New Geography

Category: Economics

  • The U.S. is Inherently Prosperous

    Obama’s $800 billion stimulus bill has both policy makers and the public wondering what the bill will actually manage to stimulate. Yet, somewhat surprisingly, a recent study shows that left to fend for itself, the United States is inherently prosperous.

    The Legatum Prosperity Index recently released a study of the most prosperous nations, measuring economic growth and quality of life. The study found that the U.S. – despite its current economic situation – ranks fourth out of 104 nations.

    The amount of wealth and sense of well-being enjoyed by U.S. citizens is higher than any among large countries, with no other country with more than 100 million inhabitants ranking above the top 10.

    The Index measures nations overall by “how well they foster the practices, institutions, and habits that create competitive economies, stable and free political institutions, and social capital.”

    When looking at prosperity in this fashion, America and its ability to foster both economic and non-economic progress is what puts it so high on the scale. The US still rewards innovation and entrepreneurship to an extent seen in few other countries. This opportunistic culture provides the basis for successful growth of commerce even in an otherwise weak environment.

    The U.S. bests the other top 10 countries on personal income by 40 percent. It scores 38 percent higher than the rest of the world in its ability to “commercialize innovation through patents.”

    On the flip side, the US ranks just 7th in economic competitiveness and below average on promoting international trade and investment. The stimulus bill could offer some jolt to the weak economy, but given access to capital, Americans might prove adept in finding their own path to prosperity.

  • Stimulus Plan Caters to the Privileged Public Sector

    Call it the Paulson Principle, Part Deux.

    Under the now thankfully-departed Treasury secretary, we got the first bailout for the undeserving – essentially, members of his own Wall Street class.

    Now comes the Democratic codicil to the P. Principle. It’s a massive bailout and expansion of the public-sector workforce as well as quasi-government workers in fields like health and education. Not so well-rewarded – except for expanded unemployment benefits – will be those suffering the brunt of the downturn, such as construction and manufacturing workers, whose unemployment is now heading north of 10%.

    Indeed, a close look at the current stimulus plan shows that as little as 5% of the money is going toward making the country more productive in the longer run – toward such things as new roads, bridges, improved rail and significant new electrical generation. These are things, like the New Deal’s many construction projects, that could provide a needed boost to our sagging national morale.

    Instead, we are focusing once again on those who have been getting the best deal for doing the least. The Bureau of Labor Statistics reports state and local government workers get paid 33% more than their private sector counterparts. If you add in the pensions and other benefits, the difference is over 40%. In New York alone, public-sector wages and benefits since 2000 have grown twice as fast as those of the average private-sector worker.

    Egregious stories of overpaid public workers are legion. In suburban Chicago, for example, some school administrators are making over $400,000 with benefits and incentives. Recent reports out of Boston suggest hundreds of firefighters and police officers make well in excess of $100,000 a year. And of course, there are the California prison guards who can make upwards of $300,000 a year with overtime.

    Of course, most public sector employees are not so lucky. But, for the most part, these workers enjoy protections, like health care for life, that most others could only dream about. Many also have pensions that allow them to retire in their 50s, while some of us will be hod-carrying well into our 70s.

    This all means that the potential price tag for swelling the public workforce could ultimately run into the trillions, a number Washington and Wall Street now use the way we used to talk about billions. At very least, we should be asking new public workers, or those whose jobs are being bailed out by the stimulus package, to make the kind of sacrifices demanded, say, of those working at General Motors. We could, for example, make them wait ’til age 60 or even 65 to retire.

    To no one’s surprise, much of this favoritism has to do with party politics. The basic truth is that auto and other industrial workers, like those in construction, have become somewhat expendable in the eyes of some Democrats – in part because they do not always follow the party line. In contrast, public-employee unions are the politically correct rock upon which much of the party now rests.

    This oversized influence is relatively recent. Yet as private-sector unions have waned, those in the public sector have waxed. They have been able to extort enormous benefits out of City Halls, counties, states and, of course, Congress.

    In the process, they have become – like the Wall Street financiers before them – a kind of privileged class. In the case of some Chicago garbage men, they often don’t work anything near 40 hours a week but are paid as if they did. Others engage in elaborate schemes to take advantage of injuries, real or imagined. Who would have thought that punching tickets for the Long Island Rail Road would be so hazardous that many retired employees use these “injuries” to collect disability money – in order to play golf or take another job?

    This can all get very expensive, especially given the poor immediate prospects that the stock market can finance these additional pensions. Some day the millennial generation should initiate a class action suit for placing this unconscionable burden on them.

    Right now, though, there’s little reason to expect President Obama and the majority Democrats will change direction. The public sector unions are often among the largest contributors to Democratic campaigns. They have also cultivated strong ties with the Washington media – some of whom, like The Washington Post’s Harold Meyerson, have argued over the years that these public workers are increasingly synonymous with the future middle class.

    There’s certain logic to this. Insulated from global competition, public employees have the ability to ratchet up their demands almost without serious limit. After all, even the most radical Republicans are not proposing to have the postal system transferred to Vietnam. We certainly don’t want to outsource our police services to China or Russia.

    So what’s not to like? Well, nothing – if the Roman Empire or China’s Qing Dynasty is your idea of a historical role model. Those regimes epitomize what happens when most of a nation’s wealth goes to support an ever-expanding bureaucracy and associated private-sector rent-seekers at the expense of both private commerce and public infrastructure. Look in the dictionary under the word decline.

    We can already see its early signs. Across the country, cities are being forced to choose between maintaining their basic infrastructure and honoring the medical, retirement and other pension obligations owed to retired public workers. The head of the Atlanta Fire Fighters’ Pension fund described groups like his as “the 800-pound gorilla in the room.” This primate has the power to stomp on the ability of states, cities and counties to put money into improving much of anything or even considering lowering taxes.

    Over time, though, one can hope President Obama will adjust his course. At some point, the middle- and working-class stiffs in the private sector – unionized or not – will question a stimulus that neglects their aspirations at the expense of protecting the imagined rights of yet another privileged class. Individually, public employees may not be as noxious as John Thain, but there are more of them. And over time, they could cost us even more.

