Category: Economics

California’s Third Brown Era

Jerry Brown’s no-frills inauguration today as California governor will make headlines, but the meager celebration also marks the restoration of one of the country’s most illustrious political families. Save the Kennedys of Massachusetts no clan has dominated the political life of a major state in modern times than the Browns of California. A member of this old California Irish clan has been in statewide office for most of the past half century; by the end of Jerry Brown’s new term, his third, the family will have inhabited the California chief executive office for a remarkable two full decades since 1958.

Brown, at 72 the oldest governor in state history, may well determine the final legacy of this remarkable family. His biggest challenge will be to reverse the state’s long-term secular decline — a stark contrast to the heady days of the first Brown era, presided over by paterfamilias Edmund “Pat” Brown.

Pat Brown was a committed progressive who actually believed in both social and economic progress. He did not focus on re-distributing wealth or expanding bureaucratic controls; his priority was to use government to help generate greater opportunities for Californians.

Under Pat roughly 20% of the state budget was devoted to capital outlays. He expanded wealth creating infrastructure such as freeways and the State Water Project, which created vast expanses of new, highly fertile farmland. He also increased the state’s parklands so that middle-class Californians could enjoy the state’s unmatched natural beauty.

Pat, as historian Kevin Starr notes, also transformed California into “a mecca for education.” Inexpensive and quality training — from the elite university to the extensive network of community colleges — fostered high-tech industries across the state. Under Pat Brown, California’s share of the nation’s employment rose from some 8% to 10% as its GDP swelled by a similar percent.

Pat, not surprisingly, remains an iconic figure for many older Californians. What ended his career was not so much his embrace of big government — although its growing scope and cost concerned many voters – but backlash against the 1964 “free speech” riots at Berkeley and the far deadlier civil unrest in Watts the following year. Running as the candidate of law and order, as well as fiscal conservatism, Ronald Reagan in 1966 defeated Brown’s bid for a third term.

Yet so great was the reservoir of affection for the Pat Brown that in 1974 the voters elected his 36-year-old son as Reagan’s successor. As the late Joe Cerrell, a key operative for both Browns, put it: “If he had run as Edmund G. Green, he wouldn’t have bet on his running in the top 14.”

Jerry Brown turned out to be of a very different political hue than his father. Sometimes he sounded more anti-government even than Reagan. He disdained his father’s traditional focus on infrastructure spending and instead preached about amore environmentally friendly “era of limits.” Brown cut the percentage of spending on such capital improvements from roughly 10% of state spending under Reagan to barely 5%, where it remains mired today.

Arguably Brown’s biggest mistake was signing legislation in 1978 that allowed collective bargaining for public employee unions. This opened the door for a power grab that eventually drove the state toward semi-permanent penury. Brown’s early embrace of environmentalism also set a pattern of state green engineering that, although clearly avant garde , also tipped the state’s competitive edge.

Brown, however, also showed a pragmatic side. Although initially opposed to Howard Jarvis’ 1978 Proposition 13 limits on property taxes, he later embraced it so enthusiastically that the casual voter might have mistaken him for its author. In his second term Brown also evolved into an avid cheerleader for the state’s burgeoning high-tech industry.

He also had good fortune to govern California at a time when surging Japanese investment, the high tech boom and, perhaps most important of all, the military buildup accelerated by the 1979 Soviet invasion of Afghanistan generated a remarkable economic boom. Between 1976 and 1980 aerospace and electronics-related employment jumped by a third. California’s share of the nation’s GDP, population and jobs rose steadily, while job growth surpassed the national average.

The third Brown era, sadly, starts with far less favorable prospects. The state’s share of the nation’s economy and employment has been shrinking for at least a decade. Per capita income has fallen in comparison with the national average by nearly 20%. Once the nation’s high tech wunderkind, California’s share of new high-tech jobs has fallen to a fraction of the national average, while other states, notably Texas, Virginia, Utah and Washington have surged ahead.

Things have been toughest on the state’s working class. Despite an ever-expanding welfare state, California’s 36 million people suffer a rate of poverty at least one-third higher than the national average when adjusted for cost of living. Unemployment now is higher than any major state outside Michigan.

Meanwhile, even as state social spending has surged, reminders of the heroic period — from the state system of higher education to the power, water and freeway systems — have fallen into disrepair. The state’s finances are in even worse shape. Under the feckless Arnold Schwarzenegger, state debt jumped from $34 billion to $88 billion. California now spends twice as much on servicing its interest (more than $6 billion annually) than on the University of California.

Brown himself recently conceded that the state budget deficit may widen to $28 billion over the next 18 months while the state’s Legislative Analyst’s Office predicts that $20 billion deficits are likely to persist at least through 2016. Not surprisingly, once golden California suffers consistently near the worst debt rating of any state. And things are not likely to turn around quickly: State and local tax revenues in the third quarter of last year rose a paltry 0.6% compared with a 5.2 % gain nationwide.

Brown’s proven taste for austerity could make him far more effective at addressing the state fiscal crisis than the clueless Terminator. His biggest problem on fiscal matters, one close advisor confided, may lie with his own Democrats in the legislature, many of whom are little more than satraps of the public employee interests.

Brown’s support for the state’s increasingly draconian green polices may prove more problematic. As Attorney General, Brown played the bully in enforcing radical green measures that seek to limit developments — industrial and residential — suspected of creating greenhouses gases. Brown suggested during the campaign that such policies would help create an estimated 500,000 green jobs, but few outside the environmental lobby take this seriously. Brownsupporter Tom Hayden points out that these jobs can only be created by higher energy prices and considerable tax increases — not exactly the elixir for an already weak economy.

More troubling still, Brown, the Democratic leadership and their media supporters continue to deny that “progressive” policies have created ”a hostile business climate.” Until they wake up to the reality of the state’s dire economic situation, little in the way of serious reform can be expected.

To succeed, Brown must move beyond delusions and rediscover the pro-business pragmatism that characterized his second gubernatorial term. If not, we can expect the final obliteration of Pat Brown’s great legacy of pro-growth progressivism, in no small part due to the misjudgments of his son and heir.

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 Thomas Hawk

January 3, 2011
The NFL: Running the Numbers in the Football Business

Why does America — and I include myself — invest so much psychic energy, not to mention hard dollars, in professional football, a sport that on many levels combines the worst aspects of roller derby and professional wrestling?

Sometimes when I am watching Dan, Boomer, Phil, Chris, Rod, Coach Cowher, Prime, Jamie, Mike, Shannon, and the rest, wearing those pink ties and crisp suits and seated on the high alters of cable television, I feel as if I am watching the Supreme Court deliberate on taunting, end-zone celebrations, the Raider Nation, clock management, Ochocinco, booth reviews, Cover Two, the wildcat, and Brett Favre’s shoulder, if not the ‘junk’ in his text messages.

Sadly, most Americans are clearer on what happens in the red zone than they are about the decisions of the Supreme Court. The business of America is football, much more than it is Main Street stores, the national budget, or the small print of the Patriot Act.

Maybe when the Decatur Staleys were playing the Chicago Cardinals, or when teams like the Massillon Tigers, the Shelby Blues, and the Ironton Tanks were on the field, football was a sport. It was played in local stadiums by players who worked in nearby steel mills and earned $25 a game.

The forward pass, national television, and the deification of Vince Lombardi turned the sport into an $8 billion bonanza that, to cover expenses, relies upon subsidized stadiums, sky boxes full of corporate bonus babies, enough violence on the field to render many ex-players vegetables, and a relationship with television that has reduced the airing of the games to violent You Tube clips spliced around ads that blur the attractions of Cialis and McDonald’s (“I’m lovin’ it!”)

