New Geography

Category: Economics

  • The middle class is key to any city’s future

    What are your favorite cities in the US and abroad? Chances are you like cities for their vibrancy, diversity, people, foods, smells, sights, sounds, and opportunities for work, learning, play and life.

    These cities can only exist with vibrant middle classes to do the work, pay the taxes, and sustain life (including birthing the kids that are the city’s future).

    I have had the opportunity to live, work in and visit cities around the world. I have noticed that cities dependent on one industry or activity (such as resort tourism, for example), are not interesting, exciting, vibrant, dynamic, or sustainable. They are missing a middle
    class. There is nothing more depressing and dispiriting than to visit a resort where you are surrounded by the wealthy attendees and minimum-wage attendants. It is laughable when such wealthy patrons then try to ameliorate the situation with low-cost housing and other half-baked solutions. Raising wages for the largely itinerant labor force does not work. You need a middle class.

    Some of our “normal” and “regular” cities are heading down this path. They are losing their middle classes.

    The Decline of Middle-Class Neighborhoods

    Several studies document the trend. According to a Brookings Institution study released last year, as a share of all urban and suburban neighborhoods, middle-income neighborhoods in the nation’s 100 largest metro areas have declined from 58% in 1970 to 41% in 2000. In their place, poor and rich neighborhoods are both on the rise, as cities and suburbs have become increasingly segregated by income.
    Middle-income neighborhoods – where families earn 80 to 120 percent of the local median income – have plunged by more than 20 percent as a share of all neighborhoods in Baltimore, Chicago, Los Angeles and Philadelphia. They are down 10 percent in the Washington area. Only 23 percent of central city neighborhoods in 12 large metropolitan areas were middle income in 2000, down from 45 percent in 1970, according to Brookings.

    In Los Angeles – the most hollowed-out metropolitan area in the country over the past three decades – the share of poor neighborhoods is up 10 percent, rich neighborhoods are up 14 percent and middle-income areas are down by 24 percent.

    There are non-economic consequences for cities that lose a lot of middle-income residents. The disappearance of middle-income neighborhoods can limit opportunities for upward mobility, the authors of the Brookings study say. It becomes harder for lower-income homeowners to move up the property ladder, buy into safer neighborhoods, send their children to better schools and even make the kinds of personal contacts that can be a route to better jobs.

    The Exit of the Middle-Class

    In New York, according to “New York’s Delicate Migration Balance,” a report released by the city’s controller last year, 300,000 residents a year are moving out of the city to other parts of the US, twice the number who relocate to NYC from elsewhere in the country – and that was before this year’s financial meltdown.

    Middle-class families – notably households with annual incomes between $40,000 and $60,000 along with households earning more than $140,000 – make up a disproportionate segment of the army heading for the exits. “Those who leave appear to be younger, better educated and slightly more affluent,” the report says. More than 40% of the adults making up the exodus have at least a bachelor’s degree; 20% have a master’s degree or higher.

    That is devastating news, writes Errol Louis (“Call an ambulance – our middle class is bleeding,” New York Daily News, 9/16/07): “It means the backbone of the city is weakening as hundreds of thousands of teachers, cops, firefighters, bus drivers, security guards, transit workers, barbers and administrators – a big slice of the people who make the city go – give up on New York every year.”

    The report also suggests that a lot of what people think they know about the supposed link between gentrification, housing prices and neighborhood change is wrong: “contrary to the tone of public discussion, New York City is not experiencing an influx of educated, affluent, working age residents.” Louis concludes:

    “Communities, and the city as a whole, thrive when we have many different income groups living side-by-side – civil servants near retirees, welfare moms next door to teachers and carpenters.
    “All are equally valuable, and all need to stay in New York. Inner-city areas especially need a critical mass of adults who can put in the enormous amount of casual time and volunteer effort it takes to raise a neighborhood’s children. The kids need to see – and learn from – all kinds of working people in the streets, parks and libraries. Schools that don’t get time, attention and pressure from middle-class parents are more likely to fail.”

    A Natural or Man-Made Trend?

    In a way this trend is natural, a tale of upward mobility: those who can move to a better neighborhood do. But why do middle-income neighborhoods “tip” towards rich or poor? Why this “big sort?”
    Public policy analysts scratch their heads. Some blame the loss of middle-income neighborhoods on the loss of the middle class itself, but that can’t be it: incomes for all types and in all income quintiles of households have gone up (except for single-female-headed households with kids), although they have gone up faster for higher income households. But there are natural reasons for that too: higher income households have more income earners, with higher skills, working more hours.

    Others blame the bifurcation of housing costs, that is, the lack of affordable middle-class housing. According to a New York University study, the likeliest households to exit in New York were those earning between $40,000 and $60,000 (the solidly middle-class in a city where the median household income is $40,000). Though these made up only 17 percent of non-elderly households in 2005, they accounted for 22 percent of those households that left.

    Any middle-class – or even upper-middle-class – flight is understandable given the chunks of income that New Yorkers pay on housing.

    Of the 110,663 Manhattan homes with a mortgage, nearly one fourth spend at least 35 percent of the household’s monthly income on housing costs, according to Census estimates. Of the 562,469 occupied rental apartments in Manhattan, over 34 percent spend at least 35 percent of the household’s monthly income on rent. Another 8.4 percent spend 30 to 34.9 percent.

