New Geography

Category: Economics

  • No More Urban Hype

    Just months ago, urban revivalists could see the rosy dawn of a new era for America’s cities. With rising gas prices and soaring foreclosures hitting the long-despised hinterland, urban boosters and their media claque were proclaiming suburbia home to, as the Atlantic put it, “the next slums.” Time magazine, the Financial Times, CNN and, of course, The New York Times all embraced the notion of a new urban epoch.

    Yet in one of those ironies that markets play on hypesters, the mortgage crisis is now puncturing the urbanists’ bubble. The mortgage meltdown that first singed the suburbs and exurbs, after all, was largely financed by Wall Street, the hedge funds, the investment banks, insurers and the rest of the highly city-centric top of the paper food chain.

    So, now we can expect some of the biggest layoffs and drops in income next to be found in the once high-flying urban cores. In New York alone, Wall Street has shed over 25,000 jobs – and the region could shed a total of 165,000 over the next two years.

    Not surprisingly, the property crisis once seen as the problem of the silly, aspiring working class and the McMansion nouveaus has now spread deep into the bailiwick of the urban sophisticates. For the first time in years, many Manhattan apartments are selling for well below purchase price, something unheard of during the boom. In Brooklyn, a 24% drop in sales over the last three months even has boosters talking of an imminent “Brownstone bust.”

    Even San Francisco – arguably the most recession-resistant big city due to its large concentration of nonprofits and “trustifarians” – is seeing prices drop for the first time in years. Far more vulnerable are fledgling neo-urban markets like Los Angeles, Atlanta, Oakland, Calif., San Diego, Memphis, Tenn., Miami and Dallas. Sales are down in most of these markets, as are prices.

    Signs of the times: desperate developers offering goodies to buyers. One downtown Los Angeles property owner has even offered to buy a Mini Cooper for anyone bold enough to buy a loft. Others, in Oakland, Boston and Atlanta, are resorting to auctions to offload their product. Foreclosures have taken place in several other markets, including Charlotte, N.C., and Philadelphia.

    Not surprisingly, many new projects conceived at the height of the bubble are being canceled, and some newly minted condominiums converted into rentals. The rental option makes immediate sense but does not help create the ambiance of luxury so coveted by wannabe cool cities. High-end buyers generally do not covet the idea of having a bunch of college-student renters enjoying a similarly granite-counter-topped unit next door. This is not necessarily good news for expensive restaurants or boutiques either.

    In addition, just if anyone is checking, even at the peak of gas prices, there remains virtually no evidence of any massive movement of the bourgeoisie back into the burghs. One assumes that the now plunging oil prices will not hurt suburban commuters.

    In reality, what we have is a market that is stuck in almost all geographies. Rather than shift people into the urban cores, or vice-versa, the mortgage crisis is simply stopping everyone in their tracks. Even if people wanted to move into the core cities, they could not sell their suburban houses to make the down payments.

    Nor is there ample reason to believe the urban migration will pick up in the near future. Crime has soared in some cities such as Oakland and Chicago. (“Obamastan” has suffered more murders this year than much larger New York and Los Angeles.) Overall, urban crime remains three times that of suburbs; a suddenly rising instance of mayhem threatens many urban recoveries.

    And in the end, it’s really all about the economy. The looming massive layoffs in many key urban markets – notably New York, Chicago and San Francisco – cannot possibly help. Finance has remained one industry that has continued to cluster in core cities, even as most others moved to the suburbs and smaller towns.

    Moreover, it is not just New York. Now, as the butcher’s bill for mortgage mania comes due, Chicago, Boston and San Francisco are all facing large-scale layoffs. The office market in the Windy City, for example, is being decimated by cutbacks at JPMorgan Chase, Merrill Lynch, Lehman Brothers and Wachovia, as well as at the commodity exchanges. So far, the less finance-dependent suburban market appears less impacted.

    A recent visit to Chicago confirmed these trends. The once ballyhooed Trump Tower, once seen as the nation’s tallest luxury condominium, remains incomplete, with a massive crane still perched at its top and troubled by persistent rumors of failing financial support. Another hyped project, Santiago Calatrava’s 2000-foot, 150-story Chicago Spire, is stuck in the ground because the developer has stopped paying his “starchitect’s” bill. All this is not too surprising, given a reported 73% drop in downtown home sales for the first half of the year.

    For a decade or more, city leaders have kept thinking that something from outside – demographic changes, high fuel prices or changing consumer tastes – would create a revival for them. This allowed them to avoid doing hard, nasty things like cutting often-outrageous public employee pensions, streamlining regulations, cutting taxes levied on businesses or improving often-dismal schools and basic infrastructure.

    Maybe the current downturn can be a wake-up call for city boosters. Overall, since 2000, the average job growth in cities has averaged less than one-sixth that of suburbs, according to research by my colleagues at the Praxis Strategy Group. This has been particularly notable in higher-paying blue collar positions in manufacturing and warehousing, but increasingly applies also to higher-end business services.

    Cities should start realizing that their biggest problem is not a shortage of cultural venues and performance artists but a chronic lack of decent, middle class jobs. And to be sure, older cities do possess critical advantages such as already existing, if often tattered, transportation systems and the best strategic locations. Their old industrial districts possess an existing infrastructure and, in some cases, a residual pool of skilled labor and some decent job-training facilities. If properly prodded, local universities could also become part of the solution by seeding new entrepreneurial ventures.

    But such a return to basics may be nullified by the prospect of an urban Democrat coming into the White House and a Congress dominated by the likes of Speaker Nancy Pelosi, Charles Rangel and Barney Frank. This will revive hope that largely suburban middle-class taxpayers will now bail out bloated city budgets and often-absurd projects (convention centers, stadia and associated nonsense).

    City leaders and land speculators may also play the Al Gore card of combating “global warming” to block new roads, single-family housing estates and even the transfer of jobs to the supposedly energy-inefficient suburbs. However, over time, the suburban-exurban majority is unlikely to support this approach. To experience a real renaissance, cities need to learn how to make themselves more congenial again to those – industry, entrepreneurs and the middle class – who have found themselves forced to head to the fringes for almost a half century.

    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.

  • New Urbanism’s Economic Achilles Heel

    By Richard Reep

    Whether one believes that form follows function or that function can follow form, a town or a city needs three key elements to be healthy. Firstly, a sense of place that includes the sacred is important to people to provide a basis for spiritual involvement. The city must then be able to reliably deliver safety and security to its inhabitants in order to grow and mature. And lastly, a city must provide the means of employment for its inhabitants.

