New Geography

Category: Politics

  • Overselling America’s Infrastructure Crisis

    60 Minutes ran a segment recently called “Falling Apart” that was another alarmist take on the state of American infrastructure. I’ll embed here but if it doesn’t display for you, click to CBS News to watch (autoplay link).

    We’ve seen this story before. America’s infrastructure is falling apart and we need to spend many billions on upgrades, but politicians won’t agree because they are too craven.



    There’s some truth to this point of view. The problem is that it’s oversold using the worst examples. It also gives short shrift to the many infrastructure upgrades that we have been making. And it ignores how people and businesses make capital purchase decisions in the real world.

    First, I’m not surprised to see that 60 Minutes spent a lot of time in Pennsylvania. In my experience, Pennsylvania is in a class by itself when it comes to infrastructure. Drive something like I-70 from Washington to the Ohio state line and prepare to be appalled. Pittsburgh legitimately has a massive infrastructure maintenance overhang. Philly too. And much of the infrastructure there was under built to begin with. The Schuylkill Expressway goes down to two lanes each way, for example. Similarly, 60 Minutes is right about some of the obsolete bridges on Amtrak’s Northeast Corridor. They may have easily included other high profile embarrassments like LaGuardia Airport or Penn Station. Or they might have taken a look at state of decay of Rhode Island’s bridges.

    There are clearly some high profile legacy items that need to be addressed. But that neglects the other side of the coin, namely that there’s a ton of major infrastructure that has been upgraded.

    60 Minutes includes some footage of Chicago. Clearly there’s a need for bigtime investment there. But in the last 20 years or so IDOT reconstructed completely many of the major freeways in the area like the Kennedy and Dan Ryan. The Tollway Authority widened virtually the entire system and implemented open road tolling, vastly reducing congestion. Similarly the CTA opened the brand new Orange Line, did major work to renovate the Green and Pink Lines, just did major infrastructure upgrades on the south branch of the Red Line, and expanded capacity on the Ravenswood. They’ve also gone from tokens and cash to electronic fare collection. At least one new commuter rail line was opened (the North Central line). The O’Hare Modernization program is underway with new runways already online and a significant reduction in congestion there. A new terminal was also built and the existing terminals given some refreshes.

    Is there a lot to do in Chicago? Undoubtedly. But let’s give credit for what has already been done.

    It’s the same elsewhere. Nicole Gelinas notes that New York has invested $123 billion in the transit system in the last 30 years. That’s not chump change. The third water tunnel is now online there as well. Indianapolis built an ultra-modern airport terminal complex that’s up to international standards. Many other airports like DTW, SJC, SFO, etc. have built major new terminals or seriously upgraded their acts. There have actually been a lot of investments in port infrastructure to get ready for post-Panamax ships.

    I’m told even Pennsylvania has done a good job of starting to address its infrastructure problems. The Philadelphia airport is actually quite nice these days, for example.

    So we’ve actually done a lot already that 60 Minutes doesn’t give us credit for.

    But what’s more, the presence of infrastructure that’s at or near the end of its useful life isn’t necessarily a bad thing anyway. Would it make sense for every single car on the road to be brand new? Of course not. Most cars ultimately end up getting driven till the wheels fall off. And that makes perfect sense. Why would you junk an asset that still has lots of service life left? We reallocate ownership of a lot of those cars during their lifespan, but we try to get the max out of their useful life.

    It’s similar in our homes. How many of us replace a furnace at the first sign of rust? Yes, sometimes we do a complete upgrade or refresh of a kitchen or bathroom, but most of the time we don’t replace major household systems like furnaces or roofs until they appear to be at a point where paying for repairs when they break appears to be futile in light of the asset age. It makes sense to pay $400 to replace a starter that fails when the car has 125,000 miles. It’s more questionable when the transmission goes out at 175.

    The fact that some issues or incidents with infrastructure can cause temporary closure or disruption is exactly how most personal capital assets work. A part goes out on our car. It needs to be towed and fixed. And it’s out of commission during that period. That’s annoying, disruptive, and costly. But does it mean that we should all go out and buy a brand new car? I don’t think so. And that’s certainly not how people behave in the real world. Obviously you have to build in a margin of safety on items like bridges where a failure would be catastrophic, but the same general principle applies. We shouldn’t wait for them to fail before replacement, but we do and should get the full useful life out of them.

    Why would we expect our government to spend our money on its capital assets in a manner differently from how we spend our money on our own personal possessions? This explains why the public is much more skeptical of spending on infrastructure than the infrastructure lobby would like. It’s to be expected that some percentage of our infrastructure will perpetually be at or near end of life, as that’s the nature of the capital asset life cycle.

    What’s more, when we replace a furnace or car, most of us don’t go out and buy Cadillacs. We buy something that fits the budget. Unfortunately, this mindset doesn’t seem to penetrate the public sector, where a significant amount of infrastructure is gold plated and priced at a level far out of line with international comparisons. The big problem in New York isn’t a lack of investment in transit. It’s the fact that the region has just about the highest transit capital costs in the world. Wonder why Madrid and Calgary have nice train systems? Among other reasons, they were very cost-efficient in their design and construction. Rather than more money, maybe we should first try some reform in our broken system of building stuff that results in lengthy project timelines and out of control costs.

    So there are some things that need to be taken care of and we need to do that. But scaremongering about dangerous bridges isn’t the right answer. And where I see the biggest infrastructure needs are on local streets and bridges, where federal and state dollars are least likely to be applicable. It’s no surprise to me that most of the pothole ridden, bombed out streets we drive on are local city streets, where they are the maintenance responsibility of an entity that lacks the large, dedicated infrastructure revenue streams available to the state and federal governments. But that’s a topic I’ll have to explore in a future post.

    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.

