Category: Economics

  • Millennial Perspective: Internet Telecom’s Pioneer

    In part 2 of a two-part series on telecommunication, Paffenbarger discusses the successes and future of Skype.

    Skype is highly recognized in the world of Voice over Internet Protocol (VoIP), the technology challenging telecommunication’s status quo. The company was first launched in 2003 in Luxembourg. Since the premiere of Skype, the company has grown to become the standard for all companies hoping to enter the field of online phone service. In 2009 it had 520 million registered users in almost every country with Internet connection. According to their website:

    Skype is software that enables the world’s conversations. Millions of individuals and businesses use Skype to make free video and voice calls, send instant messages and share files with other Skype users. Every day, people everywhere also use Skype to make low-cost calls to landlines and mobiles.

    The company itself brought in $185 million for Ebay in the last quarter of 2009 and was the fastest-growing part of Ebay’s business.

    Although the cost to call PC-to-PC is completely free, Skype makes its money from international SMS (Short Message Service) and long-distance PC to fixed lines calls. Recently, EBay sold 56 percent of the company’s stock to bidders and left founders Niklas Zennström and Janus Friis with 13 percent of profits and two chairs on the Board of Directors. Although the founders are unhappy with EBay’s decision, the company’s CEO John J. Donahoe believes “Skype will be well positioned to move forward under new owners with ownership and control over its core technology.” Skype became a household name after the publicity of the arrangement.

    Skype is recognized as the first VoIP, and media have been newly attracted to covering its story. New publicity has driven popularity and raised user numbers around the world. Recently, Oprah Winfrey Webcast has setup the Oprah Book Club over the service’s homepage. Oprah offered users the chance to view a webcast via Skype with famous authors reading through their novels. For ten weeks Oprah and Eckhart Tolle produced the show for Tolle’s book A New Earth: Get Ready to be Awakened. The publicity that was created by this event generated close to 750,000 viewers from around 139 different countries. New users logged on just to see the readings and enjoy Oprah’s Skype experience. Oprah has this to say about Skype: “With about half a million views this could possibly be the world’s largest classroom.” Evidently Oprah couldn’t get enough of the services, because last May she dedicated an entire show to Skype entitled “Where the Skype are you?” With Oprah’s support the company looks to pull in many tech savvy viewers.

    Skype now accounts for eight percent of all outgoing global calls. The success of Skype has propelled the company to be recognized amongst the top global telecommunication services. Not only does Skype function as a social medium, it is also a money-saving tool for businesses of the future. With only five years of experience under the company’s belt, its projections for future growth in the marketplace look more than healthy. Skype has come to revolutionize phone bills and the way society is controlled by the industry. Say goodbye to costly long-distance phoning, and hello to an efficient Skype, or other VoIP solution.

    Skype is not only beneficial to the daily activities of any business; it is specifically an influential tool of top entertainment industries. ESPN has adopted the use of Skype to engage in interviews that they would previously have not been able to do. With the fast-paced setup of Skype’s video conferencing, ESPN was able to interview the quarterback from Oregon during the always-busy Thanksgiving weekend. UCLA and Arizona State are both broadcasting through Skype. Skype’s ESPN partnership is bringing the public more information about the service, and increasing the awareness of VoIPs. Soon, Skype and other forms of video communication will be integrated into mainstream media.

    Skype is looking ahead towards a future where all communication will go through Internet services. Josh Silverman recently stepped up to the plate as Skype’s new CEO. He hopes to better develop Skype’s popularity in the working world. Silverman promises improvements in technology and customer service. Jonathan Rosenberg has been hired as the new technologist to move Skype along further to match future competitors. Previously a “Cisco Fellow” working in the Voice Technology Group at Cisco System, he set strategies for their own business voice system. Skype’s tactical strategies for its technological advancements are riding on Rosenberg’s employment. On Rosenberg’s website, he explains his qualifications and hopes for a better Skype of the future.

    Skype is preparing for competition that has already began to make its mark in the marketplace. While Skype has been a headline catcher, most people don’t recognize the variety of VoIP services available today. At voipreview.org you can find ratings and categorization of VoIPs to entice potential customers. The site provides information on top competitors of Skype and illustrates each VoIP’s unique niche in the market. One provider, JaJah, allows callers to type in their number and the number they wish to reach. The service calls both numbers and connects the lines. Jajah phone calls cost about 98% less than those of original long-distance rates. Open Wengo, Vbuzzer, Ichat, and ComBOTS are all different varieties of VoIP. Google Talk is beginning to gain recognition too, with its call options and instant messaging service. These companies have barely scratched the surface of what VoIP’s popularity will do in the market.

    Skype’s most threatening emerging competitor is Ooma. Ooma offers a one-time installation of an Ooma hub which is then hooked up to any high-speed internet connection for an outright fee of 249.99. Once installed Ooma makes free international calls. Ooma promises in its mission statement to free consumers from the tyranny of phone companies: “We took into account everything that was wrong with phone service today – it’s pricey, limited, and inflexible – and we made it our mission to create a better customer phoning experience. So now, when you buy an Ooma system, you own your dial tone. This means free calls in the U.S., rock-bottom international calls, and no more mysterious surcharges for premium services.”. The Ooma Telo launched on October 1st 2009, and its popularity shocked the company, who was unsure about the initial reaction. Ooma now offers it service to Wi-Fi connected smart phones for low long-distance calling. The company has recently been featured on the Today show and won the Network Products Guide Production Innovation award for 2009. The company is working on developing a mobile device.

    As of late, Skype has introduced Skype for SIP and Skype for Asterisk. “These solutions enable your PBX to be configured so your employees will be able to make Skype calls directly from their existing desk phones, without needing any new training. And with click-to-call buttons on your website and emails customers can reach you for free when they use Skype.” These configurations make calls completely free after an initial setup, and long-distance phone conversations become unbelievably inexpensive. Skype will soon be the new standard for small businesses who can’t afford large phone bills but are still involved in global growth.

    Skype is an intangible asset that businesses are actively pursuing, and employees are beginning to recognize the benefits of telecommuting through Skype and other VoIP services. It is predicted that by the year 2016 some 43% of the American working class will occasionally telecommute. Skype’s persistent leadership in the field and the companies likely to compete with it make this figure a strong possibility.

    Elizabeth Paffenbarger is a student at Chapman University.

  • Millennial Perspective: Telecom’s Internet Crisis

    In Part 1 of a two-part series, Elizabeth Paffenbarger discusses the paradigm shift VoIPs are causing in the telecommunication industry.

    In today’s multi-tasking global world, telecommunication has become essential to the health of businesses and society at large. Our “network” of colleagues, friends, and family is constantly expanding with the growth of the technologies that keep us connected. Although rarely acknowledged, the telecommunication industry drives individuals’ hectic lifestyles with social networking, video chats, and text messaging. As businesses increasingly rely on such technologies, they become ever more subject to developments in the telecom industry.

    In the 27 years since the first commercial cellular phone service was made available in Chicago, cell phone companies have come to dominate communications in America. Today, six year olds tote cell phones on the school bus and send “text” to neighbors in class. Businesses use telephones to conference with partners in other countries. Society blatantly relies on the cellular industry for entertainment, business and the comforts of life.

    Businesses rely on the use of telecommunication for their partnerships and general operations. When interviewed, an owner of the bond insurance company Paffenbarger and Walden had this to say about the effect of telecommunication on his business: “One of the largest costs to any business is the time and money put into telecommunication. The prices I pay in order to contact partners when I am away from the country really takes a toll on my operational expenses.”

    According to Mike Gikas, Senior Editor of electronics at Consumer Reports, phone companies make their money three different ways: “One, you pay for minutes you don’t use. Two, they make money when you underestimate the number of minutes you use, and you pay extra [for minutes exceeding the contractual allotment]. Three, they make money when you break the contract.” In addition, companies charge high premiums for long distance calls that don’t actually cost much more to connect. With companies charging outrageous roaming fees and creating an oligopoly of cellular services, it is easy to see the control they possess.

    Yet new technological developments – on course to disrupt the dominance of cell phone companies – provide hope for small businesses. The internet has forced the reconfiguration of commercial institutions from record companies to newspapers. Mobile and landline phone companies may now enter their own business model crises in the face of Voice over Internet Protocol (VoIP) systems.

    VoIPs offer free online communication and international calling at a minimal price. Companies that offer VoIP use three different methods of online communication to satisfy their customers. The first method is PC-to-PC communication, which allows customers to chat, videoconference, and communicate between two separate computers. The second method involves PC to fixed network lines. Through this method users are able to connect with mobile phones or landlines from a PC. The final method that is available to online users is phone-to-phone calls that are implemented through an Internet intermediary. Leading VoIP Skype focuses their business on the use of the first two forms, but other companies specialize in different areas. It will only be a matter of time until major companies switch to VoIP’s affordable strategies.