    Of the 182,226 Brooklyn homes with a mortgage, over 46 percent spend at least 35 percent of the household’s monthly income on housing costs. Of the estimated 590,843 rental apartments in Brooklyn, nearly 42 percent pay at least 35 percent of the household’s monthly income on rent.

    Others blame sprawl, complaining that exurbs are bleeding cities of the middle class. But it is hard to argue that people’s freedom of choice about where to live is the problem, and that they should be forced to live in expensive, deteriorating cities.
    It’s middle-income jobs, stupid

    In a recent article in City Journal (Summer 2008), “Houston, New York Has a Problem,” Edward Glaeser compares Houston to New York and comes to the conclusion that Houston is preferable because it welcomes the middle class, while a heavily regulated and expensive New York drives it away. It is a devastating comparison:

    “Houston’s great advantage, it turns out, is its ability to provide affordable living for middle-income Americans, something that is increasingly hard to achieve in the Big Apple. That Houston is a middle-class city is mirrored in the nature of its economy. Both greater Houston and Manhattan have about 2 million employees.

    “In Manhattan, almost 600,000 of them work in the idea-intensive sectors of finance, insurance, and professional services; only 2% are in manufacturing, and fewer than that in construction. Finance increasingly drives New York City’s economy as a whole. By contrast, Houston is a manufacturing powerhouse that makes machinery, food products, and electronics, with a retail sector twice the size of Manhattan’s and lots of middle-class jobs.”

    New York used to be a place where a lot of middle-income jobs were created. That’s not happening anymore: from 1975 to 2005, New York City shrank as a regional job hub relative to 12 surrounding counties in Long Island, southern New York and northern New Jersey, according to the Center for an Urban Future.

    Back in 1975, New York City accounted for 53.1 percent of the 5,022,801 jobs in the New York region. By 1980, the city’s share of regional jobs had diminished to 50.5 percent. In 2005 – the last year the figures were tallied – the 12 surrounding counties accounted for 52.8 percent of the 6,171,642 jobs in the New York region.

    No middle-income jobs, no middle class.

    What the Middle Class Needs

    The real obstacle to a thriving middle class in New York is too much government involvement in people’s lives, writes Nicole Gelinas in The New York Sun.

    In housing, for example, constricting the supply of apartments through regulation makes rents, on average, more expensive, not less. As for schools, Medicaid, and other government programs, all of the $58 billion New York spends annually must come from somewhere, and it comes from high taxes. As the city’s independent budget office has noted, state and local taxes within the five boroughs are the highest in the nation, nearly 50% higher than in the average city. Due in large part to these high taxes, big corporations and small businesses alike have a hard time locating middle-class jobs here.

    Living cities must be growing cities that go through constant cycles of renewal of people, economies, and industries. Creative destruction is a necessary city dynamic. This means private-sector job creation. That requires healthy business growth, which adds to the tax base, not public sector job growth, which drains funds from the system.
    There is in fact a “Virtuous Circle” of metropolitan wealth creation: it starts with business growth, leading to job growth, leading to tax revenue growth, making more government services and infrastructure possible, enhancing quality of life for all inhabitants. We all draw from and contribute to this economic food chain. Without it, cities cannot have real life.

    The key to maintaining and growing a middle class is not the government provision of services, benefits and subsidies. It is government provision of the few things government is supposed to provide: protection of persons and property and a social and legal environment which promotes the pursuit of happiness and the general welfare – most fundamentally and importantly, the freedom to start and operate a business without onerous taxation and regulation.

    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.

  • Turns Out There’s Good News on Main St.

    As the financial crisis takes down Wall Street, the regular folks on Main Street are biting their nails, watching the toxic tsunami head their way. But for all our nightmares of drowning in a sea of bad mortgages, foreclosed homes and shrunken retirement plans, the truth is that the effects of this meltdown won’t be all bad in the long run. In one regard, it could offer our society a net positive: Forced into belt-tightening, Americans are likely to strengthen our family and community ties and to center our lives more closely on the places where we live.

    This trend toward what I call “the new localism” has been underway for some years, driven by changing demographics, new technologies and rising energy prices. But the economic downturn will probably accelerate it as individuals and corporations look not to the global stage but closer to home, concentrating and congregating on the Main Streets where we choose to live – in the suburbs, in urban neighborhoods or in small towns.

    In his 1972 bestseller, “A Nation of Strangers,” social critic Vance Packard depicted the United States as “a society coming apart at the seams.” He was only one in a long cavalcade of futurists who have envisioned an America of ever-increasing “spatial mobility” that would give rise to weaker families, childlessness and anonymous communities.

    Packard and others may not have been far off for their time: In 1970, nearly 20 percent of Americans changed their place of residence every year. But by 2004, that figure had dropped to 14 percent, the lowest level since 1950. Americans born today are actually more likely to reside near their place of birth than those who lived in the 19th century. Part of this is due to our aging population, because older people are far less likely to move than those under 30. But more limited economic options may intensify this phenomenon while bringing a host of social, economic and environmental benefits in their wake.

    For one thing, they may strengthen those long-weakening family ties. We’re already seeing signs of that. American family life today may not look like “Ozzie and Harriet,” with its two-parent nuclear family, but it reflects a pattern of earlier generations, when extended networks helped families withstand the dislocations of the westward expansion or of immigration.

