Category: Policy

Tough Budget Math for City Politicians: Bad Economy + Human Nature = More Cops

Our economy is going to get better some day, step by step. But it’s bad right now, with a full recovery likely a matter of years rather than months away. Public officials should plan accordingly, keeping in mind how the vicious cycle of a bad economy turns typical decision making on its head.

Start with a look at a virtuous cycle – the opposite of a vicious cycle – for a point of reference. Look back to the early 1990s, when President Bill Clinton got a tax increase through the U.S. Congress. A lot of folks were genuinely concerned about our federal budget deficits and national debt back then. The tax hike signaled that the federal government had grown serious about getting its finances in line. That quelled fears about inflation, and sent interest rates lower.

The relatively low cost of borrowing benefited businesses just as new strides in technology were reshaping our lives and helping keep inflation in check. The tech sector’s growth sparked other segments of the economy, leading to more payroll taxes, sales taxes, property taxes, capital gains taxes, etc. The federal budget came into balance, and then went into surplus. Public officials had plenty to divvy up from the virtuous cycle.

Now we face a vicious cycle. Tapped-out consumers stop spending. Companies cut back on orders and production and payrolls. Weakness leads to more weakness. Jobs keep disappearing. Government revenues decline at every level. Budget deficits abound.

Elected officials in Los Angeles should beware as they seek to meet those deficits with budget cuts, however. The vicious cycle is in full swing. Plenty of folks are desperate to hang on to their house, make their rent, or just get their next meal. Desperate individuals sometimes take desperate actions. Some of them lie, cheat, steal – and worse.

This trend holds the potential to tear apart our social fabric. Examine past periods of economic hardship and you’ll see that some folks fall into cynicism, looking beyond government institutions for leadership. Some are drawn to what appears to be strong leadership but is really a criminal element sophisticated enough to exploit stress points in our societal sense of right and wrong. Yesterday’s gangsters could quickly become today’s folk heroes in a tough economy.

That’s a particularly vicious cycle, and it will take an increased commitment to public safety to head off any such erosion to our social compact amid the current downturn.

Now is the time for elected officials to trade across-the-board mentalities on budget cuts for a sharpened sense of priorities. They should heed the vicious cycle and find money for more cops to help keep the cynics and criminals at bay while the rest of us make an honest effort to slug our way through tough times.

The everyday working folks and business owners who will ultimately pull us out of this mess deserve that much cover.

The Los Angeles Police Department (LAPD), meanwhile, has earned the assumption that properly trained and appropriately deployed cops can do more than simply react to crimes once they have occurred. The LAPD’s recent record has earned a place for the notion that good police work can not only prevent crimes but also dispel any atmosphere of lawlessness that might otherwise take hold – with safeguards on civil liberties in place all the while.

Indeed, it’s true that the rugged economy is pushing some of our people a rung or two down the socio-economic ladder, and it’s inevitable that some of them will resort to crime. Yet that still doesn’t mean that socio-economic factors trump cops on the beat – or that we must accept lawlessness as a natural and unavoidable by-product of a bad economy. The economic downturn means that the pool of potential criminals will grow, to be sure, but that presents a question of math rather than sociology – and the answer is more cops.

Just in case that’s not enough, we urge our politicians to consider the bonus that’s in it for them. They should understand just how disappointed voters are with elected officials at every level. They should know that perhaps the best chance for them to recover their standing with the public is to make courageous decisions when it comes to public safety.

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)

January 11, 2009
The Mobility Paradox: Investing in Human Capital Fuels Migration

China has an interesting urban development strategy. The government bypasses those areas that it considers backward and plagued by poverty and entrenched political corruption. Instead, the investment goes into those areas it presumes to be new boomtowns.

Now imagine if that Darwinian approach was used here in the United States. A report (“City Beautiful”) authored by two economists at the Federal Reserve Bank of Philadelphia advocates pushing federal infrastructure dollars – which could soon be flowing in the hundreds of billions – not towards our tired, hard-pressed urban areas but those that have experienced the greatest extent of gentrification.

If you don’t want to slog through the published paper, then you can read about the controversial findings in a recent Boston Globe article. The journalist, not surprisingly, sensationalizes the conclusions and the choice quotes do a great job of provocation: “‘If you have sun and a beautiful beach and 300-year-old buildings, it’s no wonder that you’re going to attract people,’ said [co-author Albert Saiz]. ‘But that’s no use for Detroit or Syracuse.’”

The author of the Globe piece goes on to question the coming urban bailouts: “Why send another federal dollar to bolster manufacturing in Akron when it could support a golf course in sunny Phoenix?”

I get the sense that the economists in question aren’t making such a stark distinction. But I can understand why the press would go down that road. I’ve read the research and there are concerns about the wisdom of investing in cities that currently don’t attract tourists or Richard Florida’s elite Creative Class.

The Federal Reserve Bank of Philadelphia report attempts to reconfigure the understanding of urban geography. People are congregating in urban centers for a new purpose: leisure. The old school of thinking identified the central business district (CBD) as the economic heart of the metropolis. Higher densities were the result of a more efficient way of doing certain types of work (e.g. financial, insurance and real estate).

The new school sees the city as a special playground and the study tries to capture this effect by looking at tourist Meccas. In short, jobs are following talent to pleasant places to live.

Gerald A. Carlino and Albert Saiz try to figure out if the geographically mobile are indeed heading to sunnier climes or if the leisure amenities follow the talent. They claim that quality of life comes first. The best and brightest are not chasing top employment opportunities. They are keener on finding a “cool” place to hang out.

Other research suggests this approach may be limited. For example, although job growth has been very strong in some sun belt cities that are cited, growth rates in other amenity-rich cities – Boston, New York, San Francisco – have been well below par. Although often attractive to twenty-somethings, these areas also suffer a persistently strong net outmigration.

Perhaps more to the point what use is any of this to those living in the heartland cities? Should Akron start putting more money in skateparks or global warming?

There are huge problem in spending money in order to attract the geographically fickle. Fads fade and the mobile – largely people under 30 – will move again. And what about the people who can’t move? We’ve yet to address the mobility paradox.

Moving to a better place might be one of the most distinguishing features of American culture. However, less and less people can manage to do so. There are considerably more “stuck” than there are “mobile.” The nomads of the knowledge economy comprise the global elite. They can live wherever they like and, particularly when young, can move at the drop of a hat.

Where does that leave the postindustrial cities currently failing to attract the twenty-something demographic? One suggestion is to better educate people tethered to their neighborhood. The rub is that greater investment in your human capital will make your young adults more likely to leave. This is the mobility paradox. Regional workforce development has the unintended effect of increasing out-migration.

A common response to the mobility paradox is the transformation of a downtown area into a “cool city.” The theory is that the best and brightest won’t leave if there are more fun things to do. Tying up the urban budget with projects aimed at retaining the creative class has its own perils. There is little, if any, evidence indicating that this policy will decrease the geographic mobility of the well-educated. Many cities stuffed with cultural amenities also sport high rates of out-migration. Furthermore, tastes change. ”Best places to live” lists change quite a bit from one year to the next.

