Category: Economics

The Midwest: Coming Back?

Oh my name it is nothing
My age it is less
The country I come from
Is called the Midwest

–Bob Dylan, “With God on Our Side,” 1964

For nearly a half century since the Minnesota-raised Robert Zimmerman wrote those lines, the American Midwest has widely been seen as a “loser” region–a place from which talented people have fled for better opportunities. Those Midwesterners seeking greater, glitzier futures historically have headed to the great coastal cities of Miami, New York, San Diego or Seattle, leaving behind the flat expanses of the nation’s mid-section for the slower-witted, or at least less imaginative.

Today that reality may be shifting. While some parts of the heartland, particularly around Detroit, remain deeply troubled, the Midwest boasts some of the lowest unemployment rates in the country, luring back its native sons and daughters while attracting new residents from all over the country.

For example, Des Moines, Omaha, Kansas City, Columbus, Minneapolis, Milwaukee and Madison have all kept their unemployment rates lower than the national average, according to a recent Brookings survey. They are also among the regions that have been able to cut their jobless rates the most over the past three years.

This contrasts sharply with the travails of the metropolitan economies of the Southeast, Nevada, Arizona and California. Of course, other regions are doing better than the Sun Belt sad sacks. The stimulus and TARP benefited some parts of the Northeast, but even those areas haven’t performed as well as the nation’s mid-section. The only other arc of prosperity has grown around the Washington leviathan, largely a product of an expanded government paid for by the rest of the country.

In contrast, the relative prosperity in parts of the Midwest largely stems from the private sector. Take the rise in the price for agricultural commodities, global energy demand, greater home affordability and a slow but perceptible pickup in domestic manufacturing. According to University of Iowa researcher Jacob Langenfeld, these factors suggest that it’s time to stop seeing the Heartland as a perennial loser and to start seeing it as a “[model] for effective economic development.”

The new reality is reflected in several ways. In terms of personal-income growth last decade, several Midwest regions ranked among the top ten in the U.S., including Milwaukee, Cleveland, Kansas City and Cincinnati.

These cities all performed better than Seattle, Denver or Portland. San Jose and San Francisco, those perennial darlings of the information age, sat around the bottom of the list. The mid-section also boasts many of the nation’s healthiest real estate markets, according to Realtor.com. Three of the top five markets–Kansas City, Kansas, Omaha and Fargo–are located in the region

An analysis of shifting migration patterns provides even more intriguing evidence. Over the past century the Midwest’s share of the nation’s population fell from nearly 35% of the total to barely 21%. Only the Northeast, now less than a fifth of the population, has experienced a similar decline, while the West and South have registered impressive gains.

Now some of the very regions that experienced losses over the past few decades, such as St. Louis, suffer much lower rates of out-migration than a similarly sized area like San Diego. Others, such as Indianapolis, Columbus, Madison and Kansas City, have enjoyed strong rates of domestic migration. In sharp contrast, coastal giants like metropolitan Los Angeles or New York have worse domestic out-migration rates than Detroit.

The outcome of the recent midterm elections means that political changes may further propel the Midwest express. The new Congress is largely dominated by representatives of the heartland such as Speaker John Boehner of Ohio and Budget Committee Chairman Paul Ryan of Wisconsin. This marks a powerful shift from the previous Congress, controlled by iron-fisted coastal Democrats like former Speaker Nancy Pelosi of San Francisco.

We can expect the new Congress to adhere more closely to Midwestern interests on a host of issues. Energy legislation will now reflect the interests of Midwestern states, which depend heavily on coal, rather than the renewable dreams of the coastal big cities. In transportation we may see a shift in priorities from high-speed rail to such mundane things as roads and bridges.

More important still may be changes at the local level. For decades Midwestern governors and mayors tried to emulate the Northeast and West Coast. Historian John Teaford observed that the struggling Midwestern cities in the 1960s and 1970 employed “cookie cutter” redevelopment in a vain effort to replicate the great coastal cities. Ultimately the building of “international style” towers, sports stadia and cultural palaces did little to restore places whose economies had become increasingly uncompetitive.

In recent years, the most risible example of coastal aping could be found in Michigan, the nation’s most economically ravaged state. Under Gov. Jennifer Granholm Michigan focused on a strategy of promoting “cool cities” to lure the young entrepreneurial hipsters away from the coasts. Like California, Michigan placed huge bets on renewable fuels and other green industries.

By the end of Granholm’s term this winter the state suffered one the country’s highest unemployment rates, a falling population and epic out-migration. She has been replaced by a pragmatic pro-business conservative, Rick Snyder, who is focused on a practical economic-development agenda. Similar shifts have taken place in Ohio and Wisconsin.

The new brand of Midwestern realism has been embraced for years by some regions. For example, non-partisan business and civic leaders in Kalamazoo, Mich., have pushed both educational reform and economic diversification. The region, though hardly booming, has done better than the state overall and is experiencing an entrepreneurial and community renaissance.

Kalamazoo entrepreneurs tend to understand that the key to Midwestern renewal lies with the region’s core competencies and attractions. David Zimmermann, founder of Kalexsyn, a flourishing biotech company, identifies these assets: Michigan’s resident pool of skilled labor, a low cost of living and a generally community-oriented, family-friendly atmosphere.

Zimmermann says his company, which now employs 30 workers and has revenues of $5.4 million, has surprisingly little trouble attracting younger skilled workers. The median age at the company, he notes, is only 36, and many have come to Kalamazoo from traditional coastal biotech hot spots. This includes several researchers some who originally left the Midwest in their teens and twenties.

“People are looking at the Midwest and crunching the numbers,” Zimmermann says. “Maybe you take a 20% pay cut from San Francisco but you buy a nice house for $200,000. You come out way ahead. We think this a very strong advantage.”

Such a newfound appreciation for the Midwest represents a critical element in expanding the region’s turnaround. With enhanced power in Washington and more common sense government at home, the Midwest could be poised to regain a competitive advantage that has been missing for several generations.

This piece originally appeared in Forbes.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo by Paladin27

February 1, 2011
Why Affordable Housing Matters

Economists, planners and the media often focus on the extremes of real estate — the high-end properties or the foreclosed deserts, particularly in the suburban fringe. Yet to a large extent, they ignore what is arguably the most critical issue: affordability.

This problem is the focus of an important new study by Demographia. The study, which focuses largely on English-speaking countries, looks at the price of housing relative to household income. It essentially benchmarks the number of years of a region’s household income required to purchase a median-priced house.

Overall, the results are rather dismal in terms of affordability, particularly in what Wharton’s Joe Gyourko dubs “superstar cities.” These places — such as London, New York, Sydney, Toronto and Los Angeles — generally tend to be more expensive than second-tier regions commonly found in the American South and heartland.

Even with their usually higher incomes, these regions, for the most part, still have a ratio of five years median income to median house price; this is far higher than the historical ratio of three. In some areas the ratios are even more stratospheric. Sydney and Melbourne, for example, have ratios over nine; London, New York, San Jose and Los Angeles approach six or more.

Urbanists often assume that these high prices — unprecedented in a tepid economy — reflect the greater attractiveness of these regions. This is somewhat true, particularly for parts of London and New York, which can survive high ratios because their markets are less national and middle-income and more tied to the global upper classes.

In places like Mayfair or New York’s Upper East Side, the buying “public” extends beyond the local market to high-income markets in places like the United Arab Emirates, Moscow, Shanghai, Singapore or Tokyo. Many owners are not full-time residents and consider a home in such places as just another expression of their wealth and privilege.

Yet such markets are exceptional. In most regions, the vast preponderance of homebuyers are either natives or long-term migrants. Their less glamorous tastes — notably access to affordable single-family dwellings — drives migration from one region to another. Over the past decade, and even since the crash, this has meant a general trend of migration from high-end, unaffordable markets to less expensive regions. In the U.S., for example, people have been flocking to the South, particularly the large metropolitan areas of Texas.

One factor driving this migration, the Demographia study reveals, is differing levels of regulation of land use between regions. In many markets advocacy for “smart growth,” with tight restrictions on development on the urban fringe, has tended to drive up prices even in places like Australia, despite the relatively plentiful supply of land near its major cities.