    As a charismatic leader with strong union support, Obama could try to pull a “Nixon in China” and insist on reforming the benefits enjoyed by public workers as a condition of federal help. He wouldn’t be the only leader attempting a return to sanity. The idea of challenging public sector privilege has gained some currency in Ireland and France, as well as among the Liberal Democrats in the U.K.

    Such a bold initiative would earn President Obama not only gratitude from private sector workers but also posterity. But it would take courage, too; the mere suggestion of reform could result in a rash of strikes (as in Greece) and ceaseless yammering from union lobbyists and their allies on Capitol Hill.

    Of course, public-sector unions and their supporters will argue that they constitute an important part of the nation’s middle class and that their benefits are therefore sacrosanct. Yet it’s increasingly evident that this strata of middle-class workers live in a different reality than typical private sector shmoes. As George Orwell suggested in Animal Farm, it seems some animals are more equal than others.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • Wisconsin Checks Out The Finland Club

    Our Central Wisconsin delegation journeyed to Finland in October, 2008. We definitely learned a few lessons that we’ll apply here at home, with the hope of moving our ability to compete globally to a much higher level.

    “Finland is not a country, it is a club” stated one of the many presenters we heard during our study tour. This perspective of how Finns see themselves says something valuable about what they believe it will take for them to compete in the changing global economy: a whole lot of cooperation, strong relationships and inter-connectedness!

    The notion of a “club” is that a group comes together around a common interest and finds value in the network, which the club provides by further fostering that common interest. This is what we found was happening in Finland. Similar in size to Wisconsin, the country rallies together to be competitive on a global scale. They view themselves as a club, in the context of bringing bright people together as a key to innovation and commercialization. They have developed, and continue to further develop, systems in their “club” to allow this to happen.

    Although Nokia is definitely the poster child in Finland’s quest to become a top performer in global competition, the country’s business community is not resting on its laurels. Instead, there’s a very clear, shared vision of the future of the country, with a focus on the investments that can make this future a reality.

    One example is the Oulu region’s concept of a Triple Helix to foster business development and innovation. The Triple Helix intertwines business, education and government in cooperation and collaboration to deliver a support system that fosters innovation for business development. We heard presentations from about 15 agencies, government departments, educational institutions, and business associations. Each one succinctly communicated the common vision of the Triple Helix and the plan for the region to compete globally and grow its economy. Within this shared vision, everyone understood their particular agency’s role, and knew what role others played.

    Our small, rural Central Wisconsin community has had a Finnish connection since 2000, when Stora Enso Oy purchased the Fortune 500 Wisconsin Rapids-based paper company conglomerate, Consolidated Papers. This sale shook up the century-long paternalistic culture and insulated economy. And the loss of more than 4,000 jobs made the community immediately face the reality of global competition.

    In response to the crisis, the Heart of Wisconsin Business & Economic Alliance, in partnership with the Community Foundation of South Wood County, kicked off the Community Progress Initiative, which incorporates systemic approaches similar to the Triple Helix model, and uses common vision as a compelling inspiration to actively engage the community in moving forward collaboratively, kind of like a “club.” The approach has had some proven success, with opportunities for bigger breakthroughs yet to come. Our Study Tour Team is comprised of representatives from business, government, education (K-12, technical college and university levels), engineering, sustainability, philanthropy, and economic development. We are all focused on implementing the concepts on innovation and project learning gained on the tour.

    Outaniemi Technology Hub, in Espoo, provides another example of a “club” type of approach to fostering innovation to compete globally. It bridges innovation and business, uniting academia, startups, SMEs (Small and Medium Enterprises) and anchor businesses in a meaningful way to market and promote technology business development. Outaniemi comprises the biggest concentration of R&D (research and development) and innovation services, facilities and hi-tech infrastructure in the Nordic Region. It links these entities together to create cooperative productivity that is greater than the sum of its parts. The Outaniemi linkage of 32,000 people – 16,000 students, 16,000 hi-tech professionals – 600 companies, and several world headquarters, together with world class research, has resulted in a highly functioning and successful ”innovation club.”

    How did Finland develop this ”club” culture? In the 1990’s, after suffering a serious recession, Finland applied Michael Porter’s industry cluster theory to look at their industries and areas of potential competitive advantage. In Porter’s book, Competitive Advantage of Nations, he had argued that successful firms are seldom alone. Frequently, a company’s dominant market share and accelerated growth are supported by a unique combination of firms tied together by knowledge and production flows. According to Porter, competitiveness originates from these unique combinations, clusters or development blocks. Their typical features are numerous interconnections between firms, technological spillovers, and externalities.

    While many of the connections are of an economic nature, social and environmental benefits are important as well. Defining formal boundaries for these clusters may be cumbersome and even irrelevant; the main feature of a cluster is interaction and interplay among the participants. The Finnish refer to this as “co-petition.” Through cooperation — working together in industry micro-clusters that interface with other micro-clusters — they become more effective at competing in a global marketplace. The “club” concept cross pollinates the clusters to inspire innovation.

    Here in Wisconsin, our Community Progress Initiative integrated a comprehesive system of community and economic development programs to develop relationships and a synergy across the community. This sparked interest in developing an entrepreneurial and small business support system and in forming industry cluster networks. Spinning out of the industry clusters has been the Ideas Incubator and Innovation Think Tank as vehicles through which to foster innovation for business applications. We are still at the infant stage in this process, although, with the foundation set, we are poised to advance our efforts. Lessons from Finland’s experience are guiding us to results. We’ve learned to grab that low hanging fruit and take steps towards long-term gains and bold innovative wins for our ”club.”

    A successful club has the belief and willingness to invest in making itself better. Finland is doing this, supporting innovation and entrepreneurship in public policy, and investing in R&D to the tune of more than $3200 Euros (that’s over $4,000 USD) per capita in some regions. The government investment arm, TEKES, grants money to private firms exploring innovation with good business model applications. Finland invests in its bread and butter, small business, concentrating on growth sector businesses of 20-100 employees. Some of the firms receiving investment from TEKES are not Finnish owned. For example, a Wisconsin Rapids-area firm could set up a Finnish branch office and apply for TEKES R&D funding. Hmmm, I think this could be worth exploring….