We should learn from the bust of hot destinations such as Florida or even California. Today’s paradise is tomorrow’s backwater. Meanwhile most of the population will continue to live in “Forgottenville.” Should we just forget about them?

Globalization would seem to reward such an approach. Some cities will cut it, most won’t. Good luck dealing with the political instability. China gets away with ignoring its “old” cities thanks to robust growth and iron-fisted control. Given the current economic slowdown, things may be getting tense there, particularly in the left-behind industrial towns in the interior.

So should amenities drive President Obama’s economic strategy? These days, the Sunshine States also are in dire need of a bailout. Alabama fights Michigan for federal attention. If the Rust Belt benefits from the Chicago President, let’s hope it’s for its own sake – not just the creative class.

Read Jim Russell’s Rust Belt writings at Burgh Diaspora.

January 10, 2009
Daschle And State-by-State Healthcare Mistakes

Tom Daschle appears before the Senate this week for confirmation as Secretary of Health and Human Services. While Daschle knows his stuff on health care (see his book, Critical: What We Can Do About the Health-Care Crisis), the discussion is likely to be sidetracked by those who champion a reliance on insurance companies, or on piecemeal reform starting with children. Or, as I’ll discuss here, on a wrong-headed impulse to depend on the states to create new health care models.

Justice Louis Brandeis famously said, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Brandeis’ elegant language has been distilled to the phrase, “laboratories of democracy,” and used as if that’s a good thing. However, the converse also holds: bad ideas can be legislated at the state level and spread nationwide. One idea that continues to threaten to boil over the boundaries of a single state is “universal health insurance” achieved one state at a time. Oregon, Tennessee, California, and most famously Massachusetts have all experimented with versions, and other states have tried variations, particularly with children.

I’ll get to the more general notion of why I think states can’t go it alone. But for now, I’ll give a quick rundown on how states have tried and failed.

Critical Mass: Despite recent claims of a 97-percent coverage rate, Commonwealth Care, the Massachusetts plan, is struggling. You remember the Massachusetts plan: Mitt Romney was for it as governor before he was against it as a presidential candidate.

The plan is a patchwork of good intentions, political and practical exceptions, and as-yet deferred but heavy-handed enforcement. There’s an appeals system, waivers, and “creditability” (this has to do with the comprehensiveness of the policy and the out-of-network charges).

The crux of the Massachusetts law is a model of administrative clarity. The goal of insuring the uninsured was to be achieved in a couple of ways. One was that if health insurance was “offered by” an employer, the employee had to take it.

The problem is that “offered by” the employer isn’t a clean standard. Employers might have an insurance plan that’s technically available to employees, but it might be too expensive for them, or for their families. To square this circle, Massachusetts subsidized employment-based coverage if it cost more than a certain percent of the person’s income, and raised the eligibility limits for public insurance. Those without employers were required to buy private insurance, and insurers were regulated to make the policies “affordable.”

And then there are the penalties: “To enforce the mandate, [Massachusetts will] establish state income tax penalties for adults who do not purchase affordable health insurance….”

These stipulations raise obvious questions. What is “affordable”? Will residents be penalized for buying a policy too expensive for their family budget? Will insurance companies be punished for selling them such policies (do I hear the words “sub-prime mortgage”?). Will premium arrearages be counted as medical debt in bankruptcy court?

Alan Sager and Deborah Socolar, directors of the Health Reform Program at the Boston University School of Public Health, damned the Massachusetts legislation with faint praise in the Boston Globe last July: “the best law that could be passed.”

Calling it “a blessing to 350,000 newly insured people,” they pointed out that a similar number remained uninsured, and that the law often “can’t work” largely for reasons of cost. The mandates, they said, required huge subsidies, boosted payments to providers without controls, and redistributed funds committed to the most vulnerable.

Not surprisingly, by summer 2008, the lousy economy had begun to take its toll. To shore up the “coverage” rate, Massachusetts has reduced funding to safety-net hospitals, and has even cut millions of dollars from subsidized immunization programs. Patients wait six months for a physical.

With no plan for reducing medical costs, the state is effectively obligated to bankrupt itself.

The Oregon Lucky Number:

Oregon in March – for the first time in more than three years – will begin accepting new beneficiaries in its Oregon Health Plan […] The state will use a lottery system to enroll 2,000 eligible applicants per month for 11 months. Kaisernetwork.org, Jan. 10, 2008

The Oregon plan had lost two-thirds of its participants since freezing enrollment in 2004 and a lottery was deemed to be the fairest way to apportion openings.

Government lotteries have been used for everything from real estate in tax foreclosure to placement in magnet schools or, showing my age, the chance to serve in Vietnam.

Still, why should anyone have to depend on a lucky number to be treated for diabetes or cancer without going broke? If the plan is funded for 32,000 participants out of a total of 100,000 eligible residents, why didn’t they keep topping up as the numbers diminished? Or was there a theoretical break-even point somewhere?

California Pipe Dream: In early 2007, Governor Arnold Schwarzenegger announced a $14 billion program that supposedly mirrored the Massachusetts plan. The plan would have extended Medi-Cal, the state’s Medicaid program, to adults earning up to twice the federal poverty line, and to children, regardless of immigration status, who lived in homes with family incomes up to 300 percent above – about $60,000 a year for a family of four.

One controversial element called for employers without health plans to contribute to a fund to help cover the working uninsured. Doctors were to pay two percent and hospitals four percent of their revenues to help cover higher reimbursements for those who treat patients enrolled in Medi-Cal.

The ambitious program died in committee a year later, with legislators from both parties agreeing that it was unaffordable.

Florida No Frills: A 2008 Florida package would allow insurers to offer “no-frills coverage to the state’s 3.8 million uninsured” residents. Residents ages 19 to 64 could purchase limited health coverage for as little as $150 per month; the policies would cover preventive care and office visits, but not care from specialists or long-term hospitalizations.

“No frills” works better in airline travel than in health care. You can do without hot meals and pay extra for a headset or a Bloody Mary, but what Floridians will ultimately get for their $1800 a year and up are office visits and preventive care. It would probably be cheaper served à la carte and paid for in cash.

Hawaii’s Keiki Care In October, 2008, Hawaii dissolved the only state universal child health care program in the nation after only seven months. Dr. Kenny Fink, the administrator at the Department of Human Services, told a reporter, “People who were already able to afford health care began to stop paying for it so they could get it for free. I don’t believe that was the intent of the program.”

I should say not, but this disconnect between the intent of the program and its result makes perfect sense. Consumer behavior is supposed to be based on rational choices, and those parents who switched seem pretty rational. Hawaii’s solution seems simple and elegant, until you apply some basic laws of economics and behavior. Aloha, Keiki Care.

