New Geography

Category: Policy

  • XpressWest Las Vegas Train: Where are the Venture Capitalists?

    Recently, the US Department of Transportation indefinitely suspended a federal loan application for the XpressWest high-speed rail train from Victorville California to Las Vegas. The only public rationale for the decision was contained in a letter from former Secretary of Transportation Ray LaHood, who cited “buy-America provisions.” Important contents of the letter were not made public (presumably to protect confidential commercial information), but Secretary LaHood indicated that “serious issues” and “significant uncertainties” surrounding the project forced him to suspend “further consideration” of the loan request.

    US Senate Majority Leader Harry Reid of Nevada hopes to resurrect the loan application. However even he is reported to have noted that the White House is “worried about XpressWest obtaining the remaining $1.5-billion in private financing needed to get the train running.”

    That’s just the beginning of the private investment concern. Current reports indicate that the Victorville to Las Vegas line will cost $7 billion to construct, $5.5 billion of which would be provided through a low interest 35 year loan from federal taxpayers, the initial payment on which would be deferred for six years.

    Based upon the experience of high-speed rail programs around the world, it seems virtually inevitable that the Victorville to Las Vegas high-speed rail line would cost much more than $7 billion. All of those additional funds would be the responsibility of private investors, not federal taxpayers.

    International Record of Cost Escalation

    The problem is amply illustrated by   European research on world infrastructure costs.  Oxford professor Bent Flyvbjerg, along with Nils Bruzelius (a Swedish transport consultant) and Werner Rottenberg (University of Karlsruhe and former president of the prestigious World Conference on Transport Research) reviewed 80 years of infrastructure projects and found initial cost estimates to routinely be low (Megaprojects and Risk: An Anatomy of Ambition). They estimated that rail project costs escalation an average 40 percent and that 80 percent cost overruns are not unusual in passenger only rail (Note 1).

    If the Victorville to Los Angeles high-speed rail train would escalate in costs at the average indicated by the research, the cost would rise to $9.8 billion, increasing the private investment share required from $1.5 billion to $4.3 billion. If the cost escalation were to be at the 80% level, the Victorville to Los Angeles high-speed rail train would cost $12.6 billion to build, raising the private investment requirement to $7.1 billion.

    Britain’s Escalating Costs

    The British, who continue to debate building a high speed rail line from London to just north of Birmingham already seen costs rise by nearly 1/3, while experts are predicting the cost will eventually escalate 120 percent or more.

    Obviously, cost escalation at these levels would require additional private capital.

    Nearby California’s Unprecedented High Speed Rail Cost Escalation

    The actual experience of the nearby California high-speed rail line indicates that the results could be substantially worse than indicated in the academic research. Before the California High Speed Rail Authority abandoned plans to build a genuine high-speed rail line from Los Angeles to San Francisco, costs approximately tripled from the original estimates (Note 2).

    A similar tripling of cost escalation on the Victorville to Las Vegas line would take the cost to $21 billion. This would require private capital of $22.5 billion – 15 times as much money as the current $1.5 billion that is apparently difficult to raise.

    Serious Issues and Significant Uncertainties

    Meanwhile, editorialists are raising “serious issues” and “significant uncertainties” about the project.

    The Washington Post: The editorial board of the Washington Post said in a July 18 editorial (entitled “Good riddance to XpressWest, the high-speed boondoogle”) of the XpressWest project: “We’ve seen some bad policy ideas but not many more awful …” The Post continued “What XpressWest struggled to explain was why taxpayers should bet on a proposition that private investors apparently found too risky: hordes of travelers driving to Victorville, parking their cars and then boarding the train for an 80-minute ride to Vegas — as opposed to driving the whole way, flying or taking “My Party Ride,” a limo-like bus trip for up to 30 passengers at $99 each, including food and drinks.” The Post expressed relief that “common sense has prevailed,” though bemoaned the fact that “multiple federal and state agencies had given environmental and regulatory approvals.”

    Las Vegas Review-Journal: The hometown metropolitan daily expressed similar concerns. In a July 18 editorial, the Review-Journal said: “Like most recent rail projects, XpressWest ridership projections were overly optimistic. The train certainly appeared capable of meeting its operational costs, but the idea that it could make good on repaying $5.5 billion in debt on top of that was a stretch. Las Vegas Monorail, anyone?” (Note 3).

    The editorial continued: “The prospect of default on a train loan is too much to ask from a federal government already $17 trillion in debt,” adding, if the federal government “ is serious about “investing” those billions, spend them on improvements to the nation’s interstate system, which carries both passenger and commercial traffic and is in constant use, 24-7. Interstate 15, which runs between Los Angeles and Las Vegas and is heavily congested, could use the money. So could the planned Interstate 11 between Las Vegas and Phoenix.”

    In addition, echoing my, “taxpayer risk assessment,” published by the Reason Foundation, had shown that the cost of expanding Interstate 15 to six lanes between Victorville and the California border would have been a fraction of the high speed rail costs, and would have been largely paid by highway user fees paid by drivers and truckers, and would reduce both traffic congestion, greenhouse gas emissions and energy consumption.

    The editorial concluded: “Improved interstates would speed commerce, create permanent jobs and have billions upon billions of dollars in long-term economic impact across many states. That would be a return on investment. A tourist train on a high-speed trip to bankruptcy? No so much.”

    Where are the Venture Capitalists?

    There is no shortage of venture capital in the United States.The apparently difficulty being encountered in raising sufficient private capital for the project demonstrates that it is even more risky than the standard venture capital projects. The risks for private investors are huge at the $1.5 billion. The risks are even greater at double that number, which has to be considered among the more optimistic potential outcomes.

    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.

    ——

    Note 1: Flyvbjerg et al reviewed 80 years of infrastructure projects found consistent low-balling of cost estimates. They characterize the process as "strategic misrepresentation," which they shorten to "lying," in unusually frank language.

    Note 2: In response to the public outcry, the California High Speed Rail Authority substituted a somewhat less expensive plan that requires high-speed rail to mix with conventional commuter rail trains in San Francisco and Los Angeles operations.

    Note 3: The Las Vegas Monorail was similarly promoted as sufficiently viable to pay its operating and capital costs in the early 2000s. My 2000 analysis projected that ridership would be well below forecast and that the Las Vegas Monorail would eventually default on its debt. That occurred.

  • The Truce That Could Save American Cities

    Some states, such as New York and California, are loudly proclaiming that they have returned from the fiscal abyss. Maybe for now, but the future doesn’t look so good when long-term debt and pension obligations are factored in. Taken together, our 50 states owe $1 trillion in unfunded pension obligations.

    But right now the most severe and imminent fiscal crisis is in the nation’s cities. For one thing, some states are trying to improve their balance sheets by cutting aid to localities while imposing new mandates for everything from housing to green policies. Governors in states like Pennsylvania, New York and California have b been pushing obligations down to levels of government below them. California Gov. Jerry Brown’s ‘Realignment’ strategy put the responsibility of state justice programs on local governments (though this came with promises of increased state aid). Brown also oversaw the dissolution of over 400 Finance Redevelopment Agencies, some of which may now be forced into bankruptcy. So while state debt is expected to decline by $1.7 billion next year, local debt is set to increase by $600 million.

    Despite the mild recovery, many cities remain in dire fiscal straits. In April Moody’s Investors Service warned it could downgrade the ratings of Chicago, Cincinnati, Minneapolis, Portland and 25 other local governments and school districts as part of a change in how it factors public pensions into debt grades. In Chicago, teachers’ pensions alone cost $1 billion a year, while overall debt service accounts for close to a quarter of the city budget.

    Seven major municipalities have already filed for bankruptcy, the largest being San Bernardino, Calif. The main cause is not hard to find: unfunded pension obligations to employees. A recent Lincoln Institute paper estimated that the aggregate unfunded liabilities of locally administered pension plans top $574 billion and eat up nearly 20% of municipal budgets. But the worst is yet to come. According to the Lincoln Institute’s Anthony Flint,  “If trends continue, over half of every dollar in tax revenue would go to pensions, and by some estimates in some cases would suck up 75% of all tax revenue.”

    This dynamic will eventually be felt not only in long-term basket cases such as Detroit but also in America’s largest and most venerable cities such as Los Angeles, New York and Chicago. Part of the problem lies in legacy costs, similar to what we have seen in older industrial companies and airlines. The longer a municipality has been ladling out generous retirement benefits to public workers, the more they have to face the consequences, particularly as more retirees have the poor taste to live well into their eighties and beyond.

    In New York, notes the Manhattan Institute’s Steve Malanga, annual pension costs during Michael Bloomberg’s 12 years as mayor have grown from $1.8 billion to over $8 billion. According to the 2012 NYC budget, by 2015 these “legacy costs” will account for 25% of the city’s total budget, up from 16% in 2005. Overall these costs will have doubled over 10 years while other spending will have grown by barely 30%.

    A crisis is also brewing in Los Angeles, a once youthful city whose rent-seeking developer and union-dominated political structure has turned it into an economic and fiscal laggard. Former Mayor Richard Riordan has predicted that unless pensions and compensation are reformed dramatically, the city will slide toward bankruptcy. The nation’s second-largest city faces a projected $800 million deficit over the next four years and pensions that are underfunded by at least $15 billion.