    While there is a fear that the telecommunication industry will suffer against VoIPs and services like Skype there is also the possibility of Skype’s low costs increasing productivity for small and large businesses alike. The new generation is soon to be comprised of telecommuting workers and Internet efficient businesses.

    Although VoIP’s future is looking bright in America, other countries have realized the potential threat it poses for local phone services. Traditional phone services’ large profits often line the pockets of local governments who choose to “protect” national companies. Recently congressmen of Russia have begun to draft legislation to ban the use of sites such as Skype that offer free PC to landline calling. VoIP’s cheap prices compete with long-established companies of Russia that are not ready to lose market power. According to the New York Times, business lobbyists want to protect telephone companies from VoIP globalization that would damage the Russian economy. Russia’s reactions have raised questions as to whether the use of VoIPs could negatively affect the world economy. Other countries are watching Russia to observe how its plans to restrict the telecommunication market pan out. Soon, Russia may not stand alone in banning these types of services

    The future of telecommunication resembles many other industries that are succumbing to the power of the World Wide Web. Nevertheless, the dwindling prices for communication offered on the Internet do not so much pose a threat to business as they do a possibility for relieving high priced phone bills. It will soon no longer be acceptable for companies to charge the high rates for long distance communication that have become the norm. These excessive charges are unnecessary when long distance calls are not much costlier to provide. As long as government allows the operations of VoIPs, the services have a positive future ahead of them, as well as the businesses that use them.

    Part 2 in Paffenberger’s series focuses on the success and future of Skype.

    Elizabeth Paffenbarger is a student at Chapman University.

  • Memo To Obama: Banks Are Beautiful

    In his search for what Theodore Roosevelt called “a good, safe menace,” President Barack Obama has settled on the nation’s largest commercial banks, which as late as last year’s bailouts were still considered the best hope for economic salvation.

    At first Obama was content to rail about the filthy lucre of banker bonuses. Then he got the idea of maybe hitting the bonus babies with special taxes. But the reason that the Secretary of the Treasury is often the former chairman of Goldman Sachs is because the bank is one of the instruments that keeps the government afloat.

    Maybe President Obama didn’t get that memo, but he’s paying the banks’ bonuses, and they are paying his. The President needs the American banking system much in the way that the banking system needs the government as its biggest client.

    In his best imitation of William Jennings Bryant, who didn’t want the American experiment to be crucified on a “cross of gold,” the President has proposed a populist uprising against the bankers, not to mention a restoration of the Glass-Steagall Act and a tax on bank assets to recoup the taxpayer money lost in the crash.

    In attacking the money changers Obama would seem to be on safe ground. Who doesn’t despise an industry that got fat on mortgages and home equity, went bust, found redemption with easy government bailout money, and then celebrated by paying out bonuses from taxpayer contributions?

    It’s easy to imagine the President leading a Million Man March into the temples of Citibank or Bank of America to demand penance for the wages of so many sins. The Democrats may have gotten Massachusetts all wrong, but how can they not benefit from igniting a few bonfires against the vanities of Wall Street?

    The problem with a Banker Crusade is that once the ramparts are breached at castles like that of Goldman Sachs, what will become evident is that the entire American government can be understood as a failed S & L — those savings banks of shame that in the 1980s found their vaults filling up with suspect asset pools, if not whitewater.

    Like the government today, S & Ls lived beyond their means on other-people’s money, invested in bad assets, and resorted to phony accounting to cover up the losses… until the taxpayers were sent the bill for the overdrafts.

    The root cause of the S & L crisis in the 1980s was the decision of the Reagan administration to deregulate savings banks (they were no longer limited to plain vanilla mortgages), but still allow them to keep their federal insurance for deposits up to $100,000.

    Under this no-lose formula, banks could borrow nearly unlimited amounts of money in federally-insured deposits, and then lend out the funds to themselves, their cronies, or any get-rich-quick scheme that happened to send a prospectus to the bank’s board. S & Ls threw money at race horses, private planes, wine cellars, and even a few Senators, including John McCain.

    When the borrowers went broke and the banks failed, the government bailed out the depositors, and the grubstakers moved on down the trail. As Warren Buffett quipped, “In the 1980s, it was the bankers who were wearing the ski masks.”

    In the end, the government paid out something like $500 billion to cover the depositors with federal insurance.

    Fast forward to the U.S. government balance sheet in 2010, over which President Obama presides as the chief credit officer. As I read the annual report, the government is losing about $1.6 trillion a year, liabilities are $14 trillion and growing, and some of the nervous depositors are thinking of lining up at the front doors (or voting Republican).

    The deposits funding the American dream come from government bonds and securities, some of which have been sold to overseas investors. Of the $14 trillion in liabilities on the balance sheet, more than $3 trillion is held abroad, much of it in Asia and especially China.

    More troubling for the country’s Banker-in-Chief is that the government-as-bank — instead of lending its borrowed money against hard assets such as railroads, schools, wharves, hospitals — has put out the money to fund what the brochures might call Lifestyle Loans (“At American Security, you can live like there is no tomorrow”).

    At least 1980s S & Ls had a few houses and planes to repossess. All the U.S. government now shows in its loan bags is a trillion-dollar budget deficit, off balance sheet liabilities (another $1 trillion) to pay for the wars in Iraq and Afghanistan, multi-trillion dollar obligations to the depositors of Fannie Mae and Freddie Mac, and the coupons (with a present value of about $41 trillion) awarded to its citizens for Medicaid, Medicare, and Social Security redemptions.

    As a pyramid scheme, those numbers are hard to beat. The public debt is already equal to the gross domestic product, and government borrowings are projected by 2015 to rise to $20 trillion.

    Lost in the presidential outrage against the commercial lenders is one reason why so many of them are flush with money, even in bad times: banks, notably investment banks, earn huge spreads brokering debt for the American government.

    What put the government into the savings-bank business?

    After 2001, when the economy stalled, the strategy to keep the good times rolling was to encourage lower margin requirements for investment banks, home mortgages, and consumers, who were patriotically encouraged to spend the equity in their homes at places like Wal-Mart. (“When the going gets tough, the tough go shopping.”)

    To fund this asset bonanza (although it was based on dubious collateral), the government turned to the investment banks, which packaged, securitized, swapped, stripped, and laundered mortgage-backed securities until stock and real estate markets had doubled in value.

    The bubble burst not just because of rapacious bankers, but in part because the government’s voracious need for funding dried up liquidity for the leveraged banks. To be sure, the likes of Lehman and A.I.G. had bad loans galore, but the financial crisis is also about an electronic run at banks competing with the government to find funding.

    Ironically, banker greed pales in comparison to that of the U.S. Congress, which through the last decade pushed home ownership (thanks to the subprimers at Fannie and Freddie) as a way to spread the word of electoral happiness. Bad debtors got jumbo mortgages, and members of Congress got re-elected.

    In the current market, Obama manages a balance sheet that looks a lot like Citibank’s: it limps along, based on federal guarantees, and most of the collateral (consisting of subprime mortgages and used B-52 bombers) has little resale value on eBay.

    What bank would not want as its best customer a major industrial country that needs $14 trillion every year to balance its books?

    One percent of $14 trillion is $140 billion, a figure that roughly equates to the annual income of the banks that President Obama is now threatening to penalize. Would he prefer that they stop rolling over government debt?

    Listening to Obama rail against the banking fraternity, I can’t help but recall the high moral tone that starts the movie, Butch Cassidy and the Sundance Kid, which can be viewed as a cautionary tale on the moral hazards of (unauthorized) bank bonuses.

    In the opening scene, Butch is casing out a bank that he is thinking about robbing. The guard signals to him that it’s closing time. Before leaving, Butch asks, “What happened to the old bank? It was beautiful.”

    The guard answers: “People kept robbing it.”

    To which Butch responds: “Small price to pay for beauty.”

    In time, that may become the President’s reconsidered view of the banker bonuses.

    Matthew Stevenson is author of Remembering the Twentieth Century Limited and An April Across America.

  • The Fate of Detroit – Revisited Green Shoots? The Changing Landscape of America

    During the first ten days of October 2008, the Dow Jones dropped 2,399.47 points, losing 22.11% of its value and trillions of investor equity. The Federal Government pushed a $700 billion bail-out through Congress to rescue the beleaguered financial institutions. The collapse of the financial system in the fall of 2008 was likened to an earthquake. In reality, what happened was more like a shift of tectonic plates.