More recently, “smart growth” has been bolstered by claims, not always well founded, that high-density development is better for the environment, particularly in terms of limiting greenhouse gases. Fighting climate change (aka global warming) has given planning advocates, politicians and their developer allies a new rationale for “cramming” people into more dense housing, even though most surveys show an overwhelming preference for less dense, single-family houses in most major markets across the English-speaking world.

Limits on the kind of residential living most people prefer inevitably raises prices. As the Demographia study shows, the highest rise in prices relative to incomes generally has taken place in wherever strong growth controls have been imposed by local authorities.

Perhaps the poster child for “smart growth” has been the U.K. Long before the climate change debate, both of England’s major parties embraced the notion of strict constraints on suburban development — not only in London, but across the country. As a result, even places with weak economies are not as affordable as they should be. Liverpool, Newcastle and the Midlands have affordability rates higher than Toronto, Boston, Miami and Portland — and not much lower than those of New York or Los Angeles.

But the most remarkable impact of “smart growth” policies has been in Australia, which once had among the most affordable housing prices in the English-speaking world. Houses in Sydney and Melbourne, for example, are now less affordable than in London or San Francisco. Even secondary markets like Adelaide and Perth are more expensive than Toronto, New York, Los Angeles or Chicago. Most recently these policies have even caught the attention of the OECD, which linked overly regulated housing markets not only to the Great Recession, but to a continued slow economic recovery.

Compared with the U.K. and Australia, the U.S. housing market is more hopeful, with a host of regions — notably Houston, Dallas, Austin, San Antonio, Phoenix and Kansas City — with affordability rates around three and under. Low prices by themselves, of course, are no guarantor of success; in economically challenged places like Detroit and Cleveland, out-migration and high unemployment have driven prices down.

But in many, if not most, cases affordability has promoted economic and demographic growth. Generally speaking, affordable markets tend to draw migrants from overpriced ones, for example to Houston or Austin from Los Angeles or New York.

Nor is this necessarily a case of “smart” people heading to dense, expensive cities while the less cognitively gifted head to the low-cost regions — as news outlets like The Atlantic have claimed. In fact, the American Community Survey reveals that between 2007 and 2009 college graduates generally gravitated toward lower-cost, less dense markets — such as Austin, Houston and Nashville — than to the highly constrained, denser ones. Overall growth in affordable markets — with a ratio of three or four — among college graduates was roughly 5%; in the more expensive places , it was barely 3%.

How could this be, if everyone with an above-a-room-temperature IQ supposedly favors hip, cool, dense cities? Perhaps it’s because of factors often too small or mundane for urban pundits to acknowledge. Most people, particularly as they enter their 30s, aspire to a middle-class lifestyle — and being able to afford a house constitutes a large part of that.

So what does this tell us about future growth? Clearly affordability matters. Areas that combine strong income and job growth, along with affordable housing, are poised to do best. This will be particularly true once the economy recovers and a new generation of millennial buyers, entering their 30s in huge numbers over the next decade, start their search for a place where they can settle down and start raising families.

This piece originally appeared in Forbes.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo by Je Kemp

January 24, 2011

Personal Income in the 2000s: Top and Bottom Ten Metropolitan Areas

The first decade of the new millennium was particularly hard on the US economy. First, there was the recession that followed the attacks of 9/11. That was followed by the housing bust and the resulting Great Financial Crisis, which was the most severe economic decline since the Great Depression.

Per capita personal incomes in America’s major metropolitan areas vary widely. Moreover, the changes in per capita incomes from 2000 to 2009 have also varied. The differences are particularly obvious when average incomes are adjusted for metropolitan area Consumer Price Indexes. The US Bureau of Labor statistics produces a Consumer Price Index for nearly 30 metropolitan areas. Among these, 28 metropolitan areas are covered by these local Consumer Price Indexes.

While overall national inflation was approximately 25 percent between 2000 and 2009, the metropolitan area inflation indexes ranged from 16 percent in Phoenix to more than 32 percent in San Diego. Five additional metropolitan areas had 2000 to 2009 inflation of more than 30 percent, including Los Angeles, Riverside-San Bernardino, Miami, Tampa-St. Petersburg and San Diego. Four metropolitan areas experienced inflation of less than 20 percent, including Atlanta, Detroit and Cleveland and Phoenix.

Overall, the 28 metropolitan areas covered by metropolitan inflation indexes averaged a per capita income decrease of 0.1 percent, after adjustment for inflation. Increases were achieved in 18 metropolitan areas, while decreases occurred in 10. The overall average declines occurred because the steepest loss (19 percent in San Jose), was far outside the plus 10 percent to minus 8 percent range of the other 27 metropolitan areas (Table).

Metropolitan Area: Per Capita Income
Metropolitan Areas Covered by Metropolitan Consumer Price Indexes
Inflation Adjusted

Rank	Metropolitan Area	2000 in 2009$	2009	Change
1	Baltimore	$ 43,729	$ 47,962	9.7%
2	Pittsburgh	$ 39,024	$ 42,216	8.2%
3	Washington	$ 53,753	$ 56,442	5.0%
4	Philadelphia	$ 43,572	$ 45,565	4.6%
5	St. Louis	$ 38,636	$ 40,342	4.4%
6	Milwaukee	$ 40,028	$ 41,696	4.2%
7	Los Angeles	$ 41,382	$ 42,818	3.5%
8	Houston	$ 42,232	$ 43,568	3.2%
9	Cleveland	$ 38,396	$ 39,348	2.5%
10	Chicago	$ 42,761	$ 43,727	2.3%
11	Phoenix	$ 33,594	$ 34,282	2.0%
12	San Diego	$ 44,812	$ 45,630	1.8%
13	Kansas City	$ 39,020	$ 39,619	1.5%
14	New York	$ 51,638	$ 52,375	1.4%
15	Cincinnati	$ 37,852	$ 38,168	0.8%
16	Seattle	$ 48,651	$ 48,976	0.7%
17	Boston	$ 53,396	$ 53,713	0.6%
18	Minneapolis-St. Paul	$ 45,690	$ 45,750	0.1%
19	Denver	$ 46,205	$ 45,982	-0.5%
20	Miami-West Pallm Beach	$ 41,937	$ 41,352	-1.4%
21	Riverside-San Bernardino	$ 30,600	$ 29,930	-2.2%
22	Portland	$ 39,703	$ 38,728	-2.5%
23	Tampa-St. Petersburg	$ 38,048	$ 36,780	-3.3%
24	San Francico	$ 61,831	$ 59,696	-3.5%
25	Dallas-Fort Worth	$ 41,575	$ 39,514	-5.0%
26	Detroit	$ 40,412	$ 37,541	-7.1%
27	Atlanta	$ 39,775	$ 36,482	-8.3%
28	San Jose	$ 68,185	$ 55,404	-18.7%
	Unweighted Average	$ 43,801	$ 43,700	-0.2%

The Top Ten: The strongest per capita personal income growth between 2000 and 2009 was in Baltimore, which had an inflation adjusted increase of 9.7 percent. This strong performance is not surprising due to Baltimore’s proximity to Washington and the federal government’s high paying jobs. It also receives spillover lucrative employment from federal contracts to health, defense and security companies. In fact, Baltimore did better than Washington. Washington, which extends from the District of Columbia and into Maryland, Virginia and West Virginia. Not that DC did badly; it boasted the third highest income growth, and 5.0 percent.

However, perhaps the biggest surprise is the metropolitan area that slipped into the number two position between Baltimore and Washington. The Pittsburgh metropolitan area, which may have faced the most severe economic challenges of any major metropolitan area over the past 40 years, achieved per capita personal income growth of 8.2 percent. The Pittsburgh gain is all the more significant in view of the local financing difficulties which placed the city of Pittsburgh in the near equivalent of bankruptcy under Pennsylvania’s Act 47. However, as is the case in on number of metropolitan areas, the central city has become much less dominant and no longer seals the fate of the larger metropolitan area. Today, the city of Pittsburgh accounts for only 15 percent of the metropolitan area population.

Philadelphia, the other long troubled region across the state, constitutes another surprise. Philadelphia placed fourth in per capita income growth at 4.6 percent only slightly behind Washington. The Philadelphia metropolitan area borders on that of Baltimore, stretching from Pennsylvania into New Jersey, Delaware and Maryland. Together with Washington and Baltimore, Philadelphia anchors the northern end of a corridor of comparative prosperity.