  • Good Enough Urbanism: Faster, Cheaper, Smarter

    There’s plenty of blight out there. Inner city blight, failing suburban blight, long lost rural small town blight… empty storefronts, boarded up buildings, dead streets. There’s simply no government program that’s going to bring these places back to life. No Wall Street investment scheme is likely to revive these places. Developers have no economic incentive to do anything with these buildings. Banks are risk averse and will not fund investments here. However, many of these forlorn spots exist within otherwise populated and potentially healthy neighborhoods. They may have been passed over when a nearby highway was extended or bled dry by big box stores and chain restaurants. But they could be pressed into service once again if enough people colonize them in creative ways – assuming the local authorities hold back on the usual mindless code enforcement.

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    I’ve heard many local economic development people and city planners tell me they can’t force people to do anything they don’t want to do. True enough. But, man can they shut people down in a hurry for a whole lot of ridiculous minutiae for no good reason. So towns need to ask themselves if they want to continue to deteriorate for the sake of adhering to all the accumulated and often archaic rules that may not even make sense anymore, or if they want reinvestment and vitality. Keep in mind, this sort of reinvention may not exactly look like a Gap, a Starbucks, or a Nordstrom, but that doesn’t mean it isn’t employing people and creating an environment that can start turning a neighborhood around.

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    Wherever I go I seek out examples of people who carve out a little business or useful community space in the midst of an otherwise uninspiring environment. Here are a few examples. Have you ever dreamed of opening up a shop of some kind? Many people do. But then you start to think about the high rent in a good part of town, and the regulations… The need for a handicap accessible public bathroom, a federally inspected commercial kitchen, insurance, a dozen pieces of paper covered in stamps from who-knows-what bureaucracies: permits, licensing fees, certifications, public notifications… Just thinking about the process stops most people cold. And then they find themselves working as an assistant manager at a chain for slightly above minimum wage.

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    These folks just skipped the whole asking-for-permission part and started working on a shoestring budget. They gave the garage a fresh coat of pain, got some inexpensive second hand furniture, flung open the doors, put out a sign, and started selling flowers. If the business fails they haven’t lost much – and at least the garage is finally clean and organized. If the shop is successful they can eventually work their way up to the full ADA, OSHA, and DOT gold standard with minimum parking ratios and energy efficiency compliance. But that can come later. Towns have to choose. Do they want to tolerate this sort of thing or shut it down immediately? It tends to come down to the “property values” folks objecting to the “trashy” nature of such establishments. In the end it’s all a matter of self-selecting populations agreeing on what is acceptable in their neighborhood and what isn’t. Some places will roll with it and others won’t. Fair enough.

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    Here’s a small town coffee shop with a big mostly vacant gravel parking lot that’s been set up as a family gathering place. People can come here, get a sandwich, something to drink, a pastry, and linger with other people from the neighborhood. The shipping containers are both secure storage for the cafe’s supplies, as well as the walls of an outdoor play area for kids. The picnic tables, shade structures, bicycle racks… none of it is expensive. A liability lawyer and insurance adjuster could have a field day with this place. But so far there have been no deaths or mutilations – except for out on the highway in front. But those folks were in cars and had nothing to do with the coffee shop or playground. (I don’t see the county shutting down the highway.)

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    Around the corner from my apartment there’s a German Lutheran church that puts on a beer garden in their parking lot at Christmas. There’s a mix of expatriate Germans (in jeans and T-shirts) and local German-Americans (in lederhosen and fedoras) along with the usual San Francisco Hindus, Buddhists, and seriously lapsed Catholics (that would be me), but all are welcome. The beer, bratwurst and kitsch oompah band are all pretty good.

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    This is Alfonso’s Cafe. It’s basically a shed in an old parking lot in a not-so-great suburban location. He set out some patio furniture, potted plants, and a shade structure and he manages to earn a respectable living. No one will ever confuse Alfonso’s place with a Parisian cafe, but it gets the job done and truly makes his neighborhood a better place compared to a dead parking lot. It’s Good Enough Urbanism. If all goes well Alfonso may eventually graduate to something bigger and more substantial. If he had to start with the entire armature of a full scale restaurant he may never have been able to pull together the money to get started. Alfonso’s Cafe is actually an in-between step, one level above a push cart or food truck, but one step down from something bigger and fancier.

    My point is that many of the just-scraping-by locations are ripe for reinvention as incubators for small family owned mom and pop businesses if the local authorities cut folks some slack. Not everything will work, but there isn’t much to lose in trying.

    John Sanphillippo lives in San Francisco and blogs about urbanism, adaptation, and resilience at granolashotgun.com. He’s a member of the Congress for New Urbanism, films videos for faircompanies.com, and is a regular contributor to Strongtowns.org. He earns his living by buying, renovating, and renting undervalued properties in places that have good long term prospects. He is a graduate of Rutgers University.

  • New Class Order

    In this predictably difficult year for the Democrats, the party of the people is turning, of all people, to its plutocrats. However much the party stigmatizes right-wing billionaires like the Koch brothers, a growing proportion of America’s ultra-rich have become devoted Democrats, giving them an edge in fund-raising. Indeed, an analysis of billionaire contributors this year by Politifact found that 13 supported liberals while only nine backed Republicans.

    The left plutocracy helps explain how Harry Reid’s Democratic Senatorial Campaign Committee has greatly outraised their Republican rivals. Overall, Democratic-aligned committees have achieved a lopsided edge in fundraising – $453 million opposed to $289 million, according to Politico. Overall, the top three donors to the political Super PACs this year all lean to the left.

    Democrats counter that many Republican groups, notably the Koch-funded Americans for Prosperity, generally don’t reveal their finances. But as the New York Times’ Tom Edsall notes, “Liberals do the same, and the press in large part gives them a pass.” He points particularly to the “Democracy Alliance,” a conglomerate of some 100 very rich donors who contribute some $30 million annually to progressive organizations and causes.