    These  huge obligations increasingly constitute a tax on the future of urban residents. As cities are forced to cough up ever more money to meet their retirement promises to workers, they become ever more incapable of addressing the basic infrastructure needs critical to maintaining economic competitiveness against younger, often faster-growing cities in less union-dominated parts of the country, notably in the South and Southwest, as well as newer, often more affluent suburban areas.

    In the coming years count on the emergence of an increasingly dire conflict between urban boosters — who long for everything from improved schools to more bike lanes and better transit — and their traditional allies among the public-sector workforce. Essentially this will be not so much a war between conservatives and free-spending liberals, but what Walter Russell Mead has described as “blue on blue” conflict.

    Conservatives, of course, have their own answers to this conundrum: large-scale budget cuts, severing of union contracts, privatization of essential services even if  basic infrastructure   deteriorate. All but the last alternative have some place in forward-looking urban strategy, but face enormous political challenges given the essentially one-party, union-oriented politics in most major cities. If a media-savvy plutocrat like Michael Bloomberg could not slow the expansion of the cost structure of New York, it’s unlikely that the more run of the mill mayors around the country can much succeed.

    So is there a way out, short of the unlikely resurgence of conservative thinking in urban America? One possibility lies in restating urban priorities towards a  City Hall focus on boosting  the private sector as a means to meet at least some of its obligations. Rather than waging a war neither side can win, perhaps this new understanding could serve as the basis for a durable urban truce.

    This, of course, requires a short course in economics for most urban officials and unions. The impending bankruptcy of cities such as Detroit, where service cutbacks and contract rollbacks are now the order of the day, should be held up as a stark lesson of what can happen. Continued tax increases, the preferred solution among progressives, are a mistake since they tend to drive businesses and middle class workers to places with less onerous burdens.

    What needs to be drilled into the urban progressive mind is the basic reality that if the private economy fails, unions will find themselves confronted not by weak-kneed, weak-minded politicians they can own, but by bond holders, accountants, lawyers and judges who will press to either negate contracts or allow basic services to deteriorate to catastrophic levels.

    At the same time, the private sector needs to recognize its inherent interest in the maintenance of efficient and reliable city services. Rather than simply denounce government, per se, the business community needs to appreciate the fundamental importance of the public sector to long-term economic growth. For much of western history urban infrastructure and efficient services played a critical role in the creation of strong urban economies.

    This has been true as well in the United States, from the days of toll roads to late 19th century investments in water and sanitation systems. Modern Los Angeles would have been inconceivable without the aggressive, and often ruthless, building programs of the city-owned Department of Water and Power. And for all his many excesses, the resurgence of New York still rests on the road, bride and transit legacy created by the master builder Robert Moses.

    These public efforts provided a basis for economic growth, that can  generate revenues to pay city workers. Sadly this virtuous cycle has given way to a vicious one, with much of municipal spending wasted on economically questionable  “bread and circuses” — subsidized condo development, sports stadia, convention centers, arts programs, often marginal rail transit investments  — over more mundane investments in roads, bridges, buses, ports and the like. With rising interest rates imposing higher costs for infrastructure projects, the need to be judicious on spending priorities will become only greater.

    To assure the future of our cities, deals need to be struck between workers and cities to temporarily keep down costs as cities try to snap out of the post-recession doldrums and develop stronger growth-based economies. In economically distressed Rhode Island, State Treasurer Gina Raimondo, a former venture capitalist, led an effort to save that state’s cities and towns about $100 million this fiscal year and $1 billion over the next 20 years.

    Ultimately leaders in both the private and public sectors in cities need to recognize that the only way out of recurring crisis and inevitable decline lies in job-generating economic growth. Many of the cities with the best job growth are running budget surpluses , ranging from ultra-blue, union-dominated San Francisco to red state stalwarts such as Nashville, Fort Worth and Oklahoma City.

    This suggests that business and governments need not only to restrain spending, but spend public funds in ways that are most likely to stimulate economic growth. There should be a strong discussion about municipal priorities — they often differ somewhat by city – with the primary focus   on those things that promote job creation and upward mobility. The urban future can not be secured by providing lavish retirements for city workers or subsidies for rent-seekers. Cities can only truly prosper by promoting that foster  growth in ways that deliver  real benefits to the vast majority of their citizens.

    Joel Kotkin is executive editor of NewGeography.com and R.C. Hobbs Professor of Urban Studies 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.

    This piece originally appeared at Forbes.

    City Hall photo by Flickr user OZinOH.

  • A Cri de Coeur for Localism

    The current era of 21st century urban revolutions began in early 2011, with scores of cities during the Arab Spring. The uprisings have now taken on a newer, darker hue, with Sao Paolo’s protest over bus fares that has already spread to other cities in Brazil. A few uprisings have resulted in the deposing of hated Middle Eastern dictators, and many leaders have reached uneasy truces with their citizens, but observers sense that this conflict is far from over. Some see these as isolated incidents. It seems more like a global web of urban unrest searching for a voice.

    Much of today’s social unrest was predicted by French philosopher Henri Lefebvre, writing in the mid-1970s about social space in the city, and how it has been constructed to favor capitalism. The separation of work and home, for example, is a relatively modern spatial arrangement favoring wealth, and for no better example of this, one can see the hike in Sao Paolo bus fares acting as the straw that broke the camel’s back for the Brazilian poor. Lefebvre’s evaluation of the currents of the late twentieth century can now be updated, and it points to a looming social crisis.

    Western states– Chinese, Syrian, or what-have-you – have the tools to utterly crush any alternatives to their power. The state is universally promoted as the “stable center” without which, we are assured, we would descend into chaos. It enables both a spatial flatness and instantaneous communication, collapsing space and time.

    The working class, instead of rising up in Marxist-style class struggle, has continually been pacified by consumerism. Anyone interviewing a modern Chinese young adult would, if they got a candid response, hear the anger of this generation over the Tiananmen Square generation’s sell-out; economic freedom was offered by the state, and the people, starved for so long, chose it, rather than political freedom. Today, they pay the price. Placating the lower classes has become expensive, and the state has become overextended in doing so, but cannot stop at the risk of seeding a genuine revolt.

    As housing, transportation, food and living costs rise to newly unaffordable levels, a larger and larger segment of the population is left behind. An example of this is the phenomenon of food trucks, which has swept many cities in a few short years, creating a niche that is neither vending cart nor restaurant, but something new in between. Government regulation was swift in coming, notable not for its concern about health, but its concern about the economic protection of vested interests . In olden days, food vendors could just duke it out for the customer. Today, the government, anxious to keep the finely tuned economic hierarchy of the city in balance, rushes in to create order and regulate the problem away.

    Struggles in Egypt, Syria, and now Brazil have nothing to do with traditional Marxist concerns about the rise of the industrial worker. With impoverished credibility, evidenced by the multiple failures of the socialist state, leftists have little to offer when considering the urban landscape that lies before us in cities like Aleppo, Damascus, Tunis, Cairo, and many others.

    While the right cries “Marxist” at anyone protesting the greed and corruption of the global economic system, this smear is neither accurate nor serious. Old labels are used for lack of anything better, but the confrontations on the streets have neither a red flag nor a red book. Instead, the new mob – refusing to be pacified by the usual pop culture escapism – is searching for a new voice that is neither communist nor capitalist.

    The American Occupy movement faded before it could contribute anything meaningful to the last election, but perhaps by consensus it decided that the election was already lost, regardless of which party won. Disbanded, the protest against the “one percent” was an inarticulate voice not ready for prime time. What is the opposite of globalism?

    It is a new localism that will arise, refuting the power of the state and finding a yet- unnamed ethic that rejects our flattened, instantaneous space-time for something hilly and slower.
    In the coming months and years these urban voices will continue to protest the state’s authoritarianism, as well as the high price of the global economic system. Eventually, these voices will likely converge into a newer socio-economic philosophy, yet to be defined. Lefebvre died in 1991 without ever seeing the protests at global trade talks at the turn of the millennium, but he would have approved of the dialectic. He would also have predicted that they would be crushed by the state, as happened. He would see today’s world as ripe for confrontation.

    Flickr photo by Phillip Pessar, Frita Man Food Truck at Walgreens, Miami, Florida. “Food trucks in the Walgreens parking lot have become a regular thing.”

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

  • A Million New Housing Units: The Limits of Good Intentions

    In May 2013, the district of Husby in suburban Stockholm, Sweden was shaken by “angry young men” engaging in destructive behavior for about 72 hours,1 including the burning of automobiles and other properties and attacks on police officers (over 30 officers were injured). The violence spread to the nearby districts of Rinkeby and Tensta as well as to other parts of Sweden.

    Husby, Rinkeby, and Tensta are located within the corporate limits of Sweden’s capital city,2 but a considerable distance from the waterfront and medieval beauty of downtown Stockholm frequented by visitors and tourists. All three communities were planned in the 1960s and completed in the mid-1970s as part of the Swedish Million Programme.  According to official Stockholm municipal statistics, resident populations in 2012 were 12,203, 15,968, and 18,494 respectively.3

    This ambitious program was approved by Sweden’s Parliament in 1965 to remedy what was then considered an acute shortage of housing. Its goal was to rapidly produce a large number of affordable housing units for the Swedish middle class while preserving nearby open space, improving traffic safety and encouraging residents to walk, ride bicycles and use transit. Planners and architects felt that in order to achieve the desired suburban “new town” environment, development and densities were to be as concentrated as possible, and all units were to be within 500 meters of the transit station.4

    The first new homes in Tensta were delivered to their initial residents in 1967, only two years after the program was approved, but the subway line, so important to the design and development of these communities, was not to be opened to traffic until 1975.