    The business of fostering innovation is long-term work. Finland has been successful at fast-tracking the moves that hold the competitive edge in technology innovation, and at applying the results to build economic prosperity. The country’s innovation system successfully converts R&D and educational capacity into industrial strengths.

    By applying some of these lessons learned in Finland to the impressive foundation we have laid through the Community Progress Initiative in our region, we hope to be as successful as they have been. We, too, are now working to foster innovation that assists our businesses, to work together in co-petition, and to grow our region’s economy.

    Anyone want to come join our club?

    Connie Loden is the Executive Director of the Heart of Wisconsin Business & Economic Alliance that coordinates community economic development projects in Central Wisconsin. An internationally recognized leader in rural development, she holds leadership roles with the Community Development Society and National Rural Development Partnership.

  • Seattle Joins the Recession

    At the time of the election, less than 3 months ago, Seattle seemed to be riding above the fray, escaping the worst features of the recession, such as mass layoffs, even despite weakness in the housing market. Seattle area voters even approved a series of huge tax measures, including $30 billion for rail rapid transit, befitting what folks here like to consider a world-class city.

    The story recently is much more somber, reeling somewhat from a series of high-level hits to the economy. In contrast to neighboring Oregon, unemployment is not yet severe, about 6.3% for the metropolis, but there remains a degree of denial that the Emerald City is in for an actual decline! Giant Amazon actually did well over the holiday season and Costco reasonably well, considering its dependence on national consumption.

    The largest layoff, reminiscent of past recessions, was to Boeing which might drop as many as 10,000 jobs, and a yet unknown number to PACCAR, maker of Kenworth and Peterbilt trucks and the stalwarts of Seattle’s unionized and well-paid manufacturers. Starbucks is closing many stores and contracting at the headquarters. Mighty Microsoft will not occupy expected space, as it has also been hit by the recession and will experience selective layoffs.

    The decline in the housing market and new construction, residential and commercial, has collectively impacted hundreds of firms in finance, architecture, and construction. The Seattle housing market, like that of Portland, which held up longer than California’s now may experience serious declines.

    Perhaps the biggest loss, however, is the collapse of WAMU (Washington Mutual), a pacesetter in the bad practices that brought on the recession. WAMU’s demise is hurting many local investors, charities, tax revenues, as well as employment at all levels, probably leading to a downtown job loss of 20,000.

    Another casualty is the port business. A substantial part of Seattle’s growth and wealth is tied up in international trade. Container traffic has slowed markedly and is at further risk, especially if there is a rise in protectionism in Congress. Overall, the eventual losses in the in the finance, housing and perhaps even high-tech sectors of the “new economy” may be greater than the more visible problems of Boeing, PACCAR and even Starbucks, whose output and income will recover as the world economy recovers (but not until). Hard times are coming not just for Joe the Plumber, but the vaunted “creative class” as well.

    Other soft indicators are that 30 percent of homes are selling at a net loss, and that the current forecast for the next three months is for a 3-percent decline in regional product and a loss of 50,000 jobs. The recession is viewed as having “officially arrived in Seattle” in December 2008, following the layoff plans of Seattle’s iconic firms and recognition that construction employment has dropped like a “piece of concrete,” in the words of Dick Conway, a well-known Puget Sound Economic Forecaster.

    The imminent closure of the Seattle Post-Intelligencer fits into this bleak picture. This is the story of an economy that is decelerating after convincing itself it was all but recession-proof. In Detroit or even LA, they expect hard times. Up here we have all but forgotten that our economy is also cyclical, and has much vulnerability. The question is will we see again the famous billboard erected in the 1973 recession, which asked “Will the Last person leaving SEATTLE – Turn out the lights.”

    Richard Morrill is Professor Emeritus of Geography and Environmental Studies, University of Washington. His research interests include: political geography (voting behavior, redistricting, local governance), population/demography/settlement/migration, urban geography and planning, urban transportation (i.e., old fashioned generalist)

  • Reviving the City of Aspiration: A Study of the Challenges Facing New York City’s Middle Class

    For much of its history, New York City has thrived as a place that both sustained a large middle class and elevated countless people from poorer backgrounds into the ranks of the middle class. The city was never cheap and parts of Manhattan always remained out of reach, but working people of modest means—from forklift operators and bus drivers to paralegals and museum guides—could enjoy realistic hopes of home ownership and a measure of economic security as they raised their families across the other four boroughs. At the same time, New York long has been the city for strivers—not just the kind associated with the highest echelons of Wall Street, but new immigrants, individuals with little education but big dreams, and aspiring professionals in fields from journalism and law to art and advertising.

    In recent years, however, major changes have greatly diminished the city’s ability to both retain and create a sizable middle class. Even as the inflow of new arrivals to New York has surged to levels not seen since the 1920s, the cost of living has spiraled beyond the reach of many middle class individuals and, particularly, families. Increasingly, only those at the upper end of the middle class, who are affluent enough to afford not only the sharply higher housing prices in every corner of the city but also the steep costs of child care and private schools, can afford to stay—and even among this group, many feel stretched to the limits of their resources. Equally disturbing, even in good times, the city’s economy seems less and less capable of producing jobs that pay enough to support a middle class lifestyle in New York’s high-cost environment.

    The current economic crisis, which has arrested and even somewhat reversed the skyrocketing price of housing, might offer short-term opportunities to some in the market for homes. But the mortgage meltdown and its aftermath will not change the underlying dynamic: over the past three decades, a wide gap has opened between the means of most New Yorkers and the costs of living in the city. We have seen this dynamic play out even during the last 15 years, as the local economy thrived and crime rates plummeted. Despite these advances, large numbers of middle class New Yorkers have been leaving the city for other locales, while many more of those who have stayed seem permanently stuck among the ranks of the working poor, with little apparent hope of upward mobility. This is a serious challenge for New York in both good times and bad. A recent survey found the city to be the worst urban area in the nation for the average citizen to build wealth. For the first time in its storied history, the Big Apple is in jeopardy of permanently losing its status as the great American city of aspiration.

    This report takes an in-depth look at the challenges facing New York City’s middle class. More than a year in the works, the report draws upon an extensive economic and demographic analysis, a historical review, focus groups conducted in every borough and over 100 individual interviews with academics, economists and a wide range of individuals on the ground in the five boroughs. These include homeowners, labor leaders, small business owners, real estate brokers, housing developers, immigrant advocates, and officials from nearly two dozen community boards.

