New Geography

Category: Economics

  • The Transmission Infrastructure Dilemma

    Last week, Bismarck, ND was host to the second annual Great Plains Energy Expo and Showcase. Hosted by Bismarck State College and Senator Byron Dorgan, the conference focused on North Dakota’s growing energy industry, including the wind energy sector, with presenters such as T. Boone Pickens discussing the opportunities and challenges facing the industry.

    Wind is a readily available resource on the plains of North Dakota, which have been referred to as the “Saudi Arabia of wind”. According to David Hadley of the Midwest ISO, a transmission coordination agency, North Dakota is the top state in the nation for wind energy potential. At 40% capacity, the state would have over 345,000 MW of potential generation capacity.

    Current generating capacity is a minuscule fraction of this potential output. However, North Dakota has seen a major increase in investment in wind energy projects over the past several years. In 2005, there was only 80 MW of wind generation in the state. As of June, 2008, that number stands at “716 MW either in service or under construction, plus another 807.5 MW that has either been site permitted or is in some stage of the siting process.” According to the Midwest ISO, potential North Dakota projects being discussed or currently under way add up to 7656 MW of potential generation. One major project under discussion would include 2000 MW of generation, costing around 4 billion dollars. The development is, in the words of one elected official interviewed by the Bismarck Tribune, “truly eye-popping.”

    Standing in the way of exploiting the Great Plains’ wind bonanza is a major challenge- transmission capacity. North Dakota currently has a transmission export limit of 1950 MW, which is fully subscribed by current power producers. While several upgrades to the system are in the works, they will fall far short of the massive build up in transmission infrastructure needed to allow for continued rapid expansion of generation capacity. As one presenter at the Great Plains Expo put it, the region is “a victim of [its] own location.”

    In August the New York Times discussed the challenge posed by transmission limitations, noting that “North Dakota and South Dakota, could in principle generate half the nation’s electricity from turbines. But the way the national grid is configured, half the country would have to move to the Dakotas in order to use the power.” If unaddressed, the inadequacy of the electric grid will serve as a check on energy driven economic development on the Great Plains. Rick Sergel, President of the North American Electricity Reliability Corp. (NERC), argues that “Without new transmission development needed to support these resources,” it is likely “only a fraction,” of currently proposed wind projects will be built. Speaking to Reuters, Sergel called for serious consideration of “comprehensive plans that cross state lines and international borders to build the clean-energy superhighway that will provide everyone equally with access to carbon-free generation”.

    It appears that expansion and modernization of transmission infrastructure will receive significant attention from the incoming administration. President-elect Obama stated in an interview on MSNBC that “the most important infrastructure projects that we need is a whole new electricity grid,” and that he wants such projects “to be able to get wind power from North Dakota to population centers, like Chicago.” With the current economic slowdown increasing calls for an economic stimulus package, investment in infrastructure, including grid expansion and modernization, appears set to take a central role in policy discussions in the coming year.

  • In Ethnic Enclaves, The U.S. Economy Thrives

    Dr. Alethea Hsu has a strange-seeming prescription for terrible times: She is opening a new shopping center on Saturday. In addition, more amazingly, the 114,000 square foot Irvine, Calif., retail complex, the third for the Taiwan native’s Diamond Development Group, is just about fully leased.

    How can this be in the midst of a consumer crack-up, with credit card defaults and big players like General Growth struggling for their existence? The answer is simple: Hsu’s mostly Asian customers – Korean, Chinese, Taiwanese, Japanese – still have cash. “These are people who have savings and money to spend,” she explains. “Asians in Orange County are mostly professionals and don’t have the subprime business.”

    To Hsu, culture explains the growing divergence between ethnic markets and that of the general population. Asians, she notes, whether in their native lands or here in California, tend to be big savers. In tough times, they still have the cash to buy goods, while others stay home or go way down-market.

    Nor is the Diamond Development Group’s experience an isolated case. Throughout the country, ethnic-based businesses continue to expand, even as mainstream centers suffer or go out of business. The key difference, notes Houston real estate investor Andrew Segal, lies in the immigrants’ greater reliance on cash. “When cash is king,” observers Segal, president of Boxer Properties, “immigrants rule.”

    This is true not just of well-heeled Asians or Middle Easterners, but also for Hispanics, who generally have lower incomes, notes Segal’s partner, Latino retail specialist Jose de Jesus Legaspi. For example, the recession has barely taken hold at La Gran Plaza, the recently opened 1.1 million square foot retail center in Ft. Worth, Texas, where Legaspi serves as part owner and operating partner.

    The center, reconstructed from a failing old mainstream mall purchased in 2005, is now roughly 90% occupied. “We are doing so well that we are expanding the mercado,” Legaspi says, referring to the thriving centers dominated by very small businesses run from attached stalls that are a popular feature of many Latino-themed centers. “It’s all cash economy. They pay their bills with cash. The banks and credit card companies are not involved. It’s true capitalism, and it works.”

    Latino shoppers, he suggests, also have been less impacted by the stock market collapse than other consumers. After all, relatively few, particularly immigrants, have large investments on Wall Street. In addition, even if they have lost their jobs, particularly in construction, Legaspi adds, they tend to pick up other employment, even at lower wages, often in the underground economy. “They get paid in cash, and they pay in cash.”

    Another key advantage lies in close connections many ethnic merchants have to economies such as Korea, China, Taiwan and India, where enormous amounts of cash have accumulated in recent years. “Many of these merchants have family and other ties to the international economy,” observes Thomas Tseng, a principal at New American Dimensions, a multicultural marketing group in Los Angeles.

