once this Millennial generation start making money in an improving economy, they will start forming families and households, and will start buying houses.

    The World’s New Numbers
    Another recent essay on demographic projections starts with different assumptions, looks at different variables, and comes to different conclusions. Martin Walker, writing in The Wilson Quarterly, notes that something dramatic has happened to the world’s birthrates: they are up in developed countries, and down in developing countries (the opposite of what most dire forecasts project).

    Walker starts by debunking the assumption that mass migration and low birthrates are transforming the ethnic, cultural and religious identity of Europe. He notes the decline of Muslim birthrates across the globe, and rising birth rates in Western Europe – albeit from very low levels – and consistently higher rates in the United States. He then explains that aging populations in Europe and the US will not place intolerable demands on governments’ pension and health systems, if we are willing and able to both raise the retirement age and increase the workforce participation rate.

    These two steps (not easily achieved, but simple in conception) will result in a very manageable dependency ratio, similar to those of the 1960s, writes Walker. In the United States, the most onerous year for dependency was 1965, when there were 95 dependents for every 100 adults between the ages of 20 and 64 (“dependents” include people both younger and older than working age). By 2002, there were only 49 dependents for every 100 working-age Americans. By 2025 there are projected to be 80, still well below the peak of 1965. The difference is that while most dependents in the 1960s were young, most of the dependents of 2009 and beyond are older. But the point is that there is nothing outlandish about having almost as many dependents as working adults.

    The assumption underlying this more favorable scenario is that given freedom and information, that is to say, given the choice, the continuum of progress and development is uniform and universal: people in all places and of all backgrounds desire middle-class lifestyles (which include single-family detached houses, by the way). And while the planet’s population is expected to grow by about one billion people by 2020, the global middle class will swell by as many as 1.8 billion, with a third of this number residing in China. The global economic recession will retard but not halt the expansion of the middle class.

    The economic transition that development brings is accompanied by the demographic transition to lower birth and death rates (social, cultural and political transitions then occur too). Industrialization, urbanization, suburbanization: that is the pattern of how middle-classes grow. First-world countries have traversed this path, and now emerging countries are following.

    Trends can and do change. In fact, it may even be said that every trend sows the seeds of its own reversal. But it has always been my goal to identify the constants across history, as a way to establish a baseline for evaluating the likelihood of future scenarios (again, the straight-edged pieces). I believe the “aspirational model” to be one of these constants.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Yes, Manufacturing Matters

    Manufacturing employment has fallen below 12 million jobs for the first time since 1941, and manufacturing jobs as a percentage of total employment has fallen below 9%, the lowest level since the Bureau of Labor Statistics started collecting data in 1939. But annual manufacturing output per worker is also at a record high: $223,915 (in constant 2000 dollars). That’s almost 3 times as much output per worker as in the early 1970s, and twice as much output per worker compared to the mid-1980s.

    That has been the trend over the last 40 years: more output with fewer workers. That’s a good thing, or inevitable, or both – isn’t it? I used to think so; now I’m not so sure.

    Reversing Industrial Decline
    A recent report by the Lexington Institute spells out the depressing picture: After dominating global industrial activity for a century, the United States is losing its edge in manufacturing to other nations. Over the last 30 years, manufacturing has fallen from a quarter to an eighth of the domestic economy, while the share of manufactured goods consumed in America but produced by foreigners has risen from a tenth to a third. The decline of US manufacturing is reflected in record merchandise trade deficits, the loss of over 40,000 manufacturing jobs every month in the current decade, and the shrinking role of American producers in global industries such as electronics, steel, autos, chemicals and shipbuilding.

    US manufacturers continue to generate over 20% of global industrial output and have increased productivity by a third in this decade, but if current trends continue America will cease to be the biggest manufacturing nation in the near future. Many factors have contributed to the slippage in US standing, including high corporate taxes, burdensome regulations, globalization of the economy, and the efforts of trading partners to protect their economies.

    If the erosion of US manufacturing persists, America will become more dependent on offshore sources of goods and the nation’s trade balance will weaken. That will undercut the role of the dollar as a reserve currency and diminish US influence around the world, eventually having an adverse impact on our national security. This can’t be a good thing.

    China Gains in Manufacturing
    China is on its way to surpassing the US as the world’s largest manufacturer far sooner than expected. Does that matter? In terms of actual size, the answer is no. But if size is a proxy for the relative health (and prospects) of each nation’s economy, the answer could be yes.

    The US remains the world’s largest manufactuer. In 2007, the latest year for which data are available, the US accounted for 20% of global manufacturing; China’s share was 12%. The gap, though, is closing rapidly. According to IHS/Global Insight, China will produce more in terms of real value-added by 2015.

    US manufacturing is shrinking, shedding jobs and, in the wake of this deep recession, producing and exporting far fewer goods, while China’s factories keep expanding. Given the massive trade gap between the two nations and uncertainty in the US over when and to what degree manufacturing will recover, China’s ascent has become a point of growing friction.

    Many economists argue that the shrinking of US manufacturing – both in terms of jobs and share of gross domestic product – is a normal economic evolution that started long before China emerged as a manufacturing powerhouse. From their point of view, the shrinking would happen regardless and is actually a sign of health: the sector doesn’t need to be big to be productive.

    To those with this view, China’s rise is normal, healthy and beneficial, for it is the natural course of things for national economies to progress along the continuum from agriculture to manufacturing to services. We have trod that path, and now China is following.

    But another school of thought, held by “manufacturing fundamentalists,” contends that US manufacturing decline is not natural, healthy or beneficial, and must be reversed to retain America’s economic power and well-being. From this perspective, the idea that we can be a nonmanufacturing society – and still be rich, free and independent – is nonsense and folly. Such thinking has led, and will lead, to the collapse of civilizations.

    Even in its weakened state, manufacturing remains a surprisingly large part of the US economy. The sector generates more than 13% of the nation’s GDP, making it a bigger contributor to the economy than retail trade, finance or the health-care industry. Thus it would be devastating if US manufacturers now being hit by the economic downturn never recover.

    Manufacturing Not In Decline
    And yet, according to the Cato Institute, notwithstanding the recent recession that has affected all sectors of the economy, US manufacturing has been thriving in recent years. How can this be so? Again, it’s the productivity. Real US manufacturing output has increased by 81% since 1987. American real manufacturing value-added – the market value of manufactured goods, over and above the costs that went into their production – reached a record-high level in 2007.

    Manufacturing as a share of gross domestic product peaked in 1953 at about 28% of the economy and has been trending downward ever since. Today manufacturing accounts for about 12% of our services-dominated economy, but manufacturing output and value-added are higher than ever in real terms.

    According to the United Nations Industrial Development Organization, US factories are the world’s most productive, accounting for 25% of global manufacturing value-added. By comparison, Chinese factories account for 10.6%.

