New Geography

Category: Policy

  • City-Specific Immigration Visas Would Be a Modern Day Indentured Servitude

    An idea that’s been kicked around by many is to help turn around struggling cities like Detroit by offering geographically limited immigrations visas. That is, to allow foreigners get their green card if they agree to live in a particular city for a certain number of years.

    Michigan Gov. Rick Snyder has now officially endorsed the concept, calling for Detroit to be awarded 50,000 city-specific immigration visas for skilled workers over five years. As the NYT put it:

    Under the plan, which is expected to be formally submitted to federal authorities soon, immigrants would be required to live and work in Detroit, a city that has fallen to 700,000 residents from 1.8 million in the 1950s.

    “Isn’t that how we made our country great, through immigrants?” said Mr. Snyder, a Republican, who last year authorized the state’s largest city to seek bankruptcy protection and recently announced plans to open a state office focused on new Americans.

    Later, he added, “Think about the power and the size of this program, what it could do to bring back Detroit, even faster and better.”

    The appeal of the idea is obvious. I’ve probably said positive things about it myself in the past. But examine it more closely and it’s clear this is an idea that’s fatally flawed. By requiring immigrants to live and work in the city of Detroit for a period of time, this program would effectively bring back indentured servitude, only instead of having to work for the people who paid for their trip to America, these immigrants would have to work for Detroit.

    I’ve got to believe that the courts would look skeptically at such a scheme that so radically restricts geographic mobility and opportunity. What’s more, I think it’s plain wrong to invite people into our country with the idea that they are de facto restricted to one municipality.

    L. Brooks Patterson, county executive of wealthy Oakland County in suburban Detroit, took huge heat again this week when he was quoted in the New Yorker saying “I made a prediction a long time ago, and it’s come to pass. I said, ‘What we’re gonna do is turn Detroit into an Indian reservation, where we herd all the Indians into the city, build a fence around it, and then throw in the blankets and the corn.’” Yet isn’t this idea of city specific visas almost literally treating Detroit like a reservation, only for immigrants instead of Indians?

    Some have likened this to programs to entice doctors to rural areas by paying for medical school. I’m not sure how all of those are structured, but they may have questionable elements as well. But more importantly, my understanding is that they are purely financial, where medical school loans are paid off in return for a certain number of years of service. If a doctor elects to leave the program, they are in no worse shape than someone who didn’t sign up would be. They are still licensed to practice medicine and have to repay their loans just like every other doctor.

    I don’t think Gov. Snyder is motivated by any ill will in this. I think he’s genuinely looking for creative solutions to the formidable problems Detroit faces. He’s taken huge heat for finally facing up to the legacy of problems there, and hasn’t shied way from making tough calls. He’s even willing to call for some bailout money, which many in his own party don’t like. But this idea is a bad one. He should withdraw it, and the federal government should by no means open to the door to these types of arrangements.

    Immigrants remain a great way to pursue a civic turnaround, however. Detroit just needs to lure them on the open market the same way Dayton, Ohio and others are trying to do.

    Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile, where this piece originally appeared.

    Photo by telwink

  • America’s Glass Half-empty, or Half-full?

    The stock market is high, real estate prices have resurged, even the unemployment rate is dropping, yet Americans still feel pretty down about the future. A survey released in January by the AP-NORC Center for Public Affairs Research had 54 percent of respondents expecting American life to go downhill over the coming decades. In a December survey, 23 percent of respondents said things will improve over time.

    Yet, in reality, there are several huge trends – economic, environmental, demographic – working in favor of the United States. Despite 13 straight years of underwhelming leadership, the U.S. can emerge extraordinarily blessed from the Great Recession and lackluster recovery, if Americans take advantage of our current situation.

    Why, then, so glum? One explanation clearly is the shape of the economic recovery, which, due in part to Federal Reserve monetary policy, has favored the rich by primarily promoting stock market and other asset growth. “Qualitative easing,” notes one former high-level Fed official, essentially constituted a “too big to fail” windfall for the largest Wall Street firms. Executives at these same firms set new compensation records in 2011, just three years after the financial “wizards” left the world economy on the brink of economic catastrophe.

    As people on Wall Street, and their hipper counterparts in Silicon Valley, celebrate their good fortune, most people are not doing well, and they know it. Unemployment may have dropped officially, but the percentage of Americans in the workforce is now at the lowest level since December 1977. Huge parts of our society now face long-term unemployment or, at best, a marginal existence at the low end of the job market.

    This trend is most disturbing because it has been going on for a long time and, generally, has been getting worse. Since 1973, for example, the rate of growth of the “typical family’s income” in the United States has slowed dramatically; for males, it has actually gone backward when adjusted for inflation, at least until the early 1980s. In contrast, in 2012, the top 1 percent of earners accounted for one-quarter of all American income, the highest percentage in the past century.

    So, given these problems, why should anyone be optimistic? After all, by 2020, the CIA suggested in 2005, the U.S. world position will have eroded because of the rise, most notably, of India and China; many business leaders share this assessment.

    Nevertheless, here are five reasons for optimism.

    Everyone else is in worse shape

    Looking for a global hot spot that’s doing better? Look again. Virtually all America’s much-vaunted competitors of yesterday – notably, Japan and the European Union – have suffered slow economic and demographic growth. The much-ballyhooed winner of tomorrow, China, also appears to be slowing. Political corruption, soaring local debt and massive levels of pollution are creating a crisis of confidence, reflected by the growing exodus of the educated and affluent from China and Hong Kong , with many ending up in the United States.

    The other members of the so-called BRIC countries – a term coined by one of the geniuses at Goldman Sachs – also are stagnating. Brazil’s successful bids to host the 2016 Summer Olympics and this summer’s soccer World Cup have made ever more obvious the country’s massive poverty and political incompetence, made all the worse by a slowing economy. India, too, is experiencing weak growth and increased political instability. Russia’s uncrowned czar, Vladimir Putin, may be outmaneuvering our gullible, indecisive president but the country Putin controls is going nowhere, with the population stagnating and its weakening economy utterly dependent on extractive resources. Turkey, another favorite of the investment banks, is also showing signs of distress and instability.

    Energy revolution

    Barack Obama has tried to take credit for America’s huge shift toward self-sufficiency in oil and gas, a movement driven largely by wildcatters and independents. Of course, it would have never happened if he had his druthers; under his administration, energy production on federal lands has dropped steadily. Nevertheless, the president seems smart enough not to shut off this amazing development on private and state lands, despite incessant pressure from his environmentalist supporters.

    The energy revolution, notably in natural gas, changes everything. It allows us to tell many of the world’s leading malefactors – Russia, Venezuela, Iran and Saudi Arabia – to keep their oil. It also is driving continued improvement in air quality and reduced levels of greenhouse gases. American natural gas, rapidly replacing coal as an energy source, has turned this country into what one green think tank, the Breakthrough Institute, called “the global climate leader.” We are lowering our emissions far more rapidly than are the Europeans, people widely praised by some U.S. greens for having superior policies.

    Manufacturing resurgence

    For all the concern expressed about the “end of the car era,” the U.S. auto industry is doing pretty well, in fact, selling vehicles at about the levels experienced before the Great Recession. General Motors, nearly dead five years ago, is now investing $1.3 billion to upgrade five Midwest factories. New auto plants, particularly those of European and Asian carmakers, are being erected across the South. But the resurgence of U.S. manufacturing is about more than cars; there also is huge investment in other industries, notably in pharmaceuticals and refining, notably tied to the energy revolution.

    Critically, the vast supplies of oil and, most importantly, natural gas, are pushing down manufacturing costs well below those imposed on Asian and European firms. This is where industrial jobs have been growing the fastest, and are likely to expand in years ahead. In fact, U.S. industrial and energy production has driven U.S. exports to a record level, one clear sign that the nation’s competitiveness is beginning to move beyond our traditional strengths in entertainment, services and agriculture.

    Demographic advantages

    As in other countries, The U.S. birth rate fell during the recession, but this decline has now stopped as the economy has crawled back. Over the past decade, the U.S., through somewhat high birth rates and immigration, has avoided the kind of demographic implosions that afflict most of our key competitors. In the next few decades, the working population of Americans is expected to grow substantially, while those in Japan, Korea, Europe and China all taper off.

    America’s relative youth helps not only fiscally – with more young people to carry the burden of a swelling retiree population – but also culturally. Despite the rise of entertainment and media in other countries (for example, Bollywood films or Korean pop music), the domination of new culture remains overwhelmingly American. Critically, this applies not only to Hollywood but even more so to digital media, where U.S. domination is both overwhelming and terrifying our competitors, particularly the autocrats in Moscow and Beijing.

    Blessings of federalism

    Perhaps America’s greatest strength lies in its constitutional order. Unlike other countries, the U.S. was defined by a separation of powers that accommodates regional differences. The calls from Washington by both Left and Right for more national solutions is misplaced; whether used to promote conservative or liberal policies, one size does not fit nearly all in a country as diverse and differentiated as the United States.

    Instead, we need to let our states and regions seek out the approaches that work best for them. If Ohio and Pennsylvania allow fracking, and it creates significantly better results than those in anti-fossil-fuel states like New York and California, that would send a message to other states, but does not have to reflect a national policy.

    America’s regions have enormous assets and advantages in the global economy. If we allow them to exploit what they have, there may be more hope for the future than many now believe.

    This story originally appeared at The Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    USA map image by BigStockPhoto.

  • The Illusions of Charles Montgomery’s Happy City

    This is part one of a two-part series. Read part two here.

    Striking a pose of defiance, contemporary urbanists see themselves as the last champions of happiness in a world plunged into quiet despair, and Canadian writer and journalist Charles Montgomery is no exception. Drawing on the emerging ‘science of happiness’, his new book Happy City, subtitled ‘transforming our lives through urban design’, joins a wave of anti-suburban literature spurred on by climate fears and the financial crisis. ‘As a system’, writes Montgomery, the dispersed city ‘has begun to endanger both the health of the planet and the well-being of our descendants.’   