Why States Can’t Do It Alone

Why haven’t any of these state “universal health care” plans succeeded? Probably for the same reason that states can’t be self-sufficient in fossil fuels, or in banking. Most don’t produce their own fuels, and those that do can’t require their use within the state. They don’t print their own currencies. They have to compete with the rest of the world, public sector and private, for energy and capital.

These are not minor issues with localized consequences. The decision-making alone requires resources that might not be available at the state level. We need national bodies to determine standards, to evaluate technology, and – remembering that Medicaid, Medicare, the VA, and the government employee system amount to around half of health care spending – to decide on the appropriate use of federal dollars.

A final thought: Each additional set of rules, level of supervision, and geographic boundary may make sense initially. But when the lines drawn become indelible, and the bureaucracies created to enforce them calcify, we move further from the goal of providing health care. Jobs, and their budgets, become ends in themselves. We have to return to our original purpose and ask, “How can we get there?” One thing you can be sure of: it won’t be one state at a time. When it comes to health care, we need more unum and less e pluribus.

Georganne Chapin is President and CEO of Hudson Health Plan, a not-for-profit Medicaid managed care organization, and the Hudson Center for Health Equity & Quality, an independent not-for-profit that promotes universal access and quality in health care through streamlining. Both organizations are based in Tarrytown, New York.

Tom Daschle photo by: aaronmentele

January 9, 2009
Bush: A Disaster to Those He Held Most Dear

You always hurt the one you love
The one you shouldn’t hurt at all
You always take the sweetest rose
And crush it till the petals fall
You always break the kindest heart
With a hasty word you can’t recall

— Allan Roberts and Doris Fisher

Like the 1944 pop standard says, President George W. Bush has hurt the most all those he professed to love the most — from the conservative ideologues and born-again Christians to the free-market enthusiasts, energy producers and red state political class. Perhaps no politician in recent memory has done more damage to his political base.

The most obvious recent equivalent, Richard Nixon, did cause harm to the conservative cause, but that damage was short-lived. It reflected his deviousness more than his policies. Similarly, Bill Clinton’s many personality flaws weakened the Democrats’ hold on the White House, but inflicted no permanent harm to liberalism.

In contrast, the Katrina-scale disaster that has been the Bush presidency may leave his ideological backers in the wilderness for years to come. Over the past eight years, Bush has done more to undermine conservatism than all of the country’s college faculties, elite media and Hollywood studios put together.

The late Arizona Sen. Barry Goldwater — whose memory remains far more cherished than that of either President Bush — nurtured the modern brand of conservatism. Nixon employed some of these tenets, but they flourished most fully under Ronald Reagan.

Conservatism’s core values rested on notions of a strong national defense and free market economics. Bush has punctured these ideas in a way that transcends the effects of historically anomalous scandals such as Watergate or Clinton’s extramarital affairs. Bush has not only dinged the conservative car, he has totaled it.

Start with the great core issue of national defense. Arguably, Bush’s one success lies in his reaction to the Sept. 11 attacks and the ensuing lack of follow-up terrorist attacks on the homeland. Yet a series of other blunders, notably the war in Iraq, has blemished this enviable record.

Despite the great efforts of the military, particularly in recent years, to calm that rich but cantankerous country, it is hard to see how it has been worth the cost in life, treasure and international reputation.

The shoes thrown in Iraq and celebrated around the world epitomize not only ill manners but also the fact that even our supposed friends there don’t like us very much. If history is any guide, Iraq will end up as an authoritarian state with strong anti-American (as well as anti-Israel) leanings. The farther our sons and daughters get away from those ever-scowling people, the better most Americans will feel.

One unintended part of the Bush legacy will likely be a weaker, highly stressed military. The influential Democratic Netroots will be able to hound the military establishment — whatever President-elect Barack Obama’s intentions. Congress may be reluctant to commit troops to almost anything short of a Chinese invasion of San Francisco, which many Americans — and perhaps some progressive natives — might consider a blessing anyway. Support for new weapons systems, needed or not, will dissipate.

Bush’s legacy for the cause of free market capitalism may be even worse. Our first MBA-holding president has turned out to be the worst economic manager since Herbert Hoover.

The bailouts of Detroit and — much worse — the vile Wall Street profiteers now open the door to an unprecedented expansion of invasive welfarism throughout the economy. It’s hard to call proposals that build tennis courts in yuppie towns or subsidize performance artists in Flint, Mich., wasteful after the billions Treasury Secretary Hank Paulson has lavished on his compadres in Richistan.

In the coming years, the only legitimate opposition to the bipartisan pro-Wall Street policy will come from the scruffy populists of both parties, many based in the heartland regions of the country. Bush may even make quasi-Marxism respectable again. Hearing about $20 billion in new bonuses for government-subsidized Wall Streeters this year should be enough to bring out the hidden Bolshevik in even rational people.

Ironically, the only people who should be thanking Bush — the environmentalists, the urban gentry, the welfare staters — are the very ones who have despised him the most. Now that he has helped put them in power, perhaps they could host a celebrity fundraiser for the new Bush library in Dallas. Serenaded by Barbra, scolded by St. Al, with a short film by Michael Moore, the program — hosted by Whoopi Goldberg — could help consecrate a lavish new sarcophagus that Bush has prepared for the conservative movement.

This article originally appeared at Politico. White House Photo by Paul Morse

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.

January 7, 2009
How Detroit Lost the Millennials, and Maybe the Rest of Us, Too

The current debate over whether to save our domestic auto industry has revealed some starkly different views about the future of manufacturing in America among economists, elected officials, and corporate executives. There are many disagreements about solutions to the Big Three’s current financial difficulties, but the more fundamental debate lies in whether the industry should be bent to the will of the government’s environmental priorities or if it should serve only the needs of the companies’ customers and their shareholders.

But there’s something more at stake: the long-term credibility of Detroit among the rising generation of Millennials. These young people, after all, are the future consumers for the auto industry and winning them – or at least a significant portion of them – over is critical to the industry’s long-term prospects in the marketplace and in the halls of Congress.

The enormous investments the federal government has been making in private enterprises, including the auto industry, will test the ability of private sector executives to meet the expectations of this very civically minded generation. Sadly, so far, it’s a test many business leaders seem likely to fail.

In the case of the American auto industry, this failure has deep roots. Over the past few decades the leaders of the Big Three repeatedly have failed to move their industry in new directions, even when the opportunity to do so has plainly been put before them.

Attempts to nudge Detroit into producing more fuel-efficient vehicles have been going on since the 1973-4 Arab Oil embargo, which led Congress to establish Corporate Average Fuel Efficiency (CAFÉ) standards for cars and light trucks. The target was for cars to meet an average of 27.5 miles per gallon (mpg) by 1985. On Earth Day, 1992, Bill Clinton proposed to raise that standard even further to 45 mpg after he was elected President.