    With a majority of married women now working, parents are frequently sharing child-rearing duties, and other family members are getting into the act. Grandparents and other relatives help provide care for roughly half of all preschoolers in the country. As the cost of living rises, this trend could accelerate.

    At the same time, difficulty in getting reasonable mortgages and the realities of diminished IRAs will force baby boomers and Generation Xers both to prolong their parental responsibilities and to delay their retirements. This, too, is already happening: According to one study, one-fourth of Gen-Xers still receive help from their parents. And as many as 40 percent of Americans between 20 and 34, according to another survey, live at least part-time with their parents.

    This clustering of families, after decades of dispersion, will spur more localism, which has a simple premise: The longer people stay in their homes and communities, the more they identify with and care for those places.

    This is evident in everything from the mushrooming of farmers markets in communities nationwide to burgeoning suburban cultural institutions. Since the 1980s, suburbs outside such cities as Chicago, Atlanta, Washington and Los Angeles have been building or contemplating new town centers – their own Main Streets, if you will, village squares intended to foster a unique local identity and community focus. Scores of suburban towns have established local orchestras and built playhouses and symphony halls – Strathmore Hall in Bethesda is one example. All this activity has dispelled some of the view of suburbs as strongholds of middle-class torpor.

    “This used to be a place where people went to sleep,” says Patricia Jones, president of the Arts Alliance, a group that helps raise funds for the sprawling, $63 million Civic Arts Plaza in the Los Angeles suburb of Thousand Oaks. “Now it’s a place where people live, work and find their entertainment. It’s a totally different environment. It’s not boring anymore.”

    Not only that, it’s probably more interconnected than ever before. In suburbs and cities from Los Angeles to New York, Web-based community newsletters have sprung up to keep residents informed of goings-on in their neighborhoods and to provide a sense of connectedness. “There’s an attempt in this neighborhood to break down the city feel and to see this more as a kind of a small town,” says Ellen Moncure, who edits the Flatbush Family Network Web site in New York. “It may be in the city, but it’s a community unto itself, a place where you can stay and raise your children.”

    Bolstering the trend are today’s higher energy prices, which make Americans’ old nomadic patterns less economically viable in more ways than one. Take recreation. More and more, says Tim Schneider, publisher of a magazine specializing in sports travel, people are sticking close to home instead of trekking far and wide in search of fun things to do. “Stay cations,” or vacations near home, are taking the place of trips to exotic distant locales. This means tougher times for such traditional tourist hot spots as Las Vegas and Hawaii, both of which have seen a drop-off in flight arrivals due to airline cutbacks. But there’s a moral for cities, says Schneider: Instead of counting on convention centers and arts and cultural facilities to attract outside tourists, most would do better to promote local “place-branding” events such as festivals, rodeos, sports tournaments and the like.

    Higher energy prices may also refocus local economies in unexpected ways. For generations, most Americans have been buying their food from distant corporate providers. But with shipping costs – and food-safety concerns – on the rise, the trend to buy local is moving into the mainstream. In Maryland, the number of farmers markets has grown from 20 in 1991 to 84 today. In 1977, California had four such markets; today it has more than 500. Higher energy costs could also benefit local manufacturers, bringing, say, clothing manufacture back to the Los Angeles garment district from China.

    The final factor driving the localist trend is technology, which has led to a rapid expansion of home-based work and to companies’ setting up work locations closer to where their employees live. The number of home-based workers has doubled twice as quickly in this decade as in the last and is now about 9 million. Nationwide, 13 million people telecommuted at least one day a week in 2007, a 16 percent leap from 2004. And more than 22 million people run home-based businesses.

    A recent study suggests that more than one-quarter of the U.S. workforce could eventually participate full- or part-time in this new work pattern. And over time, it will accelerate localism. Commuting – which became common only over the past century – has cut workers off from the places where they live. Home-based work, by contrast, gives people more choice about where they work and more time to spend with their families and communities.

    Telecommunication allows people who want privacy, low-density neighborhoods and good schools to live in small towns in a way never before possible. It also allows a firm such as Renaissance Learning, a leading educational software company, to set up headquarters in Wisconsin Rapids, Wis., a city of 17,500 whose small-town feeling, broad river and wooded countryside appeal to many workers. “We don’t have any trouble recruiting people here,” says Mark Swanson, the firm’s technical director.

    Yet the desire to stay in the local community isn’t limited to small towns or suburbs. I see it where I live, in California’s San Fernando Valley, or in parts of my mother’s native Brooklyn, where lots of people employed in fields such as the arts, consulting and design work at home or nearby and crowd the coffee shops, restaurants and stores of streets such as Ventura Boulevard in Studio City or once-decayed but now bustling Cortelyou Road in Flatbush.

    In the end, localism is neither urban nor anti-urban. At its heart, it represents something larger: a historic American tradition that sees society’s smaller units as vital and the proper focus of most people’s lives. This made the United States different from Europe, which, as Alexis de Tocqueville noted, has long tended toward centralization of power and decision-making.

    The expansion of the European welfare state has further fostered this trend. But it’s also true that Europeans tend to move less than Americans. And the powerful resistance to the most intrusive forms of European Union integration, such as a continent-wide constitution, suggest that strong localist elements remain imbedded in European communities.

