New Geography

Category: Policy

  • Obama: Only Implement Green Policies that Make Sense in a Time of Crisis

    With the exception of African-Americans, the group perhaps most energized by the Barack Obama presidency has been the environmentalists. Yet if most Americans can celebrate along with their black fellow citizens the tremendous achievement of Obama’s accession, the rise of green power may have consequences less widely appreciated.

    The new power of the green lobby — including a growing number of investment and venture capital firms — introduces something new to national politics, although already familiar in places such as California and Oregon. Even if you welcome the departure of the Bush team, with its slavish fealty to Big Oil and the Saudis, the new power waged by environmental ideologues could impede the president’s primary goal of restarting our battered economy.

    This danger grows out of the environmental agenda widening beyond such things as conservation and preserving public health into a far more obtrusive program that could affect every aspect of economic life. As Teddy Roosevelt, our first great environmentalist president, once remarked, “Every reform movement has a lunatic fringe.”

    Today, the “green” fringe sometimes seems to have become the mainstream, as well. While conservationists such as Roosevelt battled to preserve wilderness and clean up the environment, they also cared deeply about boosting productivity as well as living standards for the middle and working classes.

    In contrast, the modern environmental movement often seems to take on a different cast, adopting a largely misanthropic view of humans as a “cancer” that needs to be contained. Our “addiction” to economic growth, noted Friends of the Earth founder David Brower, “will destroy us.” Other activists regard population growth as an unalloyed evil, gobbling up resources and increasing planet-heating greenhouse gases.

    For such people, the crusade against global warming trumps such things as saving the nation’s industrial heartland, which is largely fueled by coal, oil and natural gas, even if it means the inevitable transfer of additional goods making it to far dirtier places such as India and China. Of course, the current concern over global warming could still prove to be as exaggerated as vintage 1970s predictions of impending global starvation or imminent resource depletion.

    Certainly experience suggests we should not be afraid to question policies advocated by the true believers — particularly amid what threatens to be the worst economic downturn in generations. Actions taken now in the name of climate change could have powerful long-term economic implications.

    We don’t have to imagine this in the abstract; just look at the economies of two of the greenest states — Oregon and California — whose land use, energy and other environmental policies have helped contribute to higher housing and business costs as well as an exodus of entrepreneurs.

    Bill Watkins, head of the forecasting project at the University of California, Santa Barbara, notes that these two environmentally oriented states now have among the nation’s highest unemployment rates, pushing toward 10 percent — ahead of only the Rust Belt disaster areas farther east. In some places, such as central Oregon, it could hit close to 15 percent next year.

    Many green activists, along with “smart growth” advocates and new urbanists, laud Oregon’s long-standing strict land use controls as a national role model. Recently imposed land use legislation in California, concocted largely to meet the state’s restrictions on greenhouse gas, has been greeted by them with almost universal hosannas.

    Of course, there is nothing wrong at all with trying to curb excessive sprawl or energy use. Promoting a dense urban lifestyle is also commendable, but it is an option that appeals to no more than 10 percent to 20 percent of the population. This is even truer of middle-class people with children, few of whom can hope to live the urban lifestyles of the Kennedys, Gores and other elites — much less also afford one or two country homes to boot.

    Tough land use policies are not only hard on middle-class aspirations, but they appear to have played a role in inflating the extreme bubble that affected the California and Oregon real estate markets. Limiting options for where people and business can locate, notes UCSB’s Watkins, tends to drive up the prices of desirable real estate beyond what it would otherwise cost.

    Perhaps worst of all, it is not at all certain that a forced march back to the cities would necessarily produce a better, more energy-efficient country. Sprawling and multipolar, with jobs scattered largely on the periphery, most American cities do not lend themselves easily to traditional mass transit; in many cases, this proves no more energy efficient than driving a low-mileage car, using flexible jitney services or, especially, working at home. Big cities also have a potential for generating a “heat island” effect that can result in higher temperatures.

    Energy policy represents another field where hewing too close to the green party line could prove problematic. Obama already has endorsed California’s approach as exemplary. And indeed, some things — like imposing tougher mileage standards, stronger conservation measures and more research into cleaner forms of energy — could indeed bring about both short-term and long-term economic benefits.

    However, there are also downsides to adopting a California-style single-minded focus on renewable fuels such as solar and wind. Right now, these sources account for far less than 1 percent of our nation’s energy production. Even if doubled or tripled in the next few years, they seem unlikely to reduce our future dependence on foreign oil or boost our overall energy supplies in the short, or even medium, term.

    Looking at the experience of these two states, bold claims about vast numbers of green jobs created by legislative fiat seem more about offloading costs to consumers, business and taxpayers than anything else, particularly at today’s current low energy prices. In contrast, new environmentally friendly investments in natural gas, hydro, biomass and nuclear are more likely to find private financing and may work sooner both to reduce dependence on foreign fuels and to keep energy prices down.

    The Obama administration certainly should listen to the arguments of environmentalists. But given the clear priority among voters to deal first with the economy, the president should implement only those green policies that make sense at this time of crisis. A sharp break from the Bush approach is certainly welcome, but not in ways that promise more pain to ordinary Americans and our faltering economy.

    This article originally appeared at Politico.

    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 and is finishing a book on the American future.

  • New York Should End Its Obsession With Manhattan

    Over the past two years, I have had many opportunities to visit my ancestral home, New York, as part of a study out later this week by the Center for an Urban Future about the city’s middle class. Often enough, when my co-author, Jonathan Bowles, and I asked about this dwindling species, the first response was “What middle class?”

    Well, here is the good news. Despite Mayor Bloomberg’s celebration of “the luxury city,” there’s still a middle class in New York, although not in the zip codes close to hizzoner’s townhouse. These middle-class enclaves are as diverse as the city. Some are heavily ethnic, others packed with arty types, many of them more like suburbia than traditionally urban.

    This New York is vastly different from the one that appears in most movies. It is more like the New Jersey portrayed in “The Sopranos” or “All in the Family” (set in Queens) than Manhattan-centric “Seinfeld” and “Sex and the City”. Largely, this middle class stays in New York – despite the congestion, high taxes and regulatory lunacy – because that is where they are from, where they worship and where they are close to their places of work.

    In many cases, they live in Bay Ridge, Bayside, Brighton or Bensonhurst, in the vast sprawl that is Brooklyn and Queens. New York’s middle class is also highly diverse. In many areas, the descendants of Italians or Poles live cheek by jowl with newer groups such as Koreans, Chinese, Indians, Jamaicans, Russians, Israelis and Pakistanis. They stay and raise their children, in large part because of their extended family networks. As Queens resident and real estate agent Judy Markowitz puts it, “In Manhattan people with kids have nannies. In Queens, we have grandparents.”

    Some of the emerging middle class also cluster in places like Ditmas Park, a reviving part of Flatbush. The new population here is made up largely of information age “artisans” – musicians, writers, designers and business consultants who cluster in New York. They may have migrated there for the culture, but they stay because they find these neighborhoods congenial and family-friendly.

    “It’s easy to name the things that attracted us – the neighbors, the moderate density,” explains Nelson Ryland, a film editor with two children who works part-time at his sprawling turn-of-the-century Flatbush house. “More than anything, it’s the sense of the community. That’s the great thing that keeps people like us here.”