Four of the next six positions are occupied by Midwest metropolitan areas. This may be unexpected because of the significant job losses sustained in this area since 2000. St. Louis, which stretches from Missouri into Illinois, ranked fifth in per capita income growth, at 4.4 percent. Milwaukee ranked sixth in its per capita income growth at 4.2 percent. Cleveland ranked ninth with per capita income growth of 2.5 percent, while Chicago placed 10th, with a gain of 2.3 percent in per capita personal income.

Los Angeles was the only metropolitan area in the West to place in the top 10 in per capita income growth. Los Angeles ranked seventh growth of 3.5 percent. Houston replaced eighth with personal income growth of 3.2 percent.

Overall, the East and Midwest captured six of the top ten income positions, while the South and West occupied four of the top ten positions.

The Bottom 10: If the top 10 contained surprises, the bottom 10 could be even more surprising. Last place (28th) was occupied by San Jose, which experienced a stunning 18.7 percent decline in per capita inflation adjusted income between 2000 and 2009. This income loss is more than double that of the second-worst performing metropolitan area and more than triples that of all but two other metropolitan areas.

The second worst position (27th) also contained a surprise, in Atlanta, which has enjoyed decades of unbridled growth. Yet, Atlanta experienced a per capita income loss of 8.3 percent. There was no surprise in the third to the last ranking (26th) of Detroit, with its automobile industry employment losses and the physical deterioration of its central city, which may be unprecedented in modern peace-time. Per capita incomes declined 7.1 percent in Detroit.

Dallas-Fort Worth, which has also experienced strong growth in the past, posted a surprising fourth worst, with a per capita income decline of 5.0 percent. San Francisco, which has now replaced San Jose as the metropolitan area with the highest per capita income, ranked fifth worst and experienced a decline of 3.5 percent.

All of the remaining bottom 10 positions were occupied by metropolitan areas that have developed a reputation for strong growth. Tampa St. Petersburg ranked 6th worst, with a per capita income loss of 3.3 percent. Portland (Oregon) ranked 7th worst with a personal income loss of 2.5 percent. Riverside San Bernardino, with the lowest per capita income ranking out of the 28 metropolitan areas, ranked 8th worst with a per capita income drop of 2.2 percent.

The Miami (to West Palm Beach) metropolitan area ranked 9th in personal income growth with a loss of 1.4 percent from 2000 to 2009, while Denver topped out the bottom 10, ranking, with a per capita income loss of 0.5 percent

Overall, the South and the West captured nine of the bottom ten positions, while only one Midwestern metropolitan area, Detroit, broke into the bottom ten.

Of course, the 2000s certainly were an unusual time. But it does suggest that the dogma about the geography of regional prosperity needs to be challenged and perhaps thoroughly revised.

Photo: Pittsburgh: Second Fastest Growing Income per Capita 2000-2009 (photo by author)

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

January 24, 2011

Middle America: Problems and Prospects
Undoubtedly, America is a middle class nation. But are there problems in the middle? It would certainly seem so: reduced employment, income and wealth (more worryingly, reduced employment, income- and wealth-building opportunities); reduced prospects for generational advancement (kids are supposed to do better than their parents, right?); general feelings of stagnation, “on the wrong track,” pessimism, frustration and anger.

Are these cyclical or structural changes? What are the causes, and what are the cures?

Many analyses say the cause is the breakdown of family structure and all that engenders; others say it’s that we can’t seem to get education right. But if it’s family and/or schools, trends are not favorable. On the other hand, maybe these problems are overblown. Let’s have a look.

The Upward Mobility Gap
According to the Brookings Institution, more than two-thirds of children born into low-income households grow up to earn a below-average income, and only 6% ever make it into the top one-fifth of income earners. Why is there an upward mobility gap in America, land of opportunity? The usually cited culprits are globalization, the decline of public schools, and the decline of intermarriage between people of different classes.

As a group, adults with college degrees have an unemployment rate of 5%, steady or rising incomes, relatively stable families (their divorce rate declined over the last 10 years) and few children out of wedlock. Adults without a high school education, by contrast, face an unemployment rate over 15%, declining incomes, a higher divorce rate, and have lots of kids out of wedlock. (Among black women who didn’t finish high school, 96% of childbirths are outside marriage; among white women who didn’t finish high school, 43%).

Can anything improve this troubling picture? It is now acknowledged across the political spectrum that people who do just three things – complete high school, work at any job, and not have children out of wedlock – will have a pretty good chance of making it into the middle class. Not easy, but simple. How do we help young people understand that?

Bad Students, Not Bad Schools
The conventional wisdom to address these issues has been to spend more on public education. That may be the proverbial barking up the wrong tree. According to Robert Weissberg, author of Bad Students, Not Bad Schools (2010), school reform is hopeless.

His main points:
- Academic achievement requires intelligence and motivation. School resources, pedagogy and instructional quality are important but secondary. Unfortunately, both liberal and conservative reformers have ignored brains and work ethic and concentrate on secondary factors.
- “Bad schools” are not created “bad.” Indifferent, anti-intellectual, often violent students make schools bad, and pouring in more resources will fix nothing unless the students themselves change.
- Academic achievement requires motivation, and today’s educators foolishly believe in making learning fun and “relevant.” This approach is doomed. Learning inescapably involves pain, and without a struggle, personal advancement is impossible. Substituting cheap self-esteem to avoid agony is particularly harmful to the intellectually less able.
- American educators have long obsessed over closing racial gaps in learning and every attempt, regardless of the billions spent or tactics Yet trying to close these gaps undermines learning for both whites and blacks. The futile effort will only dumb-down education so as to provide the illusion of progress.
- Recent efforts to uplift the least able students have harmed smart kids. Programs for the intellectually gifted have been decimated under No Child Left Behind. This is the opposite of what occurred in the late 1950s and early 60s when the US responded to Sputnik by concentrating on bright students. What rescues America from self-imposed education collapse is importing smart youngsters plus scientists born overseas. This may not last forever.
- Reformers often insist that education should be treated as a business with clear standards and strict accountability to insure progress. Total nonsense. The parallel is inappropriate – you can’t “fire” non-performing students no matter how rotten or disruptive. The business-like infatuation on test scores and accountability almost inevitably subverts quality education, promotes cheating and steers less capable students away from more practical education.
- School choice – vouchers and charter schools – infatuates “conservative” educators. This approach has seldom succeeded. More important, it falsely assumes that if students and parents were given ample choice, they would crave academic excellence. More likely, they prefer sports and country club-like facilities, not tough academics.
- Education spending has sky-rocketed with little to show for these billions. Reformers misunderstand what today’s fixes are about. Schooling has become the reincarnation of the 1960s Great Society, a cornucopia of social welfare jobs and contracts. It is less about boosting learning than securing the social peace by preventing urban unrest.
When Marriage Disappears
Among the affluent, marriage is stable and may even be getting stronger. Among the poor, marriage continues to be fragile and weak. But the most consequential marriage trend of our time concerns the broad center of our society, where marriage, that iconic middle-class institution, is foundering. Marriage is in trouble in Middle America.

So finds Brad Wilcox, director of the National Marriage Project at the University of Virginia, in his latest report. The numbers are clear; over the last 30 years:
- Among “Middle Americans” (the 58% of moderately educated Americans who have a high school degree), the proportion of children born outside of marriage skyrocketed from 13% to 44% while the portion of adults in an intact first marriage dropped from 73% to 45%.
- Among financially well-educated Americans (the 30% who have a college degree or higher), the proportion of children born outside of marriage climbed only slightly from 2% to 6%, the divorce rate dropped from 15% to 11%, and intact first marriages dropped from 73% to 56%.
In sum, due to a shift in attitudes, values and behavior, the relationships of Middle Americans increasingly resemble those of the poor, while marriages among upscale Americans are getting better in many respects. For reasons both cultural and economic, there is a growing disengagement from societal institutions among large portions of the middle class.

The retreat from marriage in Middle America cuts deeply into the nation’s hopes and dreams, writes Wilcox. He believes that if marriage is increasingly unachievable for our moderately educated citizens, then it is likely that we will witness the emergence of a diminished society. Economic mobility will be out of reach, their children’s life chances will diminish, and large numbers of young men will live apart from the civilizing power of married life.