    That may be hard to fathom, says Cato, given that US factories tend not to produce the sporting goods, toys, tools, and clothing found in Wal-Mart and other retail outlets nowadays. But US factories make pharmaceuticals, chemicals, technical textiles, sophisticated components, airplane parts, and other products. American factories have moved up the value chain.

    In comparison, the percentage of Chinese value-added in high-tech exports is quite small. Economists at the US International Trade Commission estimate that only about 50% of the value of US imports from China is actually Chinese value-added; the rest is value added in other countries and embedded in the components, design, engineering, and labor.

    In iPods, for example, the Chinese value-added is a few dollars on a product that costs $150 to produce and retails for $299. Further, their sale in the United States and elsewhere supports high-paying American engineering, marketing, and logistics jobs, while providing Apple with the profits to conduct R&D to employ more engineers and keep the virtuous circle going. Without complementary Chinese and other foreign labor, far fewer American manufacturing ideas would come to fruition.

    American manufacturing is therefore not in decline, right?

    The Plight of American Manufacturing
    No, that’s not right, and yes, manufacturing is in decline, and therefore so is America. That’s the case strongly made in Manufacturing A Better Future for America, published by Alliance for American Manufacturing.

    The United States is broke because it has stopped producing what it consumes, writes the book’s editor, Richard McCormack, who is also the editor and publisher of Manufacturing & Technology News. Even an increase in consumer demand, he notes, will not put Americans back to work as the spending will only help workers making products overseas.

    About 40,000 US manufacturing plants closed between 2001 and 2008, resulting in the loss of millions of good-paying jobs, according to AAM. Offshoring of production means that the United States is not generating enough wealth to pay its mounting and massive debts. The mindset among America’s economic elite – that the country does not need an industrial base – has put the country and the world economy in a ditch.

    The book refutes some widely promoted myths, including that the US economy can thrive with just service industries as good-paying jobs are replaced by other sectors. It also debunks the notion that lost manufacturing plants will not mean lost research and development. It details the unfair trading practices China employs, and explains the social costs of the decline in manufacturing.

    It is often said our economic future is dependent on innovation and/or job training. These factors are supported most strongly in manufacturing.

    Conclusion
    You can see why I have developed doubts that the diminishing of a manufacturing base and loss of manufacturing jobs are natural, inevitable, or good for the United States and its citizenry. A post-industrial economy does not obviate the need for industry. A large and rising value of intangible goods does not obviate the need for the production of tangible things. And a “new economy” does not obviate the need for a manufacturing base.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Koyaanisqatsi Redux

    I went to Hollywood one night last week to watch my favorite film of all time, Koyaanisqatsi (released in 1983). It was being shown on a big screen at the Hollywood Bowl, accompanied by orchestra playing the original score, conducted by its composer, Philip Glass. Oh, I didn’t go to the Bowl; I watched it at my daughter’s apartment about half a mile away (hi def DVD and digital sound system turned way up, thank you). It was much more enjoyable than going to the Bowl; after all, I didn’t want to share the experience with an audience that undoubtedly would have, shall we say, a different appreciation of the art.

    You see, the message and meaning most of the Hollywood crowd take from Koyannisqatsi (Hopi Indian for “life out of balance” or “crazy life”) is that man has despoiled and separated himself from his natural environment. Frankly, it has always had the exact opposite effect on me. Even after what must be 100 viewings, I am continually overwhelmed, impressed and delighted by the images of what man has been able to create, invent and build to control his environment, increase his wealth, provide him his food and energy, raise his standard of living, and transport him around the planet (or across the city).

    I am sure most of the Hollywood Bowl crowd has a different response, and finds the images disturbing and disgusting. This is the reactionary impulse, born of an anti-industrial, anti-development mindset. I would wager the majority of that audience has bought completely into the scaremongering of catastrophic man-made global warming, which to the properly skeptical and scientifically literate remains unproven (oh hell, it’s ludicrous on its face). This is deliciously ironic, as many sequences in Koyaanisqatsi were filmed in the 1970s, when most of the same crowd were hectoring us about global cooling (doubly ironic, as a cooling may now actually be upon us).

    My first review of the film, published some 25 years ago, needs only minor updating.

    This truly remarkable film by Godrey Reggio has no plot, no characters, no dialogue. The images of the film are awe-inspiring: first, huge expanses of pristine nature: deserts, rivers, mountains, mesas, lakes, waterfalls, clouds. Then grand-scale technology: huge earth-moving machines, power plants (nuclear and otherwise), oil refineries, food-processing plants, space shuttles, rockets, jets, freeways, subways, skyscrapers, shopping malls, train stations (and of course the obligatory atomic bomb explosions and mushroom clouds) – all shot in fascinating slow-motion and/or time-lapse format by cinematographer Ron Fricke. The accompanying music by Philip Glass is eerie, haunting and perfect.

    The film is a visual, aural and emotional feast. If it bores you, you don’t understand you are looking at, in juxtaposition, the majestic indifference of nature; the supreme accomplishments of physical engineering; and some of the most awful consequences of attempts at social engineering. Some of the images that make indelible impressions, all set to a majestic, driving score:

    • desert rock formations unchanged through thousands, if not millions of years
    • huge power transmission lines stretching forever across barren desolation
    • the implausible flying behemoth that is a 747
    • the flow of vehicles on a freeway, at night, from 50 stories up, that in time-lapse photography really does look just like the flow of blood through vessels, arteries and capillaries as seen through a microscope
    • row upon row of huge, empty, abandoned south Bronx tenements
    • the razing of the Pruitt-Igoe housing project in St. Louis (the most graphic depiction of public policy failure ever committed to film, I should think)
    • the rush of commuters who in time-lapse photography look like ants swarming an anthill
    • various mass production activities: mail-sorting machines, industrial assembly lines, escalators, elevators, revolving doors, conveyor belts, money counting machines, huge bowling alleys, movie theaters
    • finally, the high resolution satellite photograph of a massive city grid (Los Angeles, of course) overlaid, first, on a printed circuit microchip board, and secondly, on an intricate Hopi Indian woven blanket. The matches are nearly perfect.

    A very noticeable detail of the ’70s-era footage from Los Angeles is the blanket of smog that covers the city; I can tell you, having lived here all of these years, that the situation is dramatically improved. (I now see far-off mountain ranges daily; in the ’70s that was rare.) Environmental quality has been improving over the decades (read The Skeptical Environmentalist by Bjorn Lomborg for the statistical evidence). The solutions to the problems that technology causes often end up being more technology, sensibly and carefully applied.

    The single greatest contributor to the amelioration of LA smog, for example, is the catalytic converter. Instigated and required by government, you say? Developed and produced by industry in response to marketplace demand, says I.