    Happy are the poor

    Repeating the fashionable wisdom, he says ‘cities must be regarded as more than engines of wealth; they must be viewed as systems that should be shaped to improve human well-being.’ Soon enough it’s apparent that to this way of thinking, well-being and poverty are by no means incompatible. ‘If a poor and broken city such as Bogota can be reconfigured to produce more joy’, he writes, ‘then surely it’s possible to apply happy city principles to the wounds of wealthy places.’    

    Montgomery starts off with ‘the happiness paradox’, arguing that ‘if one was to judge by sheer wealth, the last half century should have been a happy time for people in the United States and other rich nations … More people than ever got to live the dream of having their own detached home … The stock of cars far surpassed the number of humans who used them’. But, he is eager to explain, ‘the boom decades of the late twentieth century were not accompanied by a boom of happiness.’

    For evidence, he refers to ‘surveys’ showing that ‘people’s assessment of their own well-being’ had ‘flatlined’, and cites a few others reporting rising rates of mental conditions related to depression. None of these inculpate suburban affluence, however, or suggest people yearn to turn the clock back to before they acquired it. And nor does he explore the problems surrounding measurement of these trends.

    Moreover, such direct evidence as exists points in the opposite direction. A Pew Research Center survey, for example, found that far higher percentages of suburbanites than inner-city dwellers rated their communities as ‘excellent’ (Montgomery does concede that ‘residents in America’s central cities report being even less satisfied and even less socially connected than people in suburbia’, but does his best to explain it away).   

    The book openly admits that the idea of a link between unhappiness in the affluent west and urban form came from the rhetoric of Enrique Penalosa, former mayor of ‘poor and broken’ Bogota. Mr Penalosa declares that the unhappiest cities are not ‘the seething metropolises of Africa or South America’, but places like Atlanta, Phoenix and Miami in the US, ‘the most miserable cities of all’. Montgomery acknowledges this ‘is not science’, and ‘does not constitute proof’, but still sets out to show that ‘the decades-long expansion in the American [and Australian] economy’ and sagging levels of mental well-being aren’t just simultaneous developments, but connected, especially on the plane of ‘migration … from cities to the in-between world of sprawl.’ 

    Suburban Straw Man

    Before such a connection is anywhere near proven, though, Montgomery rushes in to assume it exists. Early in the first chapter, he is already asking ‘everything … would suggest that this suburban boom was good for happiness. Why didn’t it work?’ The habit of asserting yet-to-be or never-to-be established conclusions is commonplace throughout the book, and shapes the structure of his argument. Opening chapters set the scene with a case study of outer-suburban life which turns out to be a terrestrial version of Dante’s inferno.

    We’re introduced to the hapless Randy Straussner, a ‘super-commuter’ who drives 4 hours each workday on a round trip between his home in exurban Mountain House, California and his job 60 miles away in the San Francisco Bay Area. Most days he hits the road at 4:15 am to avoid the rush, putting off breakfast until he gets to work, and makes it back home at around 7:30 pm if ‘he was lucky.’ We’re told Randy won’t drink coffee or listen to talk radio, since ‘those just made him angry’ and aggravated ‘the pressures of the freeway.’ On arriving home, he would sometimes ‘grab a hose and water the garden until he calmed down’. Often he would hop ‘onto the elliptical trainer to straighten out his aching back’. When ‘the drive calcified his fatigue and frustration’, he drove to the gym where he could ‘sweat out his aggression.’

    Further, Randy ‘did not know, like or particularly trust his neighbours’ who ‘didn’t get to know one another’, so ‘he disliked his neighbourhood intensely.’ Montgomery adds that Randy felt ‘his own family paid the price for his stretched life’. His first marriage failed and his son ‘slid off the rails’, ending up in the county jail.

    Assuming this accurately accounts for Randy’s circumstances, just how representative is he of the typical outer-suburbanite? Peter Gordon, an urban economist at the University of Southern California, refers to empirical studies showing that ‘dispersed spatial structure was associated with shorter commute times’, suggesting “many individual households and firms ‘co-locate’ to reduce commute time [which] can be more easily [done] in dispersed metropolitan space …’

    This is borne out by the surprising stability of commute times over extended periods. According to the US Nationwide Household Travel Survey, explains Gordon, the average metropolitan commute time was 25 minutes 2009, just one minute more than in 2001, despite relevant population growth of 12 per cent. The averages for sub-area types described as ‘suburban’ and ‘second city’ were actually lower than for the ‘urban’ or core sub-area. Analysing the INRIX Traffic Congestion Scorecard and urban density data, demographer Wendell Cox also finds support for links between higher population densities and longer commute times.

    What about Randy’s other travails, are most suburbanites so estranged from their neighbours? A study cited by geographer Joel Kotkin found that for every 10 per cent drop in population density, the likelihood of people talking to their neighbours once a week rose 10 per cent. What about marital failure? Writing in the mid-2000s, Sue Shellenberger noted that ‘couples from central cities are 9 per cent more likely to crash and burn than couples from the suburbs, according to the National Center for Health Statistics.’ How about the prospect of winding up behind bars? On the basis of Brookings Institution research, Kotkin and Cox say suburban areas generally have substantially lower crime rates than ‘core cities.’

    (With their painstaking attention to statistics, Kotkin and Cox are the bêtes noires of pro-density urbanists, who tend to fall back on anecdotal evidence).

    ‘The masses will still need suburbia’  

    Use of Randy Straussner’s plight to discredit life on the urban fringe constitutes a classic Straw Man fallacy.

    From there, Montgomery proceeds to zig-zag between the fictional extremes of super-commuting hell and an opposite notion of high-rise ‘verticalism’, which he claims to reject. This dialectical type of approach has the advantage of inoculating him against the charge of ignoring inconvenient facts. In coming out for ‘a hybrid, somewhere between the vertical and horizontal city’, he gets to concede many pro-suburban realities, while clinging to his firmly anti-suburban conclusions.

    Concessions to suburbia on job location, home ownership and affordability, the popularity of driving, and economic dynamism are scattered throughout the book, intermixed with the general tone of disapproval.

    After many pages railing against ‘super-commuting’ and ‘detached houses with modest lawns … far from employment’, for instance, Montgomery is ready to admit that: ‘the US population is projected to grow by 120 million by 2050. Where will those people live? Downtowns and first-ring, streetcar-style suburbs will be able to accommodate only a fraction of the new demographic tidal wave. Most jobs have already moved out beyond city limits anyway.’ Then, quoting, he writes ‘the masses will still need suburbia.’

    This is noteworthy, since other green urbanists hold fast to the myth that jobs are concentrated in the urban core. Data in the 2011 American Community survey suggests that the ‘job-housing balance’, measuring the number of jobs per resident employee in a geographic area, is ‘nearing parity’ in suburban areas of US metropolitan regions with more than a million people. This isn’t dramatically different from the position in Australia’s 6 major cities, which have some of the world’s most dispersed patterns of employment (and will share an estimated 20 million more people by 2050). It’s all consistent with Gordon’s co-location thesis.

    In one chapter, Montgomery applauds his home town of Vancouver, which ‘has spent the past thirty years drawing people into density in a way that radically reversed a half century of suburban retreat.’ But he is forced to admit that ‘in 2012 Vancouver won the dubious honour of becoming the most expensive city for housing in North America. This means many people who work in the city … can’t afford to live there … ‘

    More generally, he says ‘the forces of supply and demand have helped make housing in some of the world’s most liveable cities’ –  for which read dense cities – ‘the least affordable.’ Again: ‘as the wealthy recolonize downtowns and inner suburbs, and property values rise accordingly, millions of people are simply being excluded.’ (Always dialectical, Montgomery mostly heaps praise on dense places like Vancouver and Portland, usually rated severely or seriously ‘unaffordable’ in the Demographia International Housing Affordability Survey, while singling out dispersed Atlanta for rebuke, despite a consistent rating of ‘affordable’.)

    And noting the influence of Vancouver’s high-rise density, spawning the label ‘Vancouverism’, Montgomery feels compelled to mention that ‘people living in towers consistently reported feeling more lonely and less connected than people living in detached homes.’ Later he writes that ‘most of us also want to live in a detached home with plenty of privacy and space.’

    On driving, the book is full of complaints that ‘governments have continued the decades-old practice of pouring tax dollars into highways … while spending a tiny fraction of that amount on urban rail and other transit service.’ Yet there is also the qualification that: ‘drivers experience plenty of emotional dividends. When the road is clear, driving your own car embodies the psychological state known as mastery: drivers report feeling much more in charge of their lives than transit users or even their own passengers.’ Montgomery lets slip the truth on popular preferences with the comment, ‘roads left to the open market – in other words, dominated by private cars.’

    Accordingly, the American Community Survey reports that between 2007 and 2012, ‘driving alone’ increased as the dominant mode of commuting in the United States, rising from 76.1 to 76.3 per cent of work trips. This bears some relation to the co-location of suburban residents and businesses.

    ‘A marvellous thing’

    Amidst his oscillations, Montgomery sketches an overview that reads like an encomium to the blessings of suburbia:

    The rapid, uniform and seemingly endless replication of this dispersal system was, for many people and for many years, a marvellous thing. It helped fuel an age of unprecedented wealth. It created sustained demand for the cars, appliances and furniture that fuelled the North American [and Australian] manufacturing economy. It provided millions of jobs in construction and massive profits for land developers. It gave more people than ever before the chance to purchase their own homes on their own land, far from the noise and haste and pollution of downtown.

    Having acknowledged the housing, transportation, employment and wider economic advantages of dispersion and suburbanisation, Montgomery could have come to the conclusion that they offer opportunities for a better life to millions of people, and should be embraced as a legitimate option by officials and planners. But that’s not where he ends up. Insisting that the dispersed city is now ‘inherently dangerous’, he signs on for pro-density ‘new urbanism’, calling for an overhaul of zoning codes, approval processes, infrastructure planning, tax incentives and funding practices to stimulate denser and less car-dependent redevelopment, aiming for transit-friendly, walkable, mixed-use, town centres and clusters of attached town-houses and low-rise apartments.