    By the 1970s, the Swedish economy had slowed considerably from its 1960s boom, and as the economy cooled, some areas outside of Stockholm where new Million Programme communities had been built suddenly had a surplus of housing. In Stockholm, production of the Million Programme units continued well into the 1970s until all planned units were completed, even though the population of Stockholm was to decline from 787,182 in 1965 to a modern low of 647,115 in 1981.

    Yet in the end, most of the residents who ended up in these units were neither middle class or of Swedish descent. In part because the Million Programme had eliminated Sweden’s shortage of housing and many of its communities were considered unsightly and undesirable by Swedes, the newly constructed units became places where waves of new immigrants to the country found a place to live. Over time these communities have become suburban ghettos for newly-arrived families and individuals, with persons of an “immigrant background” (either immigrants or the child of immigrants making up between 85% and 90% of resident population in these districts according to official statistics for 2012).  

    These areas soon became isolated from the mainstream of Swedish society. The new communities were designed to make open space accessible to their residents (ordinarily a desirable goal), but this by design disconnected from nearby older (and lower-density) subdivisions. Planners and architects for the Million Programme apparently never anticipated that their creations would become segregated to such an extent that a member of Parliament and government minister would call for some of them to be razed. Sweden’s Minister of Integration, Nyamko Sabuni, did just that in a 2009 op-ed column, when she charged that they led to “exclusion” of their residents and since many of them are badly in need of thorough renovation, some should be torn down instead.5 Indeed some Million Programme complexes outside of Stockholm have met their demise with the use of a wrecking ball.6

    Swedish planners and elected officials did learn from these mistakes. The new high-tech employment center of Kista, located adjacent to Husby, has a base of employment that never developed in the Million Programme districts, and a significantly lower percentage of immigrants (though still higher than 50%). 

    Planners and elected officials in other nations (including North America) should take notice of the Million Programme – and more-recent Smart Growth proposals – as an example of what can go badly wrong.

    The aftermath of Million Programme demonstrates the inability of elected officials and the planners and architects on their staffs to anticipate the future needs and even the demographic makeup of their constituent populations, even in a democratic nation such as Sweden. Though it was approved with wide agreement by the Parliament in 1965, it is unlikely that members of that body anticipated that Swedish middle-class families would reject the densely-developed large-scale apartment developments that the effort produced, nor that much of the wave of immigration that was to arrive on Swedish shores starting in the late 1960s and continuing for many years would end up seemingly confined and segregated in the newly-constructed communities. The problems resulting from the cheap construction methods used and a resulting need for extensive and expensive renovations in order to bring the units up to contemporary standards will require large amounts of money. The source of that funding to make those repairs has not been identified.

    Finally, the role of rail transit in these projects deserves a mention. The construction of the Stockholm subway’s Blue Line (a radial line linking all three communities with downtown Stockholm) was significantly delayed, and did not open for traffic until 1975, well after most of the new homes were occupied, even though a transit station was always intended as an integral part of each of them (prior to 1975, residents had to take buses to get downtown, or get themselves to regional rail stations some distance away).  While the subway system in general (and the Blue Line in particular) are rightly called the “world’s longest art exhibit” because of the extraordinary and diverse beauty of its underground stations, it has not prevented the isolation and economic disadvantage that the minorities living along the line have always experienced. 

    C. P. Zilliacus is a transportation engineer residing in the eastern United States.

    Translations from Swedish by the author.

    Tensta housing photo by Wikimedia Commons user Holger.Ellgaard.

    ——————–

    1           Dagens Nyheter, 2013-05-22, ”Det har blivit värre I Husby de senaste åren” (translates to “It Has Gotten Worse in Husby in Recent Years”)  http://www.dn.se/sthlm/det-har-blivit-varre-i-husby-de-senaste-aren/
    Dagens Nyheter (“The Daily News”) is the largest daily newspaper in Sweden.

    2           Like some U.S. cities, including Houston and Los Angeles, Stockholm annexed significant areas of mostly vacant land during the 20th Century that are now generally considered suburban due to distance from downtown and land use characteristics. 

    3           Municipal statistics for Stockholm obtained online from http://www.statistikomstockholm.se.

    4           A Swedish-language overview of the Million Programme was written by Michael Lindqvist, 2000-05-15 “Miljonprogrammet – planeringen och uppförandet” (“Million Programme – Planning and Construction”), available online http://www.micral.se/miljonprogrammet/Miljonprogrammet.pdf

    5           Dagens Nyheter, 2009-03-20, "Riv i miljonprogrammen för integrationens skull" (translates to "Tear Down the Million Programme Units for the Sake of Integration") http://www.dn.se/debatt/riv-i-miljonprogrammen-for-integrationens-skull/

    6           For an example, see Jan Jörnmark’s photo essay of abandoned Million Programme apartment buildings in the municipality of Laxå, located about 240 kilometers (150 miles) by highway west of Husby: http://www.jornmark.se/places_photo.aspx?placeid=29&Photonumber=001&lang=

  • Public Unions for Private Benefits: Public Sector Unions Enrich their Members by Distorting State Finances

    Concerned citizens of California are already familiar with the undue political influence of California’s prison guard union. According to Tim Kowal of the Orange County Federalist Society, the union raises $23 million dollars per year and spends $8 million of it lobbying. As a result, the state has found it impossible to engage in meaningful reform of its correctional system. The union helped defeat a 1999 bill allowing alternative sentencing to select parole offenders and attempts in 2000 and 2008 to provide substance abuse treatment for nonviolent drug users as a substitute for prison sentences. Such laws remain on the books that keep nonviolent criminals in prison, keeping prison guards in high demand with enviable job security.

    Experience shows that when public sector unions become powerful, they can influence the democratic process to secure promises of future benefits. These benefits are ubiquitous; a recent investigation uncovered that many Chicago police officers are eligible to receive annual six figure pensions upon retiring at age 50. In no way are these promises in the public interest. And the real fiscal crisis in America, at the state and local level, looms in states where public sector unions are out of control.

    Unions want more benefits and politicians would rather not incur the wrath of their constituents by raising taxes. To serve both masters, politicians incur more debt. But off the books, they also make completely unrealistic promises about retiree health benefits and pension plans. The promises are known as an unfunded liability – a promise to pay without a source of funds attached to it. Our research, “The Public Sector ‘Union’ Effect: Pushing up Unfunded Pension Liabilities and State Debt” published by The Beacon Hill Institute, establishes a convincing link between the strength of public sector unions and both public failures.

    For California, for instance, we attribute 42.8% of state and local debt to unions. This amounts to $173 billion dollars. We arrived at this conclusion by finding that, after controlling for other factors, a one percentage point increase in membership in public sector unions will lead to an increase in state and local debt by $78 per person. So, if the percentage of public sector employees increases from five to six percent, then we predict that public debt would eventually increase by $78 times the population of the state.

    In California, 58.7% of public sector employees are unionized – it isn’t even the most unionized state. The states in which public debt is most attributable to unions are Iowa (55.2% of their debt), Montana (54.3%), and Michigan (54.2%). The states which can least credibly attribute their fiscal problems to unions are Virginia (10.3%), South Carolina (11.8%), and North Carolina (12.8%).

    But this is only side of the problem. Unfunded liabilities are not included in these figures. The Pew Center on the States has elsewhere analyzed how well states are managing their public pensions and retiree health care benefits. For each of these, Pew rated states as a “Solid Performer,” “Needs Improvement,” or has having “Serious Concerns.”  California was one of several states to have “Serious Concerns” for both.

    There was only one state rated by Pew as having both liabilities under control, Wisconsin. To accomplish that, Governor Scott Walker expended a great deal of political capital to limit unions, and paid for it by nearly being recalled.

    To critically analyze this, we constructed an index out of Pew’s two ratings. For each unfunded liability, we assigned a “0” for states with “Serious Concerns,” a “1” for “Needs Improvement,” and a “2” for “Solid Performer” Then, we summed the two ratings together. States like California that are performing poorly in both have a total score of 0 in the index. Wisconsin received a total score of 4. Any state that receives a total score of 0 or 1 is poorly managing its liabilities.

    More detail is available in the paper, but one way of summarizing our results is this: After controlling for other relevant factors, a one percentage point increase the proportion of public sector employees who are unionized makes it one percent more likely for the state to receive a total score of 0 or 1. This demonstrates the link between unfunded liabilities and pressure from unions.

    The combination of high public debt and the specter of a drastic increase in costs to pay for retiree benefits constitute a recipe for disaster. If the issue is ignored, states like California will experience problems very similar to what European countries like Greece and Spain are now experiencing. Similar austerity measures would mean cuts to basic services and the highest state tax rates seen in US history to avoid bankruptcy.

    Responsible citizens and politicians should recognize the lethal pairing of high debt and poorly funded pension plans. And there is a clear relationship between poor state performance and the power of public sector unions. Engaging in real reform, as was accomplished in Wisconsin, may be politically costly, but it is the best path to allow democracy to function effectively once more.

    Ryan Murphy, PhD, is a research associate at the Beacon Hill Institute at Suffolk University.

  • The Hall of Gimmicks

    Occasional Urbanophile contributor Robert Munson has talked about how Chicago Mayor Richard M. Daley was among the first to recognize that there was a “taxpayer strike” in America. That is, given the breakdown in the social contract in our cities, taxpayers were increasingly unwilling to pour money down a rat hole.

