New Geography

Category: Economics

  • The Next Global Financial Crisis: Public Debt

    The cloud of the global financial meltdown has not even cleared, yet another crisis of massive proportions looms on the horizon: global sovereign (public) debt.

    This crisis, like so many others, has its root in the free flow of credit from the preceding economic boom years. The market prices of assets were rising steadily. Rising valuations, especially where they were based on improving revenues from robust economic activity, led to rising income streams for governments. This encouraged governments to borrow more, perhaps often to expand services – and the bureaucracy required to offer services – although sometimes to improve infrastructure.

    At the same time, rising market prices for financial assets encouraged more savers and investors into the market. That led to an increasing supply of investable funds, which drove demand for sovereign and municipal debt (in addition to the mortgage-backed securities). This process, driven by the financial services industry instead of the real economy, is eerily similar to the driving forces behind the “subprime crisis.” The demand for public offerings pulled more debt issuance out of borrowers with seemingly little concern for repayment: the financial sector gains its profits from issuance fees, trading fees, underwriting fees, etc. As in the case of mortgages, it will be those who buy and hold the debt, along with the borrowers, who will suffer the consequences.

    Certainly, emerging nations took advantage of the depth of rich nation capital markets to increase their debt through public offerings. At the end of June 2009, only Italy, Turkey and Brazil were covered by more credit default swap contracts than JP Morgan Chase and Bank of America. In addition to those two global banks, Goldman Sachs, Morgan Stanley, Deutsche Telekom AG, France Telecom and Wells Fargo Bank all have more credit derivate coverage than the Philippines.

    Yet there is clearly a potential default problem here. Gross credit default swaps outstanding for the debt of Iceland are equal to 66 percent of GDP, about 20 percent of GDP for Hungary and the Philippines and around 18 percent for Latvia, Portugal, Panama and Bulgaria. If these countries default on their debt, those global banks who sell credit derivatives will be making enormous payments – whether or not the defaulting countries receive any support or bailouts from international donor organizations (like World Bank or International Monetary Fund).

    The table below shows the GDP for the countries named in the most credit default swap contracts (as most recently reported to Depository Trust and Clearing Corporation). For each sovereign (country, state or city), we show the value of their public debt both as a figure and as a percent of GDP. The telling factor here is that the “financial markets,” if they are to be believed, judge these entities as more likely to experience “a credit event” than others. A credit event, as we learned when the AIG saga unraveled can be anything from a decline in the market price of debt to an outright default on payments.

    Sovereigns named in most credit default protection*
    Sovereign Entity  GDP (2008)  Share World GDP (est) Public Debt (current) Debt % GDP
    JAPAN  $     4,348,000,000,000 8.6%  $  7,408,992,000,000 170.4%
    REPUBLIC OF ITALY  $     1,821,000,000,000 3.4%  $  1,888,377,000,000 103.7%
    HELLENIC REPUBLIC (Greece)  $        343,600,000,000 0.4%  $      309,583,600,000 90.1%
    KINGDOM OF BELGIUM  $        390,500,000,000 0.6%  $      315,524,000,000 80.8%
    STATE OF ISRAEL  $        200,700,000,000 0.4%  $      151,929,900,000 75.7%
    REPUBLIC OF HUNGARY  $        205,700,000,000 0.3%  $      151,806,600,000 73.8%
    FRENCH REPUBLIC  $     2,097,000,000,000 3.8%  $  1,404,990,000,000 67.0%
    PORTUGUESE REPUBLIC  $        237,300,000,000 0.4%  $      152,346,600,000 64.2%
    FEDERAL REPUBLIC OF GERMANY  $     2,863,000,000,000 4.7%  $  1,792,238,000,000 62.6%
    UNITED STATES OF AMERICA  $   14,290,000,000,000 21.4%  $  8,688,320,000,000 60.8%
    REPUBLIC OF AUSTRIA  $        325,000,000,000 0.5%  $      191,100,000,000 58.8%
    REPUBLIC OF THE PHILIPPINES  $        320,600,000,000 0.5%  $      181,139,000,000 56.5%
    KINGDOM OF NORWAY  $        256,500,000,000 0.3%  $      133,380,000,000 52.0%
    ARGENTINE REPUBLIC  $        575,600,000,000 0.8%  $      293,556,000,000 51.0%
    REPUBLIC OF CROATIA  $           73,360,000,000 0.1%  $        35,873,040,000 48.9%
    REPUBLIC OF COLOMBIA  $        399,400,000,000 0.6%  $      191,712,000,000 48.0%
    UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND  $     2,231,000,000,000 3.5%  $  1,053,032,000,000 47.2%
    REPUBLIC OF PANAMA  $           38,490,000,000 0.0%  $        17,859,360,000 46.4%
    KINGDOM OF THE NETHERLANDS  $        670,200,000,000 0.3%  $      288,186,000,000 43.0%
    MALAYSIA  $        386,600,000,000 0.3%  $      165,078,200,000 42.7%
    KINGDOM OF THAILAND  $        553,400,000,000 0.9%  $      232,428,000,000 42.0%
    REPUBLIC OF POLAND  $        667,400,000,000 0.7%  $      277,638,400,000 41.6%
    FEDERATIVE REPUBLIC OF BRAZIL  $     1,990,000,000,000 2.7%  $      809,930,000,000 40.7%
    SOCIALIST REPUBLIC OF VIETNAM  $        241,800,000,000 0.5%  $        93,334,800,000 38.6%
    KINGDOM OF SPAIN  $     1,378,000,000,000 1.8%  $      516,750,000,000 37.5%
    REPUBLIC OF TURKEY  $        906,500,000,000 1.1%  $      336,311,500,000 37.1%
    KINGDOM OF SWEDEN  $        348,600,000,000 0.6%  $      127,239,000,000 36.5%
    SLOVAK REPUBLIC  $        119,500,000,000 0.2%  $        41,825,000,000 35.0%
    REPUBLIC OF FINLAND  $        195,200,000,000 0.3%  $        64,416,000,000 33.0%
    REPUBLIC OF KOREA  $     1,278,000,000,000 1.4%  $      417,906,000,000 32.7%
    IRELAND  $        191,900,000,000 0.4%  $        60,448,500,000 31.5%
    REPUBLIC OF INDONESIA  $        915,900,000,000 1.7%  $      275,685,900,000 30.1%
    REPUBLIC OF SOUTH AFRICA  $        489,700,000,000 0.5%  $      146,420,300,000 29.9%
    CZECH REPUBLIC  $        266,300,000,000 0.5%  $        78,292,200,000 29.4%
    REPUBLIC OF PERU  $        238,900,000,000 0.2%  $        57,574,900,000 24.1%
    REPUBLIC OF ICELAND  $           12,150,000,000 0.0%  $          2,794,500,000 23.0%
    REPUBLIC OF SLOVENIA  $           59,140,000,000 0.1%  $        13,010,800,000 22.0%
    KINGDOM OF DENMARK  $        204,900,000,000 0.4%  $        44,668,200,000 21.8%
    UNITED MEXICAN STATES  $     1,559,000,000,000 1.9%  $      316,477,000,000 20.3%
    BOLIVARIAN REPUBLIC OF VENEZUELA  $        357,900,000,000 0.6%  $        62,274,600,000 17.4%
    REPUBLIC OF LATVIA  $           39,980,000,000 0.1%  $          6,796,600,000 17.0%
    REPUBLIC OF BULGARIA  $           93,780,000,000 0.2%  $        15,661,260,000 16.7%
    PEOPLE’S REPUBLIC OF CHINA  $     7,800,000,000,000 7.7%  $  1,224,600,000,000 15.7%
    ROMANIA  $        271,200,000,000 0.3%  $        38,239,200,000 14.1%
    REPUBLIC OF LITHUANIA  $           63,250,000,000 0.1%  $          7,526,750,000 11.9%
    UKRAINE  $        337,000,000,000 0.6%  $        33,700,000,000 10.0%
    REPUBLIC OF KAZAKHSTAN  $        176,900,000,000 0.3%  $        16,097,900,000 9.1%
    RUSSIAN FEDERATION  $     2,225,000,000,000 4.3%  $      151,300,000,000 6.8%
    STATE OF QATAR  $           85,350,000,000 0.2%  $          5,121,000,000 6.0%
    STATE OF NEW YORK  $     1,144,481,000,000 2.1%  $        48,500,000,000 4.2%
    STATE OF CALIFORNIA  $     1,801,762,000,000 3.4%  $        69,400,000,000 3.9%
    REPUBLIC OF CHILE  $        245,300,000,000 0.3%  $          9,321,400,000 3.8%
    REPUBLIC OF ESTONIA  $           27,720,000,000 0.1%  $          1,053,360,000 3.8%
    STATE OF FLORIDA  $        744,120,000,000 1.4%  $        24,100,000,000 3.2%
    THE CITY OF NEW YORK  $     1,123,532,000,000 2.1%  $        55,823,000,000 **
    *List from Depository Trust and Clearing Corporation. [www.dtcc.com] Dubai was also on this list, but debt and GDP data were not available.
    **NYC GDP includes entire NY-NJ-PA metropolitan statistical area; debt is for City of NY only.
    Countries in Italics have never failed to meet their debt repayment schedules (Reinhart and Rogoff 2008); Thailand and Korea received IMF assistance to avoid default in the 1990s.