    While ‘new urbanism’ sweeps aside the advantages of dispersion, Montgomery’s misconceived ideas show that it offers nothing better. Take housing affordability. At first he toys with the faddish notion of ‘a by-law stating that 15 per cent of dwellings in every new subdivision … must be suitable for people of low or moderate income’, a costly burden on new construction for developers and the majority of home buyers. As the Australian experience attests, this type of planning fails to offset the spike in land values which accompanies density.

    Then, sensing this is far from enough, his demands escalate to the socialisation of housing supply: ‘it’s not enough to nudge the market towards equity … Governments must step in with subsidized social housing, rent controls, initiatives for housing co-operatives, or other policy measures.’ The destructive impacts of these sorts of measures on investment, market efficiency, public finances, and freedom of choice are passed over.

    Later in the book, Montgomery discusses ways to draw developers into density and social housing, including changes to ‘infrastructure-funding rules, tax incentives and permit requirements.’ He contends that ‘if this sounds like a big fat bonus for property developers well it is … but the truth is, as long as we inhabit a capitalist system, the future of suburbia depends on them.’

    It’s just that this isn’t capitalism as much as rent-seeking at the expense of consumers and other businesses, suppressing economic growth, opportunities and living standards. But that’s not a bad outcome for someone who extols the joys of poverty.

    John Muscat is a co-editor of The New City, where this piece first appeared.

    This is part one of a two-part series. Read part two here.

  • The Changing Face of European Economics: Liberalism Moves North

    Where do we find the nations with the highest tax levels? In the mid-90s the answer was quite clear: in Western Europe. Both Denmark and Sweden had a tax rate of 49 percent of GDP in 1996, followed closely by Finland with a 47 percent level. The tax burden was somewhat lower in France, Belgium, Austria and Italy, where rates ranged from 42 to 44 percent of GDP. Thanks to its oil-wealth Norway could afford a Nordic welfare model with 41 percent taxes, the same level as the Netherlands which had recently slimmed down its welfare system considerably. These Western European welfare states were the nine OECD countries with the highest tax rates. The tenth country was Eastern European Hungary with a rate of 40 percent.

    And where do we today find the high-tax nations? Looking at tax data from 2012, the answer is again amongst the Western European welfare states plus Hungary. At first glance, little seems to have changed with time. The only country to leave the top-10 list is the Netherlands, which has recently been replaced by another Western European nation: Luxembourg. But a closer look shows that Western Europe’s welfare states have indeed changed, and are continuing to do so. With time, a significant convergence has occurred.

    In 2012 Denmark still lead the tax league, with a 48 percent rate. France and Belgium had climbed to shared second position, with 45 percent tax rates. Rising levels in Italy and lowered ones in Sweden and Finland resulted in the three countries sharing a 44 percent level. Austria and Norway had increased their levels slightly, whilst the Netherlands had implemented further reductions. So, the welfare states with the highest taxes lowered their levels, whilst those with somewhat lower levels raised them. The Netherlands is the exception, as it continued to reduce relatively low taxes. No surprise then that it is the only country to leave the top-10 tax league.

    Of course, taxes are far from the only indicator of economic policy. A range of other factors, such as trade openness, business policy and protection of property rights, affect the opportunities for job creation, competition and growth. The Index of Economic Freedom, published by the Heritage Foundation in partnership with the Wall Street Journal, ranks countries based on a broad set of indicators of economic freedom. The Western European welfare states can overall be said to combine large public sectors and high taxation with relatively free economic policies. But the differences between them are significant, and the direction of change has varied considerably during the last decades.

    Tax rate % of GDP

    1996

    2006

    2012

    Change 1996-2012

    Sweden

    49,4

    48,1

    44,3

    -5,1

    Finland

    47,1

    43,5

    44,1

    -3,0

    Netherlands

    40,9

    39,1

    38,6*

    -2,4

    Denmark

    49,2

    49,0

    48,0

    -1,2

    Austria

    42,8

    43,0

    43,2

    0,4

    France

    44,2

    43,6

    45,3

    1,1

    Norway

    40,9

    43,1

    42,2

    1,4

    Belgium

    43,9

    44,4

    45,3

    1,4

    Italy

    41,6

    40,8

    44,4

    2,8

    * Data given for 2011. Source: OECD Stat Extract and own calculations.

    When the index of economic freedom was first published in the mid-90s, it showed that the Netherlands and Austria were the most market liberal of the nine Western European countries listed above. Sweden and Italy were on the other hand found at the bottom. In the latest 2014 edition of the index, Denmark – which compensates for high taxes with market oriented policies, including a liberal labour market – has climbed to become the freest economy amongst the group.

    In fact, Denmark ranks on 10th position globally, higher than even the US on 12th position and the UK on 14th. The Netherlands ranks on 15th place globally, followed by Finland and Sweden on the 19th and 20th positions. Belgium on the other hand has gone from being one of the more economically free Western European welfare states to becoming the third least free. Today the country scores on 35th place globally. France is found on a dismal 70th position, and is unique in having reduced its economic freedom score marginally between 1996 and 2014. Italy has merely increased its score by 0.1 points, ranking at 86th place– just below Kyrgyz Republic. The Western European welfare states might seem to have similar policies at first glance, but differences in market adaptation are in fact quite significant.

    Heritage/WSJ Economic Freedom Score

    1996

    2006

    2014

    Change 1996-2014

    Sweden

    61,8

    70,9

    73,1

    11,3

    Finland

    63,7

    72,9

    73,4

    9,7

    Denmark

    67,3

    75,4

    76,1

    8,8

    Norway

    65,4

    67,9

    70,9

    5,5

    Netherlands

    69,7

    75,4

    74,2

    4,5

    Belgium

    66,0

    71,8

    69,9

    3,9

    Austria

    68,9

    71,1

    72,4

    3,5

    Italy

    60,8

    62,0

    60,9

    0,1

    France

    63,7

    61,1

    63,5

    -0,2

    * Data for 1997 given. Source: Heritage/WSJ Economic Freedom Index and own calculations.

    The change in economic freedom parallels that of change in taxation, since taxation is an important part of economic freedom and since tax-reforms and other market reforms have tended to go hand-in-hand. The major changes have happened in the Nordics, particularly in the three high-tax countries which lack Norway’s oil-wealth. Sweden has lowered its taxes by over 5 percent of GDP between 1996 and 2012, by far the greatest change. The country has also increased its economic freedom score by over 11 points, again the most significant change. If Sweden had retained its 1996 score, it would score as the 78th freest economy today, just below Paraguay and Saudi Arabia.

    Finland has reduced its taxes by 3 percent of GDP, and improved economic freedom almost as much as Sweden. Denmark still leads the tax league, but has also implemented major increases in economic freedom – quite impressive given that the country had a high economic freedom score already in the mid-90s. Norway has liberalized overall economic policy, but increased taxation somewhat. France and Italy have stagnated at a low economic freedom score, and relied on increasing taxation rather than growth-oriented reforms to fund public services. Belgium and Austria have implemented some economic liberalization, but increased taxes. 

    The welfare states of Western Europe are quite complex. Their social and economic systems have much in common, but also differ in many ways. Today, as well as during the mid-90s, the countries in the world with the highest tax rates are found amongst this group. Still, major changes have occurred, and more seem on the way. In the upcoming 2014 elections of Sweden, it is more likely than not that the left will emerge victorious. But even the social democrats have, after initial resistance, accepted most of the current center-right government’s reforms. The social democratic government of Denmark is currently focused on reducing taxes, as well as government spending and the generosity of the welfare state. Part of the inspiration at least seem to come from the recent workfare policies of the Swedish right.

    As I recently discussed in a New Geography article, the current government of the Netherlands has raised the issue of reforming the welfare state further, to a “participation society” by encouraging self-reliance over government dependency. Finnish policies focus on how new entrepreneurial successes can be furthered. Part of the background is that Nokia, which the country relied so much on, has quickly fallen behind the global competition. On the other hand, the small company behind the game Angry Birds has gained global attention and become a symbol of new Finnish ingenuity. France and Italy still struggle with faltering markets and sluggish development. Perhaps with time the countries will follow the lead of the Nordics and the Netherlands, in reducing the scope of big government, and moving towards lower taxes and increased economic freedom?

    It is anything but easy to predict the future development of the Western European welfare states. But one thing is clear: the countries in the region that are doing well today are those that have reformed towards free-market policies and lower tax burdens since the mid-1990s. Given the apparent problems in France and Italy, and the continued interest for market reforms in the more vibrant North, it would seem that increased economic freedom is still the recipe for success.

    Dr. Nima sanandaji is a frequent writer for the New Geography. He is upcoming with the book “Renaissance for Reforms” for the Institute of Economic Affairs and Timbro, co-authored with Professor Stefan Fölster.

    Creative commons photo "Flags" by Flickr user miguelb.

  • Why State Economic Development Strategies Should Be Metro-Centric

    Globalization, technology, productivity improvements, and the resulting restructuring of the world economy have led to fundamental changes that have destroyed the old paradigms of doing business. Whether these changes are on the whole good or bad, or who or what is responsible for bringing them into being, they simply are. Most cities, regions, and US states have extremely limited leverage in this marketplace and thus to a great extent are market takers more than market makers. They have to adapt to new realities, but a lack of willingness to face up to the truth, combined with geo-political conditions, mean this has seldom been done.

    Three of those new realities are:

    1. The primacy of metropolitan regions as economic units, and the associated requirement of minimum competitive scale. It is mostly major metropolitan areas, those with 1-1.5 million or more people, that have best adapted to the new economy. Outside of the sparsely populated Great Plains, smaller areas have tended to struggle unless they have a unique asset such as a major state university. Even the worst performing large metros like Detroit and Cleveland have a lot of economic strength and assets behind them (e.g., the Cleveland Clinic) while smaller places like Youngstown and Flint have also gotten pounded yet have far fewer reasons for optimism. Many new economy industries require more skills than the old. People with these skills are most attracted to bigger cities where there are dense labor markets and enough scale to support items ranging from a major airport to amenities that are needed to compete.