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    By May of last year, when the first of this series appeared, it was clear that the American auto industry was about to fundamentally change. It has been just eight months and the changes have already been monumental. In 2009, China overtook America as the largest market for automobiles in the world. Sadly, America will never see that title again.

    Industry CEOs flew into Washington, DC on their private jets asking for billions in federal hand-outs. They were chastised and embarrassed for their greed and insensitivity by politicians who have mastered that fine art of public outrage. GM’s CEO Rick Wagoner was publicly fired. The next day, GM put all eleven corporate jets on the market causing the resale market for G-5s to collapse overnight.

    Since then, GM has entered and exited bankruptcy and senior debt holders were wiped out so the government could give ownership of GM to the UAW, in contravention of all existing bankruptcy laws. A thousand dealers were summarily terminated without compensation, or a hearing. The Saturn brand was snuffed out and the Saab brand will follow unless a miracle occurs – an unlikely prospect. Pontiac and Hummer have already been terminated.

    Chysler is now owned by Fiat, the government and the UAW. It too wiped out 1,000 loyal dealers without compensation, or a hearing. Chrysler sales, down 36%, were the worst since 1962. The company is on life support. The Italians will attempt to resuscitate the ailing brand with a fuel efficient Fiat 500 and curvaceous Alfa-Romero. Chrylser called on Lee Iacocca to help them recover in the 1980s. This time, they may need Sophia Loren to coax buyers back into the showroom.

    Ford did not take TARP bail out money and the public responded by buying Ford products. While their sales were down 15%, they gained market share because GM and Chrysler sales were down 30% and 36% respectively. Sales in December were actually up 33% from a year ago. Ford dumped loser Volvo to the Chinese automaker, Geely, who coveted the domestic dealer network. Expect to see Chinese cars in an auto mall near you sooner rather than later.

    Clunkers
    Government showed its ignorance of the automible industry by sponsoring a Cash for Clunkers program. They will claim it was a great success, selling 677,842 new cars, but critics will remind that it cost $3 billion dollars. Edmunds.com reports that all but 125,000 sales would have taken place anyway. So taxpayers forked over about $24,000 per car for 125,000 sales. The National Highway Transportation Board reported that 20,000,000 barrels of oil will be saved over 20 years but critics will remind that we import that much in just two days. In addition, the cost to administer a program that lasted just six months was $100,000,000. The government was loathe to mention the top two brands purchased in the Cash for Clunkers progran were Honda and Toyota, not American brands.

    Electrics
    As promised, the government supported the move to electric vehicles. The U.S Department of Energy gave Tesla Motors a loan of $465 million to build the $87,900 electric Karma in California. Tesla claims it has sold 1,000 cars. That means Tesla sales represent a little over one hundredth of one percent of the domestic car business. The financial wisdom of such a loan would be questionable if it were not for the equally stunning announcement that Fisker would receive $529 million from the DOE to build its $100,000 electric car – in Finland. Al Gore is a shareholder of Fisker. Honda, which sells the $20,000 Insight hybrid vehicle and achieved just 25% of forecasted sales. If Honda has trouble selling a $20,000 electric hybrid, one wonders how many $100,000 electrics Fisker and Tesla models must be sold to repay our billion dollar loan.

    Winners
    The surprise winner of the last year was Korean car manufacturer, Hyundai. With a potent combo of great styling, affordable pricing on its Kia brand and new upscale products, Hyundai sales increased a surprising 10%. They project a 17% increase in 2010. Hyundai is doing so well it may spin off its own luxury brand, Genesis, as Toyota did so successfully with Lexus. The new Equus luxury sedan is about the same size as a large Mercedes, BMW or Lexus but $25,000 less. This basic formula worked to establish the Lexus and Infiniti brands in 1989. Expect it to be repeated by Hyundai in the near future.

    Green shoots
    Even though it has relinquished its title as top dog to the Chinese, there are signs of life in the American automobile industry. Buick is the top brand in China and is resurgent in our domestic market. The new Buick Lacrosse and Regal are superb automobiles. Chevy rests its hopes on a trio of new attractive products like an all electric Volt, a retro-styled Camaro and the 40 MPG Cruze. Cadillac released a new fleet of gorgeous CTS and SRX models and announced a new full-size XTS is on the way. Cadillac will get its own stunning version of the Volt called the Converj. And Government Motors (GM) announced it will invest a billion dollars to create the fuel efficient trucks of the future in time for the economic recovery.

    At Ford, they hope the 2011 Ford Focus will be a huge success. This small car is a move upscale for Ford. It has great styling and amenities, a higher price tag and therefore higher profits. Will Ford be able to sell an expensive small car to replace the profitable SUVs like the Explorer and Expedition?

    Chrysler’s future is much murkier. A mini Fiat 500 is coming but the Alfa-Romeros have been delayed. The new Jeep Grand Cherokee and the Chrysler 300 are attractive, but the Chysler Lancia is simply weird. Chrysler revealed a new 200C EV, a surprise all electric concept. Will these models be enough to save Chrysler? We will see.

    The car business is changing. Green Shoots, as our president likes to muse. We hope he is correct.

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    This is the seventh in a series on the Changing Landscape of America.

    Robert J. Cristiano PhD is a successful real estate developer and the Real Estate Professional in Residence at Chapman University in Orange, CA.

    PART ONE – THE AUTOMOBILE INDUSTRY (May 2009)
    PART TWO – THE HOME BUILDING INDUSTRY (June 2009)
    PART THREE – THE ENERGY INDUSTRY (July 2009)
    PART FOUR – THE ROLLER COASTER RECESSION (September 2009)
    PART FIVE – THE STATE OF COMMERCIAL REAL ESTATE (October 2009)
    PART SIX – WHEN GRANNY COMES MARCHING HOME – MULTI-GENERATIONAL HOUSING (November 2009)

  • Connecting Facts to Forecast 2010

    Anyone can figure out the State of the Union by taking a good look around. I mean, I was born in the afternoon – but not yesterday afternoon – I don’t need four days of press coverage and a long speech by the President to tell me that Americans are suffering.

    This time of year, though, everyone is looking for some hint of what is to come. Even the most rational among us are tempted to seek out some prediction of the future. Economists often rate high on the list of seers sought out by most Americans – right up there with stock brokers, Dionne Warwick’s Psychic Friends Network, and Joan Quigley (White House astrologer to the Reagans).

    In this article, I’ll give you a few of my own predictions and then invite you to tell me the subject areas you want predicted. When pressed for my vision of the future, I like to add up what I already know to arrive at what I think will happen. Here’s an example:

    1. Consumer debt is about $2.5 trillion + The Federal Government Bailout commitment topped out at $12.8 trillion = American consumers, no matter how voracious their appetite for debt and foreign goods, are not the problem and cannot be the solution.

    See how it works? I confess I learned to do this while working with Mike Milken on the Global Conferences at his Milken Institute in Santa Monica, California. He called it taking the “view from 35,000 feet.” It entails taking two or more pieces of information that most people don’t hold in their heads at one time and trying to see how the ideas are connected. Here’s another one:

    2. The eight largest bank holding companies decreased lending year-over-year in the first and second quarters of 2009 + Domestic deposits are growing at double digit rates = Too Big to Fail has created monster institutions that do not have to respond to market forces or consumer demands.

    The largest bank holding companies in order of commercial banking assets are JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, PNC Financial Services Group, US Bancorp, Bank of New York Mellon, and Suntrust. That you may not have a “Suntrust” branch on the corner in your town tells you something about how big the first seven are. These banks are so big that they aren’t even using the excess reserves that the Federal Reserve Bank is making available to them – they just let it sit in the Federal Reserve accounts earning zero interest. They are no longer simply U.S. banks, subject to controls by the Fed’s monetary policy actions. They can reach out for funding across the world – including funding from sovereign wealth funds controlled by governments from China to Kuwait.

    Here’s one more, just to get the ball rolling. Then, I’ll turn to your questions and see if we can manage a few more predictions for 2010 and beyond, just using the facts as we know them today.

    3. The Federal Reserve System more than doubled the money in the banking system virtually overnight (from $984 billion on September 17, 2008) and kept it at that level ever since ($2,249 billion as of last week) + the third quarter 2009 increase in economic activity (output or gross domestic product) only got us back to where we were at the same period in 2007 = There’s enough money building up in the banking system to meet the definition of “inflation”: too much money chasing too few goods.