    New Urbanism, in its quest to dictate the physical form of an urban development, has ignored the last key element. An examination of New Urbanism in developments in Central Florida shows a glaring lack of employment, raising questions about their sustainability and long-term viability.

    As we enter the second decade of Celebration, it is useful to look at this city and its influence on the surrounding region. Opened in 1996, Celebration incorporated much of the design philosophy that was formulated around the idea that a city should have a certain “look.” This design philosophy was promulgated to the general public in Suburban Nation, a book that lashed out at the current suburban form and proposed a new form based on a nostalgic notion about a golden age of American town-making, generally in the first decades of the last century.

    By regulating the specific architectural form of a new development, the New Urbanists proposed to improve the blandness, placelessness, and lack of character that is the lot of most contemporary suburbs. Celebration, sponsored by Disney, opened to white-hot press acclaim nationwide. Phase 2 was opened ahead of schedule due to demand for new homes. Market values of homes rose quickly beyond the norm for Central Florida. Developers took notice.

    Soon, other spawn of Celebration began to show up in Central Florida, and today we have several New Urbanist communities that aspire to the same level of success. Baldwin Park, funded by Chicago’s Pritzker family, is a smaller scale version of Celebration located in the City of Orlando and convenient to downtown. Avalon Park, in the southeast corner of Orange County, is accessed from the perimeter highway that is turning Orlando into a mini-Atlanta. Horizon West, the youngest of these, is due west of Downtown Orlando, and offers another New Urbanist antidote to subdivisions, adhering to the same formula of “live, work, and play.” All of these, including Celebration, are coping with the housing crisis, foreclosure crisis, and various other current market conditions just like the rest of us.

    Sadly the “live, work, and play” slogan, which comes from New Urbanist literature, does not bear out in reality. The notion is fine enough: that people can reduce commutes by living and working in the same community. During the supposedly halcyon days of pre-auto, early 20th century America, this was the reality for many Americans. One’s life could occur within a small, walkable radius, reinforcing itself and reinforcing the social bonds of a community.

    But the early 21st Century is very different than the early 20th and New Urbanist attempts to travel backwards in time have met with limited success. To work near where you live, there needs to be employment down the street. None of these communities have employment opportunities – jobs – down the street from the residences. The dwellers of all these communities get in their cars and drive to their jobs off-campus. New Urbanism thus becomes an after-6pm-and-weekend lifestyle choice, not a new way of life.

    In Celebration, many of the early residents were Disney executives; only 4 or 5 years after opening did Disney develop office space in Celebration for some of their offices. Baldwin Park, approximately 2 miles from Downtown Orlando, never pretended to capture the employment aspect, instead selling itself (to many Celebration residents who rushed to this newer, hipper version of their town) as a downtown commute. And neither Avalon Park nor Horizon West have employment opportunities within their town centers. What they do have is easy access to the area’s ring road – ensuring vehicular congestion outside of their New Urbanist communities.

    What is in their Town Centers? Ironically, you find only a small shopping district and the ubiquitous Publix, Florida’s home-grown grocery store chain. The formula of “live-work-play” must stick in the craw of those who are employed in these stores, because the Publix employees, Starbucks baristas, dry cleaner cashiers, and others who do work in these Town Centers can not possibly afford the New Urbanist real estate. Rather than a social continuum (as was more common in the idealized version of America), there is a new social schism, with the New Urbanist underclass forced to commute to the New Urbanist communities from more affordable but less trendy housing nearby.

    In contrast, the region’s native communities have been thriving throughout the same growth period. Communities like College Park, adjacent to Orlando’s downtown, offer something that New Urbanist communities do not: diverse housing, from garage apartments and rental communities up to stately mansions, all within walking distance of each other. They offer an idiosyncratic mix of sacred places, playgrounds, schools, and shops in what the Philadelphia architect and theorist Robert Venturi calls “messy vitality.” No overarching body dictated the form, developed transects, or rigidly controlled the distance between the front porch to the street to achieve these vibrant, socially cohesive, and proud neighborhoods.

    New Urbanists claim to reduce the need for cars, but Orlando’s New Urbanist communities make the car more necessary than ever. Built on the periphery of the metropolitan area, they require a vehicle to complete the circle of functions necessary for a healthy society. Orange County planners have been submissive to the New Urbanists – especially after Celebration – but increasingly recognize that they do not solve the problems they claim to solve and instead invent more: higher traffic, less affordable housing near city centers, and lumpy development sprawl.

    The lesson for Orlando is to refrain from being seduced by the beauty contest that New Urbanists proclaim, and instead integrate all the key deeper social values such as safety, security, sacred places, and employment together. This is basic stuff recognized by greater minds – think of George Mitchell at the Woodlands or Victor Gruen in Valencia – who understand that employment constitutes a critical component to building a successful new community. Until New Urbanists learn this basic economic lesson, their contribution to our communities will remain sharply limited.

    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.

  • Root Causes of the Financial Crisis: A Primer

    It is not yet clear whether we stand at the start of a long fiscal crisis or one that will pass relatively quickly, like most other post-World War II recessions. The full extent will only become obvious in the years to come. But if we want to avoid future deep financial meltdowns of this or even greater magnitude, we must address the root causes.

    In my estimation two critical and related factors created the current crisis. First, profligate lending which allowed many people to buy overpriced properties that they could not, in reality, afford. Second, the existence of excessive land use regulation which helped drive prices up in many of the most impacted markets.