What is the reality of football “franchises,” the right to own a team in a select market? Because football is absurdly given an antitrust exemption (as if the play of the Cincinnati Bengals is in the interest of national security), franchises are best understood as local protection rackets.

Except for the Green Bay Packers, which is owned by its fans, most NFL teams are owned by corporate hierarchs who have paid millions to buy a team. Fair enough; free enterprise is in the playbook of capitalism.

But instead of a sporting club that enjoys competition and fair play, what owners buy is a cooperative share of the national football monopoly. Its purpose is to browbeat cities and states for subsidized stadiums. Players are expected to perform under barbaric working conditions, and advertisers and television networks join a never-ending race for the rights to broadcast the spectacles on the Circus Maximus.

If you are doubtful of football’s influence–peddling in smoke-free political rooms, consider this: President Obama appointed Pittsburgh Steelers owner Dan Rooney to be the U.S. Ambassador to Ireland, no doubt for his go-routes to the Democratic Party. Or that the insolvent state of New Jersey encouraged the Jets and the Giants to build a new $1.6 billion stadium in the Meadowlands, even though the state still owes $110 million on the stadium it replaced, which has since been torn down.

Keep in mind that most NFL sweetheart deals are hidden as carefully as Jimmy Hoffa would have been spiked into the end zone at Giants Stadium. Revenue-sharing, sales tax increases, municipal bonds to buy stadium land, and parking-lot concessions are among the many ways local political establishments pay obeisance to team owners, who did not get their, on average, $1 billion in net worth by reaching into their own pockets.

New Jersey loves to boast that the Jets and Giants paid privately for New Meadowlands Stadium. Actually, the fans paid, via PSLs (that’s personal seat licenses), and by paying $200 a pop for many seats. But the NFL owners chipped in $300 million, and the state has poured some $2 billion into the nearby Xanadu project (shops, offices, malls, etc.) that has little to show for the spent money except upgraded swampland, and a train line to the new stadium.

To pay for their subprime stadium debts, NFL owners are now threatening to “lockout” the players from the 2011 season, unless the players’ union agrees to lower the league’s salary cap, which sets how much each team can spend on its players.

The fans are told that the salary cap (59% of league revenue) is in place so that teams can compete as equals, and that “on any given Sunday,” every team has a chance of winning. Actually, the cap is just another example of the extent to which the NFL is a closed shop and exists to limit owners’ expenses.

To be sure, football players are not like you and me, and are paid hundreds of thousands of dollars for relatively short careers. (Running backs last less than four years in the league.) But for all the stars that you read about getting $7 million in signing bonuses, most players earn the league minimum (about $400,000) and are cut, usually after suffering a career-ending injury.

More life–threatening is the extent to which a career in football renders players prone to dementia: 6.2% of NFL players are affected, as opposed to 1.2% in the general population. In dealing with this issue, what most interests the owners isn’t player safety, but rather juking class-action liability, were it to be proven in court that NFL play causes dementia.

The bling for NFL owners, along with those subsidized stadiums, is its $20 billion in television contracts from the various networks, including CBS, NBC, Fox, and ESPN. The owners divide this swag, and the networks parse the schedule: there are games on Sunday afternoon, Sunday night, Monday night, and often on Thursdays — roughly the slots of Gregorian rituals in the middle ages.

Football’s thirty-two teams are a closed shop that enjoys antitrust exemption (hence, no competition), and the games are not “news”, and thus available to anyone to broadcast. Football is studio entertainment, played before a “live stadium audience.”

Why do we need billion-dollar stadiums in each market, when a handful at Universal Studios would suffice? And they could be “themed” to simulate snow bowls, mud games, or even the Black Hole, Oakland’s biker digs.

Ratings of televised football games continue to go up and up, dominating national life not just on Sundays, but increasingly on holidays, too. Strangers could easily get the impression that Mayflower pilgrims got together with local Indians to watch the Lions get stuffed yet again on Thanksgiving. Can an indebted nation really give up so many hours to the Bills and the Buccaneers?

The biggest risk to football as we now know it is if new technology (will today’s mainstream networks really survive?) diminishes advertising from the NFL games and waters down the $20 billion in television contracts. And, although I have no proof or evidence, I wonder if another risk to the sport could be a gambling scandal.

Developments that range from the NFL’s Red Zone broadcast to Fantasy Football have the feel of gimmicks that appeal to gamblers, who, like derivative traders, seek ways to bet on the fractional aspects of the games. One revelation of the Tiger Woods humiliations was the amount of time pro athletes spend in Vegas, rubbing shoulders with high rollers, if not cocktail waitresses. Didn’t the golfer Phil Mickelson once bet $20,000 on the 28-1 Ravens to win the Super Bowl?

For the fans, the game is about their teams winning and getting to the Super Bowl. For the owners, it’s about maintaining membership in the football oligopoly (worth about $250 million a year for each team, including the woeful Cleveland Browns). For the hot money, the games are a variation on off-track betting.

As a fan of the New York Jets, now in the forty-first year of their rebuilding program, I might take a bleak view of the NFL, as part of my denial over Mark Sanchez’s wobbly arm and his “happy feet.” Maybe I am remorseful for all the time I spend listening to Mike Mayock explain zone blocking schemes or the A gap.

At the same time, I share the views of former French president Georges Clemenceau, about an earlier League, that “of Nations.” At the Peace of Paris in 1919, he said: “I like the League. I just don’t believe in it.”

Photo of NY Jets v Eagles game by Ed Yourdon

Matthew Stevenson is the author of Remembering the Twentieth Century Limited, a collection of historical essays. He is also editor of Rules of the Game: The Best Sports Writing from Harper’s Magazine. He lives in Switzerland.

January 1, 2011
The Poverty Of Ambition: Why The West Is Losing To China And India – The New World Order

The last 10 years have been the worst for Western civilization since the 1930s. At the onset of the new millennium North America, Europe and Oceania stood at the cutting edge of the future, with new technologies and a lion’s share of the world’s GDP. At its end, most of these economies limped, while economic power – and all the influence it can buy politically – had shifted to China, India and other developing countries.

This past decade China’s economic growth rate, at 10% per annum, grew to five times that U.S.; the gap was even more disparate between China and the slower-growing E.U., Yet periods of slow economic growth occur throughout history — recall the 1970s — and economies recover. The bigger problem facing Western countries, then, is a metaphysical one — a malady that the British writer Austin Williams has dubbed “the poverty of ambition.”

This lack of ambition plagues virtually every Western country. The ability to act has become shackled by a profound pessimism that according to a recent Gallup survey contrasts with the optimism found not only in rising states like China, India and Brazil, but also deeply impoverished places like Bangladesh.

Attitudes have consequences. The rising stars of the non-Western world — from the United Arab Emirates to Singapore and China — are building cities with startling new architecture and bold infrastructure. Their entrepreneurs are expanding their operations across the planet.

Of course, you can chortle at the outrageous overbuilding in places like Dubai, but the Western world might do better to appreciate the scope of their ambition. Indeed, for years New York’s Empire State building, erected during the Depression, was derided as ”the empty state building.” Today it’s visionary developers like Iraqi-born Istabraq Janabi who are planning unlikely new structures even in troubled places like Ramadi, Iraq.

The difference in ambition can be seen clearly at airports, which now serve as the entry halls of the global economy. A traveler to John F. Kennedy Airport, Heathrow, Charles De Gualle LAX or Dulles passes through decayed remnants of fading late 20th century buildings and technology. In contrast, airports in Dubai, Hong Kong and Singapore offer clean, ultra-modern facilities with often impressive design.