    The obvious consequence is that a crisis in sovereign debt would cause problems not just within those nations, states or cities – but also among their trading and economic partners, among their lenders (banks, sovereigns or international donor organizations) as well as the global financial institutions who sold default protection through the credit derivatives markets. The financial impact would be more than anything we have seen so far: most global financial institutions received bailouts from their sovereign governments to soften or at least delay the impact of the September 2008 financial crisis. Yet, I believe the more dire consequence of a widespread sovereign debt crisis, if there is one, will be civil unrest fomented by the deterioration in governments’ critical functions that will result from their weakened financial positions.

    Policy makers will have few options available across the globe to combat this crisis. The rich world’s governments have not been able to contain their debt burdens through budgetary discipline alone. Between Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner, they’ve done everything except load the helicopter with dollar bills to finance the bailout with freshly-minted U.S. dollars.

    Policymakers are just as likely to precipitate a financial crisis as any other investor or borrower – they seem to have no prescient knowledge of the dangers associated with over-speculation, lack of solid accounting practices, balancing a budget, etc. How else do we explain their dependence on borrowing? Basic accounting principles – not to mention ideas going back at least to the biblical story of Joseph and the Pharoah – would guide users to monitor income and spending; actuarial analysis directs us to save during times of “feast” and spend the surplus during times of “famine.”

    Yet the United States government and others have already decided to monetize their financial problems at levels not seen before. I shudder to even think what sovereign default would mean to a large-country (G8, for example); however, I deem such a scenario as highly unlikely. A quick look at the table indicates the countries that have never defaulted or even rescheduled a debt payment in their history. The defaults will more likely come from spendthrift small countries, or big states like California.

    The world economy has encountered these debt situations before. But in this environment, a sovereign debt crisis would be unlike anything we have experienced in the past. Not only have financial markets become more globally integrated – with countries borrowing and lending across national borders with ease – but the use of credit derivate products has increased the chance of a default turning into a global catastrophe. These derivatives will have a multiplier effect on every sovereign debt default. We know for a fact that credit default swap contracts are written without being limited to the total value of the underlying assets. Therefore, there could be nine to fifteen times as many credit default contracts to be paid by global banks as there is debt in default.

    Today there are outstanding about $2 trillion of credit default swaps contracts on just fifty of the world’s 200 nations. These contracts could come payable under even the most modest credit event, spreading the damage globally even before debt-service payments are missed. For example, it is now known that AIG’s Financial Products Division wrote contracts that became payable when the market price of debt decreased, regardless of whether or not the borrower had missed a payment. These circumstances did not exist during any previous debt crisis, including the most recent default cycle, the emerging market debt crises of the 1980s and the 1990s. If widespread sovereign defaults happen, we can expect to see something new and potentially much more damaging.

    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.

  • Tracking Business Services: Best And Worst Cities For High-Paying Jobs

    Media coverage of America’s best jobs usually focuses on blue-collar sectors, like manufacturing, or elite ones, such as finance or technology. But if you’re seeking high-wage employment, your best bet lies in the massive “business and professional services” sector.

    This unsung division of the economy is basically a mirror of any and all productive industry. It includes everything from human resources and administration to technical and scientific positions, as well as accounting, legal and architectural firms.

    Overall there are roughly 17 million professional and business services jobs, 4 million more than manufacturing. This makes it twice as big as the finance sector and five times the size of the much-ballyhooed tech sector. While its average salary – roughly $55,000 a year – is somewhat lower than in those other elite sectors, its wages are still higher than those in all the other large sectors, like health. The sector’s $1 trillion in total pay per year accounts for nearly 20% of all wages paid in the nation; finance and tech together only account for $812 billion.

    More than that, the business and professional services sector has encompassed the fastest-growing part of the high-wage economy. Employment in lower-wage sectors like education has also grown quickly. But employment in other sectors that pay their employees well, such as technology, has remained stagnant; jobs in some, such as manufacturing, have fallen sharply. Critically, the business services sector – particularly at the better-paying end – seems to have weathered the current recession better than these other high-wage sectors.

    The crucial question remains: In what regions is this critical economic cog booming? In a new analysis with my colleagues at the Praxis Strategy Group, we examined Bureau of Labor Statistics employment data for this sector, keeping an eye on trends over both the last year and the last decade. Some of the metropolitan areas that boasted short-term growth in this sector also maintained steady employment success over the long-term, which suggests that these particular cities have sturdy economies that aren’t as prone to intense boom-bust cycles.

    At the top of our list of best places is greater Washington, D.C., and its surrounding suburbs in Virginia and Maryland. Government jobs may drive that economy, but it is the lawyers, consultants and technical services firms who harvest the richest benefits. As New York University public policy professor Mitchell Moss observes, Washington has emerged as the “real winner” in the recession – not just for public-sector workers but private-sector ones too.