    I find the movie very relevant today. It seems some of our new political overlords seem to think they can have a productive economy without production, without what the film depicts: heavy industry; mass processing of food, clothes, consumer and industrial goods; massive residential and commercial development; huge efforts devoted to energy extraction, production and transmission; untrammeled mobility for goods, people and vehicles. Now I’m a “new economy” guy myself, but I realize that our wealth, standard of living and quality of life – the current and future prospects for hundreds of millions of us – are dependent upon these activities, and that the health of the industries that make them possible are far more important than any particular small sub-species of bird, fish, ant or rat (the threats to which are always exaggerated anyway).

    We are really talking about the role of government here, not only in protecting nature. What the film shows me is that it is in fact government’s job to protect the “other” environment: the environment that encourages, promotes and allows incentives for production. Part of this environment is the need for massive infrastructure: energy systems, water systems, waste systems, transport systems, roads, dams, etc., etc., in adequate capacity and in good repair. Mass production and economies of scale bring good quality cheap to millions, and provide opportunities to generate incomes, grow wealth and lead productive, modern lives. More efficiency can also create more nature; for example, the millions of acres of non-redundant farmland turned into forest or open space.

    We used to know and understand this as a society. Our political elites were devoted to it. Now, not so much. We need to relearn the basic lessons and regain that consensus again.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends; IntegratedRetailing.com is his web site on retail trends. Roger is US economic analyst for the Institute for Business Cycle Analysis and its US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Lessons from the Left: When Radicals Rule – For Thirty Years

    Contrary to popular notions held even here in southern California, Santa Monica was never really a beach town or bedroom community. It was a blue-collar industrial town, home to the famed Douglas Aircraft from before World War II until the 1970s.

    When I first lived there in the early ’70s, the city was pretty dilapidated, decaying and declining (except for the attractive neighborhoods of large expensive homes in the city’s northern sections). I remember a lot of retirees, students, and like me and my wife, renters of small apartments in old buildings. The tiredness of the place was incongruous with its great location and weather. But then the first of several spectacular rises in real estate values took off. Rents started rising precipitously as well, and in a city where 80% of residents were renters, a political earthquake shook the establishment: in 1979 voters passed rent control and soon after that elected a slate of politicians backed by the SMRR – Santa Monicans for Renter Rights – to a majority on the city council. It has now been 30 years that the city of Santa Monica has been dominated by the politics and politicians of SMRR. What have they wrought?

    There have been some momentous battles. Property owners, denied the full use and fair value of their property, came to calling the place “the People’s Republic of Santa Monica.” As economists would predict, rent control resulted in the loss of rental units (and therefore the number of renters), slowed construction of new units, led to the deterioration of existing units as landlords deferred maintenance, decreased the city’s diversity, and increased its exclusivity. These were all opposite effects the original intentions of the new radical rulers.

    But rent control was not the only “social justice” concern on the SMRR agenda; “homeless friendly” policies led to an explosion of homeless people in the city, which comedian Harry Shearer reminds the nation every week on his NPR radio show is “The Home of the Homeless.”

    Other battles fought over the years have involved traffic issues, a living wage ordinance, preferential parking zones, McMansions, development and redevelopment, planning, zoning, schools, affordable housing requirements, and the height of fences and hedges – a thousand things big and small one would expect in a city of 85,000 residents and an annual budget of over $500 million. At some point in the 1980s, the SMRR-dominated City Council, once anti-development, realized that development could generate millions of dollars for city government necessary for funding its political agenda. Massive rezoning and redevelopment were approved.

    One might think that inconsistent policies often causing opposite effect of their intentions would have weakened the left. But two large factors have come into play over time. First, SMRR does not rule without consent and consensus – many, perhaps more than half, of home owners have supported the progressive politics and policies of the SMRR-controlled city council. Secondly, despite the concerns of some property owners and economists, Santa Monica has prospered. Despite powerful regulation, hotels, arts, jobs, and restaurants continue to flow into the city. Opponents on both sides concede most of the population is content and satisfied with the status quo.

    This has been accomplished with pragmatism and a willingness to change policies that were not working. The worst effects of rent control are in the past due to a state law that allowed vacancy decontrol. Same with homelessness: residents wanted to be “progressive” but realized that being kind to the homeless only increased their numbers. The city still overdoes it on permits, regulations, etc., but homeowners and business want to be “progressive,” so they go along with it (and they like regulation when it benefits their interests).

    The city decided to make itself a tourist destination, and it is, but when it looked like nothing but hotels would be built, voters passed a proposition to halt hotel development. On the other hand, last November voters defeated Prop T, which would have limited most commercial development in the city to 75,000 square feet a year for the next 15 years.

    Santa Monica Place, a huge indoor shopping mall, outlived its usefulness, so now it’s being rebuilt as an outdoor mixed-use development. A living wage law was passed by the City Council, and then repealed by voters.

    SMRR is a political machine that has dominated the city for 30 years, using money, favors, jobs for the connected (and bupkis for those not) to build voting blocs for power and control. It inserts its people onto all the boards and commissions with input into policymaking. Their power ultimately comes from persuading renters, who are still a big majority of the city’s inhabitants, that they need SMRR for protection from “greedy landlords.”

    So SMRR dominates political life in the city of Santa Monica, but it does so with the consent of many homeowners, property and business owners, as well as renters. Santa Monica is green, PC, insufferably “tolerant,” self-satisfied, etc., but still doing well for itself. Taxes, rules, regulations and restrictions are onerous, but people and businesses still want to be there.

    I have lived through and observed the political battles of the last 30 years as a renter, homeowner and briefly as a landlord (never again, thanks). The transformation of Santa Monica reflects an interesting story: left-leaning activists who realize they can bend the establishment by controlling it from the inside. They then become the new establishment, but like in today’s left-leaning academia, work to make sure they themselves are never similarly deposed. And yes, I wonder if it holds lessons for the nation, with President Obama and the Democrats now in control and looking to implement a left-leaning agenda.

    What might those lessons be? One, particularly difficult for conservatives to accept, is that the time-tested machinations of leftist political machines sometimes work. They work for the powerful and the connected (who get to have their cake and eat it too: financial reward with a patina of progressivism), and they are perceived to work for the powerless and unconnected (however deleterious in reality). And that the left can come to power and rule with the consent of the governed, if it doesn’t “push the envelope” beyond a certain point, changes course when warranted, rewards cronies and allies, co-opts opponents where possible (and freezes them out where not). It worked for Tammany Hall, it has worked for Mayor Daley, and it seems to be working for Obama. Saul Alinsky would be proud of his protégé.

    Perhaps at the heart of its success is that like all successful political machines, SMRR “fixes potholes.” Frank Gruber, who writes a weekly column about life and politics in Santa Monica for The Lookout News, calls this “squeaky wheel government.” SMRR council members try to turn every complaining resident – and there are many – into happy SMRR voters. Whatever the aims of SMRR, they have created a popular government.

