New Geography

Category: Economics

  • Florida’s Tourism Addiction

    Remember those innocent days last summer, when the biggest worry was high gas prices? Florida already felt the pinch as tourism dropped dramatically. Then, as the financial markets collapsed last fall, Florida’s leaders woke up and began talking about diversification. Like deer caught in the crosshairs of a rifle scope, economic boosters darted around looking for new safe places in the knowledge economy, ways to revitalize agriculture, and even exploring private space development to supplement the stuttering NASA program.

    But now, having passed through the last quarter, this talk is once more put aside for reliance on tourism again. It appears that the line for Disney’s Space Mountain could be an inverse indicator of the state’s appetite for healthy diversification. As wait time for the ride shortened in October, space programs, research laboratories, and business incubators fell back in the minds of public officials. Today, with lower gas prices, those who still have jobs are coming back to the theme parks, and the relief that state officials feel is audible: no more silly talk about diversification!

    Once upon a time, before all the turmoil, NASA had a space program. From afar, one may infer there is an exciting base of science and technology centered around the Kennedy Space Center, with engineering plants and satellite factories and science laboratories. A visit to this area reveals nothing of the sort: sleepy Cocoa, a beach town seemingly lost in time, housing a few small offices scattered around the town labeled Grumman, Boeing, or Lockheed Martin. NASA’s space program in Florida, as it turns out, produces spectacular launches but not much else; the winds of politics on Capitol Hill blow so hot or cold that little sustained investment is possible into this local economy. In 2008, NASA quietly eliminated 4,000 jobs in Central Florida, as the space shuttle program is phased out and replaced with a more efficient vehicle.

    Meanwhile, tourism grew and no one noticed.

    Once upon a time, before all the freezes, Central Florida had agriculture specializing in citrus. Remember Anita Bryant and the famous Florida Orange? Groves actually extended into southern Georgia a century ago, but citrus farming retreated further and further south as farmers sought less risk from the weather. By the early 1990s, more freezes caused Central Florida farmers to throw in the towel, carrying out with them orange juice processing plants, bottle manufacturers, and shipping and trucking centers. Replacement crops were neither entertained nor encouraged by the State, and the farmers sold their land to developers, who quickly rezoned the land for single family subdivisions. Population grew, and no one noticed.

    Once upon a time, East Coast businesses were moving their corporate headquarters to Florida. If anybody remembers John Naisbitt’s 1980 book Megatrends, Orlando was named one of the top ten cities of the future. AAA, the automobile travel association, moved its corporate headquarters to Central Florida, joining Tupperware and several others. It appeared that low taxes and great weather inevitably would lure more companies. It escaped most people’s notice that the other corporations moving here, such as Harcourt Brace Jovanovich (now Harcourt), weren’t moving their leadership, but only back offices and computer hardware to Florida, taking state business incentives and returning the favor with service workers, not executives. As these service workers are downsized due to outsourcing and automation, Florida’s economy has been dramatically affected. Meanwhile the corporate headquarters in New York were protected. The top executives may have maintained condos in Florida, but never took the place seriously for business.

    But still tourism was growing, and no one noticed.

    Once upon a time, Florida was known as the state of low taxes. No income tax for us, thank you very much, despite a few weak attempts by the legislature. Rather, Florida depends on sales taxes and property taxes to balance its budget, and growth seemed to guarantee that these would rise. But even as low as taxes were, business leaders two years ago pressured the new Governor and legislature to propose a tax cut referendum, and like sheep, the citizens voted yes. Heck, who would not want their taxes cut? Shortly after property taxes were voted lower, the bottom fell out of Florida’s housing market, producing the perfect storm of lower taxes on properties dropping in value. Then, the wise leaders chose to cut necessities like education, rather than luxuries like the purchase of U.S. Sugar’s abandoned properties.

    But tourism was growing, and no one seemed to care.

    The litany of missed opportunities is longer than the space to list them. To anyone running a business, diversification of sources of income would seem natural to promote the long-term health of your business. But Florida consistently has shown disdain for this sort of behavior, because tourism continues to provide a steady stream of revenue. It is true that historically tourism has risen at the same rate as population growth and there is no reason to doubt that tourism will rebound. So once again, Florida’s reliance on tourism may seem its key to economic survival.

    In Central Florida, the economy is tourism, with worldwide visitorship, and compared to its next closest competitor, Las Vegas, Central Florida has come through smelling like a rose. Hotels within Disney’s property quietly finished 2008 on budget, and other hotels surrounding the theme parks suffered only modest losses. New hotel starts are halted, and owners with cash are not seeking expansion, renovation, nor repositioning while occupancy is down.

    Meanwhile, digital media and medical research remain the two most viable diversification channels for Central Florida. Partnerships between the private sector and the University of Central Florida to create a digital media development center will bear fruit in the coming years, both on campus and in downtown Orlando. Growth in medical research is already happening with the arrival of the Nemours Center for Pediatric Research. Both of these are happening because of internal decisions, windows of opportunity, and with mostly private, not government, help. On the downside, space investment dwindles, agriculture divestiture continues, and the State sits idly by, dreaming dreams of legalized gaming so as to put even more eggs into tourism’s basket.

    These are excellent times for diversifying the state’s economy. Tourism breeds not just an epehemeral city, but an ephemeral state – and the risk of this position is felt every day as jobs get scarcer and scarcer. Florida’s business leaders need to take responsibility for the future of the state, stop their addiction to tourism, and seek higher and safer ground. Only with a diversified economy will the State of Florida have long-term prospects for a prosperous future.

    So come on back, everyone, and get in line for rides at Disney! Those of us living and working in Central Florida thank you for coming. And, while you are here, pat yourselves on the back for helping Florida postpone its inevitable reckoning with economic reality.

    Richard Reep is an Architect and artist living in Winter Park, Florida. His practice has centered around hospitality-driven mixed use, and has contributed in various capacities to urban mixed-use projects, both nationally and internationally, for the last 25 years.

  • Hollywood Tax Credits? The Shows Are On The Road

    If you were paralyzed with shock at the October $700 billion dollar Congressional bailout, you may have missed the inclusion of a $478 million-fine-print allotment to Hollywood for tax incentives. A month later, in the midst of California’s on-going fiscal crisis, Governor Arnold Schwarzenegger proposed something called ‘the runaway production provision’, to utilize the bailout incentives to keep entertainment production in California and stimulate investment in motion pictures here. The proposal allows production companies to claim a $15 million deduction per California movie during the first year of filming. The credit increases to $20 million if the company films in an economically depressed area.

    Whatever your thoughts may be on the bailout in general, Hollywood is hurting, and tax incentives — especially if they don’t end up exclusively in the coffers of the major players — are long overdue. If California doesn’t protect its long-standing identity as the center of the entertainment industry, the Hollywood Sign may soon be strung across a mesa overlooking Albuquerque, or facing post-Katrina trailers. Forty states offer financial incentives to feature film and television companies; currently, California does not.