    For these reasons, New York’s middle class may be hard to displace, but they certainly are under considerable stress. Urban life may have improved from its nadir in the 1970s, but our findings show that net out-migration from the city, particularly as people get into their late 20s and early 30s, has continued.

    The now-imploding economic boom did not halt this pattern. Indeed out-migration in the last few years has been greater on a per capita basis than that of the early 1990s, when “escape from New York” was a recurring media theme. The reasons: the nation’s highest cost of living, poor public schools, inadequate transit, expensive housing, high taxes and lack of broad-based economic opportunity.

    Much the same process is occurring in other great cities from San Francisco and Los Angeles to Chicago and Philadelphia. Indeed, even as gentrification brings in wealthy childless couples and students (often supported by their suburban parents) to urban areas, the number of middle-class neighborhoods has continued to decline, as demonstrated by a 2006 Brookings Institution paper.

    This is true, for example, in the San Fernando Valley section of Los Angeles, where I live. Once overwhelmingly made up of home-owning, moderate-income earners, the Valley is becoming increasingly bifurcated between the affluent and a growing class of largely minority renters.

    The hollowing of the New York middle class has been even more rapid. In 2006, Manhattan, the cradle of gentry liberalism, had achieved the widest gap between rich and poor in the nation. Overall, New York has the smallest share of middle-income families in the nation: The city’s middle class – those making between $35,000 and $150,000 a year – fell to 53% between 2000 and 2005, while remaining steady nationwide at 63%.

    Up until now, these trends did not much bother New York’s media, business and political hegemons. Under its ruling Medici, Mayor Michael Bloomberg, New York has been shaped as a place for the masters and their servants. Such Bloombergian priorities as the Second Avenue subway, the taxpayer-subsidized construction of luxury-box-laden stadiums, as well as an orgy of a city-inspired luxury condominium construction and plans for ever more high-end office towers reflect this worldview.

    Of course Bloomberg’s “luxury city” is largely a Manhattanite vision, with a few tentacles spreading to the adjacent parts of the outer boroughs. It takes its sustenance from the enormous wealth generated by Wall Street as well as the presence of a large “trustifarian” class. This is very much the New York of The New York Times: fashionably liberal in politics, self-consciously avant-garde, and devoted, more recently, to “green” consumerism.

    At the height of the boom – say two years ago – some imagined there were enough folks such as these to sustain the city. They would now constitute a de facto new middle class, except their bank accounts would have extra zeros. When Jonathan and I interviewed a developer, he bristled at us for suggesting that New York’s middle class was shrinking. “Of course, there’s a middle class,” he stated flatly. “Why, my friend’s son just bought a place here in Manhattan.”

    “Oh really?” I asked, a bit incredulously. “And how much was the apartment?”

    “One and half million.”

    “And how did he pay for it?”

    “His dad.”

    Now, with Wall Street’s money machine in reverse and the Manhattan real estate market unraveling, the surplus capital to finance million-dollar condominiums for kids may well have evaporated. Similarly, the parade of top graduates from business and law schools could slow, now that the big bonus regime may be coming to an end. If you are going to be paid bankers’ wages, why not live somewhere cheaper?

    Yet despite the tough times, there is no real reason for New Yorkers to fear a return to the bad old days of the 1970s, as Reuters recently warned. New York used to have a diverse, middle-class economy that was remarkably recession-proof.

    It could have such an economy in the future as well. A modern version may be less reliant on manufacturing, but focused instead on the talents of its citizens in such things as design, marketing and data analysis. Still, it would be a small business-oriented economy – one that could flourish outside Manhattan.

    New York should cultivate such an economic shift and also turn its attention from the chic precincts to its middle-class neighborhoods. In the post-Wall Street era, the “luxury city” concept needs to be discarded just like other toxic manifestations from a discredited era.

    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 and is finishing a book on the American future.

  • Cleveland, Part II: Re-Constructing the Comeback

    Yesterday, in Part I, I talked about how, despite the Cleveland region’s significant assets, the Greater Cleveland Partnership’s strategy is failing to transform its economy. Today I’ll focus on the strategy’s five weaknesses, and how to fix them.

    First: The Wrong Approach To Achieving Scale
    To be effective, economic development initiatives have to be big enough to make a difference. Traditionally, this has meant building bigger organizations. The Cleveland leadership is following an economic development model based on hierarchies.

    What worked 30 years ago does not work so well today. Across the business landscape large, vertically integrated organizations are breaking apart. In economic development, this transition means that civic leaders need to build regional scale by developing networks. In a world of increasing economic complexity, regions that have strong, trusted networks will be more competitive. They will learn faster, spot opportunities faster, and will align their resources more quickly. And they will make faster and better decisions. Cleveland’s civic leadership can be far more effective if it learns the power of social networks. A number of good books explore this topic; The Tipping Point should be required reading.

    Second: Misunderstanding Public-Private Partnerships
    Over the past decade, Cleveland’s business leadership has revealed a startling misunderstanding of the nature of the two categories of public-private partnerships that drive economic development.

    Publicly-led and privately-supported investment projects typically involve large infrastructure, as well as projects in which public financing represents over half of the total development budget, such as stadiums, museums, libraries, and community sports complexes.

    The second category involves privately-led and publicly-supported investment projects. Here, the private sector takes the lead, but the public sector provides support and guidance. Good examples include tax increment financing districts, business improvement districts, and virtually all economic development incentives.

    Cleveland, during the Voinovich Administration, executed well on publicly-led and privately supported projects. A new baseball stadium, the Rock and Roll Hall of Fame, the Science Museum, the new basketball arena, and the Cleveland Browns stadium are all examples. Starting in the mid-1990’s this capability degraded rapidly, so that it has taken over ten years (with no end in sight) to complete the last of the Voinovich projects, the convention center.

    But when it comes to privately-led and publicly supported investment, the business community has proven itself inept. It took ten years for it to establish a business improvement district around the new baseball stadium and arena. The signature downtown shopping mall, Tower City, has no anchors, no street visibility, and terrible parking.

    The easiest way to learn how these partnerships can be successful involves visiting other cities. Not surprisingly, Cleveland’s civic leadership does not regularly take leadership visits, a common practice among dynamic metro regions.

    Third: No Strategic Framework, No Theory Of Change
    Foundations are fond of asking for a “theory of change”. In other words, they want their grantees to orient themselves within a broader system. They want a simple, clear explanation of how a proposed intervention will transform the system to better performance.

    Cleveland’s leadership has no apparent theory of change. Overwhelmingly, the strategy is now driven by individual projects. These projects, pushed by the real estate interests that dominate the board of the Greater Cleveland Partnership, confuse real estate development with economic development. This leads to the “Big Thing Theory” of economic development: Prosperity results from building one more big thing.

    The economy has shifted under the leadership’s feet. We are rapidly moving toward an economy of networks embedded in other networks. With an economy driven by knowledge and networks, economic development is more than land development, real estate projects, and recruiting firms that move from Michigan to Mexico.

    Today, economic development begins with brainpower in 21st-century skills, and Cleveland’s leadership largely ignores the role of developing brainpower. The next version of the Cleveland+ strategy should explain how the city-region will innovate to build these skills. The best places to look: Milwaukee, Cincinnati, Syracuse and Kalamazoo.

    Prosperous regions must also develop thick, trusted networks to convert this brainpower into wealth through innovation and entrepreneurship. Cleveland’s top-heavy development organizations need to shift toward network-based strategies that are more lean and agile. That will put investment toward more productive use. Good examples to follow: Ann Arbor Spark and the Milwaukee 7.