The West’s retreat from space exploration further underscores its metaphysical poverty. Today, Europe and the U.S., the world’s historic leader in the field, are cutting back on plans to explore the cosmos, which has included a manned operation to the moon. President Obama wants NASA to focus more on issues regarding climate change instead. In contrast, the rising countries of Asia, notably China and India, have begun plans for manned flights to the moon and beyond.

This divergence is not about resources; it is about the growing conviction in the West that moving forward is an illusion or, as the British academic John Gray’s puts it, “progress is a myth.” Victorian empire-makers and intellectuals, like their republican American successors, believed perhaps naively in the potential of humanity, economic and technological progress. Today our intellectual and political classes have gone to the other extreme.

The West’s politics are in the grips of two profoundly retrograde mentalities. One, a small-minded conservatism, harks back to the “golden” age of the 1950s when Western power faced only a flawed Soviet challenge. The idealistic but flawed commitment to imposing democracy by force of the Bush years has faded; it has been replaced by an obsession with taming a bloated public sector. While this focus may be justified, it is fundamentally more reactive than proscriptive.

The Left, which once portrayed itself as the bastion of scientific rationalism, increasingly embraces neo-druidism, a secular form of nature worship. This tendency’s roots can be traced back to the “Limits to Growth” ideology of the early 1970s which projected, mostly mistakenly, that the planet was about to run out of everything from food to oil. Concerns over climate change have transformed this dismal sentiment into a theology, with carbon emissions treated as a form of original sin.

The anti-progress nature of the new Left is unmistakable. Rather than seek ways to control climate change, suggests The Guardian’s George Monbiot, environmentalism is engaged in “a battle to redefine humanity.” Monbiot believes the era of economic growth needs to come to an inevitable denouement; that “the age of heroism” will be followed by the decline of the “expanders” and the rise of the “restrainers.”

Europe, particularly the U.K., suffers acutely from metaphysical angst. Once touted as the new great power by its leaders and their American claque, the E.U. is quickly dissolving along cultural and historical lines; this is especially evident in the division between the resilient countries of the north (something like the Hansa trading states of the late Middle Ages) and the weaker countries along the periphery. For the most part, Europe no longer seems capable of doing much more than finding ways to control an unaffordable welfare state without tearing about its social net. The once cherished notion of a multi-racial “new” Europe largely has dissolved as immigration has devolved from a source of demographic and cultural salvation to a widely perceived threat to the E.U.’s economic and social health as well as security.

Such defeatism usually has less success in the United States. But America’s “progressive” left increasingly resembles its European cousins. Obama’s science advisor, John Holdren, has been a long-time advocate of the idea of “de-development,” the purposeful slowing of growth in advanced countries in order to protect the environment. The critical infrastructure needed to accommodate upward of another 100 million Americans — new dams in the west, intelligent development of our vast natural gas reserves and building new cities, airports and ports – are not at the center of either party’s platforms. These could be financed largely with private sources, given the right incentives.

Fortunately the West’s decline is not at inevitable. China, India, Vietnam, Brazil, South Africa all deserve their day in the sun, but this does not mean that Americans or Europeans should cower in the shadows. Western countries still possess much of the world’s cutting-edge technology and leading companies; the combined GDP for the E.U., North America and Oceania stands at over $33 trillion, almost five times that of India and China together.

More important still, the political and cultural institutions of the West — with their liberal values — represent the best hope for a stable world of self-governing peoples. Does anyone in the West, particularly the progressives in the media and academia, really want a world run by Chinese despotism?

The current financial crisis should serve as both a warning and a spur for a new focus on economic expansion. But this can only occur if the West can restore its belief in its future. This does not necessitate a return to the colonial attitudes of the past, but rather a keener appreciation of our unique human, physical and political advantages.

Only the United States – by far the richest, largest and most populous Western nation — can lead such a revival. For one thing, the U.S. remains the world’s leading immigrant magnet and most diverse large country, all of which makes it the natural center of an evolving global society. Although immigrants pose some serious issues, University of Chicago scholar Tito Sananji notes that the U.S., along with Canada and Australia, seems to be doing a better job educating their newcomers than the continental European states.

The U.S., Canada and Australia also possess resources, most critically food, that could benefit from growing demand in developing countries. Both North America and some European nations — notably the new Hansa of the Netherlands, Germany and Scandinavia – remain world leaders in scores of industrial endeavors, as well as technology- and culture-based industries.

Together these Western countries can do much more to shape the global future than is commonly understood. But to do so this century they will need how to recover the animal spirits that drove their remarkable rise in the last.

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 Wally Gobetz

December 30, 2010

Toronto: Three Cities in More than One Way

The issue of income disparity in Toronto has once again been brought into the public eye by a December 15th report by University of Toronto Professor David Hulchanski. The report, “The Three Cities Within Toronto,” points to a growing disparity in incomes between Downtown Toronto, the inner suburbs, and the outer suburbs of the city. The report demonstrates that between 1970 and 2005 the residents of the once prosperous outer suburbs have been losing ground compared to the now wealthy downtown core. The results for the inner suburbs have been mixed.

In 1970, 66% of city neighbourhoods were considered middle income. Only 15% were considered high or very high, and 19% were low or very low. In 2005, only 29% of neighbourhoods were considered middle income. The number of high or very high income neighbourhoods rose to 19%, while low and very low income neighbourhoods made up a staggering 54% of neighbourhoods.

The news isn’t all bad. After all, the downtown core is now one of the most desirable places to live in North America, and many of the formerly low income neighbourhoods have gentrified, or are in the process of doing so. However, many of the city’s traditional suburbs have been decimated. The former cities of Etobicoke and Scarborough used to be middle class. Not so much anymore.

In real dollar terms, even the majority of the very low income areas have become wealthier. The trouble with poverty statistics is that they focus on relative poverty, rather than absolute poverty. This means that if Etobicoke’s average income doubled tomorrow, the downtown core would all of a sudden be considered poor. This is a major limitation. Toronto isn’t exactly turning into a Canadian Detroit.

The report rightly points to the need for greater mobility in the outer suburbs. Given that the most lucrative jobs are typically downtown, many young professionals and recent graduates living outside of the core need to be able to get downtown cheaply and quickly in order to build their careers. Where the report goes wrong is that it recommends stricter land use regulations, stronger rent controls, and the revival of the flawed Transit City plan that Mayor Ford vigorously campaigned against in the recent election.

It is easy for academics to blame a lack of social welfare spending, or suburbanization for the problem. The real problem is the loss of local policy making power resulting from amalgamation. For the most part, the areas losing ground the fastest are the formerly middle class suburbs amalgamated into the city. In contrast the “exurbs” just outside of city boundaries have thrived. This is no coincidence. The real takeaway from this study is that the suburbs have different needs than the central core. By attempting to accommodate the needs of both, the megacity has benefitted neither. Short of de-amalgamation, the only hope for the city is to substantially decentralize policy making. No amount of spending can make up for the loss of local autonomy.

Policies have different effects in different types of cities. Take the treatment of automobiles. It might make sense to discourage automobile usage in downtown Toronto, but the benefits of doing so in Vaughan or Pickering would be questionable at best. Similarly, mandating that every commercial establishment have a public washroom probably makes sense as a public health measure in downtown, where public urination is an issue, but not so much in suburban Markham, or Richmond Hill.