    Los Angeles and the state of California have been victims of runaway production for 25 years, but with California’s shrinking economy and growing anti-business reputation, the fight to keep any of the state’s industries in place has gained importance. Roughly a quarter of a million Californians work directly in the entertainment industry, with a substantial additional segment of the state economy fueled by retail, professional services, health care, and education related to the industry workforce. Entertainment is the fifth largest industry in Southern California.

    ‘Runaway production’ — the popular term for motion picture and television production which moves outside the United States — and ‘production flight’ — production re-located outside of LA — mean job and economic loss for California and greater Los Angeles. Feature film production in the region has dropped by about half since its 1996 peak. By 2007, entertainment production in the region had dropped to 31%. In 2008, television production marginally increased, but the migration continued to states such as New York, New Mexico, and Louisiana, which promised better tax climates.

    Here’s a rundown on who’s eating LA’s power lunches:

    Big Apple’s Big Win: Last May Variety announced “Ugly Betty Bites the Big Apple”; the filming of ABC’s hit would possibly move to New York. By summer, persuaded by Governor David Paterson’s expansion of tax breaks, the move took place. It makes sense that “Ugly Betty,” a series about the New York fashion industry, is now actually shot in New York. But production designers are famously skillful at locale substitutions. The dealmaker was undoubtedly New York’s new laws that tripled the eligibility for a tax credit to 30%, with an expiration date pushed to 2013. New York City “tips” an additional 5% tax break.

    New Mexico’s State Motto, Crescit Eundo: Crescit Eundo translates to “it grows as it goes,” and the New Mexico film and television industry has been growing. The program was initiated by Republican governor Gary Johnson, and was then enthusiastically supported by Democratic Governor Bill Richardson. The state recently celebrated the 100th film to collect its 25% rebate through state tax incentives.

    “No Country for Old Men,” the 2007 Best Picture Oscar-winner, was based on a Cormac McCarthy novel set in Texas that used Texas as a metaphor for a changing America. But it was shot in New Mexico. The AMC series “Breaking Bad,” the feature “Terminator Salvation,” the sequel to “Transformers”, and, perhaps most appropriately, a biography of Georgia O’Keefe, were all recently filmed in New Mexico.

    New Mexico claims that its 25% production cost rebate has contributed to building a stable film industry: $600 million in direct spending since 2003, and an estimated $1.8 billion in financial impact as of 2007. In 2008, productions in the state generated about 142,000 days of employment, up from 25,000 in 2004. The state continues to invest in the future of its film industry by building additional studios, and Sony Pictures Imageworks will open a large post-production facility in Mesa del Sol west of Albuquerque in mid-2009.

    The latest California loss to New Mexico: ReelzChannel, after laying off more than 40 employees in Los Angeles, just announced its relocation to Albuquerque.

    Les Bon Temps De Roulez Rolls Over A Grand Bump: Louisiana has a history of aggressive pursuit of film and television production through tax incentives. It offers 25% (plus 10%) transferable tax credits. Jefferson parish, outside New Orleans, offers an additional 3% rebate for production with a cap of $100,000. The cap rises to $110,000 if the production office and stage are in Jefferson Parish.

    The Louisiana Film Commission boasts that more than $2 billion in productions have been filmed in the state, with a direct impact of $1.48 billion for their economy. Film production almost doubled between 2005 and 2007, and film-related jobs have grown 23% per year. An estimated 65 projects were completed in 2008.

    Louisiana’s figures look good, but are they real? In an accounting finesse as creative as a film plot, former Film Commissioner Mark S. Smith inflated budgets and broadly interpreted “film projects” to include the filming of music festivals, thereby bankrolling with taxpayer money almost 30% of some music festivals, handing out $10 million to festival producers. Smith pleaded guilty in 2007 to taking bribes of $65,000, and after numerous postponements is still awaiting sentencing.

    Louisiana quietly closed some of the loopholes related to the actual amount of filming in the state, but the system still poses questions for Louisiana taxpayers. “The Curious Case of Benjamin Button” is as big a Hollywood-picture-not-primarily-shot-in-Hollywood as they come. Most of the filming was done in New Orleans and Montreal, with some sound stage work in Los Angeles. It stars Brad Pitt (and the city of New Orleans), and is up for 13 Oscars, inclduing Best Picture. The film’s $167 million budget was so big and laden with special effects that it required the backing of two studios, Paramount Pictures and Warner Bros. Louisiana taxpayers will provide roughly $27 million of the film’s costs, as the producers who qualified for the incentives (pre-loophole-closing) ultimately cash or sell the value of their tax incentives.

    Production Flight Or Production Fleece?: While Louisiana appears resolute in its determination to be the Tinseltown of the Gulf Coast, other states in the midst of budget slashing are questioning the value of tax incentives for film production in the current economy. With Detroit in a tailspin, fiscal watchdogs in the Michigan congress are looking to cap film credits, enacted in April of 2008, at $50 million. Rhode Island, smarting from paying more in incentives than was returned to the economy on a straight-to-video movie, has also tightened its production incentive laws.

    The confusion and intricacy of exploring the possible tax credits, incentives, and rebates has created its own set of entrepreneurs. Producers who visit The Incentives Office can shop for film incentives in the way that a buyer or broker shops for favorable interest rates. The Incentives Office promises to help producers “maximize their production incentives,” to help states with their film incentive programs, and to assist lenders in verifying estimated rebates and tax credits. “Most effectively, we take care of the entire incentive process for producers, from choosing the right state to filing the final documents and collecting the money.” The Incentives Office is located in Santa Monica, so the incentive consulting business — if not the actual incentives — remain part of the California economy.

    California is struggling with more economic fault lines than a seismic map of the state. Its flagship business, entertainment, is hoping to be re-powered by tax incentives. If the industry does succeed at closing the deal with government, the last words on the script may be “I’ll be back,” and not “Hasta la vista, baby.”

    Nancy Meyer is a broadcast and cable television executive and producer. She also works in university education with the Academy of Television Arts & Sciences Foundation, and is co-author of Television, Film, and Digital Media Programs published by Princeton Review/Random House.

  • 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.

  • New Survey: Improving Housing Affordability – But Still a Way to Go

    The 5th Annual Demographia International Housing Affordability Survey covers 265 metropolitan markets in six nations (US, UK, Canada, Australia, Ireland and New Zealand), up from 88 in 4 nations in the first edition (see note below). This year’s edition includes a preface by Dr. Shlomo Angel of Princeton University and New York University, one of the world’s leading urban planning experts. Needless to say, there have been significant developments in housing affordability and house prices over the past year. In some parts of the United States, the landscape has been radically changed by rapidly dropping house prices.

    Our measure of housing affordability is the “Median Multiple,” which is the annual pre-tax median house price divided by the median household income. Over the decades since World War II, this measure has typically been 3.0 or below in all of the surveyed nations and virtually all of their metropolitan areas, until at least the mid-1990s. There were bubbles before that time in some markets, but during the “troughs” most markets returned to the 3.0 or below norm.

