New Geography

Category: Economics

  • California Business Needs to Go Small or Go Home

    Here’s the bitter reality for business in much of California: there’s no cavalry riding to rescue you from the state’s regulatory and tax vise. The voters in California have spoken, and with a definitive, distinctive twist, turned against any suggestion of reform and confirmed the continued domination of the state by public employee unions, environmental activists and their crony capitalist allies.

    You are on your own, Southern California businesses, and can count on very little help, and, likely, much mischief, from Sacramento and various lower orders of government. To find a way out of stubbornly high unemployment and anemic income growth, the Southland will need to find a novel way to restart its economic engine based almost entirely on its grass-roots business, its creative savvy and entrepreneurial culture.

    This shift poses a great challenge, both for California’s interior counties and parts of the coastal region. Unlike Silicon Valley and its hip twin, San Francisco, no one is investing much in the Southland. Among the nation’s largest metropolitan areas, the Los Angeles region has become a corporate stepchild, trailing in new office construction not only to world-beaters like Houston, but also New York, the Bay Area and even slower-growing Philadelphia or Chicago. In fact, although the second largest metro area in the country, L.A.-Orange County does not even make the top 10 regions for new building.

    Nor can we expect much in the way of residential housing growth, particularly single-family homes, as the state’s planners continue their jihad against anything smacking of suburban expansion. Traditional industries like aerospace, manufacturing and logistics face enormous regulatory barriers, ruinous taxation levels and huge energy price increases that will slow any potential growth, and could lead to yet more departures by existing large firms. Virtually all the region’s former major established aerospace companies have relocated their headquarters elsewhere, which hurts efforts to get them to expand or maintain facilities here.

    Despite all this, the Southland is not without considerable assets. Perhaps most promising is the region’s status as the nation’s No. 1 producer of engineers – almost 3,000 annually. This raw material is now being somewhat squandered, with as many as 70 percent of graduates leaving the area to find work.

    But there’s no reason for unmitigated despair; overall, Los Angeles-Orange has increased its ranks of new educated workers ages 25-34 since 2011 as much as ballyhooed New York, San Francisco and much more than Portland, Ore. For its part, the Inland Empire ranked fourth among 52 large metropolitan areas in terms of increased presence of bachelor’s degree-holders in this age group, adding almost 19,000 college-educated people since 2011.

    There’s also a case to be made for Southern California as an emerging tech hub. As venture capitalist Mark Shuster points out, the region ranks third, just behind the Bay Area and New York, for its percentage of the nation’s tech startups, and is now the fastest-growing. The overall tech base, which includes aerospace, is still the largest in the country, with more than 360,000 employees. As tech moves from basic infrastructure to application, Shuster argues, the Southland’s time may come.

    Despite producing MySpace, the region may have lost out in the social media wars, but shifts in tech trends could turn out to be far more advantageous. This relative optimism is remarkable given the losses in so many key engineering-driven industries over recent decades, from electronics and energy to aerospace.

    Southern California’s technology community could well benefit from such things as growing demand for content among tech firms, as well as attempts to reboot space exploration. Indeed, investor Peter Thiel recently suggested that the region’s technology industry is the most “underestimated” in the nation.

    “I’d definitely be short New York and long L.A.,” Thiel told the Los Angeles Times, citing both commercial space pioneer SpaceX and Oculus, the Irvine-based maker of virtual-reality headsets.

    The case for a grass-roots rebound of tech in Southern California depends heavily on one key asset – the presence of the nation’s largest community of people in the arts. Roughly half of these workers are self-employed, according to the economic forecasting firm EMSI.

    The Silicon Valley may be ideal as a place to nurture digitial technologies, but “nerds” as a whole are not cultural mavens or trend-seekers. They are better at transmitting messages than putting something worthwhile in them. In contrast, Southern California excels in filling messages with product.

    The large existing base of television, movie and commercial producers has nurtured skills that are sought worldwide. Yet at the same time, with the studio system clearly in decline, as large productions go elsewhere, digital players such as Netflix, Amazon, Apple, as well as Los Angeles-based Hulu, have become more important. Indeed, when my Chapman students, many of them film majors, discuss their futures, it is increasingly these intermediaries, not the studios, that they identify as critical to a successful career.

    This suggests a very different picture of the Southland’s industry than the one normally associated with large companies, studios and deep concentrations of talent. In the future, more production will be done by individuals, sometimes working out of their homes, scattered across the region. According to Kauffman Foundation research, the L.A. area already has the second-most entrepreneurs per 100 people in the U.S., just slightly behind the Bay Area. By necessity, Southern California’s economy will become more entrepreneurial and grass-roots; even as we have been losing large companies, our percentage growth in self-employed is among the highest in the country.

    Not surprisingly, this activity appears concentrated not in the traditional bailiwicks in the San Fernando Valley, or in the hyped Downtown-adjacent areas, but along the coastal strip from Santa Monica to Irvine that some promoters have christened “the tech coast.” This epitomizes the growing role of young individuals and startups – as opposed to veteran engineers – in shaping the Southland’s emerging tech economy.

    This pattern, however, is not just restrictive to digital entertainment. Southern California’s network of tested aerospace engineers – which, at 5,000 people, is second only to Seattle’s – is one reason why companies like SpaceX have located here. In an economy that relies more and more on individual expertise, this is a critical advantage.

    One powerful caveat: We are not likely to see much blue-collar spinoffs of tech here, due largely to high land, regulatory and energy costs. Space X, for example, may have its key brain power in Southern California, but has chosen to construct its spaceport in lower-cost, business-friendly Texas. Another aerospace firm, Firefly Systems, this year decamped entirely for Texas, moving its headquarters to the Austin area and rocket engine facilities to rural Burnett County.

    This pattern suggests that many of our emerging firms may remain somewhat limited in scope and largely focused on high-end functions, which reduces the positive impact for the region’s struggling local middle class and working class.

    But the new grass-roots economy does not apply only to tech. Los Angeles has seen a huge rise in the number of people working from home, a percentage that since 1980 has more than tripled even as transit’s ridership share has dropped. Small, home-based businesses are common not only in such fields as real estate, but also in business consulting and even trade.

    These home-based businesses, and small ones tucked into strip malls or small industrial centers – for example, in food processing – represent the last, best hope for a revived Southland economy. Our corporate community seems destined to continue shrinking, but this does not necessarily mean that the overall economy has to follow suit. Unable to rely on local officials to make things better, our best chance lies with relying on the entrepreneurial spirit and creativity of our people – the very thing that made us such an economic beacon in decades past.

    This piece first appeared at the Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Self employment photo by BigStockPhoto.com.

  • Cities: Better for the Great Suburbanization

    Where Cities Grow: The Suburbs

    The massive exodus of people from rural areas to urban areas over the past 200 years has been called the "great urbanization." For more than two centuries, people have been leaving rural areas to live in cities (urban areas). The principal incentive has been economic. But most of this growth has not taken place close to city centers, but rather on or beyond the urban fringe in the suburbs (and exurbs). Appropriately, The Economist magazine refers to the urbanization trend as the "great suburbanization," in its December 6, 2014 issue (PLACES APART: The world is becoming ever more suburban, and the better for it).

    The preponderance of suburban growth is evident in high income world metropolitan areas. For decades, nearly all growth in nearly all cities has been in the suburbs. Some notable examples are London, Toronto, San Francisco, Portland, Tokyo, Zürich, and Seoul. The dominance of suburban growth is also evident in the major cities of the less developed world, from Sao Paulo and Mexico City, to Cairo, Manila, Jakarta, Beijing, and Kolkata (see the Evolving Urban Form series). The Economist describes the substantial spatial expansion of residences and jobs in Chennai (formerly Madras), a soon-to-be megacity in India.

    Growing Cities Become Less Dense

    The Economist quotes New York University geographer Shlomo Angel, whose groundbreaking work (such as in Planet of Cities) indicates that "almost every city is becoming  less dense." Angel also shows that, contrary to the popular perception of increasing densities, cities become less dense as they add more population. This extends even to the lowest income cities, such as Addis Abeba (Ethiopia), where the population has increased more than 250 percent since the middle 1970s, while the urban population density has declined more than 70 percent. The rapidly growing cities of China exhibit the same tendency, where, according to The Economist: "Mr. Angel finds that population densities tend to drop when Chinese cities knock down cheaply built walk-up apartments and replace them with high towers."

    Suburbs in the United States

    In the United States, The Economist says that more than half of Americans live in suburbs. In fact, this is an understatement, owing to the common error of classifying "principal cities" as urban core, when many are, in fact, suburban. The Office of Management and Budget established the "principal cities" designation to replace the former "central city" versus suburb classification. This was in recognition of the fact that employment patterns in US metropolitan areas had become polycentric, with suburban employment centers, which along with central cities were designated as "principal cities."

    The absurdity of using "principal cities" as a synonym for central cities is illustrated by the broad expanses of post-1950 suburbanization now classified, with genuine core cities like New York or Chicago, as principal cities such like Lakewood, New Jersey (New York metropolitan area), Hoffman Estates (Chicago), Mesa (Phoenix), Arlington (Dallas-Fort Worth), Reston (Washington) and Hillsboro (Portland). In fact more than 85 percent of major metropolitan area (over 1 million population) residents live areas that are functionally suburban or exurban according to our small area analysis ("City Sector Model").

    Urban core growth rates have improved since 2010, which is an encouraging sign. Yet, core city jurisdictions account for less than 30 percent of metropolitan area growth, as Richard Morrill has shown. The Economist points out factors that could prevent this long overdue improvement from being sustained in the future.

    • Schools are "still often dire in the middles of cities," according to The Economist. Any hope of keeping most young families as they raise children seems impossible until core cities take on the politically challenging task of school reform.
    • The Economist also notes the huge government employee pension obligations of some large core cities, suggesting the necessity of cutting services or raising taxes. "Both answers were likely to drive residents to nearby suburbs, making the problem worse. No number of trams, coffee shops or urban hipsters will save cities that slip into this whirlpool." The Economist specifically cites Chicago and New York, but could have added many more examples both in this country and outside.

    Limiting Sprawl and Limiting Opportunity

    The Economist is refreshingly direct in its characterization of attempts to stop urban spatial expansion ("urban sprawl"). "Suburbs rarely cease growing of their own accord. The only reliable way to stop them, it turns out, is to stop them forcefully. But the consequences of doing that are severe."  The Economist: chronicles the experience of London, with its "greenbelt" ("urban growth boundary"): "Because of the green belt London has almost no modern suburban houses and very high property prices."