    Fastest Growing Professional and Business Services Sectors
    Area Name Jobs in Sector 2009
    (thousands)    		 Sector Share of Jobs 2009
    (percent of total)    		 Growth 2008 – 2009
    (percent growth)    		 Cumulative Growth 2001 – 2009
    (percent growth)    		 2001-2009 Job Change (thousands) 2008-2009 Job Change (thousands)
    Northern Virginia, VA 355.2 27.2% 1.5% 22.4% 65.0 5.2
    Washington-Arlington-Alexandria, DC-VA-MD-WV 558.7 23.0% 0.9% 22.8% 103.6 5.1
    Austin-Round Rock, TX 112.4 14.4% 3.3% 18.7% 17.7 3.6
    Houston-Sugar Land-Baytown, TX 382.3 14.7% 0.9% 19.2% 61.5 3.2
    Virginia Beach-Norfolk-Newport News, VA-NC 106.6 14.0% 2.8% 8.0% 7.9 2.9
    Bethesda-Frederick-Rockville, MD 125.7 21.9% 2.1% 9.0% 10.4 2.6
    Wichita, KS 31.5 10.1% 3.5% 16.4% 4.4 1.1
    Chattanooga, TN-GA 25.9 10.6% 4.3% 11.8% 2.7 1.1
    Peoria, IL 23.0 12.1% 4.5% 43.2% 6.9 1.0
    Rochester, NY 61.8 11.9% 1.5% 1.9% 1.1 0.9
    Augusta-Richmond County, GA-SC 31.0 14.5% 3.0% 7.5% 2.2 0.9
    Mansfield, OH 5.1 9.1% 19.4% 4.1% 0.2 0.8
    Kennewick-Pasco-Richland, WA 20.8 22.2% 4.2% 20.2% 3.5 0.8
    St. Louis, MO-IL 195.4 14.6% 0.4% 3.9% 7.4 0.8
    Fayetteville-Springdale-Rogers, AR-MO 33.5 16.2% 2.2% 34.2% 8.5 0.7
    Macon, GA 12.1 11.9% 5.5% 31.2% 2.9 0.6
    Pittsburgh, PA 158.9 13.9% 0.4% 14.5% 20.1 0.6
    Fresno, CA 30.7 10.3% 1.9% 23.3% 5.8 0.6
    Provo-Orem, UT 23.3 12.4% 2.5% 16.7% 3.3 0.6
    Charleston-North Charleston-Summerville, SC 42.2 14.3% 1.3% 31.1% 10.0 0.5

    Over the past year, parts of northern Virginia – ground zero for the so-called “beltway bandits” who work in industries the government depends on to do its job – have enjoyed the fastest growth in business and professional services, adding over 5,200 jobs despite the current downturn.

    Other areas around the nation’s capital have also seen strong growth. The Washington D.C.-Arlington-Alexandria area, for example, came in second on our list, gaining nearly 5,100 positions, while No. 6 the Bethesda-Frederick-Rockville, Md., metro area added 2,600. In addition, yet another Virginia area – No. 5-ranked Virginia Beach-Norfolk-Newport News, a center for military-related industries – gained nearly 2,900 jobs in this sector.

    It’s far too early to thank the free-spending ways of Barack Obama’s administration for all this growth. As anyone can tell you, the Bush White House and its Republican Congress were not exactly models of fiscal restraint. Plus, Washington and Northern Virginia have seen growth in their business services sectors over the last several years, in the period stretching from 2001 to 2009. Together those two metros added over 165,000 new jobs in this critical, high-wage sector.

    Of course, you don’t have to head to Washington to find a high-paying job – although you might not be able to escape unpleasant summer weather. The other major group of business-services hot spots includes Austin, Texas, at No. 3, and Houston, at No. 4. These Lone Star local economies have continued to thrive not only during the current recession but also over the last decade.

    The others winners include farther-afield locales in Kansas, Tennessee, Illinois and New York. These areas could be gaining both from companies seeking to lower costs and from the new capabilities for remote work due to the Internet. Even though they didn’t make our list, a host of smaller communities – like Mansfield, Ohio; Provo, Utah; and Charleston, S.C. – also enjoyed significant growth in the business services sector over the past year.

    So if these are the places where this segment of the economy is growing and high-paying jobs are easier to come by, where is the opposite true? The worst cities on our list span three archetypes: Rust Belt basket cases, Sunbelt flame-outs and expensive big cities. Perhaps the toughest losses were in Michigan: Detroit and the Warren-Troy metro area suffered big setbacks both in the last year and over the last decade.

    Fastest Declining Professional and Business Services Sectors
    Area Name Jobs in Sector 2009
    (thousands)    		 Sector Share of Jobs 2009
    (percent of total)    		 Growth 2008 – 2009
    (percent growth)    		 Cumulative Growth 2001 – 2009
    (percent growth)    		 2001-2009 Job Change (thousands) 2008-2009 Job Change (thousands)
    Phoenix-Mesa-Scottsdale, AZ 289.2 16.0% -10.8% 7.9% 21.2 -35.1
    Warren-Troy-Farmington Hills, MI 202.5 18.5% -12.0% -21.2% -54.4 -27.7
    Chicago-Naperville-Joliet, IL 633.6 16.8% -4.1% -2.9% -19.0 -27.0
    Los Angeles-Long Beach-Glendale, CA 574.7 14.3% -4.2% -3.4% -20.4 -25.2
    Atlanta-Sandy Springs-Marietta, GA 390.3 16.4% -5.9% -1.3% -5.1 -24.4
    Orlando-Kissimmee, FL 170.9 16.2% -8.5% 7.7% 12.3 -16.0
    Santa Ana-Anaheim-Irvine, CA 261.9 18.0% -4.7% 4.0% 10.2 -12.8
    Minneapolis-St. Paul-Bloomington, MN-WI 253.4 14.4% -4.6% -4.6% -12.2 -12.3
    Edison-New Brunswick, NJ 164.5 16.3% -6.7% -2.6% -4.4 -11.9
    Detroit-Livonia-Dearborn, MI 108.9 14.7% -9.5% -20.9% -28.8 -11.4
    Indianapolis-Carmel, IN 120.3 13.4% -8.3% 13.6% 14.4 -10.8
    Riverside-San Bernardino-Ontario, CA 133.7 11.2% -6.5% 36.0% 35.4 -9.2
    Tampa-St. Petersburg-Clearwater, FL 223.2 18.5% -3.7% 12.3% 24.5 -8.6
    New York City, NY 595.7 15.8% -1.4% -0.8% -5.1 -8.4
    Newark-Union, NJ-PA 163.5 16.0% -4.7% -0.5% -0.8 -8.0
    Bergen-Hudson-Passaic, NJ 130.6 14.6% -5.8% -9.1% -13.0 -8.0
    Milwaukee-Waukesha-West Allis, WI 107.6 12.9% -6.6% -1.7% -1.8 -7.6
    Miami-Miami Beach-Kendall, FL 139.1 13.4% -4.7% 2.2% 3.0 -6.8
    Oakland-Fremont-Hayward, CA 158.0 15.6% -4.0% -7.1% -12.2 -6.7
    Las Vegas-Paradise, NV 108.2 12.1% -5.8% 38.1% 29.9 -6.6
    Boston-Cambridge-Quincy, MA 308.8 18.2% -2.0% -6.8% -22.5 -6.4
    Sacramento–Arden-Arcade–Roseville, CA 106.1 12.3% -5.6% -1.8% -1.9 -6.3
    Cleveland-Elyria-Mentor, OH 137.8 13.3% -4.3% -5.2% -7.6 -6.1
    Denver-Aurora-Broomfield, CO 207.0 16.9% -2.9% 4.0% 8.0 -6.1

    Consistent job losses in business services in these areas – some 54,000 in the Troy area since 2001 – reveal the clear connection between employment in business services and in the region’s fundamental auto industry. It turns out that elite services often prove dependent on basic industry. When industrial plants shut down, it’s not just blue-collar workers and company executives that suffer; as a result, these firms will use fewer lawyers, accountants, architects and technical consultants.

    A similar picture emerges in cities like Phoenix, which lost about 35,000 business-services jobs in just one year. This loss stems from the collapse of the housing bubble, which powered the rest of the regional economy. The same meltdown caused smaller but still significant reversals in one-time boomtowns like Orlando, Fla., Atlanta and Southern California’s Santa Ana region, which encompasses Orange County, where business service employment dropped by double-digit rates over the past year.

    Yet these same areas should see some recovery, perhaps more so than the traditional auto manufacturing-focused towns. Phoenix, Orlando and other Sun Belt locations – including a host of other areas in Florida – all saw increasing employment in business services over the past decade. If the economy comes back, along with a stabilization of the residential real estate market, business-services job growth will likely begin to take off again. After all, the fundamental reasons for the success of these areas, such as warm weather, lower costs and the need to serve a growing population, have not fundamentally changed.