    Unfortunately, the most recent bubble was and continues to be the most severe since records have been kept. The Demographia International Housing Affordability Survey rates housing affordability using five categories, indicated in the table below.

    Demographia
    Housing Affordability Ratings

    Rating

    Median Multiple

    Severely Unaffordable

    5.1 & Over

    Seriously Unaffordable

    4.1 to 5.0

    Moderately Unaffordable

    3.1 to 4.0

    Affordable

    3.0 or Less

    Median Multiple: Median House Price divided by Median Household Income

    At the height of the current bubble, some markets saw remarkable declines in housing affordability. In some Median Multiples exceeded three times the historic norm. Among major markets (metropolitan markets with more than 1,000,000 population), Los Angeles, San Francisco, San Jose and San Diego all reached or exceeded a Median Multiple of 10. Many other markets saw their Median Multiples rise to double the historic norm and beyond, such as New York, Miami, Boston, Seattle, Sacramento and Riverside-San Bernardino. Other major US markets – such as Portland, Orlando, Las Vegas, Providence and Washington, DC – rose to above 5, a figure rarely seen in any market before the currently deflating bubble.

    America has hardly been an exception. Outside the United States, virtually all major markets in Australia were well over 6.0, as well as London and Auckland in New Zealand. Vancouver was the most unaffordable major market, with a Median Multiple of 8.4. Of particular note is barely growing Adelaide, which nonetheless has seen its Median Multiple rise to 7.1.
    But, at least in the US, the unaffordability wave has crested. Generally, the house prices peaked in the United States in mid-2007. Since then the markets with the biggest bubbles took the lead in bursting. By the third quarter of 2008 (the Survey reports on the third quarter each year), the Median Multiple in San Francisco had dropped to 8.0, San Jose to 7.4, Los Angeles to 7.2 and San Diego to 5.9. Of course, even at these levels, housing affordability in these metropolitan areas remained worse than ever before. History would suggest that housing prices in these markets have a long way to go before they hit bottom.

    Other markets have improved affordability more substantially. Inland California markets like Sacramento and Riverside-San Bernardino have gone from the “seriously” to only the “moderately unaffordable” category, with rates now in the mid-3.0s. Data for the fourth quarter is likely to indicate that Sacramento will be the first major housing market in California to return to a Median Multiple of 3.0, a rather large fall from its peak of 6.6 in 2005.

    Outside California, other markets have experienced significant price declines. But some, like Miami still at 5.6, have a long way to go before they reach the historic norm of 3.0. Las Vegas and Phoenix (which nearly reached 5) may be closer, falling to the “moderately unaffordable ” category with Median Multiples of between 3.1 and 4.0. Seattle and Portland have fallen 10 percent or more as of the third quarter but remain severely overpriced, suggesting they, like Miami, have more price declines in the offing.

    Much of the blame for the bubble has been placed at the feet of a mortgage finance industry that passed out money as if it was not its own. Not surprisingly, the ready availability of money had its effect on the market. Demand rose sharply and included many who couldn’t afford to pay.

    But profligate lending practices represent only a relatively minor cause of the bubble. This was missed by all but a few economists, notably Dr. Angel’s Princeton colleague and Nobel Laureate Paul Krugmann. He could see that there was not one “national bubble” but a series of localized ones. The real villain, he noted, lay in land use regulations.

    In reality the bubble missed much of the country – from Atlanta to El Paso to Omaha and Albany. There were house price increases, of course, but they were generally within the Median Multiple ceiling norm of 3.0. There were a few exceptions, but even they did not exceed 3.0 by much.

    Rising demand was not the big problem. Housing affordability remained at virtually the same Median Multiple level in Atlanta, Dallas-Fort Worth and Houston, the three fastest growing metropolitan areas of more than 5,000,000 population in the developed world. Many other major markets across the South and Midwest experienced little price increase and maintained their affordability. Indianapolis, which has a Median Multiple of 2.2, continued to gain domestic migration from other areas and has a near Sun Belt growth rate. Kansas City, Louisville and Columbus remain affordable and are attracting people from elsewhere.

    Although there are signs of a correction in parts of California, Nevada and Arizona, some bubbles in high-regulation markets are still in the early stage of deflating. New York, Boston, Portland and Seattle particularly may be in danger; the worst consequences of their bubbles lie ahead.

    The longer-term question remains whether these and other still highly over-valued markets in California, the Pacific Northwest, Florida and the Northeast will return to affordability, at or near a Median Multiple of 3.0. The necessary price drops would be bad news for regional economies because of the losses homeowners and financial institutions would sustain.

    At the same time maintenance of the currently elevated prices would also be bad news. In the past 7 years, 4.5 million people have moved from higher-cost markets to lower-cost markets in the United States. The formerly attractive markets of the California coast alone have seen more than two million people depart for other places since 2000. For these areas, a return to historic levels of housing affordability may be a prime pre-requisite to restoring economic health.

    HOUSING AFFORDABILITY RATINGS UNITED STATES METROPOLITAN MARKETS OVER 1,000,000
    Rank Metropolitan Area Median Multiple
    AFFORDABLE  
    1 Indianapolis 2.2
    2 Cleveland 2.3
    2 Detroit 2.3
    4 Rochester 2.4
    5 Buffalo 2.5
    5 Cincinnati 2.5
    7 Atlanta 2.6
    7 Pittsburgh 2.6
    7 St. Louis 2.6
    10 Columbus 2.7
    10 Dallas-Fort Worth 2.7
    10 Kansas City 2.7
    10 Mem[hios 2.7
    14 Oklahoma City 2.8
    15 Houston 2.9
    15 Louisville 2.9
    15 Nashville 2.9
    MODERATELY UNAFFORDABLE  
    18 Minneapolis-St. Paul 3.1
    18 New Orleans 3.1
    20 Birmingham 3.2
    20 San Antonio 3.2
    22 Austin 3.3
    22 Jacksonville 3.3
    24 Phoenix 3.4
    25 Sacramento 3.5
    26 Tampa-St. Petersburg 3.6
    27 Denver 3.7
    27 Hartford 3.7
    27 Las Vegas 3.7
    27 Raleigh 3.7
    27 Richmond 3.7
    32 Salt Lake City 3.8
    33 Charlotte 3.9
    33 Riverside-San Bernardino 3.9
    33 Washington (DC) 3.9
    36 Milwaukee 4.0
    36 Philadelphia 4.0
    SERIOUSLY UNAFFORDABLE  
    38 Chicago 4.1
    38 Orlando 4.1
    40 Baltimore 4.2
    41 Virginia Beach-Norfolk 4.3
    42 Providence 4.4
    43 Portland (OR) 4.9
    SEVERELY UNAFFORDABLE  
    44 Seattle 5.2
    45 Boston 5.3
    46 Miami-West Palm Beach 5.6
    47 San Diego 5.9
    48 New York 7.0
    49 Los Angeles 7.2
    50 San Jose 7.4
    51 San Francisco 8.0
    2008: 3rd Quarter  
    Median Multiple: Median House Price divided by Median Household Income
    Source: http://www.demographia.com/dhi.pdf

    Note: The Demographia International Housing Affordability Survey is a joint effort of Wendell Cox of Demographia (United States) and Hugh Pavletich of Performance Urban Planning (New Zealand).