    Gruber, who considers himself an “old leftie” of the “jobs, housing, education, environment” school, takes SMRR to task for putting the needs of comfortable voters (traffic, for instance) ahead of the needs of the larger community (such as jobs for minority youth). (A collection of Gruber’s columns has recently been published in a book called, fittingly, Urban Worrier: Making Politics Personal.)

    In the 2008 elections, in which Santa Monicans voted overwhelmingly for Barack Obama, all four incumbents of the City Council won easily. SMRR seems as entrenched as always. In at least this paradisiacal portion of Southern California, left-wing government appears to be working – even if sometimes at odds with its own old radical objectives.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends; IntegratedRetailing.com is his web site on retail trends. Roger is US economic analyst for the Institute for Business Cycle Analysis and its US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • The Twilight of Special Interest Politics

    Special interest groups are the scourge of the common interest, are they not? The Founding Fathers, in The Federalist Papers, recognized the danger posed by “factions,” but assumed that competing groups would keep the balance. They could not have foreseen our current Special Interest State, wherein tens of thousands of special interest groups exert such profound influence on politics, policies and life in the United States.

    Nowhere is this more evident than in California, my adopted home state. In California, as in much of the country, government is forever and hopelessly trapped in interest group politics and therefore, forever large and growing. Interest groups are intractable, in this view, because they are always able to devote more resources to their specific causes and concerns than are any conceivable guardians of the common interest.

    California’s predicament is a perfect illustration of public choice theory, which shows that government will always act in its own interest, interest group politics seem to be the logical and inevitable end-point of democracy. Multiply this process by the tens of thousands of special interests that lobby, petition and influence politicians and the public sector and it becomes clear why government will tend only to grow, never to shrink, crowding out the private sector. Over the decades the number of special interests has expanded exponentially, whether Democrats or Republicans control Sacramento or Washington.

    But eventually this system must overwhelm carrying capacity. Maybe in California we are approaching that limit even faster than the rest of the country.

    Debts, deficits, waste, inefficiency and voter/taxpayer fatigue must at some point render the special interest state untenable. Readers of this web site are familiar with the dire situation in California: a budget deficit of gargantuan proportions, driven by increases in public sector spending that have outpaced population growth plus inflation, now combined with a drastic drop in state revenues. Attempting to deal with the situation, the Governor and legislators have placed six measures on the May 19th special statewide election ballot. Proponents claim the measures will stabilize the budget process, save billions, modernize the lottery, preserve needed services, and cap elected officials’ salaries. Opponents claim the measures will raise taxes, not put a meaningful cap on spending, and not solve the state’s basic problems.

    A new poll by the Public Policy Institute of California asks voters, “Would you say the state government is pretty much run by a few big interests looking out for themselves, or is it run for the benefit of all the people?” Among likely voters, 76% say special interests dominate the state government which, only a few decades ago, was once touted as having one of the best, most forward-thinking governments on the planet!

    According to Shane Goldmacher, writing in the Sacramento Bee, they’re right. The six ballot propositions, agreed upon in February’s budget deal between Governor Schwarzenegger and the Legislature, are designed to please or neutralize the state’s most powerful political players: labor unions, public service workers, the teachers union, casino-operating Indian tribes, the liquor, beer and wine industry, and the oil industry, to name a few.

    Some of these very interest groups protected in the budget deal are bankrolling the campaign to ratify it. But, writes Goldmacher, the influence of such groups is, more often than not, simply unspoken.

    According to Jerry Roberts and Phil Trounstine (www.calbuzz.com) voters hate the propositions for the following reasons:

    • They were carefully crafted to avoid causing any pain or requiring any sacrifice by Sacramento’s heavyweight special interests.
    • They were written with stultifying complexity, the better to sell them to voters with simple-minded sound bites.
    • Their political perspective has far more to do with inside-Sacramento tactics and strategy than with the real lives of real people.

    The Third American Republic
    Clearly, in California and on the federal level, the special interest state is untenable in the long run, and what cannot continue will stop. How and when it will stop, and what will replace it, is the subject of an essay in The American by James DeLong, “The Coming of the Fourth American Republic.”

    The special interest state is the third iteration of American politics and policy, in DeLong’s analysis. The first was the Civil War and its aftermath, which established that sovereignty belongs to the nation first and the states second. The second great institutional upheaval was the New Deal, which radically revised the role of government to include responsibility for the functioning of the economy.

    As governmental power expanded, it needed to delegate management and implementation of tasks to those with administrative abilities or specific expertise. This stimulated the rise of agencies, legislative committees and subcommittees, and yes, interest groups. Eventually, perhaps inevitably, power came to rest with those with the greatest interest or the most money at stake. Thus was the Special Interest State created, with various interest groups seizing control over particular power centers of government and using them for their own ends.

    This Special Interest State must expand, explains DeLong: the larger and more complex the government becomes, the higher the costs of monitoring it. No one without a strong interest in a particular area can be expected to possess the time and energy to keep track. As a result policy turf is left to the beneficiaries of government action.

    Special interests wield their power through laws, regulations and the tax code. Voters may object, and politicians may pronounce and promise, but nothing ever gets done to diminish special interest power. In fact, special interests have become their own special interest: the millions of lobbyists, governmental officials and compliance officers that make a living from the system and resist all reform.

    But the special interest Third American Republic, writes DeLong, is falling of its own weight. American progress cannot proceed without reforming it.

    The End of the Third Republic
    This Third Republic has had a good run, and could continue, writes the author, but it is more likely that the Special Interest State has reached a limit. This may seem a dubious statement, at a time when the ideology of total government is at an acme, but DeLong offers a catalogue of the current regime’s insoluble problems:

    Sheer size. Government in the US consumes about 36% of GNP (federal and state combined). This does not reflect the impact of tax provisions, regulations, or laws, however, so an accurate estimate of how much of the national economy is actually disposed of by the government is impossible. Whatever it is, it is growing apace, and the current administration is determined to increase it considerably.
    Responsibility. As the government has grown in size and reach, it has justified its claims to power by accepting ever more responsibility for the economy and society. Failure will result in rapid loss of legitimacy and great anger.
    Lack of any limiting principles. There is no limit on the areas in which special interests will now press for action, nothing that is regarded as beyond the scope of governmental responsibility and power. Furthermore, special interests try to convert themselves into moral entitlements to convince others to agree to their claims. Compromise is regarded as immoral.
    Conflicts. The combination of moral entitlement, multiplication of claimants, and lack of limits on each and every claim throws them into conflict, and rendering unsustainable the ethic of the logrolling alliances that control it.
    U.S. politicians do not grasp the situation. None of the leaders of any branch are demonstrating an appreciation of the problems and limits of the Special Interest State.
    Past Governors and Presidents have understood the importance of keeping special interests at some distance. They may have given up the agencies, but most ensured at some level, the executive, at very least, acted in the overall public interest. This is no longer the case.