    The social consequences have been massive. "The freezing of London’s suburbs has probably aided the revival of inner-London neighbourhoods like Brixton. It has also forced many people into undignified homes, widened the wealth gap between property owners and everyone else, and enriched rentiers." Housing is typically the largest share of household expenditures and raising its price reduces discretionary incomes, while increasing poverty. In London, The Economist says that "To provide desperately needed cheap housing, garages and sheds there are being converted into tiny houses," quoting historian John Hickman who calls them “shanty towns”.

    Higher house prices and lower discretionary incomes are not limited to London. Among the 85 major metropolitan areas covered in the 10th Annual Demographia International Housing Affordability Survey, all 24 of those with "severely unaffordable" housing have London-style land-use regulation or similar land use restrictions. These financial reverses are not limited to suburban households, since urban containment policies are associated with substantial house price increases in urban cores as much as in suburbs.

    "Doom Mongering" About the Suburbs

    Oblivious to this revealed preference for residential and often commercial suburban location, many retro – urbanists, including many well placed, have viewed the suburbs with "concern and disdain," according to The Economist. Since the Great Financial Crisis, The Economist notes that this has turned to "doom-mongering."

    The Economist summarily dismisses suburban doom doctrine: "Those who argue that suburbia is dying are wrong on the facts; those who say it is doomed by the superiority of higher-density life make a far from convincing case."

    The Future

    In the editorial leader, The Economist, suggests: A wiser policy would be to plan for huge expansion. Acquire strips of land for roads and railways, and chunks for parks, before the city sprawls into them.

    The Economist adds: This is not the dirigisme (government planning) of the new-town planner—that confident soul who believes he knows where people will want to live and work, and how they will get from one to the other. It is the realism needed to manage the inevitable.

    The Economist continues that the suburbs have worked well in the West and are spreading, concluding that: We should all look forward to the time when Chinese and Indian teenagers write sulky songs about the appalling dullness of suburbia.

    Wendell Cox is principal of Demographia, an international public policy and demographics firm. He is co-author of the "Demographia International Housing Affordability Survey" and author of "Demographia World Urban Areas" and "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life." He was appointed to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member. He was appointed to the Amtrak Reform Council to fill the unexpired term of Governor Christine Todd Whitman and has served as a visiting professor at the Conservatoire National des Arts et Metiers, a national university in Paris.

    Photo: Suburban Ho Chi Minh (Saigon), by author

  • The Rustbelt Roars Back From the Dead

    Urban America is often portrayed as a tale of two kinds of places, those that “have it” and those who do not. For the most part, the cities of the Midwest—with the exception of Chicago and Minneapolis—have been consigned to the second, and inferior, class. Cleveland, Buffalo, Detroit or a host of smaller cities are rarely assessed, except as objects of pity whose only hope is to find a way, through new urbanist alchemy, to mimic the urban patterns of “superstar cities” like New York, San Francisco, Boston, or Portland.

    Yet in reality, the rustbelt could well be on the verge of a major resurgence, one that should be welcomed not only locally but by the rest of the country. Two factors drive this change. One is the steady revival of America as a productive manufacturing country, driven in large part by new technology, rising wages abroad (notably in China), and the development of low-cost, abundant domestic energy, much of it now produced in states such as Ohio and in the western reaches of Pennsylvania.

    The second, and perhaps more surprising, is the wealth of human capital already existent in the region. After decades of decline, this is now expanding as younger educated workers move to the area in part to escape the soaring cost of living, high taxes, and regulations that now weigh so heavily on the super-star cities. In fact, more educated workers now leave Manhattan and Brooklyn for places like Cuyahoga County and Erie County, where Cleveland and Buffalo are located, than the other way around.

    The Psychological Undermining of the Rustbelt

    When attention is paid to the industrial Midwest, it often takes the form of an anthropological curiosity as to how “the other half” lives. “I’ll tell you the relationship between New York and Cleveland,” said Joyce Brabner, wife of the underground comic book legend Harvey Pekar, to a New York City radio host. Brabner talked about the “MTV people” coming to Cleveland to get pictures of Pekar emptying the garbage and going bowling. But they didn’t bowl, Brabner quipped. They went to the library. “So, that’s it,” she continued. “We’re just basically these little pulsating jugular veins waiting for you guys to leech off some of our nice, homey, backwards Cleveland stuff.”

    Urban economists, particularly those on the self-satisfied coasts, tend to envision utter hopelessness for the region. “Can Buffalo Ever Come Back?” reads the headline of a City Journal article by Harvard economist Ed Glaeser. He answers in the subtitle: “Probably not—and government should stop bribing people to stay there.” Glaeser cites Buffalo’s low levels of human capital and low housing costs as reasons to federally jump ship.

    Berkeley-based economist Enrico Moretti is also bearish on the future of the region. Moretti believes that the winners in the knowledge economy, such as Silicon Valley, Boston, and Seattle, will be winning more, and the losers—he cites Cleveland and Detroit—will be winning less. In a recent interview, Moretti hints at the prospect of federal incentives tied to unemployment benefits to motivate people to leave the Rust Belt for high-tech hot spots. “If you are a waiter, you can make twice as much in Austin relative to Flint,” remarked Moretti. Of course what’s missing from this equation is that the median rent in San Francisco is much more than double that of Flint, without considering the higher cost of energy and far higher taxes.

    Often, when national experts imbue hopelessness into the region, rustbelt leaders, no strangers to desperation, often take the bait. Perhaps nothing so illustrates the long-term acceptance of second-class status than the widespread adoption of the creative class model of urban development championed by Richard Florida. This approach—which holds up places like San Francisco and New York as exemplars par excellence—maintains that the key to growth is to develop a hip, cool scene that will attract educated, entrepreneurial people to a city.

    For instance, in a recent interview about how to turn around Detroit, Florida says, “If you want to rebuild a neighborhood, you’re a lot better off starting with stuff people eat and drink.” In other words, cities should develop the microbrewery district, the artisanal culinary scene, etc. to attract the talent; and once the talent clusters, broad economic development will follow.

    This approach was adopted in the ’90s by such politicians as former Michigan governor Jennifer Granholm, who famously proclaimed that the key to turning around rustbelt cities like Detroit lay in becoming “cool” by cultivating the “creative class” and subsidizing the arts. But as the American Prospect has noted, many down-at-the-heels burgs like Cleveland, Toledo, Hartford , Rochester, and Elmira, New York have tried but largely failed to reinvent themselves as hipster-oriented. “You can put mag wheels on a Gremlin,” commented one long time Michigan observer, “but that doesn’t make it a Mustang.”

    The Resurgence of the rustbelt as a productive region

    The rustbelt revival relies not on mimicry but on embracing the regional culture that values production of things over simply their mere consumption. Cities like San Francisco, Portland and Seattle may have started with industrial roots, but their recent success has been tied to such factors as attractive geographies and, to Midwest sensibilities at least, mild climates. These regions have been enriched for decades by the migration of people from the rustbelt—Microsoft’s former President Steve Ballmer (suburban Detroit), venture capitalist John Doerr (St. Louis), and Intel co-founder Robert Noyce (Iowa) are just a few examples.

    The cities of the heartland came into existence, first and foremost, as economic entities. Detroit, for example, grew first from timber and farming, and later autos; its location at the confluence of the Detroit River and the Great Lakes assured that its products could be exported around the nation and the world. Cleveland grew, and thrived, due to its location near such natural resources as oil (which explains Standard Oil’s founding in that city), as well as its strategic lakefront location. Pittsburgh also grew largely due to the nearby availability of cheap energy as well as the confluence of three rivers that made it an ideal place for the evolution of the steel industry.

    Today many in the economics and urban planning professions consider such factors close to irrelevant. With the certainty of old Marxists predicting the inevitable end of capitalism, the clerisy today denies that industry can ever revive. “Construction and manufacturing jobs are not coming back,” intoned Slate, suggesting not much of a future for a wide swath of the country, and millions of Americans.

    Yet a funny thing has happened on the way to oblivion: the rustbelt’s industrial base is reviving. Cheap and abundant natural gas is luring investment from manufacturers from Europe and Asia, who must otherwise depend on often unsecured and more expensive sources of energy. The current energy and industrial boom, according to Siemens President Joe Kaeser, “is a once-in-a-lifetime moment.”

    Indeed, since 2010, jobs have expanded in energy, manufacturing, logistics and, with the return of the housing market in some areas, construction. Although much of the expansion has taken place in the sunbelt, notably Texas, the rustbelt economy has also been a prime beneficiary. Of the top ten states for new plants in 2010, five were in the rustbelt—led by second place (after Texas) Ohio, Pennsylvania, Michigan, Illinois, and Indiana.

     Most impressively, there has been a revival of job growth in these areas. Between 2009 and 2013, rustbelt cities and states dominated the country’s industrial revival. At the top of the list is Michigan, which gained 88,000 industrial jobs, a performance even greater than that of Texas, which came in second. The next three leading beneficiaries are all rustbelt states: Indiana, Ohio, and Wisconsin.

    For much of the past half century, the rustbelt states suffered high levels of unemployment. But today Ohio, Indiana, Minnesota and Wisconsin have considerably lower rates of unemployment than the national average, and considerably less than California, Georgia, Nevada, New Jersey, and New York.

    Human Capital: A critical advantage for the new rustbelt

    Critically, despite generations of out-migration, the region has retained a strong base of skilled, technical workers. The Great Lakes states, for example, boast the largest concentration of engineering jobs (more than 318,000) of any major region. This is 70,000 more than northeast or the west coast. In terms of engineers per capita, both Dayton and Detroit rank among the top 12 regions in the country; they have many more, per capita, than Boston, San Francisco, New York, Los Angeles, and Chicago.

    The rustbelt’s technological strengths differ considerably those of the two leading engineer cities, San Jose/Silicon Valley and Houston. In the Silicon Valley engineers tend to be focused on the high profile digital economy, while those in Houston are generally engaged with oil and gas. In contrast, the rustbelt’s workforce is more involved in the world of production, of practical engineering. Their work conforms closest to French sociologist Marcel Mauss’s description of technology as “a traditional action made effective.”

    The revival of industry makes such engineering talent critical to regional success. It also provides a critical opportunity to expand the ranks of the middle class. The University of Washington’s Richard Morrill has found that areas with large concentrations of manufacturing—including largely non-union southern plants—and other higher-wage blue collar jobs have significantly lower levels of income inequality than areas that rely primarily on service, finance, and tech industries.

    This could create tremendous opportunity for a broad swath of the rustbelt population. There is already, notes a recent Boston Consulting Group (BCG) study, a shortfall of some 100,000 skilled manufacturing positions in the U.S. By 2020, according to BCG and the Bureau of Labor Statistics, the nation could face a shortfall of around 875,000 machinists, welders, industrial-machinery operators, and other highly skilled manufacturing professionals.