    Localities have also been in a fiscal vice as their tax receipts have collapsed thanks to the Great Recession and especially the decline in housing values, while at the same time the chickens are coming home to roost from the accumulated unfunded liabilities that had been racked up from sweetheart pension deals and the like.

    And state and federal retrenchment have cut into municipal budgets. Aid to municipalities is easy to cut. Also, it’s easy for states to make municipalities bear the brunt of tax caps and other disempowerment items since living with them is Somebody Else’s Problem for state office holders. And most states radically under-empowered local governments to begin with.

    Combine these and there’s little room to maneuver for many cities and mayors. They are hemmed in on all sides. So what do they do? Unsurprisingly, they’ve increasingly turned to gimmicks, especially in bigger cities that have the talent firepower to dream them up.

    Exhibit A is parking meter lease in Chicago. It generated $1.2 billion in “free money” for Mayor Daley to use to paper over deficits, but at a huge long term cost. We’ve seen all sorts of other “public-private partnership” type deals that accomplish similar things. Many of these are not per se problematic – I’m a fan of privatization done right, for example – but the details can be troublesome when you examine them.

    One common complaint I hear in places like Chicago and Indy is the abuse of Tax Increment Financing (TIF). Without a doubt TIF has been abused in a number of cases. But what critics fail to take into account is that TIF is one of the few tools left in the civic toolbox that can actually raise real money.

    Let’s say we are all opposed to gimmicky privatization deals and TIF to raise money. Now let’s ask the question: how are our cities supposed to pay to rebuild their obsolete infrastructure like pothole-ridden streets that, even if they were already pristine, don’t meet modern 21st century demands? This is a real liability of the city, accrued over the years as previous generations failed to keep up with maintenance and such. Absent gimmicks, how is this supposed to be funded? And if the answer is don’t fund it, then how is a completely run down, dilapidated city with creaky services supposed to retain choice consumers who can easily pull up stakes and move to a new suburb or other part of the country that doesn’t have these problems? It’s easy to criticize, but solutions are needed.

    Munson thinks that we need to have accountability reforms so that the public will be convinced to open their wallets and invest. I agree this is critical. I personally have no desire to pour any more of my money into the local treasury until I can see that I’m going to get some return on it. And there’s evidence that the public will spend if you can demonstrate that. Capital bonds and actual tax increases for things like schools, transit systems, stadiums, and even cultural facilities have frequently passed across America when there’s assurance that the money is ring-fenced. When people know that they can vote for a tax and get something tangible for it, even something as dubious as a stadium, they can be convinced to vote for it. But more money for fewer and worse services is a loser every time.

    The problem is that the state controls the fiscal levers. Therefore there’s no guarantee that even if a city got its house in order, it would even be permitted to ask its residents for more money. Also, too many local leaders are beholden to special interests and so are unlikely candidates to deliver reform anyway. Paddy Bauler eloquently summed up this mindset when he famously said, “Chicago ain’t ready for reform.” Sadly, this remains true in all too many places.

    So while the use of gimmicks may be distasteful (and even destructive in the long term at times), we should expect more of it since the incentives are all aligned to produce this outcome. Those cities that do manage to reform, and get state support for the type of legal framework the need to operate (as called for in The Metropolitan Revolution) will be the ones that end up with long term success.

    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.

    Chicago parking meter photo by Ed Fisher.

  • How the Left Came to Reject Cheap Energy for the Poor

    Eighty years ago, the Tennessee Valley region was like many poor rural communities in tropical regions today. The best forests had been cut down to use as fuel for wood stoves. Soils were being rapidly depleted of nutrients, resulting in falling yields and a desperate search for new croplands. Poor farmers were plagued by malaria and had inadequate medical care. Few had indoor plumbing and even fewer had electricity.

    Hope came in the form of World War I. Congress authorized the construction of the Wilson dam on the Tennessee River to power an ammunition factory. But the war ended shortly after the project was completed.

    Henry Ford declared he would invest millions of dollars, employ one million men, and build a city 75 miles long in the region if the government would only give him the whole complex for $5 million. Though taxpayers had already sunk more than $40 million into the project, President Harding and Congress, believing the government should not be in the business of economic development, were inclined to accept.

    George Norris, a progressive senator, attacked the deal and proposed instead that it become a public power utility. Though he was from Nebraska, he was on the agriculture committee and regularly visited the Tennessee Valley. Staying in the unlit shacks of its poor residents, he became sympathetic to their situation. Knowing that Ford was looking to produce electricity and fertilizer that were profitable, not cheap, Norris believed Ford would behave as a monopolist. If approved, Norris warned, the project would be the worst real estate deal “since Adam and Eve lost title to the Garden of Eden.” Three years later Norris had defeated Ford in the realms of public opinion and in Congress.

    Over the next 10 years, Norris mobilized the progressive movement to support his sweeping vision of agricultural modernization by the federal government. In 1933 Congress and President Roosevelt authorized the creation of the Tennessee Valley Authority. It mobilized thousands of unemployed men to build hydroelectric dams, produce fertilizer, and lay down irrigation systems. Sensitive to local knowledge, government workers acted as community organizers, empowering local farmers to lead the efforts to improve agricultural techniques and plant trees.

    The TVA produced cheap energy and restored the natural environment. Electricity from the dams allowed poor residents to stop burning wood for fuel. It facilitated the cheap production of fertilizer and powered the water pumps for irrigation, allowing farmers to grow more food on less land. These changes lifted incomes and allowed forests to grow back. Although dams displaced thousands of people, they provided electricity for millions.

    By the 50s, the TVA was the crown jewel of the New Deal and one of the greatest triumphs of centralized planning in the West. It was viewed around the world as a model for how governments could use modern energy, infrastructure and agricultural assistance to lift up small farmers, grow the economy, and save the environment. Recent research suggests that the TVA accelerated economic development in the region much more than in surrounding and similar regions and proved a boon to the national economy as well.

    Perhaps most important, the TVA established the progressive principle that cheap energy for all was a public good, not a private enterprise. When an effort was made in the mid-’50s to privatize part of the TVA, it was beaten back by Senator Al Gore Sr. The TVA implicitly established modern energy as a fundamental human right that should not be denied out of deference to private property and free markets.

    The Rejection of the State and Cheap Energy

    Just a decade later, as Vietnam descended into quagmire, left-leaning intellectuals started denouncing TVA-type projects as part of the American neocolonial war machine. The TVA’s fertilizer factories had previously produced ammunition; its nuclear power stations came from bomb making. The TVA wasn’t ploughshares from swords, it was a sword in a new scabbard. In her 1962 book Silent Spring, Rachel Carson described modern agriculture as a war on nature. The World Bank, USAID, and even the Peace Corps with its TVA-type efforts were, in the writings of Noam Chomsky, mere fig leaves for an imperialistic resource grab. 

    Where Marx and Marxists had long viewed industrial capitalism, however terrible, as an improvement over agrarian feudalism, the New Left embraced a more romantic view. Before the arrival of “progress” and “development,” they argued, small farmers lived in harmony with their surroundings. In his 1973 book, Small is Beautiful, economist E.F. Schumacher dismissed the soil erosion caused by peasant farmers as “trifling in comparison with the devastations caused by gigantic groups motivated by greed, envy, and the lust for power.” Anthropologists like Yale University’s James Scott narrated irrigation, road-building, and electrification efforts as sinister, Foucauldian impositions of modernity on local innocents. 

    With most rivers in the West already dammed, US and European environmental groups like Friends of the Earth and the International Rivers Network tried to stop, with some success, the expansion of hydroelectricity in India, Brazil and elsewhere. It wasn’t long before environmental groups came to oppose nearly all forms of grid electricity in poor countries, whether from dams, coal or nuclear. “Giving society cheap, abundant energy,” Paul Ehrlich wrote in 1975, “would be the equivalent of giving an idiot child a machine gun.” 

    Elaborate justifications were offered as to why poor people in other countries wouldn’t benefit from cheap electricity, fertilizer and roads in the same way the good people of the Tennessee Valley had. Biomass (eg, wood burning), solar and efficiency “do not carry with them inappropriate cultural patterns or values.” In a 1977 interview, Amory Lovins added: “The whole point of thinking along soft path lines is to do whatever it is you want to do using as little energy — and other resources — as possible.” 

    By the time of the United Nations Rio environment conference in 1992, the model for “sustainable development” was of small co-ops in the Amazon forest where peasant farmers and Indians would pick nuts and berries to sell to Ben and Jerry’s for their “Rainforest Crunch” flavor. A year later, in Earth in the Balance, Al Gore wrote, “Power grids themselves are no longer necessarily desirable.” Citing Schumacher, he suggested they might even be “inappropriate” for the Third World.

    Over the next 20 years environmental groups constructed economic analyses and models purporting to show that expensive intermittent renewables like solar panels and biomass-burners were in fact cheaper than grid electricity. The catch, of course, was that they were cheaper because they didn’t actually deliver much electricity. Greenpeace and WWF hired educated and upper-middle class professionals in Rio de Janeiro and Johannesburg to explain why their countrymen did not need new power plants but could just be more efficient instead.