    The media focuses on huge surpluses spent by major corporations or sovereign wealth funds, but a substantial amount of the money being made in places like China or India also accumulates into family networks. They often funnel this cash to relatives’ enterprises in North America, where many also retain second homes and often educate their children.

    This combination of cash-spending customers and well-endowed investors explains why in many places, the immigrant market remains one of the few still aggressively expanding. Even in thriving Houston, notes architect Tim Cisneros, the credit crunch has stopped many projects by clients from the mainstream real estate development community. In contrast, Cisneros’ Chinese, Indian and other Asian clients continue to build and expand.

    “I am doing an Asian-Mexican sushi chain that isn’t hurt by the credit crunch since they are doing this out of the checkbook,” Cisneros told me. “And the Indian reception hall I am building is doing well. The action is from these developing companies much more than the old Anglo groups.”

    If the immigrant markets helping Cisneros through the credit crush represent one of the few bright spots in the present, they also will likely become even more important in the future – even if immigration slows down dramatically. By 2000, one in five American children already were the progeny of immigrants, mostly Asian or Latino; by 2015, they will make up as much as one-third of American kids.

    Given these underlying trends, look for developers like Dr. Hsu to keep prescribing more of what she calls “multicultural shopping centers,” focused both on immigrants and their children. As long as these newcomers, both affluent and working class, continue to save, covet cash and work hard, they are likely to continue thriving through the recession and beyond.

    “We are leased up, and we think the supply [of shopping] is not enough,” Hsu says. “We are ready to go Saturday and feel great trust in the future.” At a time when most mainstream American retailers are hiding under their desks, such sentiments are not only welcome; they may also indicate who might be leading the retail recovery when it finally comes.

    This article originally appeared at Forbes.com.

    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.

  • Island of Broken Dreams

    A The New York Times editorial wonders why foreclosure rates are so high in the two Long Island counties it rightly calls the “birthplace of the suburban American Dream.” After all, the area has “a relative lack of room to sprawl.” which in Times-speak should be a good thing, since “sprawl” is by definition both bad and doomed.

    Yet it is precisely the constraints on new housing that has served as a principal cause for Long Island problems. Long Island was the birthplace of the suburban American Dream, in principal measure because new housing development was permitted to occur at land prices reflecting little more than its agricultural value plus a premium to the selling farmer. The same financial formula expanded the American Dream throughout the country and many parts of the world, at least until urban planners were able, in some instances, to drive the price of land so high that housing was no longer affordable to average households.

    Indeed, land use regulation throughout the New York suburbs downstate, in New Jersey and Connecticut has long since rationed land for development. As a result, once loose mortgage loan standards became the practice, house prices escalated. Throughout the New York metropolitan area, the Median Multiple – median house prices divided by median household incomes rose from 3.2 to 7.0, in the decade ending in 2007. In traditionally regulated markets – like Long Island in the past and still much of the country in the present – the Median Multiple has been 3.0 or less for decades.

    Various regulations have led to this precipitous decline in the area’s housing affordability, virtually all of them falling under the category of “smart growth.” There are the regulations that have placed large swaths of perfectly developable land off limits for housing. There are large lot zoning requirements that have forced far more land than the market would have required to house the same number of people, producing an entirely artificial “hyper-sprawl.” Much of this ostensibly has been done in the interests of controlling “sprawl.” Where quarter acre lots would have been the market answer, planning authorities often have required one-half acre, one-acre and even more as minimum lot sizes.

    In fact, however, Long Island’s housing cost escalation has not been visited anywhere with more traditional liberal land use policies. From the first world’s three fastest growing metropolitan areas of Atlanta, Dallas-Fort Worth and Houston, to much of the South (excluding Florida), to the Midwest, housing prices rose little relative to incomes during the period of profligate lending. The difference, of course, was that the liberal land use regulations in these places allowed sufficient housing to be built that supply kept up with demand, thus accommodating new demand. Speculators saw no potential windfall profits to bring them into the market.

    The Times is not alone in misunderstanding the dynamics of land use regulation and housing affordability. But there is a very clear, demonstrated relationship – where land use regulations constrain development, prices are forced upward. This is because scarcity raises prices of goods that are in demand.

    Fortunately, not everyone at the Times shares the wrongheaded views of its editorial department. Had the editors walked down the virtual hall of their own department, or taken the train down to Princeton, where he lives, they would have encountered someone who understands all this. He is Paul Krugman, Times economic columnist and, much more importantly, Nobel Laureate. In August of 2005, Krugman noted that house prices had escalated strongly in the more regulated markets, but had changed little in the less regulated markets. He further rightly associated the less regulated markets with more sprawl, not less. In January of 2006, Krugman noted: that the highly regulated markets accounted “for the great bulk of the surge in housing market value over the last five years.” Krugman further predicted “a nasty correction ahead.”

    Meanwhile the non-Nobelist Times also make a point to bemoan the high levels of racial segregation on Long Island. Is it beyond them to understand that the very policies they favor are at fault? When one considers that ethnic minorities tend to have lower than average incomes and that land rationing nearly doubled the price of housing relative to incomes, it’s not surprising that they have not moved en masse to expensive places like Long Island, with the exception of Hempstead and a few other pockets. There are costs to restrictive land use regulation. One of the most pernicious consequences is the denial of the American Dream to groups of citizens that have so long been excluded from the economic mainstream.