Making sensible regulations for a small, relatively homogenous area isn’t all that difficult. Applying these regulations to a large, demographically diverse area can help some areas and hurt others. It’s not that regulations need to be a zero sum game. People in Etobicoke wouldn’t be affected if, say, maximum parking allotments were tightened in the downtown core. They would be affected if they were tightened throughout the entire megacity. Similarly, increasing maximum parking allotments might hurt the core and help the suburbs. The current one size fits all approach sometimes benefits the core and sometimes benefits the suburbs, but ever both.

Perhaps more important than city wide regulations is the centralization of taxing power. Since the merger, the city now sets tax rates across the entire megacity. This also allows the city to control the ratio of residential to non-residential taxes. The city of Toronto has the highest ratio of non-residential to residential taxes in Ontario. This means that businesses carry a higher share of the tax load in the city than anywhere else in the province. The combination of tax and regulatory policies in the city have lead the Canadian Federation of Independent Businesses to rank Toronto as the second least business friendly city in Canada. On a scale of 1-100, Toronto came in at 33, slightly ahead of Vancouver’s 31. Meanwhile, the rest of the (Greater Toronto Area) GTA is near the top, at 61. Neighbouring Oshawa took the top spot in Ontario with 69.

GTA Area Cities by CFIB Entrepreneurial Cities Policy Score

Rank (Ontario)	City	Score	Driving Distance to Yonge and Bloor
1	Oshawa	69	0:45
6	GTA (Excluding Toronto)	61
	Mississauga	61	0:27
	Brampton	61	0:41
	Richmond Hill	61	0:32
	Markham	61	0:32
	Vaughan	61	0:32
16	Hamilton	55	0:58
19	Guelph	54	1:15
24	Barrie	52	1:16
27	Brantford	51	1:20
30	Kitchener	48	1:23
33	Toronto	33
	Etobicoke	33	0:20
	Scarborough	33	0:21

Now the share of non-residential to residential taxes in Toronto may actually make sense downtown. The core is home to the third biggest financial sector in North America. These jobs are heavily concentrated in the downtown core.

Downtown Toronto isn’t competing with low tax Vaughan or Barrie for these jobs. They are competing with high tax cities like New York and Chicago. This means that employment in the core is not as easily chased off by taxes and regulations than in the suburbs. But in industries like wholesale and manufacturing, which are far more important outside of the core, employment can easily relocate to Barrie, Mississauga, Oshawa, and so forth. Indeed, jobs have been leaving the city since before the recession hit.

Since 2004 Downtown and North York have prospered but the rest of the city has lost jobs. This should make the results of the Professor Hulchanski’s report unsurprising. The financial sector isn’t enough to keep the entire city employed or lift wages in the city-controlled suburban rings. As a a result despite the thriving financial sector, Toronto was dead last in the GTA in terms of median incomes.

To turn this around, the city must decentralize decision making power so the suburban communities can come up with their own economic development strategies. No matter how much the city improves transit to the outer suburbs, they will not be able to significantly increase median incomes without creating more jobs. The financial sector will continue to grow, but many of jobs created in this sector require specialized training, and thus go to people from outside of the city. This doesn’t do much for former manufacturing workers in Scarborough and Etobicoke. Growth of the financial sector combined with the dispearance of blue collar jobs together guarantee continuing income disparities in the city.

Below is previously published data from Professor Hulchanski that highlights how badly blue collar sections of the city have been hit.

Fundamentally, a strong focus on financial and other so-called “creative class” jobs will do little for these areas. The above map was created by Richard Florida’s Martin Prosperity Institute. It shows that most creative class jobs are clustered around the subway, but this doesn’t mean that expanding rail transit will expand creative class employment. Building a light rail line through a neighbourhood doesn’t suddenly transform the residents into artists and physicians. It may attract more artists and physicians, but this could actually hurt local residents by driving up rent and property values without creating jobs for them. Below is a map of educational attainment by ward. The darker the colour, the higher the number of residents with a bachelor’s degree or higher.

The real problem is that a focus on elite jobs creates exactly the kind of bifurcation that progressive complain about. Given that city wide business policies are tailored towards creative class type occupations, it is unlikely that price sensitive manufacturers will find any reason to locate within city boundaries, rather than setting up shop in Mississauga or Barrie.

Indeed, for all the temptation by urbanists to point to Toronto’s suburban ring as an example of the decline of suburbia, the peripheral suburban areas outside of city limits have been booming. Here is a map of growth in the GTA between 2001-2006. While Toronto grew modestly, suburban cities Milton, Brampton, Vaughan, Richmond Hill, Markham, Ajax, and Whitby all grew by at least 20%. Even Oshawa, which was hit hard by the decline of the auto sector, has managed to survive, and indeed maintained a higher median income than Toronto during this period. Regional rival Mississauga eclipsed Toronto’s growth rate, and emerging regional player Barrie grew by over 20%.

In short, despite its strong financial core, Toronto is losing its standing as the go-to destination in the GTA. And it could get worse. Mississauga is working hard to lure financial services and advanced manufacturing jobs from Toronto. Several other cities, such as Guelph and Waterloo are actually competing for the very creative types that Toronto’s policies are tailored to attract. Other cities, such as Barrie are working hard to cannibalize what is left of Toronto’s manufacturing and distribution sectors. Were it not for amalgamation, Etobicoke or Scarborough could just as easily have undertaken a similar strategy to attract blue collar jobs.

The Three Cities report identifies serious regional disparities in Toronto. Unfortunately, it doesn’t provide much insight into how to fix the problem. Expanding transit options will only go so far towards this. Building more light rail may raise median incomes by attracting wealthier people to these neighbourhoods. Ironically, this will only widen the income gap. The real challenge is finding out how to create opportunities for blue collar jobs in suburban Toronto. Unfortunately, amalgamation has imposed one size fits all policies that may work downtown, but utterly fail in the suburbs and continue to drive people to the periphery outside the city limits. Ironically, the very policies that seek to halt “sprawl” may well end up exacerbating it.

Toronto Skyline photo by Smaku

Steve Lafleur is a public policy analyst and political consultant based out of Calgary, Alberta. For more detail, see his blog.

December 30, 2010

2011: Jobs Vs The Deficit

The roadmaps showing the way out of our 1.4 trillion dollar federal deficit almost always begin at the same starting points. During 2010, it became taken-for-granted that today’s record-setting red ink is a result of unrestrained government spending — especially stimulus spending. And the idea that the economic upturn in jobs and growth will begin with deficit reduction has become widely perceived as ‘common sense’.

The December release of the federal debt panel’s Simpson-Bowles report crystallized a mass re-set of priorities, with politicians and pundits freely equating solutions to ‘the deficit crisis’ with economic recovery. While conservatives and liberals reacted differently to the report’s specifics, the assumption that immediate deficit reduction would be healthy and virtuous was largely accepted. The president has also pledged to follow this path.

The media, meanwhile, geared up with a national debt counseling forum. November ended with three out of four of the lead columns in the Washington Post providing advice on the subject. US News and World Report called on the president to get busy and “name a deficit Czar”. Deficit reduction? There’s an app for that. A prominent New York Times feature titled “You Fix the Budget” included an interactive Iphone/Ipad application that urged readers to “Make your own plan and share it online”. Jobs and growth have inspired no such apps thus far.

Are congressional free-spending ways really the problem? Counter-intuitive though it may seem, the strongest evidence indicates that the deficit is tied to many political expenditures that are mandated and locked in place, and not to any ‘spending spree’.