     So rather than focus on the “hip cool,” the rustbelt’s new generation, particulary the majority without Bas, needs to become reacquainted with the skills—so often deemed unfashionable and dead-end—that built the region.

    Equally critical has been the growth among younger educated workers in the region. From 2000 to 2012, the Buffalo metro area rose to seventh in the nation in the number of 25- to 34-year-olds with a college degree, a percentage gain of 34 percent. Greater Pittsburgh ranked tenth. Over the last three years, the Cleveland metro has risen to third in the nation in the percentage gain of young adults with a college degree, behind only Nashville and Orlando. Cleveland’s gain of 15,500 college-educated young adults was greater than Silicon Valley’s and seven times that of Portland.

    These young folks aren’t just arriving, but they are also employed. According to the Center for Population Dynamics at Cleveland State University, Pittsburgh and Cleveland are third and eighth in the nation respectively in the percentage of 25- to 34-year olds in the workforce with an advanced or professional degree, ahead of such high-tech hot spots as Seattle, Austin, and San Diego, and well ahead of Portland, which ranks twenty-third. One explanation for this shift lies in job prospects. For example, one recent highly-disseminated report by the Portland-based Value of Jobs Coalition found that Portland’s “brain gain” was more akin to “brain waste.” The region’s educated labor force—which the report found was oversaturated with liberal arts majors—works fewer hours and gets paid less than the national metropolitan average.

    The Comeback is not just coming, it’s already here

    What’s driving the sudden improvement in the rustbelt? Some of it has to do with the region’s legacy. Various industrialists long ago financed the universities and hospitals that pepper the region, and it is these centers of knowledge production that are driving the highly-skilled workforce demand. For example, Carnegie Mellon’s robotics and computer engineering programs are creating a two-way pipeline between Pittsburgh and Silicon Valley. Both Google and Apple are broadening their physical footprint in the Steel City, in part because of the cost advantages the rustbelt offers relative to either coast. In Cleveland, the health care service and technology industry is clustering at a fast pace, particularly along the city’s health-tech corridor. According to Jeff Epstein, director of Cleveland Health-Tech Corridor, the city has raised more than $1 billion in venture capital over the last 12 years. The city’s biotech start-ups have increased by 133 percent, to 700, over the same time period. Global firms are taking notice. “The city has become quite a hub for the healthcare industry,” said Eric Spiegel, CEO of Siemen’s USA, on a recent visit to Cleveland. “We think there’s a good talent base here. It’s a good location for a lot of our businesses.” Bowling and taking out the garbage this isn’t.

    Another major factor lies with costs. Housing prices in most rustbelt cities, adjusted for incomes, are one-third those of the Bay Area and at most one-half those seen in the Los Angeles, New York, or Boston areas. This can be seen not just in distant exurbs or suburbs, but in prime inner-city neighborhoods. Whatever dreams millennials have are likely to center around affordable single-family housing, as they begin to marry and start families. The rustbelt offers this younger generation the kind of choices, and middle class standards, that are increasingly unattainable in the superstar cities.

    These changes are beginning to be seen in hard economic numbers. The region is already experiencing some of the nation’s largest per capita income gains. From 2009 to 2012, Cleveland’s metro income, when adjusted for inflation and cost of living, increased from $44,109 to $47,631—the fifth biggest increase in the nation, behind Silicon Valley, Houston, Oklahoma City, and Nashville. Buffalo ranked tenth in the nation, while Detroit and Pittsburgh ranked twelth and thirteenth, respectively. Conversely, Portland’s metro area ranked thirty-eighth in income gains, going from $39,414 to $40,706, one spot ahead of New York, whose per capita income nudged up by only $1,200.

    Economic development, then, is not simply about adding a cornucopia of talent or cool, then shaking and stirring it like a drink. According to Buffalo native and rustbelt economic expert Sean Safford, a director at the internationally-acclaimed Parisian Sciences Po, creative classification efforts distract from the kind of basic investments that really matter. What is important, Safford found, is investing in infrastructure that will drive the evolution of the rustbelt’s knowledge networks, particularly around the anchor institutions such as industrial research labs, universities, and hospitals that can help produce products for the global market.

    Cleveland, for one, is figuring this out. Along the city’s health-tech corridor, investment is not spent sprinkling the tech corridor with art galleries and microbreweries, but rather with the world’s first commercial 100 gigabit fiber network. Cleveland increasingly knows its bread is buttered by health care expertise, and it is making the requisite infrastructure investments to further the growth of its health care industry.

    Sure, Cleveland has got a microbrew scene as well, just like Portland. But a pricey pint requires a solid paycheck, which means Cleveland has microbreweries whose products are consumed by people who know microbes, and how to fashion steel, or develop new energy resources. Those tasty brews are consumed by producers. As long as that causality stays clear—not only for Cleveland, but for other rustbelt metro areas as well—then the region’s future could be far brighter than most experts suggest. Before long, those who can only envision the rustbelt as a landscape of garbage cans and bowling pins may find that they are the people who are stuck in the past.

    This piece originally appeared in Forbes.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Richey Piiparinen is a Clevelander, writer, and Senior Research Associate heading the Center for Population Dynamics at Cleveland State University.

  • The Curious Comeback Of U.S. Downtowns

    Perhaps nothing better illustrates the notion of urban revival in America than the comeback of many downtown districts. Yet if these areas have recovered some of their vigor, they are doing so in a manner that hardly suggests a return to their glory days in the first half of the 20th Century.

    Instead what’s emerging is a very different conceptualization of downtown, as a residential alternative that appeals to the young and childless couples, and that is not so much a dominant economic hub, but one of numerous poles in the metropolitan archipelago, usually with an outsized presence of financial institutions, government offices and business service firms.

    The good news: after an era of population declines, these areas are growing again: From 2000 to 2010, the downtown cores of the nation’s 51 metropolitan areas with populations over a milliongained slightly over 200,000 residents, or 1.3% of all the growth in the nation’s major metropolitan areas. However, 80% of that growth took place in just six cities — New York, Chicago, Philadelphia, Washington, D.C., Boston and San Francisco. In 18 of the 51 downtowns populations declined. Meanwhile, the population in the outer fringe of the 51 metro areas, 10 miles beyond downtown, grew by some 15 million.

    These trends appear to have continued into the initial stages of the current economy recovery. In a survey of 2011-2012 patterns, Trulia found a similar pattern of higher growth near the center, but even stronger growth rates on the fringes. As we have noted since 2000, the slowest growth took place in the close-in neighborhoods adjacent to the urban core.

    The better numbers reflect then not a mass “back to the city” movement but an uptick in the market appeal of city centers. And it’s unlikely that the old urban cores will ever come close to recovering the economic preeminence they once enjoyed. In American Community Survey data from 2006-08, the central business district of the New York metro area was the only one across the country that accounted for over 20% of regional employment; downtown’s share topped 10% in just six other metro areas: Chicago, Boston, Washington D.C., Richmond, Chicago and Hartford. This contrasts with the kind of employment dominance seen in the 1950s when Manhattan’s commercial core accounted for more than 35% of employment in the New York area. Of course, the decline is a natural outgrowth of the massive physical expansion of the New York area during the past half century, a pattern seen in other major regions.

    From 2000 to 2010, the share of jobs dropped somewhat in the nation’s biggest urban cores, but employment declined far more in the inner ring suburbs, according to an analysis by demographerWendell Cox. In contrast the fastest job growth was in suburban and exurban areas, paralleling their gains in population. This has become clearer since the recession ended; the consultancy Costar notesbetween 2012 and 2013 office absorption grew quicker in the suburbs than the core, accounting for 87% of new office demand. Overall suburbs account for nearly 75% of all office space in our metropolitan areas.

    We can see this pattern even in two of the hottest office markets, San Francisco and Houston. Overall, despite all the blather about tech moving into the core, San Jose, Calif., has almost 50% more new office space under construction than San Francisco. San Jose, it should be remembered, is essentially a giant suburb, with a very small downtown, and very low levels of transit ridership. It may be next to San Francisco but in urban form, it represents its direct opposite.

    In Houston, easily the nation’s leader in new office construction, downtown has fared well in the boom but the vast majority of new growth is located in the ‘burbs, including the largest project — the new ExxonMobil campus, with 20 buildings that will host 10,000 employees. In both places population growth in the suburbs has been approximately four times that of the core cities between 2010 and 2013.

    These patterns can be seen even in areas where there have been strong improvements in residential growth. In 2010, Chicago’sDowntown Loop Alliance reported that private sector employment in the Loop fell 20% during the last decade. Perhaps more telling, the number of jobs and resident workers (the “jobs-housing” balance) in the city of Chicago are converging toward equality. According to American Community Survey data, there are 1.1 jobs in the city of Chicago for each working resident. In contrast, two of the three large suburban corridors have higher ratios of jobs to workers than the city of Chicago. The Interstate 88 corridor has 1.3 jobs per worker, while the North Shore has approximately 1.5 jobs per worker. The Interstate 90 corridor has slightly more jobs than workers.

    How could this be given the much hyped migration of companies such as Boeing to the Windy City? One explanation lies with the rise of what urban analyst Aaron Renn has described as the “executive headquarters.” These relocations, he notes, tend to follow CEO preferences but cover only a small number of employees. Cost pressures, particularly from Wall Street, make securing space in central cities prohibitive if it involves large numbers of employees. A small, swanky office is one thing but putting 10,000 workers in expensive towers seems less common.

    The recent move of Archer Daniels Midland’s headquarters, he notes, brought roughly 100 jobs while that of Boeing, at a cost of $63 million in incentives, was a net gain of 500. In both cases, far more employees, spanning research, development and marketing remained in the original locations. Boeing, for example, retains over 80,000 employees in its original home around Seattle.

    What seems clear from these trends is this: downtowns are back, but not as dominant business hubs. Instead we continue to see not massive construction of new offices but the continued conversion of offices to residential buildings. This is particularly true in Chicago, where developers are adapting older office towers, malls, as well as hotels for apartments. In most cases, these are rental properties designed to serve a generally younger, and childless market.

    In Manhattan, the rate of office construction is running at a multi-decade high, but some insiders worry that demand may not be there in the next four years to fill the 14 million square feet of spaceprojected to be built by 2019. The shift of jobs, particularly in financial services, to cheaper locales could have a negative effect, as does the trend of employers cramming workers into smaller spaces.