    It is time to recognize that the regulations that raise the price of housing – however well-intentioned – work against housing affordability and represent one of the prime contributors to the high levels of foreclosures in many communities across the country.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life”

  • Influence of ‘Creative Class’ Ideas in Sweden

    By Nima Sanandaji, Johnny Munkhammar, and Peter Egardt

    The American academic Richard Florida has gained international attention for his theories about the “creative class”. According to Florida, the key to urban success lies in attracting certain groups of people, such as artists, scientists and twenty-something singles. Florida insists that this can be accomplished through nursing a specific type of culture within a city: hip cafes, art galleries and other manifestations of indigenous street-level culture.

    Florida’s theories have become rather popular in Sweden, the country which tops the list of his creativity index. In a recent study about urban development in Sweden, we have found that Florida’s ideas mainly attract the political left. The Social Democratic Party, as well as the former communist party, embrace Florida’s ideas on their party web pages. The Social Democrats go as far as to quote Florida in a parliamentary bill.

    In Sweden, Florida’s ideas are used by those who wish to argue that public funding of cultural events, rather than a competitive business climate, is the way to achieve economic growth. These urban planners quote Florida in their development strategies, shifting focus from business friendly reforms to attracting “unusual shops” in order to bring development to communities struck by high unemployment and other social ills.

    Swedish cities thus risk choosing the same strategy as Berlin, where the focus of administrators for many years has been to attract art galleries, fashion shows and hip cafes, but where basic conditions for development have been neglected. The bureaucracy in Berlin has a less-than-business-friendly attitude, and taxes for those with typical means of income, as well as for entrepreneurs, remain high.

    The result of these policies, aiming to market Berlin as “a city of glamour” to attract the creative class, has been rampant unemployment. Between 2000 and 2006 The European Union spent close to 2 billion US dollars (1.3 billion Euros) to attempt to curb the economic crisis in the city.

    Florida has, together with two Swedish co-writers (amongst others), recently published an index of creativity in Swedish municipalities. The results of this index are interesting to examine. In accordance with observations made by Harvard Professor Edward L. Glaeser, Florida’s definition of the creative class builds upon the inclusion of well educated people; municipalities with high percentages of educated people are defined as being creative.

    However, in many cases, the rankings in Florida’s Swedish index have little to do with actual creativity or the fundamentals for growth and progress within a municipality. Among 290 Swedish municipalities, the one best fitting Florida’s criterion of creativity is Södertälje.

    This is quite astonishing, since Södertälje is seldom seen as a role model for other municipalities. Among the 26 municipalities in the Swedish capital region, Södertälje has the second highest unemployment rate. The business climate there ranks, according to the Confederation of Swedish Enterprise, as only the 199th most business friendly amongst Swedish municipalities.

    The municipality in the capital region that has the highest unemployment rate is Botkyrka. It is number 233 in business climate. In Florida’s index, however, Botkyrka gains a respectable position as the 22nd most creative municipality.

    While places with failing business climates, high unemployment, high crime rates and overall failing development can be ranked as highly creative in Florida’s Swedish index, actual creativity is not always acknowledged.

    Gnosjö is a small Swedish municipality made famous by its frequent use as an example of how a spirit of entrepreneurship can lift up a community. The unemployment rate is much lower in Gnosjö than in the rest of Sweden. Gnosjö is indeed full of creativity, but in Florida’s index it only ranks as the 141st most creative municipality. Florida’s index fails to catch the real origins of creativity and cultural development in Sweden.

    Abroad, many believe Sweden to be the very showcase for social democratic welfare states. However, ambitious reforms implemented during the past few decades have transformed Sweden into a competitive economy with an increasing degree of economic freedom and strong growth.

    In the wake of this development, culture, fine food and the arts have all blossomed in Swedish cities. Tourists, as well as businesses, are attracted not least to the capital city of Stockholm. The strategy underlying this development has been based on a sound business-and-growth-friendly policy orientation, not a Berlin style emphasis on public subsidies of culture over families and businesses. Cultural development has occurred as the result of a growing economy, not the opposite.

    Nima Sanandaji is President of the think tank Captus. Johnny Munkhammar is President of the consulting agency Munkhammar Advisory. They are authors of a report for the Stockholm Chamber of Commerce about urban development. Peter Egardt is President of the Stockholm Chamber of Commerce.

  • Up Next: The War of the Regions?

    By Joel Kotkin and Mark Schill

    It’s time to throw away red, blue and purple, left and right, and get to the real and traditional crux of American politics: the battle for resources between the country’s many diverse regions. How President-elect Barack Obama balances these divergent geographic interests may have more to do with his long-term success than his ideological stance or media image. Personal charm is transitory; the struggle for money and jobs has a more permanent character.

    To succeed as president, Obama must find a way to transcend his own very specific geography – university dominated, liberal de-industrialized Chicago – and address the needs of regions whose economies still depend on agriculture, energy and industry. In the primaries, most of these went to Sen. Hillary Rodham Clinton.

    The geographic concentration of manufacturing prepared by Praxis Strategy Group presents a particular complex roadmap for the new president. Although Indiana and Wisconsin top our list of states most dependant on manufacturing employment, the next four are either in the Great Plains, Iowa, or in the south, Arkansas, Alabama and Mississippi. In fact eight of the top 13 industrial states on a per capita basis are located in the South; only one of these manufacturing hotbeds, North Carolina, supported the new president.

    In terms of industry, the auto industry represents the most difficult challenge. Great Lakes political leaders, like Michigan’s clueless Gov. Jennifer Granholm, now a top Obama advisor, will twist the new president’s arm to bail out the crippled U.S.-based auto manufacturers, essentially socializing the industry. Yet in bailing out Detroit, Obama could undermine a thriving, growing auto complex developing in the old Confederacy and along the southern rim of Midwest.