    But if Europe is joining the trend, the United States is likely to be the leader in pushing decentralization. What most impressed Tocqueville wasn’t our large cities but the vitality of our many smaller towns and communities. “The intelligence and the power are dispersed abroad,” he wrote, “and instead of radiating from a point, they cross each other in every direction.”

    Today’s localist revival reflects this tradition, but with the benefit of the great access to the larger world that technology provides. It offers the prospect of an America that, rather than being “a nation of strangers,” can aspire again to be a nation of neighbors . . . in places that we choose for ourselves.

    This article originally appeared in the Washington Post.

    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.

  • Beyond The Bailout: What’s Next in the Housing Market?

    The Emergency Economic Stabilization Act of 2008 (we’ll call it the “Bail Out”) was signed into law on October 3rd. This, combined with the new reality in capital markets and current economic conditions, will result in some major shifts in the outlook for housing over the next few years. It is always possible that the federal government will try to do even more to fix what will be an agonizing housing problem over the next few years, but seems unlikely even Bernake, Paulson or their appointed successors will be able to change the basic story line.

    The Credit Market
    Let’s set up the dynamics. The era of easy credit, especially in terms of mortgages and home equity lines, is over. The 2002 through early 2006 period will turn out to be an aberration in history. During that period, about all a person needed to do to qualify for a mortgage was to be healthy. For the foreseeable future, we will see the return of such requirements as a down payment and the ability to repay your loan based on income, along with a good credit history, that will allow a person to qualify. The tighter credit and the slow down of the economy already is making it difficult for all but the best borrowers to get mortgage loans. Thus, the housing market will remain under significant pressure and the excess supply will be absorbed only slowly.

    The Consumer
    Consumers have accumulated far too much debt; they don’t have much in the way of traditional savings; are faced with job declines and declines in hours worked and are also facing a reverse wealth affect (i.e. people tend to spend more when they feel richer and less when they feel poorer). In the 1990s, consumers felt wealthier because the stock market did very well. Studies of the wealth effect indicate that people spend about five cents out of every dollar of increased net worth from stock and housing price appreciation over about a three to five year period of time. In the early part of this decade, not only were housing prices rising rapidly, but, almost unbelievably (in retrospect), easy credit allowed people to use their house as a credit card. The result was a boom in retail spending and home buying. In fact, the rate of homeownership in the U.S. went from a long term average of about 65% in 2002, to a high of nearly 69% in 2006. The percentage of people who bought homes, as a percent of total households, reached a record level.

    Supply and Demand
    Today, there are roughly two million more homes for sale in the nation than normal (4.3 million new and resale listings versus the long-term average of 2.3 million homes for sale). In addition, foreclosures are skyrocketing and are likely to stay high for quite some time. Many recent buyers simply were not financially ready for home ownership’s financial realities. Basic demand has diminished significantly as the number of prospects who can qualify has declined. Put all of these things together and you will have a period where not only will there be fewer homes purchased, but there will be high levels of foreclosures, a decline back to the normalized level of homeownership. There will be fewer people moving (i.e. if you can’t sell your house in California, Michigan or Pennsylvania, you are not moving to Arizona). What this implies is that the demographic demand for housing will be lower than normal over the next few years until the excess supply is absorbed.

    How long will this take? Analysis suggests that it is two to four years away nationally and longer in the bubble states: Arizona, California, Florida and Nevada. All this suggests that as the homeownership rate comes down, more people will be moving to apartments, people will “double up” or move back home. As a result much of the housing demand will be absorbed by foreclosures and the excess existing housing inventory, mitigating the need for significant new housing in the near term.

    If you add this all up, this also means slower growth in what were normally rapid growing areas (like Phoenix) where a full recovery could take four to five years for housing. As the home-ownership – including condos – rate moves back to its long term trends there will be a shift back to apartments.

    Overall, there will be fewer single family homes demanded, more apartments demanded, and the homes that are demanded will be more affordable. The most affordable areas will continue to be at the edge of town. In addition, given how difficult it has been to get the entitlements necessary for new apartment construction in areas like Phoenix over the past several years along with the number of condos that are being converted back to multi-family rentals, rents are likely to increase past 2009 or 2010 as the excess supply of rental single family homes, condos and apartments are absorbed.

    Overall homeownership will still be the American dream, but that dream will not again be something people think about until housing prices stop declining and start recovering. It’s going to be a tough ride, particularly in Sunbelt ‘boomtowns’ like Phoenix.

    Elliott D. Pollack is Chief Executive Officer of Elliott D. Pollack and Company in Scottsdale, Arizona, an economic and real estate consulting firm established in 1987, which provides a broad range of services, specializing in Arizona economics and real estate.

  • The Geography of Inequality

    The global financial crisis has drawn greater attention to the world of the super rich and to the astounding increases in inequality since 1980, returning the country to a degree of inequality last seen in 1929 or perhaps even 1913. In the year 2006 alone, Wall Street executives received bonuses of $62 billion. Financial services increased from 10 percent of all business profits in 1980 to 40 percent in 2007, an obscene and indefensible development that now threatens the rest of the ‘real economy’.

    Here’s what happened to income and wealth between 1970 and 2005

    These figures reveal an inexorably growing concentration of income and wealth, which has taken place under both Democratic and Republican regimes. Conversely, given inflation over the last 35 years, lower and middle classes receive smaller shares. Only the affluent – the top 10% – and the rich – the top 1% – have gained ground.