    In order to attract and retain smart people, regional leaders need to develop quality, connected places, “hot spots” that attract people and “smart growth” strategies that efficiently leverage scarce public investments. In Cleveland’s case, the city needs more coherence to its physical development, one that embraces the city’s inevitable shrinkage in the years ahead.

    To create a buzz, effective regional leaders build their brands, not with clever logos, but with powerful experiences and stories that help people to connect their past to a prosperous future. Action, authentic stories, and networks are changing Akron, Youngstown, Kalamazoo and Milwaukee, all cities facing the same challenges as Cleveland.

    Fourth: The Wrong Mindset For Making Decisions
    If you live in a world of hierarchies, you live in a world of two directions: top-down or bottom-up, with top-down the preferred direction. It’s the direction of command-and-control; of predictability and stability. Bottom up is the opposite. It implies disorganization and chaos, inefficiency and fragmentation, confusion and uncertainty. If you approach economic development from a top-down perspective, you want to limit and control public comment. Civic engagement is a carefully circumscribed event, not a process; a meeting, not a collaboration. Anyone who has attended a school board meeting understands this point.

    There’s only one problem. The top-down world does not exist in economic development. Complex public/private strategies are developed in a “civic space” outside the four walls of any one organization. Within the civic space, no one can tell anyone else what to do. Strategies born in a top-down mindset are doomed to fail.

    Networks have no top or bottom, only nodes and links. Strategy is an exercise of aligning, linking and leveraging assets across a network. Transformation takes place when enough people in the network align themselves toward a specific outcome, through purposeful conversation. To traditionalists, conversation is a distraction or a waste of time. In the years ahead, the challenge for places like Cleveland will be to manage complex conversations.

    At Purdue, we are developing the new disciplines of “Strategic Doing”, an approach to select and test transformative ideas in complex environments quickly. Traditional approaches of strategic planning are too linear, time-consuming, inflexible and expensive. Strategic Doing offers an alternative. By translating ideas into action quickly, the disciplines of Strategic Doing build both collective knowledge and trusted connections. They lead us to “link and leverage” strategies that multiply the effective power of our assets.

    Cleveland’s leadership has a long way to travel down this road. There’s a naive ineptitude in the civic deliberations on complex issues. For over ten years, the Greater Cleveland Partnership has been fiddling with a convention center decision. In the long run, the upside for the city is minimal, while the downside grows each day. By following traditional top down management models, the city’s leadership, if it’s lucky, will build a 30-year-old idea 10 years late.

    Fifth: Weak (Or Nonexistent) Metrics
    In traditional world hierarchies, metrics are the primary instrument of top-down control. It’s not surprising that, as a rule, economic development professionals tend to shy away from measurements. Relatively few regional strategies include them.

    In a networked world, metrics serve different and more important functions. They help clarify outcomes, and add coherence by promoting alignment. Visions are difficult to translate to action. More specific outcomes and metrics mark the direction in which we are heading. They help us learn “what works”. Economic development is inherently an inductive process of experimentation. Without measurement, we have no way of knowing whether or not our underlying assumptions are more right than wrong.

    Creating The Comeback
    Cleveland can find a new path to prosperity, but it will take new leadership committed to transparency and different ways of thinking and acting. With new leadership, Cleveland can do better. It will find prosperity with initiatives that embrace brainpower, creativity, innovation, sustainability, collaboration. These are the foundations on which Cleveland’s future can be built and created.

    Ed Morrison is an Economic Policy Advisor at the Purdue Center for Regional Development. This article draws from Royce Hanson, et.al, “Finding a New Voice for Corporate Leadership in a Changed Urban World”, a case study from The Brookings Institution Metropolitan Policy Program (September 2006).

  • Cleveland: How The Comeback Collapsed

    The Cleveland comeback has stalled. Once hailed as a shining example of rebirth in our industrial heartland, Cleveland now sits rudderless and drifting backward. Between 2000 and 2007, Cleveland suffered one of the largest proportional population losses in the country: the city shrank by 8%. Per capita income growth in Cleveland also lags behind cities like Cincinnati, Milwaukee, and Pittsburgh. Since the early 1990s, the gap between Cleveland and these other cities has widened. As a regional economy deteriorates, the pressure for social services goes up. It’s not surprising, therefore, that local tax rates in Cleveland are among the highest in the country. Political corruption also takes a toll; Cleveland sits in Cuyahoga County where federal law enforcement officials recently launched a sweeping probe of political corruption.

    The future doesn’t look much brighter. Cuyahoga County is often described as the epicenter of the foreclosure crisis; since 2000, it has had the highest per capita rate in the country. Overnight, foreclosures have decimated neighborhoods that took years to rebuild. In the Cleveland neighborhood of Kinsman, half of the mortgage properties are in foreclosure. In other neighborhoods foreclosure rates range from 25% to 30% and, not surprisingly, are concentrated in the lowest income neighborhoods, the places hardest to rebuild. About 72 hours after a house becomes vacant, vandals strip appliances, windows, and fixtures (scrap metal recycling is a booming business in Cleveland). Stripping the pipes renders the property a total loss.

    Meanwhile, the Cleveland Municipal School District is making improvements only at a glacial pace. According to a recent report by America’s Promise, Cleveland ranks 48th of 50 large school districts in high school graduation rates. Fewer than six in ten of Cleveland’s 9th graders will complete high school; dropout factories here include Collinwood and East Tech high schools, where only four in ten 9th graders graduate.

    Many older industrial cities face the same set of challenges, but few cities started three decades ago with the same promise of regeneration. The collapse of the steel industry in the late 1960s was the beginning of Cleveland’s spiral downward. It did not help that 40 years ago, when the Cuyahoga River caught on fire, Cleveland jokes became a staple of late-night television. The city hit bottom when it filed for bankruptcy in 1978.

    It turned the page with the election of George Voinovich as mayor in 1980. Voinovich, a tough minded Republican, challenged the business, labor and civic leadership of the city to transform Cleveland, and the business community responded. A core of corporate CEO’s organized Cleveland Tomorrow – modeled on the Allegheny Conference in Pittsburgh – which drove a focused agenda of urban transformation. By 1989, Fortune magazine applauded the new trajectory in “How Business Bosses Saved a Sick City”.

    The partnership between the city and the business community began to shift in 1990 with the election of mayor Michael White. While the business community worked with White to complete projects like a new baseball stadium and basketball arena that had been planned earlier, the relationship between the mayor and the business community gradually deteriorated. A 1995 community push for mayoral control of the city school system represented the last big collaboration. By the time White began his third term in ’97, the Voinovich momentum pushing public-private partnerships had evaporated.

    At the same time, dramatic changes were taking place in Cleveland’s corporate landscape. By the late 1990s, the city had lost five Fortune 500 headquarters. Manufacturing, the backbone of the region’s economy, shrank dramatically. As the influence of manufacturing declined, real estate developers emerged as important forces within Cleveland’s business circle. Entering the 2001 recession, Cleveland was clearly in trouble. The Cleveland Plain Dealer proclaimed a “quiet crisis”. The editors started pushing for a master plan for economic development to follow up on the momentum of the Voinovich years. As one editor noted, the region was about to face “economic extinction.” The business leadership responded by consolidating different business organizations — Cleveland Tomorrow (leading CEOs), the Greater Cleveland Growth Association (a chamber of commerce), the Cleveland Roundtable (a group focused on diversity issues), and the Council of Smaller Enterprises (a small business organization) — into the Greater Cleveland Partnership.