Wilcox says it is not too far-fetched to imagine that the United States could be heading toward a 21st century version of a traditional Latin American model of family life, where only a small oligarchy enjoys a stable married and family life – and the economic and social fruits that flow from strong marriages. In this model, the middle and lower-middle classes would find it difficult to achieve the same goals for their families and would be bedeviled by family discord and economic insecurity.

Millennials and Hope
Another view is offered by Joseph Lawler, managing editor of The American Spectator, who writes in the current issue that the idea that the middle class is in a “slow-burning crisis” is badly overstated. Middle-class college graduates must be doing fine, he surmises, if, as a recent New York Times article on the subject relates, they are turning down starting salaries of $40,000!

The economic downturn has certainly caused widespread hardship, Lawler writes, but it would be a serious mistake to attribute the country’s economic woes to a prolonged erosion of middle-class opportunity. The fact that the American economy still provides opportunity on a vast scale should be evident from what Americans themselves are saying about their prospects. In early 2009, at the depths of the recession, the Economic Mobility Project, an initiative funded by Pew Charitable Trusts, commissioned a survey of Americans’ economic sentiments. The poll showed that 58% of people aged 18-29 thought that they would have an easier time moving up the economic ladder than their parents did. Seventy-two percent of those polled thought that their economic circumstances would be much or somewhat better in 10 years. Seventy-nine percent expressed confidence in the possibility that people could improve their economic standing even during the recession, and among youth the number rose to 88%.

They could be all wrong, but optimism in the face of uncertainty should itself be considered a strength of American society!

This clear expression of optimism among young workers conflicts with the grim trends echoed endlessly throughout political commentary, notes Lawler. The reason the polls don’t reflect such sentiments is that those malign developments are overblown, and are to a significant degree artifacts of the way statistics on income and inequality are kept.

For instance, economic mobility – the ease with which young workers move up the economic ladder – is as healthy as the polls would suggest. Middle- and lower-class wages have not progressed as they did a couple of generations ago, but still about 65% of children go on to out-earn their parents, including 80% of those in the lowest income quintile, according to a study by Julia Isaacs of the Brookings Institution.

It is hard to reconcile the fact that young generations are still advancing economically with the general phenomenon of stagnating wages until one factor is taken into account: immigration. Because immigrants earn less on average than others, including them in the sample makes it appear as though mobility is not as prevalent as it really is. And of course for many of them, even in lower income, they are doing far better than their own parents back home.

Minnesota Federal Reserve economist Terry Fitzgerald, in a contrarian 2008 paper, separated some of the frequently repeated misleading facts from the reality that the middle class has made steady gains. A key finding was that while households in the middle of the distribution have fallen behind top-earning households since the 1970s, in fact almost all households have enjoyed substantial income gains since then.

Middle America is troubled, economically and socially, and trends are not favorable. But the middle class is our strength, our hope. So what can we do to shore up the middle?

We know that the answer is fostering human capital, and we have always thought the way to do this was through education. But we are finding that educational success is correlated with and dependent upon strong family structure. Which comes first, educational achievement or strong family structure? Now we know: strong family structure.

What public policies to pursue to encourage and enhance stronger families? Answer: fewer of them.

The usual policy prescriptions — intervention and redistribution — have not worked, will not work, cannot work. We actually need less public policy, less intervention, less redistribution. If stronger families are best, also the most natural, then we should leave resources to families.

Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

Photo by: scarlatti2004
January 23, 2011
The Next Urban Challenge — And Opportunity

In the next two years, America’s large cities will face the greatest existential crisis in a generation. Municipal bonds are in the tank, having just suffered the worst quarterly performance in more than 16 years, a sign of flagging interest in urban debt.

Things may get worse. The website Business Insider calculates that as many as 16 major cities — including New York, Los Angeles, Chicago and San Francisco — could face bankruptcy in the next year without major revenue increases or drastic budget cuts. JPMorgan Chase’s Jamie Dimon notes that there have already been six municipal bankruptcies and predicts that we “will see more.”

Big cities face particularly steep challenges. Many, notes the Manhattan Institute’s Steve Malanga, have extraordinarily generous compensation systems for their public employees. New York City, for example, owes nearly $65 billion in municipal debt, as well as a remarkable $122 billion for unfunded pension obligations. President Barack Obama’s hometown of Chicago has it even worse: Its total public pension liability adds up to roughly $42,000 per household.

This all should give some pause to the relentless hoopla about the country’s supposed “urban renaissance.” The roots of the current economic crisis lie deep in urban economies, where employment growth that has lagged even in good times. During the last economic expansion, urban job growth was roughly one-sixth that of suburbs and one-third that of smaller communities.

Population flows are also less favorable than commonly perceived. Even since the onset of the Great Recession, the vast majority of urban regions have seen population continue to grow more robustly in the suburbs than in the urban core. Similarly, the largest increases in the much-coveted educated population continue to be in smaller, less dense urban areas such as Raleigh-Durham, Austin and Nashville and away from the largest, densest regions such as New York or Los Angeles.

True, many cities now boast more residential complexes, often built from abandoned office and industrial space, but there are few new office towers outside the public sector. Stadiums, convention centers, luxury hotels and other ephemera may gain public notoriety, but they have done little to boost the private sector economic base as can be seen in the lack of growth in places like downtown Cleveland, Detroit and Baltimore. In contrast, job growth has flourished in low-density regions in suburban rings, particularly in fast-growing metropolitan regions of the South , particularly in Texas and Intermountain West locales such as Salt Lake City.

Initially, the Great Recession was widely held to have reversed this pattern. As private sector growth retrenched, companies pulled out of newer offices in suburbia, sometimes consolidating in downtown office. The Bush-Obama stimulus also bailed out the two sectors — finance and government — that drive employment in most inner cities. Meanwhile, suburbs, with their collections of small companies that have little political heft and depend more on home construction, suffered greater drops in occupancies.

This urban tilt was, until recently, reinforced by political trends. After the 2008 election urban interests had secured a degree of political power unprecedented in recent history. The White House was occupied by a confirmed urbanite who found suburbs “boring” and had little connection with small town residents. The president stocked his EPA, Housing, Transportation and Education bureaucracies with pro-urban advocates who shared his vision to re-densify a country that has been steadily dispersing for half a century.

At the start of the Obama presidency virtually every critical committee post in the House was controlled by urban Democrats led by Speaker Nancy Pelosi — such old lions as Henry Waxman, Barney Frank and Charles Rangel. In concert with an urban-focused White House, they constructed a stimulus tilted toward key urban interests: public employees, large universities, mass transit and high-speed rail systems.

Now the cities’ political ascendency has come to an end. Suburban and small town voters, who represented a large majority of the electorate, shifted heavily the November toward the GOP. Unlike the city-focused old Congress, the new GOP dominated House’s primary loyalty is to the metropolitan periphery as well as smaller cities and towns.

This shift will affect big cities across the country. Urban land speculators counting on a national high-speed rail speed and expanded rail transit networks to boost central cores now face a Congress more concerned with roads than ultra-expensive new trains. You can also forget the hundreds of millions ascribed for “smart growth” plans, which, in essence, seek to direct development and housing towards high-density urban areas.

Even more serious for cities will be the fiscal fallout from the new order in Washington. Pushed by the Tea Party base, the GOP-led Congress will unlikely provide bailouts to fiscally challenged states and cities. This will hit those big cities — New York, Los Angeles, San Francisco and Chicago, – located in heavily indebted states — New York, California and, arguably the worst of the pack, Illinois — the hardest.

There is widespread concern, bordering on panic, about how potential cutbacks in state spending could further savage already strapped city budgets. In California, for example, Governor Jerry Brown’s proposed scaling back of state redevelopment funds was described in the Los Angeles Downtown News as a “budget bomb” for the city’s widely hyped but already tottering downtown renaissance.

Yet these challenges also present an opportunity for cities. As one prominent urban booster, Brookings’ Chris Leinberger, has pointed out in a recent radio interview (KPCC-FM-NPR), many of the nation’s cities no longer require the assistance deemed necessary back in the ’60s and ’70s. As they have developed somewhat stronger downtown cores, lowered crime rates and reduced “white flight,” the stronger urban cores are better positioned now, though perhaps less so than the boosters believe, to succeed on a market-oriented basis.