    Over the past few years, political winners have become increasingly aggressive. Losers have become increasingly restive, ready to attack the legitimacy of the winners’ victory. This was true for George Bush and now Barack Obama. Politics has become more like a contest between equally fierce warring gangs than a civilized contest for ideas. Each party is regarded by the other as a principle-free alliance of special interests, eager to loot the government.

    What Comes Next?
    Given these trajectories and the lack of any mechanisms for altering them, writes the author, it is hard to see how the polity of the Third Republic can continue. Nor is there any easy self-correcting mechanisms in the Special Interest State. Quite the reverse; the incentives all seem to be pushing the accelerator rather than the brake.

    Thus the need for a new break: what DeLong calls the Fourth American Republic.

    What will this look like, and how will it come about? Two possibilities for change seem most promising, he believes. The first is a third political party that explicitly repudiates the present course and requires that its members reject the legitimacy of the Special Interest State. This would require a certain almost religious fervor, but the great tides of history and politics are always religious in nature, so that is no bar. In California at least this comes up often in meetings between interested, but frustrated, citizens.

    This second would be more bottom-up. In California, there is a growing movement to change the Constitution. This could also occur on the national level as well. There could also be a groundswell to force responsible change within the current constitutional framework.

    This may seem a bit pie in the sky but, as the California crisis worsens, that of the country may not be far behind. Something, quite clearly, needs to change.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends; IntegratedRetailing.com is his web site on retail trends. Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American agent for its US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Is That an Economic Light at the End of the Tunnel or an Oncoming Train?

    When it comes to the state of the economy, is the worst behind us or still to come? Informed opinion is all over the map. The optimists are citing such factors as accommodative Federal Reserve Bank policy (massively increased liquidity), bank profitability (and yes, banks are lending, but only quality loans), money velocity (trending up), a positive yield curve (long-term vs. short-term rates), housing starts (surging), favorable financial rule changes (abandonment of mark-to-market accounting, reinstatement of the short uptick rule to prevent naked short-selling), retail sales (recovering), commodity prices (rising due to increased industrial demand), used car prices (firming), and new vehicle sales (rising off their sickening lows).

    Pessimists are pointing to job losses, bankruptcies, business closings, unfunded liabilities, budget deficits as far as the eye can see, potential for high inflation, the debt overhang, and more. They don’t believe any good news is real or sustainable. On housing, for example, they say prices have further to fall, and that new construction is mostly in condominiums, apartments and townhouses, not detached single family residences.

    But that’s disputable. In fact the housing trend has become much more positive. In California, existing home sales have jumped 30% over the past year, taking the inventory from an estimated 16.7 months to less than seven months.

    Nationwide, existing home sales have been on the rise for the last few months, with strongest growth occurring in Sunbelt markets in Arizona, Nevada and Florida, as well as in California. These are the places that experienced some of the greatest surges in prices, but have now seen declines of as much as 50% below peak, allowing new buyers to purchase affordably.

    If there is one iron-clad rule when it comes to the life cycle of recessions, it is that when things get cheap enough, buyers appear.

    In other words, there is a bottom somewhere, if for no other reason than even after the worst disaster, survivors must move ahead with their lives. And we all have to buy the basic staples (even the bare necessities add up to billions of dollars in expenditures). Will we completely change our lifestyles, living in smaller places, driving smaller cars, consuming less, become more frugal, less ostentatious, opting for voluntary simplicity, etc.? Fugetaboutit. I get asked about this during every downturn and I always say the same: only those who already have everything seem to buy into the notion of doing with less. And, as it turns out, they have to spend freely in order to impress themselves that they are living frugally.

    Going socialist?
    Some observers have said that if we continue down the current economic, social and political path, we will become like the social democracies of Western Europe, characterized by slow growth, heavy government involvement in all businesses an industries, high taxes and regulations, and a resultant lower quality of life. Others – say, those who have visited Europe and like what they see – say they would welcome the guaranteed health care, education and pension. If I may offer some personal and professional insight into the argument, as I have lived in, worked in, studied, researched and written about the European system, I would say the model is not transferable to the States, and is likely itself unsustainable even in Europe.

    Europe suffers from consistently slow growth, permanently high unemployment, aging populations, declining birthrates, rising fiscal deficits, and, worst of all, little prospect of change. The labor market is less flexible, regulations are onerous, fewer new businesses are formed, spending on research and development is lower than in the US. With so much regulation and “national champions”, barriers to competition are higher.

    Europeans are less productive, work less and earn less. And no, contrary to Jeremy Rifkin (The European Dream), this represents more than a voluntary choice of more leisure and lifestyle over income. A Federal Reserve Bank of Minneapolis study found that Europe’s higher taxes explain almost all the difference in labor-force participation rates between Europe and the US. When European tax levels were comparable, European work hours were similar. Having lived among the natives in the “café society” I can confirm that when marginal tax rates are confiscatory, the best and brightest will indeed either “go Galt” (withhold their full efforts from the labor market), or seek opportunities elsewhere abroad.

    Entrepreneurs and innovation – not ever expanded government – will save the US economy, but those are in short supply in Europe. We excel in them here, but they require low taxes, low levels of regulation, low barriers to entry and operation, the freedom to hire and fire freely, etc.

    Consumers
    What about consumers and consumer spending, such an important component of economic activity? Optimists point out that most people (upwards of 90%) are still working, earning, making their mortgage and credit card payments – and spending, if at a less frenetic pace. Pessimists see the credit contagion as spreading. They point to devastated domestic balance sheets, due to collapsing home values, declining net worth and reduced financial spending power.

    I can here also offer some personal and professional insight, from my long association with the Institute for Business Cycle Analysis: our own US Consumer Demand Index, the only monthly survey of American consumers which measures actual buying intentions (as opposed to sentiment, confidence or opinion, all of which are of course subjective). We query over 1,000 households a month on their specific spending plans across a broad range of durable and non-durable goods. We don’t ask their opinion of which direction the country is going, or on how good a job they think the President is doing. We ask them, are you, or are you not, in the next three months, going to be buying a car, PC or TV, white goods, home furnishings, kitchenware, toys, etc. In the case of food/groceries and clothing/shoes, we ask whether they are going to be purchasing more, less or the same amount as in the corresponding period of last year. Regarding those durable goods, we also ask, uniquely, if their household has no plans to be buying anything in those categories during the next three months. This gives us some unique insight into real consumer behavior.

    Our March data show a fairly strong upturn (from a very depressed level of -37 to a less depressed level of -11). This is a significant improvement, but we will refrain from calling a bottom or turnaround until we see our three-month moving average in positive territory for three consecutive months. (On the basis of this March report, the three-month moving average improved only one point, from -26 to -25, so there is still a long way to go, but the positive direction and momentum is encouraging.)