    Perhaps most perplexing is the fate of some of the other places on our worst cities list, particularly the biggest metropolitan areas. The professional and business services sector is widely considered ideal for large, cosmopolitan centers, since lots of industries require support. But Chicago experienced a huge chunk of job losses – almost 25% – in this sector during the last year. Other big cities, including Los Angeles, Minneapolis and New York, also suffered.

    This is not a new phenomenon. These and other big cities, like Boston and San Jose, San Francisco and Oakland in California, have been shedding these types of jobs since 2001. These losses, however, have been concentrated at the lower-wage end of the business service pyramid, in areas like human resources and administration. These are the positions that companies can fill more easily and cheaply using the Internet or by hiring in less expensive outposts.

    That’s why Washington and its environs, which has seen across-the-board business growth, remain the great exception. Many business-services jobs outside the beltway appear to be becoming more nomadic, based in places where firms face lower costs and where workers can afford to live well on middle-income salaries. Even the long-term resiliency of higher-wage employment like law and accounting in traditional business hubs like New York could be at risk over time, with some jobs shifting to less expensive locales or even overseas.

    The changing nature of business services presents a boon to some communities and a challenge to others as they seek to survive and thrive in spite of the current recession. How some cities manage to grow this segment of their economies may well presage which parts of the country will thrive best during the years of recovery – and beyond.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a 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 early next year.

  • Washington, DC: The Real Winner in this Recession

    No matter how far the economy falters, there is always a winner. And no city does better when the nation is at the brink of disaster than Washington, DC. Since December 2007, when the current recession formally began, the nation has lost approximately 6 million jobs. Only two states, Alaska and North Dakota, have lost a smaller percentage of jobs than Washington, DC, which has seen a job loss of 0.6%, or 4,400. Simply put, Washington has done better in this recession than 48 of the fifty states when it comes to job performance.

    This is not the first time that Washington flourished while the rest of the nation suffered. For the first few, largely prosperous decades of the 19th Century, the district was a backwater, growing more slowly than the national average. It was widely reviled as fetid, swampy place with little in the way of commerce, industry or culture. Even its great buildings were compared to “the ruins of Roman grandeur.”

    It was only during arguably our greatest national tragedy – the Civil War – that the District of Columbia grew into an urban center, more than doubling in population from 1860 to 1870. Soldiers from the northern states flocked to the District of Columbia before going to battle, a new military force was established to guard against a Confederate attack, and the management of the war itself became a major federal enterprise. Slavery was abolished in Washington prior to emancipation, and freed slaves added to the District’s growing population.

    During the 1930s, FDR created an entirely new set of federal agencies designed to create jobs by financing projects across the country. At the same time, to prevent abuses on Wall Street, Congress created new regulatory agencies, such as the Securities and Exchange Commission, which hired droves of young accountants and lawyers unable to find work in other cities across the country.

    The Second World War and the Cold War also played to Washington’s advantage, as a vast military-industrial complex rose to the fore. So it’s not surprising that now, with the nation in the midst of its worst downturn since the Great Depression, that Washington appears about to indulge in yet another orgy of growth.

    Washington has always been a one industry town: that’s why it has an intrinsically self-absorbed monotonic culture. Everyone there depends on government for their livelihood. It is fundamentally not a city of competitive industries, but a giant taxpayer-funded office park, surrounded by museums and memorials. The great presidents: Washington, Lincoln, and Jefferson, have their own monuments, while more recent leaders have concert halls and office buildings named after them.

    Today Washington, DC appears much as the twenty-first century version of a gold mining town, even if the gold, so to speak, is coming from taxpayers as well as foreign buyers of our increasingly debased US currency. The Bush Administration kicked off this boom when it created the third largest cabinet department, the Department of Homeland Security, (by consolidating unrelated federal agencies into one super-sized department) and made it the employer of airport baggage and security inspectors across the nation. A new federal agency deserves a new headquarters, of course. DHS is now rising on the site of St. Elizabeth’s Hospital in southeast Washington DC, a pre-stimulus stimulus for the District of Columbia.

    The passage of the American Recovery and Reinvestment Act may be only slowly stimulating the nation’s economy but it is already working wonders in DC. Everyone wants a piece of the action. There is a surge in the lobbying industry, with every school board, regional transit agency and county government hiring a lobbyist to guide them through the new federal grant programs.

    Tourism may be temporarily down in DC, but the hotels are filled with local law enforcement officials, university bureaucrats, and housing advocates all trying to create jobs with federal dollars. The National Telecommunications and Information Administration and the US Department of Agriculture have just nineteen months to spend $4.7 billion on broadband communications.

    To evaluate the thousands of proposals for federal funding, expert panels will convene in Washington, DC. Where else? Communities across the country may receive grants, but the hotel and restaurant industry in the nation’s capital will also prosper from this new federal program.

    The same process will follow other Obama initiatives. Health care and climate change legislation will produce the same rounds of hearings, a growing cadre of regulators and the corps of tassel-shoed lobbyists who will try to influence them.

    The heightened emphasis on transparency in government has compelled every federal department to build sophisticated websites to engage the public, to distribute information, and to conduct the entire process of awarding grants and contracts. The demand for website designers and managers has grown so quickly that a Los Angeles-based interactive advertising agency, “Sensis,” a minority owned and operated corporation, recently opened an office in the District of Columbia just to “capitalize on the federal government’s new interest in digital communications.”

    There is one unambiguous measure that signals the growth of business activity within a city. Until recently, taxi fares in the nation’s capital were based on zones. These made it very inexpensive for members of Congress to go to and from the Capital. Today, every DC taxi has a meter and the old-fashioned zone-based system has been abolished. Both the municipal government and taxi drivers understand that there are more dollars to be made from those seeking to influence government than those who actually make the laws.

    Ben Smith of Politico.com has recently pointed out that five new Washington-based reality television shows are in the planning stages, with Bravo ready to launch “The Real Housewives of Washington, DC.” It is no accident that the entertainment industry has discovered the District of Columbia. A city that thrives in a recession may become the Fantasyland of our generation.

    Mitchell L. Moss is Henry Hart Rice Professor of Urban Policy and Planning at NYU Wagner School of Public Service.

  • Recession Analysis: When will the job market fully recover?

    No one knows this answer for sure, but the data show some interesting trends for what’s possible. This analysis takes two approaches to answer this question, including:

    • Total employment: suggests recovery in 2012
    • Employment growth rates: suggests recovery in mid-2010 … but …

    This is a work in progress. Tomorrow the future will change.

    Current status

    June 2009 was the 18th month of the current and the longest recession since 1940. There were 14.7 million unemployed, more than double two years earlier, and the most since 1940 (the previous high was 12 million in 1985). Unemployment was 9.5%, almost double two years earlier, but less than the previous high of 10.8% in 1982.

    For most of the workforce, this is the worst recession of their lifetimes, and what some are calling the “Great Recession.”

    Total employment Anaysis

    The graph below shows total nonfarm employment (blue line) and the statistical average (green line). Two additional lines were added to show the normal high/low ranges. The blue dot is the BLS total nonfarm employment projection for 2016.

    Notice that total employment in June 2009 was significantly below the normal range for the first time since 1940. In fact, we have been below this normal range for about one year.

    The next graph (below) shows the same total nonfarm employment (blue line), the statistical average (green line), and adds two possible recovery timelines – fast (black) and slow (brown) – estimated from previous recovery timelines on the graph.

    When we plot the fast and slow recovery timelines starting in July 2009 and until we reach the average, here is are the results.