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • Obama, Fight The Green Agenda

    In his remarkable rise to power, President Barack Obama has overcome some of the country’s most formidable politicians – from the Bushes and the Clintons to John McCain. But he may have more trouble coping with a colleague he professes to admire: former Vice President Al Gore.

    To date, motivations from sweet reason to hard-headed accommodation have defined Obama’s Cabinet choices, most notably in such areas as defense and finance. Oddly enough, though, his choices on the environmental front are almost entirely Gore-ite in nature. Obama’s green team, for example, includes longtime Gore acolyte Carol Browner as climate and energy czar, physicist Steven Chu as energy secretary and, perhaps most alarmingly, John Holdren as science adviser.

    These individuals are not old-style conservationists focused on cleaning up the air and water or protecting and expanding natural areas. They represent a more authoritarian and apocalyptic strain of true believers who see in environmental issues – mainly, global warming – a license to push a radical agenda irrespective of its effects on our economy, our society or even our dependence on foreign energy.

    We should not underestimate the power of these extreme greens. They can count on the media to cover climate and other green issues with all the impartiality of the Soviet-era Pravda. Stories that buttress the notion of man-made global warming – like reports of long-term warming in Antarctica – receive lavish attention in The New York Times and on Yahoo!.

    Meanwhile, other reports, such as new NASA studies indicating cooling sea temperatures since 2003, or the implications of two unusually cool winters, are relegated to the mostly conservative blogosphere.

    I am no scientist. For all I know, both sides are lying or exaggerating. However, we do need to take history into account. Scientists have not been and are not immune to hysteria or groupthink, particularly when taking the “correct” view means a lush supply of cash from foundations and governmental labs. Nor is “consensus,” however constructed, always right.

    In fact, lockstep “official” science is often very wrong – from the pre-Copernican view of the solar system, to the decades spent ridiculing the now undisputed reality that continents drift over time, to eugenics or even, back in the 1970s, concern over “global cooling.”

    The past also suggests we should be particularly leery of purveyors of impending natural apocalypse. Holdren, the new science czar, for example, is a longtime disciple of the largely discredited neo-Malthusian Paul Ehrlich, who in the early ’80s bluntly predicted that global mass starvation was imminent and that critical metals would suffer severe shortages. Neither calamity has occurred – even as both global population and economic activity have surged dramatically.

    Obama may also want to consider the consequences of following the catastrophists. Supporting green causes might have been useful for bludgeoning George Bush and for raising cash over the Internet from affluent urban professionals. But now these environmentalists could obstruct his program for creating broad economic recovery and meeting the nation’s energy challenges – and they could even slow his party’s quest to secure a permanent electoral majority.

    For one thing, the economic crisis has shifted the public’s attention away from environmental issues. Recessions may reduce greenhouse gases and halt development, but they terrify voters and shift their priorities. A recent Pew survey of 20 top priorities for 2009 shows the public places a growing emphasis on strengthening the economy and particularly creating jobs, each cited by over 80% of respondents.

    In contrast, concern over the environment has dropped to 41% – down from 57% in 2007. Global warming ranked dead last; 30% of respondents named it a priority, a figure down from 38% just two years ago.

    Green activists might force the administration to eschew some of the tools that could best restore the economy. For example, they often oppose expenditures that drive industrial and agricultural growth – investments in ports, roads, bridges and even freight rail – which some see as greenhouse gas boosters. With the likes of Browner, Chu and Holdren in charge – no matter what Congress’s intentions are – an emboldened regulatory apparatus could use their power to slow, and even stop, many infrastructure improvements.

    At the same time, greens can be expected to line up with the information-age lobby, whose notion of stimulus focuses largely on universities, health care, arts, culture and media. This “post-industrial strategy,” notes author Michael Lind, may be fine for Manhattan and San Francisco, but it’s not so appealing in Michigan, Ohio, Appalachia or the Great Plains.

    All this green-blessed employment would likely produce precious few well-paying, long-term, private-sector jobs for middle- or working-class Americans. Obama should understand, as much as anyone, that the votes that won him the presidency came largely from suburban voters who are concerned about their economic futures.

    Of course, suburbanites care about the environment too, but they would rather see practical steps to clean up air and water quality and expand public open space. In contrast, the greenocrats are generally hostile to cars and single-family homes – the suburbs themselves. In other words, they largely detest many of the very things middle-class voters cherish.

    Perhaps nowhere will this green agenda create more potential problems than in the energy arena. I have long held that conservation should be encouraged in every reasonable way possible. However, it is clearly fanciful to believe that solar, wind and other renewables can supply the bulk of the new power we need now to, as President Obama put it, “fuel our cars and run our factories” – much less meet the needs of the 100 million or more American who will be online by 2050.

    Just look at the numbers. According to the latest (2007) figures from the Energy Information Agency, renewable energy accounts for less than 7% of U.S. consumption – and almost all of that is derived from burning wood and waste and hydroelectric power. Nuclear generation accounts for over 8%, while fossil fuels meet nearly 85% of America’s energy needs. On the other hand, wind and solar power, which the new president has promised to “harness,” account for just 0.39% of total American energy.

    Even doubling renewables in the next few years – itself an expensive and difficult goal – would do relatively little to meet the nation’s demand for energy. In this light, the incoming energy secretary’s strong antipathy to fossil fuels – particularly coal, which he once described as his “worst nightmare” – coupled with his lack of enthusiasm for nuclear power, which is collectively the source of over 93% of U.S. energy, seems a bit problematic.

    We can only solve America’s energy needs by blending a variety of alternative solutions – renewables, conservation, nuclear – with fossil fuel-based energy. This approach, which would vary by region, would also help revive manufacturing, agriculture and other productive industries. A renewables-only approach, in contrast, would impose very high prices and require massive subsidization, leading to greater dependence on overseas energy and also, perhaps, to a permanently shrunken economy.

    These challenges, along with recent shifts in the public’s priorities, suggest that the president may need to distance himself from his extreme green advisers – or, somehow, get them to toe a more sensible line.

    In his new job, President Obama must confront many dangerous ideologues from organizations like Hamas and al-Qaida. His political future, however, may ultimately hinge on how he handles the dogmatic ideologues he has now lifted to the highest levels of our government.

    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.

  • Infrastructure and Aesthetics

    In his 2005 book Infrastructure: A Field Guide to the Industrial Landscape, Brian Hayes surveys the built environment with an undaunted appreciation of the vast networks of infrastructure systems in America. Hayes, a writer for American Scientist, argues that common understanding of infrastructure is just as important as an understanding of nature itself. Without the ubiquitous power lines, the oft disparaged garbage dumps, or the controversial mining industry, the United States would not have been able to achieve status as the paragon of 20th Century modernization – a pattern now emulated by the likes of China and India.