When Al Gore was asked to join the ticket, auto industry executives, terrified at the prospect that the man who had called for the abolition of the internal combustion engine might become Vice President, implored the leadership of the United Automobile Workers (UAW) to meet with the candidates and bring them to their senses. The lobbying effort worked. Under pressure from Owen Beiber, then UAW president, and Steve Yokich, who was his designated successor, and the powerful Democratic Congressman from Dearborn, Michigan, John Dingell, Clinton agreed to delay the adoption of higher CAFÉ standards until it could be proven that such goals were attainable.

This formulation opened the door for what came to be known as the Partnership for a New Generation of Vehicles or PNGV. Reluctantly supported by the Big Three, PNGV provided approximately a quarter of a billion dollars in government research funds to demonstrate the feasibility of producing a midsize sedan that could get 80 mpg. Often called “the moon shot of the 90s,” each car company was to make a prototype of such a vehicle by the politically convenient year of 2000 and begin mass production by 2004, another presidential election year.

After a few years of technological research, reviewed by the independent National Research Council (NRC), the partnership settled on the combination of a hybrid gasoline and electric powered propulsion system as the most promising approach. But by 1997, the car companies were resisting development of even a prototype for such a vehicle.

Vice President Gore, who had been in charge of the PNGV program since its inception, decided to meet with the Big Three CEOs to make sure they did not forget their past commitments. The answer from Detroit was emphatic: profits were coming from SUVs and heavy-duty trucks, not cars. Gore suggested they deploy a 60 mpg hybrid passenger sedan in 2002 rather than waiting for an 80 mpg version in 2004. Ford’s Peter Pestillo and his UAW ally, Steve Yokich, quickly replied, “no way.” Pestillo maintained, “we need much more time than that to make them cost competitive.” Gore could have, but didn’t, embarrass his host by pointing out that Toyota’s Prius was already delivering 55 mpg.

Not all executives were blind to the challenge. General Motors’ Vice-Chairman, Harry Pearce had been the driving force behind GM’s ill-fated EV1 electric car experiment. Despite a bout with leukemia that took him out of consideration for CEO of the company, he and his allies within GM exerted powerful influence on the company’s CEO, Jack Smith. He also won over an influential ally at Ford, the Chairman of its Board of Directors, William Clay “Bill” Ford, Jr., great grandson of the company’s founder.

At the Detroit Auto Show in January, 1999 Bill Ford personally introduced a new line of electric cars, under the brand name, THINK. Even though Honda and GM had abandoned the concept of an all electric vehicle by then, Ford said he thought there was still a niche market for such a car. Tellingly, Jac Nasser, Ford’s newly installed CEO, demonstrated his attitude toward these ideas by treating the visiting Secretary of Transportation, Rodney Slater, to a personal trip in a new Jaguar Roadster with the highest horsepower and worst gasoline mileage of any car at the show.

Right after that display of internal differences at Ford, Harry Pearce personally presided over the public introduction of General Motors’ PNGV hybrid prototype car, which delivered 80 mpg fuel efficiency, while seating a family of five comfortably. He then surprised everyone by revealing GM’s real vision of the future – a hydrogen fuel cell powered car called the “Precept” that got 108 mpg in its initial EPA tests. He grandly predicted that such cars would be on the road by 2010.

Clearly the industry was at a critical fork in the road. At a 2000 meeting at the Detroit airport, almost exactly one year to the day since their last meeting, Vice President Gore suggested to auto company executives that developing these products could enhance both the industry’s image and each company’s individual brands. Gore reminded his listeners, “It’s not just the substance of the issue you need to consider. You also need to think about the symbolism of the decision. Putting SUVs into the PNGV project would change the public’s perception of where you are going in the future.”

Jac Nasser wanted to know if such a commitment would change the dialogue between the industry and government. Gore suggested he would put his personal reputation behind such an agreement, which would garner the auto industry a great deal of positive press and appeal to the growing ranks of environmentally minded consumers.

But when it came time to put their reputation on the line, the auto executives blinked. The CEOs were not ready to commit to any specific production goals. This less-than-clarion call for a green automotive industry future made it only to page B4 of the Wall Street Journal the next day and was otherwise ignored by the rest of the public that the participants were hoping to impress.

Today, only Ford, the one American auto company not to ask for a bailout in 2008, is ready to offer a car that meets the original Clinton target. In showrooms in 2009, its Fusion Hybrid five-passenger sedan uses the hybrid technologies first explored in the PNGV to get 45 mpg in city driving, more on the highway, and costs about $30,000. As a result, Ford is in a much better position today to weather the whirlwind of change in consumer tastes and financial markets, even without the support of the federal government.

Unfortunately for America, General Motors, the largest of the Big Three, went in almost the opposite direction. Rick Wagoner, who became General Motors’ CEO in June 2000, chose to pursue an SUV-centered strategy that won big profits for a brief period. Since then, however, GM stock has plunged 95%, from $60 per share to roughly $3 in late 2008. General Motors, which lost $70 billion since 2005, has seen its market share cut in half. Having failed to embrace a public partnership with a sympathetic government, Wagoner was forced to beg for a federal bailout with onerous conditions. Seven years after the fateful auto summit with Al Gore, when asked what decision he most regretted, Wagoner told Motor Trend magazine, “ending the EV1 electric car program and not putting the right resources into PNGV. It didn’t affect profitability but it did affect image.” [emphasis added]

Had the auto industry taken Gore’s lead a decade ago and built a positive image among the very environmentally conscious Millennial Generation, it might have built a constituency to support the government’s bailout. Instead, the companies’ brands, particularly GM’s, have taken such a beating that the President-elect recently reminded the car companies that “the American people’s patience is wearing thin.” In contrast to young Baby Boomers buying songs by the Beach Boys celebrating the Motor City’s products, the country seems ready to drive their “Chevy to the levee” and tell the company “the levee is dry.”

But that is not the right answer. Millennials bring not only an acute environmental consciousness to the country’s political debate, but a desire for pragmatic solutions to the nation’s problems that promote economic equality and opportunity. To secure Millenials’ support, however, the domestic automobile industry needs to be seen as a contributor in ending America’s dependence on foreign oil and improving our environment. Not only would such an approach assure the industry’s future profitability, it would also remake its image in a way that will appeal to both their future customers and the politicians they support.

Morley Winograd, co-author with Michael D. Hais of Millennial Makeover: MySpace, YouTube, and the Future of American Politics (Rutgers University Press: 2008), served as Senior Policy Advisor to Vice President Gore where he witnessed the events described in this article. He and Mike Hais are also fellows of NDN and the New Policy Institute.

January 5, 2009
Current Policy Overlooks the New Homeless

San Francisco: A Chevron employee is forced to move his family of four into their Mitsubishi Gallant after being laid off…

Atlanta: Jeniece Richards moved from Michigan to Atlanta a year ago, but despite her best efforts, and two college degrees, remains homeless. She is living in temporary housing with her two children and younger brother…

Denver: As Carrie Hinkle’s hours dwindled, she was forced to choose between paying rent or buying food for her daughter. The two are now working with local agencies towards permanent housing, again…

These stories, plucked from the headlines of the past months are more than the typical holiday coverage. They show faces of the newly homeless, growing as the economy crumbles and opportunities fade.