    All this reflects a changing class system far more nuanced than the overworked meme about the “1 percent” arrayed against the toiling masses. Instead, we have a plutocracy increasingly divided, mostly along regional and industry lines, among themselves. It’s no surprise voters, notes columnist John Kass, are confused by this recent headline in the Chicago Tribune: “Obama decries income inequality in speech after $50,000-a-person fundraiser for Quinn.”

    The Democrats’ Plutocrats

    The Democratic plutocracy is largely rooted in such industries as telecommunications, entertainment, software, legal services and, surprisingly, a large section of Wall Street. Financial firms, such as Goldman Sachs, supported the president even before his first election. Although the firm did shift towards Mitt Romney in 2012, it maintains close, even intimate, ties to the president, as spelled out in the left-leaning Huffington Post. Wall Street has been the big winner in the Obama economy due to the Federal Reserve’s policy of ultra-low interest rates, which work to force investors into stocks.

    Others sectors also have good reasons to embrace the Democrats. Lawyers often benefit from increased regulation, although that does not apply to most businesses. Overall, legal firms have contributed more than twice as much to Democrats than they have to Republicans.

    Another powerful force for the Democrats lies in the high-tech sector. The same Fed policy that helps Wall Street asset managers also boosts venture capitalists by making investment in even dodgy start-ups irresistible. Once a minor force in campaigns, the tech firms, including software, have greatly expanded their campaign spending, up three-fold since 2000, with a tilt that, in 2012, saw Democrats harvest roughly twice as much high- tech cash as their GOP rivals.

    Most of the leading tech industry figures – Yahoo’s Melissa Mayer, Google’s Sergei Brin, venture capitalist Reid Hoffman as well as Facebook’s Mark Zuckerberg and Sheryl Sandberg – strongly tilt toward the Democrats. The grassroots nerdistan may be even more bluish; 91 percent of the contributions of Apple employees in the 2012 presidential race went to President Obama.

    Concerns over climate change are a big plus for the Democrats with Silicon Valley. Mega-figures like Google’s Eric Schmidt and Tom Steyer, a former big time investor in fossil fuels, oppose all fossil fuels, including natural gas. Apple’s CEO Tim Cook, who has Al Gore on his board, has even asked that what he considers climate change “deniers” not invest in his company.

    Silicon Valley is not just content to proselytize the masses. Firms like Google and investors have been quick to exploit the Democrats’ green politics, investing heavily in highly subsidized renewable fuels. Being green has become yet another business opportunity for some of America’s wealthiest investors and companies.

    Then there’s always geography. Most of the major Democratic plutocrats live in solidly blue states such as Washington, California, Illinois and New York, where political influence means, for the most part, appealing to Democrats.

    In contrast, being a conservative Republican in Silicon Valley avails one little; you are pretty much excluded from the biggest political events and any ideological misstep, as the former head of Mozilla learned the hard way, can lead to virtual banishment.

    The Republican Residue

    None of this suggests that the Republicans have become the new de facto populist party. The GOP still gathers in millions of dollars from big businesses, but these tend to be very different industries than those of the Democrats. Particularly prominent are fossil fuel companies, caught in the crosshairs of the White House and its regulatory apparatus. In 2012, oil and gas executives doubled their federal contributions to $70 million, with some 90 percent going to Republicans.

    This year, energy firms are again making big bets on the GOP, hoping to block environmentalist-backed regulations by helping Republicans gain a majority in the Senate.

    Republicans also do well with old-line oligarchs in agribusiness firms, home builders, casino owners, commercial banks and insurance companies. Once more divided in their loyalties, these appear to becoming increasingly GOP oriented in recent years. The party’s embattled governors have been raising millions from energy moguls like the Kochs, casino magnate Sheldon Adelson and tobacco firm Reynolds American.

    There’s also a strong regional tilt here. Most strong energy, home-building and agribusiness firms are concentrated in the middle of the country, most prominently in Texas, Oklahoma, and the Dakotas. Voters in these states, particularly Republicans, tend to be more favorable, according to Gallup, to expanding natural gas and oil production than their Democratic counterparts who are generally more partial to wind and solar.

    Other players tip the scales to the Democrats.

    Traditionally, Democrats have balanced the disproportionate business support for Republicans with strong backing from unions.

    Since 1989, six of the largest political donors have come from labor. Today, business may be effectively divided, but organized labor remains rock solid in its backing for President Obama and his party.

    Some private sector unions are upset by presidential policies on such things as Keystone XL pipeline.

    But increasingly, the dominant union force behind the Democrats is not hard-hats but public employee unions, whose power in many blue states is all but incontestable.

    Looking forward: The Gentry Liberal Ascendancy

    Despite the fund-raising shortfall, Republicans could do well this November.

    Even brilliantly targeted get-out-the-vote efforts, or effective use of social media, may not be enough to save Harry Reid’s Senate majority, and certainly will not be enough to break the GOP stranglehold on the House. But this may prove only a temporary triumph, as most long-term trends in political fund-raising favor the Democrats.

    The most profound is the movement of money away from the tangible economy – oil and gas, manufacturing, home-building, logistics – to such activities as financial transactions, digital technology, media and entertainment.

    Unless the Democratic Party rediscovers its populist soul, these sectors, and those who derive their fortunes from it, will enjoy friendly treatment from Democrats, whether in mergers, as in the case of Comcast, or in evading privacy controls, which impacts much of the social media sector.

    More important will be the progressive orientation of the trustifarians, the inheritor generation, which is just emerging from Hollywood, Silicon Valley and Wall Street.