    Yet it seems that ‘infrastructure’ has lost its fabled status in America. Our parents – or grandparents, depending on your age – celebrated achievements such as the building of the Hoover Dam or the California Water Project. But starting with the 1970s, as the environmental movement began to gain steam, and more recently after Al Gore’s documentary An Inconvenient Truth, large scale infrastructure has increasingly become something to be reviled.

    The only time we are reminded of our infrastructure is when tragedy strikes, be it a mining accident, a bridge falling down or a collapsed levee. It’s as if we wish to keep the very things that support our modern lifestyles ‘out of sight out of mind’. No one really wants to know where their trash ends up or what the intricate processes for treating sewage are, nor does anyone want to be a neighbor with a coal burning power plant.

    At the same time what had once been centers for productive industry have also been redeveloped into hip and trendy neighborhoods marketed to those looking for an ‘edgy’ urban experience. To be sure, part of the allure of once industrial areas such as San Francisco’s South of Market and Brooklyn’s Williamsburg lies in the gritty aesthetic and adaptability of warehouse and manufacturing buildings for reuse.

    Yet even though residential development may be halted for the foreseeable future, it is critical to not lose sight of the aesthetic value of the industrial landscape. This ‘diamond in the rough’ appeal applies not only to converted lofts and art galleries but to both our current functioning and yet-to-be built infrastructure as well.

    The potential for infrastructure to please the eye and to uplift the soul is not lacking in historical precedent. Some of the greatest monuments to the genius of ancient architects remain those which served as essential infrastructure, the most notable example the aqueducts constructed by the Romans.

    Yet today, aside from exceptions like the bridges of Spanish architect Santiago Calatrava, the world of high architectural design has largely ignored the possibility that infrastructure could be beautiful. Instead, design media is relentlessly focused on museums and other elitist structures with the more mundane and common buildings being “left to the engineers”.

    LeCorbusier, the late Swiss/French architect and one of the ‘godfathers’ of modern architecture would be rolling in his grave if he knew this was the case. In his seminal manifesto Towards a New Architecture, LeCorbusier speaks of his appreciation for the industrial aesthetic: “Thus we have the American grain elevators and factories, the magnificent first-fruits of the new age”.

    LeCorbusier, or ‘Corb’ as he is called, went on to apply the industrial aesthetic to socialist housing schemes while proclaiming that the “house is a machine for living in”. Although the jury is still out on whether or not living in a machine has mass appeal, Corbusier’s celebration of the simple and repetitive massing of structures such as grain silos is a good reminder that beauty can be derived from infrastructure.

    Early 20th Century American city builders also celebrated infrastructure. Willis Polk, a prominent San Francisco architect, was commissioned in 1910 to build a water temple in Sunol, California. Sunol, about 40 miles outside of San Francisco, was where converging water lines met before feeding into the city. Sensitive to the importance of getting fresh water to a growing population, some of San Francisco’s wealthiest citizens hired Polk to design the structure, which was inspired by the Temple of Vesta at Tivoli. Soon after, the area around the iconic structure became a popular spot for park goers.

    Similarly, Los Angeles architect Gordon Kaufman was hired to add aesthetic merit to the Hoover Dam. Still generating power for parts of Southern California, Nevada and Arizona, the massive dam symbolizes one of the most ambitious pieces of infrastructure in American history. At the time, the dam was the world’s largest concrete structure, yet Kaufman softened the aesthetics by adding a simple and elegant Art Deco touch to the otherwise imposing structure.

    The marriage of aesthetic beauty and infrastructure does not always have to take place at the grand scale of the Hoover Dam or the Golden Gate Bridge. In contrast, the barn, according to Brian Hayes, remains “the unmistakable icon of American agriculture and rural life.” The barn, a prevailing theme in American literature, represents function and flexibility of the highest order: one day it could be housing livestock while the next it could serve as a dance hall. Whatever the function, there is no questioning the charm of these structures dotting the rural landscape. With a renewed interest in family and organic farming in current popular culture, these buildings – including new barns – could assume a renewed meaning.

    With the Obama stimulus plan comes not only an opportunity to create jobs but to advance a cultural appreciation for the structures and systems that have made the United States a model to be emulated. Wind turbines, for instance, are gaining traction as the symbols of clean energy. When driving past large scale wind farms like the San Gorgonio Pass near Palm Springs, the movement of the out-of-proportion blades coupled with the dizzying repetition of turbines results in something similar to a pleasant hallucination. The appreciation for wind turbines is a start in the right direction, yet if we are to ensure that the systems that run the country are suited to last for generations to come, the culture needs to once again celebrate, rather than demonize, our infrastructure.

    Adam Nathaniel Mayer is a native of the San Francisco Bay Area. Raised in the town of Los Gatos, on the edge of Silicon Valley, Adam developed a keen interest in the importance of place within the framework of a highly globalized economy. He currently lives in San Francisco where he works in the architecture profession.

  • What Way for the Stimulus? Post-Industrial America vs. Neo-Industrial America

    As a result of the economic crisis, there is a broad consensus in favor of large-scale public investment in infrastructure in the U.S., both as part of a temporary stimulus program and to promote long-term modernization of America’s transportation, energy, telecom and water utility grids. But this momentary consensus masks the continuing disagreement on whether the U.S. government can legitimately promote American industries, and, if so, which industries. This is a problem for infrastructure policy, because different national infrastructures correspond to different national economic strategies.

    Consider the antebellum U.S. in Henry Clay’s American System: federal infrastructure investment in canals and later railroads (“internal improvements”) was part of a package that included import-substitution tariffs to protect infant U.S. industries from British competition. For Clay and his Whig allies and followers, including future Republicans such as Abraham Lincoln, internal improvements and tariffs were not ends in themselves. They were instruments to be used in the pursuit of the Whig-Republican vision of a decentralized, mixed industrial and agricultural economy where business owners, mostly small, and free workers, mostly prosperous, could realize the utopia of Clay’s “self-made man.”

    From Thomas Jefferson to Jefferson Davis, the Southern planters who opposed such ambitious schemes had no objection to infrastructure as such. They favored infrastructure tailored to suit the needs of their semi-colonial slave plantation economy, based on exports of cotton and other commodities to British and Western European factories. Local wharves and harbors that facilitated the shipment of crops to industrial Britain were acceptable to the planters. They opposed infrastructure that would encourage industrialization in the South or the U.S. as a whole, out of fear that urbanization and industrialization would threaten their local dominance over both black slaves and poor white yeoman farmers. They also feared they would be marginalized in national politics – as they indeed were – by industrialists, merchants and financiers.

    Today, the rivalry is not between the champions of an industrial America and an agrarian America. Rather, it is a rivalry between the champions of a neo-industrial America, which includes world-class industrial agriculture, and a post-industrial America, in which most if not all manufacturing and even agriculture will be outsourced. In this formulation, post-industrial America emerges as a consumerist paradise populated by investors, executives of multinational companies, rentiers, realtors, government and nonprofit bureaucrats, and a supporting cast of service sector proletarians including nursing aides, nannies, gardeners, security guards and restaurant and hotel workers.