    Although also hit by the recession, companies like Toyota, Honda, Hyundai, Mercedes and BMW have brought unprecedented prosperity to these areas, which include some of historically poorest regions of the country. This is also where many of the most fuel-efficient “green” vehicles in America are being produced. The workers they employ may not belong to the unions so influential among liberals, but their interests matter mightily to Democrats as well as Republicans who represent them.

    Energy issues may be even more challenging from a regional perspective. The nation’s fossil fuel resources are heavily concentrated in the west and South, led by Wyoming, Alaska, West Virginia, Oklahoma, Louisiana, New Mexico, Texas, Montana, North Dakota and Kentucky. Sen. Obama only took one of these states, New Mexico. The new president’s statements against coal and other fossil fuels were not popular in areas where these provide not only reliable low cost energy but also well-paying jobs.

    Not just oil-riggers, heartland miners and coal companies have an interest in an expansive approach to energy policy. If enacted, Obama’s “cap and trade” proposals could raise the cost of Midwestern energy, largely coal-based, by between 20 to 40 percent, according to a recent study by Bernstein Research. This would create yet another disadvantage for U.S. manufacturers, particularly against largely unregulated competitors in developing countries.

    In contrast, reliable and affordable domestic energy supplies from all sources – including from nuclear facilities – would be a major boon manufacturers across the country. Obama must recognize that many states with coal and oil reserves also possess strong wind and bioenergy potential. He should favor expansion of both. The resulting lower cost electrical power could boost an incipient electric car industry that may be the last, best hope for hard-pressed General Motors.

    Here’s another case where regional politics could prove sticky for Obama. Any attempt to boost non-renewable energy supplies would run into opposition from the largely coastally-centered green lobby. These groups generally oppose virtually any fossil fuel development, and most remain hostile to nuclear power. While well-intentioned, increasingly restrictive environmental regulations on manufacturing could push production to parts of the world with dirtier industries and over reliance on shipping long distances. The net reduction in carbon emissions, as a result would seem somewhat ephemeral.

    The current recession and falling energy prices could provide political cover for Obama to shift his energy policies. Hard times have already eroded support for strict curbs on greenhouse gases in Europe and strong advocacy for carbon taxes clearly hurt the Liberals in the recent Canadian elections. A similar reaction could also emerge in this country, excepting the deepest blue coastal enclaves.

    Finally there remains one other regional constituency that must be addressed, that of the financial community. Our analysis shows securities and commodity trading industries to be regionally concentrated, with the largest clusters in greater New York, vice President-elect Biden’s home state of Delaware, followed by New Hampshire and Illinois. They are all now bedrock “blue states” and backed Obama generally by large margins.

    Yet this presents yet another regional dilemma. Simply put, the rest of the country detests Wall Street. They see the bailout benefiting big players in cities like New York or Chicago, but doing little for smaller banks who do much of the lending outside the big money centers. This sentiment cuts across party lines, particularly in the West and South, as the initial anti-bailout votes in the House show.

    All presidents face such regional challenges in governing this vast and diverse country. The weak politicians, like George W. Bush, tend to fall back on an ever-narrower band of regional alliances that, once threatened, easily break apart.

    Transformative leaders, like Franklin Roosevelt and Ronald Reagan, learn to extend their appeal to as many industries and regions as possible. In the next four years, we will get to see what kind of leader Barack Obama intends to be.

    This article originally appeared at Politico.com

    Joel Kotkin is a Presidential Fellow at Chapman University and executive editor of NewGeography.com. Mark Schill, a strategy consultant at the Praxis Strategy Group, is the site’s managing editor.

  • The Case for Optimism on the Economy

    With the prospect of a long, deep recession staring us in the face, are there any reasons for optimism?

    You betcha!

    The central characteristic of the American economy – resiliency – is now being severely tested. But there are ample reasons to believe it will pass that test. Simply put, even after this crisis the US will still have the world’s largest, most dynamic, most productive, most innovative, most technologically advanced, most competitive and most venturesome economy. Combined with population and household growth (the only first-world, industrial economy that can so claim), the US still has the best prospects for sustainable economic growth (which is a good thing, because we will need to return to a growth path to be in a position to solve the many challenges we will be facing in the years and decades ahead).

    What is the case for optimism? Past experience and the fundamentals.

    Globalism
    “If sensible rescue efforts continue – and they will – the immediate crisis will quickly pass. Shell-shocked businesses and consumers won’t recover rapidly from the trauma of recent months, especially as we now cope with recession. But the downturn shouldn’t be prolonged: The economy here and those overseas should start to pick up no later than next spring.” So writes Steve Forbes, publisher of the magazine that bears his family name, in an essay entitled “Capitalism Will Save Us.”

    Despite the crisis, Forbes points out, the global economy still retains enormous strengths. Between the early 1980s and 2007 we lived in an economic Golden Age: worldwide, 70 million people a year were joining the middle class. Even the much-maligned US economy has been doing well in recent years. Between year-end 2002 and year-end 2007 US growth exceeded the entire size of China’s economy.

    As a result, the world is flush with cash. It’s frozen because of fear, but the important things is: cash is there. And the US remains the premier destination for investment capital. So the global boom should resume next year, slowly at first and then with increasing momentum.

    One word of caution: if we continue down the path of criminalizing business failures (think KMPG, Arthur Andersen), we risk undermining the basic idea of limited liability, and the risk-taking it encourages and engenders. That would be catastrophic. Limited liability is arguably the single most important innovation of the modern age, the most significant enabler of the explosive economic growth, development and widespread affluence we have seen since the 19th century. The punitive and costly Sarbanes-Oxley Act, passed in a fit of Congressional pique to punish financial crime, has done no good but lots of harm.