    Profligate lending all by itself would not likely have produced the financial crisis. It took a toxic connection with excessive land-use regulation. In some metropolitan markets, land use restrictions, such as urban growth boundaries, building moratoria and large areas made off-limits to development propelled house prices to unprecedented levels, leading to severely higher mortgage exposures. On the other hand, where land regulation was not so severe, in the traditionally regulated markets, such as in Texas, Georgia and much of the US Midwest and South there were only modest increases in relative house prices. If the increase in mortgage exposures around the country had been on the order of those sustained in traditionally regulated markets, the financial losses would have been far less. Here is a primer on the process:

    1. The International Financial Crisis Started with Losses in the US Housing Market: There is general agreement that the US housing bubble was the proximate cause for the most severe financial crisis (in the US) since the Great Depression. This crisis has spread to other parts of the world, if for no other reason than the huge size of the American economy.
    2. Root Cause #1 (Macro-Economic): Profligate Lending Led to Losses: Profligate lending, a macro-economic factor, occurred throughout all markets in the United States. The greater availability of mortgage funding predictably led to greater demand for housing, as people who could not have previously qualified for credit received loans (“subprime” borrowers) and others qualified for loans far larger than they could have secured in the past (“prime” borrowers). When over-stretched, subprime and prime borrowers were unable to make their mortgage payments, the delinquency and foreclosure rates could not be absorbed by the lenders (and those which held or bought the “toxic” paper). This undermined the mortgage market, leading to the failures of firms like Bear Stearns and Lehman Brothers and the virtual failures of Fannie Mae and Freddie Mac. In this era of interconnected markets, this unprecedented reversal reverberated around the world.
    3. Root Cause #2 (Micro-Economic): Excessive Land Use Regulation Exacerbated Losses: Profligate lending increased the demand for housing. This demand, however, produced far different results in different metropolitan areas, depending in large part upon the micro-economic factor of land use regulation. In some metropolitan markets, land use restrictions propelled prices and led to severely higher mortgage exposures. On the other hand, where land regulation was not so severe, in the traditionally regulated markets, there were only modest increases in relative house prices. If the increase in mortgage exposures around the country had been on the order of those sustained in traditionally regulated markets, the financial losses would have been far less. This “two-Americas” nature of the housing bubble was noted by Nobel Laureate Paul Krugman more than three years ago. Krugman noted that the US housing bubble was concentrated in areas with stronger land use regulation. Indeed, the housing bubble is by no means pervasive. Krugman and others have identified the single identifiable difference. The bubble – the largest relative housing price increases – occurred in metropolitan markets that have strong restrictions on land use (called “smart growth,” “urban consolidation,” or “compact city” policy). Metropolitan markets that have the more liberal and traditional land use regulation experienced little relative increase in housing prices. Unlike the more strongly regulated markets, the traditionally regulated markets permitted a normal supply response to the higher market demand created by the profligate lending. This disparate price performance is evidence of a well established principle of economics in operation – that shortages and rationing lead to higher prices.

      Among the 50 metropolitan areas with more than 1,000,000 population, 25 have significant land use restrictions and 25 are more liberally regulated. The markets with liberal land use regulation were generally able to absorb from the excess of profligate lending at historic price norms (Median Multiple, or median house price divided by median household income, of 3.0 or less), while those with restrictive land use regulation were not.

      Moreover, the demand was greater in the more liberal markets, not the restrictive markets. Since 2000, population growth has been at least four times as high in the traditional metropolitan markets as in the more regulated markets. The ultimate examples are liberally regulated Atlanta, Dallas-Fort Worth and Houston, the fastest growing metropolitan areas in the developed world with more than 5,000,000 population, where prices have remained within historic norms. Indeed, the more restrictive markets have seen a huge outflow of residents to the markets with traditional land use regulation (see: http://www.demographia.com/db-haffmigra.pdf).

    4. Toxic Mortgages are Concentrated Where there is Excessive Land Use Regulation: The overwhelming share of the excess increase in US house prices and mortgage exposures relative to incomes has occurred in the restrictive land use markets. Our analysis of Federal Reserve and US Bureau of the Census data shows that these over-regulated markets accounted for upwards of 80% of “overhang” of an estimated $5.3 billion in overinflated mortgages.
    5. Without Smart Growth, World Financial Losses Would Have Been Far Less: If supply markets had not been constrained by excessive land use regulation, the financial crisis would have been far less severe. Instead of a more than $5 Trillion housing bubble, a more likely scenario would have been at most a $0.5 Trillion housing bubble. Mortgage losses would have been at least that much less, something now defunct investors and the market probably could have handled.

      While the current financial crisis would not have occurred without the profligate lending that became pervasive in the United States, land use rationing policies of smart growth clearly intensified the problem and turned what may have been a relatively minor downturn into a global financial meltdown.

    Never Again: All of the analyst talk about whether we are “slipping into a recession” misses the point. For those whose retirement accounts have been wiped out, or stock in financial companies has been made worthless, those who have lost their jobs and homes, this might as well be another Great Depression. These people now have little prospect of restoring their former standard of living. Then there is the much larger number of people whose lives are more indirectly impacted – the many households and people toward the lower end of the economic ladder who have far less hope of achieving upward mobility.

    All of this leads to the bottom line. It is crucial that smart growth’s toxic land rationing policies be dismantled as quickly as possible. Otherwise, there could be further smart growth economic crises ahead, or, perhaps even worse, a further freezing of economic opportunity for future generations.

    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”

  • Industry, inequality and the middle classes

    The financial collapse dominates the news, but its unregulated rise is not unrelated to the relative decline of manufacturing over the last quarter century, and the outsourcing of much of industrial production. One consequence of this de-industrialization and financialization of everything has been an astounding increase in inequality, a massive concentration of wealth at the very top and the squeezing of the middle classes.

    Places that remained strong in manufacturing tend to have had and still have lower inequality than places more dependent on services, lowly to professional, and experienced a smaller change in inequality. This case has been argued by many, perhaps most eloquently by Zimmermann and Beal (2002) in Manufacturing Works, and by Scott (2003) The High Price of Free Trade.

    Zimmermann argues the importance of industrial production for national and local prosperity. In Part 2, “Changing geography and what it means”, he treats the relocation of industry, and then follows with “Counties gaining momentum:, Counties losing momentum, and Big City Blues (Philadelphia and beyond)”. He notes the huge northeastern losses in industry coincided with increased inequality, e.g., New York, St. Louis, Philadelphia, and Rochester and in large numbers of smaller metropolitan counties. In contrast decreased inequality in many places in the South, Mountain states and plains (e,g, ND, SD, WY, UT, NE) with rapid industrial growth.

    Local economies dominated by manufacturing generally have had less inequality than ones dominated by services. Although this is particularly true in mostly northern states with a long history of labor unrest and successful unionization, even the more recent largely nonunionized industrialization in the South has reduced income inequality, although statewide levels remain a high, a hangover from their long pre-industrial and even feudal histories.

    What distinguishes lower levels of inequality? In my work using Census data these areas generally experience female labor force participation, higher shares of manufacturing and a larger population with only a high school education (i.e., not overloaded with us professionals!), but lower shares of government and of services. Manufacturing is just one of many factors, but it is a powerful one.