    When challenged as to why poor nations should not have what we have, green leaders respond that we should become more like poor nations. In The End of Nature, Bill McKibben argued that developed economies should adopt “appropriate technology” like those used in poor countries and return to small-scale agriculture. One “bonus” that comes with climate change, Naomi Klein says, is that it will require in the rich world a “type of farming [that] is much more labor intensive than industrial agriculture.” 

    And so the Left went from viewing cheap energy as a fundamental human right and key to environmental restoration to a threat to the planet and harmful to the poor. In the name of “appropriate technology” the revamped Left rejected cheap fertilizers and energy. In the name of democracy it now offers the global poor not what they want — cheap electricity — but more of what they don’t want, namely intermittent and expensive power. 

    From Anti-Statism to Neo-Liberalism

    At the heart of this reversal was the Left’s growing suspicion of both centralized energy and centralized government. Libertarian conservatives have long concocted elaborate counterfactuals to suggest that the TVA and other public electrification efforts actually slowed the expansion of access to electricity. By the early 1980s, progressives were making the same claim. In 1984, William Chandler of the WorldWatch Institute would publish the “The Myth of the TVA,” which claimed that 50 years of public investment had never provided any development benefit whatsoever. In fact, a new analysis by economists at Stanford and Berkeley, Patrick Klein and Enrico Moretti, find that the “TVA boosted national manufacturing productivity by roughly 0.3 percent and that the dollar value of these productivity gains exceeded the program’s cost.”

    Even so, today’s progressives signal their sophistication by dismissing statist solutions. Environmentalists demand that we make carbon-based energy more expensive, in order to “harness market forces” to cut greenhouse gas emissions. Global development agencies increasingly reject state-sponsored projects to build dams and large power plants in favor of offering financing to private firms promising to bring solar panels and low-power “microgrids” to the global poor — solutions that might help run a few light bulbs and power cell phones but offer the poor no path to the kinds of high-energy lifestyles Western environmentalists take for granted.

    Where senators Norris and Gore Sr. understood that only the government could guarantee cheap energy and fertilizers for poor farmers, environmental leaders today seek policy solutions that give an outsized role to investment banks and private utilities. If the great leap backward was from statist progressivism to anarcho-primitivism, it was but a short step sideways to green neoliberalism.

    But if developed-world progressives, comfortably ensconced in their own modernity, today reject the old progressive vision of cheap, abundant, grid electricity for everyone, progressive modernizers in the developing world are under no such illusion. Whether socialists, state capitalists, or, mostly, some combination of the two, developing world leaders like Brazil’s Lula da Silva understand that cheap grid electricity is good for people and good for the environment. That modern energy and fertilizers increase crop yields and allow forests to grow back. That energy poverty causes more harm to the poor than global warming. They view cheap energy as a public good and a human right, and they are well on their way to providing electricity to every one of their citizens. 

    The TVA and all modernization efforts bring side effects along with progress. Building dams requires evicting people from their land and putting ecosystems underwater. Burning coal saves trees but causes air pollution and global warming. Fracking for gas prevents coal burning but it can pollute the water. Nuclear energy produces not emissions but toxic waste and can result in major industrial accidents. Nevertheless, these are problems that must be dealt with through more modernization and progress, not less.

    Viewed through this lens, climate change is a reason to accelerate rather than slow energy transitions. The 1.3 billion who lack electricity should get it. It will dramatically improve their lives, reduce deforestation, and make them more resilient to climate impacts. The rest of us should move to cleaner sources of energy — from coal to natural gas, from natural gas to nuclear and renewables, and from gasoline to electric cars — as quickly as we can. This is not a low-energy program, it is a high-energy one. Any effort worthy of being called progressive, liberal, or environmental, must embrace a high-energy planet.

    Shellenberger and Nordhaus are co-founders of the Breakthrough Institute, a leading environmental think tank in the United States. They are authors of Break Through: From the Death of Environmentalism to the Politics of Possibility.

    This piece originally appeared at TheBreakthrough.org.

  • No Solar Way Around It: Why Nuclear Is Essential to Combating Climate Change

    Nobody who has paid attention to what’s happened to solar panels over the last several decades can help but be impressed. Prices declined an astonishing 75 percent from 2008 to 2012. In the United States, solar capacity has quintupled since 2008, and grown by more than 50 times since 2000, according to US Energy Information Administration data. In 1977, solar panels cost $77 per watt. Today, they are less than a dollar per watt.

    So it came as a shock to many and an offense to some to learn that new nuclear plants still cost substantially less than solar. Solar advocates have challenged our recent analysis finding that the electricity from Finland’s beleaguered Olkiluoto plant is still four times cheaper than electricity from Germany’s solar program, claiming that we cherry-picked cases to make nuclear look good and solar look bad.

    It is an odd objection, given that we selected perhaps the most expensive nuclear power plant ever built for our comparison. The complaint is odder still because many of the same critics who accused us of cherry-picking then turned around and, without any apparent irony, cherry-picked small, one-off solar projects as evidence that our analysis is slanted toward nuclear. 

    The reason we compared the Finnish plant to the German solar program is not just because renewables advocates have long claimed that the two examples prove that solar is cheap and nuclear is expensive. We also compared the two because both projects exist in the real world at significant scale, which helps avoid the cherry-picking problem of overgeneralizing from particular cases. Thanks to generous subsidies, Germany generated 5 percent of its electricity from solar last year — a huge amount compared to other nations. By contrast, last year the United States produced just 0.18 percent of its electricity from solar, according to the EIA.

    Some have reasonably asked if there aren’t broader surveys of the costs of new solar and new nuclear. There are. Both the International Energy Agency and the EIA have done them, and both find that solar costs substantially more than new nuclear construction.

    While those figures represent the cost of the average solar installation today, they don’t tell us what it costs for a major industrial economy to scale up solar rapidly, such that it gets a significant percentage of its electricity from solar. To date, Germany is the only major economy in the world that has done so. The costs of Germany’s solar feed-in tariff represent the only real world figure we have. 

    As solar has scaled up in Germany, the costs have declined. But the dynamics are not dissimilar with nuclear. France saw significant cost declines as it scaled up standardized plant designs in the 70s and 80s. The new plant in Finland is a first-of-kind design. Subsequent builds are already showing significantly lower costs. The EPR under construction in France, initiated around the same time as the one in Finland, is expected to cost slightly less. The third and fourth versions of the EPR, currently under construction in China, will be a third the cost of the Finnish plant.

    Had we chosen to use the two new Chinese plants, solar would have cost twelve times more than nuclear, rather than just four times more. Of course this comparison would almost certainly have raised further objections that we had compared German apples to Chinese oranges. Yet it turns out that the German solar program has benefited enormously from the scaling up of Chinese solar manufacturing — or in the eyes of the US Solar Energy Association, the US Trade Commission, and the European Union, the outright dumping of solar panels by Chinese firms. Indeed the flood of Chinese solar panels, which take up as much as 80 percent of market share in Europe, has depressed the cost of solar panels by as much as 88 percent according to EU officials.

    Surely, if it is appropriate to tout solar cost reductions that have been driven by Chinese mercantilism and industrial policy it is also appropriate to consider the cost benefits that Chinese manufacturing and construction costs are bringing to nuclear ­— even more so given that the vast majority of future carbon emissions will come from places like China, not Finland or Germany.   

    Our analysis was further biased toward solar over nuclear by not accounting for the high costs of backing up and integrating intermittent solar electricity. Leading anti-nuclear greens, including Bill McKibben and Robert F. Kennedy Jr., note that for a few hours during a sunny weekend day, solar provided 50 percent of Germany’s electricity; at the same time, as we pointed out, only five percent of the country’s total electricity came from solar in 2012. What that means is that if Germany doubled the amount of solar, as it intends to do, there might be a few hours or even days every year where the country gets 100 percent of its electricity from solar, even though solar only provides 10 percent of its annual electricity needs.

    What happens beyond that is anyone’s guess. Some say Germany could sell its power to other countries, but this would mean other countries couldn’t move to solar since Germany would provide electricity at the same hours it would seek to unload it on their neighbors. Solar advocates say cheap utility-scale storage is just around the corner; in fact, choices are extremely limited and expensive. As a result, analysis by the Clean Air Task Force suggest that integration costs for solar and wind are likely to surge dramatically should renewables rise much above 20 or 30 percent of total electrical generation (see graph below).


    Costs of adding intermittent generation are likely to scale super-linearly with penetration, creating a deployment barrier.  Some examples (various bases) in the figure: “Wind A” is the marginal cost per MWh of wind in ERCOT relative to the same index at 0% wind penetration. “Wind B” is the reciprocal of total system wind capacity factor in CAISO relative to 0% wind penetration (an indicator relative total system construction cost).“Wind C” is the number of annual CCGT start-ups in Ireland relative to 0% wind penetration (a proxy for system-wide O&M costs and emissions due to cycling).“PV” is the marginal cost per MWh of PV in ERCOT relative to the same index at 0% PV penetration. “RE Bundle” is the relative size of the US bulk transmission system (million MW-miles) due to bundled renewables (roughly ½ wind+solar) relative to 0% penetration.

    Sources: CATF from Denholm & Hand, 2011 (Wind A); Hart et al, 2012 (Wind B); Troy et al, 2010 (Wind C); Denholm & Margolis, 2006 (PV); NREL, 2012 (RE Bundle). 