    Monetary Policy, Energy Costs, Housing
    Jeffrey Lacker of the Federal Reserve Bank of Richmond agrees growth will return next year; he expects the US economy to regain positive momentum sometime in 2009 for several reasons. First, monetary policy is now quite stimulative. The federal funds target rate is 1 percent, below the expected rate of inflation. Second, the major shocks that dampened economic activity this past year have already subsided or are in the process of doing so. Energy prices have reversed most of the earlier run-up; that will free up a portion of consumer budgets for spending on other goods and services. And third, the drag from housing seems likely to lessen in the next year, and in fact, we should see a bottom in housing construction around the middle of 2009.

    These are trying times, admits Lacker, but we have weathered economic downturns and banking distress before, both nationally and globally. The fundamental creative process that drives innovation and improves well-being over time has not been mortally wounded, and that bodes well for the long-term.

    Velocity
    If there is a slowdown in the turnover of money – say a 5% decline – the impact on nominal GDP growth is no different than if the money supply itself shrinks by 5%. And that’s exactly what caused the sharp drop in growth (with some panic thrown in for good measure). This sharp drop in growth is due to a temporary drop in velocity, not a typical recession caused by fundamental, economy-changing events such as higher tax rates, tighter money, protectionism or other public policies that stifle innovation or entrepreneurship.

    But there is good news. After ham-handing the rescue operation for months, the cavalry has finally arrived. The Fed has injected massive amounts of liquidity, driving the federal funds rate to roughly 1%.

    Moreover, the Treasury Department has drawn a line in the sand. It has decided that no more banks will fail due to a lack of liquidity. Despite the downside this represents for the ideal of free markets, these actions by the Fed and Treasury will help unlock the credit markets and turn velocity upward. With velocity and the money supply both heading up, a “V” shaped recovery is likely.

    Rather than being the first of several negative quarters of economic growth, economists like Brain Wesbury and Robert Stein of First Trust Advisers predict a healthy period of growth in the second half of 2009. To be precise, they expect real GDP to be flat in Q1-2009 but then grow at an average annual rate of 3% in the final three quarters of next year, with only a temporary hit to earnings. The Dow Jones industrials average should recover to 11,000 by the end of this year, with another 20% climb in 2009 all the way up to 13,250.

    We Have Been Here Before
    The US economy has blossomed for 25 years, and can and will again. If, however, we regress by adopting protectionism, higher taxes, too much regulation and other key policy mistakes, the effect on our economy could be devastating. With the prospect of a new Democratic administration and Congress, these are not insubstantial fears. The Bush tax cuts will expire after 2010 if action is not taken to extend them. The capital gains tax rate will go up; the dividend tax rate will go up; the death tax will jump from 0% to 55% in 2011. These automatic tax increases we have the makings of an economic calamity. Same goes for increased protectionism and new regulations. But it will be with eyes wide open.

    Innovation is Key
    Pessimism about America’s future has been growing, at least until the recent election of Barack Obama. Yet beneath the gloom, economists and business leaders across the political spectrum are slowly coming to an agreement: Innovation is the best – and maybe the only – way the US can get out of its economic hole. New products, services, and ways of doing business can create enough growth to enable Americans to prosper over the long run.

    But here’s the conundrum: If money alone were enough to guarantee successful innovation, the US would be in much better shape than it is today. Since 2000, the nation’s public and private sectors have poured almost $5 trillion into research and development and higher education, the key contributors to innovation. Nevertheless, employment in most technologically advanced industries has stagnated or even fallen.

    The new field of innovation economics addresses this gap between spending and results. Economists are increasingly studying what drives successful innovation to learn how companies can get more bang from the bucks spent on R&D and higher education.

    One of the hottest areas in the field is the use of government aid to cultivate “innovation clusters,” or collections of local companies and academic institutions working together to create new products and processes. Ideally, those alliances would build on existing expertise in a region.

    It’s possible the longstanding partisan debate over tax rates and budget deficits may soon become a sideshow. If it is realized that the main purpose of economic policy is to spur innovation and growth, then the two political parties will have to stop fighting and coalesce around policies that promote innovation.

    So let’s keep things in perspective. Reports of our demise are premature.

    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.

  • European Housing Woes

    While the decline in housing prices in America has been making news for some time now, less attention has been paid on this side of the Atlantic to the downturn in European housing. The housing market in Europe, much like that of the United States, “soared during the first half of this decade, rising far beyond the levels that you’d expect, based on traditional economic factors.”

    The fallout from the bubble is beginning to look the same, if not worse. According to Newsweek, over the first six months of 2008, housing prices in several European nations, including the United Kingdom, Spain, Sweden, and Norway, have fallen “at a faster rate than is occurring in the United States.” According to one analyst interviewed by Newsweek, the European downturn is still in an “early stage”.

    Eastern Europe is also seeing major fallout from deflation of the real estate bubble. According to Reuters, nations such as Bulgaria, Romania, and the Baltic republics of Latvia, Estonia, and Lithuania, have seen property prices plummet as easy access to credit has dried up. A Bulgarian property agent interviewed by Reuters reported that “No-one is buying. Everything has frozen”. The credit crunch has led to fears of “a wave of bank and currency crises,” which might necessitate IMF bailouts of several Eastern European nations. In the past two weeks Hungary and Ukraine have been bailed out, with the IMF providing loans “totaling $32 billion, in exchange for belt-tightening.”