    It is instructive to look at some example areas of higher and of lower inequality in 2000 relative to the composition of their labor forces. The most unequal large areas/counties are New York (Manhattan) and Washington DC – by far, both with high levels of professional services and government, and low levels of industry. Also very unequal are many retirement and environmental service areas, with almost no manufacturing, such as St. Petersburg, Naples, Vero Beach and many other growing Florida cities, Jackson, Wyoming, and several ski dominated areas in Colorado and Utah.

    In stark contrast, inequality is quite low in such strong manufacturing communities as Kansas City, Worcester, Appleton-Green Bay, Fond du Lac (and several other Wisconsin cities), Duluth, Grand Rapids, Davenport-Rock Island, Manchester, NH, Lancaster, PA and Tacoma, WA.

    In sum, economic characteristic variation is real: egalitarian regions exhibit higher labor force participation, especially of women, and high levels of manufacturing – this is probably the most meaningful economic variable to account for lower inequality – and conversely higher inequality is associated with service and government job dependency. High shares of both managerial-professional occupations and service jobs, with lower shares of craft and manufacturing jobs are typically characteristic of elite metropolitan areas and helps account for their higher inequality.

    Change in inequality 1970-2000
    Since the 1970s most major metropolitan areas became less industrial and far more dominated by professional, finance, and other services, and by trade, and concomitantly, have become far more unequal. Prominent examples are Los Angeles, Chicago, Detroit Minneapolis, Dallas, Houston, St. Louis, Atlanta, Rochester, Pittsburgh, Cincinnati, Cleveland, Indianapolis, Birmingham, Baltimore and Boston – a roster of historic giants of industry.

    There are probably only limited opportunities for these areas – particularly in California and the Northeast – to reindustrialize. Yet there may be more opportunities in dozens of smaller metropolitan areas, in all parts of the country, but especially in the historic Midwestern and Northeastern “urban-industrial” heartland, that have suffered varying degrees of deindustrialization. These places enjoy low costs and often retain concentrations of skilled labor. Places like Florence and Gadsden, AL; Pueblo CO; Peoria and Rock Island, IL; Evansville and Muncie, IN; Dubuque, IA; Shreveport, LA; Saginaw, Midland, Benton Harbor, Flint and Muskegon, MI; Binghamton, NY; Toledo, Akron, Dayton, and Canton OH; Tulsa, OK; and Charleston and Wheeling, WV all could benefit from a new emphasis on productive enterprise. But the question remains: does Congress or the next President possess the will to make this happen?

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

  • American Elections Inspire Interest in Ghana

    There’s another presidential election just around the corner here in Ghana. Current President John Kufuor is stepping down after eight years in office that has seen the gold- and cocoa-exporting West African country expand its economy and solidify its democratic credentials. Another economic stride forward is expected when Ghana begins to pump oil in 2010 or 2011.

    Many people I’ve talked to expect the ruling New Patriotic Party (NPP) to keep a hold on the presidency here in Ghana. The street signs and billboards of NPP Presidential Candidate Nana Akufo Addo appear to significantly outnumber those of National Democratic Congress (NDC) opposition candidate Professor Atta Mills. But the election in Ghana is not the only presidential race that people here are thinking of and talking about in the city and villages.

    Accra, Aburi and Akropong are about as far away from the election day swing states in America as you can get. But America’s election is more than just another news story on the BBC. Crawling and darting through the hectic traffic of the capital city of Accra one catches an occasional glimpse of an Obama bumper sticker. Traveling with my Ghanaian hosts and meeting with people at restaurants and bars talk about the American election quickly turns to questions about the prospects of Barack Obama.

    It becomes readily apparent who is the favored choice between Obama and McCain. People react favorably and with big smiles when I tell them that Obama is leading in the polls. They ask me a second, maybe a third time if I think he will really win. At times some will repeat his name following the conversation – as some kind of hopeful confirmation.

    The interest in the US election goes beyond the Obama candidacy; this is one place where America’s status has not plummeted . Relations between the two countries are at an all-time high, with President Kufuor meeting with President Bush at least five times in the last three years. A visit by President Bush to the capital city of Accra in February of 2008 created widespread excitement, pride and goodwill as the two presidents talked about development issues, the fight against HIV/AIDS, the Africa Union, regional security, and Millennium Development Goals, humanitarian issues.

    The prospects of more international trade and investment for Ghana are certainly part of this equation. A 2007 Pew Global poll shows that, all things considered, people in 47 countries consistently endorse international trade. Favorable views are especially common in sub-Saharan Africa. In all 10 African countries included in the survey, over 80 percent said trade was having a positive impact. My conversations with businessmen and traditional leaders confirm that more trade and development cooperation with the United States is eagerly anticipated.

    Lastly, but certainly as important, the interest in the American election is a consequence of the many personal and family ties that bind Ghanaians to the United States. In conversations over the course of several days I’ve met people who have lived in the Bronx, are proud Kansas Jayhawks, or have spent time in Seattle, Atlanta and Washington DC and the suburbs of northern Virginia. Others have told me of sisters, brothers, sons and daughters who now living throughout the United States.

    No matter the eventual outcome of the election – in the US or Ghana – it is clear that the relationship between the two democracies will and should continue to flourish. Ghana, as much of Africa, faces many development challenges and there will continue to be many opportunities for the US to work together with Ghanaian businesses and leaders in continuing to take small steps and big strides forward.

    Delore Zimmerman is Publisher of NewGeography.com and President of Praxis Strategy Group, a company that works to improve the futures of communities and regions.

  • Knowledge Worker Migration: Going Where the Brains Are

    At a time when national unemployment is rising, Nebraska is working overtime to attract labor. At the inaugural Sarpy County Economic Summit, Governor David Heinemann (R) talked about the need to “market the state to 16- to 20-year-olds.” Nebraska, apparently, has more jobs requiring college degrees than it has college graduates. (Interested college students can call the Director of the Nebraska Department of Economic Development, Richard Baier, at 402-471-3746.)
    Special incentives are in place for any employer who will bring in jobs that will drive up the average local salary. The idea is to keep young college graduates here by bringing in better jobs.

    Nebraska is not alone in this regard. In the middle of all the economic turmoil, the Federal Reserve districts in Cleveland, Chicago and Kansas City reported high demand and resulting upward pressure on wages for skilled labor. The industries most in need of additional skilled workers are energy, health care, and manufacturing. Yes, manufacturing. Skilled financial services workers were easier to come by in Dallas as a result of mergers in the industry. The same was true for financial workers in Chicago. The only minimum-wage jobs going wanting are in the leisure and hospitality industry in the Kansas City district.