Consider the sharp increase in expenditures for SNAP (the old “food stamps” program), or for unemployment benefits. While the guidelines to qualify for these benefits have stayed roughly the same, payments have ballooned — in the case of SNAP, 72 percent from 2007 to 2009, as detailed in a report from The Levy Economics Institute of Bard College. The federal government did not choose to increase this spending. And the financial threshold for receiving benefits was not lowered. But many more families slid out of the middle class and into the safety net. As the economy tanked, the recession itself automatically triggered increased federal outlays, which in turn fed the deficit.

In other words, the system is performing as we originally intended, and hoped, that it would. Like a truck engine suddenly expected to haul a much heavier load, the federal budget is burning more gas… and by doing so, is able to continue uphill, carrying individuals, families, and businesses out of financial disaster.

If calls to drastically reduce the deficit succeed, and federal spending is radically turned down now, the result will be comparable to cutting the engine’s fuel supply. The roll back downhill will be swift, horrific, and potentially out of control.

For a glimpse of how deficit slashing could play out, take a look at Portugal. Already, there are signs that recent austerity measures will actually increase its government’s fiscal deficit, a consequence of falling tax revenue and rising social needs as a result of increased unemployment. Portugal’s central government lost ground in the first nine months of this year as its deficit rose by about $280 million, even as actions to restrain it were set in motion. The pursuit of yet more deflationary spending cuts and tax increases could continue the vicious cycle.

Crisis-related spending, whether oriented toward businesses or households, has been trashed as costly. But shouldn’t it be obvious that business and household income and spending help the private sector, which needs to thrive for the economic growth we need?

Liberal think-tanks are not alone in their view that running deficits is a logical and necessary response to a severe recession. Even David M. Walker, former CEO of the Peter G. Petersen Foundation, an anti-deficit think tank dedicated to austerity, has joined Lawrence Mishel of the Economic Policy Institute in acknowledging that the United States must address “jobs now and deficits later”; Mishel and Walker have called for two years of elevated deficits.

And the public does not disagree, despite the Tea Party street-theater shows. In this autumn’s CBS News Poll, 54 per cent saw the Economy/Jobs as the nation’s most important problem, compared to 3 per cent for the Budget Deficit/National Debt; the CNN/ Opinion Research Corp figures were almost the same. Fox News and Bloomberg polls also showed that concerns about the economy and jobs considerably — by about 20 per cent — trumped the deficit and spending.

Gestures to counteract deficits with measures such as the pay-freeze on federal salaries, or with anti-earmark legislation, are purely symbolic at best and, in the case of salaries, counterproductive.

Similarly, calls for the deficit to be pegged to no more than 21 percent of Gross Domestic Product, as in the Simpson-Bowles report, or 20 percent, as suggested by Representative Mike Pence (R-Indiana), make no sense, and provoke one simple and as yet unanswered question: Why?

We are indeed in a crisis. But the crisis is jobs, and the solution is to grow the economy. Deficit reductions would have a negative impact on both. The deficit hawks who demand chicken feed-sized cuts have yet to provide data — let alone logical arguments — that show how these cuts could lead to job creation and growth.

The deficit should not be treated as the main problem when it is, in reality, only the product of a poorly functioning economy. There are many good reasons that a reasonable deficit reduction plan should be early on the agenda when the US economy is once again strong. But the austerity measures being floated today range from meaningless to ludicrously dangerous. There is no reason that this so-called crisis needs to be acted on while the economy is weak. In deficit reduction — as in navigating turns in the road — timing is everything.

Photo by Premshree Pillai

Dimitri B. Papadimitriou is President of The Levy Economics Institute of Bard College. He recently co-edited, with L. Randall Wray, The Elgar Companion to Hyman Minsky.

December 29, 2010
Washington Opens The Virtual Office Door

On December 9, President Obama signed into law the Telework Enhancement Act, a bill designed to increase telework among federal employees. Sponsored by Representatives John Sarbanes (D-MD), Frank Wolf (R-VA) and Gerry Connolly (D-VA), the legislation gives federal agencies six months to establish a telework policy, determine which employees are eligible to telework, and notify employees of their eligibility. Agency managers and employees are required to enter written telework agreements detailing their work arrangements and to receive telework training. Under the Act, teleworkers and non-teleworkers must be treated equally when it comes to performance appraisals, work requirements, promotions and other management issues. Each agency must designate a Telework Managing Officer, and must incorporate telework into its continuity of operations plan.

Supporters of the measure, including the National Treasury Employees Union and the Telecommunications Industry Association, rightly tout its potential to improve the productivity of federal employees, reduce the government’s overhead expenses, decrease energy consumption and cut carbon emissions. Indeed, the Telework Research Network estimates that if the eligible federal workers who wanted to telecommute did so once a week, agencies would increase productivity “by over $4.6 billion each year” and save “$850 million in annual real estate, electricity, and related costs.” The country would save nearly six million barrels of foreign oil and reduce greenhouse gas emissions by one million tons per year. The bill would enable agencies to continue functioning during emergencies (federal telecommuters saved the government an estimated $30 million per day when D.C.-area snow storms shut down offices last winter), and it would decrease traffic congestion.

Increasing the number of federal telecommuters is a good first step towards empowering the nation to tap telework’s many benefits. However, a diverse group of advocates would like to see telework become widely available for all workers. The Obama Administration endorses this goal. Proponents of broad access to telework include champions for small businesses and for energy independence, transportation alternatives, work/life balance, homeowners, environmental protection, disabled Americans, and rural economic development. To maximize telework’s promise — including its potential to open employment opportunities for 17.5 million people — Congress must enact comprehensive legislation offering employers, workers and other stakeholders in both the public and private sectors a wide array of cogent reasons to expand the practice.

Comprehensive legislation would need to offer either carrots or sticks to constituencies that may resist telework’s growth: organizations with telework-shy managers; commercial landlords worried about telework-induced vacancies; and cities and states afraid that reducing the number of commuters will decrease their revenue. A few key elements:

Remove Regulatory Barriers
Perhaps the single greatest regulatory barrier to telework is the threat interstate, part-time telecommuters face of being taxed twice at the state level on the wages they earn at home: once by their home state and then again by their employer’s state. New York has been especially aggressive in taxing nonresidents on the wages they earn at home even though their home states can tax those wages, too. The double tax risk makes telework unaffordable for many Americans.

Proposed federal legislation called the Telecommuter Tax Fairness Act would eliminate this roadblock to telework, prohibiting states from taxing the income nonresidents earn in their home states. This bill, introduced in the 111th Congress by Representatives Jim Himes (D-CT) and Frank Wolf, enjoys bi-partisan support from lawmakers representing states across the country. It must be included in any package intended to accelerate telework’s adoption.

Simplify the Home Office Deduction
The complexity of the current home office deduction discourages home-based workers from taking advantage of it. Potent telework legislation would give both home-based business owners and telecommuting employees the option to take a standard home office deduction.

Offer Incentives To Employers
Employers should be allowed to treat as nontaxable income the dollar savings they realize as a result of telework. Alternatively, they should receive a tax credit based either on the cost they incur for equipping employees to telecommute or on the percentage of workers who telecommute. They should receive a payroll tax break when they hire new teleworkers

Because managerial resistance is a significant obstacle to telework’s growth, and because managers who telecommute themselves may have a more positive view of telework than their office-based colleagues, businesses should receive added incentives to allow managers to telecommute.

Offer Incentives To Workers
Workers should be allowed a tax credit based on the amount of time they spend telecommuting or on the cost they incur to purchase equipment and services necessary for telecommuting. They should have the option to treat the value of all equipment and services the employer provides to facilitate telework as a fringe benefit excludable from their taxable income, even when personal use of the tools is also permitted.