    2. States are not singular economic units. This follows straightforwardly from the first point. As a mix of various sized urban and rural areas, regions of states have widely varying degrees of economic success and potential for the future. Their policy needs are radically different so the one size fit all nature of government rules make state policy a difficult instrument to get right. Additionally, many major metropolitan areas that are economic units cross state borders.

    3. Many communities may never come back, and many laid-off workers may never be employed again. Realistically, many smaller post-industrial cities are unlikely to ever again by economically dynamic no matter what we do. And lost in the debate over the n-th extension of emergency unemployment benefits is the painful reality that for some workers, especially older workers laid off from manufacturing jobs, there’s no realistic prospect of employment at more than near minimum wage if that. As Richard Longworth put it in Caught in the Middle, “The dirty little secret of Midwest manufacturing is that many workers are high school dropouts, uneducated, some virtually illiterate. They could build refrigerators, sure. But they are totally unqualified for any job other than the ones they just lost.” This doesn’t even get to the big drug problems in many of these places. This isn’t everybody, but there are too many people who fall into that bucket.

    I want to explore these truths and potential state policy responses using the case study of Indiana. An article in last week’s Indianapolis Business Journal sets the stage. Called “State lags city with science, tech jobs” it notes how metropolitan Indianapolis has been booming when it comes to so-called STEM jobs (Science, Technology, Engineering, Math). Its growth rate ranked 9th in the country in study of large metro areas. However, the rest of Indiana has lagged badly:

    Indiana for more than a decade has blown away the national average when it comes to adding high-tech jobs. But outside the Indianapolis metro area, there isn’t much cause for celebration.

    Careers in science, technology, engineering and math—typically referred to as STEM fields—have surged in growth compared to other careers in Marion and Hamilton counties. It’s a boon for economic development, considering the workers earn average wages almost twice as high as all others, and employers sorely need the skills. Dozens of initiatives focus on building STEM jobs in the state.

    A recent report ranked the Indianapolis-Carmel metro area ninth in the country in STEM jobs growth since the tech bubble burst in 2001. But while the metro area has grown, the rest of Indiana has barely budged from the early 2000s, an IBJ analysis of U.S. Bureau of Labor Statistics found.

    Indianapolis grew its STEM job base by 39% since 2001 while the rest of the state grew by only 10% (only 6% if you exclude healthcare jobs). Much of the state actually lost STEM jobs.

    This divergence between metropolitan Indianapolis (along with those smaller regions blessed with a unique asset like Bloomington (Indiana University), Lafayette (Purdue University) and Columbus (Cummins Engine)) and the rest of the state is a well-worn story by now. Here are a few baseline statistics that tell the tale.


    Item Metro Indianapolis Rest of Indiana
    Population Growth (2000-2012) 15.9% 4.1%
    Job Growth (2000-2012) 5.9% -7.2%
    GDP Per Capita (2012) $50,981 $34,076
    College Degree Attainment (2012) 32.1% 20.1%

    Additionally, there does appear to be something of a brain drain phenomenon, only it’s not brains leaving the state, it’s people with degrees moving from outstate Indiana to Indianapolis. From 2000-2010 a net of about 51,000 moved from elsewhere in Indiana to metro Indianapolis. As Mark Schill put it in the IBJ:

    “Indianapolis is somewhat of a sponge city for the whole region,” said Mark Schill, vice president of research at Praxis Strategy Group, an economic development consultant in North Dakota.

    The situation in Indiana, Schill said, is common throughout the United States: States with one large city typically see their engineers, scientists and other high-tech workers flock to the urban areas from smaller towns.

    Even I find it very surprising that of my high school classmates with college degrees, half of them live in Indianapolis – this from a tiny rural school along the Ohio River in far Southern Indiana near Louisville, KY.

    What has Indiana’s policy response been to this to date? I would suggest that the response has been to a) adjust statewide policy levers to do everything possible to reflate the economy of the “rest of Indiana” while b) making subtle tweaks attempt to rebalance economic growth away from Indianapolis.

    On the statewide policy levers, the state government has moved to imposed a one size fits all, least common denominator approach to services. The state centralized many functions in a recent tax reform. It also has aggressively downsized government, which now has the fewest employees since the 1970s. Tax caps, a comparative lack of home rule powers, and an aggressive state Department of Local Government Finance have combined to severely curtail local spending as well. Gov. Pence took office seeking to cut the state’s income tax rate by 10% (he got 5%), and now wants to eliminate the personal property tax on business. Indiana also passed right to work legislation.

    I call this “the best house on a bad block strategy.” I think Mitch Daniels looked around at Illinois, Ohio, and Michigan and said, “I know how to beat these guys.” Indiana is not as business friendly as places like Texas or Tennessee, but the idea was to position itself to capture a disproportionate share of inbound Midwest investment by being the cheapest. (I’ll get to Pence later).

    The subtle tweaks have been income redistribution from metro Indianapolis (documented by the Indiana Fiscal Policy Institute) and using the above techniques and others to apply the brakes to efforts by metro Indy to further improve its quality of life advantage over many other parts of the state (see my column in Governing magazine for more). One obvious example is a recent move by the Indiana University School of Medicine to build full four year regional medical school campuses and residency programs around the state with the explicit aim of keeping students local instead of having them come to Indianapolis for medical training.

    What there’s been next to nothing of is any sense of metropolitan level or even regional thinking. The state does administer programs on a regional level, but the strategy is not regionally oriented and the administrative borders don’t even line up. Here are the boundaries of the various workforce development boards:


    There’s a semi-metropolitan overlay, but as I’ve long noted places like Region 6 are economic decline regions, not economic growth regions. Here’s how the Indiana Economic Development Corp. sees the world:



    These are not just agglomerations of the workforce districts, there are numerous differences between them. The point is that clearly the organization is driven by administrative convenience and the political need for field offices, not a metro-centric view of the world or strategy.

    Add it all up and it appears that Indiana has decided to fight against all three new realities above rather than adapting to them. It rejects metro-centricity, imposes a uniform policy set, and is oriented towards trying to reflate the most struggling communities. I don’t think this was necessarily a conscious decision, but ultimately that’s what it amounts to.

    When you fight the tape, you shouldn’t expect great results and clearly they haven’t been stellar. Since 2000, Indiana comfortably outperformed perennial losers Michigan and Ohio on job growth (well, less job declines), but trailed Kentucky, Wisconsin, Minnesota, Iowa, and Missouri. But notably, Indiana only outpaced Illinois by a couple percentage points. That’s a state with higher income taxes (and that actually raised them) that’s nearly bankrupt and where the previous two governors ended up in prison. Yet Indiana’s job performance is very similar. What’s more, Hoosier per capita incomes have been in free fall versus the national average, likely because it has only become more attractive to low wage employers.

    Fiscal discipline, low taxes, and business friendly regulations are important. But they aren’t the only pages in the book. Workforce quality counts for a lot, and this has been Indiana’s Achilles heel. (My dad, who used to run an Indiana stone quarry, had trouble finding workers with a high school diploma who could pass a drug test and would show up on time every day – hardly tough requirements one would think). Also aligning with, not against market forces is key.

    I will sketch out a somewhat different approach. Firstly, regarding the chronically unemployed, clearly they cannot be written off or ignored. However, I see this as largely a federal issue. We need to come to terms with the reality that America now has a population of some million who will have extreme difficulty finding employment in the new economy (see: latest jobs report). We’ve shifted about two million into disability rolls, but clearly we’ve to date mostly been pretending that things are going to re-normalize.

    For Indiana, the temptation can be to reorient the entire economy to attract ultra low-wage employers, then cut benefits so that people are forced to take the jobs. I’ve personally heard Indiana businessmen bemoaning the state’s unemployment benefits that mean workers won’t take the jobs their company has open – jobs paying $9/hr. Possibly the 250,000 or so chronically unemployed Hoosiers may be technically put back to work through such a scheme – eventually. But it would come at the cost of impoverishing the entire state. Creating a state of $9/hr jobs is not making a home for human flourishing, it’s building a plantation.

    Instead of creating a subsistence economy, the focus should instead be on creating the best wage economy possible, one that offers upward mobility, for the most people possible, and using redistribution for the chronically unemployed. You may say this is welfare – and you’re right. But I would submit to you that the state is already in effect a gigantic welfare engine. In addition to direct benefits, the taxation and education systems are redistributionist, and the state’s entire economic policy, transport policy, etc. are targeted at left-behind areas (i.e., welfare). Even corrections is in a sense warehousing the mostly poor at ruinous expense. So Indiana is already a massive welfare state; we are just arguing about what the best form is. I think sending checks is much better than distorting the entire economy in order to employ a small minority at $9/hr jobs – but that’s just me. Again, we are in uncharted territory as a country and this is ultimately going to require a national response, even if it’s just swelling the disability rolls even more. I do believe people deserve the dignity of a job, but we have to deal with the unfortunate realities of our new world order.

    With that in mind, the right strategy would be metro-centric, focusing on building on the competitively advantaged areas of the state – what Drew Klacik has called place-based cluster – and competitively advantaged middle class or better paying industries.

    Contrary to some of the stats above, this is not purely an Indianapolis story. Indiana has a number of areas that are well-positioned to compete. Here’s a map with key metro regions highlighted:




    This may look superficially like the maps above, but it is explicitly oriented around metro-centric thinking. Metro Indy has been doing reasonably well as noted. But Bloomington, Lafayette, and Columbus (sort of small satellite metros to Indy) have also done very well. In fact, all three actually outperformed Indy on STEM job growth.

    Additionally, three other large, competitively advantaged metro areas take in Indiana territory: Chicago, Cincinnati, and Louisville. These are all, like Indy, places with the scale and talent concentrations to win. True, none of the Indiana counties that are part of those metros is in the favored quarter. But they still have plenty of opportunities. I’ve written about Northwest Indiana before, for example, which should do well if it gets its act together.