    Throughout the course of our research, the vast majority of New Yorkers—for the most part fierce defenders of the city—were alarmingly pessimistic about the current and future prospects of the local middle class. “What middle class?” was the quip we heard repeatedly after telling people about our study.

    But for all the valid concerns of those we spoke with, our conclusion is that a strong middle class remains in New York, and that there are considerable grounds for optimism about its future. In 2007, the city recorded the second highest total of building permits issued since it started keeping track in 1965, with Brooklyn and Queens hitting records—a clear sign that large numbers of people want to live in these long-time middle class havens. Home ownership rates in the city reached their highest levels ever in 2007, another testament to the city’s desirability—even if a not insignificant share of the recent housing purchases were driven by unfair and deceptive predatory lending practices. And in many communities, there have been long waiting lists for day care centers and private schools. While the economic crisis is already leading to sharp spikes in foreclosures, a precipitous decline in housing sales and, most troubling, a massive number of layoffs, it should not reverse the sense of many middle class families that New York now offers a safe environment to raise their kids—a key factor in the decision to stay in the city rather than decamp for the suburbs.

    “The perception of New York among young people is so phenomenal,” says Alan Bell, a partner with the Hudson Companies, a real estate development company that has built housing from the East Village to the Rockaways. “It used to be that automatically you’d get married and had kids and you were out to Montclair, New Jersey or Westchester. Now they want to stay. The question is how they stay since it’s so expensive.”

    Set against this picture of progress, however, are some alarming trends. Most of the people interviewed for this report told us of middle class friends, relatives or colleagues who had recently given up on the city. “I work with a lot of people who moved to Philadelphia and commute each day,” says Chris Daly, a media director at Macy’s who now lives with his wife and three kids in Tottenville, Staten Island but plans to move to New Jersey. “It’s the cost of living. You’re going to see more people moving to Philadelphia, the Poconos and commuting.”

    Unless we find ways to reverse some of the trends detailed in this report, the New York of the 21st century will continue to develop into a city that is made up increasingly of the rich, the poor, immigrant newcomers and a largely nomadic population of younger people who exit once they enter their 30s and begin establishing families. Although such a population might sustain the current “luxury city”—as Mayor Michael Bloomberg famously described New York—it betrays the city’s aspirational heritage. Further, a New York largely denuded of its middle class will find it nearly impossible to sustain a diversified economy, the importance of which is clearer than ever in light of the current finance-led recession.

    As a final consideration, a large and thriving middle class has always provided the ballast that a great city requires. Throughout modern history, such cities at their height—for example, Venice in the 15th century and Amsterdam in the 17th—have nurtured a large and growing middle class. But no city has had a greater history as a middle class incubator than New York. As the legendary urbanist and long time New York resident Jane Jacobs once noted: “A metropolitan economy, if working well, is constantly transforming many poor people into middle class people, many illiterates into skilled people, many greenhorns into competent citizens… Cities don’t lure the middle class. They create it.”

    Although some may suggest that this is a role New York can no longer play, we believe it is one that the city needs to address if it is to remain a truly great city.

    Released by Center for an Urban Future, this report was written by Jonathan Bowles, Joel Kotkin and David Giles. It was edited by David Jason Fischer and Tara Colton, and designed by Damian Voerg. Mark Schill, an associate with Praxis Strategy Group, provided demographic and economic data analysis for this project. Additional research by Zina Klapper of www.newgeography.com as well as Roy Abir, Ben Blackwood, Nancy Campbell, Pam Corbett, Anne Gleason, Katherine Hand, Kyle Hatzes, May Hui, Farah Rahaman, Qianqi Shen, Linda Torricelli and Miguel Yanez-Barnuevo.

  • New York Should End Its Obsession With Manhattan

    Over the past two years, I have had many opportunities to visit my ancestral home, New York, as part of a study out later this week by the Center for an Urban Future about the city’s middle class. Often enough, when my co-author, Jonathan Bowles, and I asked about this dwindling species, the first response was “What middle class?”

    Well, here is the good news. Despite Mayor Bloomberg’s celebration of “the luxury city,” there’s still a middle class in New York, although not in the zip codes close to hizzoner’s townhouse. These middle-class enclaves are as diverse as the city. Some are heavily ethnic, others packed with arty types, many of them more like suburbia than traditionally urban.

    This New York is vastly different from the one that appears in most movies. It is more like the New Jersey portrayed in “The Sopranos” or “All in the Family” (set in Queens) than Manhattan-centric “Seinfeld” and “Sex and the City”. Largely, this middle class stays in New York – despite the congestion, high taxes and regulatory lunacy – because that is where they are from, where they worship and where they are close to their places of work.

    In many cases, they live in Bay Ridge, Bayside, Brighton or Bensonhurst, in the vast sprawl that is Brooklyn and Queens. New York’s middle class is also highly diverse. In many areas, the descendants of Italians or Poles live cheek by jowl with newer groups such as Koreans, Chinese, Indians, Jamaicans, Russians, Israelis and Pakistanis. They stay and raise their children, in large part because of their extended family networks. As Queens resident and real estate agent Judy Markowitz puts it, “In Manhattan people with kids have nannies. In Queens, we have grandparents.”

    Some of the emerging middle class also cluster in places like Ditmas Park, a reviving part of Flatbush. The new population here is made up largely of information age “artisans” – musicians, writers, designers and business consultants who cluster in New York. They may have migrated there for the culture, but they stay because they find these neighborhoods congenial and family-friendly.

    “It’s easy to name the things that attracted us – the neighbors, the moderate density,” explains Nelson Ryland, a film editor with two children who works part-time at his sprawling turn-of-the-century Flatbush house. “More than anything, it’s the sense of the community. That’s the great thing that keeps people like us here.”

    For these reasons, New York’s middle class may be hard to displace, but they certainly are under considerable stress. Urban life may have improved from its nadir in the 1970s, but our findings show that net out-migration from the city, particularly as people get into their late 20s and early 30s, has continued.