Facing layoffs and deep cuts in working hours, many in fragile circumstances could no longer afford their mortgage. More commonly, they were renting from a landlord who foreclosed on their residence. Healthy, hardworking and addiction-free, the new homeless are closer in demeanor and behavior to our neighbors than the overly-typified street drunk.

Homeless resource programs across the country have been reporting record requests for assistance. A recent report from the U.S. Conference of Mayors found that, of 21 cities surveyed, 20 reported an increase in requests for food, with 59 percent coming from families. Nationwide, increased food stamps claims – a clear indicator of rising poverty – reached a record 31.6 million in September, up more than four million in a year according to the New York Times.

California, which has had a homeless problem for decades, has become the epicenter for the newly homeless. The state’s unemployment rate rose to 8.4 percent in November from 5.4 percent in 2007, making it the third highest in the nation. Compounding the homeless problem is the state’s high foreclosure rates (third in the country, according to RealtyTrac data). Homeless programs from San Francisco to San Diego are reporting record numbers, mostly from newly homeless residents impacted by the housing crises or falling economy.

Sadly this surge in homelessness comes just after a period when the problem was finally getting under control. One study by the Interagency Council on Homelessness found a 12 percent decrease in overall homelessness when comparing 2005 to 2007 data. That same time period also reveals a staggering 30 percent decrease in chronic homelessness (defined as being homeless for either over a year or for multiple stints).

In 2000, the National Alliance to End Homelessness crafted their landmark Ten Year Plan to End Homelessness. With successful bipartisan funding, 355 Ten Year Plans have been put into action nationwide.

Such plans, and a strong economy, accelerated the recent gains in the fight against homelessness. But the surge in newly homeless and shrinking budgets now threatens to reverse the progress.

New York City’s municipal shelter systems have seen record-setting increases over the past three months, according to the City’s Department of Homeless Services, but deep cuts loom ahead. Already, the city’s current budget includes a 3 million dollar decrease in outreach funding.

Denver plans to slash nearly a fourth of its funding for homeless initiatives at a time when the city reports a 38-percent increase in homelessness over the past year (Denver Post).

This situation will get much worse. A 20 percent increase of urban homelessness has been projected by the Interagency Council on Homelessness for 2009. Escalating homelessness and looming funding cuts create conditions for a renewed homeless crisis.

In the past debate has focused on the mentally ill and substance abusers, but the new homeless represent different phenomena. President-elect Obama has the responsibility to increase assistance to the degree that reflects the expanding problem. Washington seems all too willing to prop up the corporate players of the American economy, but let us not forget about the hardest hit by these times. Swift action must be taken to assure that the problem of the new homeless becomes no more than a historical footnote – to assure that we as Americans can look back with pride knowing that even during our hardest hour, all were cared for.

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.

January 5, 2009
Scrap Zoning; Legalize Great Places

Crisis offers opportunity. With real estate in a freefall, there is an opportunity to lay the foundation for a more prosperous and sustainable American landscape.

If only there is the vision and political will.

What is the single most significant change that can be made in every town and city in America? One that would aid economic development, reduce greenhouse gas emissions, foster healthier lifestyles, reduce dependence on foreign oil, protect open space and wildlife habitats, and reduce wasteful government spending?

Scrapping zoning codes.

Take any great place that people love to visit. You know, those lively tourist haunts from Nantucket to San Francisco. Those red hot neighborhoods from Seattle’s Capital Hill to Miami Beach’s Art Deco district. Those healthy downtowns from Portland, Oregon to Chicago, Illinois to Charleston, South Carolina. What do they all have in common?

The mix of uses that gives them life are outlawed by zoning in virtually every city and town in all 50 states.

Widespread adoption of zoning is a legacy of Herbert Hoover. As Commerce Secretary, he pushed zoning regulations to cure “the enormous losses in human happiness and in money, which have resulted from lack of city plans which take into account the conditions of modern life.” He championed the “Standard Zoning Enabling Act” to address “the moral and social issues that can only be solved by a new conception of city building.” After the Supreme Court upheld zoning in 1926, zoning — and sprawl — spread from sea to shining sea.

The high court based its decision on the need to protect health and safety by “excluding from residential areas the confusion and danger of fire, contagion and disorder which in greater or less degree attach to the location of store, shops and factories.” The quite sensible idea that people shouldn’t live next to steel mills was used to justify a system of “zones” to isolate uses that had lived in harmony for centuries. Suddenly, new neighborhoods were segregated by income, and commerce was torn asunder from both customers and workers. Timeless ways of creating great places were ruthlessly outlawed.

This coincided neatly with the rise of the car industry, and the systematic dismantling of America’s electric streetcar network. Today, we look back nostalgically on the “streetcar suburbs” and the booming cities of turn-of-the-century America when we sing:

City sidewalks, busy sidewalks
Dressed in holiday style
In the air there’s a feeling of Christmas.
Children laughing, people passing,
Meeting smile after smile
And on every street corner you’ll hear. . .
Silver bells, silver bells
It’s Christmas time in the city.

But zoning, cars, and suburban development put an end to such “contagion and disorder,” replacing busy “city sidewalks” with enclosed malls, parking lots, and traffic congestion.

Today, almost everyone admits the environmental and social devastation caused by sprawl, though some still defend it as a response to the consumer market. But “The American Dream” of single-family tracts, shopping centers and business parks owes more to zoning mandates than to market economics. Zoning was imposed on the American landscape by an unholy alliance between Utopians preaching a “modern” way of life and hard-headed businessmen who profited from supplying that new model, including an auto industry steeped in the ideology that “What’s good for General Motors is good for America.”

Politicians at every level bought into sprawl, playing both sides of the zoning game to harvest votes and campaign cash. It’s no coincidence that the rocket-fueled career of Vice President Spiro Agnew began at a suburban zoning board. He would have succeeded Richard Nixon as president if criminal charges for taking bribes from developers hadn’t caught up to him and forced his resignation first.

For a long time, support for zoning was impregnable. In the only country on earth to organize its urban form around Crayola colors on a map, those who questioned zoning were treated like the lunatics who denounce paper money.

Until now, perhaps. Younger Americans are turned off by the devotion of Baby Boomers to the landscape of “Leave it to Beaver.” Environmentalists are slowly realizing that, in protection of the environment, cities aren’t the problem, they are actually the solution. A movement of post-modern planners, architects, developers, transit advocates and historic preservationists has emerged under the banners of “smart growth,” “new urbanism” and “green building.” And at the local level, citizen activists (and even elected officials) are finally pushing to reverse suburban sprawl. A new vision has emerged around building compact and energy-efficient communities for the future.

What’s been lacking is the tool for producing that outcome, and for supplanting zoning at the local level. If “zoning” is the DNA of sprawl – the coding that endlessly replicates the bleak landscape of autotopia – then what is the DNA of livable communities?