    Already the bulk of nonprofits are now solidly liberal, with roughly 70 percent of their funds going to left-of-center causes. This trend will likely increase in the future. The new gentry – like the inheritors of the fortunes of the once-reactionary Ford, MacArthur and Rockefeller families – is likely to ignore basic business concerns and instead adopt the generally leftist culture in their favored locales.

    Ultimately, the American oligarchy is transforming in ways injurious to Republicans and favorable to the Democrats. The Supreme Court has dropped restrictions on fundraising and the economy has boosted the incomes of the super-rich, but not much for anyone else.

    That may upset Democrats in principle, but, in the long run, they are likely to be the biggest beneficiaries.

    This piece originally appeared at The Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

  • Legal but Still Poor: The Economic Consequences of Amnesty

    With his questionably Constitutional move to protect America’s vast undocumented population, President Obama has provided at least five million immigrants, and likely many more, with new hope for the future. But at the same time, his economic policies, and those of the progressive wing of the Democratic Party, may guarantee that many of these newly legalized Americans will face huge obstacles trying to move up in a society creating too few opportunities already for its own citizens, much less millions of the largely ill-educated and unskilled newcomers.

    Democratic Party operatives, and their media allies, no doubt see in the legalization move a step not only to address legitimate human needs, but their own political future. With the bulk of the country’s white population migrating rapidly to the GOP, arguably the best insurance for the Democrats is to accelerate the racial polarization of the electorate. It might be good politics but we need to ask: what is the fate awaiting these new, and prospective, Americans?

    In previous waves of immigration, particularly during the early 20th Century, there were clear benefits for both newcomers and the economy. A nation rapidly industrializing needed labor, including the relatively unskilled, and, with the help of the New Deal and the growth of unions, many of these newcomers (including my own maternal grandparents) achieved a standard of living, which, if hardly affluent, was at least comfortable and moderately secure.

    Demand for labor remained strong during the big immigrant wave of the 1980s until the Great Recession. The country was building houses at a rapid clip, which required a large amount of immigrant labor. Service industries, particularly before the onset of digital systems, such as ipads for ordering, that replace human staff in fast-food restaurants, tend to hotels and provide personal services, although often at low wages.

    More recently, this wave of undocumented migration has diminished, as economic prospects, particularly for the low-skilled, have weakened. Yet the undocumented population remains upwards eleven million. Largely unskilled and undereducated, roughly half of adults 25 to 64 in this population have less than a high-school education compared to only 8 percent of the native born. Barely ten percent have any college, one third the national rate.

    This workforce is being legalized at a time of unusual economic distress for the working class. Well into the post-2008 recovery, the country suffers from rates of labor participation at a 36 year low. Many jobs that were once full-time are, in part due to the Affordable Care Act, now part-time, and thus unable to support families. Finally there are increasingly few well-paying positions—including in industry—that don’t require some sort of post-college accreditation.

    Sadly, the legalization of millions of new immigrants could make all these problems worse, particularly for Latinos already here and millions of African-Americans.

    African-American unemployment is now twice that of whites. The black middle class, understandably proud of Obama’s elevation, has been losing the economic gains made over the past thirty years.

    Latino-Americans have made huge strides in previous decades, but now are also falling behind, with a gradual loss of income relative to whites. Poverty among Latino children in America has risen from 27.5 percent in 2007 to 33.7 percent in 2012, an increase of 1.7 million minors.

    Logically, many Latinos and African-Americans might suspect that amnesty won’t be a great deal for them. There are occasional signs of disquiet. A recent Pew survey found that not only half of all whites, but nearly two-fifths of African Americans and roughly even a third of Hispanics approved of increased deportations of the undocumented. A Wall Street Journal-NBC poll found that well less than half of Latinos supported the President’s action.

    This ambivalence may reflect the reality that legalization of the undocumented may be felt hardest in those places, such as California, that have attracted the most newcomers, and also have highly developed welfare states. Today public agencies in Los Angeles, with an estimated one million undocumented immigrants, are bracing from large increases in the demand for state provided services.

    One LA Supervisor estimates the County, facing “an already impossible fiscal dilemma,” will need to spend an additional $190 million, without hope of federal compensation, on the newly legalized population. Ultimately, the newest migrants will be competing with existing residents—particularly poorer ones—not only for jobs but also social services.

    The President’s action on immigration requires a profound shift in economic policy, particularly in the large urban centers where most undocumented are clustered, to avoid creating a squeeze on scarce jobs and services. But Obama’s other big agenda—addressing climate change—has slowed the expansion of fossil fuel development. Meanwhile, it’s the energy sector that creates precisely the kinds of high-paying blue collar jobs, averaging upwards of $100,000 annually, that immigrants might be eager to fill and could give low unskilled workers a foothold into the middle class.

    Similarly, efforts by Obama’s allies at Federal agencies like HUD to encourage dense housing and discourage suburban growth means far less construction employment, one of the largest generators of good blue collar jobs and opportunities.

    Ironically, the places where the cry for amnesty has been the loudest—New York, San Francisco, Los Angeles, and Chicago—also tend to be those places that have created the least opportunity for the urban poor. This is in part due to the fact that these areas have tended to de-industrialize the most rapidly, discourage fledgling grassroots businesses through high taxes, environmental and housing, regulations.

    Whatever their noble intentions, these cities generally suffer the largest degree of income inequality, notes a recent Brookings study. In fact, according to an analysis by Mark Schill at the Praxis Strategy Group, African-American incomes in New York are barely half those of whites and, in San Francisco somewhat below half. In contrast, cities with broader economies like Dallas and Houston, have black populations earning sixty five percent of white incomes. Similarly, Latinos in Boston, New York, Philadelphia and San Francisco do far worse, relative to incomes, than their Sunbelt counterparts, compared to whites.