    The now-imploding economic boom did not halt this pattern. Indeed out-migration in the last few years has been greater on a per capita basis than that of the early 1990s, when “escape from New York” was a recurring media theme. The reasons: the nation’s highest cost of living, poor public schools, inadequate transit, expensive housing, high taxes and lack of broad-based economic opportunity.

    Much the same process is occurring in other great cities from San Francisco and Los Angeles to Chicago and Philadelphia. Indeed, even as gentrification brings in wealthy childless couples and students (often supported by their suburban parents) to urban areas, the number of middle-class neighborhoods has continued to decline, as demonstrated by a 2006 Brookings Institution paper.

    This is true, for example, in the San Fernando Valley section of Los Angeles, where I live. Once overwhelmingly made up of home-owning, moderate-income earners, the Valley is becoming increasingly bifurcated between the affluent and a growing class of largely minority renters.

    The hollowing of the New York middle class has been even more rapid. In 2006, Manhattan, the cradle of gentry liberalism, had achieved the widest gap between rich and poor in the nation. Overall, New York has the smallest share of middle-income families in the nation: The city’s middle class – those making between $35,000 and $150,000 a year – fell to 53% between 2000 and 2005, while remaining steady nationwide at 63%.

    Up until now, these trends did not much bother New York’s media, business and political hegemons. Under its ruling Medici, Mayor Michael Bloomberg, New York has been shaped as a place for the masters and their servants. Such Bloombergian priorities as the Second Avenue subway, the taxpayer-subsidized construction of luxury-box-laden stadiums, as well as an orgy of a city-inspired luxury condominium construction and plans for ever more high-end office towers reflect this worldview.

    Of course Bloomberg’s “luxury city” is largely a Manhattanite vision, with a few tentacles spreading to the adjacent parts of the outer boroughs. It takes its sustenance from the enormous wealth generated by Wall Street as well as the presence of a large “trustifarian” class. This is very much the New York of The New York Times: fashionably liberal in politics, self-consciously avant-garde, and devoted, more recently, to “green” consumerism.

    At the height of the boom – say two years ago – some imagined there were enough folks such as these to sustain the city. They would now constitute a de facto new middle class, except their bank accounts would have extra zeros. When Jonathan and I interviewed a developer, he bristled at us for suggesting that New York’s middle class was shrinking. “Of course, there’s a middle class,” he stated flatly. “Why, my friend’s son just bought a place here in Manhattan.”

    “Oh really?” I asked, a bit incredulously. “And how much was the apartment?”

    “One and half million.”

    “And how did he pay for it?”

    “His dad.”

    Now, with Wall Street’s money machine in reverse and the Manhattan real estate market unraveling, the surplus capital to finance million-dollar condominiums for kids may well have evaporated. Similarly, the parade of top graduates from business and law schools could slow, now that the big bonus regime may be coming to an end. If you are going to be paid bankers’ wages, why not live somewhere cheaper?

    Yet despite the tough times, there is no real reason for New Yorkers to fear a return to the bad old days of the 1970s, as Reuters recently warned. New York used to have a diverse, middle-class economy that was remarkably recession-proof.

    It could have such an economy in the future as well. A modern version may be less reliant on manufacturing, but focused instead on the talents of its citizens in such things as design, marketing and data analysis. Still, it would be a small business-oriented economy – one that could flourish outside Manhattan.

    New York should cultivate such an economic shift and also turn its attention from the chic precincts to its middle-class neighborhoods. In the post-Wall Street era, the “luxury city” concept needs to be discarded just like other toxic manifestations from a discredited era.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • Cleveland, Part II: Re-Constructing the Comeback

    Yesterday, in Part I, I talked about how, despite the Cleveland region’s significant assets, the Greater Cleveland Partnership’s strategy is failing to transform its economy. Today I’ll focus on the strategy’s five weaknesses, and how to fix them.

    First: The Wrong Approach To Achieving Scale
    To be effective, economic development initiatives have to be big enough to make a difference. Traditionally, this has meant building bigger organizations. The Cleveland leadership is following an economic development model based on hierarchies.

    What worked 30 years ago does not work so well today. Across the business landscape large, vertically integrated organizations are breaking apart. In economic development, this transition means that civic leaders need to build regional scale by developing networks. In a world of increasing economic complexity, regions that have strong, trusted networks will be more competitive. They will learn faster, spot opportunities faster, and will align their resources more quickly. And they will make faster and better decisions. Cleveland’s civic leadership can be far more effective if it learns the power of social networks. A number of good books explore this topic; The Tipping Point should be required reading.

    Second: Misunderstanding Public-Private Partnerships
    Over the past decade, Cleveland’s business leadership has revealed a startling misunderstanding of the nature of the two categories of public-private partnerships that drive economic development.

    Publicly-led and privately-supported investment projects typically involve large infrastructure, as well as projects in which public financing represents over half of the total development budget, such as stadiums, museums, libraries, and community sports complexes.

    The second category involves privately-led and publicly-supported investment projects. Here, the private sector takes the lead, but the public sector provides support and guidance. Good examples include tax increment financing districts, business improvement districts, and virtually all economic development incentives.

    Cleveland, during the Voinovich Administration, executed well on publicly-led and privately supported projects. A new baseball stadium, the Rock and Roll Hall of Fame, the Science Museum, the new basketball arena, and the Cleveland Browns stadium are all examples. Starting in the mid-1990’s this capability degraded rapidly, so that it has taken over ten years (with no end in sight) to complete the last of the Voinovich projects, the convention center.

    But when it comes to privately-led and publicly supported investment, the business community has proven itself inept. It took ten years for it to establish a business improvement district around the new baseball stadium and arena. The signature downtown shopping mall, Tower City, has no anchors, no street visibility, and terrible parking.

    The easiest way to learn how these partnerships can be successful involves visiting other cities. Not surprisingly, Cleveland’s civic leadership does not regularly take leadership visits, a common practice among dynamic metro regions.

    Third: No Strategic Framework, No Theory Of Change
    Foundations are fond of asking for a “theory of change”. In other words, they want their grantees to orient themselves within a broader system. They want a simple, clear explanation of how a proposed intervention will transform the system to better performance.