    • Fast recovery => beginning of 2012
    • Slow recovery => beginning of 2018

    The requirements for a fast recovery are high. The most jobs ever created in one year was 5 million in 1984 and 1941. To recover by 2012, the US would have to add 5 million jobs per year (400,000 per month) for the next two and a half years – and this has never been done before. We’ve added jobs at 400,000 per month, but never for two and a half years in a row.

    Employment growth rates

    Employment growth is the annual rate of change between a given month and 12 months earlier. These monthly data points are plotted on the graph below, and include the employment growth (blue line), the statistical average (green line) and the recessions (red dots that cover up the blue line).

    Then we added two possible recovery timelines – fast (black) and slow (brown) – estimated from previous recovery timelines on the graph.

    When we plot the fast and slow recovery timelines starting in July 2009 and until we reach the average, here is are the results.

    • Fast recovery => middle of 2010 (read the next paragraph)
    • Slow recovery => beginning of 2014

    HOWEVER, AND THIS IS IMPORTANT, the current recession has now lasted longer than one year, and the employment growth rates only look back 12 months. This introduces a cumulative effect that has not been compensated for in this graph. This makes both recovery estimates too optimistic. Plus, even when growth rates return to the average, we will have a backlog of millions who have yet to find a job.

    Employment growth rates are a revealing trending tool with some interesting benefits:

    • This graph comes close to a “real feel.” We can tell at a glance how difficult it is to find a job.
      • When employment growth is above the green line, jobs are relatively easy to find because demand exceeds supply. A case-in-point is the late-1990s.
      • When employment growth is between the green line and zero, jobs are harder to find, even though employment is growing, because job growth is not keeping up with workforce growth.
      • When employment drops below zero, jobs are difficult to find. Supply exceeds demand.
    • Notice that the deep recessions of the 40s, 50s and early 60s recovered quickly, and shallow recessions like 1991 and 2001 recovered slowly. This may seem like good news given that we’re in a deep recession (this should recover quickly), but there’s more – deep recessions cycle quickly, going from highs to lows every 4 years (two good years followed by two bad years). By contrast, the last 6 recessions were shallow and separated by about 8 years.
    • Notice that the recessions (red dots that cover up the blue line) almost always start as soon as the blue line crosses the green line on the way down. This seems to be a much better and real time indicator than waiting for the
      NBER to formally announce the beginning of a recession – always many months after the recession has already begun. (last time it took them 11 months)
    • Notice that in almost every case, the end of a recession occurs as soon as the blue line turns back up. This too is a much better and real time indicator than waiting for the NBER to formally announce the end of a recession, months after the fact.

    The current recession appears to be slowing down significantly.

    Notice that the distance between the red dots (monthly growth rate changes) has been getting smaller in recent months. The data are hard to see, and a small piece of the graph above is blown up here on the right.

    The smaller distance between the most recent three or four red dots indicate a slowing in our decline – what some call “getting less bad.” When the red dots are spaced far apart, as they were earlier, employment was declining quickly.

    When the blue line on our employment growth rate graphs turns up, chances are high that we’ve hit the bottom. However, this has not happened yet.

    Interestingly, some forecast the end of the recession for 2009, and they could be right! It’s not the end that matters so much, it’s how long it will take to recover – there are millions of unemployed that need to get back to work, and our workforce is expanding at about 1.5 million per year.

    Post recession unemployment changes

    Between 1950 and 1984, the unemployment rate dropped immediately after the “official” end of every recession. In the last two recessions (1991 and 2001) unemployment increased by less than 1%, shown with brown circles.

    It remains to be seen what will happen to unemployment after the end of the 2009 recession. From these data, one might conclude that it will rise a maximum of 1%. However (read the Total Employment analysis at the top of this page), we are outside the normal limits of employment variation for the first time.

    The take-away

    1. This is the worst recession of a lifetime for almost everyone in the workforce
    2. We’re not at the bottom yet, but we could be close – this recession could end in 2009
    3. The most likely “fast” recovery date (to be fully recovered) is the beginning of 2012

    If you’d like to join a discussion about this page on July 21st,
    click here and sign up … it’s free.

    This report was written by Mark Hovind, President of JobBait. Mark helps six and seven figure executives find jobs by going directly to the decision-makers most likely to hire them. Mark can be reached through www.JobBait.com or by email at Mark@JobBait.com.

  • Telecommuting And The Broadband Superhighway

    The internet has become part of our nation’s mass transit system: It is a vehicle many people can use, all at once, to get to work, medical appointments, schools, libraries and elsewhere.

    Telecommuting is one means of travel the country can no longer afford to sideline. The nation’s next transportation funding legislation must promote the telecommuting option…aggressively.

    The current funding legislation, called SAFETEA-LU, is set to expire on September 30. On June 24, a House subcommittee approved a discussion draft of the new funding bill: the Surface Transportation Authorization Act of 2009. U.S. Representatives James L. Oberstar (D-MN) and John L. Mica (R-FL), Chair and Ranking Member, respectively, of the Transportation Committee are now sparring with the Obama Administration about just when Congress should focus on reauthorizing SAFETEA-LU; the lawmakers say now; the Administration says 18 months from now. Regardless of the timetable adopted, the measure the House and Senate ultimately pass must maximize the powerful benefits of internet-based travel.

    Whereas the infrastructure for cars, buses and trains consists of roads and rails, the infrastructure required for telecommuting is broadband. Fortunately for the framers of the new transportation package, the stimulus legislation already provides significant funding – over $7 billion – to expand access to broadband. The transportation legislation should provide more. It should also expressly encourage the use of that broadband to telecommute.

    Some Congressional leaders have called on their colleagues to recognize telecommuting as a full-fledged transportation mode. On May 14th, twelve members of the House wrote to both the House Transportation Committee and the House Committee on Energy and Commerce, requesting that they consider including some pro-commuter reforms as they design the nation’s new transportation and energy laws. Among their requests were initiatives to incentivize telecommuting.

    One strategy these lawmakers proposed for encouraging telework was to condition federal grants to states and localities for transportation infrastructure on their creation of bold incentives for telework. Why impose this condition? Telework limits the wear and tear on new roads and rails, as well as the demand for further construction. Thus, it protects the federal investment in such infrastructure and mitigates future costs.

    There is precedent for insisting that the recipients of federal funding for infrastructure focus on telework’s potential to reduce the need for that infrastructure. Federal law provides that executive agencies, when deciding whether to acquire buildings or other space for employee use, must consider whether needs can be met using alternative workplace arrangements such as telecommuting. Requiring state and local governments that seek federal aid for new roads to include telecommuting in their transportation plans would demonstrate the same kind of fiscal responsibility.

    Other lawmakers have introduced legislation specifically linking broadband and more conventional kinds of transportation infrastructure. Representative Anna G. Eshoo, a Democrat from California, together with Democratic Representatives Henry A. Waxman from California, Rick Boucher from Virginia and Edward J. Markey from Massachusetts, has sponsored the Broadband Conduit Deployment Act, a bill that would require new federal highway projects to include broadband conduits. Democratic Senators Amy Klobuchar from Minnesota, Blanche L. Lincoln from Arkansas and Mark R. Warner from Virginia have introduced companion legislation in the Senate.

    The proposal set forth in the two bills makes economic sense. It would be an unconscionable waste of taxpayer dollars to dig up roadways, expand and repave them and then dig them up again to lay the broadband pipes the stimulus bill made possible. If the pipes are installed while the roadways are under construction, they will be available when broadband providers are ready to get communities online.