    What about the wannabes like downtown Dallas, Atlanta and Los Angeles? These central cores have failed to recover their economic base, with vacancy rates approaching 20% despite a dearth of new construction. Nor has mass transit — often sold as the “magic bullet” to turn these central cores into thriving urban hubs — succeeded in reestablishing their economic centrality. In all three metro areas, despite multibillion-dollar expenditures on new rail lines, transit ridership remains at or even slightly below the levels of a decade ago.

    None of this suggests that these cores are not important to their regions, and particularly to their often vulnerable self-esteem. The downtowns of Atlanta and Dallashave gained some residents, and there is more pedestrian traffic at night. Similarly Los Angeles, whose downtown attracted nearly half of all L.A. residents daily in the 1920s, according to Robert Fogelson, continues to fade in economic importance. Today it represents about 2% of the vastly expanded metro area’s jobs. At least four other regional job centers are as larger or larger ).

    Yet despite this, it’s legitimate to see some revival of the area, largely due to a rash of residential conversions and some new apartment building. This has brought some new life, as well as some restaurants and some shops, as the population within two miles of City rose by an impressive 23,000 since 2006. But this hardly represents a full-scale return to the center city as the population of the surrounding areas — two to five miles from City Hall — has dropped by a similar number. Almost all the new construction in downtown is either for residents or hotels; very little new office space is being produced.

    Los Angeles’ downtown recovery, notes real estate analyst David Shulman, is “more about sports and entertainment venues, restaurants and bars, loft conversions, and hotels than it is about companies that need a lot of floors in tall buildings. Nightlife and streetscapes trump florescent light and cubicles.”

    This resurgence in L.A., and elsewhere, is no mean accomplishment, but it also does not constitute sea-change in fundamental economic geography. Downtowns are back, but more as a lifestyle option than as a dominant feature of the metropolitan landscape.

    This piece originally appeared in Forbes.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Lead photo of 432 Park Avenue in New York by Louis B (Own work) [CC-BY-3.0 or CC-BY-4.0], via Wikimedia Commons

  • Legal but Still Poor: The Economic Consequences of Amnesty

    With his questionably Constitutional move to protect America’s vast undocumented population, President Obama has provided at least five million immigrants, and likely many more, with new hope for the future. But at the same time, his economic policies, and those of the progressive wing of the Democratic Party, may guarantee that many of these newly legalized Americans will face huge obstacles trying to move up in a society creating too few opportunities already for its own citizens, much less millions of the largely ill-educated and unskilled newcomers.

    Democratic Party operatives, and their media allies, no doubt see in the legalization move a step not only to address legitimate human needs, but their own political future. With the bulk of the country’s white population migrating rapidly to the GOP, arguably the best insurance for the Democrats is to accelerate the racial polarization of the electorate. It might be good politics but we need to ask: what is the fate awaiting these new, and prospective, Americans?

    In previous waves of immigration, particularly during the early 20th Century, there were clear benefits for both newcomers and the economy. A nation rapidly industrializing needed labor, including the relatively unskilled, and, with the help of the New Deal and the growth of unions, many of these newcomers (including my own maternal grandparents) achieved a standard of living, which, if hardly affluent, was at least comfortable and moderately secure.

    Demand for labor remained strong during the big immigrant wave of the 1980s until the Great Recession. The country was building houses at a rapid clip, which required a large amount of immigrant labor. Service industries, particularly before the onset of digital systems, such as ipads for ordering, that replace human staff in fast-food restaurants, tend to hotels and provide personal services, although often at low wages.

    More recently, this wave of undocumented migration has diminished, as economic prospects, particularly for the low-skilled, have weakened. Yet the undocumented population remains upwards eleven million. Largely unskilled and undereducated, roughly half of adults 25 to 64 in this population have less than a high-school education compared to only 8 percent of the native born. Barely ten percent have any college, one third the national rate.

    This workforce is being legalized at a time of unusual economic distress for the working class. Well into the post-2008 recovery, the country suffers from rates of labor participation at a 36 year low. Many jobs that were once full-time are, in part due to the Affordable Care Act, now part-time, and thus unable to support families. Finally there are increasingly few well-paying positions—including in industry—that don’t require some sort of post-college accreditation.

    Sadly, the legalization of millions of new immigrants could make all these problems worse, particularly for Latinos already here and millions of African-Americans.

    African-American unemployment is now twice that of whites. The black middle class, understandably proud of Obama’s elevation, has been losing the economic gains made over the past thirty years.

    Latino-Americans have made huge strides in previous decades, but now are also falling behind, with a gradual loss of income relative to whites. Poverty among Latino children in America has risen from 27.5 percent in 2007 to 33.7 percent in 2012, an increase of 1.7 million minors.

    Logically, many Latinos and African-Americans might suspect that amnesty won’t be a great deal for them. There are occasional signs of disquiet. A recent Pew survey found that not only half of all whites, but nearly two-fifths of African Americans and roughly even a third of Hispanics approved of increased deportations of the undocumented. A Wall Street Journal-NBC poll found that well less than half of Latinos supported the President’s action.

    This ambivalence may reflect the reality that legalization of the undocumented may be felt hardest in those places, such as California, that have attracted the most newcomers, and also have highly developed welfare states. Today public agencies in Los Angeles, with an estimated one million undocumented immigrants, are bracing from large increases in the demand for state provided services.

    One LA Supervisor estimates the County, facing “an already impossible fiscal dilemma,” will need to spend an additional $190 million, without hope of federal compensation, on the newly legalized population. Ultimately, the newest migrants will be competing with existing residents—particularly poorer ones—not only for jobs but also social services.

    The President’s action on immigration requires a profound shift in economic policy, particularly in the large urban centers where most undocumented are clustered, to avoid creating a squeeze on scarce jobs and services. But Obama’s other big agenda—addressing climate change—has slowed the expansion of fossil fuel development. Meanwhile, it’s the energy sector that creates precisely the kinds of high-paying blue collar jobs, averaging upwards of $100,000 annually, that immigrants might be eager to fill and could give low unskilled workers a foothold into the middle class.

    Similarly, efforts by Obama’s allies at Federal agencies like HUD to encourage dense housing and discourage suburban growth means far less construction employment, one of the largest generators of good blue collar jobs and opportunities.

    Ironically, the places where the cry for amnesty has been the loudest—New York, San Francisco, Los Angeles, and Chicago—also tend to be those places that have created the least opportunity for the urban poor. This is in part due to the fact that these areas have tended to de-industrialize the most rapidly, discourage fledgling grassroots businesses through high taxes, environmental and housing, regulations.

    Whatever their noble intentions, these cities generally suffer the largest degree of income inequality, notes a recent Brookings study. In fact, according to an analysis by Mark Schill at the Praxis Strategy Group, African-American incomes in New York are barely half those of whites and, in San Francisco somewhat below half. In contrast, cities with broader economies like Dallas and Houston, have black populations earning sixty five percent of white incomes. Similarly, Latinos in Boston, New York, Philadelphia and San Francisco do far worse, relative to incomes, than their Sunbelt counterparts, compared to whites.

    These trends could worsen in precisely those areas with the biggest concentrations of undocumented immigrants covered by Obama’s executive order.

    Take, for example, the borough of the Bronx in New York City. The most Latino of all New York’s counties, in the Bronx, roughly one in three households live in poverty, the highest rate of any large urban county.

    In the country. It’s doubtful that legalization absent job growth will improve conditions , as it adds more potential claimants for local benefits without creating new income sources.

    For reasons that can’t be purely economic, most Latino political leaders, and much of the group’s electorate, are in favor of policies that, over time, could doom prospects for Those who receive amnesty. Of course, there are other factors that play into support for these policies, like the emotional pull to reunite families, but whatever their appeal such measures could leave the very people they are meant to help as legal paupers.

    My adopted home region of Southern California has seen an almost 14% drop in high-wage blue-collar jobs since 2007. Deindustrialization has continued, and construction employment lagged, even while the country as a whole, sparked by more secure and now cheaper energy supplies, has seen industrial production improve since 2010.

    Herein lies the great dilemma then for the advocates of amnesty. In much of the country, and particularly the blue regions, they will find very few decent jobs but often a host of programs designed to ease their poverty. The temptation to increase the rolls of the dependent—and perhaps boost Democratic turnouts—may prove irresistible for the local political class.

    So what should we do under these circumstances? Constitutional arguments aside, there do seem to be some better ways to create conditions for upward mobility among newcomers.

    Higher minimum wages may help some of the legal residents, but arguably at the cost of new jobs for others including the newly amnestied. However popular with most voters, such redistributive measures will not address the fundamental economic challenge posed by amnesty.

    Perhaps a sounder strategy would be to adopt policies that encourage broad-based economic growth, including energy, manufacturing, logistics and home construction. This would, of course, require some moderation of regulatory standards, particularly in reference to climate change.

    The President’s recent deal with China, which essentially allows the Chinese to keep boosting emissions until 2030 while we reduce ours steeply, could make things worse. In some states like California, where the global warming consensus is beheld with theological rigidity, “green,” anti-suburban policies largely guarantee that most of the urban poor will never enter the middle class. In San Francisco, Boston and New York, the percentage of Latino and black homeowners is roughly one-third to one-half that seen in redder regions like Houston, Dallas, Phoenix and Atlanta.

    In essence, the deepest blue states have created the worst of all conditions for the urban poor, and will be particularly tough on undocumented residents granted amnesty.

    All this suggests that, if we are to make new Americans economically successful, we need to concentrate not on racial redress but find ways to spark broad based economic growth. Increasing use of inexpensive natural gas, for example, would not only help continue to reduce emissions but would spark an industrial expansion that would create more blue collar jobs. Similarly, policies that allowed for affordable, energy efficient new homes could create not only more blue collar employment possibilities, but a brighter future for young families, many of whom are themselves immigrants or their children.

    The current amnesty could benefit both the country overall as well as recent immigrants if it is tacked to a broad based economic growth strategy. But that doesn’t seem to be in the cards. Instead, continuing policies that inhibit broad-based economic growth are increasing the numbers of Americans who must depend on government, not the economy, to take care of themselves and their families.

    This piece originally appeared at The Daily Beast.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Photo by telwink

  • The Demographics That Sank The Democrats In The Midterm Elections

    Over the past five years, the Democratic Party has tried to add class warfare to its pre-existing focus on racial and gender grievances, and environmental angst. Shortly after his re-election in 2012, President Obama claimed to have “one mandate . . . to help middle-class families and families that are working hard to try to get into the middle class.”

    Yet despite the economic recovery, it is precisely these voters, particularly the white middle and working classes, who, for now, have deserted the Democrats for the GOP, the assumed party of plutocracy. The key in the 2014 mid-term elections was concern about the economy; early exit polls Tuesday night showed that seven in 10 voters viewed the economy negatively, and this did not help the Democratic cause.