    Cleveland’s leadership has no apparent theory of change. Overwhelmingly, the strategy is now driven by individual projects. These projects, pushed by the real estate interests that dominate the board of the Greater Cleveland Partnership, confuse real estate development with economic development. This leads to the “Big Thing Theory” of economic development: Prosperity results from building one more big thing.

    The economy has shifted under the leadership’s feet. We are rapidly moving toward an economy of networks embedded in other networks. With an economy driven by knowledge and networks, economic development is more than land development, real estate projects, and recruiting firms that move from Michigan to Mexico.

    Today, economic development begins with brainpower in 21st-century skills, and Cleveland’s leadership largely ignores the role of developing brainpower. The next version of the Cleveland+ strategy should explain how the city-region will innovate to build these skills. The best places to look: Milwaukee, Cincinnati, Syracuse and Kalamazoo.

    Prosperous regions must also develop thick, trusted networks to convert this brainpower into wealth through innovation and entrepreneurship. Cleveland’s top-heavy development organizations need to shift toward network-based strategies that are more lean and agile. That will put investment toward more productive use. Good examples to follow: Ann Arbor Spark and the Milwaukee 7.

    In order to attract and retain smart people, regional leaders need to develop quality, connected places, “hot spots” that attract people and “smart growth” strategies that efficiently leverage scarce public investments. In Cleveland’s case, the city needs more coherence to its physical development, one that embraces the city’s inevitable shrinkage in the years ahead.

    To create a buzz, effective regional leaders build their brands, not with clever logos, but with powerful experiences and stories that help people to connect their past to a prosperous future. Action, authentic stories, and networks are changing Akron, Youngstown, Kalamazoo and Milwaukee, all cities facing the same challenges as Cleveland.

    Fourth: The Wrong Mindset For Making Decisions
    If you live in a world of hierarchies, you live in a world of two directions: top-down or bottom-up, with top-down the preferred direction. It’s the direction of command-and-control; of predictability and stability. Bottom up is the opposite. It implies disorganization and chaos, inefficiency and fragmentation, confusion and uncertainty. If you approach economic development from a top-down perspective, you want to limit and control public comment. Civic engagement is a carefully circumscribed event, not a process; a meeting, not a collaboration. Anyone who has attended a school board meeting understands this point.

    There’s only one problem. The top-down world does not exist in economic development. Complex public/private strategies are developed in a “civic space” outside the four walls of any one organization. Within the civic space, no one can tell anyone else what to do. Strategies born in a top-down mindset are doomed to fail.

    Networks have no top or bottom, only nodes and links. Strategy is an exercise of aligning, linking and leveraging assets across a network. Transformation takes place when enough people in the network align themselves toward a specific outcome, through purposeful conversation. To traditionalists, conversation is a distraction or a waste of time. In the years ahead, the challenge for places like Cleveland will be to manage complex conversations.

    At Purdue, we are developing the new disciplines of “Strategic Doing”, an approach to select and test transformative ideas in complex environments quickly. Traditional approaches of strategic planning are too linear, time-consuming, inflexible and expensive. Strategic Doing offers an alternative. By translating ideas into action quickly, the disciplines of Strategic Doing build both collective knowledge and trusted connections. They lead us to “link and leverage” strategies that multiply the effective power of our assets.

    Cleveland’s leadership has a long way to travel down this road. There’s a naive ineptitude in the civic deliberations on complex issues. For over ten years, the Greater Cleveland Partnership has been fiddling with a convention center decision. In the long run, the upside for the city is minimal, while the downside grows each day. By following traditional top down management models, the city’s leadership, if it’s lucky, will build a 30-year-old idea 10 years late.

    Fifth: Weak (Or Nonexistent) Metrics
    In traditional world hierarchies, metrics are the primary instrument of top-down control. It’s not surprising that, as a rule, economic development professionals tend to shy away from measurements. Relatively few regional strategies include them.

    In a networked world, metrics serve different and more important functions. They help clarify outcomes, and add coherence by promoting alignment. Visions are difficult to translate to action. More specific outcomes and metrics mark the direction in which we are heading. They help us learn “what works”. Economic development is inherently an inductive process of experimentation. Without measurement, we have no way of knowing whether or not our underlying assumptions are more right than wrong.

    Creating The Comeback
    Cleveland can find a new path to prosperity, but it will take new leadership committed to transparency and different ways of thinking and acting. With new leadership, Cleveland can do better. It will find prosperity with initiatives that embrace brainpower, creativity, innovation, sustainability, collaboration. These are the foundations on which Cleveland’s future can be built and created.

    Ed Morrison is an Economic Policy Advisor at the Purdue Center for Regional Development. This article draws from Royce Hanson, et.al, “Finding a New Voice for Corporate Leadership in a Changed Urban World”, a case study from The Brookings Institution Metropolitan Policy Program (September 2006).

  • Cleveland: How The Comeback Collapsed

    The Cleveland comeback has stalled. Once hailed as a shining example of rebirth in our industrial heartland, Cleveland now sits rudderless and drifting backward. Between 2000 and 2007, Cleveland suffered one of the largest proportional population losses in the country: the city shrank by 8%. Per capita income growth in Cleveland also lags behind cities like Cincinnati, Milwaukee, and Pittsburgh. Since the early 1990s, the gap between Cleveland and these other cities has widened. As a regional economy deteriorates, the pressure for social services goes up. It’s not surprising, therefore, that local tax rates in Cleveland are among the highest in the country. Political corruption also takes a toll; Cleveland sits in Cuyahoga County where federal law enforcement officials recently launched a sweeping probe of political corruption.

    The future doesn’t look much brighter. Cuyahoga County is often described as the epicenter of the foreclosure crisis; since 2000, it has had the highest per capita rate in the country. Overnight, foreclosures have decimated neighborhoods that took years to rebuild. In the Cleveland neighborhood of Kinsman, half of the mortgage properties are in foreclosure. In other neighborhoods foreclosure rates range from 25% to 30% and, not surprisingly, are concentrated in the lowest income neighborhoods, the places hardest to rebuild. About 72 hours after a house becomes vacant, vandals strip appliances, windows, and fixtures (scrap metal recycling is a booming business in Cleveland). Stripping the pipes renders the property a total loss.