    The Partnership focused its economic development agenda on building a convention center, the last Voinovich era project. It also re-organized a set of affiliate economic development organizations for better control and (hopefully) impact. JumpStart (for start-ups), BioEnterprise (for life science companies), MAGNET (for manufacturing companies), Team NEO (a recruiting organization), and Cleveland+ (a new branding effort) were to drive the transformation of the city-region, renamed Cleveland+. The Partnership has been resourceful in financing. A close relationship with a new coalition of foundations, called Fund for our Economic Future, provides about $8 million a year for the affiliate organizations, and effectively operates as a financing arm for the Cleveland+ strategy.

    To finance the new convention center, the Partnership pushed County Commissioners to approve a sales tax increase for about $500 million. In July 2008, the Commission — cleverly skating past a public vote (which by all accounts would have rejected the plan) — increased the sales tax unilaterally…and in a hurry. The vote to finance a convention center took place without a development plan, or even a site, in place. So, in effect, Cuyahoga County taxpayers are already paying for a non-existent convention center. The reason for all the rush seems clear. Last July, on the eve of the Commission vote to raise the sales tax, the Federal Bureau of Investigation assembled a team of over 200 agents to launch a public corruption probe, with raids of county offices, the home of one commissioner, and the offices of several contractors. Federal prosecutors are looking into the close relationship between county officials and several contracting and real estate development firms.

    Amidst the turmoil, Cleveland’s leadership has drifted into a classic case of group think. By shutting themselves off from public scrutiny, they have tried to shield themselves from growing public opposition. But in the process, they have drifted into a dream world that is increasingly detached from underlying market realities. The City’s future, according to the leadership’s current thinking, hinges on a convention center. There’s only one problem: There is no evidence that this strategy will work (and plenty of evidence that it will not). Convention centers represent a formula for low-skill, low-wage employment and public operating deficits as far as the eye can see.

    Put the convention center aside for a moment. Despite the significant assets within the region, the Greater Cleveland Partnership’s broader strategy for Cleveland is failing to transform the city-region’s economy.

    There are five weaknesses in the current Cleveland strategy: The wrong approach to scale, to public/private partnerships, to theoretical underpinnings, to change, to decision-making, and to understanding metrics.

    In Part II, I talk about what went wrong in each of these important realms, and how to strengthen each one.

    Ed Morrison is an Economic Policy Advisor at the Purdue Center for Regional Development. This article draws from Royce Hanson, et al, “Finding a New Voice for Corporate Leadership in a Changed Urban World”, a case study from The Brookings Institution Metropolitan Policy Program (September 2006).

  • Report: Ontario, CA – A Geography for Unsettling Times

    These are unsettling times for almost all geographies. As the global recession deepens, there are signs of economic contraction that extend from the great financial centers of New York and London to the emerging market capitals of China, India and the Middle East. Within the United States as well, pain has been spreading from exurbs and suburbs to the heart of major cities, some of which just months ago saw themselves as immune to the economic contagion.

    Without question, the damage to the economies of suburban regions such as the Inland Empire has been severe. Foreclosures in San Bernardino and Riverside Counties have been among the highest in the country, while drops in real-estate related employment have resulted in the first net job losses in four decades. This has led some critics to suggest that the entire area is itself doomed, destined to devolve along with other suburban regions to “the new slums”.

    Yet our close examination of both short and longer-term trends suggests these perspectives are wildly off-base. For one, it is critical to separate different parts of the Inland region from one another. A place like Ontario retains many characteristics that make it far more able than other locales in the region to resist the negative trends. These advantages include a diversified economy, a powerful local job center, an excellent business climate and, most of all, a location perfectly positioned along the historic growth corridors of Southern California.

    These assets have already allowed Ontario to weather the current storm far better than many other Inland Empire areas. Foreclosure rates, for example, although far too high, have remained considerably below the average for the region, and far below those in communities that lack the same strong diversified economic base and close access to employment.

    More importantly, Ontario remains well-positioned to take advantage of both the eventual recovery of the Inland region and the greater expanse of Southern California. Housing prices – particularly the availability of single family homes – has been a driver of growth for the inland region for decades. As prices fall, the rates of affordability for the region – which had been dropping dangerously – will once again rise.

    Despite the claims of some theorists, the preference of most Californians for single family housing seems likely to be unabated, particularly as immigrants seek a better quality of life and the first generation of millennials enters the home-buying market. These are populations that have been heading east to Ontario, the surrounding “Mt. Baldy region,” and to the Inland Empire as a whole for decades, and there is no reason to suppose the flow will stop.

    As the Inland Empire restarts its growth cycle, Ontario will remain uniquely suited to take advantage. Significantly, despite the current downturn in energy prices, worldwide supply shortages as well as growing political demands for regulation on carbon emissions will lead businesses to look increasingly at procuring goods and services nearby. As the Inland Empire’s premier business and transportation hub, Ontario will be well-positioned to emerge as the epicenter of the entire Inland Region.

    At the same time, Ontario residents generally have short commutes, and the city sits astride the primary transportation routes of the region. Over time, well-planned developments such as the New Model Colony will offer a wide range of residents an opportunity to live, work and spend their spare time within a relatively compact, energy-efficient place.

    Business friendliness is also a key asset. Ontario enjoys a close working relationship with expanding companies in business services, manufacturing, logistics, medical services, and other industries not directly dependent on the housing sector.

    But more than anything, Ontario’s position rests on the city’s fundamental commitment to a balance of jobs and housing, and to a long-standing focus on economic growth. Unlike many communities in the region, Ontario has grown on a solid economic basis. As the fourth largest per capita beneficiary of retail sales in Southern California, the city has a considerable surplus to meet hard times .

    Although the immediate prospects for virtually all communities will be difficult, few places in Southern California can hope to ride out the current tsunami better than Ontario. And even fewer seem as well-endowed to ride the next wave of growth that will sweep through the region – as has occurred throughout the last century – when the economy once again regains its footing and customary vitality.

    See attached .pdf file for full report.

    Primary Authors: Joel Kotkin, Delore Zimmerman
    Research Team: Mark Schill, Ali Modarres, Steve PonTell, Andy Sywak
    Editor: Zina Klapper

    Photo courtesy of Valerita

  • Florida’s Tourism Addiction

    Remember those innocent days last summer, when the biggest worry was high gas prices? Florida already felt the pinch as tourism dropped dramatically. Then, as the financial markets collapsed last fall, Florida’s leaders woke up and began talking about diversification. Like deer caught in the crosshairs of a rifle scope, economic boosters darted around looking for new safe places in the knowledge economy, ways to revitalize agriculture, and even exploring private space development to supplement the stuttering NASA program.

    But now, having passed through the last quarter, this talk is once more put aside for reliance on tourism again. It appears that the line for Disney’s Space Mountain could be an inverse indicator of the state’s appetite for healthy diversification. As wait time for the ride shortened in October, space programs, research laboratories, and business incubators fell back in the minds of public officials. Today, with lower gas prices, those who still have jobs are coming back to the theme parks, and the relief that state officials feel is audible: no more silly talk about diversification!