    We do not present this evidence to advocate against solar subsidies or Germany’s program. We have long advocated that governments spend significantly more on energy innovation, including the deployment of solar panels. But it’s one thing to endorse Germany’s big investment in solar in the name of accelerating solar innovation, and it’s quite another to claim — as McKibben, Kennedy, and environmental groups do — that Germany’s solar program and increasingly cheap solar panels demonstrate that solar energy is ready to scale, capable of substantially displacing fossil energy, and a viable alternative to nuclear.

    In reality, there’s little evidence that renewables have supplanted — rather than supplemented — fossil fuel production anywhere in the world. Whatever their merits as innovation policy, Germany’s enormous solar investments have had little discernible impact on carbon emissions. Germany’s move away from baseload zero-carbon nuclear has resulted in higher coal consumption since 2009. In 2012, Germany’s carbon emissions rose 2 percent.

    Nuclear, by contrast, replaces fossil energy. A recent analysis by the Business Spectator’s Geoff Russell finds that big nuclear programs around the world have shown the ability to scale up three to seven times faster than Germany’s vaunted Energiewende (see below). In 1970, fossil fuels supplied roughly two-thirds of France’s electricity, with the balance mostly coming from hydro. By 1990, fossil’s share of the electricity supply had dropped to 10 percent, according to EIA data, while nuclear supplied 80 percent, an energy mix that still holds today. As a result, France’s electricity sector emits 80 grams of CO2 per kWh, compared to Germany’s 450 grams CO2 per kWh. Sweden and Ontario, which also have large shares of nuclear in their electricity supply, augmented by large hydro projects, are even lower. 

    In the United States, nuclear power grew from supplying zero percent of US electricity in 1965 to 20 percent in 1990. Over that same period, coal generation remained flat, rising from 54 percent of generation in 1965 to 60 percent in 1990, during a period when total electricity demand roughly tripled. Since the early 1990’s, when the US nuclear build-out stalled, the vast majority of new US electricity demand has been met by coal and gas.

    Even so, nuclear still needs to get better and cheaper if it is going to displace fossil energy at any scale that will make much difference in terms of climate change. Next generation plants that are safer, cheaper, and more reliable will be necessary if nuclear is to be more than a hedge against fossil energy in the developing world and to see significant new deployment at all in the developed world. Solar, wind, and energy storage technologies will need substantial further advances if they are going to even begin to achieve the scale possible with present day nuclear.

    Our analysis serves a broader point: we must reject technology tribalism if we are to meet rising energy demand and combat global warming. This entails paying close attention to the substantial challenges emergent technologies face, not ignoring them, and discerning how far different technologies are from being capable of replacing fossil energy. The question is not whether solar is the solution, or nuclear. The question is what technologies will deliver clean, reliable, and cheap energy to a growing population, and what it will take to get those technologies to scale. Any movement serious about addressing climate change will thus be characterized by a broad commitment to innovation and a willingness to take a hard, non-ideological look at present day zero-carbon technologies.

    Shellenberger and Nordhaus are co-founders of the Breakthrough Institute, a leading environmental think tank in the United States. They are authors of Break Through: From the Death of Environmentalism to the Politics of Possibility.

    This piece originally appeared at TheBreakthrough.org.

    Photo Credit: SonomaPortal.com.

  • The Unexotic Underclass

    The startup scene today, and by ‘scene’ I’m sweeping a fairly catholic brush over a large swath of people – observers, critics,  investors, entrepreneurs, ‘want’repreneurs, academics, techies, and the like – seems to be riven into two camps.

    On one side stand those who believe that entrepreneurs have stopped chasing and solving Big Problems – capital B, capital P: clean energy, poverty, famine, climate change, you name it.  I needn’t replay their song here; they’ve argued their cases far more eloquently elsewhere.  In short, they contend that too many brains and dollars have been shoveled into resolving what I call ‘anti-problems’ –  interests usually centered about food or fashion or ‘social’ or gaming.  Something an anti-problem company  might develop is an app  that provides  restaurant recommendations based on your blood type, a picture of your childhood pet, the music preferences of your 3 best friends, and the barometric pressure of the nearest city beginning with the letter Q.  (That such an app does not yet exist is reminder still of how impoverished a state American scientific education has descended.  Weep not! We redouble our calls for more STEM funding.)

    On  the other side stand those who believe that entrepreneurs have stopped chasing and solving Big Problems – capital B, capital P – that there are too many folks resolving anti-problems… BUT  just to be on the safe side, the venture capitalists should keep pumping tons of  money  into  those anti-problem entrepreneurs because you never know when some corporate leviathan – Google, Facebook, Yahoo! – will come along and buy what yesterday looked like a nonsense app and today is still a nonsense app, but a nonsense app that can walk a bit taller, held aloft by the insanities of American exceptionalism.  For not only is our sucker birthrate still high in this country (one every minute, baby!), but our suckers are capitalists bearing fat checks.

    On the other other side, a side that receives scant attention, scanter investment, is where big problems – little b, little p – reside.  Here, you’ll find a group I’ll refer to as the unexotic underclass.  It’s rather quiet in these parts, except during campaign season when the politicians stop by to scrape anecdotes off the skin of someone else’s suffering.  Let’s see who’s here.

    To your left are single mothers, 80% of whom, according to the US Census,  are poor or hovering on the nasty edges of working poverty.  They are struggling to raise their kids in a country that seems to conspire against  any semblance of proper rearing: a lack of flexibility in the workplace; a lack of free or affordable after-school programs;  an abysmal public education system where a testing-mad, criminally-deficient curriculum is taught during a too-short school day; an inescapable lurid wallpaper of sex and violence that covers every surface of  society;  a cultural disregard for intelligence, empathy and respect;  a cultural imperative to look hot, spend money and own the latest “it”-device (or should I say i-device) no matter what it costs, no matter how little money Mum may have.

    Slightly to the right, are your veterans of two ongoing wars in the Middle East. Wait, we’re at war? Some of these veterans, having served multiple tours, are returning from combat with all manner of monstrosities ravaging their heads and bodies.  If that weren’t enough, welcome back, dear vets, to a flaccid economy, where your military training makes you invisible to an invisible hand that rewards only those of us who are young and  expensively educated.

    Welcome back to a 9-month wait for medical benefits.  According to investigative reporter Aaron Glantz, who was embedded in Iraq, and has now authored The War Comes Home: Washington’s Battle against America’s Veterans, 9 months is the average amount of time  a veteran waits for his or her disability claim to be processed after having filed their paperwork.  And by ‘filed their paperwork,’ I mean it literally: veterans are sending bundles of papers to some bureaucratic Dantean capharnaum run by the Department of Veterans’ Affairs,  where, by its own admission, it processes 97%  of its claims by hand, stacking them in heaps on tables and in cabinets.

    In the past 5 years, the number of vets who’ve died before their claim has even been processed has tripled. This is America in 2013: 40 years ago we put a man on the moon; today a young lady in New York can use anti-problem technology if she wishes  to line up a date this Friday choosing only from men who are taller than 6 feet, graduated from an Ivy, live within 10 blocks of Gramercy, and play tennis left-handed…

    …And yet, veterans who’ve returned from Afghanistan and Iraq have to wait roughly 270 days (up to 600 in New York and California) to receive the help — medical, moral, financial – which they urgently need, to which they are honorably entitled, after having fought our battles overseas.

    Technology, indeed, is solving the right problems.

    Let’s keep walking.  Meet the people who have the indignity of being over 50 and finding themselves suddenly jobless.  These are the Untouchables of the new American workforce: 3+ decades of employment and experience have disqualified them from ever seeing a regular salary again.   Once upon a time, some modicum of employer noblesse oblige would have ensured that loyal older workers be retained or at the very least retrained, MBA advice be damned.  But, “A bas les vieux!” the fancy consultants cried, and out went those who were  ‘no longer fresh.’  As Taylor Swift would put it, corporate America and the Boomer worker  “are never ever getting back together.”  Instead bring in the young, the childless, the tech-savvy here in America, and the underpaid and quasi-indentured abroad willing to work for slightly north of nothing in the kinds of conditions we abolished in the 19th century.

    For, in the 21st century, a prosperous American business is a soaring 2-storied cake: 1 management layer at top thick with perks, golden parachutes, stock options, and a total disregard for those beneath them; 1 layer below of increasingly foreign workers (If you’re lucky, you trained these people before you were laid off!), who can’t even depend on their jobs because as we speak, those sameself consultants – but no one that we know of course — are scouring the globe for the cheapest labor opportunities, fulfilling their promise that no CEO be left behind.

    Above all of this, the frosting on the cake,  the nec plus ultra of evolutionary corporate accomplishment: the Director of Social Media.  This is the 20-year old whose role it is to “leverage social media to deliver a seamless authentic experience across multiple digital streams to strategic partners and communities.”  In other words, this person gets paid six figures to send out tweets. But again, no one that we know.

    Time and space and my own sheltered upbringing  defend me from giving you the whole tour of the unexotic underclass, but trust that it is big, and only getting bigger.

    ___________________________________

    Now, why the heck should any one care? Especially a young entrepreneur-to-be.  Especially a young entrepreneur-to-be whose trajectory of nonstop success has placed him or her leagues above the unexotic underclass.  You should care because the unexotic underclass can help address one of the biggest inefficiencies plaguing  the startup scene right now: the flood of  (ostensibly) smart, ambitious young people desperate to be entrepreneurs; and the embarrassingly idea-starved landscape where too many smart people are chasing too many dumb ideas, because they have none of their own (or, because  they suspect no one will invest in what they really want to do).  The unexotic underclass has big problems, maybe not the Big Problems – capital B, capital P – that get ‘discussed’ at Davos.  But they have problems nonetheless, and where there are problems, there are markets.