    “The Democrats have committed political malpractice,” says Morley Winograd, a longtime party activist and a former top aide to Vice President Al Gore during the Clinton years. “They have not discussed the economy and have no real program. They are offering the middle class nothing.”

    Winograd believes that the depth of white middle- and working-class angst threatens the bold predictions in recent years about an “emerging Democratic majority” based on women, millennials, minorities and professionals. Non-college educated voters broke heavily for the GOP, according to the exit polling, including some 62% of white non-college voters. This reflects a growing trend: 20 years ago districts with white, working-class majorities tilted slightly Democratic; before the election they favored the GOP by a 5 to 1 margin, and several of the last white, Democratic congressional holdovers from the South, notably West Virginia’s Nick Rahall and Georgia’s John Barrow, went down to defeat Tuesday night.

    Perhaps the biggest attrition for the Democrats has been among middle-class voters employed in the private sector, particularly small property and business owners. In the 1980s and 1990s, middle- and working-class people benefited from economic expansions, garnering about half the gains; in the current recovery almost all benefits have gone to the top one percent, particularly the wealthiest sliver of that rarified group.

    Rather than the promise of “hope and change,” according to exit polls, 50% of voters said they lack confidence that their children will do better than they have, 10 points higher than in 2010. This is not surprisingly given that nearly 80% state that the recession has not ended, at least for them.

    The effectiveness of the Democrats’ class warfare message has been further undermined by the nature of the recovery; while failing most Americans, the Obama era has been very kind to plutocrats of all kinds. Low interest rates have hurt middle-income retirees while helping to send the stock market soaring. Quantitative easing has helped boost the price of assets like high-end real estate; in contrast middle and working class people, as well as small businesses, find access to capital or mortgages still very difficult.

    The Republicans made gains in states in New England and the upper Midwest where the vast majority of the population, including the working class, remains far whiter than the national norm of 64% Anglo, such as Massachusetts, where a Republican was elected governor, Michigan, Arkansas and Ohio. Anglos constitute 89% of the population in Iowa and 93% in the former working-class Democratic bastion of West Virginia, two states where the Republicans picked up Senate seats. In Colorado, another big Senate pickup for the GOP, some 80% of the electorate is white. In Kentucky, where Senator Mitch McConnell won a surprisingly easy re-election, only 11% of voters were non-white, down 4% from 2008.

    A more intriguing danger sign for Democrats has been the surprisingly strong GOP performance among the educated professionals that embraced Obama early on. This can be seen in gubernatorial victories in deep blue Massachusetts and Maryland,  and a close race in Connecticut; in all three states concerns over taxes have shifted some voters to the GOP. Voters making over $100,000 annually broke 56 to 43 for the GOP, according to NBC’s exit polls. College graduates leaned slightly toward the Republicans, but among white college graduates the GOP led by a decisive 55 to 43 margin.

    In Colorado, Senator-elect Cory Gardner, like many successful GOP candidates, also did well with middle-income voters (annual salaries between $50,000 and $100,000), who basically accounted for his margin of victory. These are voters that some Republicans are targeting to instigate a new “tax revolt,” like the one that helped catapult Ronald Reagan into the presidency. The potential may be there if the Republicans can wake up from their blind instinct to protect large corporations and big investors. Certainly Obama’s call for higher income taxes on the wealthy has alienated small business owners and professionals, though barely impacting tech oligarchs, whose wealth is taxed at far lower capital gains rates.

    It can be argued that changing demographics will make this year’s blowout a temporary setback. Among Latinos, a key constituency for the Democrats’ future, economic hardships and disappointment at the Democrats’ failure to achieve immigration reform have blunted but hardly reversed voting trends. This year, according to exit polls, Latinos remained strongly Democratic, but down from the nearly three-quarters who supported President Obama in 2012 to something slightly less than two-thirds.

    One encouraging sign for Republicans: Texas Governor-elect Abbott won 44% of the Hispanic vote.

    Perhaps the more serious may be shifts among millennials, a generation that, for the most part, stands most in danger of proleterianization. Once solidly pro-Democratic, this generation has become increasingly alienated as the economy has failed to produce notable gains. In states across the country, the Republican share of millennial votes grew considerably. According to exit polls, their deficit with voters under 30 has shrunk to 13%. The Republicans actually won among white voters under 30, 53% to 44%, even as they lost 30- to 44-year-olds, 58 to 40. If these trends hold, the generation gap that many Democrats saw as their long-term political meal ticket may prove somewhat less compelling.

    If they are losing the middle and working classes, and even some millennials, what are the Democrats left with? They did best in states like California and New York, where there is a high concentration of progressive post-graduates and non-whites, and where many of the sectors benefiting most from the recovery have thrived, notably tech, financial services, and high-end real estate.

    Yet these areas of strength could also prove a problem for the Democrats. A party increasingly dominated by progressives in New York, Los Angeles, the Bay Area and Seattle may embrace the liberal social and environmental agenda that captivates party’s loyalists but is less appealing to the middle class. Unless the Democrats develop a compelling economic policy that promises better things for the majority, they may find their core constituencies too narrow to prevent the Republicans from enjoying an unexpected, albeit largely undeserved, resurgence.

    This piece originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Illustration by Flickr user DonkeyHotey.

  • Brain Drain Hysteria Breeds Bad Policy

    Desperate times call for desperate measures. The Rust Belt, a region familiar to the air of anxiety, knows this all too well, particularly the “desperate measures” part.

    A case in point: During the 1990’s, Pittsburgh, like many of its Rust Belt peers, was in the midst of a fit of brain drain hysteria. Strategic policy was needed. So the powers that be thought of a marketing campaign meant to saturate the minds of the educated “young and the restless” who were thinking about exiting the Steel City. Pittsburgh demographer and economist Chris Briem, in a 2000 op-ed in the Post-Gazette, picks it up from here:

    “The focus on retaining vs. attracting workers is pervasive in local policies. One marketing character thought of by the Pittsburgh Regional Alliance, whose mission is to promote Pittsburgh, was the genial "Border Guard Bob." The image was of an older, uniformed sentinel on Pittsburgh’s borders keeping our citizens, in particular the younger workers, from leaving the region. This is the same logic that inspired the East Germans to build a wall around Berlin and is likely to have as much success in the long-run.”

    Luckily for Pittsburgh, Border Guard Bob never materialized. Policy-wise, building walls is terrible form in the age of information. Still, the aura of desperation remained in the region, despite its illogicality. For instance, in his 2002 piece called “Young people are not leaving Pittsburgh”, Briem crunched the numbers to find the region’s brain drain wasn’t. Yet he found it hard “to convince Pittsburghers that the outmigration of youth is not the problem it once was,” blaming “a persistence of memory” stemming from the regional exodus in the 1980’s.  

    As a demographer and economic thinker in Cleveland, I can sympathize with Briem. Cleveland, too, is prone to bouts of brain drain hysteria. A recent report highlighted in the New York Times called “The Young and Restless and the Nation’s Cities” was enough set off a flare-up. The report found that between 2000 and 2012, Greater Cleveland added less than 800 25- to 34-year-olds with a college degree—an increase of 1%. The metro ranked second last out of 51 metros, behind only Detroit.

    Obviously, those numbers are not good. That said, from a methodological standpoint, the study has its limitations. Specifically, the analysis cuts through four economic eras: 2000, the end of a prolonged expansionary period; 2005 to 2007, the middle of a jobless economic recovery; 2008 to 2010, the throes of a deep global recession; and 2011 to 2012, a period of economic recovery.

    Why does this matter? Migration patterns are affected by quite different economic circumstances nationally. This is especially true for the 25- to 34-year-old cohort, who are the most mobile, if not fickle, group.

    For example, Greater Cleveland’s lack of a young adult brain gain from 2000 to 2012 resulted from a substantial decrease of nearly 16,000 25- to 34-year-olds with a 4-year college degree from 2000 to 2006. The 2001 recession and subsequent jobless recovery hit Cleveland hard. However, my research at the Center for Population Dynamics at Cleveland State University showed that Greater Cleveland recouped the losses from earlier in the decade, gaining approximately 17,000 25- to 34-year-olds with a 4-year degree from 2006 to 2012—an increase of 23%.

    Moreover, the Census recently released data for 2013, which allows a comparison of the nation’s top big-city metros for 2011 to 2013: the current era of economic recovery. Put simply, what large metros have the momentum? Has there been a shift in where the “young and the restless” are attempting to settle down?

    The results are surprising. Cleveland ranks 3rd in the nation, with a 19.85% increase in the number of young adults with a college degree, behind the Sun Belt metros Nashville and Orlando. And no, this percentage “pop” for the region is not simply due to the fact that Cleveland had a really small base of young college graduates. In fact, the region’s 3-year gain of 15,557 ranks Cleveland 15th in total gains, despite being the 29th largest metro in the nation. To put this in perspective, Greater Cleveland had a larger total growth than Chicago, and nearly seven times the gain of Portland: the nation’s poster child for where the “young and restless” go to “live, work, play”.