    A recent report on European housing by Stratfor argues that the housing bubble faced by Europe was larger than that seen in the United States, and in correcting could lead to a “long-term deflationary spiral”. The report points out that in addition to facing overheated housing markets, Europe, over the long-term, faces a “poor demographic situation,” with a birth rate well below replacement level. According to Stratfor, this situation “will dampen the demand for housing in the long term and possibly create a deflationary spiral in the housing market”.

    Not all analysts are so gloomy, with some arguing that “the practice of giving mortgages to less credit-worthy buyers,” never reached the same levels in Europe, and that while prices did boom, there is not a “vast glut of never-lived-in houses sitting vacant on the market,” which should help to mitigate the situation. Regardless of the severity, it appears clear that Europe is set to face a continued period of real estate value contraction.

  • The Change We Need – Part II: Will We Sustain The Current Economy, Or Create A Sustainable Economy?

    Yesterday, Rick Cole discussed the theoretical basis for the most effective kinds of economic change. Today, he provides specific suggestions. – The Editors

    No brief outline can do justice to weaving together the potentially convergent strands that compose the key elements of the remaking of the American economy. None of the policy prescriptions here are original, but it is important to see them as complimentary parts of a larger whole:

    •GREEN BUSINESS: This means shifting from thinking of “green jobs” as being generated by alternative energy to an understanding that, in the decade ahead, every single job in the American economy will be “green”, as we ruthlessly pursue less wasteful, more sustainable and more productive business practices. This is primarily the domain of the private sector, but Federal policies that deal with taxes, regulations, research, purchasing and grant-making must all be tweaked to actively promote green practices, rather than inadvertently hinder them.

    •SMART GROWTH: The suburban, auto-dominated landscape of the past fifty years is not only unsustainable on a world-scale, it won’t work for a post peak oil, post carbon America. Alternate fuels are not enough, nor will public transit work in sprawled suburbs. Chicago is the headquarters for the Congress for the New Urbanism, a largely apolitical movement of architects, planners, developers and activists promoting a revival of traditional town and city building that emphasizes mixed-use, transit-oriented design at every scale of development from neighborhood to metropolis. While catching on in cities and states across the country, the movement remains largely marginalized in Washington. One exception is Congressman Earl Blumenauer, an early Obama backer from Portland, Oregon. Former Milwaukee Mayor John Norquist has also laid out a program for reversing the Federal government’s half century of counter-productive policies.

    •REGIONALISM: Obama’s speech to the US Conference of Mayors embraced this powerful focus on metro regions as the engines of global growth. Bruce Katz of the Brookings Institution has been one of its leading theoreticians, and former HUD Secretary Henry Cisneros one of its most eloquent champions. Denver, Seattle, Salt Lake City, Sacramento, Portland, Chattanooga and St. Louis have emerged as models for metro/suburban collaboration to promote infrastructure investment, economic development and land use planning. Europe has pioneered this kind of regional collaboration to stay competitive in the global economy. There is also a powerful social equity dimension to this movement, which ensures that inner cities will not be left of out the regional efforts to improve education, reinvest in older communities, and focus on the creation of high-wage, high-value jobs.

    •TRANSPORTATION: In 1991, Senator Pat Moynihan spearheaded the least-heralded major domestic policy shift of that decade, the landmark ISTEA omnibus transportation bill. Unfortunately, the Clinton Administration failed to follow up on it, and left highway expansion as the continuing Federal policy direction, instead of investing in matching the investment by all other advanced economies in both high-speed rail and public transit. This has been compounded by the Bush Administration’s embrace of libertarian market mechanisms for funding future transportation investment. This failure has fueled sprawl and its appetite for oil consumption and greenhouse gas emissions. The new administration will need to start where ISTEA left off to rebuild our goods- and people-moving capacity 0n an environmentally and economically sustainable model.

    •HUMAN CAPITAL: Obama’s education program needs to be place-based in a way that directly ties into the drive to restore American competitiveness. Mayors around the country have followed the lead of Chicago’s Richard Daly in seeing the revival of K-12 schools as fundamental to restoring America’s great cities as engines of new wealth creation, and not just gentrified havens for young professionals amongst crime-ridden slums. One of Obama’s successes as an organizer was to establish a job training program in the projects. But without a national commitment to human capital, we won’t reduce the underclass, assimilate immigrants, and provide the workforce that can outperform the hard-working offshore workforce clamoring for what were once American jobs.

    •INNOVATION: Obama’s popularity in Silicon Valley mirrors his embrace of venture capital investment in American jobs. The Japanese failed to shake off their decade-long slump because they remained tied to “pork barrel” public works stimulation of their economy. Harnessing private investment and entrepreneurship to rebuild America’s cities, older suburbs and essential infrastructure is essential not only to economic success, but to political success as well. We must find a way to redeploy the huge brainpower and speculative investment that has gone into financing consumer debt and exotic credit mechanisms into rebuilding America’s cities and productive economy.

    •NEW ORLEANS: Of all of George Bush’s public relations stunts and policy failures, none is crueler than his broken promise to rebuild that city. Nothing would be a more powerful counter-point to those wasted years than to use the New Orleans region as a model for a rebuilt, muscular economy that puts people back to work in high-wage, high-value jobs. Of course, the default choice is tourism, gambling, and decay. But great cities are not primarily sinkholes for consumption. They’re centers of enterprise, trade and the generation of wealth.

    This is simply a superficial survey of the shape of a fundamental reshaping of the American landscape and economy that could emerge from the wrenching changes ahead. “Change we can believe in” will need to look beyond Washington and its sound bite pre-occupations and stale wedge issues. It will need to harness local movements, as well as Mayors, Council members, Governors, and State Legislators to experiment with and implement a new model throughout our federalist system. Obama carries the unique advantage of having been a community organizer and a state legislator. He can be the model and the inspiration for a broad-based movement for change that is not solely reliant on Washington politics or policy.