    Just as there was one logical infrastructure for the industrializing North and one for the anti-industrial plantation South in the nineteenth century, so in the twenty-first century a different infrastructure would be appropriate, depending on whether the goal is a post-industrial America or a neo-industrial America.

    A post-industrial infrastructure can be simple, local and substantially foreign.

    The post-industrial infrastructure can be simple since it involves little more than the roads and harbors needed to bring in high-value-added imports from abroad and ship out low-value-added American commodities. Adequate harbors are necessary, as are adequate highways to help ship U.S. soybeans and timber to industrial Asia while bringing Chinese, Japanese and Korean goods to Wal-Marts for distribution.

    The post-industrial infrastructure can also be local. Just as the Southern planters were indifferent or hostile to regional or national infrastructure projects, so the elites of the service sector are interested chiefly in the infrastructure needs of the half dozen or so coastal megalopolitan areas where they live. Many favor high-speed rail to connect nearby big cities on the coasts, while denouncing federal investment in non-metropolitan areas as boondoggles. The FIRE (Finance, Insurance, Real Estate) economy of post-industrial America could function reasonably well as long as a handful of colossal city-states – Boswash, Northern California, Greater LA, the Texas Triangle – had state-of-the-art local telecom and transportation and energy grids. So what if the rest of the continent decayed?

    Finally, the post-industrial infrastructure can be largely foreign. Most of the urban service sector elite favors both outsourcing American industry and importing a new metropolitan immigrant proletariat willing to work for lower wages and fewer benefits than native Americans. To be sure, someone must build the components of the metro infrastructure and put them in place. But steel can be shipped in from Asia and assembled in New York, San Francisco, Atlanta, Chicago and Houston by immigrants, legal or illegal. Better yet, the metro-supportive infrastructure can be leased or permanently sold to foreign consortiums and even foreign sovereign wealth funds, in order to avoid the need to raise taxes to pay for upfront costs or repay bonds over the long term. The “leakage” of federal stimulus spending to benefit Chinese factories, law-breaking Latin American illegal immigrants and petrostate sovereign wealth funds will not bother elites who are not only post-industrial but to a large extent too sophisticated to worry about narrow patriotism.

    If the infrastructure of a post-industrial America would be simple, local and largely foreign, the infrastructure of a neo-industrial America should be complex, national and predominantly American.

    A neo-industrial infrastructure necessarily must be complex, because the purpose of a neo-industrial infrastructure would be onshoring – arresting and in some cases reversing the transfer of high-value-added manufacturing and services to other countries. This requires something more than freight rail bringing Chinese imports to Wal-Mart and airports helping to deliver Amazon.com boxes to urban apartments. It requires an infrastructure tailored to the needs of an entire complex ecosystem of factories, design offices, and their suppliers and contractors. And that infrastructure not only must be rebuilt in existing industrial areas like Detroit but also built from scratch in areas such as the Great Plains. It would aim to put many of tomorrow’s factories and research parks in today’s depopulating rural areas and derelict inner cities.

    A neo-industrial infrastructure must be national and inclusive in scope. Its goal resonates with the aspiration of Henry Clay Whigs, Lincoln Republicans and William Jennings Bryan Populists – a decentralized, prosperous middle-class society of small and medium-sized towns as opposed to a country where half a billion people are crammed into a few plutocratic megacities and forced to live in dense apartment blocks.

    Such decentralization – contrary to the claims of some urbanists and greens – need not mean excessive “sprawl.” This is still a very large country with lots of land, as anyone who spends time away from the coasts recognizes.

    But more important, there can only be an independent middle-class majority in a United States with 400 or 500 million people in 2050 if most Americans live and work in relatively low-density areas where homes are affordable and small business rents are not crippling. That means building new towns and new industrial centers away from the existing ones, to spread out the population and accommodate tens of millions of new immigrants with desirable skills. The rich, who will remain concentrated in a few metro areas, where they can socialize, compete and conspire with one another, must be taxed by the federal government to subsidize the infrastructure of the entire continental U.S., not just their own cities, metro areas and states.

    Last but not least, a neo-industrial infrastructure must be predominantly national with respect to its components and its workforce. It would be self-defeating to design an infrastructure friendly to American industries and workers and then hire foreign industries and foreign workers to build it. Most or all federal infrastructure spending should be reserved for corporations and suppliers whose high-value-added production takes place on American soil. And all jobs directly or indirectly related to infrastructure construction should be reserved for citizens or legal immigrants. Law-abiding American citizens should not be taxed to subsidize law-breaking illegal immigrant workers and the unpatriotic, criminal contractors who employ them. This is not “nativism.” The right kind of legal immigration would be an important part of any neo-industrial strategy, as would taking advantage of foreign direct investment by foreign companies and sovereign wealth funds in mutually beneficial ways.

    The debate about infrastructure, then, is also a debate about the future industrial profile of America. Will America in the twenty-first century be neo-industrial or post-industrial? This debate, in turn, may well determine whether the U.S. will become a decentralized, continental middle-class society or a collection of plutocratic, hierarchical city-states. The stakes could not be higher.

    Michael Lind is Whitehead Senior Fellow at the New America Foundation and Director of the American Infrastructure Initiative.

  • Solving the Financial Crisis: Looking Beyond Simple Solutions

    When presented with complex ideas about complicated events, the human tendency is to think in terms of Jungian archetypes: good guys and bad guys, heroes and villains. The more complicated the events, the more the human mind seeks to limit the number of variables it considers in unison in order to make sense of what it sees. The result is a tendency to describe events in the simplest black and white terms, ignoring the spectrum of colors in between.

    This principle can be seen in the current explanation of the financial crisis. University of West Virginia Professor of Sociology Lawrence Nichols has developed what he calls the “landmark narrative” shaping how the public reacts to dramatic swings in financial cycles.

    As Professor Nichols explains, the narrative described by the landmarks can be a contrived and even inaccurate version of history. By its nature, the shorthand narrative is often unable to describe the detailed reality of an occurrence. Much like an interstate highway, the landmark narrative takes the valley pass, avoiding the mountaintops from which the full view of history can be seen and understood. If we move away from the landmark narrative – beyond the highway for a view from the hilltop – we’ll see more of the landscape: enough to make sense of the complicated events that make up our financial environment.

    There is real danger in limiting our view of events to what can be described by the landmark narrative. It’s like describing New Jersey from the I-95 Turnpike: funny enough for late night television but not particularly useful for problem solving. Basing our view of events on the landmark narrative can, and very well might, lead to “solutions” that could prove as dangerous – or worse – than doing nothing.

    Specifically, reactions to the current financial crisis are making their way into popular consciousness, potentially becoming imbedded in unpredictable and usually indelible ways. In a democracy, our elected officials are bound to respond to these shifts in popular consciousness. The constant repetition of contrived and inaccurate versions of events eventually leads us to suffer what Nobel Laureate Merton Miller called “the unintended consequences [of] regulatory interventions.” Austrian Economist Ludwig von Mises, in fact, warned decades earlier that market data could be “falsified by the interference of the government,” with misleading results for businesses and consumers.