    I did an analysis comparing States (plus Puerto Rico and D.C.) by the high percentage of workers with graduate degrees in 2007 and the change in that figure from 2005. For example, Nevada ranked 45th among the States for workforce with graduate degrees in 2007; yet they ranked number 1 for increasing that percentage since 2005 (from 6.6% to 7.5%). The Knowledge Score is simply the difference in the two ranks. Nevada has the highest score at 44. The States with the lower scores are falling behind: although they rank high this year other states are moving up faster in gaining educated knowledge workers. Delaware has a score of -37: they rank 15th for an educated workforce but next to last (better only than New Mexico) for going from 11.1% of the workforce with graduate degrees in 2005 to 10.4% in 2007.

    The Minneapolis district “reported continued strength in professional business services.” Our analysis scores them 2, meaning they are currently attracting a more educated workforce. In contrast, San Francisco and Philadelphia reported that “demand for professional business services was down.” I score California at -30 and Philadelphia at -14, meaning that they are losing their educated workforce. It’s likely that knowledge workers are leaving because of the lack of opportunity and, in California especially, high housing costs.

    Although Illinois ranked 12th among the states for percentage of the workforce with graduate degrees, their increase from two years ago was about the national average, giving them a Knowledge Score of -21. The demand for skilled labor in manufacturing, healthcare, and some professional services remained strong in the Chicago Federal Reserve district, which will put upward pressure on wages. These higher wages will serve to attract more knowledge workers to the State. The Chicago district, which includes northern Illinois, southern Wisconsin, southern Minnesota, Michigan, and northern Indiana, reported shortages of skilled workers. Among the States included in the Chicago district, only Wisconsin and Indiana have positive Knowledge Scores.

    The relationship between education and income is well-known. The median-income in the U.S. was $33,452 for 2007, about what is earned by the worker with some college or an associate’s degree. Workers with only a high school diploma make about 20% less than that. A bachelor’s degree translates into a 40% increase in income; a worker with a graduate degree earns 83% more than the median-income. And this curve gets steeper every year: from 2006 to 2007 the slope increased 3%.

    So where are the knowledge workers going to and coming from? Nevada, Hawaii and DC lead the way in attracting them while New Mexico, Delaware and Louisiana are the biggest losers. Actually, only 10 States are losing knowledge workers as a percent of the workforce, including North Dakota, West Virginia, New Hampshire, Alaska, Arizona, California and Mississippi. In addition to educating the workforce, the U.S. also benefits from international migration. In the face of some of these shortages for skilled-labor, US immigration routinely increases the allowance for workers in industries like technology and others requiring advanced education. However, there has been little change in the overall percentage of the US workforce with advanced degrees: 10% in 2005, 9.9% in 2006 and 10.1% in 2007. Among the many other states increasing the share of their workforce with advanced degrees, Montana, North Carolina, Maine, Vermont and Maryland led the way with increase of more than 0.5%.

    You are probably surprised to find Nevada at the top of the Knowledge Scores. From September 2007 to September 2008, Nevada decreased the overall number of jobs by 7,600. In fact, the loss of 14,300 construction jobs was offset by a gain of 7,600 jobs in health services, transportation, utilities, education, and other services. The shift is toward jobs requiring skilled workers, those with higher levels of education, the Knowledge Workers.

    Down the road, it appears that the balance of knowledge workers are shifting to states that, for years, lagged behind perennial leaders like Massachussetts, California and New York. Now the balance is shifting and as the economy moves from speculation to productive jobs – such as those related to manufacturing, logistics, food and energy – we will also see an increase in new opportunities in these states for knowledge workers who are increasingly critical to these fields as well.

    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.

  • Obama’s Marketing Message

    By Morley Winograd and Michael D. Hais

    In less than two weeks, when Barack Obama’s lead in all the polls is likely to be confirmed in the voting booth by the American electorate, millions of words will be written about why he won and how John McCain managed to lose. Unfortunately, marketing executives and corporate leaders have ignored some of the most important lessons from the campaign.

    Obama’s success to date lies in his ability to blend his own persona as a messenger with a unifying and uplifting message that reaches the newest generation of Americans, Millennials, born between 1982 and 2003. His campaign has mastered marketing through social networks and other Internet-based communication technologies. This “cool” approach defeated the “hot” rhetoric that came from his primary opponent, Hillary Clinton, and is likely to perform even more favorably against the more confrontational and traditional campaign of John McCain.

    But Millennials don’t just represent the key constituency behind Senator Obama’s successful campaign but also a key market opportunity for economic growth. Almost one-third of all Americans are in this generational cohort, and even though many of them are still too young to vote, almost all of them influence the daily purchases of the families of which they are a part. Until brand managers and marketing mavens master the art of reaching and attracting Millennials, consumer expenditures will continue to languish.

    CEOs need to learn how to create brands that attract Millennials with something more transcendent than their product’s functionality or characteristics. Corporations will only hit their growth targets if they are willing to change their own message, messenger and media to fit the tastes of this generation.

    A recent study by The Economist magazine’s Intelligence Unit suggests this campaign lesson has not yet penetrated the thinking of many in the “C suites” of the world’s corporations. More than half of those executives said they did not currently have a strategy to target or retain this demographic group. In their report, “Maturing with the Millenials”, survey respondents acknowledged the need for new tactics to target the millennial customer, but indicated a lack of readiness to do so.

    For instance, the report found that, “While 44% indicate that communicating the right messages in the right medium and at the right time is critical to their success, the majority have yet to leverage enriched content, peer recommendations and enhanced online experiences as part of their outreach—even though they acknowledge these are among the most effective ways to communicate with Millennials.” This sounds a lot like Hillary Clinton’s advisors Mark Penn and Mandy Grunwald on the eve of the Iowa caucuses when they derided the supporters of Obama as looking “like Facebook” pages. When Obama’s Facebook legions came out to vote in droves in the Iowa caucuses they dealt a fatal blow to Senator Clinton’s cause.

    Companies, fortunately, do not have to suffer the short shelf life of failed candidates. They can change their strategies in order to capture an emerging new base. We have seen this with companies that have succeeded with emerging ethnic markets at home and with whole new markets abroad.