    Once upon a time, before all the turmoil, NASA had a space program. From afar, one may infer there is an exciting base of science and technology centered around the Kennedy Space Center, with engineering plants and satellite factories and science laboratories. A visit to this area reveals nothing of the sort: sleepy Cocoa, a beach town seemingly lost in time, housing a few small offices scattered around the town labeled Grumman, Boeing, or Lockheed Martin. NASA’s space program in Florida, as it turns out, produces spectacular launches but not much else; the winds of politics on Capitol Hill blow so hot or cold that little sustained investment is possible into this local economy. In 2008, NASA quietly eliminated 4,000 jobs in Central Florida, as the space shuttle program is phased out and replaced with a more efficient vehicle.

    Meanwhile, tourism grew and no one noticed.

    Once upon a time, before all the freezes, Central Florida had agriculture specializing in citrus. Remember Anita Bryant and the famous Florida Orange? Groves actually extended into southern Georgia a century ago, but citrus farming retreated further and further south as farmers sought less risk from the weather. By the early 1990s, more freezes caused Central Florida farmers to throw in the towel, carrying out with them orange juice processing plants, bottle manufacturers, and shipping and trucking centers. Replacement crops were neither entertained nor encouraged by the State, and the farmers sold their land to developers, who quickly rezoned the land for single family subdivisions. Population grew, and no one noticed.

    Once upon a time, East Coast businesses were moving their corporate headquarters to Florida. If anybody remembers John Naisbitt’s 1980 book Megatrends, Orlando was named one of the top ten cities of the future. AAA, the automobile travel association, moved its corporate headquarters to Central Florida, joining Tupperware and several others. It appeared that low taxes and great weather inevitably would lure more companies. It escaped most people’s notice that the other corporations moving here, such as Harcourt Brace Jovanovich (now Harcourt), weren’t moving their leadership, but only back offices and computer hardware to Florida, taking state business incentives and returning the favor with service workers, not executives. As these service workers are downsized due to outsourcing and automation, Florida’s economy has been dramatically affected. Meanwhile the corporate headquarters in New York were protected. The top executives may have maintained condos in Florida, but never took the place seriously for business.

    But still tourism was growing, and no one noticed.

    Once upon a time, Florida was known as the state of low taxes. No income tax for us, thank you very much, despite a few weak attempts by the legislature. Rather, Florida depends on sales taxes and property taxes to balance its budget, and growth seemed to guarantee that these would rise. But even as low as taxes were, business leaders two years ago pressured the new Governor and legislature to propose a tax cut referendum, and like sheep, the citizens voted yes. Heck, who would not want their taxes cut? Shortly after property taxes were voted lower, the bottom fell out of Florida’s housing market, producing the perfect storm of lower taxes on properties dropping in value. Then, the wise leaders chose to cut necessities like education, rather than luxuries like the purchase of U.S. Sugar’s abandoned properties.

    But tourism was growing, and no one seemed to care.

    The litany of missed opportunities is longer than the space to list them. To anyone running a business, diversification of sources of income would seem natural to promote the long-term health of your business. But Florida consistently has shown disdain for this sort of behavior, because tourism continues to provide a steady stream of revenue. It is true that historically tourism has risen at the same rate as population growth and there is no reason to doubt that tourism will rebound. So once again, Florida’s reliance on tourism may seem its key to economic survival.

    In Central Florida, the economy is tourism, with worldwide visitorship, and compared to its next closest competitor, Las Vegas, Central Florida has come through smelling like a rose. Hotels within Disney’s property quietly finished 2008 on budget, and other hotels surrounding the theme parks suffered only modest losses. New hotel starts are halted, and owners with cash are not seeking expansion, renovation, nor repositioning while occupancy is down.

    Meanwhile, digital media and medical research remain the two most viable diversification channels for Central Florida. Partnerships between the private sector and the University of Central Florida to create a digital media development center will bear fruit in the coming years, both on campus and in downtown Orlando. Growth in medical research is already happening with the arrival of the Nemours Center for Pediatric Research. Both of these are happening because of internal decisions, windows of opportunity, and with mostly private, not government, help. On the downside, space investment dwindles, agriculture divestiture continues, and the State sits idly by, dreaming dreams of legalized gaming so as to put even more eggs into tourism’s basket.

    These are excellent times for diversifying the state’s economy. Tourism breeds not just an epehemeral city, but an ephemeral state – and the risk of this position is felt every day as jobs get scarcer and scarcer. Florida’s business leaders need to take responsibility for the future of the state, stop their addiction to tourism, and seek higher and safer ground. Only with a diversified economy will the State of Florida have long-term prospects for a prosperous future.

    So come on back, everyone, and get in line for rides at Disney! Those of us living and working in Central Florida thank you for coming. And, while you are here, pat yourselves on the back for helping Florida postpone its inevitable reckoning with economic reality.

    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.

  • Obama’s Other History

    The coverage of President Barack Obama’s first days in office has been intense, to say the least. Yet it has still managed to overlook an historical comparison that is worthy of our consideration.

    Obama took office just a few months after a stock market crash that left no doubt about the rugged shape of our economy. The ensuing decline has been swift and scary, leading some to talk about a possible fall into an outright depression.

    Now consider Herbert Hoover, the president who took office just a few months before a stock market crash that signaled the Great Depression in 1929. Hoover remains a figure of historical disfavor to this day because of what he did — and particularly what he didn’t do — after the crash. He served nearly four years in the Oval Office as the Great Depression raged, continuing to view government’s role in the economy as largely limited. He offered no enormous economic stimulus plans or social programs. Clusters of tent cities occupied by the dispossessed of our land became known as “Hoovervilles.”

    Then came Franklin Roosevelt, who immediately put enormous economic stimulus plans into action and launched a whole host of social programs.

    Timing can be everything — in politics, economic matters, and life in general.

    Our timing might be just right with Obama because our economy’s nose-dive came just a month or so before the presidential election. Obama came to the job at a moment when he has a chance to move on our problems before they settle in to another Great Depression. What if Roosevelt had gotten a shot a few months after the stock market crash in 1929 instead of nearly four years into the mess?

    Here’s another historical comparison worth noting: Hoover won election as a Republican in 1928 in part because of widespread prejudice against Roman Catholics, a sentiment that worked against New York Governor Al Smith, who ran as the Democratic nominee in the race.

    There’s true irony in this piece of history, because Smith had recognized the shaky nature of the economy well before the crash that signaled the start of the Great Depression. The actions he took in New York during the 1920s could be viewed as a state version of what would become Roosevelt’s famous New Deal package of economic stimulus and social programs.

    Bigotry ravaged Smith’s campaign, though. He might not have won in any case, but the anti-Catholic emotions that took wing in large parts of the populace, media and other parts of the power structure left him without a fighting chance.

    Smith’s loss spelled a wait of nearly four years before the federal government became fully engaged in putting its might against the Great Depression. It was just a few months ago that Americans could have again allowed prejudice — this time against African/Americans — to override a presidential campaign. That might have led to another slow response to an economic crisis. It’s not a perfect comparison to match recent Republican nominee John McCain to Hoover, but the Arizona Senator has long favored smaller government, which is nowhere near what we saw from Roosevelt or are seeing from Obama.

    Now here’s the hard part of this history lesson: There’s still plenty of debate among scholars and economists on whether Roosevelt’s massive government programs worked. The New Deal brought immediate relief to millions in dire straits, an invaluable record in its own right. But there is data to indicate that the programs ultimately failed to put the economy back on track. Indeed, the Great Depression didn’t really end until World War II led factories and farms to crank up production. Some would argue that the New Deal amounted to short-term fixes that did more harm than good over the long haul.