    This covers a broad swath of the state from the Northwest to the Southeast. It comes as no surprise to me that Honda chose to locate its plant half way between Indianapolis and Cincinnati, for example.

    The state should align its resources, policies, and investments to enable these metro regions to thrive. This doesn’t mean jacking up tax rates. Indiana should retain its competitively advantaged tax structure. But it should mean no further erosion in Indiana’s already parsimonious services. The state is already well-positioned fiscally, and in a situation with diminishing marginal returns to further contraction.

    Next, empower localities and regions to better themselves in accordance with their own strategies. This means an end to one size fits all, least common denominator thinking. These regions need to be let out from under the thumb of the General Assembly. That means more, not less flexibility for localities. Places like Indianapolis, Bloomington, and Lafayette would dearly love to undertake further self-improvement initiatives, but the state thinks that’s a bad idea. (I believe this is part of the subtle re-balancing attempt I mentioned).

    It also means using the state’s power to encourage metro and extended region thinking. For example, last year within a few months of each other the mayors of Indianapolis, Anderson, and Muncie all made overseas trade trips – separately and to different places. That’s nuts. The state should be encouraging them to do more joint development.

    This also means recognizing the symbiotic relationship that exists between the core and periphery in the extended Central Indiana region, clearly the state’s most important. The outlying smaller cities, towns, and rural areas watch Indianapolis TV stations, largely cheer for its sports teams, get taken to its hospitals for trauma or specialist care, fly out of its airport, etc. Metro Indianapolis and its leadership have also basically created and funded much of the state’s economic development efforts (e.g., Biocrossroads) and many community development initiatives (the Lilly Endowment). Many statewide organizations are in effect Indianapolis ones that do double duty in serving the state. For example, the Indiana Historical Society. (There is no Indianapolis Historical Society).

    On the other side of the equation, Indianapolis would not have the Colts and a lot of other things without the heft added from the outer rings out counties that are customers for these amenities. It benefits massively from that, particularly since it’s a marginal scale city. One of the biggest differences between Indy and Louisville is that Indy was fortunate enough to have a highly populated ring of counties within an hour’s drive.

    So in addition to aligning economic development strategies around metros, and freeing localities to pursue differentiated strategies, the state should encourage the next ring or two of counties that are in the sphere of influence of major metros to align with their nearest larger neighbor.

    Contrary to popular belief, this is a win-win. When I was in Warsaw, Indiana, people were concerned that many highly paid employees of the local orthopedics companies lived in Ft. Wayne. From a local perspective, that’s understandable and obviously they want to be competitive for that talent and should be all means go for it. On the other hand, what if Ft. Wayne wasn’t there for those people to live in? Would those orthopedics companies be able to recruit the talent they need to stay located in small town Indiana?

    It’s similar for other places. Michael Hicks, and economist at Ball State in Muncie, said, “Almost all our local economic policies target business investment and masquerade as job creation efforts. We abate taxes, apply TIFs and woo businesses all over the state, but then the employees who receive middle-class wages (say $18 an hour or more) choose the nicest place to live within a 40-mile radius. So, we bring a nice factory to Muncie, and the employees all commute from Noblesville.” Maybe Muncie isn’t completely happy about this, understandably. But would they have been able to recruit those plants at all (and the associated taxes they pay and the jobs for anybody who does stay local) if higher paid workers didn’t have the option to live in suburban Noblesville? Would the labor force be there?

    I saw a similar dynamic in Columbus. Younger workers recruited by Cummins Engine chose to live in Greenwood (near south suburban Indy). Columbus wants to keep upgrading itself to be more attractive – a good idea. But the ability to reverse commute from Indy is an advantage for them.

    Louisville, Kentucky has one of the highest rates of exurban commuting the country because so many Hoosiers in rural communities drive in for good paying work.

    This is the sort of thinking and planning that needs to be going on. Realistically, most of these small industrial cities and rural areas are not positioned to go it alone and they shouldn’t be supported by the state in attempting to do so. They need to a align with a winning team.

    There are two groups of places that require special attention. One is the mid-sized metro regions of Ft. Wayne, Evansville, and South Bend-Elkhart. These places are too far from larger metros and aren’t large enough themselves to have fully competitive economies. No surprise two of the three lost STEM jobs. Evansville has done better recently on the backs of Toyota, but has a vast rural hinterland it cannot carry with its small size. The region has done ok of late, but it has also received gigantic subsidies in the form of multiple massive highway investments, and now a massive coal gasification plant subsidy. I don’t believe this is sustainable. These places need special assistance from the state to devise and implement strategies.

    The other grouping consists of rural and small industrial areas that are too far outside the orbit of a major metro to effectively align with it. This would includes places like Richmond or Blackford County. They might get lucky and land a major plant, but realistically they are going to require state aid for some time to maintain critical services.

    For the last two groups especially, there also needs to be a commitment by the state’s top brain hubs – Indy and the two university towns – to applying their intellectual and other resources to the difficult problem at hand. Part of that involves helping them be the best place of their genre that they can. While cities are competitively advantaged today, not everybody wants to live in one. So there is still an addressable market, if not as large, for other places.

    Put it together and here’s the map that needs to be changed. It’s percentage change in jobs, 2000-2012:



    Pretty depressing. Urban core counties had some losses, but suburban Indy, Chicago, and Cincy did decently (Louisville’s less well), plus Bloomington area, Lafayette, and Columbus. You see also the strong performance of Southwest Indiana which is fantastic, but the sustainability of which I think is in question. Wages are higher in metro areas too, by the way. Here’s the average weekly wage in 2012, which shows most of the state’s metros doing comparatively well:



    In short, I suggest:

    – Retain lean fiscal structure but limit further contractions
    – Goal is to build middle class or better economy, not bottom feeding
    – Align economic development efforts to metro areas, particularly larger, competitively advantages locations. Align capital investment in this direction as well.
    – Greater local autonomy to pursue differentiated strategies for the variegated areas of the state
    – Special attention/help to strategically disadvantaged communities, but not entire state policy directed to servicing their needs.
    – Utilization of transfers for the chronically unemployed pending a federal answer, but again, not redirection of state policy to attract $9/hr jobs.

    This requires a lot of fleshing out to be sure, but I think is broadly the direction.

    Back to Gov. Mike Pence, would he be on board with this? He’s Tea Party friendly to be sure and interested in fiscal contraction. But he’s not a one-trick pony. He’s actually taken some interesting steps in this regard. He is subsidizing non-stop flights from Indianapolis to San Francisco for the benefit of the local tech community. He also wants to establish another life sciences research institute in Indy. And he’s talked about more regionally focused economic development efforts. It’s a welcome start. I think he groks the situation more than people might credit him for. Keep in mind that he did not establish the state’s current approach, which arguably even pre-dated Mitch Daniels, and he has to deal with political realities. And if as they say only Nixon could go to China, then although a reorienting of strategy is not about writing big checks, still perhaps only someone with conservative bona fides like Pence can push the state towards a metro-centric rethink.

    Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile, where this piece originally appeared.

  • California’s Potholed Road to Recovery

    California’s economy may be on the mend, but prospects for continued growth are severely constrained by the increasing obsolescence of the state’s basic infrastructure. Once an unquestioned leader in constructing new roads, water systems, power generation and building our human capital, California is relentlessly slipping behind other states, including some with much lower tax and regulatory burdens.

    The indications of California’s incipient senility can be found in a host of reports, including a recent one from the American Society of Civil Engineers, which gave the state a “C” grade. Roads, in particular, are in bad shape, as many drivers can attest, and, according to another recent study, are getting worse. The state’s shortfall for street repair is estimated at $82 billion over the next 10 years.

    Remarkably, given how Californians spend and tax ourselves, we actually bring up the rear in terms of road conditions. Indeed, one recent survey placed California 47th among the states in road quality. In comparison, low-tax Texas notched No. 11, showing that willingness to spend money is not the only factor.

    Greater Los Angeles is particularly affected; L.A. roads have been ranked by one Washington-based nonprofit as the worst in the nation. Bad roads cost L.A. drivers an average $800 a year in vehicle repairs, and a full quarter of roadways were graded “F,” meaning barely drivable. The region that gave birth to the freeway and the dream of quick, efficient travel, now has worse roads than some much poorer, less-important, lower-tax cities, such as Houston, Dallas or Oklahoma City. Not surprisingly, Los Angeles has been ranked has having the worst traffic congestion in the nation, but San Francisco and San Jose also make it to the 10 metros with the worst traffic.

    But it’s not just the roads that are in bad shape. Other basic sinews of the state’s infrastructure – ports, water systems, electrical generation – are increasingly in disrepair. Conditions are so poor at Los Angeles International Airport, admits new L.A. Mayor Eric Garcetti, that “there’s nothing world class” about the aging facility. This is critical for a city and region with significant global pretensions. Since 2001, LAX traffic has declined by more than 5 percent, while double-digit gains in passenger traffic have been logged by such competitors as New York, Miami, Atlanta and Houston.

    Meanwhile the Los Angeles-Long Beach port system, facing greater competition from the Gulf Coast, as well as other Pacific Coast ports, has been beleaguered by regulations that, among other things, mandate moving heavy loads with zero-emission but expensive, underpowered electric trucks that further undermine port productivity. Rather than see the ports as job and wealth generators, ports also have become increasingly sources for revenue for hard-hit city budgets.

    Overall, the bills are mounting; California faces an enormous shortfall in infrastructure. One study, conducted by California Forward, puts the bill for the next 10 years at $750 billion.

    The case for addressing infrastructure needs should be compelling on its own but, given fiscal limitations, it’s critical first to set some sense of priority. California, particularly under the current governor’s father, the late Edmund G. “Pat” Brown, spent upward of a fifth of its budget on basic infrastructure; today that share is under 5 percent. Rather than build the infrastructure that might spark the economy, as the elder Brown did, we have chosen, instead, to spend on government salaries and pensions, which, however well-deserved, require a transfer of wealth from the private sector to the public sector that brings only minimal benefits.