    The first 100 and the first 1000 days of the new administration will be a time of harsh testing, for Washington, and for the country. We are too big and complex a nation for any administration to chart a single course for our gargantuan economy and our diverse geography.

    But a clear course that favors investment in capacity over spending on consumption, and a commitment to sustainability over business as usual could have a profound impact on the shape of American metropolitan regions and the communities they contain. That is “the change we need”.

    Read: The Change We Need: Will We Sustain The Current Economy, Or Create A Sustainable Economy? Part I

    Rick Cole is the City Manager in Ventura, California, where he has championed smart growth strategies and revitalization of the historic downtown. He previously spent six years as the City Manager of Azusa, where he was credited by the San Gabriel Valley Tribune with helping make it “the most improved city in the San Gabriel Valley.” He earlier served as mayor of Pasadena and has been called “one of Southern California’s most visionary planning thinkers by the LA Times.” He was honored by Governing Magazine as one of their “2006 Public Officials of the Year.”

  • The Change We Need: Will We Sustain The Current Economy, Or Create A Sustainable Economy? Part I

    The Change We Need will run in two parts. In Part I, Rick Cole lays out the kinds of changes we need, and why. Part II outlines his specific policy prescriptions.- The Editors

    Will this historic election alter the American physical landscape as well as the electoral one? Much will depend on whether the Obama Administration will focus on trying to revive the economy or move to reshape it.

    Bold leadership sounds great in the abstract, but embarking on profound changes in the economy is both politically risky and economically daunting. Government, especially the one the new president will inherit, is severely limited in its competence and capacity to reshape the American share of the global economy.

    The easier option is to minimize the “change we need,” and aim for a “kinder, gentler, greener and more regulated” version of the Enron economy bequeathed by President Bush. We may be facing the most profound economic crisis since Franklin Roosevelt took office, but so far, instead of investing in a more sustainable economy, the Democrats seem to be focused on a “stimulus” response to boost spending.

    This is essentially the path followed over the past two decades without success by Japan’s ruling Liberal Democrats. In reaction to the Japanese real estate and financial meltdown in 1989, the party essentially opted to “bail-out” the status quo. The cost has been nearly twenty years of economic anemia and political gridlock.

    As Japan found, a broken economy can’t be successfully “stimulated.” A patchwork of single-issue nostrums (alternative energy, public works spending, health care reform) will not put Americans back to work and America back on track.

    Why not? Why isn’t it possible to revive the Clinton formula for a soaring stock market, nearly full employment and low interest rates? The answer, of course, is that neither the global economic crisis nor America’s vulnerability are sudden or surprising. The problems are deep-seated and structural, and both Clinton and Bush steered around them by postponing difficult, but necessary sacrifices.

    The Republicans, of course, are most immediately and egregiously culpable. Their foreign wars, their reckless deficit spending, their unconscionable tax cuts, their laissez faire dismantling of so much of the middle class safety net, their disastrous energy policies, and their injection of cheap money into a housing/consumer spending bubble are all proximate causes of the stunning decline of American economic prowess. But the long-term, Democratic failure to chart a different course leaves the next president unprepared to offer a comprehensive alternative that makes sense in the global economy in which we now find ourselves.

    The inescapable mathematics of our situation is that America runs on $2 billion a day of money borrowed from abroad. That long-running profligacy has made us into the world’s largest debtor nation by far. For the first time in our history, we are in a position where we cannot reflate our way back to prosperity.

    The retooling of America we face will require a president with an approach as bold and flexible as the New Deal, and a re-investment in real places , instead of the exotic and deracinated instruments that Warren Buffett has derided as “financial weapons of mass destruction.”

    The magnitude of the unfolding crisis offers glaring dangers and remarkable opportunities for embarking on a long-term rebuilding of our economy on a far more solid and sustainable foundation.

    One quickly forgotten episode in the campaign gives particular “hope” that Obama may ultimately choose the more difficult, but more promising, path. At a crucial juncture during his primary battle with Hillary Clinton, he bucked both her and John McCain and their blatant pander of a “gas tax holiday” to offset skyrocketing prices at the pump.

    “This is what passes for leadership in Washington,” he responded right before the important Indiana primary. “Phony ideas, calculated to win elections instead of actually solving problems.”

    He went on to acknowledge, “I wish I could stand up here and tell you that we could fix our energy problems with a holiday. I wish I could tell you that we can take a time-out from trade and bring back the jobs that have gone overseas. I wish I could promise that on day one of my presidency, I could pass every plan and proposal I’ve outlined in this campaign. But my guess is that you’ve heard those promises before. You hear them every year, in every election.”

    Such courageous “straight talk” must also acknowledge that we can’t work our way out of unprecedented levels of consumer and public debt by borrowing money. That way lies Argentina. President Obama is going to have to deliver big time on the somewhat hazy promise of rebuilding our economy with green jobs, but at a scale and scope that few have dared even suggest so far. He is going to have to do that in the face of almost irresistible political clamor to go the other direction: to somehow keep the casino economy going by cutting taxes, propping up banks, stimulating consumer spending, and keeping the American people on the job doing things that make our problems worse, from building freeways to financing more suburban subdivisions so we can continue to export a trillion dollars a year to oil exporting nations.

    Building a sustainable economy is such a huge, complicated, politically challenging endeavor, that it will take every bit of Obama’s personal charisma, and leadership abilities, and the backing of an unprecedented movement of support.