    That leaves us to wonder whether the current plans to spend $700 billion to bail out banks and automakers — and hundreds of billions more on roads and bridges — will bring improvements that make such outlays worthwhile.

    The effort will be made sooner rather than later, though, and that’s because Americans didn’t hold a fellow back from the highest office in the land based on prejudice this time around.

    That’s real progress — even if it’s the only progress we can claim for certain as we fight through our tough economy.

    Jerry Sullivan is the Editor & Publisher of the Los Angeles Garment & Citizen, a weekly community newspaper that covers Downtown Los Angeles and surrounding districts (www.garmentandcitizen.com)

  • Hollywood Tax Credits? The Shows Are On The Road

    If you were paralyzed with shock at the October $700 billion dollar Congressional bailout, you may have missed the inclusion of a $478 million-fine-print allotment to Hollywood for tax incentives. A month later, in the midst of California’s on-going fiscal crisis, Governor Arnold Schwarzenegger proposed something called ‘the runaway production provision’, to utilize the bailout incentives to keep entertainment production in California and stimulate investment in motion pictures here. The proposal allows production companies to claim a $15 million deduction per California movie during the first year of filming. The credit increases to $20 million if the company films in an economically depressed area.

    Whatever your thoughts may be on the bailout in general, Hollywood is hurting, and tax incentives — especially if they don’t end up exclusively in the coffers of the major players — are long overdue. If California doesn’t protect its long-standing identity as the center of the entertainment industry, the Hollywood Sign may soon be strung across a mesa overlooking Albuquerque, or facing post-Katrina trailers. Forty states offer financial incentives to feature film and television companies; currently, California does not.

    Los Angeles and the state of California have been victims of runaway production for 25 years, but with California’s shrinking economy and growing anti-business reputation, the fight to keep any of the state’s industries in place has gained importance. Roughly a quarter of a million Californians work directly in the entertainment industry, with a substantial additional segment of the state economy fueled by retail, professional services, health care, and education related to the industry workforce. Entertainment is the fifth largest industry in Southern California.

    ‘Runaway production’ — the popular term for motion picture and television production which moves outside the United States — and ‘production flight’ — production re-located outside of LA — mean job and economic loss for California and greater Los Angeles. Feature film production in the region has dropped by about half since its 1996 peak. By 2007, entertainment production in the region had dropped to 31%. In 2008, television production marginally increased, but the migration continued to states such as New York, New Mexico, and Louisiana, which promised better tax climates.

    Here’s a rundown on who’s eating LA’s power lunches:

    Big Apple’s Big Win: Last May Variety announced “Ugly Betty Bites the Big Apple”; the filming of ABC’s hit would possibly move to New York. By summer, persuaded by Governor David Paterson’s expansion of tax breaks, the move took place. It makes sense that “Ugly Betty,” a series about the New York fashion industry, is now actually shot in New York. But production designers are famously skillful at locale substitutions. The dealmaker was undoubtedly New York’s new laws that tripled the eligibility for a tax credit to 30%, with an expiration date pushed to 2013. New York City “tips” an additional 5% tax break.

    New Mexico’s State Motto, Crescit Eundo: Crescit Eundo translates to “it grows as it goes,” and the New Mexico film and television industry has been growing. The program was initiated by Republican governor Gary Johnson, and was then enthusiastically supported by Democratic Governor Bill Richardson. The state recently celebrated the 100th film to collect its 25% rebate through state tax incentives.

    “No Country for Old Men,” the 2007 Best Picture Oscar-winner, was based on a Cormac McCarthy novel set in Texas that used Texas as a metaphor for a changing America. But it was shot in New Mexico. The AMC series “Breaking Bad,” the feature “Terminator Salvation,” the sequel to “Transformers”, and, perhaps most appropriately, a biography of Georgia O’Keefe, were all recently filmed in New Mexico.

    New Mexico claims that its 25% production cost rebate has contributed to building a stable film industry: $600 million in direct spending since 2003, and an estimated $1.8 billion in financial impact as of 2007. In 2008, productions in the state generated about 142,000 days of employment, up from 25,000 in 2004. The state continues to invest in the future of its film industry by building additional studios, and Sony Pictures Imageworks will open a large post-production facility in Mesa del Sol west of Albuquerque in mid-2009.

    The latest California loss to New Mexico: ReelzChannel, after laying off more than 40 employees in Los Angeles, just announced its relocation to Albuquerque.

    Les Bon Temps De Roulez Rolls Over A Grand Bump: Louisiana has a history of aggressive pursuit of film and television production through tax incentives. It offers 25% (plus 10%) transferable tax credits. Jefferson parish, outside New Orleans, offers an additional 3% rebate for production with a cap of $100,000. The cap rises to $110,000 if the production office and stage are in Jefferson Parish.

    The Louisiana Film Commission boasts that more than $2 billion in productions have been filmed in the state, with a direct impact of $1.48 billion for their economy. Film production almost doubled between 2005 and 2007, and film-related jobs have grown 23% per year. An estimated 65 projects were completed in 2008.

    Louisiana’s figures look good, but are they real? In an accounting finesse as creative as a film plot, former Film Commissioner Mark S. Smith inflated budgets and broadly interpreted “film projects” to include the filming of music festivals, thereby bankrolling with taxpayer money almost 30% of some music festivals, handing out $10 million to festival producers. Smith pleaded guilty in 2007 to taking bribes of $65,000, and after numerous postponements is still awaiting sentencing.

    Louisiana quietly closed some of the loopholes related to the actual amount of filming in the state, but the system still poses questions for Louisiana taxpayers. “The Curious Case of Benjamin Button” is as big a Hollywood-picture-not-primarily-shot-in-Hollywood as they come. Most of the filming was done in New Orleans and Montreal, with some sound stage work in Los Angeles. It stars Brad Pitt (and the city of New Orleans), and is up for 13 Oscars, inclduing Best Picture. The film’s $167 million budget was so big and laden with special effects that it required the backing of two studios, Paramount Pictures and Warner Bros. Louisiana taxpayers will provide roughly $27 million of the film’s costs, as the producers who qualified for the incentives (pre-loophole-closing) ultimately cash or sell the value of their tax incentives.

    Production Flight Or Production Fleece?: While Louisiana appears resolute in its determination to be the Tinseltown of the Gulf Coast, other states in the midst of budget slashing are questioning the value of tax incentives for film production in the current economy. With Detroit in a tailspin, fiscal watchdogs in the Michigan congress are looking to cap film credits, enacted in April of 2008, at $50 million. Rhode Island, smarting from paying more in incentives than was returned to the economy on a straight-to-video movie, has also tightened its production incentive laws.

    The confusion and intricacy of exploring the possible tax credits, incentives, and rebates has created its own set of entrepreneurs. Producers who visit The Incentives Office can shop for film incentives in the way that a buyer or broker shops for favorable interest rates. The Incentives Office promises to help producers “maximize their production incentives,” to help states with their film incentive programs, and to assist lenders in verifying estimated rebates and tax credits. “Most effectively, we take care of the entire incentive process for producers, from choosing the right state to filing the final documents and collecting the money.” The Incentives Office is located in Santa Monica, so the incentive consulting business — if not the actual incentives — remain part of the California economy.