    The space  that caters to my demographic – the cushy 20 and 30-something urbanites – is oversaturated. It’s not rocket science: people build what they know.  Cosmopolitan, well-educated young men and women in America’s big cities are rushing into startups and building for other cosmopolitan well-educated young men and women in big cities.  If you need to plan a trip, book a last minute hotel room, get your nails done, find a date, get laid, get an expert shave, hail a cab, buy clothing, borrow clothing, customize clothing, and share the photos instantly, you have Hipmunk, HotelTonight, Manicube, OKCupid, Grindr, Harry’s, Uber, StyleSeek, Rent the Runway, eshakti/Proper Cloth and Instagram respectively to help you. These companies are good, with solid brains behind them, good teams and good funding.

    But there are only so many suit customisation, makeup sampling, music streaming, social eating, discount shopping, experience  curating companies that the market can bear.  If you’re itching to start something  new, why chase the nth  iteration of a company already serving the young, privileged, liberal jetsetter? If you’re an investor, why revisit the same space as everyone else?  There is life, believe me, outside of NY, Cambridge, Chicago, Atlanta, Austin, L.A. and San Fran.

    It’s where the unexotic underclass lives.  It’s called America.  This underclass is not some obscure niche market.  Take the single mothers. Per the US Census Bureau, there are 10 million of them  today; and an additional 2 million single fathers.  Of the single mothers, the majority is White, 1 in 4 is Hispanic, and 1 in 3 is Black.  So this is a fairly large and diverse group.

    Take the veterans. (I will beat the veteran drum to death.) According to the VA’s latest figures, there are roughly 23 million vets in the United States.  That number sounds disturbingly high; that’s almost 1 in 10 Americans.  Entrepreneurs and investors like big numbers.  Other groups you could include in the underclass: ex-convicts, many imprisoned for petty drug offenses, many released for crimes they never even committed.  How does an ex-convict get back into society?  And navigate not just freedom, but a transformed technological landscape?  Another group, and this one seems to sprout in pockets of affluence: people with food allergies.  Some parents today resort to putting shirts and armbands on their kids indicating what foods they can or can’t eat.  Surely there’s a better fix for that?

    Maybe you could fix that.

    ___________________________________

    Why do I call this underclass unexotic?  Because, those of us, lucky enough to be raised in comfortable environs – well-schooled, well-loved, well-fed – are aware of only 2 groups: those at the very bottom and those at the very top.

    We have clear notions of what the ruling class resembles – its wealth,  its connections, its interests.  Some of you reading this will probably be part of the ruling class before you know it.  Some of you probably already are.  For the 1% aspirants (and there’s no harm in having such aspirations), hopefully by the time you get there, you will have found meaningful problems to solve – be they big, or Big.

    We have clear ideas of what the exotic underclass looks like because everyone is clamoring to help them.  The exotic underclass are people who live in the emerging and third world countries that happen to be in fashion now -– Kenya, Bangladesh, Brazil, South Africa. The  exotic underclass are poor Black and Hispanic children (are there any other kind?) living in America’s urban ghettos.  The exotic underclass suffer from diseases that have stricken the rich and famous, and therefore benefit from significant attention and charity.

    On the other hand, the unexotic underclass, has the misfortune of being insufficiently interesting.  These are the huddles of Whites – poor, rural working class – living in the American South, in the Midwest, in Appalachia.  In oh-so-progressive Northeast, we  refer to them as ‘hicks’ and ‘hillbillies’ and ‘trailer trash,’ because apparently, this is the one demographic that American manners have forgotten.

    The unexotic underclass are the poor in Eastern Europe, and Central Asia, who just don’t look foreign enough for our taste.  Anyone who’s lived in a major European city can attest to the ubiquity of desperate Roma families, arriving from Bulgaria and Romania, panhandling in the streets and on the subways. This past April, the employees of the Louvre Museum in Paris went on strike because they were tired of being pickpocketed by hungry Roma children.   But if you were to go to Bulgaria to volunteer or to start a social enterprise, how would the folks back on Facebook know you were helping ‘the poor?’  if the poor in your pictures kind of looked like you?

    And of course, the biggest block of the unexotic underclass are the ones I alluded to earlier: that vast, suffocating mass right here in in America. We don’t notice them because they don’t get by on $1 a day. We don’t talk about them because they don’t make $1 billion a year.  The only place where they’re popular is in Washington, D.C. where President Obama and  his colleagues in Congress can can use members of the underclass to spice up their stump speeches: “Yesterday, I met a struggling family out in yadda yadda yadda…” But there’s only so much Washington can do to help out, what with government penniless and gridlocked, and its elected officials occupying a caste of selfishness, cowardice and spite, heretofore unseen in American politics.

    __________________________________

    If you’re an entrepreneur looking for ideas, consider looking beyond the city-centric, navel-gazing, youth-obsessed mainstream.  That doesn’t mean you need to fly to the end of the world.  Chances are there are more people addressing the Big Problems of slum dwellers in Calcutta, Kibera or Rio, than are tackling the big problems of hardpressed folks in say, West Virginia, Mississippi or Louisiana.

    To be clear, I’m not painting the American South as the primary residence of all the wretched of the earth. You will meet people down there who are just as intelligent and cultured and affluent as we pretend everyone up North is.

    Second, I’m not pitting the unexotic against the exotic.  There is nothing easy or trendy about the work being done by the brave innovators on the ground in Asia, Africa, and Latin America.  Some examples of that work: One Earth Designs which helps deliver clean energy and heating solutions to communities in rural China; Sanergy, which is bringing low-cost sanitation to Kenya’s poorest slums;  Samasource, which provides contract work to youth and women in Haiti, Ghana, Kenya, Uganda and India.  These are young startups with young entrepreneurs who attended the same fancy schools we all know and love (MIT, Harvard, Yale, etc.), who lived in the same big cities where we all congregate, and worked in the same fancy jobs we all flocked to post-graduation.  Yet, they decided they would go out and  tackle Big Problems – capital B, capital P. We need to encourage them, even if we could never imitate them.

    If we can’t imitate them,and we’re not ready for the challenges of the emerging market, and we have no new ideas to offer, then maybe there are problems, right here in America for us to solve…The problems of the unexotic underclass.

    ____________________________________

    Now, I can already hear the screeching of meritocratic,  Horatio Algerian Silicon Valley,

    “What do we have to do with any of this? The unexotic underclass has to pull itself up by its own bootstraps!  Let them learn to code and build their own startups!  What we need are more ex-convicts turned entrepreneurs, single mothers turned programmers, veterans turned venture capitalists!
    The road out of welfare is paved with computer science!!!”

    Yes, of course.

    There’s nothing wrong with the entrepreneurship-as-salvation gospel. Nothing wrong with teaching more people to code.  But it’s impractical in the short term, and misses the greater point in the long term:   We shouldn’t live in a universe of solipsistic startups…  where I start a company and produce things only for myself and for people who resemble me.  Let’s be honest.  Very few of us are members of this unexotic underclass.  Very few of us even know anyone who’s  in it.   There’s no shame in that.  That we have  sailed on a yacht of good fortune most of our lives — supportive generous families, a stable peaceful democracy, excellent schooling, prestigious careers and companies, relatively good health – is nothing to be ashamed of. Consider yourselves remarkably blessed.

    What is shameful though, is that in a country with so many problems, with such a heaving underclass, we find the so-called ‘best and brightest,’ the 20-and 30-somethings who emerge from the top American graduate and undergraduate programs, abandoning their former hangout,Wall Street, to pile into anti-problem entrepreneurship.

    Look, I worked for Goldman Sachs immediately after graduating from Wellesley. After graduating from MIT, I worked at a hedge fund. I am not throwing stones.   Here in hell, the stones wouldn’t reach you anyhow… If you’re under 30 and in finance, you’ve definitely noticed the radical migration of your peers from Wall Street to Silicon Valley and Silicon Alley.   This should have been a good exchange.  When I first entered banking, leftist hippie that I was (and still am), my biggest issue was what struck me as a kind of gross intellectual malpractice:  how could so many bright historians and economists, athletes and engineers, writers and biogeneticists, from every great school you could think of – Princeton, Berkeley, Oxford, Harvard, Imperial, Caltech, Amherst, Wharton, Yale, Swarthmore, Cambridge, and so on — be concentrated into a single sector, working obscene hours at a sweatshop to manufacture money?

    When I look at the bulk of startups today – while  there are notable exceptions (Code for America for example, which invites local governments to request technology help from teams of coders) – it doesn’t seem like we’ve aspired to something nobler: it just looks like we’ve shifted the malpractice from feeding the money machine to making inane, self-centric apps. Worse,  is that the power players, institutional and individual — the highflying VCs, the entrepreneurship incubators, the top-ranked MBA programs, the accelerators, the universities,  the business plan competitions have been complicit in this nonsense. 

    Those who are entrepreneurially-minded but young and idea-poor need serious direction from those who are rich in capital and connections.  We see what ideas are getting funded, we see money flowing like the river Ganges towards insipid me-too products, so is it crazy that we’ve been thinking small?  building smaller? that our “blood and judgment” to quote Hamlet, have not been  “so well commingled?”