    [Feel free to contact me for a copy of the US CDI and subscription information (or feel free to visit www.consumerdemand.com). Our monthly surveys, which have been conducted since February 2001, give a fairly accurate forecast of the strength and direction of the PCE (Personal Consumer Expenditures) and ISM (Institute for Supply Management) indexes 4 to 6 months ahead of official data.]

    So where do I stand? I believe the tide is starting to turn – the rate of decline in most major economic indicators is clearly slowing. The forward looking stock market is well off its lows. In our latest CDI survey, the percentage of consumers declaring themselves on the sidelines decreased from the record high level of 68.4 in February to the still awful 62.2 in March (at least we’re moving in the right direction!).

    So is that flickering light we see the end of the tunnel or an oncoming train? Ask me in two months. I would offer a stronger opinion, but everyone in the “foreseeing” business ought to be properly humble from now on.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends; IntegratedRetailing.com is his web site on retail trends. Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American agent for its US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • A California Wedding

    My wife and I attended a wedding on a recent past weekend. It was a beautiful event in a beautiful setting: city of Atascadero, county of San Luis Obispo, on California’s central coast. We drove through spectacularly beautiful wine country to get there. The weather was beautiful. A beautiful young couple exchanged vows in the backyard of the groom’s childhood home, where his mom still lives.

    Beautiful setting, wonderful people
    Two beautiful families became one big extended family. It was a beautiful atmosphere: loving, warm and generous of spirit. Every single person I encountered during the weekend impressed me as a beautiful, wonderful individual, and that’s not just the champagne talking. Even the exes got along beautifully, and that was a good thing, because my god, there were a lot of them.

    Demographics rears its head
    As a demographer I was cognizant of several overlapping trends that were manifesting themselves. The bride is an only child. The bride’s mom (let’s call her “Betty”) is an only child. Two of Betty’s exes were present, including the bride’s father (an only child), as was her current husband (a childless only child). Everyone is seemingly on wonderful terms with ex-spouses, ex-spouses’ intervening and current partners, and everyone else.

    The bride’s father (let’s call him “Jack,” because this is going to get complicated), after his marriage to Betty, was then married for a while to a woman (let’s call her “Jane”), who was also present. One of Jane’s previous husbands was a guy (oh hell, let’s call him “Peter”) who is here by dint of multiple connections, having grown close with the bride as a counselor, and as a former business partner of the bride’s father, Jack.

    Jack and Jane not only married with Peter’s blessing, they got married in Peter’s house, the same house in which he (Peter) and Jane had gotten married ten years previously. They all get along wonderfully as well. Jack is here, by the way, with current partner “Louise,” a lovely person who, for my demographically analytical purposes, is divorced and childless (forgive me Louise, that sounds worse than it should). Betty’s other ex in attendance is, we’ll say, “Randy,” who is here with, oh, “Melody,” also previously divorced. They make a really sweet couple, and are both childless.

    Peter and Jane have an only child we’ll call “Helen.” She was the maid of honor. Also in attendance are the bride’s (married and as yet childless) good friends “Mary” and “Andrew” (an only child).

    Peter is a relationship counselor; this must come in handy. We are all staying at Peter’s serene and beautiful vineyard compound, the grounds of the Center for Reuniting Families, a retreat where he offers individuals, couples and families a place to heal themselves and their relationships. This is coastal California, after all.

    So let’s see:
    “Betty” has two exes here (Jack and Randy);
    “Jack” has two exes here (Betty and Jane);
    “Jane” has two exes here (Jack and Peter);
    “Peter” has two exes here (Jane and “Linda”).

    Who is Linda? Linda lives at the compound, as do a few of her exes and current partner. Linda and her only child run a bakery together and made the spectacular, beautiful wedding cake.

    The groom’s divorced parents are also on wonderful terms, and it showed on the day when it all came together.

    I guess my wife and I are the outliers. We are still in a long-lasted first marriage and have four siblings between us who can say the same. We do have an only child, though; each of our four siblings has two each.

    I am not a native Californian, but my wife is, and her mother and grandmother can claim nine marriages between them.

    We do have an only child, but during the 1970s we did belong to the National Organization for Non-Parents, which promoted the notion it was okay to be childless. The founder also eventually had a child and formed a new organization to promote the notion that single children were okay too. God, we baby boomers.

    Implications, Reflections
    What does it all mean? Well, the first thing that occurs to me is that statistics on marriage, divorce and remarriage don’t really capture the whole picture. Many people believe the divorce rate is 50%, but the divorce rate is not even measured or expressed as a percentage figure; it’s the number of divorces per 1,000 of population in any given year. In 2005, the most recent year for which data are available, the US divorce rate was 3.6, the lowest level since 1970. (The peak was 5.3 in 1981.) And California was not the state with the highest divorce rate; that distinction went to Nevada, at 6.4, followed by Arkansas at 6.3 and Wyoming at 5.3.

    The reason so many people think the divorce rate is 50% is because for any given year of the past many decades, the number of divorces (and hence, the divorce rate) has been about half the number of marriages (and thus half the marriage rate). For example, in 2005 there were about 2.2 million marriages in the US (resulting in a marriage rate of 7.5), and about 1 million divorces (and a divorce rate of 3.6).

    It’s hard to state the percentage of marriages that end in divorce, because there are few longitudinal studies done tracking the same married couples over time, and the percentage which divorce will increase the longer the time frame. But I have read a figure of approximately 33%, which if true would mean that two-thirds of first marriages do not end in divorce. On the other hand, the divorce rate is down because the marriage rate is down, and for the first time in our history, the percentage of households comprised of married couples has fallen below 50% (and thus, no longer a majority of households).

    [The exact 2005 numbers: of the nation’s 111.1 million households, 55.2 million, or 49.7%, were made up of married couples, those with or without children. The rest were single households, unrelated cohabitating households, or other non-traditional households.]

    What about the kids?
    The second thing I can tell you is that the statistics reveal nothing about the level of happiness out there. The people I saw this weekend were about as happy, content and well-adjusted a group as I’ve ever seen. Not that they haven’t gone through their share of heartbreak, difficulty, sorrow, challenge and crisis (no small amount of which relating to children!). Our daughter, in her 20s, tells us she does not know of a single contemporary who is not dealing with one or more “issues” (therapy, medication, psychoanalysis, depression, bipolar disorder, drug use, eating disorders, cutting, to name a few). And if you’re going to say these problems are most prevalent in the populations that can afford them, I’ll agree.

    Still, the incidence of single children and childlessness might be a concern. Demographers Ben Wattenberg and Nicholas Eberstadt have written of a future world of declining fertility and birth rates, leading to eventual declines in population. They’re concerned because population growth is the foundation of modern economies and welfare states, and if populations of the rich, advanced, educated, industrialized, developed countries are not growing (and they are not, except for the notable exception of the US), then who will reproduce and replenish? Increasingly, they fear, people at odds with the modern world.