    California is struggling with more economic fault lines than a seismic map of the state. Its flagship business, entertainment, is hoping to be re-powered by tax incentives. If the industry does succeed at closing the deal with government, the last words on the script may be “I’ll be back,” and not “Hasta la vista, baby.”

    Nancy Meyer is a broadcast and cable television executive and producer. She also works in university education with the Academy of Television Arts & Sciences Foundation, and is co-author of Television, Film, and Digital Media Programs published by Princeton Review/Random House.

  • Oregon’s Immigration Question: Addressing the Surge in the Face of Recession

    The men huddle outside the trailer, eyeing the passing traffic. Handmade signs stapled to telephone posts speak for them: “Hire a Day Worker!” The site, a fenced-in lot at Northeast MLK and Everett Street, was launched in 2007, a testament both to Oregon’s recent immigration boom and lack of federal reform.

    Since then, Obama’s historic campaign, several wars and a global recession have pushed the immigration question from the national headlines. But in Oregon – where the surging migrant population is on a crash course with a withering economy – the issue is bound to reignite.

    Oregon’s economic boom, which started later than that in the rest of country, has ended. Unemployment has risen considerably. Oregon’s 9.0 percent unemployment rate was the nation’s 6th worst in December 2008 according to the Bureau of Labor Statistics.

    At the eye of the storm have been losses in the construction industry, a major employer of immigrants. The hard times there will put new pressure on local legislators and law officials to “clean out immigrants”. Oregonians should not give in to such misguided temptations. Oregon’s immigrants have played a historic role in enriching the state’s economy and can continue to do so if given the opportunity.

    Oregon’s immigration explosion is relatively new. The state’s foreign-born make up 9.5 percent of the population, with more than 60 percent of the immigrant population arriving after 1990, according to 2005 census data.

    The influx of Latinos to the state is even more recent. Estimates place 75 percent of Latinos coming between 1995 and 2005. Unlike other immigrants who tend to concentrate to urban and suburban areas, Latinos are dispersing across Oregon. Between 1990 and 2000, the Latino population doubled in 21 of Oregon’s 36 mostly-rural counties. Agriculture employment, cheap housing, and existing Latino communities attract the rural migration.

    Within the Portland metro area, the largest concentrations of foreign-born population live in Southeast Portland (Ukrainians, Russians, Romanians), Northeast Portland (Vietnamese, Africans), and Central Portland (Asians, Eastern Europeans), according to a study by the Urban Institute. Notably, more Russians and Ukrainians moved to Oregon’s suburbs between 2000 and 2005 than to any other region in the nation, according to a recent University of Oregon study.

    Currently, immigrants total over 11 percent of the state’s labor force, up from 5.4 percent in 1990. Yet native unemployment did not increase during this time period.

    One reason for this, argues MIT’s Tamar Jacoby in a recent Foreign Affairs article, is that the immigrant workforce should be viewed as complementary rather than competitive to the native workforce. For example, the business owner who can hire housekeepers and landscapers can devote more time to growing his business, and to leisurely expenditures that support other local businesses.

    Oregon’s diverse agricultural industries – ranking third nationally for labor-intensive crops – offer a more concrete example of the complimentary nature of immigrants.

    The state is home to a $325 million dairy and cattle milk production industry, a $778 million nursery and greenhouse industry, a $380 million fruit and nut industry, and a $200 million wine industry. All are primarily staffed by immigrants. In this case, immigrant labor allows Oregon’s agricultural sectors to thrive in the face of fierce import competition.

    Immigrants have historically had a strong entrepreneurial spirit. Nationwide, 25.3 percent of technology and engineering companies had at least one foreign born key founder, based on a Duke University study. Often with few resources or formal education, immigrant entrepreneurship can foster new kinds of services. The abundance of landscaping businesses and nail salons is a testament to such ingenuity. In 2005, over 6,000 Latino and 400 Slavic entrepreneurs operated throughout the Portland metro area, according to one University of Oregon study.

    Beyond providing jobs and fueling local economies, immigrant entrepreneurs bring the benefits of globalization to places like Oregon. They encourage trade and investment from their connections abroad.

    Immigrants pay taxes, buy houses, food, cars, and clothes just like native residents. Even illegal immigrants – which many immigration-demagogues label as the real problem – have taxes withheld from their paychecks. They also otherwise bring money to the state through sales taxes on local purchases. A study by the Oregon Center for Public Policy found that undocumented immigrants contribute between $134 million and $187 million in taxes annually to Oregon’s economy. These numbers represent only those coming from undocumented workers and exclude the significant investments made through entrepreneurship, agricultural support and the continual purchase of goods and services.

    Yet serious immigration reform is needed. A large portion of immigrants spends only stints working in the states, frequently sending money back home. The consequences of this go beyond the obvious fiscal drain. The stint worker will invest minimally in learning English, will often share rent in decrepit neighborhoods, and spend as little as possible in order to maximize savings for abroad.

    The problem facing Oregonians is not immigration per se – or even illegal immigration, which constitutes only 10 percent of the migration to the state. The real problem is stint immigrants, who invest little in the long-term health of their new communities and the economy of the state.

    The curious delusion about this point is that current federal legislation includes temporary-worker permits as key to reform. By giving only temporary permits to immigrants who might otherwise be coaxed into permanent stay, Washington is explicitly discouraging acculturation and encouraging capital drains.

    In large part, the real solution to the downsides of immigration lies in the permanent integration of Oregon’s new residents. When these residents feel they may be here permanently – without constant threat of deportation – they will be more likely to invest in their new communities and futures.

    Even the state’s recent job-shedding should not derail Oregonians’ historic acceptance of foreign residents. Oregon’s immigrants will stabilize agriculture and other service industries by providing cheap labor through hard times.

    If the incoming administration manages the recession correctly, Oregon’s economy will soon recover. To rebound quickly, the state will need to employ thousands – natives and immigrants – in the infrastructure and Green packages coming from Washington. Oregon’s post-recession economy, like its pre-recession economy, will depend on immigrant labor.

    A comprehensive understanding of Oregon’s immigration question must go beyond viewing the huddle of men on MLK and Everett every morning as mere numbers, bodies for pay.

    A true understanding of the issue will surface only by looking beyond the numbers to recognize these men’s potential, resourcefulness and culture as indispensable components that once shaped our nation’s identity and will continue to mold its future.

    Ilie Mitaru is the founder and director of WebRoots Campaigns, based in Portland, OR, the company offers web and New Media strategy solutions to non-profits, political campaigns and market-driven clients.

  • New Survey: Improving Housing Affordability – But Still a Way to Go

    The 5th Annual Demographia International Housing Affordability Survey covers 265 metropolitan markets in six nations (US, UK, Canada, Australia, Ireland and New Zealand), up from 88 in 4 nations in the first edition (see note below). This year’s edition includes a preface by Dr. Shlomo Angel of Princeton University and New York University, one of the world’s leading urban planning experts. Needless to say, there have been significant developments in housing affordability and house prices over the past year. In some parts of the United States, the landscape has been radically changed by rapidly dropping house prices.

    Our measure of housing affordability is the “Median Multiple,” which is the annual pre-tax median house price divided by the median household income. Over the decades since World War II, this measure has typically been 3.0 or below in all of the surveyed nations and virtually all of their metropolitan areas, until at least the mid-1990s. There were bubbles before that time in some markets, but during the “troughs” most markets returned to the 3.0 or below norm.