    These shortfalls are made even worse by ideological considerations that, in this one-party-rule state, overcome even the most rational approach to infrastructure development. The ruling class in Sacramento speaks movingly about the Pat Brown legacy, but has little interest in mundane things like roads, bridges, port facilities and other economically useful infrastructure. Instead, the powerful green and planning clerisy is focused on transforming the state into a contemporary ecotopia, where people eschew cars, live in crowded apartment towers and ride transit to work. Economic considerations, upward mobility and the creation or retention of middle-class jobs are, at best, secondary concerns.

    This ideological bent leads to grossly misplaced priorities. Consider, for example, the billions of dollars being proposed for building Gov. Jerry Brown’s signature project, a $68 billion, 800-mile high-speed rail system, even as state highways erode. The bullet train, which even liberals such as Kevin Drumm at Mother Jones magazine have pointed out, has devolved into a boondoggle with costs far above recent estimates and, given the lack of interest from private investors, something unlikely to offer much of an alternative to commuters for decades to come. Unlike many liberal commentators, who tend to favor crony-capitalist projects with a “green” cast, Drumm denounced the entire project as being justified with projections, such as for ridership, that are “jaw-droppingly shameless.”

    In addition, the project’s future has been clouded by legal challenges from a host of complainants stretching from Central Valley farmers to suburbanites on the San Francisco peninsula. In December, Superior Court Judge Michael Kenny in Sacramento County accused the state high-speed rail authority of ignoring provisions in the authorizing legislation for the project designed to prevent “reckless spending.”

    Public support for this misguided venture has been fading, thankfully. Even before Judge Kenny’s decision, a USC/Los Angeles Times poll showed statewide voter opposition rising to 53 percent, while 70 percent would like to have a new vote on the legislation that authorized the project.

    At the same time, federal funding, critical to keeping this failing project afloat, grows increasingly unlikely. California Congressman Jeff Denham, also a former supporter of the project, joined with Congressman Tom Latham to ask the federal Government Accountability Office if further federal disbursements could be illegal, given the uncertainty of the state funding needed to “match” the federal dollars. With Republicans likely to retain the House after the 2014 elections, it seems all but certain that high-speed rail – at least the statewide system proposed by its advocates – is heading to a less-than-spectacular denouement.

    This tendency to allow ideological considerations to overcome logic suffuses virtually the entire planning process across the board. For example, devotion to alternative energy sources leads the state to reject the expanded use of clean, cheap and plentiful natural gas in favor of extremely expensive renewable fuels, notably wind and solar. This may have much to do with the investments by crony capitalists close to Democratic politicians – think Google or a host of venture-capital firms – as with anything else. Under the right circumstances, such as government mandates, even unsound investments can make some people rich, or, in this case, even richer.

    But the cost to the rest of society of such Ecotopian policies can be profound, and could cost as much as $2,500 a year per California family by 2020. High energy prices will severely affect the state’s already-beleaguered middle- and working-class families, particularly in the less-temperate interior of the state.

    The commitment to expensive energy also makes bringing new industry – such as manufacturing or logistics – that can provide jobs ever more problematical. Similarly, money poured into follies like high-speed rail also weaken the state’s ability to fund, directly or through bonds, more-critically needed, if less-politically correct, transport infrastructure.

    Given these clear abuses of the public purse, it is not surprising that some Californians may simply want to close their wallets. Yet this would be a disservice to future generations, who will need new roads, ports, bridges and electrical generation. California needs to rediscover its historic commitment to being an infrastructure leader, but only after acquainting ourselves once again with the virtues of common sense.

    This story originally appeared at The Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

  • Correcting Priorities: The 10th Annual Demographia Housing Affordability Survey

    Alain Bertaud of the Stern School of Business at New York University and former principal planner of the World Bank introduces the 10th Annual  Demographia International Housing Affordability Survey by urging planners to abandon:

    "…abstract objectives and to focus their efforts on two measurable outcomes that have always mattered since the growth of large cities during the 19th century’s industrial revolution: workers’ spatial mobility and housing affordability".

    This year’s edition has been expanded to nine geographies, including Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the United Kingdom, and the United States. A total of 85 major metropolitan areas (of over 1,000,000 population) are covered, including five of the six largest metropolitan areas in the high income world (Tokyo-Yokohama, New York, Osaka-Kobe-Kyoto, London, and Los Angeles). Overall, 360 metropolitan markets are included.

    View the map with housing data for all markets created by the New Zealand Herald.

    The Affordability Standard

    The Demographia International Housing Affordability Survey uses a price-to-income ratio called the "median multiple," calculated by dividing the median house price by the median household income. Following World War II, virtually all metropolitan areas in Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States had median multiples of 3.0 or below. However, as urban containment policies have been implemented in some metropolitan areas, house prices have escalated well above the increase in household incomes. This is exactly the effect that economics predicts to occur where the supply of a good or service is rationed, all things being equal.

    Even a decade ago, there was considerable evidence of the rapidly deteriorating housing affordability in markets with urban containment policy. Yet, governments implementing these policies were largely ignoring not only the trends, but also any reference to the extent of the losses in historic context. Co-author Hugh Pavletich of Performance Urban Planning and I established the Demographia International Housing Affordability Survey to draw attention to this policy driven attack on the standard of living.

    The Demographia Survey rates housing affordability as follows:

    Demographia Housing Affordability Rating Categories

    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 & Under

    Affordability in the 9 Geographies

    Among the nine geographies and all 360 markets, Ireland emerges has the most affordable, with a median market multiple of 2.8. The United States follows at 3.4, and Canada at 3.9. Japan’s median market multiple is 4.0, while the United Kingdom is at 4.9 and Singapore at 5.1 The other geographies are all well into the severely unaffordable category, including Australia and New Zealand, at 5.5, and far worse Hong Kong, at 14.9 (Figure 1).

    Costly Hong Kong & Vancouver, Affordable Pittsburgh and Atlanta

    For the fourth year in a row, Hong Kong is the least affordable major metropolitan area, with a median multiple of 14.9, three times its early 2000s ratio. Vancouver is again the second most unaffordable major market, with a median multiple of 10.3, three times its pre-urban containment level. Housing affordability in coastal California is well on the way to the stress of the 2000s. San Francisco ranks third most unaffordable at 9.2 and nearby San Jose is at 8.7, with San Diego (7.9) and Los Angeles (7.7) following closely. Sydney, at 9.0, ranks fourth with Melbourne at 8.4 and Auckland at 8.0.All of these metropolitan areas have had serious deterioration of housing affordability since adopting urban containment policy.

    All of the affordable major metropolitan areas are all in the United States. Pittsburgh is the most affordable, at 2.3. There are 13 additional major affordable housing markets, which include growing and over-5 million Atlanta as well as Indianapolis and Columbus, with their strong economies (Figure 2).

    Japan

    Notably, Japan’s two largest metropolitan areas, Tokyo-Yokohama and Osaka-Kobe-Kyoto have avoided the severely unaffordable territory occupied by the other three megacities (New York, Los Angeles, and London). Osaka-Kobe-Kyoto has the best housing affordability of any megacity, at 3.5 (moderately unaffordable) and Tokyo-Yokohama is at 4.4 (seriously unaffordable).

    House Size

    This year’s Demographia Survey also provides information on average new house size in the nine geographies (Figure 3). The largest houses are in the United States, which is second only to Ireland in affordability. The smallest houses are in Hong Kong, which also has the least affordable housing. In living space those who pay the most get the least, while those who pay the least get the most.

    The Imperative for Reform

    Housing is the largest element of household budgets, and its cost varies the most between metropolitan areas. Where households pay more than necessary for housing, they have less dicsretionary income and lower standards of living and there is more poverty. This is a natural consequence of planning policies that place the urban form above the well-being of people. One of the principal justifications is environmental, but the gains from urban containment policy are scant and exorbitantly expensive.

    Virtually all of the geographies covered in the Demographia Survey are facing more uncertain economic futures than in the past. As is always the case in such situations, lower income households tend to be at greatest risk, while younger households have much less chance of living as well as their parents (except those fortunate enough to inherit their wealth or housing).

    There is no more imperative domestic policy imperative than improving the standard of living and minimizing poverty. Planning must facilitate that, not get in the way. Bertaud is hopeful:

    "But if planners abandoned abstracts and unmeasurable objectives like smart growth, liveability and sustainability to focus on what really matters –  mobility and affordability – we could see a rapidly improving situation in many cities.  I am not implying that planners should not be concerned with urban environmental issues.  To the contrary, those issues are extremely important, but they should be considered a constraint to be solved not an end in itself."

    Download the full report (pdf):  10th Annual  Demographia International Housing Affordability Survey

    Photo: Suburban Tokyo (by author)

  • Britain’s Planning Laws: Of Houses, Chickens and Poverty

    Perhaps for the first time in nearly seven decades a serious debate on housing affordability appears to be developing in the United Kingdom. There is no more appropriate location for such an exchange, given that it was the urban containment policies of the Town and Country Planning Act of 1947 that helped drive Britain’s prices through the roof. Further, massive damage has been done in countries where these polices were adopted, such as in Australia and New Zealand (now scurrying to reverse things) as well as metropolitan areas from Vancouver to San Francisco, Dublin, and Seoul.

    A healthy competition has developed between the Conservative-Liberal Democrat coalition and the Labour Party to finally address the problem of the resulting land and housing shortage that has driven prices up so much relative to incomes.

    It probably helps that public opinion seems to be changing. A recent MORI poll found that 57 percent of respondents considered rising house prices to be a bad thing for Britain, compared to only 20 percent who though it a good thing.

    It has been more than a decade since Kate Barker, then a member of the Monetary Policy Committee of the Bank of England (the central bank) was commissioned by the Blair Labor government to examine the issues. Her conclusions were clear. Britain has a serious housing affordability problem and its restrictive land use policies were the cause. These higher housing costs, the largest element or household expenditure have reduced the standard of living and increased poverty beyond what would have occurred if urban containment regulation had not destabilized house prices. The Economist notes that home ownership is falling and that the number of couples with children who are renting has tripled since the late 1990s.