    As Americans, we have repeatedly failed to learn this lesson. Throughout our history, Americans have had an irrational fear of finance. Deemed to be too complicated, the field of finance lends itself easily to description by landmark narrative. Quite possibly to our detriment, the rise of the financial sector has been tied to economic expansion throughout our modern business history. The more robust the flow of finance in capital markets, the more robust is economic activity. Our economy, our livelihood and our well-being are inextricably related to finance at home and around the world.

    So what are the assumptions about finance we see today? It turns out many of the assumptions are often erroneous and usually dangerous. The problems on Wall Street, for example, did not stem from too few laws; rather, it resulted from not enforcing the laws we already have. When I talk to regulators and industry participants about problems with fails-to-deliver in bond and equity markets, they often respond that there is no rule against it. Indeed, there is no specific law that says that the seller of stock cannot fail to deliver the shares on the settlement date (usually 3 days after the trade); there is no specific punishment in place. Yet it seems clear that if someone takes your money and doesn’t give you what they promised, this is stealing and there are laws against it. Look at it this way: there is no specific law that says “it is a crime to hit a person on the head with a hammer.” Yet I assure you that if I hit you on the head with a hammer the police will arrest me for a crime. It will have some other name (like “assault with a deadly weapon”) instead of “the crime of hitting a person on the head with a hammer.” But I will be just as arrested. And it is just as much a crime.

    So the real problem here is not a lack of laws, but a lack of enforcement of what already exists on the books. Our reluctance to act on this reality has serious consequences. First, we don’t focus on punishing the perpetrators. Our government says they don’t have time for “finger pointing” because they are too busy rushing rapidly to fix the problem – a problem they have yet to define. So we pour money into institutions, allow huge bonuses to be paid with public money, lavish retreats on insurance company executives – and then insist what we need is massive regulatory reform.

    This has reached the level of absurdity. The House Financial Services Committee held hearings on January 5 to assess the alleged $50 billion investment fraud engineered by Mr. Bernard L. Madoff. The assumption is that somehow we don’t have the laws on the books to prevent Ponzi schemes; in fact those laws have been there for decades. A rash of new laws to prevent such occurrences is not necessary; we simply need to enforce what already exists.

    Yet rewrite we will, and with what may well be reckless abandon. Opening the session, Congressman Paul E. Kanjorski (D-PA), the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, called for Congress to “rebuild” the regulatory system and commence with “the most substantial rewrite of the laws governing the U.S. financial markets since the Great Depression.”

    But this is the wrong approach. The real question isn’t new laws – although that may make good headlines for vote-seeking congressmen. The more basic question should be: where has the lawman been?

    Hearings like this are an integral part of the “landmark narrative.” Unless we’ve learned our lesson, we will be in for a rash of new rules, regulations and legislation paving the path for a future round of financial turmoil while allowing the perpetrators who created the crisis to avoid prosecution. Remember Sarbanes-Oxley, the measure supposed to prevent ill-doing by Wall Street. Passed in 2002, it didn’t seem to do anything except keep accountants and lawyers busy. In fact, it had the unintended consequence of discouraging small businesses from going public because of the extra cost for the reporting it required. Need more examples? Here’s a speech by an SEC economist that explains how regulations designed “to reduce executive compensation could actually increase expected compensation.” I’ve written in the past about “regulatory chokeholds” that make the failures of financial institutions almost inevitable.

    In 2009, we are presented with a new opportunity to display our capacity to evolve beyond the same old pattern of reaction and spurious law-writing. When dealing with violations of the law by respectable and powerful groups (like bankers), we need to consider using the laws already there; it’s simply time to find someone to enforce them.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • The Leveling of Citigroup

    The idea that Citigroup could support the family by gambling didn’t begin with Robert Rubin. It’s part of a long tradition. What was different in the most recent go-round is that, this time, Citi didn’t invent the game. Of course, once it got to the casino it characteristically placed larger bets than anyone else.

    Word that Citigroup is teetering on the brink of break up brings a certain wistfulness to this former Citibank speechwriter. Not because intensive care is something new for the old bank — it isn’t — but because it ended up on life support by following the crowd instead of leading it. For well over a century, Citigroup and its precursors — First National, the City Bank of New York, First National City, Citibank, and Citicorp — were innovators. They didn’t just overdo the fad of the moment, as they have done with mortgage-backed securities of one sort or another: they created it. They led the Charge of the Light Brigade.

    New York was America’s imperial city, and Citibank was a vehicle for imperial vision by people who lacked imperial lineage.

    When trade followed the flag to Latin America and the Philippines, Citi was there to count the cash. The vision of the bank as a financial supermarket didn’t begin when Sandy Weill stepped into the picture; it had its antecedents in the 1920s when Charles Mitchell, chairman of the National City Bank, merged commercial and consumer banking with his “bank for all”. His vision that was still ruffling feathers six decades later, when senior vice-president Eben Pyne bitterly told me, “Charles Mitchell ruined my grandfather’s bank [Farmers Loan and Trust], and they’re doing the same thing now with these credit cards.” After acquiring Grandpa Percy’s FL&T for its retail customer base, National City stuffed customers accounts with speculative paper from Latin America. Think Bernard Madoff with widows and orphans.

    Walter Wriston was CEO when I arrived at Citi in 1980. Walt used to say that when he entered banking soon after World War II, it seemed like the embodiment of everything dull. Over his next years as Citicorp Chairman, he would certainly turn up the excitement. He pioneered the negotiable certificate of deposit, shepherded the career of consumer banking king John Reed, and above all attacked the regulatory and legal regime that had been erected during the Depression, all under the watchful eye of a portrait of Austrian economist Frederich Hayek on his office wall. The strategy that emerged late in his tenure was known as the “Five I’s”: institutions, individuals, investments, insurance, and information. They wanted to do it all. And to do it, Citi needed to create a level playing field. Other institutions not regulated as banks could perform bank-like functions, while banks couldn’t reciprocate. Merrill Lynch’s money market accounts, which offered interest along with checking privileges, were a case in point.

    The deregulation campaign provided plenty of work for the speechwriting team. Ronald Reagan’s first term, when Adam Smith neckties were all the rage, was a propitious time to turn up the heat. The anti-regulatory fever that we were doing our utmost to spread was more reasonable then than many people now credit. At the time, we liked to remind everyone that the prohibition against interstate banking dated from an era when people traveled by horse. Under unitary banking laws then current in Texas, for example, each standalone ATM required incorporation as a bank. The commercial market allowed corporations with excess cash to lend to other corporations by way of Wall Street, bypassing the banks. It seemed as though any financial company that didn’t have a bank charter was free to poach on bank territory, while we had our hands tied.