    These trends could worsen in precisely those areas with the biggest concentrations of undocumented immigrants covered by Obama’s executive order.

    Take, for example, the borough of the Bronx in New York City. The most Latino of all New York’s counties, in the Bronx, roughly one in three households live in poverty, the highest rate of any large urban county.

    In the country. It’s doubtful that legalization absent job growth will improve conditions , as it adds more potential claimants for local benefits without creating new income sources.

    For reasons that can’t be purely economic, most Latino political leaders, and much of the group’s electorate, are in favor of policies that, over time, could doom prospects for Those who receive amnesty. Of course, there are other factors that play into support for these policies, like the emotional pull to reunite families, but whatever their appeal such measures could leave the very people they are meant to help as legal paupers.

    My adopted home region of Southern California has seen an almost 14% drop in high-wage blue-collar jobs since 2007. Deindustrialization has continued, and construction employment lagged, even while the country as a whole, sparked by more secure and now cheaper energy supplies, has seen industrial production improve since 2010.

    Herein lies the great dilemma then for the advocates of amnesty. In much of the country, and particularly the blue regions, they will find very few decent jobs but often a host of programs designed to ease their poverty. The temptation to increase the rolls of the dependent—and perhaps boost Democratic turnouts—may prove irresistible for the local political class.

    So what should we do under these circumstances? Constitutional arguments aside, there do seem to be some better ways to create conditions for upward mobility among newcomers.

    Higher minimum wages may help some of the legal residents, but arguably at the cost of new jobs for others including the newly amnestied. However popular with most voters, such redistributive measures will not address the fundamental economic challenge posed by amnesty.

    Perhaps a sounder strategy would be to adopt policies that encourage broad-based economic growth, including energy, manufacturing, logistics and home construction. This would, of course, require some moderation of regulatory standards, particularly in reference to climate change.

    The President’s recent deal with China, which essentially allows the Chinese to keep boosting emissions until 2030 while we reduce ours steeply, could make things worse. In some states like California, where the global warming consensus is beheld with theological rigidity, “green,” anti-suburban policies largely guarantee that most of the urban poor will never enter the middle class. In San Francisco, Boston and New York, the percentage of Latino and black homeowners is roughly one-third to one-half that seen in redder regions like Houston, Dallas, Phoenix and Atlanta.

    In essence, the deepest blue states have created the worst of all conditions for the urban poor, and will be particularly tough on undocumented residents granted amnesty.

    All this suggests that, if we are to make new Americans economically successful, we need to concentrate not on racial redress but find ways to spark broad based economic growth. Increasing use of inexpensive natural gas, for example, would not only help continue to reduce emissions but would spark an industrial expansion that would create more blue collar jobs. Similarly, policies that allowed for affordable, energy efficient new homes could create not only more blue collar employment possibilities, but a brighter future for young families, many of whom are themselves immigrants or their children.

    The current amnesty could benefit both the country overall as well as recent immigrants if it is tacked to a broad based economic growth strategy. But that doesn’t seem to be in the cards. Instead, continuing policies that inhibit broad-based economic growth are increasing the numbers of Americans who must depend on government, not the economy, to take care of themselves and their families.

    This piece originally appeared at The Daily Beast.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

    Photo by telwink

  • 10 Steps to Financial System Stability: Lessons Not Learned

    Recently, BloombergView writer Michael Lewis called attention to tape recordings made by a Federal Reserve Bank of New York bank examiner who was stationed inside Goldman Sachs’ offices for several months during 2011-2012. She released the tapes to This American Life who aired her story on September 26, 2014. Every media article I’ve seen on this begins with a prelude warning how complicated and hard to follow the story will be. Regular readers of New Geography are several steps ahead in their understanding of these causes and consequences of the financial crisis. If you are new here, you can follow the links in this piece to earlier NG articles.

    Central to the theme of the story is the release of a 2009 report by Columbia University professor David Beim on why the Federal Reserve – especially the New York office which was supposed to be watching the banks – failed to act to prevent the crisis. Beim listed about a dozen “Lessons Learned” by bank supervisors after the financial crisis. In this article, we list the Lessons not Learned before the financial crisis. These lessons come from decades-old studies of financial regulation from around the world. If any US policy makers had paid attention in school, we would have avoided the global financial collapse of 2008. The United States – which was at the center of that storm – had been preaching these steps to emerging market nations for decades. Unfortunately, they just were not following them for us. In the fall of 1998, those emerging market economies seriously threatened the financial stability of the West. In the fall of 2008, it was the West that brought the threat upon itself and the rest of the world.

    Four Policies, Five Tasks and One Idea

    Policies not implemented

    1. Have private, independent rating agencies: US rating agencies were technically independent because they were not owned by the government. However, with the creation by the Securities and Exchange Commission (SEC) of the “Nationally Recognized Statistical Rating Organization” or NRSRO designation, three big credit rating agencies were the only ones accepted for use to meet regulatory requirements – they were issuing 98% of all credit ratings. This gave a government imprimatur to selected businesses, creating undue reliance by financial markets globally. By 2008, the “NRSRO” term appeared in more than 15 SEC rules and forms (not including those directly used for NRSROs), plus rules in all 50 states. NRSROs are also referenced in 46 Federal Reserve rules and regulations. Even though the SEC sanctioned and required the use of the NRSROs they had no say in the process used to establish the ratings.

    Despite even pseudo-independence from the government, the NRSROs were not independent of the financial institutions that paid them to issue credit ratings. The government sanction gave them more power to wield against – or in favor of – the banks and companies they rated. They made money consulting for the same firms, resulting in pressure to rate bonds higher than they should have been rated.