    Even though most executives surveyed by The Economist understood that Millennials have specific consumer needs, few have tailored their marketing strategy for this generation. Four out of 10 executives in the Economist’s survey said that Web 2.0 technologies, such as webcasts and online forums, are the best way to serve Millennial customers. More than 80 percent agreed that consumer needs vary by age group, and 42 percent believed that a bigger share of investment should go towards Millennial customers. Yet remarkably, the respondents reported that telephone, e-mail and physical storefronts were the top three ways that Millennials could interact with their company currently.

    The risks companies are taking by not addressing Millennials are great. John Gerzema, Chief Insights Officer for Young & Rubicam, details this argument in a new book, The Brand Bubble. His research shows that consumers’ trust in brands has declined by half in just ten years. Instead consumers increasingly turn to nontraditional sources of information, such as search engines and social networks, to determine what they should buy and from whom. That is why any good corporate CEO should check every day what customers are saying about their company on the mushrooming “Why I hate xx” websites that now exist for every major company.

    To restore their brand’s value and regain traction with the buying public, companies will need to reinvent themselves in order to engage Millennial constituencies on Millennial terms and in Millennial media. They will need to learn the art of attracting support from Millennials without appearing to be chasing after it in much the same way Obama did in his campaign.

    One leading-edge private sector example of how to pull off this Zen-like non-effort is Nike’s successful efforts to enhance its brand’s attractiveness by creating online communities of runners. By partnering with Apple it created an application for runners that transfers running time, distance and even calories burned to a Nano so that the results can be uploaded for sharing with others. By building virtual running communities, Nike gave its customers an opportunity to register their individual profiles while receiving content that they can access while running. Nike was able to create its own social network linking people with similar running habits, such as those who run with poodles, to produce a strong bond of affiliation among each member of the group, and from that experience an equally strong sense of loyalty to the Nike brand.

    In 2006, the International Television and Video Almanac pointed out that Americans were being bombarded with about “5,000 marketing messages each day, up from 3000 in 1990 and 1500 in 1960.” Nothing in the trend line for communication technologies suggests this amount of corporate generated content is likely to decrease in the coming decades. Not surprisingly, Millennials can absorb much more information at any single moment than previous generations. But this does NOT mean that they are absorbing information in the same way. To gain the attention and brand loyalty of Millennials, companies will have to turn to non-traditional, online information distribution platforms to create a new message that builds a sense of community and caring around their products.

    The best way to do that is to incorporate a cause or purpose into the reason for buying a product. It may be protecting the environment by going green, or reducing inequality in the world through acts of charity, or demonstrating a commitment to young people by investing in educational institutions, or all of the above. Regardless of the cause, not only did the era of unfettered capitalism end with this month’s financial meltdown, but so too did the days of appeals to consumers based solely on narrow self-interest or conspicuous consumption. Bling is out; doing good is in. Make that your message, and you have a story that will work effectively in the Millennial era.

    Morley Winograd and Michael D. Hais are co-authors of Millennial Makeover: MySpace, YouTube, and the Future of American Politics

  • Obama’s Marketing Message

    In less than two weeks, when Barack Obama’s lead in all the polls is likely to be confirmed in the voting booth by the American electorate, millions of words will be written about why he won and how John McCain managed to lose. Unfortunately, marketing executives and corporate leaders have ignored some of the most important lessons from the campaign.

    Obama’s success to date lies in his ability to blend his own persona as a messenger with a unifying and uplifting message that reaches the newest generation of Americans, Millennials, born between 1982 and 2003. His campaign has mastered marketing through social networks and other Internet-based communication technologies. This “cool” approach defeated the “hot” rhetoric that came from his primary opponent, Hillary Clinton, and is likely to perform even more favorably against the more confrontational and traditional campaign of John McCain.

    But Millennials don’t just represent the key constituency behind Senator Obama’s successful campaign but also a key market opportunity for economic growth. Almost one-third of all Americans are in this generational cohort, and even though many of them are still too young to vote, almost all of them influence the daily purchases of the families of which they are a part. Until brand managers and marketing mavens master the art of reaching and attracting Millennials, consumer expenditures will continue to languish.

    CEOs need to learn how to create brands that attract Millennials with something more transcendent than their product’s functionality or characteristics. Corporations will only hit their growth targets if they are willing to change their own message, messenger and media to fit the tastes of this generation.

    A recent study by The Economist magazine’s Intelligence Unit suggests this campaign lesson has not yet penetrated the thinking of many in the “C suites” of the world’s corporations. More than half of those executives said they did not currently have a strategy to target or retain this demographic group. In their report, “Maturing with the Millenials”, survey respondents acknowledged the need for new tactics to target the millennial customer, but indicated a lack of readiness to do so.

    For instance, the report found that, “While 44% indicate that communicating the right messages in the right medium and at the right time is critical to their success, the majority have yet to leverage enriched content, peer recommendations and enhanced online experiences as part of their outreach—even though they acknowledge these are among the most effective ways to communicate with Millennials.” This sounds a lot like Hillary Clinton’s advisors Mark Penn and Mandy Grunwald on the eve of the Iowa caucuses when they derided the supporters of Obama as looking “like Facebook” pages. When Obama’s Facebook legions came out to vote in droves in the Iowa caucuses they dealt a fatal blow to Senator Clinton’s cause.

    Companies, fortunately, do not have to suffer the short shelf life of failed candidates. They can change their strategies in order to capture an emerging new base. We have seen this with companies that have succeeded with emerging ethnic markets at home and with whole new markets abroad.

    Even though most executives surveyed by The Economist understood that Millennials have specific consumer needs, few have tailored their marketing strategy for this generation. Four out of 10 executives in the Economist’s survey said that Web 2.0 technologies, such as webcasts and online forums, are the best way to serve Millennial customers. More than 80 percent agreed that consumer needs vary by age group, and 42 percent believed that a bigger share of investment should go towards Millennial customers. Yet remarkably, the respondents reported that telephone, e-mail and physical storefronts were the top three ways that Millennials could interact with their company currently.

    The risks companies are taking by not addressing Millennials are great. John Gerzema, Chief Insights Officer for Young & Rubicam, details this argument in a new book, The Brand Bubble. His research shows that consumers’ trust in brands has declined by half in just ten years. Instead consumers increasingly turn to nontraditional sources of information, such as search engines and social networks, to determine what they should buy and from whom. That is why any good corporate CEO should check every day what customers are saying about their company on the mushrooming “Why I hate xx” websites that now exist for every major company.