    Citibank was constantly challenging these constraints, legally, operationally, and, happily for me, rhetorically. Some of the ideas were just plain dumb. One was a travelers-checks-by-mail scheme that would allow consumer deposits to be collected across state lines. What was missing was any sense that consumers could actually be induced to do business this way; one thing I did learn at Citibank was that consumer behavior often failed to keep up with the brilliance of these innovators.

    There was a pervasive feeling that Wall Street’s profits were unjustifiably high, and that we should be allowed to compete. We needed the regulatory freedom to enter each new line of business that just wasn’t there for banks. If Merrill Lynch could offer interest-bearing checking accounts and Sears could issue credit cards and sell insurance, why shouldn’t we sell mutual funds and insurance policies in our branches? We had machines to do mindless tasks like taking deposits and dispensing cash; why shouldn’t we use our people to do things that only people can do?

    But as we achieved some of our legal and regulatory goals, the true prize only receded. The head of our private banking division once confided in me, for no good reason, “Do you know how hard it is to beat the S&P 500 day after day?” Citibank was discovering, yet again, that it’s hard to make a whole lot of money in banking all the time unless you’re smart and nimble enough to adjust to changing economic circumstances.

    Citibank was nimble of mind but slow of foot. Profitability depended on finding an occasional niche and driving a truck through it, whether it was lending to Latin America, commercial real estate, or credit cards. At some point, John Reed told us that Citibank was a credit card company with six or seven [unprofitable] lines of business. At other times the investment didn’t pay off at all. Remember Quotron, the dominant player in desktop information for brokers around the world? Even the bank’s own due diligence showed that it wasn’t worth the $1.5 billion price tag. But we wanted to buy market share in that fifth “I”, the financial information business. This transaction made Daimler’s acquisition of Chrysler look like the Louisiana Purchase. At the time, there was a former trader named Bloomberg just entering the picture. Within a couple of years, it was his name, not Quotron’s, that sat on every trading desk in the world.

    In the early 1990s, as its stock fell below $10, necessitating a Saudi bailout, Citibank abandoned one of its most cherished traditions, the continuous payment of dividends for more than 100 years. A tradition sustained for many years, as it turns out, by borrowed money, not earnings.

    Fast forward to this week: a lead headline in the New York Times business section reads, “Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket”. The playing field is now level. Bear Sterns, Lehman Brothers, Merrill Lynch, and Citi have all been leveled by their gambles in the same lousy securities.

    Citibank was always a bi-polar kind of place. It alternated eras of rash and brash with periods of sober and staid, sometimes with new senior management and sometimes with the same team that created the mess to begin with. For now, the mania is over. Current CEO Vikram Pandit, described in the press as a technocrat, has put Smith Barney up for sale. It’s back to basics. Both Grandpa Percy Pyne, and now Grandson Eben, can take time out from turning over in their graves for a little schadenfreude. If we’re lucky, Citigroup will be just a bank… until the next time.

    Henry Ehrlich is a footnote to the financial history of our time. He was a senior speechwriter for Citibank for 11 years, where he served the great, the near great, and the not so great. Among other things, he wrote every speech for the senior bank negotiator during the early years of the 1980s LDC debt crisis. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.

  • In a Financial Crisis What Happens to the Dog Bakeries?

    What will happen to the dog bakeries? I ask this question, because this line of business (and perhaps many others) escaped my attention for so long. I saw my first one years ago in suburban St. Louis. As one interested in economics, poverty and history, it struck me that dog bakeries represented a perfect symbol for the many “discretionary” business lines that have been established in recent decades in what has been called the consumer economy.

    This discretionary economy consists of businesses for which do not exist in societies with little discretionary income. It includes in its ranks a host of businesses that did not even exist before the last couple of decades, from dog bakeries, to Starbucks, tony cafes, specialized clothing stores and personal fitness centers. While these businesses might have been attractive to the households of the 1940s, 1950s, 1960s, or 1970s, people just didn’t have enough discretionary income to support them.

    Stores specializing in accessories for the bathroom simply did not exist in the immediate post World War II years. There was little, if anything, akin to a Gap store, a Banana Republic or an Abercrombie and Fitch. Few people had either access to or membership in gyms or personal fitness centers. Gyms in those days were often barebones affairs for roughnecks as opposed to the fashionista hangouts of today.

    Even in the 1960s and 1970s, many of the businesses we take for granted today simply did not exist. There were no Starbucks coffee shops. If you wanted espresso, you looked near a college campus or found an Italian neighborhood. Big box stores specializing in pets had not proliferated. Instead there were small stores crowded with everything from hamsters and turtles to birds and bulldogs. I suspect there were no dog bakeries.

    It would be most difficult to reliably estimate the size of the discretionary economy. Much of the discretionary economy lies embedded in the larger service sector. By 2007, the share of private employment in the nation in services had reached 2.5 times the rate of 1947. Within that vast sector are companies which provide goods and services our forebears lived without like gyms, boutique coffee and dog bakeries.

    The years since World War II have seen an unprecedented democratization of prosperity in the United States. Poverty rates have fallen and people live a far better life style than before. This has led critics to complain about the consumer society. For some, this “consumerism” was declared a false god and some even looked forward to a day of reckoning when the nation’s sins of over-consumption would earn it a deserved eternal damnation.

    Generally, these critics lacked a decent understanding of economics. For one thing even the most frivolous types of consumption employ people. When households cancel the gym memberships or have no need of the dog bakery, people lose their jobs. Supporting a nation of 300 million people requires all of the consumption it can afford to provide employment, a decent standard of living, and yes, to reduce poverty.

    So what happens now? If the ‘bubble’ expanded the discretionary economy, what will a prolonged recession do? It could be a mistake to presume that the economic downturn will soon be reversed and that previous consumption rates will be restored. One of the factors different about this downturn is the extent to which it has reduced the wealth of households. The IRAs and investment portfolios that many had relied upon to provide a comfortable retirement have declined steeply in value. This is a particular problem for the millions of baby boomers, who have spearheaded the development of the discretionary economy.

    Now they seem less likely to consume with the abandon they showed before the prospect of running out of money became a realistic one. The coffee at home will be more attractive than the $5.00 latte at Starbucks. Rather than stopping at the canine bakery, people may now choose to buy more prosaic dog biscuits from a supercenter aisle. The recent decision by Starbucks to close 600 stores recently may be a harbinger of things to come.

    But there is more. Boomers and others who have seen their savings devastated could reduce their spending on other items not directly part of the discretionary economy. The wardrobe – you need clothes, but not necessarily new suits every season – may not be renewed quite as frequently. The car may be kept a couple of extra years. This could place the entire auto bailout in jeopardy.

    It would be a mistake to assume that there will be a quick and easy exit from the current economic difficulties. An affluent economy is necessarily a consuming society. Such an economy requires both necessities as well as the frills. It needs gyms, Starbucks, dog bakeries and the rest of the discretionary economy, just as it needs automobile manufacturing, information services and grocery stores. The destruction of the discretionary economy may not be as serious as the loss of homes in Detroit or jobs on Wall Street, but it can not take place without destroying the jobs and lives of people.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”