    Planning and Chickens

    This week, The Economist weighed into the debate (Britain’s planning laws: An Englishman’s home):

    "Now that the economy is at last growing again, the burning issue in Britain is the cost of living. Prices have outstripped wages for the past six years. Politicians have duly harried energy companies to cut their bills, and flirted with raising the minimum wage. But the thing that is really out of control is the cost of housing. In the past year wages have risen by 1%; property prices are up by 8.4%. This is merely the latest in a long surge. If since 1971 the price of groceries had risen as steeply as the cost of housing, a chicken would cost £51 ($83)."

    For those of us unfamiliar with the cost of chicken in British hypermarkets, The Daily Mail says it is about £2 ($3). Indeed, even the chicken industry suffers, as planning restrictions  are getting in the way of adding the chicken farms Britain requires.

    Moreover, the high costs cited by The Economist are after the house prices increases that had already occurred by 1970. Even then, before such inflationary pressures were seen elsewhere, Sir Peter Hall characterized soaring land and house prices as the biggest failure of the 1947 Act. Hall had led a major research effort on the subject, which produced a two-volume work, The  Containment of Urban England (See The Costs of Smart Growth Revisited: A 40 Year Perspective).

    From Affordable to Unaffordable

    While the historic relationship between household incomes and house prices (the "median multiple") was under 3.0 across the United Kingdom as late as the 1990s, it has now deteriorated to more than 7.0 inside the London Greenbelt. Unbelievably it has risen to elevated levels even in the less prosperous the north of England. For example, depressed Liverpool has a median multiple over 5.0, which is 60 percent above the maximum historic range and making the metropolitan area "severely unaffordable." Liverpool is probably best compared to Cleveland in the United States for its economic distress.

    The shortage of housing in Britain has become acute. There are additional concerns that the globalization of housing markets has hit London particularly hard and is driving households out of the housing market.

    More Money, Less House

    Through all of this, Briton’s are getting less for their money. Since 1920, the average size of a new large family house has been reduced 30 percent. Semi-detached houses are 44 percent smaller and townhouses (terrace housing) is 37 percent smaller (Figure 1). Britain now has some of the smallest new housing in the world. The average new house in continental Europe is 50% or more larger than in England and Wales. New houses are two to three times as large in Canada, New Zealand, Australia and the United States (Note 1). In some US cities, residents can build "granny flats" which are larger than new houses in Britain. For example, San Diego’s limit for granny flats of 850 square feet exceeds Britain’s average new house size of 818 square feet.

    Paving Over Ohio?

    Of course, those who see urban expansion (the theological term is "sprawl") as ultimate evil imagine an England and Wales being literally paved over by allowing people to live as they prefer. They need not worry.

    For example, England and Wales is less crowded than spacious Ohio, with its rolling hills and extensive farmland. According to the 2011 census, only 9.6% of the land in England and Wales is urban, the other 90.4% is rural. In Ohio, on the other hand, 10.8% of the land is urban and only 89.2% of the land is rural. Even the state of Georgia, with the least dense large urban area in the world, Atlanta, has roughly as much rural land (91.7 percent) as England and Wales (Figure 3).

    Every Gram is Sacred?

    Originally, urban containment was justified on social and aesthetic grounds. However, curbing greenhouse gases is now used as the raison d’etre for highly restrictive housing policies. Urban policy in England and Wales and elsewhere has been hijacked by a philosophy that any gram of greenhouse gas that can be reduced must be, regardless of its impact on society, the economy, the standard of living or poverty.

    One of the worst conceivable strategies for reducing greenhouse gas emissions is to waste money on costly and ineffective measures. The Intergovernmental Panel on Climate Change (IPCC) has indicated that sufficient reductions in greenhouse gas emissions can be achieved for a range of from $20 to $50 per ton. Urban containment policy cannot deliver for this price. In contrast, improving automobile fuel efficiency is forecast improve greenhouse gas emissions, even as driving continues to rise with a growing population (see Urban Planning for People). In addition, the higher house prices associated with urban containment policy are well beyond the IPCC range.

    No program can produce substantial greenhouse gas emission reductions that does not focus on higher value strategies. Urban containment has no high value strategies.

    Planning, People and Poverty

    Britain’s land policy competition between the political parties is long overdue. Coalition Communities Secretary Eric Pickles, decries "the way families are trapped in ‘rabbit hutch homes’." The Labour Party opposition has promised that, if elected in 2015, steps will be taken to increase land supply and housing affordability, so that "working people and their children" have the "decent homes they deserve."

    The Economist states the issue squarely:

    "Building on fields in a country that is as crowded as England will always rile some people, however well-designed the system. But the alternative is worse: a nation of renters and rentiers, where only the rich own houses."

    —————–

    Note 1: As Figure 2 indicates, Hong Kong housing is considerably smaller than that of England and Wales. Hong Kong really is the ultimate smart growth or urban containment city. It has the highest urban population density in the high income world. It has the highest share of its commuters using mass transit to get to work. Its traffic congestion is intense. And, predictably, it has the highest house prices relative to incomes yet documented in the high income world.

    We need to be spared the "sun rises in the west" economic studies claiming that somehow the laws of economics, that work so relentlessly to drive up prices where supplies are constrained in other industries (such as petroleum, corn, etc.) have no effect on land and housing.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.

    Photo: St. Pancras Station (London), by author

  • How Houston’s Missing Media Gene Hobbles Its Global City Ambitions

    In an upcoming study I am working on with Chapman University’s Center for Demographics and Policy, we show that San Francisco and Houston are North America’s “emerging” global cities. They are also rival representative champions and exemplars of two models of civic development. San Francisco is the world’s technology capital; focused on the highest levels of the economic food chain; paragon of the new, intangible economy; and promoter environmental values and compact development.  Houston is the closest thing to American laissez-faire; unabashed embracer of the old economy of tangible stuff, including unfashionable, but highly profitable, industries like oil, chemicals, and shipping.

    San Francisco embraces development restrictions that it sees as environmentally sustainable — and not coincidentally produced the highest housing costs compared to income in the nation, rendering the region unaffordable to all but the elite — whereas Houston has risen as an “opportunity city” for the non-elite; and the land of no-zoning and unrestricted development.  Somewhat unexpectedly, both cities are remarkably socially tolerant. Houston has an openly lesbian Democratic mayor and is extremely diverse, and while San Francisco may be a bit more free wheeling with its Folsom Street Fair and such, it’s also more strictly enforces its intellectual and political orthodoxy.

    Yet to date the competition between these two emerging models has been non-existent, at least from Houston’s perspective. Simply put, the Bay Area has played its hand brilliantly, and is lavished with praise in the media. In contrast Houston seems to be missing the self-promotion gene, at least outside what it has to pay for with advertising. The Bay Area has built its own image, often with the avid support of journalists who grant tech moguls demi-god status, and understandably prefer San Francisco’s spectacular scenery, mild weather and world-class restaurants to flat, steamy Houston, whose exciting food scene is typically housed in nondescript strip malls.

    In conventional (that is New York or London) terms it’s easy to see San Francisco as a global capital. It has long been established as an elite national center, the financial capital of the West Coast, as well as the traditional center, along with parts of New York, of the American counter-culture. With the comparative decline of Los Angeles, the Bay Area reigns supreme on the west coast. Its technology industry strides the globe like a colossus, its tech titans have managed, at least to date, to play simultaneously the roles of both modern day robber barons and populist heroes.

    Houston is less obvious. Though the energy capital of the world, Houston is still emerging as a prominent national and global city. It’s less mature, and was a small, obscure city when San Francisco was already emerging as the uncontested capital of the west coast.  And unlike San Francisco, whose only real rival is much smaller Seattle, Houston competes with an equally large, and in many ways also rising rival in Dallas-Ft. Worth.

    Unlike tech, energy has produced few rockstars, but many who are castigated as demons. Although there are 5,000 energy companies and 26 Fortune 500 headquarters in Houston, few of its leaders have achieved public prominence apart from Dick Cheney and Enron’s Jeff Skilling and Ken Lay — not exactly folk heroes.

    This is not to say some energy people don’t deserve celebration. For example, few Americans noticed the recent death of George Mitchell, the father of the fracking revolution that has driven America’s greenhouse gas emissions down at the fastest rate in the world, and one of America’s premier developers of master planned developments in the form of The Woodlands near Houston. The Economist said of this son of poor Greek immigrants, “Few businesspeople have done as much to change the world as George Mitchell.”  (Most people hearing the name would probably think of former Maine Senator George Mitchell).

    The maturity curve alone isn’t enough to account for the difference. Two additional factors are at work. First, the Bay Area self-consciously sees itself as a leader and moral exemplar. It wants to world to follow where it leads. Houston it seems, perhaps in line with its laissez-faire approach, wants to leave others alone, and be left to its own.  It may boast of having a great model, but whether others adopt has been of no particularly great local concern.

    The second big divergence relates to media. After all, the media, understood broadly, is how we come to have knowledge about or opinions of many things. Simply put, San Francisco and the tech industry get the power of media, while Houston doesn’t.

    The content creators may still prefer a New York, LA, or DC but the tech moguls are circling the last redoubts of entertainment and information.   Apple now has a dominant position in content distribution for music and is expanding in other areas.  Google generates huge advertising revenues that are greater than the entire newspaper and magazine industry.  Despite its many troubles, Yahoo remains one of the most-visited news sites. Meanwhile in just last year or two, Facebook co-founder Chris Hughes has bought the venerable New Republic while Seattle’s Jeff Bezos  recently bought the Washington Post. Pierre Omidyar, founder of Ebay, recently announced a $250 million new media venture featuring Glenn Greenwald and other well-known leftist media types.