    And what will be the effect on families in a world where the only biological relatives for many people will be their ancestors?

    Demographer Phillip Longman puts it more bluntly in his book The Empty Cradle. Childbearing has become a sucker’s game, he writes: parents are supposed to provide society with a steady new supply of well-bred individuals (educated, moral, balanced, sober, disciplined, productive citizens), in exchange only for the psychic rewards. No wonder the birthrate is falling. Or was, until 2007. In that recent year there were a record 4.3 million births in the US, the most since 1957 (the middle of the Baby Boom). The fertility rate (the average number of children born to each woman over her lifetime) rose to 2.1 (the level needed to maintain current population size), the highest since 1971.

    Of course by 2050 half of the 400 million Americans projected to be alive will be what are now considered ethnic and racial minorities. That doesn’t bother you, does it?

    But none of it was a concern this particular weekend. Everything, and everyone, was beautiful. Even the traffic on the 101 returning to Los Angeles was not that bad. This doesn’t have the look or feel of decline, but if it is, it’s been a beautiful ride.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends; IntegratedRetailing.com is his web site on retail trends. Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American agent for its US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Financial Crisis: Have We Hit Bottom Yet?

    These are not boom times for optimists. But I believe that – combined with knowledge of what has worked in the past – there are numerous signs that the economy may turn around faster than many think.

    Bottoming Signs

    Here are some small signs that the economy is at last bottoming:

    – The ISM non-manufacturing services report for December came in at 40.6 on the composite index, compared to 37.3 in November. New orders, employment, backlogs, and exports all ticked higher than the previous month. So did the overall-business-activity index.
    – November factory orders rose at a 3.9% annual pace, the first increase in four months and the best gain in 10 months. Computer orders surged 12.5%.
    – Pending home sales declined again overall, but in the West pending sales continued to increase, up 27% since the August 2007 bottom.
    – Commercial construction rose 0.7% annually in November, and is up 12.1% over the past three months.
    – Real disposable personal income jumped 1% in November and is up 7.1% at an annual rate over the past three months. Real consumer spending rose 0.6% in November.
    – Inflation is plummeting, largely a function of collapsing oil and retail gas prices.
    – The money supply of liquid assets, as measured by M1 and M2, is growing robustly, fueled by the Fed’s gigantic increase in the monetary base.
    – The credit freeze continues to thaw. The three-month LIBOR rate is all the way back to 1.4%. Corporate bond rates continue to decline.

    The Economic News Isn’t All Bleak

    What happened after the collapse of Lehman on Sept. 15 was a global, synchronous cessation of all but nondiscretionary economic activity. It came in the wake of a near-collapse of global credit markets. The fall was remarkably rapid. But if things came to a halt more quickly than ever before, they could also restart more quickly than ever before. Zachary Karabell, president of River Twice Research, calls attention to some positive signs:

    – “First, we haven’t seen war, revolution, the collapse of states and governments, or massive demonstrations sweeping the globe.” It is a remarkable testament to global stability even in the most difficult time.

    – “Second, consumers in many parts of the world are in relatively good shape.” A third of American households have no mortgage. The savings rate in China is 50%. The accumulation of wealth is still massive in the US, Europe, Japan, China, the Gulf region, Brazil, India and Russia. Even at its most promiscuous, the credit system did not allow consumers to leverage themselves to the obscene 30:1 ratio that some financial institutions did.

    Karabell continues:

    People have also reacted swiftly to the current problems, paying down debt and paring back purchases out of prudence or necessity. That’s a short-term drag on economic activity, but it will leave consumer balance sheets in good shape going forward. Low energy prices and zero inflation will boost spending power. Even if unemployment reaches 9% or more, consumer reserves in the US and world-wide are deeper than commentary would suggest. Household net worth in the US is down from its highs but is still about $45 trillion. As the credit system eases, historically low interest rates also augur debt refinancing and constructive access to credit for those with good histories and for small business creation in the year ahead. Entrepreneurs often thrive when the system is cracking.
    In addition, corporations generally have very clean balance sheets with little debt and lots of cash, unlike the downturns in 2002 and in the 1980s. And government has more creative ways to spend, which both the current Federal Reserve and the incoming Obama administration intend to do.

    2009 Could Be Better Than You Think

    Here are five good reasons why 2009 could be better than you think, according to Alan Murray:

    1. This will be a good year to invest in stocks (the bottom will be found sometime this year, and it probably won’t be too far below where the market is today).
    2. It will be a good year to invest in real estate (fixed-rate mortgages are at historic lows).
    3. Americans will learn to live within their means (you can’t spend what you don’t earn).
    4. President Obama will have a historic opportunity to reshape public policy (sure, some of the stimulus money will be wasted, but a lot will be beneficial).
    5. Your (federal) taxes won’t rise (not this year, anyway).

    What Could Go Right in 2009

    Superstrategist Ed Yardeni is quoted by James Pethokoukis in US News & World Report on what could go right in 2009:

    1. Lower mortgage rates fuel a refinancing boom which lifts consumer spending.
    2. Home sales increase and home prices stabilize.
    3. Easier credit conditions increase auto sales.
    4. The drop in fuel prices also boosts consumer spending; the unemployment rate peaks below 8%.
    5. Massive spending on infrastructure by the US government offsets weakness in such spending by state and local governments.
    6. The money supply grows rapidly.
    7. Stimulative monetary and fiscal policies overseas revive global economic activity and US exports.
    8. Depleted inventories and improving sales trigger a big jump in industrial production.
    9. Credit quality spreads narrow significantly and rapidly as investors seek better returns than available in Treasury securities.
    10. Stock prices rise 30%-40% in anticipation of better earnings during the second half of 2009 and in 2010.
    11. Inflation remains subdued, and productivity pops.

    Looking on the Bright Side

    Martin Walker, Senior Director of AT Kearny’s Global Business Policy Council, is not down-hearted, for the following reasons:

    First, the financial crisis is starting to ease. The LIBOR rate is back down below the panic level. Credit Default Swaps look much less worrying. International coordination to ameliorate the crisis is unprecedented, and includes China.

    Second, we now have a reasonable sense of how long the recession is going to be; it started in the third quarter of last year, will last for at least 18-24 months, and will see a decline in GDP among the G-7 countries of 2 to 3 percent.

    The growth rate of the BRIC economies – Brazil, Russia, India and China – will slow, as will the growth of such middle-income countries as Mexico, Australia, Turkey, Taiwan, Indonesia, Saudi Arabia and South Korea. But they will all still be growing.

    Third, there is some very good news on innovation which points to a much brighter future. All previous predictions of gloom and despair – from Thomas Malthus in 1798 predicting human population would overwhelm food supplies to the Club of Rome’s forecast of major minerals and commodities shortage in the 1970s – have been proved wrong by human ingenuity and technological progress. Brains, brawn and sheer effort have a remarkable way of overcoming obstacles.