    To restore their brand’s value and regain traction with the buying public, companies will need to reinvent themselves in order to engage Millennial constituencies on Millennial terms and in Millennial media. They will need to learn the art of attracting support from Millennials without appearing to be chasing after it in much the same way Obama did in his campaign.

    One leading-edge private sector example of how to pull off this Zen-like non-effort is Nike’s successful efforts to enhance its brand’s attractiveness by creating online communities of runners. By partnering with Apple it created an application for runners that transfers running time, distance and even calories burned to a Nano so that the results can be uploaded for sharing with others. By building virtual running communities, Nike gave its customers an opportunity to register their individual profiles while receiving content that they can access while running. Nike was able to create its own social network linking people with similar running habits, such as those who run with poodles, to produce a strong bond of affiliation among each member of the group, and from that experience an equally strong sense of loyalty to the Nike brand.

    In 2006, the International Television and Video Almanac pointed out that Americans were being bombarded with about “5,000 marketing messages each day, up from 3000 in 1990 and 1500 in 1960.” Nothing in the trend line for communication technologies suggests this amount of corporate generated content is likely to decrease in the coming decades. Not surprisingly, Millennials can absorb much more information at any single moment than previous generations. But this does NOT mean that they are absorbing information in the same way. To gain the attention and brand loyalty of Millennials, companies will have to turn to non-traditional, online information distribution platforms to create a new message that builds a sense of community and caring around their products.

    The best way to do that is to incorporate a cause or purpose into the reason for buying a product. It may be protecting the environment by going green, or reducing inequality in the world through acts of charity, or demonstrating a commitment to young people by investing in educational institutions, or all of the above. Regardless of the cause, not only did the era of unfettered capitalism end with this month’s financial meltdown, but so too did the days of appeals to consumers based solely on narrow self-interest or conspicuous consumption. Bling is out; doing good is in. Make that your message, and you have a story that will work effectively in the Millennial era.

    Morley Winograd and Michael D. Hais are co-authors of Millennial Makeover: MySpace, YouTube, and the Future of American Politics (Rutgers University Press: 2008)

  • The Entrepreneur is the True Face of Capitalism in America

    “Joe the Plumber” has gotten a lot of media attention over the past week. Depending on which side of the political fence you’re on, he is either a phony who is not even a registered plumber or a symbol for the unintended consequences of wealth redistribution policies. A Rasmussen survey taken on October 19th showed “Sixty-nine percent (69%) of Democrats think [Obama] is right on [spreading the wealth], but 78% of Republicans disagree.”

    It is easy to rail against corporations like Exxon-Mobil while surging gas prices force average Americans to make tough choices with the family budget. In 2007, they reported $39.5 billion in profits which represented 11.4 percent of revenues – up 9.3 percent over 2005.

    Not surprisingly, building popular support to tax windfall profits is easy politically. So, too, is the idea that these taxes should be redistributed to working families. On the other hand, making the case that profits will spur new energy development and reward shareholders seems almost impossible.

    CEO pay, and especially bonuses, are also easy targets for populists. In 2007, major financial firms in New York paid $39 billion in bonuses to themselves. Overall, CEO bonuses increased 27.1 percent in 2006 according to Business Week. The public has trouble understanding how the CEO at Lehman Brothers can make almost $450 million since 2000 and provide millions of dollars in “golden parachutes” to executives even as the firm was failing.

    But the media and the electorate often miss a key distinction. CEOs are not entrepreneurs. They are high paid managers who run the companies that true entrepreneurs built generations ago. Many are graduates of elite business schools who have extensive networks of contacts in business, government and among the “movers and shakers” of our nation. Quite a few are from the nation’s wealthiest families.

    On the other hand, “Joe the Plumber” is a symbol of entrepreneurism – the “little guys” with big dreams. They want to be their own boss. They feed off the soft underbellies of corporations too big or too inflexible to react to changes that create opportunities. Most are hard-working and honest. They don’t have stock options, bonuses or golden parachutes at retirement. In fact, most have many payless paydays when building their businesses.

    Entrepreneurs are America’s job creators. According to the Small Business Administration, from 2003 to 2004 companies with less than 20 employees created roughly 1.6 million net new jobs. Companies with 20 to 499 employees created around 275,000 net new jobs. Meanwhile, employment at companies with more than 500 employees shrank by 214,000.

    The University of Michigan and Florida International University study entrepreneurial activity in America. The metric they use is the number of people who start new businesses or manage firms less than four years old. In 2005, they reported that 23 million people were in this category. Some of the demographics of this group are interesting:

    • 18- to 34-year-olds account for about 44 percent of new firm creations.
    • 57 percent of those starting a new business have high school education.
    • Only 23 percent have finished college.

    Entrepreneurs are the risk-takers in America who know that they are bucking long odds in pursuing their dream. In his book Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By, Professor Scott Shane compiled data tabulated by the Bureau of the Census produced for the Office of Advocacy of the U.S. Small Business Administration and found that only 29 percent of business ventures that were started in 1992 where still around in 2002.

    The entrepreneur is the embodiment of the American spirit and validation of the American dream. Bill Gates epitomized this in the last few decades. He is now using his tremendous wealth for good by funding education and world health programs. On the foundation’s website, Gates lists 15 principals about the role of philanthropy. Principal #7 reflects Gates’s entrepreneurial roots: “We take risks, make big bets, and move with urgency. We are in it for the long haul.”

    The legacy of entrepreneurism can be seen in university buildings, hospital wings, libraries, research centers, foundations and companies that bear the names of entrepreneurs. Most started with a vision to do something new or make something better or more efficiently than ever before. Sadly, many of these institutions, particularly universities and non-profit foundations, seem committed not to fostering more entrepreneurs, but rather to teaching that capitalism is inherently unfair.

    When candidates rail against CEOs and corporate greed they need to be careful that their anger and the populist policies that grow out of it do not spill over into entrepreneurism and extinguish its flame.

    Let’s punish those whose greed for short-term profits has nearly destroyed our economy whether or not they are on Wall Street or in a corporate suite. But we must keep in mind that if we let our anger spill over to extreme new regulation and a new regime of higher taxes, we will also be targeting those “little guys and gals” who want to chart their own course to success. America needs its entrepreneurs perhaps now more than ever before in our history.

    Dennis M. Powell is president and CEO of Massey Powell an issues management consulting company located in Plymouth Meeting, PA.