    We need someone bold (and older than us) to stand up for Big Problems which are tough and dirty.  But what we especially need is someone to stand up for big problems – little b, little p –which are tough and dirty and too easy to overlook.

    We need:

    A Ron Conway, a Fred Wilson-type at the venture level to say, ‘Kiddies, basta with this bull*%!..  This year we’re only investing in companies targeting the unexotic underclass.”

    A Paul Graham and his Y Combinator at the incubator level, to devote one season to the underclass, be it veterans, single moms or overworked young doctors, Native Americans, the list is long:  “Help these entrepreneurs build something that will help you.”

    The head of an MIT or an HBS or a Stanford Law at the academic level, to tell the entire incoming class: “You are lucky to be some of the best engineering and business and law students, not just in the country, but in the world.  And as an end-of-year project, you are going to use that talent to develop products, policy and programs to help lift the underclass.”

    Of the political class, I ask nothing.  With a vigor one would have thought inaccessible to people at such an age, our leaders in Washington have found ever innovative ways to avoid solving the problems that have been brought before them.  Playing brinkmanship games with filibusters and fiscal cliffs;  taking money to avoid taking votes.  They are entrepreneurs of the highest order: presented with 1 problem, they manage to create 5 more. They have demonstrated that government is not only not the answer, it is the anti-answer…

    The dysfunction in D.C. is a big problem.

    Entrepreneurs: it looks like there’s work for you there too…

    C.Z. Nnaemeka studied Philosophy at Wellesley; logically, she has spent most of her time in finance, beginning at Goldman Sachs. Born in Manhattan to Nigerian parents, she attended French schools, graduating from the Lycée Français de New York. Since then she has alternated between writing, banking, and consulting to startups in Europe, Latin America, and Australia. Previously, she lived in Paris where she founded a political discussion group and was a foreign affairs commentator for the conservative newspaper, Le Figaro. She graduated from MIT in 2010, focusing on Entrepreneurship + Innovation.

  • The Mad Drive to Subvert Democracy in Toronto

    Let me stipulate that I think Toronto’s Rob Ford is a terrible mayor. In fact, while I might not go so far as Richard Florida, who labeled Ford “the worst mayor in the modern history of cities, an avatar for all that is small-bore and destructive of the urban fabric, and the most anti-urban mayor ever to preside over a big city,” I’m willing to say he’s probably in the running for the title.

    The roots of Rob Ford lie in “amalgamation,” the forcible merging of the city of Toronto government with various of its suburbs by the Ontario provincial government. The idea was cost savings, but of course costs went up. Also, it created a Mars-Venus situation that ultimately led to Ford, a former city councilor in Etobicoke, being elected mayor. This would be like a consolidation of Chicago with Cook County in which a member of the Schaumburg city council ended up mayor. Not good. The urban intelligentsia that despises Ford now find themselves in the embarrassing position of having to explain to their friends that they are in total agreement with Wendell Cox, an implacable foe of government consolidations, who predicted these results.

    But there’s a big difference between Florida’s bashing of Ford, which falls within the principles of democratic discourse as we’ve come to know it, and what appears to be an effort by some to subvert democracy by finding any pretext to run Rob Ford out of office.

    I’m not sure where the idea that the loser in an election tries to undermine the legitimacy of the government of the winner came from. But in the modern era it could be the Republican impeachment of Bill Clinton that launched it. This quickly proved to be standard fare. There was the brouhaha over the “selected not elected” George W. Bush as well as the more passionate strain of “birthers” when it comes to President Obama. Given that, especially in the big leagues, there is always some dirtiness in politics, it’s easy to find things to seize upon to claim someone’s holding of an office is invalid. After all, it appears that Clinton really did commit perjury and there was shall we say some murkiness down in Florida. However, these aren’t truly what the people raising a ruckus cared about. What they cared about was the man in office they didn’t like – and getting him out of it.

    Canada has a reputation as a kinder, gentler nation, but they now appear to have imported from America what Clinton labeled “the politics of personal destruction.” Rob Ford has been the target of a series of vicious attacks, generally aided and abetted (if not outright instigated) by the old city Toronto media that clearly don’t like him, designed to drive him out of office.

    One was a lawsuit that claimed he should be tossed out of office because of events related to his using official letterhead and such to raise $3,500 for a charity. Believe it or not, the trial judge actually agreed with this and ordered him removed from office. If that’s the threshold for getting someone kicked out of office, I dare say every major politician in America would be gone. Yes, politicians do often use affiliated charities as a, shall we say, lubricating mechanism. Yes, there’s the appearance or even the reality of some impropriety in these things. But this is such small fry stuff that to throw the mayor of the biggest city in the country out of office over it defies belief. If you think this is removal worthy, I’m confident I can find something just as bad in almost any politician that you actually like. Fortunately, saner heads at the appeals level prevailed and the ruling was overturned.

    Recently we’ve also seen reports originating from, I kid you not, Gawker, in which some shady Somalis supposedly showed a reporter a cell phone video of Rob Ford smoking crack. Shortly thereafter the Toronto Star got in on the act, saying their reporters had seen the video in the back seat of the car, though with the CYA proviso that they had “no way to verify the authenticity of the video.” Other media that may not have directly originated such a story have piled on and thus there’s a firestorm awhirl.

    Where is the video, you might ask? Good question. Supposedly it’s for sale for $200K but oddly no one snapped it up, not even one of the extremely wealthy Ford haters that Toronto has in abundance. So you want to buy it? Oh, Gawker now tell us it might be “gone.” Hmmm…..

    I’m not saying there’s no video. Rob Ford has certainly acted like he’s guilty of something. But it seems amazing to me that in this era in which all types of tapes and documents spontaneously get loose, this one is no where to be found. Also, the idea of the mayor of Toronto smoking crack with a bunch of Somalis while they film him falls into the “extraordinary claims require extraordinary proof” category. The still photo is interesting, but I’ve seen many compromising photos of mayors, who are routinely snapped with all sorts of random people who they may find out later are unsavory characters. I can’t imagine this sort of media feeding frenzy over say, similar allegations against Michael Bloomberg or Rahm Emanuel.

    The Toronto Globe and Mail is a serious newspaper that’s roughly Canada’s New York Times. Though they didn’t break the video story, they did follow-up with a rather tabloidesque article about the history of Rob Ford’s family with drugs. Ford’s brother Doug, the focus of the piece, is on the city council himself, so is a legitimate investigative target so to speak, but the piece also digs into other family members.

    Not only is the Globe and Mail digging up dirt on Rob Ford’s family, this piece did it entirely with anonymous sources. They claimed to talk to no fewer than ten people who called Doug Ford a drug-dealer, but curiously none of them were willing to talk on the record. That didn’t stop the Globe and Mail from reporting:

    Ten people who grew up with Doug Ford – a group that includes two former hashish suppliers, three street-level drug dealers and a number of casual users of hash – have described in a series of interviews how for several years Mr. Ford was a go-to dealer of hash. These sources had varying degrees of knowledge of his activities: Some said they purchased hash directly from him, some said they supplied him, while others said they observed him handling large quantities of the drug.

    The events they described took place years ago, but as mayor, Rob Ford has surrounded himself with people from his past. Most recently he hired someone for his office whose long history with the Fords, the sources said, includes selling hashish with the mayor’s brother.
    …
    There’s nothing on the public record that The Globe has accessed that shows Doug Ford has ever been criminally charged for illegal drug possession or trafficking. But some of the sources said that, in the affluent pocket of Etobicoke where the Fords grew up, he was someone who sold not only to users and street-level dealers, but to dealers one rung higher than those on the street. His tenure as a dealer, many of the sources say, lasted about seven years until 1986, the year he turned 22. “That was his heyday,” said “Robert,” one of the former drug dealers who agreed to an interview on the condition he not be identified by name.

    Upon being approached, the sources declined to speak if identified, saying they feared the consequences of outing themselves as former users and sellers of illegal drugs.

    The Globe also tried to contact retired police officers who investigated drugs in the area at the time. One said he had no recollection of encountering the Fords.

    The article is full of innuendo about the Ford’s such as the idea that Rob Ford recently hired a drug dealing associate of Doug’s from the old days (highlighted above), along with curious mentions and links to beatings, killings, and white supremacy/KKK. (Rob Ford is a white supremacist who likes to smoke crack with Somalis???) It’s capped off by having various anonymous sources given pseudonyms so that they appear to be actual people on the record. As this excerpt notes, the police record and police contacts don’t back up the story, which just adds to the general notion of dubiosity and suggests this is a very exaggerated piece that tries to throw things to the wall to see what sticks.

    All it all, given the extreme reactions to financial dealings that, even if they were proven, would have been a non-issue almost anywhere else, along with a firestorm of allegations about smoking crack and so much more with no actual proof, the Rob Ford affair has thus far generated much more smoke than fire.

    Rob Ford is the price Toronto is paying for the foolishness of the provincial government and the failure of an urban candidate to offer a compelling vision for the entire amalgamated city. But it strikes me very much that a group of old Toronto city partisans, who are incensed a guy like Ford had the temerity to win an election, are determined to use any means necessary to correct what they see is that injustice. But just as with what happened in America and its politics in the wake of the Clinton impeachment, Canada may come to rue the day a group of its citizens decided to try to overturn an election by destroying the winner rather than waiting for their next opportunity at the ballot box.

    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 Wiki Commons user MTLskyline.