Officer Incentives To Insurers
Insurers covering losses that telework can minimize should be recruited to promote telework with tax advantages. Because experienced teleworkers enable their companies to continue operating even when emergencies render the main office unusable, business continuity insurers can limit their exposure by increasing the number of their policyholders that maintain strong, well-designed telework programs. They should receive incentives to do so.

Automobile insurers should also be enlisted. The less frequently people drive, the fewer accidents occur and the less liability car insurers face. To motivate these insurers, Congress should offer them tax advantages based on 1) the proportion of their corporate policyholders that have both significant telework programs and aggressive policies to replace work-related driving with Web-based or telephone conferencing; and 2) the proportion of their individual policyholders who telecommute regularly.

Offer Incentives To Commercial Property Owners
Because businesses with dispersed workers need less office space, commercial landlords may wince at decentralization. However, the landlords able to fill their buildings with a greater number of tenants requiring less space – rather than fewer tenants requiring more – can thrive. In addition to operating greener and more cost-efficient sites, these landlords can reduce their risk of loss: Because each tenant represents a smaller proportion of a landlord’s total revenues, a single tenant’s default or decision to relocate is less likely to deal the landlord an insurmountable blow.

To entice commercial property owners to encourage their tenants to adopt telework, Congress should offer the owners tax incentives based on the proportion of their tenants that have either vigorous telework programs or well-enforced policies requiring employees to replace business travel with remote conferencing.

Make State and Local Efforts To Promote Telework A Condition Of Federal Transportation Funding
By reducing the demand for roads and mass transit, telecommuting minimizes the cost of repair, maintenance and expansion of such infrastructure. Before the federal government subsidizes state and local transportation investments, the funding recipients should be compelled to mitigate costs by promoting telework.

One step that states receiving federal aid should be required to take is to eliminate tax barriers to interstate telework. For example, they should be prohibited from subjecting a nonresident company to business activity taxes when the company’s sole connection to the state is its employment of a few in-state telecommuters. States could also allow car insurers to offer pay-as-you-drive policies.

States and municipalities could require their agencies to develop telework programs for their own workers and to engage only those contractors that make the maximum possible use of telework. They could require agencies seeking funds to increase their car fleets or facilities to submit an assessment of whether telework could eliminate or reduce the need. They could compel their employees who seek approval for business travel to demonstrate that remote conferencing would not be an adequate substitute. They could authorize agencies to retain the funds the agencies save as a result of telework.

States could create offices that promote telework and provide technical/legal support for both public and private employers developing telework programs; designate high traffic and pollution days as telework days and publicize them; and conduct public awareness campaigns to encourage telework, including campaigns specifically targeting businesses. Municipalities could eliminate telework-hostile zoning rules.

All of these proposals would go a long way towards minimizing needless travel. Some would cost the federal government nothing or save it money. Others require a federal investment, but the investment would be made via business and individual tax breaks — welcome incentives for many members of the incoming Congress. Together, these suggestions would create jobs and strengthen the nation’s energy security. They would reduce traffic, carbon emissions and transportation costs; enable workers to meet conflicting job and family responsibilities; help businesses lower expenses, and drive profits. These are fundamentally important goals with bi-partisan support. Congress should act quickly and forcefully to unleash telework’s potential to meet them.

Photo by By Rae Allen, “My portable home office on the back deck”

Nicole Belson Goluboff is a lawyer in New York who writes extensively on the legal consequences of telework. She is the author of The Law of Telecommuting (ALI-ABA 2001 with 2004 Supplement), Telecommuting for Lawyers (ABA 1998) and numerous articles on telework. She is also an Advisory Board member of the Telework Coalition.

December 28, 2010
General Motors’ IPO: Deal Or No Deal?

Those who are looking for a feel-good stimulus story, notably members of the Obama administration, cite the recent initial public offering (IPO) in which the federal government sold off 28 percent of its General Motors shares for about $15 billion.

When the government-owned shares went public, President Obama said: “American taxpayers are now positioned to recover more than my administration invested in GM.” From the headlines and sound bites, you might think that the government was in the money on the $49 billion that the Troubled Asset Relief Program invested in GM during the dark days of the Great Recession.

To believe that the U.S. government made money on its GM investment is to imagine that former republics of Yugoslavia will get back together so that they can restart the production lines of the Yugo.

In the GM story, there have been many winners and losers on the road from bankruptcy to IPO. For the most part, the losers include investors, bondholders, taxpayers, and the 65,000 workers laid off so that, in the showroom of American politics, the bailout money could look like a rebate.

The winner was the United Auto Workers union, which delivered Ohio and Michigan to the Obama campaign in the 2008 election. Without the union’s support in 2012, the president’s handling and maneuvering ability in the electoral college might resemble the torque on a Chevy Vega.

The GM that went bankrupt in 2008 was not just a car company; it was also an unfunded pension plan, a bad bank (partial ownership of General Motors Acceptance Corporation or GMAC), and a health maintenance organization notable for padded bills.

As it hit the crash wall, GM had negative equity, $88 billion in losses since 2004, 92,000 workers, 500,000 retirees, and 22% of a domestic car market that had shrunk to 13 million cars a year.

What sleight of an accountant’s hand turned the originator of the Chevy Nova into an emerging juggernaut (maybe one with “soft Corinthian leather?”) that the market now values at $51 billion?

Instead of letting GM go through Chapter 11 liquidation, and winding up the company according to bankruptcy laws, the U.S. government stepped in and allocated the spoils according to political rather than legal precedents. In theory, the move was designed to “protect American jobs.” What did these jobs cost?

The immediate losers were GM shareholders (largely wiped out), and the holders of $95 billion in corporate bonds, now worth about $0.30 on the dollar.

If you check the price of GM shares today, you will see them trading at around $34 a share. “Not bad,” I can hear you saying, recalling GM at $22 or even $8. But these are the new Government Motors shares; the old ones, which your grandfather owned, are trading for less than $1 on penny stock exchanges. Maybe the certificates are selling at flea markets?

In the restructuring, the new owners of GM became the U.S. (61%) and Canadian (12%) governments, and the United Auto Workers (17.5 %), whose generous health and retirement packages would have been watered down or lost in a commercial liquidation.

In the bankruptcy, the UAW retirees were moved ahead of the bondholders to the front of the disassembly line, no doubt because their rust-belt votes count more in presidential elections than those of bi-coastal hedge funders.

Stakes in the new GM were granted to the union in lieu of cash due on health care and other benefits, which survived the reorganization. In the recent IPO, the unions netted $3.4 billion for a third of their stake.

Other options thrown into the car deal included the $17 billion given to GMAC, whose losses became a ward of the state, and whose profits go to the hedge fund, Cerberus. It’s been renamed Ally Bank, just so you won’t associate its bad debts with the GM bailout. (“Test drive the new Ally… from zero to $17 billion in six point four seconds.”)

GM was also allowed to carry forward $45 billion in Net Operating Losses through bankruptcy, a deduction rarely, if ever, granted to other scrapped companies. Clunkers for cash? The company also got a $6.7 billion loan, at below market rates.

And finally, to promote Chevy Volts, buyers of the new hybrid electric car are given $7500 in federal tax credits. Maybe Ford dealers can match the subsidy on their hybrids by throwing in a set of snow tires?

The new GM is allowed to operate with an unfunded pension liability, which remains on the books to the tune of about $30 billion. Mark that claim to market (those accounting rules that did so much to collapse the likes of Merrill Lynch), and GM’s IPO stake is hardly worth $15 billion.