  • The biggest issue remains undecided

    Unless something completely unexpected occurs, the presidential election has been settled, with Barack Obama the clear winner. Yet, except for the Republican Party’s demise, the most important issue of this era — the future of the middle class — remains largely unaddressed.

    Indeed, even as social polarization has diminished — a change that is reflected in Obama’s electoral success — economic polarization has intensified. Globalization and the securitization of almost everything have created arguably the greatest concentration of wealth since before the Great Depression.

    During much of the 20th century, the middle class was on a roll, with strong income gains and increasing rates of homeownership. But in the past few decades, while returns to capital and to certain elite occupations grew rapidly, wages for lower-income and middle-class workers have stagnated.

    To date, neither Obama nor John McCain has articulated a clear message of how to restore the path to upward mobility. Recent proposals from both candidates have been distinctly ad hoc and have had a short-term orientation — not surprising, given the severity of the crisis and the brief period left before the election.

    Yet over time, how the next president, presumably Obama, addresses the problems of middle-class Americans will determine the future of American politics. The party that captures the loyalty of that class — as Republicans did in the early 20th century; Democrats, from the 1930s to the 1960s; and Republicans, again after that — will dominate the nation’s politics in the coming decade.

    The political future may lie with a party that embraces a growth-oriented economic strategy that focuses on the creation of higher-income productive jobs for both younger and older workers. But it’s far from clear that the Democrats under Obama are ready to play that role.

    Clearly, these are not the Democrats of Franklin D. Roosevelt’s New Deal, Harry Truman’s Fair Deal or even Lyndon Johnson’s Great Society. Working- and middle-class Americans, including small farmers, low-level proprietors and ethnic businessmen, constituted the primary base for those Democrats. Although some leading Democrats, notably Roosevelt himself, came from the aristocracy, the upper classes and most of the corporate hierarchy remained fiercely Republican.

    But now the old class lines have changed. The once-impregnable visual barriers of the past — which separated the ultrarich from the rest of us — have largely dissolved. As Irving Kristol once noted, “Who doesn’t wear blue jeans these days?” Today, you can walk into a film studio, software corporation or high-tech firm and have trouble distinguishing the upper tiers from at least the middle ranks.

    Many of these moguls today tend to be socially and environmentally liberal and strong supporters of the Democratic Party. Yet despite their attire and attendance at U2 concerts, their economic concerns will remain radically different from the rest of society. Having secured their support, a President Obama may be forced to take great pains to secure the fortunes of the likes of George Soros, Robert Rubin, the Google decabillionaires and other big party funders.

    We may have witnessed the birth of this new class in the bizarre alliance of Nancy Pelosi, Harry Reid and Barney Frank with Wall Street’s viceroy, Treasury Secretary Henry Paulson. Once fully in power, these Democrats likely will begin by propping up the financial elites — much as Bush has done — but will also have to make a “grand bargain” to satisfy key party constituencies outside of the financial elite.

    There are already hints of this in Obama’s recent statements. His program to send cash to the poor through tax credits and other largesse can be seen as a political payout to his large, heavily minority, urban constituency. Massive bailouts for failing city, state and county governments — another part of the senator’s program — would also bolster public employee unions and their pension funds, both of which have emerged as key Democratic backers. New handouts for the U.S.-based auto industry, as Obama has recently suggested, would, not coincidentally, help one of the last large, unionized private sectors.

    Sadly, none of this will do more to create upward mobility, particularly for the next generation. The working poor may get a few hundred desperately needed dollars to spend, but this is no substitute for a policy that would stimulate production of jobs. Unions and their pension funds would get an extended holiday from addressing their often outrageously generous retirement and medical benefits, but that comes at the expense of the larger, private work force. The financial elites could secure government support for stabilized markets but would have little incentive to invest in domestic production industries and middle-class employment.

    Finally, Obama’s base of highly educated, socially liberal, professional Democrats — largely insulated in universities and nonprofits from economic distress — would be rewarded with the political validation of their worldviews on everything from gay marriage and diversity to environmentalism. More federal support for education, another likely Obama initiative, could also allow them to keep comfortably feathering their nests.

    Over time, however, such an approach could threaten the unity of the Democratic Party. This prospect emerged in the first House vote on the initial Wall Street bailout package. In addition to economic fundamentalist Republicans, many suburban, exurban and rural Democrats also found the plan objectionable. Hostility was particularly marked in the Great Plains, Appalachia, South Texas and other areas strongly oriented toward energy production, manufacturing and logistics.

    This growing wing of populist Democrats, often more socially conservative than their coastal and urban counterparts, tend to favor steering capital toward sectors such as domestic energy production, agriculture, manufactured goods and domestically sourced specialized services. All these, they believe, could drive up incomes and salaries for a wide spectrum of Americans far better than boosting transfer payments or shoring up investment banks.

    This political approach does not appeal to the urban liberals now dominant in both the Democratic Congress and the Obama camp. These represent places, such as New York, San Francisco and Chicago, that are increasingly more dependent on speculative real estate and financial assets than producing goods. Their primary interest in the next few years will be to find out how to create yet another bubble, perhaps tied to designated “green” industries, which could send local land values and stocks soaring again to unsustainable heights.

    All this, however, leaves the Democrats and Obama in a quandary. They could favor programs to expand industry, energy production and basic infrastructure, but they would risk of a wrathful Gore and his allies. It will take all Obama’s considerable political skill to balance his commitments to the greens, the hedge fund industry and venture capitalists with creating a program that will increase the incomes and prospects for middle-class Americans.

    Republicans could take advantage of this schism — if they have the intelligence and foresight to do so. The GOP could embrace the old Hamiltonian policy of internal improvements and incentives for the country’s industrial, energy and logistics companies that still employ millions of working- and middle-class Americans.

    After all, the legacy of corporate socialism bequeathed by President Bush makes it almost impossible for Republicans to sell themselves as economic libertarians. They will need to offer something to the middle class besides the well-worn politics of social resentment and military belligerence.

    But such a GOP rebirth likely lies in the future, if ever. In the next few years, the Democrats will have to address the nation’s growing class chasm on their own. How they do this may well determine not only the future success of the Obama presidency, but the survival of the American aspirational model, as well.

    This article originally appeared at Politico.

    Joel Kotkin is a presidential fellow at Chapman University and executive editor of www.newgeography.com. He is finishing a book on the American future.