It is found in timeless ways of building, updated for the 21st Century, including the need to accommodate cars. It regulates incompatible uses without the absurdities of conventional zoning. It is calibrated for new buildings to contribute to their context and to the larger goal of making a great place. It does so primarily by regulating the form of buildings, since that is what determines the long-neglected public realm of streets and sidewalks. It does that by regulating setbacks, heights and the physical character of buildings.

It exists, and it’s quietly spreading.

Where it’s been tried, it’s been a success. Seaside, Florida, the poster town for “new urbanism,” was “coded” rather than zoned, and ended up on the cover of Time magazine. In 2003, Petaluma, California scrapped its zoning regulations and adopted a new code for 400 underdeveloped acres in their Downtown, producing more than a quarter billion dollars in new investment. Miami, Florida is the first major city in America to embark on replacing zoning citywide.

Unfortunately, this promising alternative is currently saddled with two competing names, both of them unsatisfactory if the movement is truly to catch fire.

“Form-based codes” is the cumbersome term popular amongst planners. It is a literal tag that captures the emphasis on regulating the “form” of buildings, rather than the obsession with their “use” that is common to all zoning codes. But Americans suffer collective amnesia about why the form of cities determines their character; so while it addresses the “how” of coding, it fails to convey the “why.”

It clearly lacks the appeal of “No Child Left Behind” or “Homeland Security” as a marketing tool for reform.

Recognizing this, Seaside’s designer, Andres Duany, coined the term “smart codes.” The advantages of replacing a “zoning code” with something called a “smart code” are pretty obvious: “smart” is much better than “dumb,” which is why “smart growth” has caught on as a slogan. The obvious tool for promoting “smart growth” would be “smart codes.”

But the problem with the term “smart codes” is the same as the problem with the slogan “smart growth.” Pretty soon, everybody starts calling their codes “smart,” even if they aren’t. This has actually happened with lots of really atrocious developer schemes that have masqueraded as “smart.”

The magnitude of the problem may trump the limitations of the current names for the solution. While some still claim that the real estate meltdown is only a nasty cyclical slump, that’s just whistling past the graveyard. The model is broken. Building and financing generic products (class A office; suburban housing tract; grocery-anchored strip center; business park, etc.) through globally marketable securities has become radioactive. By the time supply and demand right themselves, the un-sustainability of the whole underlying system will be laid bare.

Of course, one can never underestimate what historian Barbara Tuchman called “the march of folly.” Perhaps in the interest of “stimulus” to the moribund economy, we will be willing to spend trillions more to subsidize sprawl. But in the end, as economist Herbert Stein pointed out, “That which cannot go on forever, won’t.”

Before that day comes, we can save untold environmental, economic and social damage by the widespread adoption of coding that respects human scale, restores the proximity of complimentary uses, and repairs the damage done to the American landscape and our rich (but abandoned) tradition of creating fine neighborhoods, towns and cities.

Scrap zoning. Adopt coding. Legalize the art of making great places that people cherish, that produce economic value, and that leave a lighter environmental footprint on the land.

Rick Cole is the City Manager in Ventura, California, where he has championed smart growth strategies and revitalization of the historic downtown. He previously spent six years as the City Manager of Azusa, where he was credited by the San Gabriel Valley Tribune with helping make it “the most improved city in the San Gabriel Valley.” He earlier served as mayor of Pasadena and has been called “one of Southern California’s most visionary planning thinkers by the LA Times.” He was honored by Governing Magazine as one of their “2006 Public Officials of the Year.”

January 2, 2009
Stimulate Manufacturing and Production, Not Consumption and Consumerism

As store earnings plunged last week, the National Retail Federation proposed that the country create the mother of all sales by suspending taxes on all purchases. These tax holidays would occur in March, July and October and be national in scope.

The bill, they suggested, should be picked up by – who else? – the federal taxpayer, who would make up for the lost local revenues even for the five states without sales taxes. The rationale, suggests the Federation’s chairman, J.C. Penney Chief Executive Myron Ullman III, in a letter to President-elect Barack Obama, would be “to help stimulate consumer spending as one of the first priorities of your new administration.”

Now I can understand the manager at the local Target, Macy’s or Nordstrom feeling a bit neglected as money pours out to prop up financial institutions and the Big Three. This proposed subsidy for mallrats, however, makes the previous somewhat-dubious bailouts look like good policy.

In fact, if there is one thing Americans do not need, it is yet another incentive to spend money they do not have. This has become a fixture of stimulus-think under the Bernanke-Bush regime. Remember the tax rebates earlier in the year? That was a big help, wasn’t it?

Sadly, this “shop ’til you go bankrupt” strategy is being adopted by the new kingpins in Washington as well. Already you can hear Barney Frank, chair of the House Financial Services Committee, talking about a big stimulus to “prop up consumption.”

This quick-fix approach has become a new genus of bipartisan madness. Like “the best minds of my generation … looking for an angry fix” – to recall Allen Ginsberg’s Howl – politicians and policymakers seem to feel we need some quick high to restore our battered economy.

Like a bad drug habit, reckless stimulation may make us feel better in the short term, but it could leave us shaky later on. To be effective over time, a stimulus plan must first address some fundamental challenges that have haunted the American economy for a generation.

Of course, there are countries that should be spending more. Places like China, Germany and Japan have gotten fat off our consumption. Now their beggar-thy-neighbor policies are backfiring as shopaholic nations, most notably the U.S., rein in their spending.

In contrast, our economy’s failing stems from not producing nearly enough in goods and services to pay our bills. Our long-term weakness stems not from a shortage of consumer credit – the main obsession of Wall Street and both parties – but from the decline in manufacturing, growing dependence on imported fuel and deteriorating basic infrastructure.

Our consumption patterns – coupled with disdain for production – explain how our deficit in goods-related trade alone has soared over the past two decades from roughly $100 billion annually to over $800 billion. In the process, we have created an enormous shift in currency reserves to countries like China, Russia, India, Korea, Brazil and Taiwan. They produce and save too much; we consume and borrow too much.

Reversing this dangerous disequilibrium does not necessitate the end for American-style capitalism – as suggested recently by France’s president, Nicolas Sarkozy – but instead a paradigm shift within it.

First, we need to swear off our addiction to hype-driven bubbles, seen first in technology and more recently in real estate. The fact that the government may be about to start yet another – this one colored “green” – suggests bad habits are hard to break.

Of course, bubbles certainly benefit some individuals and companies, most notably the financial sectors, who can best take advantage of wild speculative swings. The financial sector’s share of profits more than doubled as a percentage of national income since the 1980s.

However, this pattern has not worked so well for most Americans, who have seen their wages stagnate or even fall. Most of us would benefit far more from robust growth that stems from productive industries like energy, fiber, food, logistics and manufacturing. Parts of the industrial Midwest, Texas and the Southeast have enjoyed expansions in these fields – until the onset of the recession, at least.