    The rise in GDP, while it may signal the technical end of the recession, does not put an end to the financial stress we are suffering. In the seven years before the technical beginning of the recession, the U.S. economy was growing at more than five percent each year. Basically, that means the recent recession put us about $1 trillion in the hole to economic prosperity. The much-touted improvement in the economy in the third quarter of 2009 was about $90 billion. At this rate, it will take 11 quarters (nearly 3 years) to catch up. That’s why so many economists are more pessimistic than many politicians.

    For the rest of 2010, I invite you to submit comments below or drop me an email with two or three facts that you would like to see connected. I’ll take on the challenge of finding the connections, the relationships and interpreting the signals for what those facts might mean for you and the economy in the coming months.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

    Photo: Vermin Inc

  • The Death Of Gentry Liberalism

    Gentry liberalism, so hot just a year ago, is now in full retreat, a victim of its hypocrisy and fundamental contradictions. Its collapse threatens the coherence of President Barack Obama’s message as he prepares for his State of the Union speech on Wednesday.

    Gentry liberalism combines four basic elements: faith in postindustrial “creative” financial capitalism, cultural liberalism, Gore-ite environmentalism and the backing of the nation’s arguably best-organized political force, public employee unions. Obama rose to power on the back of all these forces and, until now, has governed as their tribune.

    Obama’s problems stem primarily from gentry liberalism’s class contradictions. Focused on ultra-affluent greens, the media, Wall Street and the public sector, gentry liberalism generally gives short shrift to upward mobility, the basic aspiration of the middle class.

    Scott Brown’s shocking victory in Massachusetts–like earlier GOP triumphs in Virginia and New Jersey–can be explained best by class. Analysis by demographer Wendell Cox, among others, shows that Brown won his margin in largely middle- and working-class suburbs, where many backed Obama in 2008. He lost by almost 2-to-1 among poor voters and also among those earning over $85,000 a year. He also won a slight margin among union members–remarkable given the lockstep support of their organizations for Brown’s Democratic opponent, Martha Coakley.

    Geography played a role, of course, but class proved the divider. Coakley did well in the wealthiest suburbs largely north and northwest of Boston. But Brown’s edge in the more middle- and working-class suburbs proved insurmountable.

    Obama, a genius at handling race, has always had problems with class. His early primary victories in 2008 resulted not only from superior organization but the preponderance of students and upper-income professionals in early primary states. Once Hillary Clinton morphed, just a bit late, into Harry Truman in a pants suit, she proved unstoppable, rolling over Obama in critical states like Pennsylvania, Texas, California, Florida, Michigan and throughout Appalachia.

    In the general election Obama succeeded in winning over a significant portion of these voters. Long-simmering disgust with the Bush administration and the Republican Congress, combined with a catastrophic economic collapse, undermined the GOP’s hold on middle-class suburbanites.

    Now that the ball is in his court, the president and his party must abandon their gentry-liberal game plan. The emphasis on bailing out Wall Street and public employees, supporting social welfare and manufacturing “green” jobs appealed to the core gentry coalition but left many voters, including lifelong Democrats, wondering what was in it for them and their families.

    In the next few elections there’s an even greater threat of alienation among millennial voters, who in 2008 accounted for much of the president’s margin of victory. Generational researchers Morley Winograd and Mike Hais note that millennials are starting to enter the workforce in big numbers. Right now their prospects are not pretty. The unemployment rate for those under 25 stands at 19%. Even for college graduates, wages are declining even as opportunities dry up.

    The greatest political danger is not so much a millennial switch to the GOP but a loss of enthusiasm that will diminish the youth vote. Winograd and Hais estimate only about one-third of those who voted in 2008 in Massachusetts voted in this last special Senate election. “Republicans will keep on celebrating victories until Democrats turn their attention to young voters and get them as excited as Obama did in 2008,” Winograd warns.

    Ever deepening disillusionment–not only among millennials–is inevitable unless Obama changes course and starts building a broad-based recovery. The president’s economic team is as pro-big-bank as any conjured up by the most rock-ribbed Republican. Its motto could be a reworking of that old notion by onetime GM CEO and Eisenhower Defense Secretary Charles Wilson: “What’s good for General Motors is good for the USA”–just substitute Wall Street for GM.

    But where GM brought jobs and prosperity to millions, the current Wall Street focus has forged a recovery that works for the gentry but fails to promote upward mobility. Bailed out from their disastrous risky bets and then provided with easy access to cheap credit, the financiers have had themselves a fine party while the rest of the private sector economy suffered. The partygoers have become so rarified that they are unable to lift even the New York City economy, whose unemployment rate now surpasses the national average.

    This spectacle has forced Obama to try locating his hidden populist, but dangers lurk in this shift. If he attacks Wall Street with any real ferocity, the only linchpin of the current weak recovery could crumple. An administration that has focused on finance as the essence of the economy may prove poorly suited to skewer its primary object of affection.

    Yet it may not be too late for the president to recover some of his economic mojo. Although his financial tax plan represents little more than petty cash at today’s absurd Wall Street rates, Obama’s endorsement of Paul Volcker’s more muscular reform agenda could rally Democrats while forcing Republicans into a doctrinal crisis. Some, like Sen. John McCain, may favor a policy to downsize the megabanks and limit their activities. But many others who hold up the holy grail of free markets über alles will expose themselves again as mindless corporate lackeys.

    But badmouthing the financial aristocracy is not enough. Obama also must jettison some of the lamer parts of the gentry agenda. Cap and trade, a gentry favorite that satisfies both green piety and Wall Street’s greedy desire for yet another speculative market, needs to be scrapped as a potential job-killer for many industries. Similarly, the administration needs to delay measures to impose draconian limits of greenhouse gas emissions through the Environmental Protection Agency, which could devastate large sectors of the economy, including manufacturing, agriculture and construction.

    Obama, particularly after the Copenhagen fiasco, needs to shift to more practical, job-creating conservation measures like tree-planting and reducing traffic congestion–notably by promoting telecommuting–while continuing research and development of all kinds of cleaner fuels. Measures that make America more energy-efficient and self-sufficient–without ruining the economy with ruinously high prices–would be far more saleable to the public than the current quasi-religious obsession with wind and solar.

    Obama also needs to stop his naive promotion of the chimera of “green jobs” as his signature answer to the country’s mounting employment woes. There is no way a few thousand, mostly heavily subsidized, jobs creating ever more expensive energy can turn around any economy. Just look at the economic carnage in Spain–where youth unemployment has now reached a remarkable 44%–which has bet much of its resources targeting “green” energy.

    More than anything the president needs to make the case that government can help the productive economy. This requires a scaling down of regulatory measures that are now scaring off entrepreneurs–including some aspects of health care reform–and beginning to demonstrate a direct concern for basic industries like manufacturing, agriculture and trade.

    Pivoting away from gentry liberalism will no doubt offend some of the president’s core constituencies. But if he does not do this soon, and decisively, he will find that the middle-class anger seen in Massachusetts will spread throughout the country. As a result Barack Obama, a man who would be Franklin Roosevelt and could settle on being the next Bill Clinton, will end up looking more like that sad sack of Democratic presidents, James Earl Carter.

    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. He is author of The City: A Global History. His next book, The Next Hundred Million: America in 2050, will be published by Penguin Press February 4th, 2010.

  • Phoenix, Put Aside Dreams of Gotham

    Now that Phoenix’s ascendancy has been at least momentarily suspended, its residents are no doubt wondering what comes next. One tendency is to say the city needs to grow up and become more like East Coast cities or Portland, Ore., with dense urban cores and well-developed rail transit. The other ready option is always inertia – a tendency to wait for things to come back the way they were.

    Neither approach will work in the long run. Over the coming decade, Phoenix has to recalibrate its economy into something based on more than being a second option for Californians and speculative real-estate investment. Instead, it needs to focus laserlike on economic diversity and creating good jobs.

    The model here for Phoenix is not New York or San Francisco. Phoenix can’t rival these cities for their 19th-century charm or early 20th-century infrastructure. As we would say back in New York (my hometown): fuggedaboutit.

    Instead of dreaming about Gotham, Phoenix should think more about Houston. Like the Texas megacity, Phoenix is the ultimate late 20th-century town, dependent on air-conditioning, ample freeway space and a wide-open business culture.

    A century away from becoming “quaint,” Phoenix needs to follow Houston’s example of relentless economic diversification: in Phoenix’s case, away from dependence on tourism and construction. Houston has done this by focusing beyond its core energy sector to fields like international trade, manufacturing and medical services.

    Phoenix’s opportunities may lie elsewhere but may include some of these same industries. The idea is that the region needs to heal its job problem. Only then can the real-estate market rebound on a solid basis.