    Meanwhile, the Cleveland Municipal School District is making improvements only at a glacial pace. According to a recent report by America’s Promise, Cleveland ranks 48th of 50 large school districts in high school graduation rates. Fewer than six in ten of Cleveland’s 9th graders will complete high school; dropout factories here include Collinwood and East Tech high schools, where only four in ten 9th graders graduate.

    Many older industrial cities face the same set of challenges, but few cities started three decades ago with the same promise of regeneration. The collapse of the steel industry in the late 1960s was the beginning of Cleveland’s spiral downward. It did not help that 40 years ago, when the Cuyahoga River caught on fire, Cleveland jokes became a staple of late-night television. The city hit bottom when it filed for bankruptcy in 1978.

    It turned the page with the election of George Voinovich as mayor in 1980. Voinovich, a tough minded Republican, challenged the business, labor and civic leadership of the city to transform Cleveland, and the business community responded. A core of corporate CEO’s organized Cleveland Tomorrow – modeled on the Allegheny Conference in Pittsburgh – which drove a focused agenda of urban transformation. By 1989, Fortune magazine applauded the new trajectory in “How Business Bosses Saved a Sick City”.

    The partnership between the city and the business community began to shift in 1990 with the election of mayor Michael White. While the business community worked with White to complete projects like a new baseball stadium and basketball arena that had been planned earlier, the relationship between the mayor and the business community gradually deteriorated. A 1995 community push for mayoral control of the city school system represented the last big collaboration. By the time White began his third term in ’97, the Voinovich momentum pushing public-private partnerships had evaporated.

    At the same time, dramatic changes were taking place in Cleveland’s corporate landscape. By the late 1990s, the city had lost five Fortune 500 headquarters. Manufacturing, the backbone of the region’s economy, shrank dramatically. As the influence of manufacturing declined, real estate developers emerged as important forces within Cleveland’s business circle. Entering the 2001 recession, Cleveland was clearly in trouble. The Cleveland Plain Dealer proclaimed a “quiet crisis”. The editors started pushing for a master plan for economic development to follow up on the momentum of the Voinovich years. As one editor noted, the region was about to face “economic extinction.” The business leadership responded by consolidating different business organizations — Cleveland Tomorrow (leading CEOs), the Greater Cleveland Growth Association (a chamber of commerce), the Cleveland Roundtable (a group focused on diversity issues), and the Council of Smaller Enterprises (a small business organization) — into the Greater Cleveland Partnership.

    The Partnership focused its economic development agenda on building a convention center, the last Voinovich era project. It also re-organized a set of affiliate economic development organizations for better control and (hopefully) impact. JumpStart (for start-ups), BioEnterprise (for life science companies), MAGNET (for manufacturing companies), Team NEO (a recruiting organization), and Cleveland+ (a new branding effort) were to drive the transformation of the city-region, renamed Cleveland+. The Partnership has been resourceful in financing. A close relationship with a new coalition of foundations, called Fund for our Economic Future, provides about $8 million a year for the affiliate organizations, and effectively operates as a financing arm for the Cleveland+ strategy.

    To finance the new convention center, the Partnership pushed County Commissioners to approve a sales tax increase for about $500 million. In July 2008, the Commission — cleverly skating past a public vote (which by all accounts would have rejected the plan) — increased the sales tax unilaterally…and in a hurry. The vote to finance a convention center took place without a development plan, or even a site, in place. So, in effect, Cuyahoga County taxpayers are already paying for a non-existent convention center. The reason for all the rush seems clear. Last July, on the eve of the Commission vote to raise the sales tax, the Federal Bureau of Investigation assembled a team of over 200 agents to launch a public corruption probe, with raids of county offices, the home of one commissioner, and the offices of several contractors. Federal prosecutors are looking into the close relationship between county officials and several contracting and real estate development firms.

    Amidst the turmoil, Cleveland’s leadership has drifted into a classic case of group think. By shutting themselves off from public scrutiny, they have tried to shield themselves from growing public opposition. But in the process, they have drifted into a dream world that is increasingly detached from underlying market realities. The City’s future, according to the leadership’s current thinking, hinges on a convention center. There’s only one problem: There is no evidence that this strategy will work (and plenty of evidence that it will not). Convention centers represent a formula for low-skill, low-wage employment and public operating deficits as far as the eye can see.

    Put the convention center aside for a moment. Despite the significant assets within the region, the Greater Cleveland Partnership’s broader strategy for Cleveland is failing to transform the city-region’s economy.

    There are five weaknesses in the current Cleveland strategy: The wrong approach to scale, to public/private partnerships, to theoretical underpinnings, to change, to decision-making, and to understanding metrics.

    In Part II, I talk about what went wrong in each of these important realms, and how to strengthen each one.

    Ed Morrison is an Economic Policy Advisor at the Purdue Center for Regional Development. This article draws from Royce Hanson, et al, “Finding a New Voice for Corporate Leadership in a Changed Urban World”, a case study from The Brookings Institution Metropolitan Policy Program (September 2006).

  • Report: Ontario, CA – A Geography for Unsettling Times

    These are unsettling times for almost all geographies. As the global recession deepens, there are signs of economic contraction that extend from the great financial centers of New York and London to the emerging market capitals of China, India and the Middle East. Within the United States as well, pain has been spreading from exurbs and suburbs to the heart of major cities, some of which just months ago saw themselves as immune to the economic contagion.

    Without question, the damage to the economies of suburban regions such as the Inland Empire has been severe. Foreclosures in San Bernardino and Riverside Counties have been among the highest in the country, while drops in real-estate related employment have resulted in the first net job losses in four decades. This has led some critics to suggest that the entire area is itself doomed, destined to devolve along with other suburban regions to “the new slums”.

    Yet our close examination of both short and longer-term trends suggests these perspectives are wildly off-base. For one, it is critical to separate different parts of the Inland region from one another. A place like Ontario retains many characteristics that make it far more able than other locales in the region to resist the negative trends. These advantages include a diversified economy, a powerful local job center, an excellent business climate and, most of all, a location perfectly positioned along the historic growth corridors of Southern California.

    These assets have already allowed Ontario to weather the current storm far better than many other Inland Empire areas. Foreclosure rates, for example, although far too high, have remained considerably below the average for the region, and far below those in communities that lack the same strong diversified economic base and close access to employment.