The contrived GM liquidation also kept the auto maker from dumping about $14 billion in promises onto the Pension Benefit Guaranty Corporation, a nominally private company — the board, however, consists of the secretaries of Labor, Commerce, and Treasury — that, with government benedictions, backs up politically correct pension payments.

There is almost no way to know the total losses that can be attributed to the government’s GM restructuring. But, clearly, the government played Three-card Monte with the company’s bad assets, and kept the good ones for themselves. On Wall Street — the object of so much government venom — this is called “asset stripping.”

Little wonder that everyone, including its government shareholders, are now upbeat about GM’s prospects. Morningstar writes: “GM can break even at near-depression-like sales volume, and it is selling more units in the U.S. with four brands than old GM did with eight brands in 2009.”

At the time of GM’s IPO, President Obama sounded like Mr. Goodwrench: “Just two years ago, this seemed impossible. In fact, there were plenty of doubters and naysayers who said it couldn’t be done, who were prepared to throw in the towel and read the American auto industry last rites.”

What he might have said is this: “We hosed the shareholders and suckered the bondholders down to $0.30 on the dollar. We propped up GMAC with $17.5 billion and then buried the losses in bad bank accounting. We leaned on the accountants to keep $45 billion in Net Operating Losses. We learned something from Bernie Madoff and are letting GM continue to carry $30 billion in unfunded pension liabilities. We dumped GM’s health care obligations, for shares, into a union trust. The rest we moved off the lot. Home run.”

The government originally threw $49 billion at GM’s cash guzzling problems and then forced another $100 billion on the market in losses. In exchange thus far, it has recouped $15 billion, for about half of it stake in the new GM.

In Washington, that might pass for a good deal. It might also seem fair in a remake of The Godfather (“The Corleone Family wants to buy me out? No, I buy you out, you don’t buy me out.”) Elsewhere, it sounds like a lemon.

Photo of Classic Cadillac 2 by Shiny Things: “For-sale Cadillac parked in Morro Bay. How tempting is that?”

Matthew Stevenson is the author of Remembering the Twentieth Century Limited, a collection of historical essays. He is also editor of Rules of the Game: The Best Sports Writing from Harper’s Magazine. He lives in Switzerland.

December 27, 2010
Holiday Greetings from New Geography

Here’s to the end of our 31st month publishing NewGeography.com. It’s been another good year of steady growth. Thanks for reading, for the good natured arguments, and your submissions. We hope your holiday season is relaxing and safe (for me it’s a 350 mile drive across the frozen tundra.)

Here’s a look at of some of our most popular pieces over the past year.

January
The War Against Suburbia
Reducing Travel Congestion and Improving Travel Options in Los Angeles
Housing Affordability as Public Policy: The New Demographia International Housing Affordability Survey
Beyond Neo-Victorianism: A Call for Design Diversity

February
America on the Rise
A Race of Races

March
What American Demographics Will Look Like in 2050
Midwest Success Stories
New Traffic Scorecard Reinforces Density-Traffic Congestion Nexus
Let’s Not Fool Ourselves On Urban Growth

April
Best Cities Rankings
Finding Good in this Bad Time

May
Is it Game Over for Atlanta?
Bungled Parliament: The Price of Pursuing Safe Society Over Growth and Opportunity
Shanghai: The Rise of the Global City

June
The Future of America’s Working Class
Time to Dismantle the American Dream?
The Suburban Exodous, Are We There Yet?

July
How Texas Avoided the Great Recession
”James Drain” Hits Cleveland
Civic Choices: The Quality Vs. Quantity Dilemma

August
The Golden State’s War on Itself
The Beginning of the Great Deconstruction
Urban Legends, Why Suburbs Not Dense Cities are the Future
City Thinking is Stuck in the 90s
Can the Suburban Fringe be Downtown-Adjacent?

September
The New World Order
City Size Does Not Matter Much Anymore

October
The Smackdown of the Creative Class
Greetings from Recoveryland, Ten Places to Watch Coming out of the Great Recession
The World’s Fastest Growing Cities
The Privitization-Industrial Complex

November
I Opt Out of California
The Rise of the Efficient City
The Other Chambers of Commerce

December
Hasta La Vista, Failure
If California is so Great, Why are So Many Leaving?
Cities that Prosper, Cool or Not

Photo by Fusionpanda

December 25, 2010
The California Cheerleaders Are at it Again

State Treasurer Bill Lockyer and economist Stephen Levy published a piece in the Los Angeles Times that argues that California doesn’t really have any fundamental problems. In their piece, Lockyer and Levy don their rose-colored glasses and give us the same tired old excuses, twisted logic, and factual inaccuracies.

I’ll begin with the factual inaccuracies:

Lockyer and Levy claim that California is the state with the youngest population. That is just incorrect. The U.S. Census website has a map. California is not even the same color as that used to identify the lowest-aged states.

The authors’ claim that California’s high unemployment rate is due to the loss of 600,000 construction jobs is also wrong. Since November 2007, the month before the recession started, California’s construction industry has lost 334.7 thousand jobs. This represents less than 25 percent of California’s 1.36 million job losses since the recession’s inception. The story is still wrong if we choose the starting date for calculating job losses as the date that most supports L&L’s argument. California’s construction jobs peaked at 948.3 thousand in February 2006. It appears to have bottomed out at 529.2 thousand in September 2010. This is a huge number of job losses, over 400,000, but it is only two-thirds of the 600,000 claimed, and it certainly does not explain all of California’s high unemployment or California’s million plus non-construction recession job losses.

Lockyer and Levy claim that California’s budget crisis stems strictly due to revenue shortfalls, saying,

“Our critics say we are addicted to spending. But the numbers show that isn’t true….California’s current budget woes have been caused by the devastation visited on our revenue base by the recession, not a failure to curb spending. In the three fiscal years preceding this one, general fund expenditures fell by $16 billion.”

This is just disingenuous. Lockyer knows as well as anyone that the general fund comprises less than half of California’s spending, and while the general fund expenditures have indeed reflected a decline in taxes, total State spending has increased from $194.3 billion in fiscal year 2007/08 to $216 billion in the 2010/11 year. Furthermore, when the composition of State spending is evaluated, we see that virtually all of the cuts in the general fund have been in local assistance. State operations have been almost completely spared.

Besides, California’s budget problems didn’t begin with the recession. Do Lockyer and Levy think that our memories are so short that we forgot that Gray Davis was thrown from office because of budget problems, and that Arnold came in office pledging to fix California’s persistent budget deficits?

We are also again treated to Lockyer’s mantra that California has a constitutional requirement that it not default on bonds, adding,

“During the current fiscal year, general fund revenues are expected to total $89.4 billion. Education spending under Proposition 98 will total $36 billion. That leaves $53.4 billion available to pay debt service on bonds — more than eight times the $6.6 billion the state will need.”

That’s wonderful, but constitutional requirements and revenues don’t pay debt. Cash pays debt, and California does run out of cash. When California runs out of cash it issues vouchers. Already some banks have refused to accept California vouchers. What will the State do if all banks refuse to honor vouchers?

I’m sure the Treasury sets aside funds for debt repayment before they issue vouchers. Whatever they set aside will probably not be enough if California finds itself in a situation where vouchers are not accepted. Do we think the unions will let their people work if they are not being paid? Would the workers want to work if they are not being paid? Would contractors work? Will there be anybody around to write a check, even if the reserves are there?