    This pattern of inequality also has a geography with variations across the country between different places (here counties). Generally between 1970 and 2000 the greatest inequality has developed in the largest metropolitan regions and their suburbs.


    Large metropolitan core counties are by far the most likely to have higher inequality. In contrast other geographies have much lower inequality, with small metropolitan, small city and rural counties near the national average. In other words, core metropolitan counties are skewed toward greater inequality (higher shares of very rich and of very poor), while suburban and exurban areas generally exhibit lower inequality (values bunched centrally, with fewer extremely rich or poor households).

    Overall the greatest inequality lies in the very largest metropolitan cores (Los Angeles, Chicago, New York, Houston, etc), areas with large racial or ethnic minorities (e.g., in FL, TX, CA and much of the South), as well as in selected large northeastern metropolises (suburb as well as core, as in Chicago, Cleveland, Pittsburgh, New York, Philadelphia, and Washington DC) and across the southern half of the country more generally. Lower inequality occurs mainly in suburban or small metropolitan counties, and mainly in the north.

    Among smaller metropolitan (< 50,000 households) and non-metropolitan counties there emerges a truly dramatic north-south cleavage just around the Iowa border and along the Ohio River divide. A more mixed pattern prevails in the west and in the northeast, where intermediate levels of inequality are common. Especially high rates of inequality characterize racial and ethnic minority areas and Appalachia, as could be expected, but also many environmental amenity areas, especially in the west. Low inequality is fairly extensive in the hinterlands of selected Great Lakes and upper Midwest metropolises, like Omaha, Minneapolis and Chicago. Generally more egalitarian areas boast higher incomes, female labor force participation, more shares in manufacturing, greater incidence of husband-wife families, of whites, of home ownership, but lower percentages of government and service jobs, fewer residents with less than a 9th grade education, people 18-24, singles, single parent families, and less Blacks and Hispanics. High levels of inequality are generally the opposite of the egalitarian areas: more minorities, single parent families, less manufacturing and dependence on government as well as service sector jobs. Inequality varies by both kinds of settlement geography and by the social and economic character of areas. The most obvious and visible attributes that signify greater inequality are social characteristics: racial and ethnic minorities, low levels of education, low proportions of traditional husband-wife families (partly because of fewer earners), and high dependency (many of the very young and very old). Unequal places tend to be those with low concentrations of manufacturing and higher shares of both managerial-professional occupations and service jobs. Geographic impacts vary. Most rural, newer suburban and exurban areas tend to have lower inequality because they tend to maintain middle income homogeneity. Yet rural areas that are isolated and have weak economies, like Appalachia, suffer high inequality. Large metropolitan areas with the highest inequality also tend to have large concentrations of racial minorities and of non-families, especially young singles Overall it is clear that inequality has been on the rise since 1970. This was a time when the nation was prosperous, manufacturing was strong, as were unions, income taxes fairly progressive, while “war on poverty” legislation had helped those at the bottom, the baby boom was still on and families dominant. But if the extent of inequality has grown, its geography has changed far less. Large metropolitan cores had the highest inequality in 1970 and 2000, and metropolitan suburbs and exurbs the lowest, with small cities in between. Yet inequality grew fastest in large metropolitan cores and suburbs. Small metropolitan areas (many were small cities in 1970) had the next highest increase (80 percent) and rural small town areas the lowest (69 percent). Sadly, only a few counties had decreases in inequality. Many were military base counties, mainly in the south. Another group of counties with lower inequality are new suburban counties, which have become more uniformly middle class as a result of significant urban growth, mainly in the South with more rapid urban and industrial growth. Overall, the change in inequality between 1970 and 2000 was substantial and wide ranging. The causes for this tend to be national and structural, including deindustrialization, the rise of a service economy, the decline of the traditional family and tax changes favoring the very wealthy. Areas that traditionally were most unequal – notably the great global cities – have simply become more so. It is here, in the command and communication centers of the economy, that the greatest wealth has been accumulated and where we can see the rise of a new aristocracy nevertheless dependent on a large low wage service class. The next Administration and Congress should start to address these trends or the traditional American dream will become, for most citizens, no more than that. 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)

  • Gas boom ripples through Pennsylvania economy

    Almost 150 years after Colonel Edwin Drake drilled the country’s first commercial oil well in Western Pennsylvania and transformed Pittsburgh into a manufacturing powerhouse, a huge natural gas field could be about to rescue this region’s sluggish economy from its post-industrial death spiral.

    The future energy boom will come from tapping an estimated 50 trillion cubic feet of recoverable natural gas that is locked into the Marcellus Shale, a huge, 400-million-year-old layer of sedimentary rock that lies about 8,000 feet beneath all of Western Pennsylvania and most of West Virginia, eastern Ohio and western New York. Worth an estimated $1 trillion, the gas from the Marcellus Shale could do for the Pittsburgh area what the smaller but similar Barnett Shale did for the Dallas-Fort Worth area in Texas – pump billions of dollars into local economies for two decades.

    Rodney Waller, a vice president at the Fort Worth-based Range Resources Corp. oil and gas company, said the exact size and scale of the Marcellus play is not yet known. But he says his company – the leading gas driller in Pennsylvania with 5,400 shallow producing wells – already has invested $500 million in the project. Marcellus’s gas is costly and technologically tricky to reach.