    This employment focus must replace the current obsession with changing the city’s urban form. Despite the current problems, Phoenix has performed pretty well over the past decade, creating more new jobs than most Sun Belt cities, not to mention job losers like San Francisco, Chicago, Los Angeles and New York. Equally important, it still leads the nation over the past decade in net in-migration among the largest cities

    Unfortunately, some in Phoenix still suffer horribly from Manhattan envy. One prominent Phoenix consultant describes the downtown as “the glorious goose that’s laying the gilded egg” that will turn the city into a dynamic trend-setter of a new urban paradigm. Phoenix, he opined, “won’t be a place of renown till it has the Big It.” In other words, Phoenix will not be a true metropolis until it has its own Times Square, Eiffel Tower, Space Needle or other grand attraction.

    Yet in newer cities like Phoenix, the quest for the “Big It” is often delusional. In Phoenix, the vast majority of the population moved in decades after the original downtown lost its primacy. People have their own notion of what “it” is, and many times, “it” could be in a different center or in more than one center – think Scottsdale, Tempe, Mesa, the Camelback Corridor, or a host of other communities.

    The Valley’s $1.4 billion transit system carries barely 15,000 round trips daily – a microscopic proportion of the region’s trips – with the biggest traffic on weekends. Sounds more like Disneyland than New York.

    Nor does the high-end condo, art-museum, convention-center thing seem to be working so well. Too bad the extra $1.5 billion spent sprucing up the area could not have been spent more usefully for less critical things, like police and fire, or better roads and schools.

    Rather than focus on emulating the urban father figures from the past, Phoenix’s best bet lies with its best assets: being reasonably priced, professionally managed and, well, warm and lovely in December. Shedding its real-estate-obsessed cocoon, Phoenix should focus on creating jobs for both present and future residents. That’s how you can grow up and find your own way.

    This article first appeared at The Arizona Republic.

    Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His next book, The Next Hundred Million: America in 2050, will be published by Penguin Press February 4th.

    Photo: robotography

  • The Kids Will Be Alright

    America’s population growth makes it a notable outlier among the advanced industrialized countries. The country boasts a fertility rate 50% higher than that of Russia, Germany or Japan and well above that of China, Italy, Singapore, North Korea and virtually all of eastern Europe. Add to that the even greater impact of continued large-scale immigration to America from around the world. By the year 2050, the U.S. population will swell by roughly 100 million, and the country’s demographic vitality will drive its economic resilience in the coming decades.

    This places the U.S. in a radically different position from that of its historic competitors, particularly Europe and Japan, whose populations are stagnant. The contrast between the U.S. and Russia, America’s onetime primary rival for world power, is particularly dramatic. Some 30 years ago, Russia constituted the core of a vast Soviet empire that was considerably more populous than the U.S. Today, even with its energy riches, Russia’s low birth and high mortality rates suggest that its population will drop to less than one-third that of the U.S. by 2050. Russian Prime Minister Vladimir Putin has spoken of “the serious threat of turning into a decaying nation.”

    An equally dramatic and perhaps more critical demographic shift is taking place in East Asia. Over the past few decades a rapid expansion of their work force fueled the rise of the “East Asian tigers,” the great economic success stories of the late-20th and early-21st centuries. Yet that epoch is coming to an end, not only in Japan and Korea but also in China, where the one-child policy has set the stage for a rapidly aging population by mid-century.

    Within the next four decades, most of the developed countries in both Europe and East Asia will become veritable old-age homes: A third or more of their populations will be over 65, compared with only a fifth in America. Like the rest of the developed world, the U.S. will certainly have to cope with an aging population and lower population growth, but in relative terms the county will boast a youthful, dynamic demographic.

    As many other advanced countries become dominated by the elderly, the U.S. will have the benefit of a millennial baby boom as the “echo boomers” start having offspring in large numbers later in this decade. This next surge in growth may be delayed if tough economic times continue, but over time the rise in births will add to the work force, boost consumer spending and allow for new creative inputs.

    The differing demographic trajectories create a diverse set of issues for 21st-century America than those facing its rivals. The key challenges the European Union, Japan and Korea will contend with in the coming decades involve coping with a rapidly aging population, filling labor shortages and finding ways to invest in growing economies. In contrast, the U.S.’s greatest priority will be to create opportunities for its ever-expanding population. The New America Foundation estimates the country needs to add more than 125,000 jobs a month simply to keep pace with population growth in 2010. What the U.S. does with its “demographic dividend”—that is, its relatively young working-age population—will largely depend on whether the private sector can generate the incomes among the young to meet the needs of a larger aging population.

    Entrepreneurialism and America’s flexible business culture—including the harnessing of entrepreneurial skills of aging boomers—will prove critical to meeting this challenge. Many of the individuals starting new firms will be those who have recently left or been laid off by bigger companies, particularly during a severe economic downturn. Whether they form a new bank, energy company or design firm, they will do it more efficiently—with less overhead, more efficient use of the Internet and less emphasis on pretentious office settings.

    “People are watching their companies go under. Therefore you get three vice presidents who get laid off but know their business,” says Texas entrepreneur Charlie Wilson. “They start a new company somewhere cheap that is more efficient and streamlined. These are the new companies that will survive and grow the next economy.”

    It is here—at the grassroots level—that you can best glimpse the essential sources of American resiliency. American society draws most of its adaptive power not from its elite precincts but through the efforts of communities, churches, entrepreneurs and families.

    You can see this in the resurgence of once-declining Great Plains cities like Fargo, N.D., where high-tech now joins agriculture and manufacturing to form one of the country’s strongest local economies. Or you can visit the emerging immigrant hotbeds, such as the San Gabriel Valley east of Los Angeles or the Sugarland area, just west of Houston, with their plethora of new churches, temples, companies and ethnic shopping malls.

    Immigrants represent a critical component of our next wave of new dynamism. Between 1990 and 2005, immigrants started one quarter of all venture-backed public companies. Large American firms are also increasingly led by people with roots in foreign countries, including 14 of the CEOs of the 2007 Fortune 100.

    But much of the energy will come from more obscure enterprises. Recent newcomers have already distinguished themselves as entrepreneurs, forming businesses from street-level bodegas to the most sophisticated technology start-ups.

    What drives immigrants is their optimism in America’s future. California developer Dr. Alethea Hsu, in explaining why she opened a new Asian-oriented shopping center in Orange County, cited the entrepreneurial energy of both affluent and working class immigrants which, she said, will allow them to thrive through the recession and beyond. “We are leased up, and we think the supply of shopping still is not enough,” Ms. Hsu said in early 2009. “We feel great trust in the future.”

    This entrepreneurial urge also extends beyond the immigrant community. In 2008, 28% of Americans said they had considered starting a business, more than twice the rate for French or Germans. Self-employment, particularly among younger workers, has been growing at twice the rate as in the mid-1990s. In the most recent Legatum Prosperity Index, the U.S. ranked at the top among all countries in terms of entrepreneurship and innovation.

    Most important of all will likely be the rise of the millennial generation—a group of Americans who will start reaching their prime earning years late in the next decade. Surveys identify them as strongly family- and community-oriented. The millennials will be America’s new entrepreneurs, workers and consumers in the coming decades. They will provide the kind of resource our major competitors are destined to run short on.

    The millennials also will help shape an increasingly culturally diverse America which by 2050 will be roughly half made up of ethnic minorities. This emerging post-ethnic future contrasts dramatically with the ethnic politics common among the nation’s chief global rivals. Even famously politically correct nations as Sweden, Denmark and the Netherlands have turned against immigration. Switzerland just banned the construction of minarets, while France is considering banning some forms of Islamic garb.

    Our prime Asian rivals—China, Japan, and Korea—remain even more culturally resistant to diversity. Chinese xenophobia, in particular, is deeply entrenched, notes Martin Jacques, author of “When China Rules the World.” A Chinese world superpower would be both racially homogenous and far from tolerant of newcomers. Recently the appearance of a mixed-race Shanghai girl on a national talent show sparked a surge of racist invective.

    The very diversity of the emerging America makes many wonder what will hold the country together. Ultimately, this unique society will find its binding principle in the notions that have long differentiated it from the rest of world: a common belief system, a sense of a shared destiny and an aspirational culture.

    As the British writer G. K. Chesterton once put it, the U.S. is “the only nation…that is founded on a creed.” This faith is not, and was not initially meant to be, explicitly religious; rather, it is a fundamentally spiritual idea of a national raison d’être.

    Of course, this optimistic scenario depends on intelligent and energetic actions by central and local governments, as well as community organizations. But the road to the American future will be primarily laid not by the central state but by families, individuals and communities. During the industrial age Ralph Waldo Emerson once observed, “The age has an engine, but no engineer.” Much the same may be said in the coming decades.

    This article first appeared at The Wall Street Journal.

    Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His next book, The Next Hundred Million: America in 2050, will be published by Penguin Press February 4th.

    Photo: jcolman

  • Florida: From Hard Times in the Sunnier Climes

    By Richard Reep

    Florida’s era of hard times continues. Last week we held a “Jobs Summit ” here in Orlando but heard little but self-congratulation by politicians like Governor Charlie Crist. He praised the Legislature’s budget cuts but had little to claim when it came to reviving the economy.

    The basic reality is this: Florida is not only troubled, but in danger of falling further behind. For example, Suntech China, a solar cell manufacturer, recently worked with the State of Florida to build a solar cell manufacturing plant – in Arizona. Thanks to Florida’s unconvincing efforts, this employer decided to call Arizona its new home.

    The television and movie industry is rapidly expanding out of California into states like New York, Louisiana and New Mexico, thanks to incentives by these states to attract film and TV producers. Florida, with MGM, Universal Studios, Full Sail, and other venues, remains stagnant in this industry.

    While Central Florida is one of the country’s top ten “super regions” of population clusters, it consistently fails to get on the national stage regarding transportation, employment, and return on its federal tax money. For every dollar of income tax sent by Central Florida citizens each year, far less than a dollar comes back in terms of federal spending. Other states, like New Mexico and Alaska, receive our portion of that dollar.

    Publicly funded capital improvement projects, such as Nemours Hospital, continue to be awarded to out-of-state companies, leaving companies here in Florida, already reeling from the collapse of the real estate bubble, in even worse shape.

    Florida, which has little onshore energy resources such as oil or gas, has offshore energy resources that could pump billions of dollars into its coffers. Instead the riches of the Gulf are being exploited by Texas, Louisana, and Alabama.

    Florida, the “Sunshine State,” with vast solar and agricultural potential, has no renewable energy policy. Instead, biofuel and solar research leadership seems headed to Michigan, California and other states.

    Florida has yet to create a policy of sustainability at a statewide level. Instead, the state relies on growth, tourism, and agriculture for employment, hardly a sustainable policy given the catastrophe of 2009.

    While statewide unemployment is over 11%, labeled “Great Recession” by the press, those in the design and construction industry face unemployment estimates between 25% and 33%, levels matching that of the Great Depression.

    Nor are politics in our favor, even though Florida, reversing its generally conservative past, cast its lot with Obama in 2008. But now the promises of Transportation Secretary Ray LaHood in return for the State’s funding of commuter rail seem to be largely forsaken. During the Jobs summit, Obama’s railroad czar Joseph Szabo assured Florida that its priority would be yielded to Illinois. High-speed rail in Florida is unlikely in our lifetime. Chicago is simply more important than Orlando in today’s politics.

    Clearly Florida is not yet a basket case. With the right help from Tallahassee, Florida can reinvent itself and take advantage of the following natural assets:

    Sunshine still can bring talent and jobs. Sure, we are behind right now, but sunshine brought jobs before WW2 when Florida was ahead in aviation training. The mild climate is far more forgiving on student pilots than places where harsh winters ground light aircraft.

    Suntech should serve as Florida’s Pearl Harbor. Sure, we lost one solar cell manufacturer, but that technology is barely efficient enough to be viable. Florida could take advantage of this failure to revamp its poor growth management process, which was the reason for the failure to begin with, and actively seek out the best candidate for research and development of photovoltaic technology that would compete with Suntech and win.

    Deregulate Power Generation: The Sunshine State should be a net energy producer, not consumer. We could build a conduit to supply energy, through solar fields, up into the Southeast, as well as down into the Caribbean. There is a rather large island in need of vast amounts of clean power 90 miles away that will need this someday soon.

    Agricultural jobs: The statewide emergency declared as a result of the freeze should be a wake-up call to assist agriculture with some new ideas. Rather than sell dead orange groves out to developers, Florida should assist farmers to convert a portion of cropland to power generation, using solar collectors, photovoltaics, and biofuel crops.

    Media: This is a no-brainer for jobs. The movie industry grew in California because of the climate but is unionized and regulated to death. It’s time for Florida to compete. The next wave of entertainment culture is interactive virtual reality anyway, and the center of this activity has yet to be established, although there is an emerging concentration of firms like Raytheon doing research here. Florida could become a virtual reality technopole if it attracts the right players and provides the right resources.

    Transportation and the National Stage: For too long, Florida’s congressional delegation seems to have labored in the background, and Florida sends too few effective people to Washington. As a state made up of people escaping hard reality up north, we seem to have taken our “live and let live” beach culture too far and it has cost us credibility, capital, and clout. It’s time to reverse this trend and get passionate about our worth as a state and our contribution to America in items that matter. As a destination, Florida must rank much higher than Illinois for travel, and high speed rail should be awarded based on need rather than political favoritism.

    Meanwhile, growth and tourism will come back. They always do. And Florida, instead of losing designers to its competition, could find ways to retain them for the next generation of entertainment and leisure destinations. Housing, presently overbuilt, shouldn’t be ignored, but Florida has much to fix in terms of the quality of housing. Public/private partnerships to increase quality of life over quantity are necessary to make housing attractive and affordable and create quality, desirable communities for the 21st century.

    Florida is truly at a crossroads. For the last hundred and sixty-five years it relied on agriculture, growth, and tourism, but these narrow economic bands perpetuate cyclical booms and busts. Fundamental change can occur if the state’s leadership declares war on business as usual. The state needs to get nimbler to stay competitive when the economy does return. For those who want to stick it out and see Florida through this economic transition, it is imperative that the leadership respond now not just with words, but with actions that effect true, deep, and meaningful change.

    Richard Reep is an Architect and artist living in Winter Park, Florida. His practice has centered around hospitality-driven mixed use, and has contributed in various capacities to urban mixed-use projects, both nationally and internationally, for the last 25 years.

  • The War Against Suburbia

    A year into the Obama administration, America’s dominant geography, suburbia, is now in open revolt against an urban-centric regime that many perceive threatens their way of life, values, and economic future. Scott Brown’s huge upset victory by 5 percent in Massachusetts, which supported Obama by 26 percentage points in 2008, largely was propelled by a wave of support from middle-income suburbs all around Boston. The contrast with 2008 could not be plainer.

    Browns’s triumph followed similar wins by Republican gubernatorial contenders last November in Virginia and New Jersey. In those races suburban voters in places like Middlesex County, New Jersey and Loudoun County, Virginia—which had supported President Obama just a year earlier—deserted the Democats in droves. Also in November, voters in Nassau County, New York upset Nassau County Executive Thomas Suozzi, an attractive Democrat who had carefully cultivated suburban voters.

    The lesson here is that political movements ignore suburbanites at their peril. For the better part of a century, Americans have been voting with their feet, moving inexorably away from the central cities and towards the suburban periphery. Today a solid majority of Americans live in suburbs and exurbs, more than countryside residents and urbanites combined.

    As a result, suburban voters have become the critical determinants of our national politics, culture, and economy. The rise of the Republican majority after 1966 was largely a suburban phenomenon. When Democrats have resurged—as they did under Bill Clinton and again in 2006 and 2008—it was when they came close to splitting the suburban vote.

    But now, once again, things have changed. For the first time in memory, the suburbs are under a conscious and sustained attack from Washington. Little that the administration has pushed—from the Wall Street bailouts to the proposed “cap and trade” policies—offers much to predominately middle-income oriented suburbanites and instead appears to have worked to alienate them.

    And then there are the policies that seem targeted against suburbs. In everything from land use and transportation to “green” energy policy, the Obama administration has been pushing an agenda that seeks to move Americans out of their preferred suburban locales and into the dense, transit-dependent locales they have eschewed for generations.

    As in so many areas, this stance reflects the surprising power of the party’s urban core and the “green” lobby associated with it. Yet, from a political point of view, the anti-suburban stance seems odd given that Democrats’ recent electoral ascendency stemmed in great part from gains among suburbanites. Certainly this is an overt stance that neither Bill nor Hillary Clinton would likely have countenanced.

    Whenever possible, the Clintons expressed empathy with suburban and small-town voters. In contrast, the Obama administration seems almost willfully city-centric. Few top appointees have come from either red states or suburbs; the top echelons of the administration draw almost completely on big city urbanites—most notably from Chicago, New York, Los Angeles, and San Francisco. They sometimes don’t even seem to understand why people move to suburbs.

    Many Obama appointees—such as at the Departments of Transportation and of Housing and Urban Development (HUD) and at the Environmental Protection Agency (EPA)—favor a policy agenda that would drive more Americans to live in central cities. And the president himself seems to embrace this approach, declaring in February that “the days of building sprawl” were, in his words, “over.”