More important, productive economic growth creates demography far more egalitarian than the Namibia-like bifurcation that characterizes bubble centers like Manhattan and San Francisco. In fact, notes University of Washington demographer Richard Morrill, areas with greater concentration of these kinds of industries tend to suffer less inequality and offer better prospects for the average middle class worker.

Concerns over income equality should persuade Democrats – the supposed party of the people – to focus primarily on the basics of economic growth. This is precisely what we have not been doing for over a generation.

Just think of the billions sunk into convention centers, yuppie condos, performing arts centers and other ephemera. These produce some high-wage short-term construction and architecture jobs, but after that, they offer largely low-paying service work. Meanwhile the Chinese and other competitors dredge new harbors, build high-speed rail systems, new freeways and fiber-optic lines – the keys for pushing their economies to the next stage.

Sure, you can say the Chinese are also hurting from this financial crisis. But at least they can pay for their own stimulus. The Germans, Russians and Japanese, for now, can also dip into their dollar reserves to pay for new infrastructure investment. In contrast, we will have to beg the money for our stimulus like some busted-up small-town bookie.

More serious yet, the real problem may be whether we even want to make the changes necessary to boost our economy. Americans were once masters of both innovation and production, but we have begun to fall behind on both counts.

Indeed, our policies no longer focus on such things as manufacturing and energy production, deeming them beneath our dignity. As early as the mid-1980s, the New York Stock Exchange issued a report baldly stating that “a strong manufacturing economy is not a requisite for a prosperous economy.”

At the same time, we have deluded ourselves into believing that a small number of “creative” alchemists – software engineers, hedge fund managers, urban developers – could transform code, cash and condos into limitless pots of gold. The huge winnings of these few would then allow the rest of us to spend like teenagers on a borrowed credit card, consuming everything made by the hard-working fools abroad.

By now we should know better. Americans possess no monopoly on “creativity.” Our suppliers abroad are using the billions made from selling us everyday stuff to help finance future moves up the value-added scale. You can see it in every critical field from aerospace, steel and pharmaceuticals to software services, fashion design and entertainment.

Americans can meet this challenge but not by goading the family to spend more at Wal-Mart. Instead, we need to remember what actually drives economic growth. The ultimate fate of the economy will not be determined in the malls, but in the mines, oilfields, farms, factories, design shops and laboratories of a more productive economy.

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.

December 30, 2008
The Importance of Productivity in National Transportation Policy

For years, transit funding advocates have claimed that national policy favors highways over transit. Consistent with that view, Congressman James Oberstar, chairman of the powerful House Transportation and Infrastructure Committee, wants to change the funding mix. He is looking for 40 percent of the transportation funding from the proposed stimulus package to be spent on transit, which is a substantial increase from present levels.

This raises two important questions: The first question is that of “equity” – “what would be the appropriate level to spend on transit?” The second question relates to “productivity” – “what would be the effect of spending more on transit?”

Equity: Equity consists of spending an amount that is proportionate to need or use. Thus, an equitable distribution would have the federal transportation spending reflect the shares that highways and transit carry of surface travel (highways plus transit). The most commonly used metric is passenger miles. Even with the recent, well publicized increases in transit ridership, transit’s share of surface travel is less than 1 percent. Non-transit highway modes, principally the automobile, account for 99 percent of travel.

So if equity were a principal objective, transit would justify less than 1 percent of federal surface transportation expenditures. Right now, transit does much better than that, accounting for 21 percent of federal surface transportation funded expenditures in 2006. This is what passes for equity in Washington – spending more than 20 percent of the money on something that represents less than one percent of the output. Transit receives 27 times as much funding per passenger mile as highways. It is no wonder that the nation’s urban areas have experienced huge increases in traffic congestion, or that there’s increasing concern about the state of the nation’s highway bridges, the most recent of which occurred in Minneapolis, not far from Congressman Oberstar’s district.

In addition, a substantial amount of federal highway user fees (principally the federal gasoline tax) are used to support transit. These revenues, which are only a part of the federal transit funding program, amounted to nearly $5 billion in 2006. Perhaps most amazingly, the federal government spends 15 times as much in highway user fees per transit passenger mile than it does on highways. Relationships such as these do not even vaguely resemble equity.

Moreover, truckers would rightly argue against using passenger miles as the only measure of equity. Trucks, which also pay federal user fees, account for moving nearly 30 percent of the nation’s freight. Transit moves none. Taking money that would be used to expand and maintain the nation’s highways will lead to more traffic congestion and slower truck operations – which also boosts pollution and energy use. This also means higher product prices.

Productivity: For a quarter of a century, federal funding has favored transit. A principal justification was the assumption that more money for transit would get people out of their cars. It hasn’t happened. Transit’s share of urban travel has declined more than 35 percent in the quarter century since highway user fee funding began. State and local governments have added even more money. Overall spending on transit has doubled (inflation adjusted) since 1982. Ridership is up only one third. This means that the nation’s riders and taxpayers have received just $0.33 in new value for each $1.00 they have paid. This is in stark contrast to the performance of commercial passenger and freight modes, which have generally improved their financial performance over the same period.

It’s clear spending more on transit does not attract material numbers of people out of cars. Major metropolitan area plans are biased toward transit but to little overall effect. At least seven metropolitan areas are spending more than 100 times more on transit per passenger mile than highways and none is spending less than 25 times.

The net effect of all this bias has barely influenced travel trends at all. Since 1982, per capita driving has increased 40 percent in the United States. Moreover, the increases in transit ridership (related to history’s highest gasoline prices) have been modest relative to overall travel demand. Transit captured little (3 percent) of the decline in automobile use, even in urban areas. Most of the decline appears to be a result of other factors like people working at home or simply choosing to drive less. It is notable that none of the transit-favoring metropolitan area plans even projects substantial longer term reductions in the share of travel by car.

The reason for this is simple. Transit is about downtown. The nation’s largest downtown areas, such as New York, Chicago, San Francisco, Boston, Philadelphia, Boston and Washington, contain huge concentrations of employment that can be well served by rapid transit modes. Yet relatively few Americans either live or work downtown. More than 90 percent of trips are to other areas where transit takes, on average, twice as long to make a trip – if there is even service available. Few people are in the market for longer trip times.

These policy distortions are not merely “anti-highway.” They are rather anti-productivity. This means they encourage greater poverty, because whatever retards productivity tends to increase levels of poverty. It would not be in the national interest for people to choose to take twice as much of their time traveling. By definition, wasting time retards productivity and international competitiveness. These are hardly the kinds of objectives appropriate for a nation facing perhaps its greatest financial challenges since the Great Depression.

For years, national transportation policy has been grounded in hopeless fantasy about refashioning our metropolitan areas back to late 19th Century misconceptions. It’s time to turn the corner and start fashioning a transportation strategy – including more flexible forms of transit – that make sense in our contemporary metropolis.