    If passed, the Broadband Conduit Deployment Act would only strengthen the case that funding for infrastructure projects should be conditioned on state and local government efforts to facilitate telework. If, as they finance highway projects, American taxpayers also fund broadband, they should not then have to struggle to telecommute. They should be able to help contain transportation costs and, at the same time, easily make the greatest possible use of the broadband access they financed.

    What kind of steps to promote telework should states and localities be required to take if they want to qualify for federal transportation funding?

    Congress should insist that they provide telework tax incentives for both employees and employers; eliminate tax, zoning and other laws that are hostile to telework; and offer both public and private sector employers technical help in developing and implementing robust telework programs. The government grantees should be required to create such programs for their own employees. They should also be required to designate certain high traffic and high pollution days as telework days — days when employees are specifically urged to take the web to work — and to conduct public awareness campaigns about the benefits of telework.

    These benefits go beyond transportation infrastructure savings, emissions reductions, and congestion management. Telework can help businesses and government agencies reduce real estate, energy and other overhead costs and use the savings to avoid job cuts or to hire new staff. It can increase employers’ productivity by 20% or more, and enable them to sustain operations if an emergency, such as the recent swine flu outbreak, compels significant absenteeism.

    Telework enables Americans who cannot find work in their own communities – and cannot sell their homes – to look for more distant positions. It can help those still employed to lower their commuting costs and juggle competing work and family obligations. It can help older Americans who cannot afford to retire to continue working even when they no longer have the stamina for daily commuting. And it can help disabled Americans with limited mobility join or re-enter the workforce.

    When Congress finalizes its new transportation policy, it must exploit the tremendous mileage it can get from encouraging web-based travel. Conditioning funding to state and local governments on investment by those governments in pro-telework measures – and offering meaningful federal funding to promote telecommuting – is a dual strategy that would yield a greener and leaner transportation system.

    In the process, this strategy would advance crucial energy, economic, quality of life and contingency planning goals. A clear emphasis on the need for telework in the new transportation bill is essential to help the nation get to where it needs to go.

    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.

  • Who Killed California’s Economy?

    Right now California’s economy is moribund, and the prospects for a quick turnaround are not good. Unable to pay its bills, the state is issuing IOUs; its once strong credit rating has collapsed. The state that once boasted the seventh-largest gross domestic product in the world is looking less like a celebrated global innovator and more like a fiscal basket case along the lines of Argentina or Latvia.

    It took some amazing incompetence to toss this best-endowed of places down into the dustbin of history. Yet conventional wisdom views the crisis largely as a legacy of Proposition 13, which in effect capped only taxes.

    This lets too many malefactors off the hook. I covered the Proposition 13 campaign for the Washington Post and examined its aftermath up close. It passed because California was running huge surpluses at the time, even as soaring property taxes were driving people from their homes.

    Admittedly it was a crude instrument, but by limiting those property taxes Proposition 13 managed to save people’s houses. To the surprise of many prognosticators, the state government did not go out of business. It has continued to expand faster than either its income or population. Between 2003 and 2007, spending grew 31%, compared with a 5% population increase. Today the overall tax burden as percent of state income, according to the Tax Foundation, has risen to the sixth-highest in the nation.

    The media and political pundits refuse to see this gap between the state’s budget and its ability to pay as an essential issue. It is. (This is not to say structural reform is not needed. I would support, for example, reforming some of the unintended ill-effects of Proposition 13 that weakened local government and left control of the budget to Sacramento.)

    But the fundamental problem remains. California’s economy–once wondrously diverse with aerospace, high-tech, agriculture and international trade–has run aground. Burdened by taxes and ever-growing regulation, the state is routinely rated by executives as having among the worst business climates in the nation. No surprise, then, that California’s jobs engine has sputtered, and it may be heading toward 15% unemployment.

    So if we are to assign blame, let’s not start with the poor, old anti-tax activist Howard Jarvis (who helped pass Proposition 13 and passed away over 20 years ago), but with the bigger culprits behind California’s fall. Here are five contenders:

    1. Arnold Schwarzenegger

    The Terminator came to power with the support of much of the middle class and business community. But since taking office, he’s resembled not the single-minded character for which he’s famous but rather someone with multiple personalities.

    First, he played the governator, a tough guy ready to blow up the dysfunctional structure of government. He picked a street fight against all the powerful liberal interest groups. But the meathead lacked his hero Ronald Reagan’s communication skills and political focus. Defeated in a series of initiative battles, he was left bleeding the streets by those who he had once labeled “girlie men.”

    Next Arnold quickly discovered his feminine side, becoming a kinder, ultra-green terminator. He waxed poetic about California’s special mission as the earth’s guardian. While the housing bubble was filling the state coffers, he believed the delusions of his chief financial adviser, San Francisco investment banker David Crane, that California represented “ground zero for creative destruction.”

    Yet over the past few years there’s been more destruction than creation. Employment in high-tech fields has stagnated (See related story, “Best Cities For Technology Jobs“) while there have been huge setbacks in the construction, manufacturing, warehousing and agricultural sectors.

    Driven away by strict regulations, businesses take their jobs outside California even in relatively good times. Indeed, according to a recent Milken Institute report, between 2000 and 2007 California lost nearly 400,000 manufacturing jobs. All that time, industrial employment was growing in major competitive rivals like Texas and Arizona.

    With the state reeling, Arnold has decided, once again, to try out a new part. Now he’s posturing as the strong man who stands up to dominant liberal interests. But few on the left, few on the right or few in the middle take him seriously anymore. He may still earn acclaim from Manhattan media offices or Barack Obama’s EPA, but in his home state he looks more an over-sized lame duck, quacking meaninglessly for the cameras.

    2. The Public Sector

    Who needs an economy when you have fat pensions and almost unlimited political power? That’s the mentality of California’s 356,000 workers and their unions, who make up the best-organized, best-funded and most powerful interest group in the state.

    State government continued to expand in size even when anyone with a room-temperature IQ knew California was headed for a massive financial meltdown. Scattered layoffs and the short-term salary givebacks now being considered won’t cure the core problem: an overgenerous retirement system. The unfunded liabilities for these employees’ generous pensions are now estimated at over $200 billion.

    The people who preside over these pensions represent the apex of this labor aristocracy. This year two of the biggest public pension funds, CalPERS and CalSTERS, handed out six-figure bonuses to its top executives even though they had lost workers billions of dollars.

    Almost no one dares suggest trimming the pension funds, particularly Democrats who are often pawns of the public unions. Some reforms on the table, like gutting the two-thirds majority required to pass the budget, would effectively hand these unions keys to the treasury.

    3. The Environment

    Obama holds up California’s environmental policy as a model for the nation. May God protect the rest of the country. California’s environmental activists once did an enviable job protecting our coasts and mountains, expanding public lands and working to improve water and air resources. But now, like sailors who have taken possession of a distillery, they have gotten drunk on power and now rampage through every part of the economy.

    In California today, everyone who makes a buck in the private sector–from developers and manufacturers to energy producers and farmers–cringes in fear of draconian regulations in the name of protecting the environment. The activists don’t much care, since they get their money from trust-funders and their nonprofits. The losers are California’s middle and working classes, the people who drive trucks, who work in factories and warehouses or who have white-collar jobs tied to these industries.

    Historically, many of these environmentally unfriendly jobs have been sources of upward mobility for Latino immigrants. Latinos also make up the vast majority of workers in the rich Central Valley. Large swaths of this area are being de-developed back to desert–due less to a mild drought than to regulations designed to save obscure fish species in the state’s delta. Over 450,000 acres have already been allowed to go fallow. Nearly 30,000 agriculture jobs–held mostly by Latinos–were lost in the month of May alone. Unemployment, which is at a 17% rate across the Valley, reaches upward of 40% in some towns such as Mendota.