    2. Provide some government safety net but not so much that banks are not held accountable:  Many banks – and all of the New York Feds “primary dealers” – achieved “too big to fail” status through the Wall Street Bailout Act. A few were allowed to fail in the months leading up to the passage of the Bailout – most notably Lehman Brothers – in what amounted to the federal government picking winners and losers without accountability. The Federal Deposit Insurance Corporation was nearly bankrupted in late 2009, removing the safety net that protected depositors. The FDIC was so depleted by the epidemic of collapsing banks, they eased the rules on buyers of failing banks, opening the door for hedge funds and private investors to gain access to “bank” status – and the protections that go with it. At the end of September 2009, the FDIC’s fund was already negative by $8.2 billion, a decrease of 180% in just three months. FDIC is projected to remain negative over the next several years as they absorb some $75 billion in failure costs just through the end of last year.

    At the same time, bailed-out banks, brokers and private corporations received additional financial support from the Federal Reserve in a move unprecedented in US history. Billions of dollars in loans were made to the banks without proper documentation. The lack of transparency in the process used by the Treasury to decide who would receive bailout funds and what the recipients have done with the hundreds of billions of dollars was the subject of a GAO audit we wrote about in 2011.

    3. Allow very little government ownership and control of national financial assets: Four years after the crisis, the U.S. Treasury still owned more than half of American International Group, Inc., (AIG). AIG was the world’s largest insurance company – giving the government ownership in international financial assets, too. The U.S. government took ownership positions in virtually every major financial institution during the bailout, plus some non-banks that had lending arms (like General Motors Acceptance Corporation). The GAO audit of the Fed shows we loaned money to and took ownership stakes in a slew of non-regulated businesses like Target and Harley Davidson. The lack of transparency in these transactions is dangerous. Austrian Economist Ludwig von Mises warned decades earlier that market data could be “falsified by the interference of the government,” with misleading results for businesses and consumers.

    4. Allow banks to reduce the volatility of returns by offering a wide-range of services: Until the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, banks were restricted to buying securities defined as investment grade by the NRSROs. Given what we now know about these ratings and the actual riskiness of some AAA-rated investments, the requirement actually made bank investments more dangerous. The process followed in the years (even decades) leading up to the collapse of credit markets was not one that would meet the definition of “unrestricted.” Although there appeared to be a wide range of activities available to US banks, the restriction on credit ratings would eventually increase volatility by concentrating risk instead of dispersing it. Just because a bank can deal in a particular investment does not mean that they should.

    The steps outlined here are a comprehensive program, not a menu of options.  There is no sense allowing banks wide latitude to make risky investments if proper supervision and enforcement is not in place. That leads us to the next steps: the necessary tasks for prudent regulation.

    Tasks Not Taken

    Ten years before the most recent financial crisis (1998), the international financial system had already entered a new era. Speaking at the Western Economics International Association in 2001, Lord John Eatwell said, “The potential economy-wide inefficiency of liberalised financial markets was indisputable.” Eatwell had been writing about these problems for decades.

    5. Require financial market players to register and be authorized: US regulators failed to act on establishing registration for hedge funds, failed to establish requirements for registering who can issue collateralized mortgage obligations (mortgage-backed securities), and failed to act on loopholes in regulations prohibiting insurance companies like AIG from issuing credit default swaps through subsidiaries – the list goes on. Dodd-Frank established the Financial Stability Oversight Council to designate “Systemically Important Nonbank” – yet another government imprimatur for unregulated entities. Instead of making sure only authorized businesses perform financial activity they are only making sure those big financial firms are bailed-out faster in the future.

    6. Provide information, including setting standards, to enhance market transparency: There were no standards for issuing derivatives. Nor for collateralized debt like the mortgage-backed bonds where there was no link from homes/real estate. Because the financial issuers had no standard for reporting changes in ownership to land offices who keep track of liens on homes (usually county-level property office), probably one-third of the bonds the Fed is buying in their monthly “quantitative easing” purchases are truly worthless.

    7. Routinely examine financial institutions to ensure that the regulatory code is obeyed: Without registration and standards, of course, they can be no surveillance by any regulator. Congress admitted that while “most of the largest, most interconnected, and most highly leveraged financial firms in the country were subject to some form of supervision” it proved to be “inadequate and inconsistent.” The story described to This American Life by Carmen Segarra is not news – it is only one more in a long history of problems.

    8. Enforce the code and discipline transgressors: Despite existing rules allowing regulators to prohibit offenders from engaging in future financial activity, only minimal fines have been issued.  “Too big to fail” practices allow regulators to “look the other way” on money laundering and other issues that put our national security at risk. According to the Special Inspector General’s Quarterly Report (September 2012), the “Treasury [is] selling its investment in banks at a loss, sometimes back to the bank itself” allowing even banks who have the ability to pay to get out of the program for less than they owe. Those responsible for creating the situation that required the Bailout have not been called to discipline. Quite the contrary, many were paid elaborate bonuses at the same time their financial institutions were receiving bailout funds.

    9. Develop policies that keep the regulatory code up to date: More than a decade before the crisis, Brooksley Born raised enormous concerns over derivatives in the US – including credit default swaps – during her tenure as chair of the Commodity Futures Trading Commission (1996-1999).  Both the SEC and the Federal Reserve Board objected to her ideas.  On June 1, 1999, Congress passed legislation prohibiting such regulation, ushering in a long period of growth in the unregulated market. Five years after the financial crisis began, rules are still not implemented. AIG became subject to Federal Reserve supervision only in September 2012 when they bought a savings and loan holding company. By October 2, 2012, AIG had been notified that it is being considered for the “systemically important” designation – the “too big to fail” stamp of approval for everything they do.