    Table 1: 25-to-34-year-olds with at least a Bachelor’s degree, Change, 2011 to 2013
    Metro Area 2011 2013 % Change 2011 to 2013 Total Change 2011 to 2013
    Nashville-Davidson–Murfreesboro–Franklin, TN 82,588 103,239 25.01% 20,652
    Orlando-Kissimmee-Sanford, FL 83,706 101,066 20.74% 17,361
    Cleveland-Elyria, OH 78,392 93,949 19.85% 15,557
    Riverside-San Bernardino-Ontario, CA 97,804 116,767 19.39% 18,963
    Jacksonville, FL 47,792 56,256 17.71% 8,464
    Austin-Round Rock, TX 119,482 138,240 15.70% 18,758
    Seattle-Tacoma-Bellevue, WA 208,647 240,267 15.15% 31,620
    Sacramento–Roseville–Arden-Arcade, CA 77,075 87,435 13.44% 10,360
    Salt Lake City, UT 55,036 62,124 12.88% 7,088
    Pittsburgh, PA 117,402 131,770 12.24% 14,368
    Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 306,271 341,220 11.41% 34,948
    Columbus, OH 106,144 118,224 11.38% 12,080
    Houston-The Woodlands-Sugar Land, TX 266,289 295,230 10.87% 28,941
    Buffalo-Cheektowaga-Niagara Falls, NY 52,231 57,727 10.52% 5,496
    Dallas-Fort Worth-Arlington, TX 296,927 327,330 10.24% 30,403
    New Orleans-Metairie, LA 54,104 59,616 10.19% 5,512
    San Jose-Sunnyvale-Santa Clara, CA 135,306 148,978 10.10% 13,672
    Detroit-Warren-Dearborn, MI 154,542 170,122 10.08% 15,580
    San Francisco-Oakland-Hayward, CA 320,585 350,490 9.33% 29,904
    Baltimore-Columbia-Towson, MD 150,003 163,941 9.29% 13,938
    New York-Newark-Jersey City, NY-NJ-PA 1,216,127 1,327,778 9.18% 111,651
    Los Angeles-Long Beach-Anaheim, CA 631,960 688,057 8.88% 56,098
    St. Louis, MO-IL 134,267 145,978 8.72% 11,710
    Oklahoma City, OK 58,027 63,084 8.71% 5,057
    San Antonio-New Braunfels, TX 85,240 92,524 8.55% 7,284
    Hartford-West Hartford-East Hartford, CT 59,780 64,784 8.37% 5,004
    Denver-Aurora-Lakewood, CO 163,026 176,237 8.10% 13,211
    Milwaukee-Waukesha-West Allis, WI 79,404 85,793 8.05% 6,390
    Louisville/Jefferson County, KY-IN 50,790 54,849 7.99% 4,060
    Virginia Beach-Norfolk-Newport News, VA-NC 67,664 72,888 7.72% 5,224
    Tampa-St. Petersburg-Clearwater, FL 99,316 106,504 7.24% 7,187
    San Diego-Carlsbad, CA 167,735 179,850 7.22% 12,114
    Birmingham-Hoover, AL 47,340 50,675 7.04% 3,335
    Kansas City, MO-KS 102,284 109,455 7.01% 7,171
    Rochester, NY 48,844 52,212 6.90% 3,368
    Boston-Cambridge-Newton, MA-NH 348,490 371,303 6.55% 22,813
    Phoenix-Mesa-Scottsdale, AZ 163,995 174,694 6.52% 10,699
    Providence-Warwick, RI-MA 64,205 68,349 6.45% 4,144
    Raleigh, NC 76,164 80,447 5.62% 4,283
    Indianapolis-Carmel-Anderson, IN 91,083 95,827 5.21% 4,744
    Las Vegas-Henderson-Paradise, NV 59,998 63,058 5.10% 3,060
    Cincinnati, OH-KY-IN 95,084 99,225 4.36% 4,142
    Minneapolis-St. Paul-Bloomington, MN-WI 214,755 223,640 4.14% 8,885
    Washington-Arlington-Alexandria, DC-VA-MD-WV 460,693 477,706 3.69% 17,013
    Chicago-Naperville-Elgin, IL-IN-WI 558,464 572,324 2.48% 13,860
    Atlanta-Sandy Springs-Roswell, GA 272,907 279,232 2.32% 6,325
    Portland-Vancouver-Hillsboro, OR-WA 119,490 121,794 1.93% 2,304
    Miami-Fort Lauderdale-West Palm Beach, FL 221,294 224,388 1.40% 3,094
    Richmond, VA 59,907 59,289 -1.03% -618
    Memphis, TN-MS-AR 52,911 49,412 -6.61% -3,499
    Source: ACS 1-Year, 2011, 2013 Note: Charlotte was removed from the analysis due to substantial geographic changes in the MSA designation from 2011 to 2013. Created by the Center for Population Dynamics at Cleveland State Univeristy, October, 2014. 

     

    What gives?

    Part of the answer may be economic. For example, my colleagues Joel Kotkin and Aaron Renn recently analyzed the growth in per capita GDP from 2010 to 2013 for Forbes in a piece entitled “The cities that are benefiting the most from the economic recovery”. Cleveland ranked 15th in the nation, with a 6% increase. In terms of income, the metro is 5th in the nation in the total per capita income increase from 2010 to 2012, behind Houston, San Jose, Oklahoma, and San Francisco.

    In understanding Cleveland’s nascent young adult brain gain, the broader economic performance is important. Healthier economies make metros “stickier” for those here and more of a magnet for those who aren’t. And while there also is the element of “Rust Belt Chic”, or the lure of so-called “authentic” places that counter the “Brooklynization” of American cities, Cleveland as a destination, or a “consumer city”, will always take a back seat to Cleveland as a “producer city”, which is a metro of good jobs, good schools, and affordable housing. The producer city focuses on the creation of value, not simply the consumption of things. This is not to say amenities, such as a good culinary and microbrew scene, are not important, it only says that if the talent you attract has nothing to produce or nowhere to live, well, all play and no work makes Jack a dull boy.

    Talent attraction, then, is only part of the formula in Cleveland’s ongoing and difficult economic restructuring. Talent production is also needed, for both natives and newcomers, regardless of the age group. But emphasizing the latter entails knowing the score on the former. Brain drain hysteria breeds desperation.

    And desperate times call for desperate measures—and bad policy.

    This piece first appeared at Crains Cleveland.

    Richey Piiparinen is a Clevelander, writer, and Senior Research Associate heading the Center for Population Dynamics at Cleveland State University.

  • Silicon Valley’s Chips off the Old Block

    Silicon Valley long has been hailed as an exemplar of the American culture of opportunity, openness and entrepreneurship. Increasingly, however, the tech community is morphing into a ruling class with the potential for assuming unprecedented power over both our personal and political lives.

    Rather than the plucky entrepreneurs of legend, America’s rising tech oligarchy constitutes a narrow emerging elite. They are primarily beneficiaries of the limited pools of risk capital – nearly half of which is concentrated in Silicon Valley. They also have access to a highly incestuous club of skilled professional managers, lawyers, PR mavens and accountants that counterparts elsewhere are unlikely to enjoy.

    In contrast to the intense competitive environment that defined industries such as semiconductors, disc drives and personal computers in the 1980s, today’s “lords of cyberspace,” as author Katherine MacKinnon describes them, enjoy oligopolistic market shares that would thrill the likes of John D. Rockefeller. Google, for example, accounts for more than two-thirds of the market for Internet search. The fantastic wealth amassed by Bill Gates, like that of the other oligarchs, stems in large part from these kinds of “monopoly” rent; in his case, for consistently mediocre but dominant software.

    Of course, these oligarchs, like feudal lords or rival gangs, sometimes fight among themselves, say, Google versus Apple over operating systems or, increasingly, over hardware segments of the industry. Yet, this struggle between oligarchs is far from a competitive free for all: Together, these two firms provide almost 90 percent of the operating systems for smartphones.

    Faux Progressivism

    Normally, progressives would be expected to decry such concentrations of wealth and power. But Silicon Valley has largely insulated itself from such criticism by taking “progressive” policy stances, notably on climate change, and by cultivating both a “hip” image and close ties to the Obama administration. When Steve Jobs died in 2011 during the Occupy Wall Street movement, the passing of this brilliant, but often ruthless, 0.00001 percenter was openly mourned as if he was a counterculture hero.

    But this should not mask the fact that Silicon Valley entrepreneurs have turned out to be every bit as cutthroat – and odious to the individual – as any industrial group in modern American history. As technologist and author Jaron Lanier has suggested, the current oligarchical ascendency rests not on improving productivity or sparking broad-based growth, but mining the private lives of every consumer in order to reap riches from advertisers.

    Google, while a prime offender, is hardly alone in pursuing violations of privacy. Consumer Reports has detailed Facebook’s pervasive, and often deepening, privacy breaches. Ironically, as one blogger noted, even as Facebook has been loosening privacy restrictions for teenage users of its site, company founder Mark Zuckerberg acquired property around his Palo Alto estate to better-protect his privacy.

    Once seen as a liberating force, the social media firms are morphing into an overweening Big Brother. Apple’s new devices, the tech publication Wired recently noted, are aimed at “building a world in which there is a computer in your every interaction, waking and sleeping.” The ambition for control is remarkable. As Google’s Eric Schmidt put it: “We know where you are. We know where you’ve been. We can, more or less, know what you’re thinking about.”

    Political, social implications

    In the emerging era of the tech oligarchs, the rights of the individual computer user look increasingly like those of farmers or small-business people shipping products by rail at the turn of the 20th century; sitting at a home office or kitchen table, the individual computer user has precious little leverage.

    These odds will be made even longer as Silicon Valley leadership pursues sweeping ambitions to influence the political class. “Politics for me is the most obvious area [to be disrupted by the Web],” suggests former Facebook president Sean Parker.

    The success with which technology assisted President Obama’s re-election effort offers clear support to Parker’s assertion. And, not surprisingly, when Obama’s top aides leave government, several have landed lucrative jobs with the tech elite.

    Some see this ascendency as a positive. One tech booster foresees the old “nexus” between Wall Street and Washington being replaced by one between Silicon Valley and the federal leviathan, which will usher the world into a “new age of abundance, connectivity, innovation and sharing.” This viewpoint is beyond naïve, and closer to delusional.

    We often forget that, despite their green and counterculture allure, the tech oligarchs are, indeed, oligarchs, who live fantastically luxurious and consumptive lives. Google executives, for example, have burned the equivalent of upward of 59 million gallons of crude oil – for many years at subsidized federal rates – from 2007-13 on their private jets, even as they hectored regular consumers to cut back on energy use.

    But nothing so mimics the arrogance and hubris of the tech oligarchs as their largely successful efforts to avoid taxation. Bill Gates had voiced public support for higher taxes on the rich but tech companies, including Microsoft, have bargained over, and legally avoided paying, their own taxes while higher taxes fell on affluent, but hardly megarich, taxpayers.

    Similarly, the founders of Twitter have developed elaborate plans to avoid taxation and protect their suddenly vast estates. Facebook paid no taxes in 2012, despite making a profit of over $1 billion. Apple, which the New York Times described as “a pioneer in tactics to avoid taxes,” has kept much of its cash hoard abroad to keep it away from Uncle Sam.

    The Road to Oligarchy

    Emboldened by their access to individual data, the tech oligarchs could form the core of what a recent report from the professional services giant PWC described as virtual “ministates,” with control over markets and employees that more resemble an Orwellian nightmare than a technological utopia.

    This influence will be enhanced by growing control of the media. In the past, more hardware-oriented companies provided the “pipelines” through which traditional media disseminated their products. But, increasingly, the oligarchs – taking advantage of the online shift – are devastating traditional media. Google’s ad revenue in 2013 surpassed that of newspapers.

    The Valleyites are also moving into the culture business, with both YouTube (owned by Google) and Netflix getting into the entertainment content business. The oligarchs may need to source content from more-established vendors on the East Coast or in Hollywood, but they increasingly will control the financial purse strings as well as the critical pipelines.