    Fortunately, however, there is a vast untapped source of innovative and promising ideas and practitioners working off the radar screen of the national political class in Washington and its small-minded media annex. They have laid out a framework for restoring American competitiveness that is based on investment rather than consumption – on sustainability rather than short-term fixes.

    Read: The Change We Need – Part II: Will We Sustain The Current Economy, Or Create A Sustainable Economy?

    Rick Cole is the City Manager in Ventura, California, where he has championed smart growth strategies and revitalization of the historic downtown. He previously spent six years as the City Manager of Azusa, where he was credited by the San Gabriel Valley Tribune with helping make it “the most improved city in the San Gabriel Valley.” He earlier served as mayor of Pasadena and has been called “one of Southern California’s most visionary planning thinkers by the LA Times.” He was honored by Governing Magazine as one of their “2006 Public Officials of the Year.”

  • Surprise! For Fiscally Responsible, Housing Remains Good as Gold

    Back in 2002, I compared housing to gold. The surge in home buying in the 2000s looked like the 1970s rush to buy gold. Like the current times, the 1970s were a time of great economic uncertainty, followed by the rapid inflation of prices in the 1980s. Regardless of the actual return on investment, many people bought gold as a hedge against financial and economic turmoil. When Americans bought houses in the 2000s, they believed homes would provide some of that same protection, in addition to being a place to live.

    Today it is fashionable to believe that this shift to housing was a tremendous mistake. Yet our research suggests that, if done responsibly, investments in real estate have continued – even amidst the severe bubble in certain locales – to serve as a decent hedge against hard times. Real estate may have taken a dive, but, over time, the market has remained even further under water. The reality is that the percentage of regular (conventional and prime) mortgages past due and 90 days past due were higher in 1984 to 1989 (average 0.59%) than they were in 2007 (0.49%). The fact that foreclosures in regular mortgages spiked upward in 2007 and 2008 may have more to do with the Failure of Financial Innovation than with the behavior of homeowners. (Notice that the past due rate is historically much higher than foreclosure rate and they are now merging; and that regular mortgage interest rates remain at historically low levels.)

    Let’s look at the record. Since the turn of the 21st century, the net worth of Americans grew six times faster than disposable income. Initially this was more the result of the increase in the value of financial assets than real estate. However, while financial assets dipped in value in 2002, real estate did not, hence the perception that houses could be a better “investment” than stocks and bonds. Real estate values continued to grow at a rate more than twice as fast as income. Last year the value of financial assets dropped 2.9%, but real estate assets dropped by only 1.4%.

    The relationship between real estate shares and stock values has changed direction and become more volatile. From 1945 through 1980, the DJIA moved with household investment in real estate and then in the opposite direction through about 2002. In 2003, 2004 and 2005, DJIA and household real estate moved in the same direction. Now, it seems to be shifting again, ironically again in favor of real estate.

    The stock market was never the “safe” investment. You could have invested in about 400 shares of General Motors stock at $83 a share in 2000; it closed at $3 today (with an analyst’s target price of $0). Or you could have made a down payment on a $315,000 condo in Santa Monica; and sold it this year for $680,000. When capital and productivity are again allowed to surge, we can expect the housing market to rebound first and more strongly than the stock market. Right now even amidst the perilous economic news, we believe the turn back to real estate is just beginning, although the effects probably won’t be fully felt till 2010. We see evidence of potential buyers sitting on the sidelines. There was already a surge in homes sales this summer as some buyers must have judged prices to have adjusted sufficiently in some regions.

    So then the question is: did the New Gold strategy work? Has homeownership shielded Americans from economic uncertainty? We think the answer is – surprisingly – “yes”. As financial markets have become increasingly volatile, regular Americans were able to access the value of their homes. The aggregate value of mortgages increased from 44.4 percent of household real estate values in 2002 to 53.8 percent at the end of the first quarter of 2008. Note that this is not merely a result of falling real estate values. Aggregate real estate holdings increased in every year except for the last one.

    When real estate values slowed down, mortgage values slowed down even more. And, obviously, it isn’t because the bank reduced the value of the mortgage! It can only be because homeowners continued paying on existing balances.

    Before the “subprime crisis”, household real estate values grew at an increasing rate – from 9.9% in 2003 to 11.8% in 2004. But the growth of mortgages slowed from 14.1% in 2003 to 13.9% in 2004 and to 13.1% in 2005 when the growth of household real estate remained constant. What was happening here? I think millions of responsible American households were paying into equity. And when things got tough in 2007, some of them dipped into that equity. Not to remodel the kitchen or to buy a boat; but to expand their small business or start their kids in college. These homeowners are “the rest of us who have been prudent and responsible” as Roger Randall called them in a Letter to the Editor of USA Today (November 11, 2008). Mr. Randall asks the question: “Where can the prudent sign up for rewards?” The answer is: Anyone who protected their credit score over the last 8 years can still get a “no-doc” mortgage and bank credit for their small business. When a mortgage broker I know lamented that he couldn’t write a mortgage for anyone with a credit score under 600, I asked: “If someone has a credit score of 585, should they be buying a house?” Of course, the answer is “no.”

    Sure, you can deride this activity as Americans “treating their homes like piggy banks.” But the reality is that millions of Americans planned it this way. With a fiscally responsible approach to homeownership and financing, they have been and will continue to be able to insulate themselves from the worst of economic times. Good as Gold!

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Dr. Trimbath’s credits include appearances on national television and radio programs. Dr. Trimbath is a Technical Advisor to the California Economic Strategy Panel and Associate Professor of Finance and Business Economics at USC’s Marshall School of Business. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute and Senior Advisor on the Russian capital markets project for KPMG.