    Wells must be drilled to 7,000 or 8,000 feet, then a high-pressure mix of water, sand and chemicals is used to fracture the shale and liberate the gas molecules locked in it. Horizontal drilling allows each well to capture the gas within a 3,000- or 4,000-foot radius.

    Western Pennsylvania’s “Gas Rush” has already started slowly and quietly in the rural counties surrounding Pittsburgh and Allegheny County, where, since 1950, the economy has shed hundreds of thousands of manufacturing jobs and the metro population has been stuck at about 2.3 million. Thousands of landowners have leased their mineral rights to energy outfits like Range Resources. Waller said the coming gas boom could last 15 years or more, as the Barnett Shale field has in Texas. And the drilling pattern in Pennsylvania will follow the same rural-to-urban scenario it did in Texas, with the richest and most easily accessible deposits taken first and densely populated areas near Pittsburgh last. Waller says that in Dallas-Fort Worth, where gas production has escalated in the last five years, it seems everyone has been getting a cut of the Barnett Shale’s riches.

    For example, the homeowners’ association that runs Waller’s 38-acre gated community received a $25,000-per-acre signing deal. That $950,000, plus royalties, will be shared proportionally by the association and residents. Thanks to the techno-miracle of horizontal drilling, the well will be three blocks away.

    A million dollars is chicken feed compared to what the city of Fort Worth expects to get from gas leases and royalties over the next 20 years – nearly $1 billion. For the right to drill for gas under its 18,460 acres, the Dallas-Fort Worth International Airport alone received a check in 2006 from Chesapeake Energy for $185 million – not to mention the additional 25 percent of all royalties.

    Meanwhile, Arlington, the growing community of 367,000 between Fort Worth and Dallas, has already banked $50 million in signing bonuses for leasing 4,300 of its acres, according to city real estate manager Roger Venables. Signing bonuses in Arlington – $75 per acre in 2005 – were $30,000 in July, said Venables, who estimates that the city’s nearly 7,000 acres will ultimately generate about $850 million. He said most of that gas revenue will go into an endowment and be distributed through community grants to improve the quality of life in Arlington.

    In Washington County south of Pittsburgh, where Range Resources drilled a test well in 2002 that proved the Marcellus Shale contained enough gas to be profitable, the early returns are more modest. Hundreds of landowners who own the mineral rights beneath their property have penned “signing bonuses” that have now risen to $4,000 per acre. They also will get at least 12.5 percent of production royalties.

    Washington County’s government has already scored a small benefit: Planning Department Director Lisa Cessna says the county was paid an upfront bonus of $17,000 from Range Resources in 2002 to explore for gas in 2,700-acre Cross Creek Park. Plus, it gets a now laughably low price of $10 per acre per year. So far, the county has realized about $60,000 in gas-related revenue, but royalty checks will soon sweeten that figure, as will a deal the county is seeking for its other major land holding, 2,289-acre Mingo Park.

    Whoever wins the right to drill at Mingo must pay Washington County at least $4,000 an acre, fork over at least 15 percent in royalties and abide by strict environmental regulations, Cessna said. Bids will be opened Nov. 4.

    By the end of the year, Range Resources will finally see its first commercial flow of gas from the Marcellus from three wells operating in Cross Creek Park, Waller said last week. As for the cash-starved governments of the City of Pittsburgh and Allegheny County, which controls 9,300 acres of land at Pittsburgh’s two airports, they too will most likely benefit handsomely from the Marcellus gas play.

    But they’ll have to be patient. In Texas, the development of the Barnett Shale took 15 years to spread from the hinterland to downtown Fort Worth, where drilling is occurring now.

  • New York’s Decentralized Economy?

    Even before the Wall Street meltdown, the New York area was going through its own de-clustering. No it hasn’t – and probably never will – become a multi polar area in the style of Los Angeles, Houston or Phoenix, but the trend to deconcentrate jobs has been inexorable over the last thirty years, according to a new report by our friends at the Center for an Urban Future.

    The report states:

    “In 1975, New York City accounted for 53.1 percent of all private sector jobs in the 17-county metro region. But by 2005, the five boroughs’ share was just 47.2. Most of the ci ty’s losses occurred in Manhattan, which had 33.9 percent of the region’s private sector jobs in 1975 but only 28.8 percent in 2005.”

    None of this is particularly worrisome in that the shrinkage of the city’s jobs slowed considerably in the past decade up to 2005. The whole region showed some growth. But what happens now with an estimated 150,000 or more jobs expected to be wiped out due to the financial crisis? This may prove the biggest crisis faced by the city since the “Ford to City: Drop Dead” days of the 1970s.

    Both the Giuliani and the Bloomberg legacies surely will now be tested.

  • In the Doldrums: Another Economic Indicator Heads South

    Lost amidst headlines of bank nationalization, credit market woes, and a worldwide equities rout, was news that the Baltic Dry Index, an index seen as a measure of world trade flows and future economic activity, has been in freefall this week. A drop of 8% on Tuesday was bookended by drops of around 11% on both Monday and Wednesday.

    According to the Guardian, the index is

    “seen as a good leading indicator of future economic production levels because it charts the cost of freight movements in 26 of the world’s biggest shipping lanes of “dry” materials, such as coal, iron ore and grain which feed into the production of finished goods some weeks or months ahead.”