    Unfortunately, the most recent bubble was and continues to be the most severe since records have been kept. The Demographia International Housing Affordability Survey rates housing affordability using five categories, indicated in the table below.

    Demographia
    Housing Affordability Ratings

    Rating

    Median Multiple

    Severely Unaffordable

    5.1 & Over

    Seriously Unaffordable

    4.1 to 5.0

    Moderately Unaffordable

    3.1 to 4.0

    Affordable

    3.0 or Less

    Median Multiple: Median House Price divided by Median Household Income

    At the height of the current bubble, some markets saw remarkable declines in housing affordability. In some Median Multiples exceeded three times the historic norm. Among major markets (metropolitan markets with more than 1,000,000 population), Los Angeles, San Francisco, San Jose and San Diego all reached or exceeded a Median Multiple of 10. Many other markets saw their Median Multiples rise to double the historic norm and beyond, such as New York, Miami, Boston, Seattle, Sacramento and Riverside-San Bernardino. Other major US markets – such as Portland, Orlando, Las Vegas, Providence and Washington, DC – rose to above 5, a figure rarely seen in any market before the currently deflating bubble.

    America has hardly been an exception. Outside the United States, virtually all major markets in Australia were well over 6.0, as well as London and Auckland in New Zealand. Vancouver was the most unaffordable major market, with a Median Multiple of 8.4. Of particular note is barely growing Adelaide, which nonetheless has seen its Median Multiple rise to 7.1.
    But, at least in the US, the unaffordability wave has crested. Generally, the house prices peaked in the United States in mid-2007. Since then the markets with the biggest bubbles took the lead in bursting. By the third quarter of 2008 (the Survey reports on the third quarter each year), the Median Multiple in San Francisco had dropped to 8.0, San Jose to 7.4, Los Angeles to 7.2 and San Diego to 5.9. Of course, even at these levels, housing affordability in these metropolitan areas remained worse than ever before. History would suggest that housing prices in these markets have a long way to go before they hit bottom.

    Other markets have improved affordability more substantially. Inland California markets like Sacramento and Riverside-San Bernardino have gone from the “seriously” to only the “moderately unaffordable” category, with rates now in the mid-3.0s. Data for the fourth quarter is likely to indicate that Sacramento will be the first major housing market in California to return to a Median Multiple of 3.0, a rather large fall from its peak of 6.6 in 2005.

    Outside California, other markets have experienced significant price declines. But some, like Miami still at 5.6, have a long way to go before they reach the historic norm of 3.0. Las Vegas and Phoenix (which nearly reached 5) may be closer, falling to the “moderately unaffordable ” category with Median Multiples of between 3.1 and 4.0. Seattle and Portland have fallen 10 percent or more as of the third quarter but remain severely overpriced, suggesting they, like Miami, have more price declines in the offing.

    Much of the blame for the bubble has been placed at the feet of a mortgage finance industry that passed out money as if it was not its own. Not surprisingly, the ready availability of money had its effect on the market. Demand rose sharply and included many who couldn’t afford to pay.

    But profligate lending practices represent only a relatively minor cause of the bubble. This was missed by all but a few economists, notably Dr. Angel’s Princeton colleague and Nobel Laureate Paul Krugmann. He could see that there was not one “national bubble” but a series of localized ones. The real villain, he noted, lay in land use regulations.

    In reality the bubble missed much of the country – from Atlanta to El Paso to Omaha and Albany. There were house price increases, of course, but they were generally within the Median Multiple ceiling norm of 3.0. There were a few exceptions, but even they did not exceed 3.0 by much.

    Rising demand was not the big problem. Housing affordability remained at virtually the same Median Multiple level in Atlanta, Dallas-Fort Worth and Houston, the three fastest growing metropolitan areas of more than 5,000,000 population in the developed world. Many other major markets across the South and Midwest experienced little price increase and maintained their affordability. Indianapolis, which has a Median Multiple of 2.2, continued to gain domestic migration from other areas and has a near Sun Belt growth rate. Kansas City, Louisville and Columbus remain affordable and are attracting people from elsewhere.

    Although there are signs of a correction in parts of California, Nevada and Arizona, some bubbles in high-regulation markets are still in the early stage of deflating. New York, Boston, Portland and Seattle particularly may be in danger; the worst consequences of their bubbles lie ahead.

    The longer-term question remains whether these and other still highly over-valued markets in California, the Pacific Northwest, Florida and the Northeast will return to affordability, at or near a Median Multiple of 3.0. The necessary price drops would be bad news for regional economies because of the losses homeowners and financial institutions would sustain.

    At the same time maintenance of the currently elevated prices would also be bad news. In the past 7 years, 4.5 million people have moved from higher-cost markets to lower-cost markets in the United States. The formerly attractive markets of the California coast alone have seen more than two million people depart for other places since 2000. For these areas, a return to historic levels of housing affordability may be a prime pre-requisite to restoring economic health.

    HOUSING AFFORDABILITY RATINGS UNITED STATES METROPOLITAN MARKETS OVER 1,000,000
    Rank Metropolitan Area Median Multiple
    AFFORDABLE  
    1 Indianapolis 2.2
    2 Cleveland 2.3
    2 Detroit 2.3
    4 Rochester 2.4
    5 Buffalo 2.5
    5 Cincinnati 2.5
    7 Atlanta 2.6
    7 Pittsburgh 2.6
    7 St. Louis 2.6
    10 Columbus 2.7
    10 Dallas-Fort Worth 2.7
    10 Kansas City 2.7
    10 Mem[hios 2.7
    14 Oklahoma City 2.8
    15 Houston 2.9
    15 Louisville 2.9
    15 Nashville 2.9
    MODERATELY UNAFFORDABLE  
    18 Minneapolis-St. Paul 3.1
    18 New Orleans 3.1
    20 Birmingham 3.2
    20 San Antonio 3.2
    22 Austin 3.3
    22 Jacksonville 3.3
    24 Phoenix 3.4
    25 Sacramento 3.5
    26 Tampa-St. Petersburg 3.6
    27 Denver 3.7
    27 Hartford 3.7
    27 Las Vegas 3.7
    27 Raleigh 3.7
    27 Richmond 3.7
    32 Salt Lake City 3.8
    33 Charlotte 3.9
    33 Riverside-San Bernardino 3.9
    33 Washington (DC) 3.9
    36 Milwaukee 4.0
    36 Philadelphia 4.0
    SERIOUSLY UNAFFORDABLE  
    38 Chicago 4.1
    38 Orlando 4.1
    40 Baltimore 4.2
    41 Virginia Beach-Norfolk 4.3
    42 Providence 4.4
    43 Portland (OR) 4.9
    SEVERELY UNAFFORDABLE  
    44 Seattle 5.2
    45 Boston 5.3
    46 Miami-West Palm Beach 5.6
    47 San Diego 5.9
    48 New York 7.0
    49 Los Angeles 7.2
    50 San Jose 7.4
    51 San Francisco 8.0
    2008: 3rd Quarter  
    Median Multiple: Median House Price divided by Median Household Income
    Source: http://www.demographia.com/dhi.pdf

    Note: The Demographia International Housing Affordability Survey is a joint effort of Wendell Cox of Demographia (United States) and Hugh Pavletich of Performance Urban Planning (New Zealand).

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”