    One Way Out

    Which leads us to one old idea that every student who ever took economics 101 should remember:

    10. Create specialized financial institutions: In the context of what we know about the policies and tasks that support financial stability, only one additional factor needs to be considered, and that is an old theory on the economic gains from specialization. In The Wealth of Nations, Adam Smith told us that the bigger the market the greater the potential gains from specialization. With equity markets alone reaching a global value of $46 trillion, the potential gains are enormous.

    Peter Drucker made this point on specialization in 1993 in his prophetic book “Post-Capitalist Society.” While diversification is good for a portfolio of financial investments, in large systems it means “splintering.” In a system as large as financial markets, diversification “destroys the performance capacity.” If financial institutions are tools to be used in furthering the efforts of the broad economy, then as Drucker writes “the more specialized its given task, the greater its performance capacity” and therefore the greater the need for specialization.

    The rise of the financial sector has been tied to economic expansion throughout our modern business history. The more robust the flow of finance, the more robust is the potential for economic activity. Greater efficiency in capital markets can lead directly to greater efficiency in industry. Our economy, our livelihood and our well-being are inextricably related to finance at home and around the world. It is now necessary to return to the basics and recognize the long run value of economically efficient specialization. We are living in the post-capitalist society described by Drucker. US regulators have been overly focused on the financial theory of portfolio diversification, ignoring the economic importance of gains through specialization. Drucker’s forecast was accurate: “Organizations can only do damage to themselves and to society if they tackle tasks that are beyond their specialized competence.”

    None of this is to say that our long-term failure is guaranteed. What happens next will be an experiment on a grand scale. The Financial Crisis Inquiry Commission concluded: “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.” Carmen Segarra did not tell us anything new: hopefully what she told us – and what ProPublica and others are writing about it – will help a wider public to understand the problem.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Dr. Trimbath’s credits include appearances on national television and radio programs and the Emmy® Award nominated Bloomberg report Phantom Shares. She appears in four documentaries on the financial crisis, including Stock Shock: the Rise of Sirius XM and Collapse of Wall Street Ethicsand the newly released Wall Street Conspiracy. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute. She served as Senior Advisor on United States Agency for International Development capital markets projects in Russia, Romania and Ukraine. Dr. Trimbath teaches graduate and undergraduate finance and economics.

    Wall Street bull photo by Bigstockphoto.com.

  • The Progressives’ War on Suburbia

    You are a political party, and you want to secure the electoral majority. But what happens, as is occurring to the Democrats, when the damned electorate that just won’t live the way—in dense cities and apartments—that  you have deemed is best for them?   

    This gap between party ideology and demographic reality has led to a disconnect that not only devastated the Democrats this year, but could hurt them in the decades to come. University of Washington demographer Richard Morrill notes that the vast majority of the 153 million Americans who live in  metropolitan areas with populations of more than 500,000  live in the lower-density suburban places Democrats think they should not. Only 60 million live in core cities.      

    Despite these realities, the Democratic Party under Barack Obama has increasingly allied itself with its relatively small core urban base. Simply put, the party cannot win—certainly not in off-year elections—if it doesn’t score well with suburbanites. Indeed, Democrats, as they retreat to their coastal redoubts, have become ever more aggressively anti-suburban, particularly in deep blue states such as California.  “To minimize sprawl” has become a bedrock catchphrase of the core political ideology.   

    As will become even more obvious in the lame duck years, the political obsessions of the Obama Democrats largely mirror those of the cities: climate change, gay marriage, feminism, amnesty for the undocumented, and racial redress. These may sometimes be worthy causes, but they don’t address basic issues that effect suburbanites, such as stagnant middle class wages, poor roads, high housing prices, or underperforming schools. None of these concerns elicit much passion among the party’s true believers.

    The miscalculation is deep-rooted, and has already cost the Democrats numerous House and Senate seats and at least two governorships. Nationwide, in areas as disparate as east Texas and Maine or Colorado and Maryland, suburban voters deserted the Democrats in droves. The Democrats held on mostly to those peripheral areas that are very wealthy—such as Marin County, California or some D.C. suburban counties—or have large minority populations, particularly African-American.

    This is not surprising since the policies and predilections of President Obama and his team are based on a largely exaggerated urban mythology. Former HUD Secretary Shaun Donovan, for example, has declared the move to the suburbs is “over.” People are, he has claimed, “moving back into central cities and inner ring suburbs.” To help foster this trend, administration policies at HUD and other agencies have been designed to fulfill Donahue’s vision of getting Americans out of their suburban homes and cars and into apartments and trains. These policy initiatives include large “smart city” grants for dense development, restrictions on new building, the promotion of high-speed rail links that would supposedly reconcentrate economic activity in the urban core. The administration’s strong support for regional governments, and its attempts to force suburbs to diversify their populations (even though they are already where minorities increasingly move) are thinly disguised efforts to promote densification and put the squeeze on suburban growth.

    Yet, as census data and electoral returns demonstrate, the demographic realities are nothing like what Donahue and the administration insist. The last decennial census showed, if anything, that suburban growth accounted for something close to 90 percent of all metropolitan population increases, a number considerably higher than in the ’90s. Although core cities (urban areas within two miles of downtown) did gain more than 250,000 net residents during the first decade of the new century, surrounding inner ring suburbs actually lost 272,000 residents across the country. In contrast, areas 10 to 20 miles away from city hall gained roughly 15 million net residents.

    Since 2010, suburban growth has slowed as young people, hampered by a weak economy and tougher mortgage standards, have not been able to buy houses. But while population growth in the same time period has been roughly even between the suburbs and core cities,  the suburban population, which is so much larger to start with, has continued to expand at a faster rate . According to demographer Morrill, since 2010 the suburbs have added 4.4 million people compared to fewer than 2 million in core cities.