    Not surprisingly, belief in “smart growth,” a policy that seeks to force densification of communities and returning people to core cities, animates many top administration officials. This includes both HUD Secretary Shaun Donovan and Undersecretary Ron Sims, Transportation undersecretary for policy Roy Kienitz, and the EPA’s John Frece.

    Transportation Secretary Ray LaHood revealed the new ideology when he famously declared the administration’s intention to “coerce” Americans out of their cars and into transit. In Congress, the president’s allies, including Minnesota Congressman James Oberstar, have advocated shifting a larger chunk of gas tax funds collected from drivers to rail and other transit.

    In addition, the president’s stimulus—with its $8 billion allocation for high-speed rail and proposed giant increases in mass transit—offers little to anyone who lives outside a handful of large metropolitan cores. Economics writer Robert Samuelson, among others, has denounced the high-speed rail idea as “a boondoggle” not well-suited to a huge, multi-centered country like the United States. Green job schemes also seem more suited to boost employment for university researchers and inner-city residents than middle-income suburbanites.

    Suburbanites may not yet be conscious of the anti-suburban stance of the Obama team, but perhaps they can read the body language. Administration officials have also started handing out $300 million stimulus-funded grants to cities that follow “smart growth principles.” Grants for cities to adopt “sustainability” oriented development will reward those communities with the proper planning orientation. There is precious little that will benefit suburbanites, such as improved roads or investment in other basic infrastructure.

    But ultimately it will be sticks and not carrots that planners hope to use to drive de-suburbanization. Perhaps the most significant will be new draconian controls over land use. Administration officials, particularly from the EPA, participated in the drafting of the recent “Moving Cooler” report, which suggested such policies as charging tolls on the Interstate Highway System, charging people to park in front of their homes, and steering some 90 percent of all future development into the most dense portions of already existing urban development.

    Of course, such policies have little or no chance of being passed by Congress. Too many representatives come from suburban or rural districts to back policies that would penalize a population that uses automobiles for upwards of 98 percent of their transportation and account for 95 percent of all work trips.

    But the president’s cadres may find other ways to impose their agenda. New controls, for example, may be enacted through the courts and regulatory action. There is already precedence for this: As EPA director under Clinton, current climate czar Carole Browner threatened to block federal funds for the Atlanta region due to their lack of compliance with clear air rules.

    Such threats will become more commonplace as regulating greenhouse gases fall under administrative scrutiny. As can already be seen in California, regulators can use the threat of climate change as a rationale to stop funding—and permitting—for even well-conceived residential, commercial, or industrial projects construed as likely to generate excess greenhouse gases.

    These efforts will be supported by an elaborate coalition of new urbanist and environmental groups. At the same time, a powerful urban land interest, including many close to the Democratic Party, would also support steps that thwart suburban growth and give them a near monopoly on future development over the coming decades.

    Glimpse the Future

    One can glimpse this future by observing what takes place in most European countries, including the United Kingdom, where land use is controlled from the center. For decades options for new development have been sharply circumscribed, with mandates for ever-smaller lots and smaller homes more the norm for single-family residences.

    In Britain the dominant planning model is widely known as “cramming,” meaning forced densification into smaller geographic areas. Over the past generation, this has spurred a rapid shrinking of house sizes. Today the average new British “hobbit” house, although quite expensive, covers barely 800 square feet, roughly one-third that of the average American residence. Even in quite distant suburbia many of the features widely enjoyed here—sizable backyards, spare bedrooms, home office space—are disappearing.

    But these suburban hobbits will be living large compared to the sardines who would be forced to move into inner cities. In London, already a densely packed city, planners are calling for denser apartment blocks and congested neighborhoods.

    This top-driven scenario may be playing soon in America. Following the proposed edicts of “Moving Cooler,” the urban option increasingly would become almost the only choice other than the countryside. Unlike their baby boomer parents, the next generation would have few affordable choices in comfortable, low- and medium-density suburbs and single-family homes.

    Ownership of a single-family home would become increasingly the province only of the highly affluent or those living on the fringes of second-tier American cities. Due to the very high costs of construction for multi-family apartments in inner cities, most prospective homeowners would also be forced to remain renters. Although widely hailed as “progressive,” these policies would herald a return to the kind of crowded renter-dominated metropolis that existed prior to the Second World War.

    Are Suburbs Doomed?

    The anti-suburban impulse is nothing new. Suburbs have rarely been popular among academics, planners, and the punditry. The suburbanite displeased “the professional planner and the intellectual defender of cosmopolitan culture,” noted sociologist Herbert Gans. The 1960s counterculture expanded this critique, viewing suburbia as one of many “tasteless travesties of mass society,” along with fast and processed food, plastics, and large cars. Suburban life represented the opposite of the cosmopolitan urban scene; one critic termed it “vulgaria.”

    Liberals also castigated suburbs as the racist spawn of “white flight.” But more recently, environmental causes—particularly greenhouse gas emissions as well as dire warning about the prospects for “peak oil”—now drive much of the argument against suburbanization.

    The housing crash that began in 2007 added grist to the contention that the age of suburban growth has come to an end. To be sure, the early phases of the subprime mortgage bust were heavily concentrated in newer developments in the outer fringes. In part due to rising home prices, a disproportionate number of new buyers were forced to resort to sub-prime and other unconventional mortgages.

    The outer suburban distress attracted much media attention and delighted many who had long detested suburbs. One leading new urbanist, Chris Leinberger, actually described suburban sprawl as “the root cause of the financial crisis.” Leinberger and other critics have described suburbia as the home of the nation’s future “slums.” The favorite images have included McMansions being taken over by impoverished gang-bangers and other undesirables once associated with the now pristine inner city.

    Others portray future suburbs as serving at best as backwaters in a society dominated by urbanites. In contrast to a brave new era for “the gospel of urbanism,” the suburbs are expected to contract and even wither away. According to planner Arthur C. Nelson’s estimate, by 2025 the United States will have a “likely surplus of 22 million large lot homes”—that is, residences on more than one sixth of an acre.

    City boosters, however, largely ignore the real-estate crisis impact on urban condo markets throughout the country. Like the new developments on the fringe, the much hyped apartment complexes in central cities such as New York, Miami, Los Angeles, Chicago, and Denver came on line precisely as the housing market crashed, with similar devastating effects. Many remain unoccupied and others have been converted from high-end condos to more modest rentals.

    Yet fundamentally the attack on suburbia has less to do with market trends or the environment than with a deep-seated desire to change the way Americans live. For years urban boosters have proposed that more Americans should reside in what they deemed “more livable,” denser, transit-oriented communities for their own good. One recent example, David Owens’ Green Metropolis, supports the notion that Americans should be encouraged to embrace “extreme compactness”—using Manhattan as the model.

    Convinced Manhattanization is our future, some “progressives” are already postulating what to do with the remnants of our future abandoned. Grist, for example, recently held a competition about what to do with dying suburbs that included ideas such as turning them into farms, bio-fuel generators, and water treatment plants.

    What Do the Suburbanites Want?

    In their assessments, few density advocates bother to consider whether most suburbanites would like to give up their leafy backyards for dense apartment blocks. Many urban boosters simply could not believe that, once given an urban option, anyone would choose to live in suburbia.

    Jane Jacobs, for example, believed that “suburbs must be a difficult place to raise children.” Yet had Jacobs paid as much attention to suburbs as she did to her beloved Greenwich Village, she would have discovered that they possess their own considerable appeal, most particularly for people with children. “If suburban life is undesirable,” noted Gans in 1969, “the suburbanites themselves seem blissfully unaware of it.”

    Contrary to much of the current media hype, most Americans continue to prefer suburban living. Indeed for four decades, according to numerous surveys, the portion of the population that prefers to live in a big city has consistently been in the 10 to 20 percent range, while roughly 50 percent or more opt for suburbs or exurbs. The reasons? The simple desire for privacy, quiet, safety, good schools, and closer-knit communities. The single-family house, detested by many urbanists, also exercises a considerable pull. Surveys by the National Association of Realtors and the National Association of Home Builders find that some 83 percent of potential buyers prefer this kind of dwelling over a townhouse or apartment.

    In other words, suburbs have expanded because people like them. A 2008 Pew study revealed that suburbanites displayed the highest degree of satisfaction with where they lived compared to those who lived in cities, small towns, and the countryside. This contradicts another of the great urban legends of the 20th century—espoused by urbanists, planning professors, and pundits and portrayed in Hollywood movies—that suburbanites are alienated, autonomous individuals, while city dwellers have a deep sense of belonging and connection to their neighborhoods.