Even setbacks, like the largely failed condo boom, can turn into an advantage. No longer commanding high prices from the never-quite-materialized hordes of affluent “empty nesters,” the new units could provide a stock of lower-cost housing for the younger, educated and childless demographic attracted to urban core. Although most millennials consider suburbs their ultimate destination, a sizable number, roughly one in five, rank an urban center as their “ideal” location.

Cities need to break their reliance on outside help from a country that is, for the most part, not dense or urban. Future urban progress cannot rely on Washington’s largesse or diktats. Instead cities need to focus on how to create a greater competitive advantage in the demographic and employment marketplace. Rather than obsessing over government-driven employment, they have to create conditions that will lead to job creation in the private sector, particularly from the oft-neglected and usually politically impotent small business sector. These include such things as relaxing some regulations, including taxes on home-based businesses, incubator centers and more consistent standards on building construction.

City governments will need to shift their priorities away from ephemera and concentrate on such basics as improving schools, promoting entrepreneurial growth and nurturing sustainable middle class neighborhoods. The current shift in political power away from cities may be painful at first, but it could prove the elixir that will turn the urban renaissance fantasy into something closer to reality.

This piece originally appeared in Forbes.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo by asterix611

January 20, 2011
Agglomeration Vs. Isolation for Science Based Economic Development

Earlier this month President Obama signed the reauthorization of the COMPETES Act, which provides federal funding for science initiatives aimed at enhancing economic competitiveness. In addition to shoring up agencies like the National Science Foundation, the bill called on the Department of Commerce to create a new program charged with supporting the development of research parks and regional innovation clusters. Unheard of before World War II, these entities today represent the cutting edge in what insiders call TBED: technology-based economic development. By leveraging existing strengths and promoting cooperation between universities and private industry, TBED-minded regions seek to attract outside investment and carve out a niche in the global economy.

Research parks and innovation clusters both draw on the logic of agglomeration: when smart people (or up-and-coming firms) gather in a concentrated area, the story goes, they bounce ideas off each other and push each other to innovate and eventually outperform other people or firms who are more widely dispersed. This is the logic at the heart of Geoffrey West’s grand unified theory of urbanism featured in the New York Times back in December. It’s the logic of Silicon Valley. But is agglomeration always good for science? What assumptions do clusters and science parks make about how research gets carried out? That is, does science cluster of its own accord? Or can the political and economic arguments for clustering come into conflict with strains of science that are best kept at arm’s length?

An instructive case to consider is that of the National Bio- and Agro-Defense Facility (NBAF), an animal disease research facility set to be built in Manhattan, Kansas. After the anthrax attacks of 2001, bioterrorism experts convinced the Bush administration that biological agents and, specifically, diseases affecting American livestock could constitute a threat to the nation’s security. American agriculture was, in the words of one presidential directive, “an extensive, open, interconnected, diverse and complex structure providing potential targets for terrorist attacks.” So the Department of Homeland Security (DHS) dreamed up a new, state-of-the-art laboratory for animal disease research, and after a long, involved site selection process, Kansas was selected to host the new lab in December 2008. As the Daily Yonder recently reported, concerns persist about whether it’s a good idea to conduct research on deadly livestock diseases smack in the middle of cattle country.

Then what brought NBAF to Kansas, if DHS acknowledged that a mainland location was riskier than a lab located offshore? The answer, as far as I can tell, is agglomeration. NBAF’s predecessor, the Plum Island Animal Disease Center, was located in the middle of Long Island Sound to minimize the risk of an accidental pathogen release. Scientists took a ferryboat to work in the morning, and in the early years nothing could leave the island, not even library books. NBAF, on the other hand, was always envisioned as part of a constantly circulating network. DHS’s request for proposals explicitly mentioned “proximity to other related scientific programs and research infrastructure” as one of the selection criteria. Others included proximity to vaccine manufacturers and access to an international airport. If the geographical logic of animal disease research after World War II was one of isolation, then the new logic of post-9/11 science was one of hyperconnection.

The sites that were well connected—literally—were the ones that moved forward in the NBAF site selection process. Georgia and North Carolina offered access to nearby veterinary schools, while Mississippi vowed to work with contract research giant Battelle to drum up the necessary workforce. Backers in San Antonio proposed locating the lab in, you guessed it, the Texas Research Park. But it was the Kansas bid that best exemplified the new logic of agglomeration, by envisioning NBAF as the anchor for an emerging Kansas City Animal Health Corridor. Kansas State University, where the lab would be located, offered DHS “surge capacity” in its new Biosecurity Research Institute if a crisis were to ensue. And as for the half-million cattle in nearby counties? Those, too, became part of the cluster, with the Kansas Livestock Association issuing a letter of support arguing that “having this facility in close proximity to the nation’s geographic concentration of meat production is extremely logical.” The proximity that a previous generation of researchers understood as a vector of contagion was now being repackaged as a source of reassurance and a boon to scientific discovery.

You can’t fault Kansas, of course, for wanting to secure its slice of the knowledge economy. In a report for the Chicago Council on Global Affairs, Mark Drabenstott argues that Midwestern states need to be looking beyond silos and smokestacks, and the Kansas Bioscience Authority estimates that NBAF will have a positive economic impact of $3.5 billion over the next two decades. That’s pretty good. Except, according to a 2009 report from the Government Accountability Office, the cost of a large-scale outbreak of foot-and-mouth disease would be even greater. There are no easy answers here. The point is that science-driven development carries risks, and concentrating brainpower in one place can also mean concentrating the harmful substances that those knowledge workers handle each day. Without being hobbled by irresponsible fearmongering, states and regions pursuing an innovation agenda need to be honest about the associated risks—and to ensure that the people who bear those risks also stand to reap the rewards.

After all, confining science to uninhabited islands means asking scientists to live like monastics, and risks isolating them in an echo chamber of their own assumptions. That’s neither desirable nor practical. So, if the science cluster is here to stay, then the question becomes how to build a research infrastructure that maximizes the benefits of clustering and minimizes the drawbacks.
Brazil’s Ministry of Science and Technology just put forward a promising template, which calls for decentralizing scientific research from the southern cities of São Paulo and Rio de Janeiro to other parts of the country. Too much concentration in the south, the ministry concluded, could actually quash innovation and exacerbate existing inequalities. But a growing research economy in the north could ease the strain on the region’s natural resources and help incoming president Dilma Rousseff to make good on her pledge to combat poverty in the South American nation.

Let’s be clear: there’s no neatly replicable way of manufacturing scientific breakthroughs, and people around the world will continue to have good ideas without ever setting foot in an innovation cluster. Still, modern science thrives on linkages, and managing those linkages has become an increasingly central part of modern statecraft. As policymakers use the new tools at their disposal to promote cooperation between universities, companies, and local economies, they would do well to think of agglomeration, not as an inherent good, but as a means of securing real, sustainable prosperity.

Marcel LaFlamme is a graduate student in the Department of Anthropology at Rice University. His research focuses on science-driven development on the American Great Plains.

Photo: NBAF draft rendering, K-State.edu

January 18, 2011
Rise of the Hans

When Chinese President Hu Jintao comes to Washington this week, there aren’t likely to be many surprises: Hu and Barack Obama will probably keep their conversation to a fairly regulated script, focusing on trade and North Korea and offering the expected viewpoints on both. But seen from a different angle, everything in that conversation could be predicted, not from current events but from longstanding tribal patterns.

With China’s new prominence in global affairs, the Han race, which constitutes 90 percent of the Chinese population, is suddenly the most dominant cohesive ethnic group in the world — and it is seeking to remain that way through strategic alliances, aggressive trade policy, and attacks on racial minorities within the country’s boundaries. The less tribally cohesive, more fragmented West is, meanwhile, losing out.

Almost 20 years ago, I wrote a book called Tribes that sought to trace the role of ethnicity, race, and religion in economic and geopolitical affairs. At the time, there was some skepticism about the continuing influence of ethnicity; some considered the work, frankly, regressive and racist. Now, however, my thesis from 1992 has really come to fruition. We are living in the age of tribes — and China is just the start.