    Since reaching a peak in July, the BDI has plummeted over 80%, leading to fears that demand for commodities, particularly in China, may be on the wane. This could, reports the Guardian, mean that the “great Asian miracle economy might now be coming apart at the seams, in spite of the official figures suggesting everything is still fine.”

    Agricultural areas throughout the United States, buoyed by recent high prices for commodities, have thus far shown economic strength in the face of increasingly difficult conditions nationwide. The good times may be, if not coming towards an end, facing some sort of moderation.

    Effects of the credit crunch have already begun to show some impact on international commodities trade. Last week, Canada’s Financial Post reported that grain shipments had begun to pile up in ports as international buyers found themselves unable to obtain letters of credit. In the words of one marketing expert, the situation is a “nightmare.” According to experts interviewed by Bloomberg, “letters of credit and the credit lines for trade currently are frozen,” and as a result, “nothing is moving”. Such credit issues, in connection with weakened demand for commodities in a potential worldwide recession and a downturn in international trade, may mean that communities around the nation will soon face a more difficult economic picture.

  • The American Dream: Alive and Well (Some Places)

    Even after the burst of the housing bubble, the American Dream of home ownership has remained alive in some places. As it turns out the “bubble” was far from pervasive, and as Nobel Laureate Paul Krugman indicated in The New York Times, the housing price increases were largely limited to the areas of the nation with stronger land use regulation.

    In all, at the peak of the housing bubble, 46 of 129 US markets had house prices at or below the historic ceiling of three times household incomes (see 4th International Demographia Housing Affordability Survey. Before the bubble, nearly all markets were at or below that norm, but many have risen to double, triple or even more than three times the standard.

    The American Dream can be said to have started with William Levitt, who revolutionized home building starting with his huge Levittown, New York development in the late 1940s.

    As Witold Rybczynski wrote in a recent Wilson Quarterly article, new Levittown houses could be purchased for three times the average wage in Levittown. This bought a detached 750 square foot house, without a garage. Interestingly, this was at a time when single-income families were still the norm.

    Levittown is the birthplace of the modern American Dream. It was only after the pioneering model of Levittown that home ownership became the norm by becoming affordable to middle-income and blue collar households in America. At the end of World War II, home ownership in the United States was 40 percent. By 1960, it exceeded 60 percent and since risen to above 65 percent.

    Levittown, and the automobile-oriented urban expansion it foreshadowed, resulted in the greatest democratization of prosperity in history. Wherever mass suburbanization occurred – whether in the United States, its first world cousins Canada and Australia, Western Europe or later even Japan – we have seen the unprecedented rise of a mass property-owning class.

    This economic and social advance was built on liberal land use regulation. It would not have been possible if the policies that have poisoned housing markets from Los Angeles and Portland to Miami and Boston had been in effect at that time.

    Yet there is still life outside the high-priced coastal regions. Indeed in much of the country today, new housing affordability is at least as good as it was in Levittown. Generally, where land regulation has remained reasonable, new houses can be purchased for less than three times median household incomes. Purchasers may need two incomes to get there, but the effect remains the same. Moreover, the houses in these markets generally boast two-car garages and living space nearly double that of the typical Levittown ‘starter’ house.

    The small selection of examples below is limited to metropolitan areas with high housing demand. These are not economic basket cases like those in and around certain old industrial cities. Nor are these places where the market has evaporated because so many people have left or are planning to leave. Instead these are places attracting domestic migrants from other parts of the country (especially from metropolitan areas with strong land use regulation). These listings are the result of a quick search; they may not necessarily represent the least expensive new houses available. Each has three bedrooms and all have two-car garages.

    Atlanta: A new 1,500 square foot for a base price of $130,000 – 2.3 times the median household income View listing.

    Austin: A new 1,200 square foot for a base price of $106,500 – 1.9 times the median household income View listing.

    Charlotte: A new 1,500 square foot for a base price of $133,000 – 2.5 times the median household income View listing.

    Columbia, South Carolina: A new 1,500 square foot for a base price of $130,000 – 2.7 times the median household income View listing.

    Columbus: A new 1,400 square foot for a base price of $130,000 – 2.5 times the median household income View listing.

    Dallas-Fort Worth: A new 1,250 square foot for a base price of $120,000 – 2.2 times the median household income View listing.

    Houston: A new 1,300 square foot for a base price of $100,000 – 1.9 times the median household income View listing

    Indianapolis: A new 1,500 square foot for a base price of $114,000 – 2.1 times the median household income View listing.

    Kansas City: A new 1,200 square foot for a base price of $150,000 – 2.8 times the median household income View listing.

    The list could go on and on, including virtually every area of the nation that has not driven up the price of developable land by land use regulations. The American Dream is alive and well where it has not been snuffed out by economics-be-damned urban planning policies.

    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.”

  • Resources and Resourcefulness – Welcome to The Real Economy

    By Delore Zimmerman

    The orchard-laden foothills of North Central Washington’s Wenatchee Valley are resplendent at this time of year. The apple and pear harvest is in full swing. The warm golden hues, the crisp mountain air and the bustle of trucks carrying produce to markets near and far provide a stark and welcome contrast to the daily barrage of bad news about the downward spiral of the nation’s financial markets.

    In places like New York, Chicago and San Francisco we can see the result of the demise of once-vaunted vapor traders. They created nothing but debts and are leaving whole economies in shambles.