    Indeed on virtually every measurement—from jobs and environment to families—suburban residents express a stronger sense of identity and civic involvement with their communities than those living in cities. One recent University of California at Irvine study found that density does not, as is often assumed, increase social contact between neighbors or raise overall social involvement. For every 10 percent reduction in density, the chances of people talking to their neighbors increases by 10 percent, and their likelihood of belonging to a local club by 15 percent.

    These preferences have helped make suburbanization the predominant trend in virtually every region of the country. Even in Portland, Oregon, a city renowned for its urban-oriented policy, barely 10 percent of all population growth this decade has occurred within the city limits, while more than 90 percent has taken place in the suburbs over the past decade. Ironically, one contributing factor has been the demands of urbanites themselves, who want to preserve historic structures and maintain relatively modest densities in their neighborhoods.

    Multicultural Flight

    Perhaps nothing reflects the universal appeal of suburban lifestyles more than its growing ethnic diversity. In 1970 nearly 95 percent of suburbanites were white. Today many of these same communities have emerged as the new melting pots of American society. Along with immigrants, African-Americans have moved to the suburbs in huge numbers: between 1970 and 2009, the proportion of African-Americans living in the periphery grew from less than one-sixth to 40 percent.

    Today minorities constitute over 27 percent of the nation’s suburbanites. In fast-growing Gwinett County outside Atlanta, minorities made up less than 10 percent of the population in 1980; by 2006 the county was on the verge of becoming “majority minority.” In greater Washington, D.C., the Northeast’s most dynamic region in economic and demographic terms, 87 percent of foreign migrants live in the suburbs, while less than 13 percent live in the district, according to a 2001 Brookings Institution study.

    Perhaps most intriguingly, this diversity is itself diverse, including not only African-Americans but also Latinos and Asians. Suburban areas such as Fort Bend county, Texas, and the city of Walnut, in the San Gabriel Valley east of Los Angeles, already have among the most diverse populations in the nation. And this is not merely a California phenomenon: Aurora (outside Denver), Bellevue (the Seattle suburb), and Blaine (outside Minneapolis) are becoming ever-more diverse even as the nearby city centers become less so. By 2000 well over half of mixed-race households were in the suburbs, a percentage that continues to grow.

    Today the most likely locale for America’s new ethnic shopping centers, Hindu temples, and new mosques are not in the teeming cities but in the outer suburbs of Los Angeles, New York, and Houston. “If a multiethnic society is working out in America,” suggests California demographer James Allen, “it will be worked out in [these] places  . . . The future of America is in the suburbs.”

    A War Not Worth Fighting

    If most Americans clearly prefer suburbs then why would our elected representatives choose to pick a fight with them? Perhaps the most widely used explanation lies with densification as a means of reducing greenhouse gases. But this rationale itself seems flawed, and could reflect more long-standing prejudice than proven science.

    For example, a recent study by the National Academy of Sciences found that a nationally imposed densification policy would at best cut greenhouse gas emissions between less than 1 and 11 percent by 2050. Other research suggests that, by some measurements, low-density development can use less energy than denser urban forms.

    Although automobile commuting now consumes more energy resources than well-traveled traditional urban rail systems, the future generation of low-mileage cars may prove more efficient than often underutilized rail systems that are now seen as critical elements of fighting climate change. A public system running at low capacity—commonplace in many regions—may actually produce more emissions than the coming generation of personal vehicles.

    Moreover, tall buildings may not be as green as some advocates suggest. Recent studies out of Australia show that townhouses, small condos, and even single-family homes generate far less heat per capita than the supposedly environmentally superior residential towers, particularly when one takes into account the cost of heating common areas and the highly consumptive lifestyle of affluent urbanites (with their country homes, vacations, and frequent flying). In terms of energy conservation, the easiest and least expensive option may be to retrofit single-family houses and wood-shaded townhouses.

    Two- or three-story homes or townhouses often require only double-paned windows and natural shading to reduce their energy consumption; one Los Angeles study found that white roofs and shade trees can reduce suburban air conditioning by 18 percent. Such structures are particularly ideal for using the heat- and water-saving elements of landscaping: after all, a nice maple can cool a two-story house more efficiently than it can a ten-story apartment.

    Of course, density advocates can and do produce their own studies to justify their agenda. But there seems enough reasonable doubt to focus on more efficient, and less intrusive, ways to create greener communities by improving energy efficiency of automobiles and changing the way suburbs fit into metropolitan systems.

    Turning Deadwood into Greenurbia

    The “green” assault on suburbia also largely ignores changes already taking place across the suburban landscape. In a historical context, the latest suburban “sprawl” may be compared to Deadwood. That rough-and-ready mining town on the Dakota frontier was developed quickly for the narrow purpose of being close to a vein of gold. But over time these towns developed respectable shopping streets, theaters, and other community institutions.

    One change already evident can be seen in commuting patterns. Density advocates and the media often characterize suburbanites as people who generally take long commutes to work compared to the shorter rides enjoyed by city-dwellers. But with the continuing dispersion of work to the suburbs over the past two decades, suburban work locations actually enjoyed shorter commutes than their inner city counterparts in virtually all the largest metropolitan areas.

    This is true even in New York. Although Manhattanites enjoy short commutes and can even walk to work, most people who live in New York City and work in Manhattan suffer among the longest commutes in the nation. In fact, residents of Queens and Staten Island spend the most time getting to work of all metropolitan counties. Residents in suburbs and particularly exurbs actually endure generally shorter commutes, in large part because of less congestion and closer proximity to employment.

    Such pairing of jobs and housing will shape the suburban future and represents among the easiest ways to cut transportation-related emissions. Even more promising has been the continuing rise in home-based employment. According to Forrester Research, roughly 34 million Americans now commute at least part time from home; by 2016 these numbers are predicted to swell upwards to 63 million.

    Oddly, despite these tremendous potential environmental benefits, the shift toward cyberspace has elicited little support from smart-growth advocates. Indeed most reports on density and greenhouse gases virtually ignore the consideration of telecommuting and dispersed work.

    One reason may be that telecommuting breaks with the prevailing planning and green narratives by making dispersion more feasible. The ability to work full time or part time from home, notes one planning expert, expands metropolitan “commuter sheds” to areas well outside their traditional limits. In exchange for a rural or exurban lifestyle, this new commuter—who may go in to “work” only one or two days a week—will endure the periodic extra long trip to the office.

    Yet although it may offend planning sensibilities, the potential energy savings—particularly in vehicle miles traveled—could be enormous. Telecommuters drive less, naturally; on telecommuting days, average vehicle miles are between 53 percent and 77 percent lower. Overall a 10 percent increase in telecommuting over the next decade will reduce 45 million tons of greenhouse gases, while also dramatically cutting office construction and energy use. Only an almost impossibly large shift to mass transit could produce comparable savings.

    Ultimately, technology will undermine much of the green case against suburbia. If we really want to bring about a greener era, focusing attention on low-density enclaves would bring change that conforms to the preferences of the vast majority of people.

    Think Twice Before You Act

    Ultimately, the war against suburbia reflects a radical new vision of American life which, in the name of community and green values, would reverse the democratizing of the landscape that has characterized much of the past 50 years. It would replace a political economy based on individual aspiration and association in small communities, with a more highly organized, bureaucratic, and hierarchical form of social organization.

    In some ways we could say forced densification could augur in a kind of new feudalism, where questions of land ownership and decision making would be shifted away from citizens, neighbors, or markets, and left in the hands of self-appointed “betters.” This seems strange for an administration—and a party—whose raison d’être ostensibly has been to widen opportunities rather than constrict them.

    Indeed it is one of the oddest aspects of contemporary “progressive” thought that it seeks to undermine even modest middle class aspirations such as living in a quiet neighborhood or a single-family house. This does not seem a winning way to build political support across a broad spectrum of the populace.

    Of course suburbia is not and will not be the option for everyone. There will continue to be a significant, perhaps even growing, segment of the population which opts for a dense urban lifestyle or, for that matter, to live further in the countryside. But unless we see a radical change in human behavior and social organization, the majority will likely settle for a suburban or exurban existence.

    Given these realities, it seems more practical not to work against such aspirations but instead to evolve intelligent policies that would reconcile them with our long-term environmental needs. Suburbanites like their suburbs but would also like to find a way to make them greener as well as more economically and socially viable. Right now neither party has developed such an agenda, and so the suburbs, now clearly leaning right, remain up for grabs. To win suburbanites over, politicians first have to respect the basic preferences while offering a realistic program for improvement. This remains a key to building a sustainable electoral majority, not just for the next election, but for the decades to come.

    This article first appeared at The American.

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