    This isn’t just hubris, it’s good business. With Silicon Valley magnates starting to come under the same scrutiny as their 1% peers in other industries, it pays to have the means to control the narrative. Glenn Greenwald helped break the story on NSA snooping, but now that he’s on Silicon Valley’s payroll, how likely is it that he’ll take a similarly tough line on tech company privacy matters?  Give the Bay Area/tech crowd their due – they know what they are doing.

    Houston, by contrast, has close to zero media influence or impact and seems not to care. It’s much less an influencer of media than one whose reputation has been shaped by it, and often not in a good way. Though there are many sprawl dominated metropolises in America, it’s Houston that has become the bête noire of urbanists.

    It’s easy to understand historically why Houston has so little media influence, but harder to understand why the city is so blasé about it.  Tory Gattis, a former McKinsey consultant and local Houston blogger, suggests that it has to do with the DNA of the energy industry.  Most energy companies in Houston are B2B operations, so have little need for mass media. Energy has always been a political game and the industry’s approach has been a fairly direct one: employ a phalanx of lobbyists and former politicians around the world to help secure deals.  Also, unlike with the latest smart phone or social media app, you don’t need to convince anybody to fill up his gas tank or turn on his furnace in the winter.  The product is already completely understood by the end customer and literally sells itself.

    This mindset explains why the city has a blind spot, a missing gene if you will, that keeps it from understanding the necessity of having a robust media presence as part of its ambition to become a true global city. The Bay Area tech community may have been slow to the party when it comes to lobbying, but they are spending big to catch up fast and many of their executives have political as well as media aspirations. But despite its incredible wealth and surfeit of billionaires, Houston is absolute nowhere when it comes to media or thought leadership, and seems indifferent to the fact.

    Beyond merely asserting a role on the stage, getting in the media game is critical to the survival of Houston and its model.  The Bay Area sees itself as a model for a future America and world. It is spending big, lobbying big, and invading politics to create the kind of future it wants to see. Its mindset is to dominate.

    Houston may be content to let San Francisco go its own way but the reverse does not hold.  Silicon Valley has its sights set on overturning the fossil fuel industry through big investments (and good ol’ government pork) in green tech companies. Legal mandates that favor their investments are popular. It should be no surprise that folks like Bay Area billionaire Thomas Steyer have been vocal opponents of the KeystoneXL pipeline. (Such opposition is not uniform. Mark Zuckerberg’s Fwd.us organization supports KeystoneXL. But there’s clearly a lot of Silicon Valley support for policies that aren’t great for the Houston model).

    Houston can brag all its wants about its legitimate accomplishments in important areas like job and population growth and in providing middle-class opportunity. But if it wants to claim the mantle of global city, or even just head off threats to its way of doing business, it needs, like the Bay Area, to self-consciously stake out the role of leader.  For starters, that means putting its bigtime financial and intellectual muscle behind getting its message out. That means, like it or not, investing not only in oil wells, but inkwells.

    Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile.

    Photo by telwink.

  • How Silicon Valley Could Destabilize The Democratic Party

    Much has been written, often with considerable glee, about the worsening divide in the Republican Party between its corporate and Tea Party wings. Yet Democrats may soon face their own schism as a result of the growing power in the party of high-tech business interests.

    Gaining the support of tech moguls is a huge win for the Democrats — at least initially. They are not only a huge source of money, they also can provide critical expertise that the Republicans have been far slower to employ. There have always been affluent individuals who backed liberal or Democratic causes, either out of conviction or self-interest, but the tech moguls may be the first large capitalist constituency outside Hollywood to identify almost entirely with the progressives.

    This alliance of high tech and Democrats is relatively new. In the 1970s and 1980s the politics of Silicon Valley’s leaders tended more to middle-of-the-road Republican. But the new generation oligarchs are very different from the traditional “propeller heads” who once populated the Valley. More media savvy and less dependent on manufacturing, the new leaders have less interest in the kind of infrastructure and business policies generally favored by more traditional businesses. They also tend to have progressive views on gay marriage and climate change that align with the gospel of the Obama Democratic Party.

    In the process, the Bay Area, particularly the Silicon Valley – San Francisco corridor, has become one of the most solidly liberal regions in the country. The leading tech companies, mostly based in the area, send over four-fifths of their contributions to Democratic candidates.

    This tech alliance is creating a pool of potential business-tested candidates for the party, including Twitter co-founder Jack Dorsey, who has said he wants to run for mayor of New York someday, even if he now resides in San Francisco.

    The tech oligarchs are also poised to reinforce the media dominance enjoyed by the Democrats. Over the past two years we have seen one tech entrepreneur and Obama ally, Chris Hughes, take over the venerable New Republic, while another, Amazon’s Jeff Bezos, bought the Washington Post.More important, pro-Democratic tech firms such as Microsoft, Yahoo and Google now dominate the online news business, while others, such as Netflix and Amazon, are moving aggressively into music, film and television.

    Yet for all the advantages of this burgeoning alliance with tech interests, it threatens to create tensions with the party’s traditional base — minorities, labor unions and the public sector — as the party tries accommodate a constituency that combines social liberalism and environmentalist sentiments withvaguely libertarian instincts. The fact that this industry has a pretty awful record on labor and equity issues is something that could prove inconvenient to Democrats seeking to adopt class warfare as their primary tactic.

    Indeed, despite its counter-cultural trappings and fashionably progressive leanings, Silicon Valley has turned out to be every bit as cutthroat and greedy as any gaggle of capitalists. Leftist journalists like John Judis may rethink their support for the Valley agenda once they realize that they have become poster children for overweening elite power and outrageous inequality.

    Privacy is one issue that should divide liberals from the tech oligarchs. Historically liberals have been on the front line of the battle to protect personal information. But now tech interests have worked hard, with considerable Democratic support, to block privacy protections that would damage their profits in Europe, and closer to home.

    Another inevitable flashpoint regards unions, a core progressive constituency. Venture capitalist Mark Andreesen recently declared that “there doesn’t seem to be a role” for unions in the modern economy because people are “marketing themselves and their skills.” Amazon has battled unions not only in the United States, but in more union-friendly Europe as well.

    Avatars of equality? Valley boosters speak of the “glorious cocktail of prosperity” they have concocted, but have been very slow to address, or even seek to ameliorate, the vast social chasm that exists under their feet.

    Many core employees at firms like Facebook and Google enjoy gourmet meals, childcare services, even complimentary house-cleaning in an effort to create, as one Google executive put it, “the happiest most productive workplace in the world.”  Yet the reality is less pleasant for other workers in customer support or retail, like the Apple stores, and even more so for contracted laborers in security, maintenance and food service jobs.

    Indeed over the past decade the Valley itself has grown almost entirely in ways that have benefited the affluent, largely white and Asian professional population. Large tech firms are notoriously skittish about revealing their diversity data, but one recent report found the share of Hispanics and African-Americans, already far below their percentage in the population, declined in the last decade; Hispanics, roughly one quarter of the local workforce, held 5.2% of the jobs at 10 of the Valley’s largest companies in 2008, down from 6.8% in 1999, according to the San Jose Mercury News. The share of women in management also has declined, despite the headlines generated by the rise of high-profile figures like Yahoo’s Marissa Mayer and Facebook’s Sheryl Sandberg.

    The mostly male white and Asian top geeks in Palo Alto or San Francisco should celebrate their IPO windfalls, but wages for the region’s African-Americans and Latinos, roughly a third of the local population, have dropped, down 18% for blacks and 5% for Latinos between 2009 and 2011, according to a 2013 Joint Venture Silicon Valley report. Indeed as the Valley has de-industrialized, losing over 80,000 jobs in manufacturing since 2000, some parts of the Valley, notably San Jose, where manufacturing firms were clustered, look more like a Rust Belt city than an exemplar of tech prosperity.

    Overall, most new jobs in the Valley pay less than $50,000 annually, according to an analysis by the liberal Center for American Progress, far below what is needed to live a decent life in this ultra-high cost area. Part-time security workers often have no health or retirement benefits, no paid sick leave and no vacation. Much the same applies to janitors, who clean up behind the tech elites.

    The poverty rate in Santa Clara County has climbed from 8% in 2001 to 14%, despite the current tech boom; today one out of four people in the San Jose area is underemployed, up from 5% a decade ago. The food stamp population in Santa Clara County has mushroomed from 25,000 a decade ago to almost 125,000. San Jose is also home to the largest homeless camp in the continental U.S., known as “the Jungle.” As Russell Hancock, president of Joint Venture Silicon Valley, admitted: “Silicon Valley is two valleys. There is a valley of haves, and a valley of have-nots.”

    These realities suggest that the tech oligarchs, despite their liberal social views, are creating an environment for the “one percent” every bit as stratified as that associated with Wall Street. Google maintains a fleet of private jets at San Jose airport, making enough of a racket to become a nuisance to their working-class neighbors. Google executives tout its green agenda but have burned the equivalent of upwards of tens of millions of gallons of crude oil, which seems somewhat less than consistent.

    At the same time, the moguls have a record of tax evasion — a persistent progressive issue — that would turn castigated plutocrats like Mitt Romney green with envy. Individuals like Bill Gates have voiced public support for higher taxes on the rich, yet Microsoft, Facebook and Apple have all saved billions by exploiting the tax code to shelter profits offshore. Twitter’s founders creatively exploited various arcane loopholes to avoid paying taxes on some of the proceeds of their IPO that they set aside for heirs.

    The set of differing rules for oligarchs and everyone else extends even to the most personal issues. Yahoo’s Mayer, a former Google executive, banned telecommuting for employees — particularly critical for those unable to house their families anywhere close to ultra-pricey Palo Alto. Yet Mayer, herself pregnant at the time, saw no contradiction in building a nursery in her own office.

    This model of economic development seems it would be more appealing to those who believe in “the survival of the fittest” than people with more traditional liberal values. The alliance with tech may well be a critical boon to the progressive cause and its champions for the time being, but at some time even the most deluded progressives will begin to realize with whom they have chosen to share their bed.

    This story originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Official White House Photo by Pete Souza.