    Diminishing benefits to society

    Tech industry boosters, such as UC Berkeley’s Enrico Moretti, claim the new tech oligarchs represent the key to a growing economy and greater regional well-being. This claim, however, is dubious, even in Silicon Valley. Tech companies restrain their employees’ wage growth through informal agreements to prevent poaching of each others’ employees and by importing relatively low-paid “technocoolies” to do their programming. Expanding this category of workers has become a major priority for tech firms – despite a surplus of American IT workers – such as Facebook.

    Rather than enhancing middle-class opportunities, high-technology industries have promoted an economy with sharp divisions between the top employees and low-wage workers in retail and other service industries such as janitors, clerks and cashiers. The mostly white and Asian employees at firms like Facebook and Google enjoy gourmet meals, child-care services, even complimentary housecleaning; but wages for the region’s African-American and large Latino populations, roughly one-third of the total, have actually dropped, notes a 2013 Joint Venture Silicon Valley report. As Russell Hancock, the group’s president, observed, “Silicon Valley is two valleys. There is a valley of haves, and a valley of have-nots.”

    In San Francisco, Silicon Valley companies provide free and more luxurious transport for the privileged few they employ, providing a daily reminder of the growing segregation between rich and poor. Increasingly large sections of the Bay Area resemble a gated community, where much of the working and middle classes fork over a large portion of their incomes in rent and often are forced to commute huge distances to jobs serving the Valley’s upper crust.

    There is no denying that the tech oligarchs will continue to play a critical role in the American economy; and, as Mike Malone, among others, suggests, they likely may become even more dominant in the years ahead. This will not be all bad; the country similarly benefited from the often-ruthless actions of the industrial moguls. But, at some point, the public has to weigh how much power and money can be concentrated in a relative handful of companies and people without posing a threat both to our individual rights and democracy itself.

    This piece first appeared at the Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Photo by TechCrunch (4S2A2079Uploaded by indeedous) [CC-BY-2.0], via Wikimedia Commons

  • RIP, NYC’s Middle Class: Why Families are Being Pushed Away From the City

    Mayor de Blasio has his work cut out for him if he really wants to end New York’s “tale of two cities.” Gotham has become the American capital of a national and even international trend toward greater income inequality and declining social mobility.

    There are things the new mayor can do to help, but the early signs aren’t promising that he will be able to reverse 30 years of the hollowing out of the city’s once vibrant middle class.

    As the cost of living has skyrocketed while pay has stagnated except for those at the very top, New York has shifted from a place people go to make it to a place for those who already have it made, or whose families have.

    And once here, the rich are indeed getting richer even as the rest of the city is barely holding on.

    Manhattan is now the most unequal county in America (it was 17th in 1980), with a Gini coefficient — which measures the disparity between the richest and poorest residents — higher than that of Apartheid-era South Africa.

    Between 1990 and 2010, the city’s 1% saw their median income shoot up from $452,415 to $716,625 in 2010 dollars, even as the bottom 60% hardly saw their incomes budge at all, according to a recent City University study. The trend precedes Michael Bloomberg, the billionaire mayor who envisioned New York as a “luxury city,” and it won’t be easy for de Blasio to reverse — especially as he rolls out pricey new public-employee contracts and programs like universal pre-K that further expand the city’s dependence on its wealthiest citizens.

    In 2009, the 0.5% of New Yorkers who made $1 million or more accounted for 27% of the city’s income (nearly three times their share nationally), and an even higher share of its tax take. But while the smart set that attends President Obama’s frequent Manhattan fundraisers has prospered, in no small part thanks to low-interest Federal Reserve policies that have helped big banks more than working people, just across the Harlem River roughly one in three Bronx households lives in poverty — making it the nation’s poorest urban county.Over the Bloomberg years, New York was the national leader in both luxury housing and in homelessness — with a 73% jump in the number of homeless families here. Last January, an unprecedented 21,000 children were in the city’s shelter system each night. This year, that number is rising.

    And as the city becomes more economically unequal, it’s also become more racially segregated. Demographer Daniel Herz’ census analysis shows New York is now America’s second most racially divided city, behind only Milwaukee.African-American incomes in New York are barely half those of whites, as compared to nearly 70% in Phoenix and Houston.

    And New York City now has the nation’s single most segregated public school system, according to a devastating report from the Civil Rights Project at UCLA.

    As the 2014 report put it: “In 2009, black and Latino students in the state had the highest concentration in intensely-segregated public schools (less than 10% white enrollment), the lowest exposure to white students, and the most uneven distribution with white students across schools.”

    Nowhere are these divergences more obvious than in nouveau hipster and increasingly expensive Brooklyn. In my parents’ native borough, the average income has actually dropped between 1999 and 2011, despite huge increases of wealth in areas closer to Manhattan.

    Roughly one in four Brooklynites — most of them black or Hispanic — lives in poverty.

    Bloomberg’s notion that if “we can find a bunch of billionaires around the world to move here, that would be a godsend,” with prosperity trickling down, hasn’t panned out, at least for most New Yorkers. The billionaires came, bought and flourished, but the same can not be said for Gotham’s middle and working classes.

    Using Bureau of Economic Analysis data, analyst Aaron Renn estimates that the city’s per capita GDP has grown a bare 2.3% since 2010, below the mediocre 3.8% national rate and behind such traditional hard-luck cases as Buffalo, Cleveland and Baltimore.

    The percentage of New Yorkers living in poverty has actually gone up by 1.1% since 2010, while household income has been flat.

    Rather than forge a more upwardly mobile society, New York epitomizes what Citigroup researchers have labeled a “plutonomy,” an economy and society driven largely by the investment behavior and spending of the uber-rich. This creates great demand for low-end service workers — dog-walkers, baristas and waiters — but not much for New York’s middle or aspiring middle class.

    Adjusting for the cost of living here, the average paycheck in New York is one of the lowest of any major metropolitan area. Put otherwise, working New Yorkers pay a huge premium to live in the five boroughs, one that repels middle-class individuals and families who aren’t compelled to be here.

    The exodus of the middle class has been ongoing for 30 years, with New York by one measure now having the second lowest share of middle-income neighborhoods of America’s 100 largest cities.As the middle class has waned, even exemplars of the celebrated creative class — musicians, artists, writers — find the going increasingly rough, and unrewarding. Laments rock icon Patti Smith: “New York has closed itself off to the young and the struggling. New York City has been taken away from you.”

    This is the dynamic New Yorkers elected de Blasio to fix. And he’s right the reality of rising inequality and, more important, diminishing opportunity, must be confronted.

    Critically — and here de Blasio has better instincts than his predecessor — more emphasis needs to be placed on the outer boroughs. Even if Manhattan remains the prototypical luxury city, the rest of New York can be reinvented as a generator of middle-class jobs and opportunities.

    One approach that’s paid dividends for workers in cities such as Houston, Dallas-Ft. Worth, Nashville and Pittsburgh is to concentrate on diversified economic growth.

    Certainly some middle class jobs could be created by boosting such things as the port and logistics, resuscitating industries such as food processing and specialized household goods, and rolling out policies that encourage, rather than overregulate, smaller firms in the business-service industry.

    But de Blasio’s press to bring in more tax revenue to pay for ambitious new programs, more generous social services and new contracts for city workers have the perverse effect of doubling down on Bloomberg’s bet on the wealthy.

    His ambitious ramping up of green-energy policy could be the straw that breaks the back of what remains of the logistics and manufacturing industries in New York, something that has already occurred in California.

    And his kowtowing to the teachers union and attempted assaults on charter schools threaten to further undermine the effectiveness of public education, something vital to middle and working class residents.

    In fact, the effect of de Blasio’s policies may turn out to be more neo-Victorian than progressive. Rather than new homeowners, the city may see a greater concentration of people dependent on government largesse.

    The poor-door phenomena, with a few lucky members of the lower class winning subsidized units in buildings for the rich, but with separate entrances and no access to luxury amenities, recreates not social democracy but the Victorian upstairs-downstairs society.

    The critical point is this: New York is losing its role as a place of opportunity, and the de Blasio toolbox is unlikely to put back the ladder that’s been pulled up.

    A great city does not only serve the rich, transforming others into their servants or recipients of noblesse oblige. New York need to be, as Rene Descartes described Gotham’s founding city, 17th century Amsterdam, “an inventory of the possible.”

    That must hold true for most New Yorkers, not just for the very rich.

    This piece first appeared at the New York Daily News.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Photo by Kevin Case from Bronx, NY, USA (Bill de Blasio) [CC-BY-2.0], via Wikimedia Commons

  • Real Economic Payoff from Infrastructure

    With the Obama proposal to get some money for infrastructure, it is time to revisit the payoff from investments in transportation. Investments that improve the performance of transportation in the US will pay for themselves in 17 years through increased economic activity and the resulting gains in federal tax revenue. The rate of return for national investments in transportation is 7%, significantly more than the cost of borrowing. Recently released research verbalizes a theory of why the performance of infrastructure matters for the economy.

    Transportation provides the foundation for all economic activity. Transportation is used to bring labor and inputs to places of production, to deliver final goods and services to end users and to bring customers to the market place. How well is it doing its job? In an economy the size of the US even small improvements can mean big dollar gains. Making the investment to improve transportation performance can result in a measurable return on investment with a payback period that is well short of the life-expectancy of most transportation infrastructure.

    Just as infrared is the invisible part of the spectrum of light, it often seems that infrastructure is the invisible part of the economy. It has become popular – especially since the turn of the century – to think of the economy as increasingly dependent on the insubstantial and the ethereal – emailing, e-trading, e-commerce. The reality is that all commerce – even e-commerce – eventually depends on transportation infrastructure. After all, someone has to get the computer components from the factory to the e-business; and when the computer hardware breaks down, someone will likely use transportation infrastructure to get to the place of business to fix it. No e-commerce can occur until transportation infrastructure is used to get the equipment to the location where rare earth minerals are extracted and to take those minerals to the factory – usually on another continent – where workers arrive via transportation infrastructure to build the computers in the first place. In many ways, there can be no commerce – “e“ or otherwise – without bricks-and-mortar infrastructure.

    Despite repeated outcries for additional funding, transportation spending in the US was more than $100 billion under budget in the first decade of the new century. While there is much debate about how much to spend on transportation, since 1980 (1990), federal spending on transportation in the US has been $152.3 billion ($125.5B) less than budgeted. Federal spending on transportation exceeded budget in only four years: 2011 by $6.5 billion (the most ever), 2012 by $4.4 billion, 1996 by about $3 billion, and 1995 by $50 million. The $10.9 billion spending over-budget in 2011 and 2012 was necessary to fulfill commitments from 2009, when spending was under-budget by an extraordinary $40.7 billion. Excluding 2009, the average annual under budget since 1980 (1990) was $3.5 billion ($3.8 billion).