Such primitive racial instincts were supposed to be long ago passé: We’re supposed to be living in Thomas Friedman’s “flat” world or Kenichi Ohmae’s “borderless world.” By now, supposedly, everyone is increasingly interconnected and undifferentiated. Affairs should be managed neatly by deracinated professionals, working on their iPads from Brussels, Washington, or any of the other “global” capitals.

But most people do not really see themselves as members of a large multinational unit, global citizens, or “mass consumers.” Instead the drivers of history remain the essentials: the desire to feed one’s family, support the health of the tribe, and shape the immediate community. The particularistic continues to trump the universalistic.

This has only become more evident as our world becomes more multipolar. During the 19th and much of the 20th century, the world was dominated by a European capitalist mindset that glossed over many of the ethnic and racial differences simmering under the surface in the regions under its rule. Particular groups, including Chinese, Muslims, or Hindu Indians, might have harbored a sense of unique identity but, for the most part, either melded into the Euro-American mold, or, after the Russian Revolution of 1917, into the alternative Soviet one.

Today this has changed dramatically, as once suppressed racial and ethnic groups express their power on a global level. The rise of Chinese national identity, increasingly stripped of its socialist clothing, must be seen as the driving force behind the new tribalism. The country’s re-emergence as a great world power expresses the cultural ascendency not so much of Marxism or Maoism but of the Han race, which in only a few decades could control the world’s largest economy.

This represents a major shift in the identity of the Chinese tribe, a combination of political and economic power with a very homogeneous worldview. The best way to explain China’s economic and foreign policy is most accurately seen as a tribal expression of what Friedrich Nietzsche called a “will to power.” Essentially, the Han has become a tribal superpower that treats other groups — from China’s non-Han minority to much of the rest of the world — as a vast semi-colonial periphery. And with its growing economic and military might, Han China may soon be able to impose its will on some of these “lesser” cultures, should it desire.

China may be setting the underlying tone of our new world, but many other groups have responded in similarly tribal fashion. Like China, Russia has abandoned internationalist communism for a kind of Leninist state-capitalism with racial overtones, as evident both in the increasingly rough treatments of darker-skinned ethnic minorities such as Chechens and an aggressive ethnic Russian retro-imperialism — once disguised in socialist trappings — toward “near abroad” countries like Georgia, Armenia, Ukraine, and Belarus.

The state-sponsored restoration of everything from the Orthodox Church to Stalin — as well as the consolidation of state ownership over the lucrative energy sector — reflects the deeply nationalist core of the modern Russian state, which, for historical, geographical, and cultural reasons, has, with few exceptions, always bent toward authoritarianism. The end of the Soviet Union, it turns out, did not usher in a wider embrace of universal capitalism so much as engender various forms of ethnicity-based irredentism and, in Russia itself, a renewed Slavic nationalism.

As they have modernized and globalized, other races — Persians, Arabs, Brazilians, for just a few examples — have turned out to be far less cosmopolitan and more tribal. These nationalisms, or tribalisms vary widely. Some, like China and Russia, are specifically racial in character. Others, such as Brazil, are remarkably multi-racial. In some cases historic resentments are at the base. But all are less interested in adopting globalized norms of free markets or capitalism than using state power (through sovereign wealth funds and state-controlled corporations) to increase their influence and wealth.

The new tribalism is also increasingly evident in Europe. Just a few years ago Europhiles like French eminence grise Jacques Attali or left-wing author Jeremy Rifkin could project a utopian future European Union that would stand both as a global role model and one of the world’s great powers. Today, Rifkin’s ideal of a universalistic “European dream” is collapsing — a process accelerated by the financial crisis — as the continent is torn apart by deep-seated historical and cultural rifts.

Europe today can best be seen as divided between three cultural tribes: Nordic-Germanic, Latin, and Slavonic. In the north, there is a vast region of prosperity, a zone of Nordic dynamism. Characterized by economies based on specialized exports, a still powerful Protestant ethic, and a culture that embraces authority, these countries — including Scandinavia, the Netherlands, Germany, and, arguably, the Baltic states — are becoming ever more aware of the cultural, fiscal, and attitudinal gulf between them and the southern countries.

At the same time, the attempt to build a new European identity fused with immigrants appears to be failing. As Chancellor Angela Merkel noted, Germany has failed at “multi-culturalism.” Such sentiments may be reviled by the media, academics, and even business leaders in Northern Europe, but they are clearly popular at the grassroots. Once considered paragons of liberalism, countries such as Denmark and the Netherlands have incubated potent anti-immigration movements.

In a world dominated increasingly by Asia, northern Europe cannot be anything more than a peripheral global power, which may explain its new introversion. Instead these resilient cultures more accurately represent a revival of the old Hanseatic League, a network of opportunistic and prosperous trading states that ringed the North and Baltic seas during the 13th century. This new league increasingly battles over issues of trade and fiscal policy, often with ill-disguised contempt, with the southern European countries I call “the Olive Republics”: a region typified by dire straits, with rapidly aging populations, enormous budget deficits, and declining industrial might. Southern Europe now constitutes a zone of lassitude that extends from Portugal and Spain through the south of France, Italy, the former Yugoslavia, Greece, and Bulgaria.

The last European tribe includes the Slavic countries, centered by Russia but extending to parts of the Balkans as well, places like Ukraine, Belarus, Serbia, and Moldova that historically have looked east as well as west and are currently defined by shrinking populations and weak democratic institutions. A historic pattern of Russian domination is evident here, based in large part on a revived Slavic identity that embraces similarities in religion, culture, history, and language with countries living under Russia’s shield. In this sense the czars are back, not a great development for the rest of the world or for the fading chimera of a “common European home.”

What does this resurgence of tribalism mean to the foreign policy community? Clearly more attention needs to be played to such issues as cultural vibrancy, birthrates, and economic “animal spirits.” In some sense, we need to return to the perspectives of ancient writers like Herodotus and Ibn Khaldun, who attributed the rise and fall of nations to the vitality of what the latter called “group feeling.”

Tribalism will also threaten the efficacy of international organizations, which tend to assume common interests between groups. Instead we have to think of future international cooperation in more traditional terms, balancing distinct sets of tribal interest. As tribes continue to pursue their own interests ever more zealously, the idealistic rhetoric of multinational organizations will become ever more risible. The way China and other developing countries snarled up the Copenhagen climate conference reflects this shift.

Similarly, the problems with controlling trade to Iran have to do with long-standing economic relationships that are closely linked to cultural ties. Sanctions imposed from the West cannot compete with far more long-standing trade relations between Iran and places like Dubai. In the future, the best hope may lie in more temporary, ad hoc alliances based on the self-interest of individual tribes, such as how the U.S. and Russia may cooperate in space exploration as a means to preserve their hegemony in that field against newcomers such as China.

In essence, we need to shift from seeking labored, politically correct commonalities among cultures and work more on learning to reconcile and co-exist with people who always, inevitably, will remain strangers. This means, for example, throwing out the idea that any international model — say, the Anglo-American version — can be imposed or grafted onto other cultures.

“What about us?” Anglo-Americans may ask. In a globalized world that speaks and writes in English, the Anglosphere retains some natural advantages. This is where the most elite colleges and universities are located, and where the top financial firms are concentrated. Equally important, the Anglosphere also controls much of what the developing countries will most need in the future — food — through the unsurpassed fecundity of the United States, Canada, Australia, and New Zealand.

Demographics and a unique ability to absorb a wide range of immigrants make the Anglosphere economically and demographically vibrant — a point often missed by political scientists like the late Samuel Huntington and some elements on the political right. By 2050, the Anglosphere will be home to upwards of 550 million people, the largest population grouping outside China and India. English-speakers may not straddle the world like the 19th century empire-makers, but they are likely to remain first among equals well into the current century.

Ultimately, this will depend on how the English-speaking world evolves and learns to embrace its multiracial population without losing its sense of a common identity. Ideally, the Anglosphere can offer an alternative that embraces not merely a language but a set of historically achieved values such as democracy and freedom of speech, religion, and markets. Already many of the English-speaking world’s exemplary writers, artists, industrialists, and entrepreneurs hail from a vast and ever expanding array of backgrounds. It is in the melding of many into one dynamic culture that the Anglosphere may retain a powerful influence over our emerging world of tribes.