    4. The Business Community

    This insanity has been enabled by a lack of strong opposition to it. One potential source–California’s business leadership–has become progressively more feeble over the past generation. Some members of the business elite, like those who work in Hollywood and Silicon Valley, tend to be too self-referential and complacent to care about the bigger issues. Others have either given up or are afraid to oppose the dominant forces of the environmental activists and the public sector.

    Theoretically, according to business consultant Larry Kosmont, business should be able to make a strong case, particularly with the growing Latino caucus in the legislature. “You have all these job losses in Latino districts represented by Latino legislators who don’t realize what they are doing to their own people,” he says. “They have forgotten there’s an economy to think about.”

    But so far California’s business executives have failed to adopt a strategy to make this case to the public. Nor can they count on the largely clueless Republicans for support, since GOP members are often too narrowly identified as anti-tax and anti-immigration zealots to make much of a case with the mainstream voter. “The business community is so afraid they are keeping their heads down,” observes Ross DeVol, director of regional economics at the Milken Institute. “I feel they if they keep this up much longer, they won’t have heads.”

    5. Californians

    At some point Californians–the ones paying the bills and getting little in return–need to rouse themselves. The problem could be demographic. Over the past few years much of our middle class has fled the state, including a growing number to “dust bowl” states like Oklahoma, Texas and Arkansas from which so many Californians trace their roots.

    The last hope lies with those of us still enamored with California. We have allowed ourselves to be ruled by a motley alliance of self-righteous zealots, fools and cowards; now we must do something. Some think the solution is reining in citizens’ power by using the jury pool to staff a state convention, as proposed by the Bay Area Council, or finding ways to undermine the initiative system, which would remove critical checks on legislative power.

    We should, however, be very cautious about handing more power to the state’s leaders. With our acquiescence, they have led this most blessed state toward utter ruin. Structural reforms alone, however necessary, won’t turn around the economy’s fundamental problems and help California reclaim its role as a productive driver of the American dream.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a 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 early next year.

  • Unemployment Rising in Washington, DC

    In the past month, Washington D.C. has experienced both an increase in number of jobs as well as an increase in unemployment, according to the Washington Post.

    The city’s unemployment rate rose from 9.9 in April to 10.7 percent in May – far surpassing the national average of 9.4 percent – despite gaining about 1,400 jobs primarily with the federal government.

    The District is often considered to be immune to such job market fluctuations because of steady government employment. But as Alice Rivlin, senior fellow at the Brookings Institution, points out, “[D.C.] has plenty of jobs, mostly high-skill jobs that require education beyond high school.”

    The high-paid, higher-skill jobs created within the government are often times given to those not living in the city – Virginia’s unemployment rate: 7.1 percent, Maryland’s: 7.2 percent.

    Job loss has also disproportionately affected the city’s African American population. The predominately white and affluent Ward 3 had an unemployment rate of 2.5 percent in April, far better than the largely poor and black Ward 8, where the rate was 23.3 percent.

  • View from the UK: The Progressive’s Dilemma

    American progressives long have looked upon Britain’s Labour Party as an exemplar of how to prioritize social welfare without entirely alienating business. Unlike their European counterparts, whose overly suspicious view of wealth and overly generous view of social welfare spending make poor role models for America, the British Labour Party has brokered a “partnership” between wealth and welfare over the years more suitable to the American psyche.

    Yet today that partnership is nearing collapse. For over a decade Britain’s supercharged financial sector fuelled the growth of an expansive state. But as the financial sector has cooled, Britain’s Labour party is now faced with the stark reality of burgeoning social welfare commitments, unprecedented public debt, and dubious upward mobility prospects for the ordinary citizen. The government has seemed more competent at creating upward mobility for civil servants who service the growing social welfare state than doing the same for the larger population who have to pay for it.

    Now the question for Labour – and the UK – is how to maintain an expansive social insurance program by somehow creating the kind of growth needed to pay for it. Once its “wealth creation strategy” of relying on a fecund banking sector fell apart, its project of providing income security rather than fostering income growth for ordinary people appears to be on the verge of failure.

    In order to maintain social welfare goals amidst a floundering economy, the UK has financed its shortfall through massive debt – something the average British household knows something about. Between 1997 and 2007 average household debt grew from 105 to 177 percent of disposable income. The US, of course, also experienced an explosion of household debt during the same period but not nearly to the same extent. At the end of 2007 America’s average household debt reached 106 percent of disposable income – essentially where the UK started 10 years earlier.

    The UK’s comfort with personal debt has now extended to the public realm. Even before the recession, Britain had $1.2 trillion of public debt, and by next year it will rise to $1.8 trillion, or 81 percent of GDP. If debt payment were a government agency, it would be the fourth largest in Britain. According to the London-based think tank the Centre for Social Justice, 21 percent of total public spending will be devoted to debt service in 2020, compared to 6 percent today. Public debt in the US, by comparison, will reach 60 percent of GDP by next year, and interest on the debt will rise from 4.6 percent to nearly 14 percent ten years from now. Labour’s legacy will be the Mount Everest of indebtedness it has left the current and subsequent generation.

    To put this in perspective, we need look no further than historic trends over the past 30 years. Public debt has tracked fairly proportionately with public spending in the UK during this period. During the economic stagnation of the late 1970s, public debt rose to nearly 50 percent of GDP. It hit its nadir at around 25 percent in 1990 after the Thatcher era, and then rose to around 35 percent, where it has remained ever since – until last year. Suddenly, debt has skyrocketed to more than 75 percent of GDP in the past year – an unprecedented level – and will rise to 100 percent by 2012 before swelling to 150 percent by 2020. In order to reduce debt to its 45 percent level of just a few years ago, public spending would need to be cut by a third. Given that one-fifth of all public spending will go to debt service in 10 years, cutting spending will prove politically impossible for a government – and perhaps an entire nation – that identifies ever expanding government-funded services as essential.

    Even more disquieting, tax receipts have mainly hovered around 35 percent of GDP regardless of the tax rate during the past 30 years. This means that raising tax rates – such as Labour’s proposal to lift the top tax bracket to 50 percent– have little effect as high earners move away or find other ways to protect their assets. Logically, if it hopes to cope with its debt obligations, Britain should therefore keep taxes as low as possible and cut public spending. But instead the UK drives full-speed ahead into the fog of debt without having any notion of how to service its future obligations.

    The UK is therefore faced with a thorny dilemma: on the one hand, it has spent decades creating a social welfare system that reduces risk and promises citizens protection from life’s vagaries, and on the other, it needs people to take risks in order to revitalize the economy. Government spending fostered risk avoidance precisely when Britain most needs an entrepreneurial class that can help diversify the economy away from finance and, to a lesser extent, tourism.

    The people most hurt by social welfare are young working class people – the very group Labour purports to represent. In the UK there’s much talk about the NEETs – young people in their late teens who are Not in Employment, Education, or Training. In 2000 there were 630,000 young people between the ages of 16 and 19 in this group. Today, that number totals 860,000, a 36 percent increase in less than a decade. This would be the equivalent of 4.5 million young people in the United States. If NEETs were a city, they would be the third largest metropolitan area in the UK.

    Increasing numbers of able-bodied young people dropping out of society altogether reflects a growing sense of hopelessness. According to the Gallup World Poll, only 20 percent of 25-34 year olds, and 25 percent of 35-49 year olds, thought the economic conditions in the UK were good before the current economic crisis. The UK’s NEET problem and economic pessimism were rampant when the going was good – something that can only be worse now.