    But in the Wenatchee Valley one can clearly see the fruits – both tangible and figurative – of the real economy. Over the course of almost ten years a determined coalition of community and business leaders has been working hard and working together to build an economy of substance and promise. The results of their efforts include a picturesque and vital downtown, a thriving and growing fruit and wine industry, a riverfront soon to be animated with housing and community recreation facilities, and a Yahoo data service center.

    These diverse elements make for an economy whose benefits are substantial and meaningful for the people of that region. The City of Wenatchee and the Port of Chelan County are the driving forces behind these initiatives. But the Wenatchee Valley’s success also can be traced directly to the investments and commitment of numerous private and government partners from within the region and from the outside. The Chelan County Public Utility District, for example, operates three hydro projects that deliver clean, renewable, low-cost energy to local residents and to other utilities that serve 7 million residents of the Pacific Northwest. The PUD operates a utility system that now includes local water, wastewater and wholesale fiber-optic services in addition to electricity.

    To capitalize further on its hydro power resources leaders in the Valley are aggressively pursuing an Advanced Vehicle Innovations (AVI) initiative. The AVI Consortium was conceived by the Port of Chelan County in 2005 to establish North Central Washington as a catalyst and center for development, demonstration, and deployment of flex-fuel plug-in hybrid electric vehicles. These are vehicles propelled by a combination of electricity-from-the-grid and bio-fuels (i.e., bio-diesel, ethanol). Both of these energy resources are in plentiful supply in the region.

    So here’s a lesson for our nation’s next stab at building a prosperous national economy. Put the money in the hands of those who can harness local and regional resources and make something useful out of them. It can be fruit, a manufactured product, or a service like data processing. The result is a community that, although not immune to the Wall Street tsunami, retains tangible assets that will survive the current storm.

    This real economy is working right now in the Wenatchee Valley. It also exists in many other communities and regions throughout the nation, from the Dakota plains to the energy corridor around Houston, and the growing industrial districts of the Southeast. These places represent the bright face of America’s future economy. If only they were taken more seriously by those – our nation’s leaders and so-called financial wizards – who are now driving us towards an era of darker expectations.

    Delore Zimmerman is President of Praxis Strategy Group and Publisher of NewGeography.com

  • The Financial Crisis: Bubbles Deflating Worldwide

    The mortgage meltdown is much more than an American affair. Real estate bubbles have developed in all major English speaking countries – US, Canada, UK, Ireland, Australia and New Zealand.

    Over the past year, house prices have dropped 12 percent in the United Kingdom. The annual decline is approaching 10 percent in Ireland, while median house prices have dropped six percent in New Zealand. In each of these countries, the price declines started after the United States. Further, each of these nations has experienced massive nationwide housing inflation, in part, I believe, as a result of highly restrictive land use policies. These policies, often known as ‘smart growth’ have made it virtually impossible to build new housing on the fringe of urban areas inexpensively.

    Where prices will finally settle, no one knows. Some analysts soothe the market claiming that the bottom is near. But many, including The International Monetary Fund, predict the worst of the mortgage crisis is yet to come in the United States. Similarly, former chairman of the council of economic advisors, Martin Feldstein suggested last week that prices would fall to their pre-bubble levels, as did I in this space as well. That’s what bursting bubbles is all about – prices that drop to pre-bubble levels.

    Canada is another story. Like the United States, housing costs remain within historic norms where there is traditional land use regulation, while restrictive land use regulation has led to a housing bubble in some markets. This is especially true in Vancouver, where there has been some minor price softening in recent months. Bank of Nova Scotia officials have indicated that they do not expect the kind of bubble bursting in overpriced Canadian markets that has occurred in the United States, at least partially because there was a lower volume of profligate lending (subprime, etc.) in Canada.

    Janet Albrechtsen, a columnist for The Australian writes in The Wall Street Journal that the Australian financial system also is healthier than America’s, at least in part because of more stringent mortgage regulation. If her analysis is right, Australia could be spared the mortgage meltdown that is engulfing America, the United Kingdom, Ireland and New Zealand. Thus, far, there is little indication of declining house prices in Australia.

    That does not mean there is no bubble. Even with strong banks, Australia has a problem. A housing bubble as pervasive as the United Kingdom has developed in Australia, despite its wiser financial regulation, House prices have risen to from two to three times the historic Median Multiple (median house price divided by median household income) norm of 3.0.

    The Australian bubble, like in the United Kingdom, Ireland and New Zealand (as well as parts of the US) has been spurred by overly restrictive land use regulation, which forces land prices up and causes them to explode even with moderate increases in demand. In response, the Median Multiple has increased to more than double the historic norm in all major capital cities. As a result, younger and future Australians have to pay far more of their income for housing than those who came before. So, while superior regulation may have kept Australia’s banks healthy, the prospects of many younger members of society have been greatly diminished. They will have been the victims of the largest inter-generational transfer of wealth in the nation’s history.

    Despite Ms. Albrechtsen’s optimism, it is not yet clear that Australia’s bubble will not eventually burst. Certainly falling commodity prices could hurt the employment situation, particularly for middle and working class Australians who are now struggling to pay ever higher percentages of their incomes for housing. Australia may have remained ‘the lucky country’ so far in terms of real estate. But whether that will persist in the coming months is still open to question.

    Note 1: http://www.demographia.com/dhi.pdf.

    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.”