This piece originally appeared in Foreign Policy.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo Peter Fuchs

January 17, 2011
Self-Employment Key to Expanding Rural America’s Revival

In many ways, these are the best of times for rural America. Rising commodity prices for food, fiber and energy have revived the economy in much of the nation’s heartland. But still, many rural communities still are losing population, particularly among the young, and suffering unacceptably high rates of poverty. What accounts for this “best of times, worst of times” scenario?

Part of the problem lies with the highly productive nature of industries like agriculture, which now require less and less human input. In addition, the U.S. economy has undergone, and continues to undergo, structural changes beginning with the 2001 recession and continuing today. Permanent employment growth among America’s largest employers began stagnating before the 9-11 (2001) recession. During the recovery, the share of U.S. employment by America’s largest employers declined from 34% to 26% (or by -24%) of all employment (youreconomy.org). This trend coincided with the movement among large corporations to outsource work. Jobs that in the past would have been filled by permanent, salaried-with-benefits employees are today contracted out, allowing firms to lower legacy worker costs and increase workforce flexibility.

This slower rate of job creation may be structural and permanent, not just part of the recession and recovery cycle. Coping with these changes will most likely require an expansion of small-scale entrepreneurship, enabling rural residents to enjoy the quality of life benefits of “rural living” and also to tap economic opportunities. Some of these opportunities are even created by the outsourcing of work by larger employers. Our work with the RUPRI Center for Rural Entrepreneurship over the past 10 years suggests that the rise in self-employment – small-scale entrepreneurship – and slow job creation are related and could present a development “silver lining” opportunity for many communities in the United States.

The potential behind this phenomenon can best be observed in the rise of necessity entrepreneurship. Necessity entrepreneurs are driven into business by the lack of jobs in their region – many clearly would prefer to take a job if those opportunities were available. But, once in business, these entrepreneurs could help create the foundation of a whole new generation of ventures that will help re-invent and renew the rural American economy.

Fortunately, the trend towards small, “microenterprise” has been evolving for a generation. Over the past decade, the number of Americans who are self-employed has risen by 4.3 million. The percentage of the American workforce that is self-employed has risen from 2.5% of all workers in 1993 to 7% in 2008 based on research from the Edward Lowe Foundation (www.youreconomy.org).

Why is this important for rural places and how might this shape rural development strategies?

Freedom to Choose. For one thing, entrepreneurs have far greater freedom to live where they want, including in rural towns and the countryside, and still make a living in our outsourced economy. Our work, particularly across the heartland, suggests that communities can stimulate development and growth by acting upon this emerging trend. The key to success appears to be rooted in an integrated strategy that emphasizes and preserves rural quality of life and values while at the same time creating a strong and supportive entrepreneurial environment.

Rooted Economic Opportunity. Self-employment – creating your own job – represents an opportunity for rural places to intentionally connect strategies to improve “quality of place” and “economic development”. We are seeing rising interest in designing community development strategies that include targeted “people attraction” in combination with efforts to create jobs and career pathways brough on by transplanted entrepreneurial ventures.

Social & Economic Renewal. The lament in rural communities and in rural policy circles has been the “brain drain” or the perceived loss of the “best and brightest.” Based on our field research throughout North America we would argue that the dominate group leaving rural areas are not necessarily the best and brightest, but those with a greater capacity for taking risk. This distinction is strategically important in that losing risk takers erodes a community’s fundamental capacity for innovating and embracing necessary change. Attracting entrepreneurs introduces “change agents” back into declining rural communities. This introduction enhances social and economic renewal.

There are rural communities across the Heartland that illustrate this transformation including larger communities like Dickinson, North Dakota, Kearney, Nebraska and Salina, Kansas. But the emerging success stories are not restricted to the larger of the rural communities and include very small communities like Rawlins County, Kansas (population 2,425), Chase County, Nebraska (population 3,625), Valley County Nebraska (population 4,108) and Linn County, Missouri (population 12,606). Rawlins County is a particularly important example in that this community has over the last 15 years embraced a development strategy focusing on both entrepreneurship and people attraction with impressive emergent results. Rawlins County has begun to rebuild a more dynamic and competitive economy via area entrepreneurs, dramatically improved its migration balance and stabilized the decline in student enrollment through the attraction and retention of younger families. (Read more about the Rawlins County story.)

More work needs to be done to fully understand these trends. Further clarification on how communities can act on them to build brighter futures are suggested below:

Necessity Entrepreneurs. There is a compelling need to learn more about the size and nature of rising numbers of self-employed and necessity entrepreneurs. This research needs to be national in scope, but with detail at regional and community levels as well. Deeper understanding can form the basis of better development strategies.

Targeted People Attraction. More and more communities are exploring people attraction. There is considerable room to learn more and build more targeted and effective strategies. Current efforts need to be documented and evaluated. Promising practices need to be tested and developed.

Necessity to Opportunity Entrepreneurs. Lack of job opportunities is driving more people to necessity entrepreneurship. But necessity entrepreneurship can become a personal trap and a dead end strategy for communities. We need to learn more on how the increasing pool of necessity entrepreneurs can grow into a new generation of opportunity entrepreneurs who can create greater long term, sustainable economic prosperity.

Don Macke is Co-founder and Director of Strategic Engagement, RUPRI Center for Rural Entrepreneurship.

Photo by Tom Haymes

January 15, 2011
Fuzzy Thinking by Famous Economists

Edward L. Glaeser, in an end-of-year piece for the New York Times, claims that generous housing supply is the reason that Texas’s economy is performing so well. As he says in his final paragraph:

“Housing regulations, more than those that bind standard businesses, explain the Sun Belt’s population growth. If New York and Massachusetts want to stop losing Congressional seats, then they must revisit the rules that make it so difficult to build. High prices show that the demand would be there if the supply is unleashed.”

This can’t be true.

If it were true, Fresno, Modesto, and other cities in California’s Central Valley would be booming. They are not. Instead, six of the ten worst U.S. Metro Areas for joblessness are in California’s Central Valley.

It is not just California. There are lots of places where housing is abundant and inexpensive and economic activity is dismal, Michigan for example. Maybe bringing up Michigan is a little unfair, Glaeser does mention demand for housing in the essay, and there is clearly little demand for Michigan housing. Still, it brings up the question of where demand for housing comes from. It’s a question Glaeser does not address.

We’ll get back to the question of demand for housing.

Glaeser claims that building homes causes prosperity, but Michigan’s housing abundance is not because of recent construction. He mentioned Georgia and Arizona, but those economies have been performing worse than the national average in terms of jobs and unemployment since the crash of the housing bubble. Now Nevada leads the nation in the AP’s Economic Stress Index, the sum of unemployment, foreclosure, and bankruptcy rates.

As it turns out, Texas is the only state among the ones that Glaeser discusses that has outperformed the national average since the recession. Something else is going on, and that something is opportunity, but Glaeser makes a fundamental mistake early in the paper:

“If economic productivity – created by low regulations or anything else – was causing the growth of Texas, Arizona and Georgia, then these places should have high per capita productivity and wages. Yet per capita state product in Arizona in 2009 was $35,300, 16 percent less than the national average. Per capita state products was $36,700 in Georgia and $42,500 in Texas.”

It is a mindboggling mistake for an economist to claim that business decisions are made based on productivity, without consideration of costs. If productivity was all that mattered, little manufacturing would take place in China, as United States factory workers are about five times more productive than their Chinese counterparts.

Paul Krugman, in another New York Times piece, takes up where Glaeser leaves off and makes another amazing mistake:

“Part of the answer is that reports of a recession-proof state were greatly exaggerated. It’s true that Texas job losses haven’t been as severe as those in the nation as a whole since the recession began in 2007. But Texas has a rapidly growing population — largely, suggests Harvard’s Edward Glaeser, because its liberal land-use and zoning policies have kept housing cheap. There’s nothing wrong with that; but given that rising population, Texas needs to create jobs more rapidly than the rest of the country just to keep up with a growing work force.”

Krugman goes on to say that people move to cheap housing, and economic growth follows.