Resources:

Urban Transport Statistics: United States: A Compendium
http://www.publicpurpose.com/ut-usa2007ann.pdf

Regional Plan Spending on Highways and Transit
http://www.publicpurpose.com/ut-rplantransit.pdf

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.”

December 29, 2008

A Housing Boom, but for Whom?

By Susanne Trimbath and Juan Montoya

We just passed an era when the “American Dream” of home ownership was diminished as the growth of home prices outpaced income. From 2001 through 2006, home prices grew at an annual average of 6.85%, more than three times the growth rate for income.

This divergence between income and housing costs has turned out to be a disaster, particularly for buyers at the lower end of the spectrum. In contrast, affluent buyers – those making over $120,000 – the bubble may still have been a boom, even if not quite as large as many had hoped for.

For middle and working class people, the pressure on affordability was offset by historically low mortgage interest rates which fell from over 11 percent around the time of the 1987 Stock Market Crash to 6 percent in 2002. Yet if stable interest rates were beneficial to overall affordability, the artificially low interest rates promoted by the Federal Reserve may have created instability. By allowing people to increase their purchasing power to an extraordinary level, low mortgage interest rates fueled a rapid escalation in housing prices.

Now that prices are falling quicker than incomes, there should be a surge in new buyers. Since 1975, whenever the ratio of mortgage payments to income falls, home sales usually rise. The correlation coefficient indicates that for every 1% improvement in affordability there is a 2% increase in home sales. But now, something is wrong. In 2007, for every 1% improvement in affordability, home sales fell by 2%.

Part of the problem is that prices still are simply too high. Even as recently as August 2008, the median home price was still historically high in comparison to median income – about 4 times. It takes lower rates than in the past for a family with the median income to afford the median priced house. This means that homes are less affordable today than they were 6 years ago.

The last time that home sales fell as they became more affordable was in the 1990s at a time known as a “credit crunch.” At that time, the ratio of home prices to income was actually lower – 3.8 times in September 1990 compared to 4.3 in September 2008. The difference was that between 1990 and 1992 mortgage interest rates averaged a hefty 9.26%. In the last 3 years, the average was 6.14% and while the words “credit crisis” bled in headlines around the world, the regular mortgage interest rate barely budged.

What we are clearly witnessing is a fundamental slow-down in the gains towards homeownership. Of course, most of the gains in homeownership in the US were made in the 20 years after World War II: owner-occupied housing went from 43% in 1940 to 62% in 1960. In the 40 years that followed ownership crept up a bit, from 62% to 68%.

Boom, yes. But for Whom?

One disturbing aspect of this slow-down has been its effects by class. Overall, ownership has gained only among households making $120,000 or more; for all other groups the ratio of owners to renters is lower today than it was in 1999. (About 80% of American households have income less than $100,000 per year. For Hispanics and African Americans, the number is closer to 90%.)

There have been some exceptions, particularly among minorities targeted by national policy: expanding home ownership opportunities for minorities was a fundamental aim of President Bush’s housing policy. In the early years of this decade Hispanics enjoyed a net 2.6 percentage point gain in home ownership. In the next four years, while most Americans were seeing a decrease in home ownership, the Hispanic population continued to see gains. Although African Americans initially gained more than Whites in home ownership, they gave back more of those gains in the housing collapse

The great irony is that exactly those programs aimed at improving affordability may have been responsible for this recent decline. We first wrote about Housing Affordability in 2002. One of our concerns then proved to be true: buyers would focus on “can I afford this home” instead of “what is this home worth.” Although there were some gains in overall home ownership rates in the US during the early part of the boom, about 40 percent of that was given back during the last four years as home prices surged out of reach.

	Rate	Change in Rate
Location	2008 Q2	1999-2004	2004-2008	1999 – 2008
US	68.1	2.2	-0.9	1.3
Northeast	65.3	1.9	0.3	2.2
Midwest	71.7	2.1	-2.1	0.0
South	70.2	1.8	-0.7	1.1
West	63.0	3.3	-1.2	2.1
City	53.4	2.7	0.3	3.0
Suburb	75.5	2.1	-0.2	1.9
Non-metro*	74.9	0.9	-1.4	-0.5
White	75.2	2.8	-0.8	2.0
Black	48.4	3.0	-1.3	1.7
Other**	60.2	5.5	0.6	6.1
Multi	56.4	NA	-4.0	NA
Hispanic	49.6	2.6	1.5	4.1

Table based on historical data from US Housing Market Conditions, U.S. Department of Housing and Urban Development, Office of Policy Development and Research,
*Non-metro includes all areas outside metropolitan statistical areas (non-urban). Note from Census.gov: For Census 2000, the Census Bureau classifies as “urban” all territory, population, and housing units located within an urbanized area (UA) or an urban cluster (UC). It delineates UA and UC boundaries to encompass densely settled territory, which consists of: core census block groups or blocks that have a population density of at least 1,000 people per square mile and surrounding census blocks that have an overall density of at least 500 people per square mile.
**”Other” includes “Asian”, which reports household incomes about 20% to 30% higher than the Racial/Ethnic category “All” regardless of income level category.

The areas with the biggest losses in home ownership rates in the 2004-2008 period were outside the cities, particularly in the Midwest which encompasses Missouri, Iowa, Kansas, Nebraska, Minnesota and the Dakotas (west north central) plus Wisconsin, Illinois, Indiana, Michigan and Ohio (east north central). Of the geographic segments, non-metropolitan Americans gained the least in home ownership in the 1999-2004 housing boom; and only the Midwest geographic segment gave back more.

What about the future? The Obama-Biden Agenda Plan on Urban Policy mentions housing nine times, including a headline on “Housing” with plans for making the mortgage interest tax deduction available to all homeowners (it currently requires itemization) and an increase in the supply of affordable housing throughout Metropolitan Regions. The former should help middle-class households; the latter will help lower-income households. This is not a continuation of the Bush Administration policy which relied on stimulating the demand for housing by providing mechanisms to bring households into the market. The data shows that low income households barely kept even on ownership (versus renting) under this policy, middle-class households suffered tremendous losses and only the wealthy, those making more than $120,000 in income, had a gain in home ownership.

The last President ignored our advice in 2002: “A more balanced effort to stimulate supply would equilibrate the potential adverse affect on prices” from over stimulating demand. Let’s hope this new President gets the balance right.

Dr. Trimbath is a former manager of depository trust and clearing corporations in San Francisco and New York. She is co-author of Beyond Junk Bonds: Expanding High Yield Markets (Oxford University Press, 2003), a review of the post-Drexel world of non-investment grade bond markets. Dr. Trimbath is also co-editor of and a contributor to The Savings and Loan Crisis: Lessons from a Regulatory Failure (Kluwer Academic Press, 2004)

Mr. Montoya obtained his MBA from Babson College (Wellesley, MA) and is a former research analyst at the Milken Institute (Santa Monica, CA) where he coauthored Housing Affordability in Three Dimensions with Dr. Trimbath. He currently works in the foodservice industry.

December 28, 2008