The fact is that if vouchers are not accepted, California will be plunged into a very serious crisis, a crisis in which case California’s constitutional requirement to pay would have no more meaning than its constitutional requirement that it have a balanced budget by June.

Lockyer and Levy ludicrously claim that California’s business environment is good. But disinterested groups that issue reports that consistently rank California as among the least attractive states are wrong, groups like the Tax Foundation and Chief Executive Magazine. Lockyer and Levy cite Public Policy Institute of California (PPIC) research that business relocations cause smaller percentage job losses in California, but the PPIC can’t measure jobs that aren’t created when businesses that could reasonably be expected to expand in or move to California don’t.

Lockyer and Levy also repeat Brett Arends’s claim that California’s share of the World’s venture capital has increased to 50 percent, but they neglect to note that the amount is declining, a lot, as Tim Cavanaugh showed here. California is getting a larger share of a rapidly declining pie. The net result is a huge decrease in California’s venture capital.

Finally, I’ll conclude with my favorite Lockyer and Levy quote:

“California no doubt faces serious challenges. But our obstacles are not insurmountable.”

That’s exactly right, but the problems are not insurmountable until you confront California’s real, fundamental, problems.

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 Kevin Cole

December 24, 2010
A New Era For The City-state? The New World Order

The city-state, a relic dating back to Classical or Renaissance times, is making a comeback. Driven by massive growth in global trade, shifts in economic power and the rise of emerging ethnic groups, today’s new independent cities have witnessed rapid, often startling, economic growth over the past decade.

The contemporary city-state has flourished primarily in two regions: the Persian Gulf and Southeast Asia. The development of Hong Kong and Singapore provided a critical stage for Southeast Asia, which has been home to the world’s the greatest economic expansion. Hong Kong, now a quasi-independent part of China, competes with London’s West End as the world’s most expensive office market. By one account, it is experiencing the fastest growth in rents of major office markets in the past year. Once known for their poverty and destitution, these Asian city-states now boast incomes comparable to many European and North American cities.

The Persian (or, as some like to call it, Arabian) Gulf constitutes the other hot bed for 21st Century city-states. Over the past decade, a string of once obscure cities from Dubai and Abu Dhabi to Qatar and Bahrain have risen to positions of global significance. Qatar, a tiny emirate with roughly 1.7 million people, will host the 2022 World Cup–an announcement that surprised nearly everyone. Abu Dhabi, a desert metropolis of some 2 million people, is undergoing the largest cultural development project on the planet, financed by the emirate’s huge oil wealth. This includes three massive museums: an outpost of the Louvre, a branch of the Guggenheim 12 times the size of the New York original, and a museum on maritime history.

These city-states may share religious and political affiliations, but like their Phoenician, Greek and Renaissance forebears, they compete ferociously with one another. Today Dubai, which like Abu Dhabi is part of the United Arab Emirates, easily represents the most evolved expression of the modern Gulf city-state. Not much more than a tiny fishing and pirate haven until modern times, the city had less than 400,000 residents in 1985; it now has close to 2 million. In the past decade Dubai has become a city of superlatives: the world’s largest office tower; the Middle East’s largest port, airport and financial center.

In many ways Dubai’s strengths are those of traditional city-states. Unlike other Gulf Arabs, the Dubai Emiratis have depended more on trade than oil for their wealth. Highly anxious to seize one of the most critical corridors of world trade, they have built the Middle East’s largest port at Jeber Ali and the massive Dubai International Airport, one of the largest and best-run on the planet.

And to an extent largely unmatched in the Arab world, Dubai and its ruler, Mohammed bin Rashid Al Maktoum, have fostered an environment well-suited for global trade. Muslim cultural tendencies (like Friday holidays and largely halal food) are gently followed, but there’s room for a great deal of flexibility for expatriates.

Inside the financial towers, it’s not unusual to see people dressed as they would in London or Wall Street–men in smart suits and women in knee-length skirts. Alcohol is readily available in the hotel restaurants, and the cab drivers are as likely to be Hindus from India as Muslims from an Arab country. Restaurants tend to be Lebanese, Persian or Western; there are karaoke clubs, bars and pubs across the city. Business in Dubai is conducted in many languages among a plethora of ethnic groups ranging from Americans and Brits to Indians, Russians, Pakistanis, Koreans and Lebanese, among others.

“Funny” business, as in most trading cities, also fuels the Dubai’s dynamism. The city-state has been a convenient laudromat for money out of sanctioned Iran. Indeed, the Dubai Creek area near the souk is crowded with dhows being packed with crates ready to ship across the Gulf to the Islamic Republic. These can include some relatively harmless consumer goods like televisions, but some allege that some of the cargo includes materials for Iran’s nuclear program.

Then there are the corrupt south Asian politicians, Russian Mafiosi or Southeast Asian drug dealers, who reside part time in the city and also deposit their cash there. Included in this cash in-flow, according to Wikileaks, are many millions of U.S. and other NATO aid dollars skimmed off by our wonderful Afghan allies. (Your tax dollars at work!)

Both the predominate legitimate business and, probably, the thieves see much benefit in Dubai’s largely efficient authoritarian order. There are incidents of violence on occasion, but nothing on the scale of Karachi or Juarez, Mexico, gang wars. A safe place attracts all kinds of business, as was true back in the days when the Doges ran Venice. Backed both by social order and monumental infrastructure investments and high social order, Dubai now boasts the fourth most office space per capita of any large city on the planet–behind only New York, Paris and London.

Since the 2008 financial crisis the office market has become severely overbuilt, transforming Dubai from one of the world’s hottest commercial markets to one of the sickest. Estimates of actual office vacancy rates start at 15% but could rise to 25% or even 50%, according to a recent Jones Lang estimate. However, a walk through the massive new “Business Bay” development–planned as 64 million square feet of office, commercial and residential space–resembles a walk through the real estate landscape left from a neutron bomb. You don’t see much in the way of people except security guards and occasional day laborer. Even optimists, counting on a renewal of global economic growth, do not expect a major improvement in the overall property market until 2013 or 2014.

A more serious and long-term problem may prove political. Unlike Singapore and Hong Kong, where most work is done by citizens, Dubai and the other gulf city-states rely almost completely on imported labor. Expatriates seem to do almost everything from city planning and administration work to running the hotels and basic infrastructure maintenance. This is not surprising as less than 1 in 5 residents is an Emirati.

Some foreign residents live luxuriously, in communities like the Palm that look more like Newport Beach, Calif., than parts of the developing world. Many others inhabit dismal labor camps that are collections of cinderblocks in the desert. These camps, notes Kevin Phillips, a local evangelical missionary who works in Dubai, are plagued with problems typical of any settlement made up of young, temporary males workers: crime, drugs, fist-fights and prostitution.

But arguably the biggest danger to Dubai–and to other Gulf city states–lies in the numbers of Arabic speaking workers and professionals who, despite sharing a language and religion with the Emiratis, often feel only a tenuous stake in the city’s success. Unlike their counterparts in Singapore, they have virtually no chance to become citizens. Commitment to the long-term health of the city is not always evident among people who consider themselves mere sojourners.

Yet for all these problems, one should not rule out Dubai or other Gulf urban areas like Abu Dhabi and Qatar as potential future great city-states. In a world where cross-cultural trade remains an ascendant phenomenon, we are likely to see the emergence of an expanding number of city-states over the coming years. Athens, Carthage or Venice may have constituted the great city-states of the past, but the 21st century is likely to create its own batch of luxuriant successors.

This article originally appeared at Forbes.com

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 *Crazy Diamond*

December 23, 2010