People make locational decisions based on far more factors than housing costs, factors like job prospects and opportunity, climate, cultural amenities, taxes and the like. In economic terms, we say that job growth and population growth are jointly determined. There is nothing sequential going on at all. Instead, population growth (and housing demand) reflects job growth prospects, housing costs, and other factors. Job growth reflects population growth prospects (and housing supply), productivity, wage rates, and other costs and resources.

Krugman also asserts that Texas’s economy is not exceptional among the large states, citing unemployment rates equal to New York or Massachusetts. But he ignores the fundamentals here – like higher job growth and more in-migration. During its boom period, California often suffered higher unemployment because so many people were coming there. In contrast, the workforces in both Massachusetts and New York are among the slowest growing in the country. New York, in particular, competes with California and Michigan for the highest rates of domestic outmigration. People would stay if there was opportunity.

In his rush to denounce Texas, Krugman exaggerates or dismisses facts. Yes, Texas has a twenty billion deficit now, but that the Lone Star State budget is for two years, something he neglects to mention. These estimates may soon be downgraded, as the price of oil rises. In addition, he fails to acknowledge Texas’s stellar performance in creating both high-tech and middle skill jobs at many times the rate of such favored blue states as Massachusetts, New York and California. People are not as stupid as many Nobel Prize winners might think; they move for opportunity, not just for cheap houses or low-paid work.

You do not have to be a free market fundamentalist to recognize that, in relative terms, we can see a band of prosperity from North Dakota to Texas. In general, economic performance declines as you move from this Heartland band to the coasts, particularly the West Coast. People who want to believe that policy doesn’t matter give oil and agriculture as the two major reasons for the Heartland’s relative prosperity. Krugman suggests that high oil prices are a key reason for Texas’s economic performance.

No doubt, oil is important to Texas, but prices have been generally low throughout the recession, while the oil companies’ domestic capital budgets have been small. Similarly, agriculture is booming nationwide, not just in the Heartland, a result of high prices caused by growing global demand. California certainly has lots of oil and agriculture, and no one would claim that California is booming. There is more to the Heartland’s growth than agriculture and oil, and that includes states which are governed by Democrats, such as Montana.

A region’s job growth is a result of business locational decisions. A business moves to or expands in a region based on a whole host of reasons. These include available infrastructure, resource availability, market size and location, labor supply and costs, worker productivity, facilities costs, transportation costs, and other costs. Those other costs include what I call DURT (Delay, Uncertainty, Regulation, and Taxes).

There is no reason for every location to have the same DURT. On the contrary, a location blessed with an abundance of the other factors of business locational decisions could afford to have more expensive DURT, while locations less blessed need to have cheaper DURT to attract businesses.

This is what we see. The coasts tend to be more intrinsically attractive than the Heartland, but they also tend to have more expensive DURT. But now many of these states – driven by such factors as public sector costs or environmental regulations – have raised the price of their DURT so high that they have driven business to expand more to less attractive locations with cheaper DURT, demonstrating once again that policy matters.

Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org.

Photo by Dean Terry

January 8, 2011
The Heartland Rises

The change in congressional power this week is more than an ideological shift. It ushers in a revival in the political influence of the nation’s heartland, as well as the South.

This contrasts dramatically with the last Congress. Virtually its entire leadership — from former House Speaker Nancy Pelosi (D-Calif.) on down — represented either the urban core or affluent, close-in suburbs of large metropolitan areas. Powerful old lions like Reps. Charles Rangel (D-N.Y.) of Harlem, Henry Waxman (D-Calif.) of Los Angeles and Barney Frank (D-Mass.) of Newton, an affluent, close-in Boston suburb, roamed. The Senate was led by Sen. Harry Reid (D-Nev.), who loyally services Las Vegas casino interests while his lieutenant, Sen. Chuck Schumer (D-N.Y.), is now the top Democratic satrap of Wall Street.

The old Senate tandem remains in place — but with greatly reduced influence. Many remaining Democrats, particularly those from the heartland, now live in justifiable fear for their political lives. But the most radical shifts in political geography are in the House.

The new House leaders are, for the most part, from small towns, suburbs and interior cities. Most GOP pickups came from precisely these regions — particularly in the South and Midwest.

The new speaker, Rep. John Boehner (R-Ohio), for example, represents a southern Ohio district that includes some Cincinnati suburbs. Rep. Eric Cantor (R-Va.), the majority leader, comes from suburbs west of Richmond. Rep. Paul Ryan (R-Wis.), chairman of the Budget Committee, hails from Janesville (population: 63,000).

Power is moving within state delegations. Before the elections, California’s most influential House members hailed from coastal districts. In contrast, Rep. Kevin McCarthy, the new majority whip, represents Bakersfield, an oil-rich, largely agricultural area known as “Little Texas” — a far cry from the urbanity of Pelosi’s San Francisco.

This change in geography also suggests a shift in the economic balance of power. The old Congress owed its allegiance largely to the “social-industrial” complex around Washington, Wall Street, public-sector unions, large universities and the emergent, highly subsidized alternative-energy industry. In contrast, the new House leaders largely represent districts tied to more traditional energy development, manufacturing and agriculture.

The urban-centered environmental movement’s much-hyped talk of “green jobs,” so popular in Obama-dominated Washington, is now likely to be supplanted by a concern with the more than 700,000 jobs directly related to fossil fuel production. Greater emphasis may be placed on ensuring that electric power rates are low enough to keep U.S. industry competitive.

The Obama administration’s land-use policies will also be forced to shift. Sums lavished on “smart growth” grants to regions, high-speed rail and new light-rail transit are likely to face tough obstacles in this Congress.

Ken Orski, a former senior Transportation Department official and longtime observer of Washington land-use and transportation policy, said that no member of the GOP majority on the House Transportation and Infrastructure Committee comes from a big-city, transit-oriented district. The new committee, dominated by members from rural, suburban and interior smaller cities, represents areas that rely little on mass transit. These members are expected to steer money back to the roads and bridges their constituents rely on.

Even more important are pending changes in energy policy. Many conservatives disdain what they consider “green pork” — subsidies for renewable fuels like solar and wind as well as the electric car and battery industry. Many firms involved in renewable fuels, already struggling to compete with cheap natural gas, could be driven out of business without continued federal nurturing.

Another top priority for GOP leaders — and perhaps some energy-state Democrats — may be to choke off funding for the Environmental Protection Agency’s announced new regulations for greenhouse gases. Three out of four jobs in the oil and gas extraction industry are in GOP-dominated Texas, Oklahoma and Louisiana. California’s still-large oil industry includes many who work in the state’s increasingly Republican-leaning interior.

Similarly, more than two-thirds of the nation’s coal mines, a prime EPA target, are in just three, increasingly red-leaning states — Kentucky, Pennsylvania and West Virginia, according to the Energy Information Administration.

Yet urban areas can expect some benefits from this Congress. The recent extension of the Bush tax cuts largely benefits wealthy professionals, who cluster in a handful of expensive, liberal-oriented cities and their leafy, affluent suburbs. San Francisco, Boston and Manhattan liberals may groan about “breaks” for the rich, but many may be cursing the GOP all the way to the bank.

Over time, the new emphasis on fiscal austerity could also play to Wall Street’s advantage — probably the last intention of most tea party activists. Reductions in public borrowing should drive more money into the private economy. This approach, adopted by Conservative British Prime Minister David Cameron, has helped create a smart recovery for London — even as the rest of Britain suffers from government cutbacks.

The drive for austerity could also threaten traditional heartland staples like agricultural price supports and military spending. Major defense budget reductions, a necessity for any credible cut, could prove painful for military-oriented, red states like Virginia, Arizona, Alabama and Texas.

This new regional balance of power poses a profound existential question for Democrats in states like California, New York and Illinois. The unlikely possibility of any future bailout for states or cities should help concentrate their minds on things like cutting spending and restoring their ability to create new jobs.

Overall, it may be better for all regions to have a divided government. With President Barack Obama still in charge of the executive branch, we are not likely to see a repeat of the Bush-era excesses that favored traditional energy companies, suburban housing speculation and agribusiness.

Optimistically, we may now see a canceling out of both parties’ regional tilts, spurring greater competition among localities for both investment and human talent. This could ultimately benefit the entire economy — taxpayers and communities — shedding an enlightened pragmatism on the current dreary landscape that is U.S. politics.

This article first appeared at Politico.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

Photo by Smaku

January 7, 2011