    This is not merely the result of a profligate welfare state. The NEET problem has its origins in complex cultural phenomena. However, it is difficult to argue with the conclusion that an increasing economic resignation among Britain’s younger population is ill-timed for a government betting on future workers to pay the public mortgage.

    The US has a more diversified economy than the UK and likely suffers from less economic resignation, but it is beset with a similar dilemma. Despite historically unprecedented levels of public debt, albeit less extreme than Britain’s, the Obama administration appears to be pursuing an economic program that bears similarities to the Labour preoccupation with creating prophylactics against risk and hardship. In a matter of months, the US deficit has risen from 3.2 to 13.1 percent of GDP, according to the Congressional Budget Office.

    Even with President Obama’s widely doubted promises to cut the deficit in half, the CBO estimates a yearly shortfall of more than $1 trillion ten years from now. Even worse, there is precious little in the administration’s plans – including its grandiose claims about “green jobs” – that will create the growth necessary to carry such debt in the future. In fact many of the administration’s proposals – from its healthcare program to its auto company ownership and a more heavily regulated financial sector – could serve more to curb growth than encourage it. In addition, increased taxes on “the rich” will hit small businesses most grievously, the most plausible engine for growth.

    It appears the administration seems intent on following Labour’s folly of mortgaging the future. Without addressing the issue of how to unleash the entrepreneurial energies of the young generation, it’s hard to see how America will avoid falling into the morass in which its British cousins are now so perilously trapped.

    Ryan Streeter is Senior Fellow at the London-based Legatum Institute.

  • Shrinking the Rust Belt

    An article in the London Daily Telegraph suggesting that President Obama might back a major program of bulldozing parts of cities in the Rust Belt has put so-called “shrinking cities” back in the spotlight. Many cities around the country, especially in the Rust Belt have experienced major population loss in their urban cores which has sometimes spilled into their entire metro area. They have thousands of abandoned homes, decayed infrastructure, environmental challenges, and no growth to justify a belief that many districts will ever be repopulated.

    Cities in the Rust Belt grew in an era when large scale manufacturing required large amounts of labor. Today, productivity improvements mean that the United States can set new industrial production records with a fraction of the workforce of yesteryear. With much of its traditional labor force no longer as in demand in the modern economy, many Rust Belt cities lack an economic raison d’etre. Some may transform themselves for the modern economy, but many will be forced to accept the reality of a significantly diminished stature in the 21st century.

    In this world, size can prove a liability. One of the biggest problems in turning around Detroit is the sheer size of the region. The metro area has a population of 4.5 million – not including nearby Ann Arbor or Windsor, Canada. Is there really any need in the modern day for a city the size of Detroit in Southeastern Michigan? It seems doubtful. As I’ve argued before, transforming that city’s economy would be much easier if the region were smaller.

    One challenge is that a decline in population, which is already occurring naturally, doesn’t shrink the area of urbanization or the accompanying infrastructure that needs to be maintained. Indeed, although it is losing population and can’t support the infrastructure it has, Detroit still wants to build more, such a new regional rail transit system. And legacy debts such as pension liabilities don’t get smaller just because people leave. As with leverage, scale economics works in declining places as well as on the growing ones. The people who operate new transit systems or police who secure expanded areas must be paid. Roads, sewers, and water lines need to be maintained. In many places that are losing people, jobs, and tax base, such fixed costs could prove ruinous over the long run.

    Under such conditions, Rust Belt cities require both outside help and a program of managed shrinkage. The first challenge will be getting these cities, especially larger ones like Detroit, to admit that they need to do it on a regional basis. Medium sized cities like Flint and Youngstown have been more willing to face up to challenges. In contrast, places like Detroit, Cleveland, and Buffalo still see themselves as important national cities. Pride is blocking the effort to undertake a major managed shrinkage program. Instead of adjusting to reality, these cities continue to pour hundreds of millions into projects that vainly attempt to restart growth. .

    What would a federally assisted managed shrinkage program look like? No one can say for sure since this is a new field in America. Clearly, study of what has happened in Europe, particularly in Germany, where managed shrinkage has long been on the agenda, is warranted. But these ideas can’t just be transplanted via lift and drop. We need to create a distinctly American program informed by the best practices of elsewhere. That program should include the following elements:

    1. Education. Raising educational attainment not only makes people more employable in the new economy, it makes them more mobile.
    2. Relocation Assistance. Many people in the Rust Belt might want to move but be unable to do so because they are upside down on a mortgage or can’t sell their house. As more people leave, that will put downward pressure on the housing market. Hence, some government relocation assistance to help buy out people who want to move might be helpful.
    3. Shrinking the Urban Footprint. The quantity of urbanized land needs to be reduced so that the excess housing and infrastructure can be retired and the cost of servicing it eliminated. This means painfully identifying areas which will not receive reinvestment, and encouraging and assisting the people and businesses that remain to relocate. This will be difficult as these neighborhoods are still the locales for people’s homes and they have a strong emotional sense of ownership. Sensitivity is clearly called for. We need to increase localized density in areas targeted for redevelopment and convert other areas to non-urbanized uses such as nature preserves or agriculture. This will be a long process.
    4. Financial Restructuring. Older cities are often hobbled by mountains of debt, underfunded pensions, overstaffed payrolls, and too many municipal fixed assets. The government needs to be right-sized. Federal assistance may be needed to take over pensions and to give cities some tools to restructure unsustainable debt loads outside of bankruptcy.
    5. Development Restrictions. In return for federal assistance, there ought to be a real insistence that these cities sign up to the shrinkage programs. This might include enforceable restrictions on their ability to adopt policies that are oriented towards servicing growth such as restrictions on the ability to use federal funding for net new infrastructure. For example, if Detroit wants to build a federally funded rail system, it should retire an equivalent amount of other infrastructure elsewhere to offset it.

    Participation would be voluntary, but the federal government should make it clear that it will not finance futile attempts by these cities to try to recapture the glory of their pasts.

    This is of course only a conceptual outline of a program. Significant thought, analysis, and research would be needed to develop a program. Given our lack of experience in the field, experiments should be encouraged, flexibility granted within broad parameters, and real world feedback continuously incorporated back into the program. Clearly, we will not get everything right the first time around. We need to have the courage to learn from our mistakes and not forge headlong into failure simply because it would look like a political retreat.

    This won’t be pleasant or easy. It is not a path anyone wants to take. But given the condition of much of the Rust Belt, the only viable options appear to be painful ones. As local blogger Tom Jones recently said, “Too often, dealing with urban problems in Memphis is like the stages of grief. Just this once, maybe we can move past denial, anger, bargaining and depression, and unabashedly move to acceptance and develop the kinds of bold plans that can truly make a difference in the trajectory of our city.”

    Aaron M. Renn is an independent writer on urban affairs based in the Midwest. His writings appear at The Urbanophile.

  • Mapping US Metropolitan Unemployment Rates, May 2009

    Here’s a quick map of the newly released May 2009 metropolitan area unemployment numbers. On this map, color signifies the rate in May 2009 and size of bubble indicates the rate point change since May of last year. Green dots are below the national unemployment level of 9.1 in May, and red dots are above the national number.

    We can see that highest unemployment is concentrated on the west coast and California, manufacturing dependend Michigan, Indiana, and Ohio, parts of Appalachia, the Carolinas, and Florida.

    Unemployment is increasing the fastest in Kokomo and Elkhart-Goshen, IN; Bend, Eugene, Medford, and Portland, OR; Hickory-Lenoir-Morganton, NC; and Muskegon and Monroe, MI.

    While every metropolitan area of the country saw increased unemployment over May 2008, the Great Plains from Texas to North Dakota, the Mountain West, and parts of New England are still holding employment better than the rest of the nation.