    Figure 1 Federal Spending Over/Under-Budget 1980-2012

    Screen Shot 2014-05-21 at 2.20.23 PM

    Data Source: Budget of the United States, Transportation Budget Authority FY 2011, Table 3.1 Outlays by Superfunction and function, updated with Table 5.1 from FY2014 tables; actual spending through 2012. Red on either line indicates spending over budget for that year. Author’s calculations.

    Table 1 Federal Spending Under-Budget by Decade

    Screen Shot 2014-05-19 at 5.03.29 PM

    Worse yet, transportation policy has been allowed to stagnate: the strategic economic goals and performance measures in the Department of Transportation’s 2014 performance plan are nearly identical to the 2002 plan. Economic competitiveness is one of the strategic goals set by the US Department of Transportation (Performance Plan FY2014, available at www.dot.gov). By their definition, economic competitiveness means maximizing the economic returns of the network and keeping the transportation system responsive to consumer needs. This may sound like the kind of initiative that would allow the US to stay globally competitive. However, these strategic goals are little changed from ten years ago; and most of the performance measures in the 2014 economic strategy were the same in 2002. Each strategic goal is also associated with a line-item in the federal budget, making them more than just slogans, making them actual cost centers.

    Figure 2 Department of Transportation Performance Plans

    Screen Shot 2014-05-19 at 5.53.47 PM

    Clearly, what the US needs now is better planning and strategic project selection, plus streamlined delivery processes to increase the productivity of infrastructure investment. Most of the existing transportation infrastructure could not handle the coming surge in demand. The surge is not only the result of organic growth in the size of the country, but also from an increase in the fundamental reliance of our economy on the use of transportation infrastructure. The result will be a nation falling further and further behind our global competitors.Yet, the world that business moves in has changed significantly as has the way that business moves. The service sector – the fastest growing part of the economy – is increasingly dependent on transportation. The services sector has the second fastest growing usage of transportation services (after construction) and remains the fastest growing sector in the US economy. Measuring the economy’s response to a change in the demand for transportation services, DOT-RITA conclude that “an investment in … transportation will have a greater economic impact than an equally sized investment in trade or utilities.” Investments to improve air transportation services would have the biggest economic impact. Except for rail transportation, the impact of improving the nation’s airports is bigger than investments in government and information services.

    Table 2 World Economic Forum, Global Competitiveness Report 2009-2010


    *The European Union economy is the largest in the world (CIA, 2013).  Scores are the result of responses to questions in the format: “How would you assess the quality of  [X] in your country? (1 = extremely underdeveloped; 7 = extensive and efficient by international standards),” where [X] is “Basic Infrastructure”, “Roads”, Railroads”, etc.  Scores for 2009-2010, US rank for transportation infrastructure was little change in 2012-2013 (13th). Details available at http://www.weforum.org/

    What will it cost?

    The US has more airports, roads and railways than any other country in the world – only Russia, China and Brazil have more waterways. However, the US is not alone in needing massive investments in infrastructure.

    The total investment needed for all infrastructures worldwide is estimated at $53 trillion through 2030, with a total of $15.5 trillion just for transportation. The Organization for Economic Cooperation and Development and others estimate a cost equivalent to 3.5% of GDP to improve infrastructure across all sectors – water, energy and transportation. A report from McKinsey Global Institute (McKinsey Infrastructure Practice) calculates that this investment is 60% more than all spending in the last 18 years; and more than the estimated value of today’s worldwide infrastructure. Consulting firm Booz Allen projects the cumulative infrastructure spending needs for the US (and Canada) from 2005 to 2030 to be $936 billion for road and rail and $432 billion for airports and seaports (about $1.4 Trillion total). Dividing this between the US and Canada in proportion to real GDP, just over $1.2 trillion is needed to upgrade the performance of US transportation infrastructure to first class.

    For the purpose of demonstration, let’s assume that the entire $1.2 trillion is invested in the US in 2014. The latest models demonstrate that the economic gains would begin to appear as higher GDP per capita in 2018. The economy starts 2018 at a level that is higher than it would have been without the investment in infrastructure. By 2025, the economy is larger by an amount greater than the initial investment in 2014. In financial terms, the investment has a 17 year payback period – substantially shorter than the life expectancy of transportation infrastructure. Taking 25% of the gain each year as government revenue (average government tax revenue as a percent of GDP in the US), the cumulative increased tax revenue will exceed the cost by 2025. A standard, basic financial analysis well-understood by both business executives and policy-makers shows a 7% internal rate of return – a number significantly higher than the borrowing costs for financing transportation infrastructure investments in the United States.

    Paying For It

    But what about the rest of the story: where does the initial funding come from to make the needed performance improvements? There is no “free ride” here – the construction and renovation of transportation infrastructure carries a hefty price tag that has to be paid one way or another. The options currently under discussion among researchers and policy makers in the United States are:

    1. The status quo – which has not worked in over 20 years.

    2. Reducing demand – One way to improve performance is to discourage the use of transportation infrastructure. Joel Kotkin reports the work of demographer Wendell Cox on the new migration to America’s “Efficient Cities” – resulting in net outmigration from America’s most congested cities.  Smaller populations are one way that the demands on infrastructure may fall naturally – but with potentially undesirable consequences for economic growth. While American’s do more driving than any other nation on earth, there is some new evidence that the long standing trend of increasing driving is tailing off.

    3. Increasing user fees — Unfortunately, user fees are wrought with difficulties. First, “congestion pricing” fees are used to reduce demand rather than as a way to generate a revenue stream (with the obvious exception of some toll roads). There are several specific challenges: federal barriers to implementing fees and transaction costs are the most obvious. While the impact of fees as a revenue mechanism may be modest, there are additional implications for land use patterns and policies. Urban Land Institute provides an important cautionary note on tolling that could be applied to user fees in general. If the fees are permanent and not limited to rewarding investors in a particular facility, local policies will need to be established regarding the distribution of income beyond the designated payback period. The alternative, of course, is to tie the period of the fees to the reward and repayment of investors.

    4. Public-Private Partnerships — Also known as PPP or P3 – cover a spectrum of financing options ranging from private concession operators to privately owned roads. At the lowest level on the PPP spectrum are private operators who raise their own financing for upfront costs and ongoing operations for concessions such as food service on highway plazas or newspaper stands inside train stations. Their revenue generally comes from sales. At a higher level, risk is allocated between public and private partners (e.g., public carries demand risk, private carries construction risk). Financing is often shared and comes in the form of both equity and debt. The revenue stream to repay debt (or reward equity investors) comes from user fees. In “build, operate, transfer” (BOT) cases, the government’s role changes from manager, operator and financier to regulator. Effective government controls on safety and security, anti-competitive behavior (access, pricing, service quality, etc.) are critical to the success of these projects. The final level is a purely private project which is used for public purposes. The private owner/operator builds the facility. A revenue stream is necessary to service debt, repay financial loans/borrowings, and reward capital investment. Freight railroads in the US are a good example of privately financed infrastructure in the US.

    There is no lack of private money – especially under the current conditions of Federal Reserve intervention in the economy. According to a 2013 study by consulting firm McKinsey, an additional $2.5 trillion will be made available for infrastructure financing by 2030 if institutional investors meet their target allocations. The trouble is finding ways to direct revenue back to the private investors.

    Other Revenue StreamsUntitled

    How do we create that revenue stream to attract private investment into public infrastructure? Americans are notoriously opposed to paying for public goods. Branded revenue opportunities are just coming on the table in the US but have been used wide and far in other countries.

    Branded revenue streams – or private advertising in public spaces – has come a long way since realtors put their faces on benches or lawyers put their names on the backs of city buses. Branding now extends to the infrastructure itself. New York City’s Metropolitan Transit Authority added branding to turnstiles and train doors. More opportunities exist, including entrances, escalators, stairs, trains, overpasses, poles, walls, and even floors. Phoenix and Denver expect to earn up to $1 million in annual revenue from wrapping light rail trains in advertisements.

     Branding is not limited to print, either. New York, Chicago and Santa Monica are exploring LED advertising on the sides of busses. Dayton, Champaign-Urbana, Toledo (TARTA) and Kansas City (KCATA) have audio ads timed to promote businesses along routes. Just as advertising in metro transit is no longer limited to framed posters on subway platforms, highway advertising is no longer just for billboards. Why not, as pictured here, allow branding on overpasses? In November 2010 (USA Today November 22), cash-strapped California considered generating a much-needed revenue stream by allowing advertisements on emergency (“Amber-alert”) highway signs. But even these signs are virtual antiques. Ideas for where and what can accommodate an attractive yet discrete opportunity for a branded revenue stream are only limited by the number of pixels that can be used in an electronic display.

    The Way Forward

    All is not doom and gloom. There is a new, improving trend in the performance of transportation infrastructure in the United States. These improvements are a reflection of broad-based initiatives on both the supply and the demand sides. Meanwhile, the US continues to decline in the global rankings for poor transportation infrastructure (World Economic Forum, Global Competitiveness Index, shown earlier). Although US road, rail and even port rankings manage to stay in or near the top 20 in the world in the rankings, the US airport infrastructure quality ranking fell from 9th in the world in 2007-2008 to 32nd in 2010-2011 (currently at 30th).

    The underlying question is not how much to invest it is how that investment can deliver improvements in infrastructure. Analysts at McKinsey estimate that streamlining infrastructure delivery alone could generate 15% in cost savings. Clearly, additional funding alone is not enough. We also need innovative ways to fund, build, maintain and operate the vital transportation structures that support economic activity.

    Acknowledgements: Some of this material was previously published as STP Working Paper 2014_02, Calculating the Real Economic Payoff of Infrastructure. The Let’s Rebuild America initiative at the US Chamber of Commerce is headed by Janet Kavinoky. Funding for the project was also provided by the National Chamber Foundation in Washington, D.C. The original project team for developing indices to measure the performance of infrastructure in the United States was led by Michael Gallis and Associates of Charlotte, NC. The author is grateful to Kamna Pandey in New Dehli (India) for her slide show on revenue streams.

    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 and the Emmy® Award nominated Bloomberg report Phantom Shares. She appears in four documentaries on the financial crisis, including Stock Shock: the Rise of Sirius XM and Collapse of Wall Street Ethicsand the newly released Wall Street Conspiracy. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute. She served as Senior Advisor on United States Agency for International Development capital markets projects in Russia, Romania and Ukraine. Dr. Trimbath teaches graduate and undergraduate finance and economics.

    This piece was originally published by IO Sustainability.