    More importantly, Ontario remains well-positioned to take advantage of both the eventual recovery of the Inland region and the greater expanse of Southern California. Housing prices – particularly the availability of single family homes – has been a driver of growth for the inland region for decades. As prices fall, the rates of affordability for the region – which had been dropping dangerously – will once again rise.

    Despite the claims of some theorists, the preference of most Californians for single family housing seems likely to be unabated, particularly as immigrants seek a better quality of life and the first generation of millennials enters the home-buying market. These are populations that have been heading east to Ontario, the surrounding “Mt. Baldy region,” and to the Inland Empire as a whole for decades, and there is no reason to suppose the flow will stop.

    As the Inland Empire restarts its growth cycle, Ontario will remain uniquely suited to take advantage. Significantly, despite the current downturn in energy prices, worldwide supply shortages as well as growing political demands for regulation on carbon emissions will lead businesses to look increasingly at procuring goods and services nearby. As the Inland Empire’s premier business and transportation hub, Ontario will be well-positioned to emerge as the epicenter of the entire Inland Region.

    At the same time, Ontario residents generally have short commutes, and the city sits astride the primary transportation routes of the region. Over time, well-planned developments such as the New Model Colony will offer a wide range of residents an opportunity to live, work and spend their spare time within a relatively compact, energy-efficient place.

    Business friendliness is also a key asset. Ontario enjoys a close working relationship with expanding companies in business services, manufacturing, logistics, medical services, and other industries not directly dependent on the housing sector.

    But more than anything, Ontario’s position rests on the city’s fundamental commitment to a balance of jobs and housing, and to a long-standing focus on economic growth. Unlike many communities in the region, Ontario has grown on a solid economic basis. As the fourth largest per capita beneficiary of retail sales in Southern California, the city has a considerable surplus to meet hard times .

    Although the immediate prospects for virtually all communities will be difficult, few places in Southern California can hope to ride out the current tsunami better than Ontario. And even fewer seem as well-endowed to ride the next wave of growth that will sweep through the region – as has occurred throughout the last century – when the economy once again regains its footing and customary vitality.

    See attached .pdf file for full report.

    Primary Authors: Joel Kotkin, Delore Zimmerman
    Research Team: Mark Schill, Ali Modarres, Steve PonTell, Andy Sywak
    Editor: Zina Klapper

    Photo courtesy of Valerita

  • A Sober Look at the New Year for Obama

    Personal experience made me a skeptic about racial progress. When I was 8, I was upset when our Japanese neighbors in Los Angeles were sent off to internment. In 1963, I traveled across the Deep South, awed by the totality of poverty, segregation and discrimination.

    But the election of Barack Obama restored a degree of faith in the American experiment, and hope for an economic and social turnaround. I was inspired by the inauguration and am encouraged by initial and intended actions. I’m reasonably sure that significant reforms will occur.

    But my skepticism about more fundamental change remains strong. The Democratic Party is of the intellectual rich, not of the worker, and not very inclined to deep change. The most critical political story of the election was the 12 to 15 percent shift of the rich, educated and suburban to the Democrats, offsetting the shift of about 6 percent of the less educated or professional, but more religious and rural to the Republicans.

    Karl Rove’s strategy of combining affluent economic conservatives and social conservatives ultimately failed. He thought tax cuts would keep the rich loyal, but they defected. But at the same time, the shift of the affluent has, in my mind, weakened the historic mission of the Democratic Party.

    By far the greatest issue before us, one barely on anyone’s agenda, is the astounding degree of economic inequality, perhaps approaching the levels of 1929 or even 1913. This obscene outcome, an astounding concentration of wealth by the super-rich, is a consequence of market failure – the capacity of those at the top to exercise monopoly power over the economy, and whose tax cuts and deregulation contributed to the current financial crisis and deepening recession.

    Not unrelated to this process are deindustrialization, over-globalization and overdependence on other nations for resources, products, and credit. The story of the rise of the United States to world power was based on production. Our success over Germany and Japan depended on massive production of war materials (yes, from the likes of General Motors, Ford and Chrysler) and our capacity to destroy the productive capacity of the enemy. Now we are willing to bail out the bloated financial and service sectors, and let industry die. Trade is overall beneficial and it is in our interest to aid in the economic development of all countries, but it is irresponsible and false savings to outsource basic production (and increasingly, even services). It is absurd to believe that we can safely prosper by trading, packaging, moving, storing, advertising, insuring, selling, brokering information, but not MAKING STUFF!

    This system of import dependence has accentuated our growing class divide. We create high-end jobs for some, but very few of the middle class opportunities long associated with production. Production also creates a wide range of higher end service-related jobs. When you are selling things made in China, much of the non-production value added is also exported.

    The increased bifurcation of our society can be seen in other fields. While the United States may have the “finest” education at the top, the general level of education is amazingly mediocre with astounding prevalence of ignorance and superstition, especially about science, economics and geography. I do not see even a hint of a turnaround here.

    I suspect the power of the medical insurance and hospital sectors are sufficient to prevent serious reform of the dysfunctional health system. Nor are we close to abandonment of the hopeless war on drugs, or to real reform of criminal justice, and – despite the election of Barack Obama – the integration of millions of Black males into mainstream society. Do the ivory tower economic theorists, Democratic as well as Republican, have a clue about the disaster potential of 100,000 more unemployed workers in Detroit? Does no one remember the race riots in Detroit or Watts, and the long history of labor unrest in America?

    This sad economic and social restructuring began around 1976. Believe it or not, the lowest level of economic inequality in US history was 1974 in the Nixon administration. Those of us at the top surely believe we earned our way there, but are in denial about the immense cost to the majority left behind.

    I just hope I’m as wrong about prospects for real reform as I was about the election!

    P.S.
    A guy (Obama) who could do the Bump with a 9 year old girl at maybe his 10th inaugural ball is so cool that perhaps I’ll raise my optimism level!

    Richard Morrill is Professor Emeritus of Geography and Environmental Studies, University of Washington. His research interests include: political geography (voting behavior, redistricting, local governance), population/demography/settlement/migration, urban geography and planning, urban transportation (i.e., old fashioned generalist)