    Dr. Roger Selbert is a business futurist and trend guy. He publishes Growth Strategies, a newsletter on economic, social and demographic trends, and is a professional public speaker (www.rogerselbert.com). Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American representative for its US Consumer Demand Index.

  • Will the Bubble Burst Aspen?

    Aspen is a great town. Its uniqueness extends beyond its spectacular geography to its amenities, people and community spirit. It’s a world-class, year-round Rocky Mountain resort offering great food, music, skiing, shopping – great everything – right in the middle of a real, functioning, small American community.

    It’s no surprise people like it, want to keep it going. And not just the good, smart people who live in Aspen full-time and those who own second homes there (including some of the wealthiest people on Earth), but the thousands of good, smart people who visit every year to address big issues at the Aspen Institute and numerous other forums. These include elites of American arts, sciences, politics and economics with amazing amounts of brainpower and money at their disposal.

    But geographic realities plus inexorable economic, demographic, and social trends are conspiring against the best of intentions. The future of Aspen – playground to the smart, rich and famous – may soon become untenable.

    The financial crisis dominates thinking now. Could it be the catalyst that signals the beginning of the end of business as usual: the start of a major, long-term and permanent change?

    The list of interested parties includes a wide cross section of year-round residents, second homeowners, business and property owners, public officials, visitors, employers and employees, builders and construction companies, managers and personnel at SkiCo (the town’s largest employer).

    I have both personal and professional interests in trends in Aspen, and have been fortunate to visit many times and spend considerable time there over the past 35 years. My in-laws have been gracious and generous hosts (how lucky is that?), and in my role as an analyst of economic and demographic trends, I have been invited to speak, make presentations and attend seminars on many occasions (I always accept!).

    Over the years I have personally seen the transformation from funky (I think the first time I skied there was in jeans and a sweatshirt) to glam and chic. To me it has always posed the classic development problem: how do you both improve and preserve what you’ve got, without setting forces in motion that undermine what you were trying to protect?

    Before the housing and economic meltdown Aspen’s future was considered in State of the Aspen Area 2008, a report commissioned by the Aspen City Council and Pitkin County Board of Commissioners to provide guidance for future decisions on issues ranging from housing to growth management to transportation. The goal was to generate a 10-year community vision for the future, but that future may have to be put on hold.

    The report highlighted several trends that seemed to pose serious challenges for Aspen. Most prominently, it suggested that the Aspen economy was becoming dangerously dependent on real estate and construction, as opposed to the original drivers of skiing, lodging and retail/restaurants. There were many new jobs, but a decrease in available housing for workers.

    Aspen backs up to the Continental divide (closed all winter)! The Roaring Fork Valley is steep and narrow. Low- and middle-income workers must all live and commute “down valley.” But down-valley communities, where one used to be able to find cheap housing, have themselves become too crowded and expensive.

    On top of this the Roaring Fork Valley has moved within sight of being “built out.” Traffic congestion is expanding up and down the valley (there is only one road – Route 82 – to get in or out of town), reaching intolerable levels during rush hours which start earlier and end later. A population of primary and second homeowners increasingly “aging in place” (with large percentages intending to retire in place), taking both their labor and residences off the market, exacerbate existing housing/lodging/worker imbalances.

    The only reason the town “works” now is massive cross-subsidization. The fabulously wealthy subsidize the town budget with high property taxes on their mansions (even though some are in residence only a few weeks a year). They also subsidize the many arts, cultural attractions and charities so ubiquitous to Aspen as well as a range of services for year-round residents, from child care to education, health services, senior services, and police and fire departments.

    Revenues from the rich and ultra-rich also pay for a town government that has a budget of $100 million plus for a town of 6000 permanent residents. In other words, Aspen could not afford itself if it had to rely on itself. Yet it was assumed the system would continue to work indefinitely because of the belief that “there will always be [a need for] an Aspen,” a playground for the ultra wealthy who spent freely and gave generously.

    The burst of the housing bubble, and now the financial and economic crisis, throw that assumption into doubt. Even before the financial meltdown, the usual source of funds – more building to generate more fees, and/or raising taxes on visitors and residents (those both full-time and part-time) – were reaching limits. Now many construction projects have come to a virtual halt; it is no longer certain there will be buyers or a market for the completed structures – developers need to stop bleeding cash immediately. The value of building permits issued in Aspen this year is down 47 percent through Dec. 10.

    Meanwhile the all-important non-profit sector has fallen into a tailspin. Contributions to the arts and other charities are primed to plummet. Endowment funds have lost millions. Sales tax revenue, which is the main tax source, will soon crash due to decreased tourism. Visitor reservations are dramatically down this Holiday season; retail stores are posting “Help Not Wanted” signs.

    As a result, Aspen, a city unused to troubles, now has about all it can handle. Budget cuts threaten to cause havoc. Cuts in services, both governmental and those subsidized directly by the wealthy patrons, seem inevitable. Conflicts among elected officials, business, full- and part-time citizens could get ugly.

    Of course, there is always the possibility that Aspen will weather the storm: after one or two down seasons at most, the number of visitors and dollars collected, spent and donated will resume their inexorable rise. After all, the ultra rich, trendy and connected will always need a playground. The problems listed above are not impervious to solutions; those bridges will be crossed when encountered by lots of brainpower and money.

    In addition, not everyone is alarmed by the economic crisis and housing crash; some Aspen residents are indeed rooting for it, welcoming a lull in the constant construction, development and traffic, and hoping a slowdown will ameliorate such problems as the housing and worker shortages. Fiscal constraints will also bring some sanity back to (what they feel has been) the town government’s extravagance.

    Long, slow decline is certainly possible: less spending, fewer visits, tax receipts, and charitable contributions could unravel the entire structure of cross-subsidization. Could it mean a reversion to the “old Aspen,” the laid-back, counterculture, easy-going, hippy-dippy, live-off-the-land Aspen?

    Maybe so. But perhaps Aspen is facing systemic problems that can not be easily solved. Obviously, there are a great many demands on the area’s land, people, government and businesses. There has never been a consensus in Aspen that growth and development are desirable, even though the town has been dependent upon them. Now that certain limits are within sight of being reached, the already politicized town could become even more polarized.

    The city government has always been composed and supported by year-round local residents, of course, who have always had a love/hate relationship with growth and development: the tourists and wealthy second homeowners bring the city great wherewithal, but they also bring great demands on the area’s carrying capacity and inevitably change the character of the place.

    Of course, these conflicts have always existed, but as the stakes and money involved have grown, they have become more intense. It’s going to be an interesting next few years. See you at the Nell.

    Dr. Roger Selbert is a business futurist and trend guy. He publishes Growth Strategies, a newsletter on economic, social and demographic trends, and is a professional public speaker. Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American agent for its US Consumer Demand Index.