    The big problem here is this: the progressives’ war on suburbia is essentially an assault on the preferences of the middle class. Despite the hopes at HUD, the vast majority of Americans—even in most cities and particularly away from the coasts—actually live in single-family homes in low- to mid-density neighborhoods, and overwhelmingly commute by car. If we measure people by how they actually live, notes demographer Wendell Cox, more than 80 percent of those in metropolitan areas have what most would consider a suburban life style.

    Contrary to the conventional wisdom, there is nothing intrinsically “progressive” about hating suburbs. It was, after all, President Franklin Roosevelt who believed that dispersion and homeownership would make the country much stronger. “A nation of homeowners, of people who own a real share in their land, is unconquerable,” he maintained. This notion of favoring policies that allowed for middle-class and eventually working-class people to own their own homes and a patch of grass was shared by Harry Truman, John Kennedy, and Bill Clinton, all of whom were fairly successful in winning over suburban voters.

    Suburbanites are not intrinsically Republican. Clinton, noted political analyst Bill Schneider, shared suburban voters’ skeptical view of government’s ability to address problems, and won 47 percent of the suburban vote in 1996. Barack Obama, running as a conciliatory pragmatist in 2008, did even better with some 50 percent. This performance was aided by the growing proportion of racial minorities, including African Americans, who had moved to the suburbs.

    But as Obama’s administration took shape, suburban support began to ebb. In 2012, Obama lost the suburbs to Romney  by a two-point margin. In this year’scongressional elections the GOP edge grew to 12 points in the suburbs, which accounted for a majority of the electorate. The  Democrats won by 14 percent in the more urban areas, but these accounted for barely one-third of the total vote. The result was a thorough shellacking of the Democratic party from top to bottom.

    Yet even these numbers do not express how critical suburban voters were this year. Much of urban America, particularly in places like Phoenix, Houston, and Las Vegas, is primarily suburban. They have multiple employment centers and the vast majority of commuters take to the roads. Democrats did not do so well in these cities this year, although the party continues to dominate more traditional inner cities dominated by apartment dwellers and mass transit riders. Some hopeful conservative commentators have noted a slight increase in GOP votes in some inner cities, but the percentages are still laughably pathetic.

    This can be seen in GOP wins in the governor’s races. Michigan’s Republican Governor Rick Snyder got 6.8 percent of the vote in Detroit. Successful Illinois challenger Bruce Rauner won only 20 percent of Chicago’s take, even in the face of gross mismanagement by his Democratic opponent. And Maryland’s Larry Hogan won about 22 percent in Baltimore. In all these elections, it was the suburbs—not paltry gains in the cities—that made the difference. Rauner’s election, for example, was based largely on a 60 percent margin in Chicago’s swing “collar counties.” Boston’s suburbs, particularly in the more working class south, helped assure the gubernatorial election of GOP candidate Charles Baker in this bluest of blue states. Suburban voters also played a huge role in the Republicans’ biggest win—the Texas governorship—giving GOP candidate Greg  Abbott almost two-thirds of their votes.

     Much the same suburban swing can be seen in the critical senatorial races races where the Democrats lost seats. Iowa Republican Joni Ernst lost the city vote but won 58 percent of suburban electorate, almost equaling her show in the rural areas. In Colorado, Corey Gardner also secured a large majority among suburban voters, who accounted for roughly half the total electorate. Finally, in the upset of Senator Kay Hagan in North Carolina, successful GOP candidate Thom Tillis ran even better in the suburbs—with some 57 percent of the vote—than he did in the supposedly hardcore conservative countryside.

    But the best way to see the suburban impact is to look at the House races. Among the 12 seats that Republicans took from the Democrats, half were located in solidly suburban areas. These included districts surrounding such cities as Raleigh, N.C.; Salt Lake City, which elected black Republican Mia Love; Miami, in a predominately Latino area; Las Vegas, in a suburban district that went for Obama in 2012; and eastern Long Island. The powerful shift in suburban voting also appears to have cost the Democrats two seats in the president’s home state—one in the northern suburbs of Chicago and the other in southern Illinois communities adjacent to St. Louis, a district that has been in Democratic hands for three decades.

    So what does this mean for 2016 and beyond? To be sure, the key Democratic urban-centric constituencies—millennials, single women, minorities—likely will turn out in bigger numbers in the next election. But ultimately their numbers will be somewhat balanced by rural and small town voters, who will continue to support conservatives overwhelmingly. Ultimately there is only one truly contested piece of political turf in this country—the suburbs—and who wins there takes the whole enchilada.

    There are those, even slightly deluded Republicans, who believe the country is becoming “more urban” and that therefore the suburban edge will mean less in the years ahead. Yet since 2011 the most rapid growth in country, as noted by Trulia’s Jed Kolko, continues to be in the suburbs and exurbs. Some urban cores have recovered nicely, but most often the surrounding city areas have continued to see slow or negative growth.

    Nor is this trend likely to reverse in the near future. As Millennials head into their thirties, survey data suggests that most are looking for single family houses and most favor suburban locations where increasingly they will be joined by   immigrants and minorities. And virtually all the fastest growth urban regions—Houston, Dallas-Ft. Worth, Phoenix, Charlotte—remain largely suburban in form and character, while growth is much slower in the more traditional legacy cities such as San Francisco, New York, or Boston.

    None of this suggests that that Republicans can take suburban votes for granted. The suburbs are changing in ways that could help progressives, notably by becoming more heavily minority and Millennial. The preferences of these new arrivals will differ from those of previous suburban generations—particularly their views on immigration, the need for open space and cultural liberalism. That said, how likely is it that these new suburbanites will embrace progressive ideologues who continually diss the very places they have chosen to live?

    The  progressive “clerisy” and their developer allies may wish to destroy the suburban dream, but they will not be able to stay in office for long with such attitudes. America remains, and likely will remain, a predominately suburban nation for decades to come. This demographic reality means that whoever wins the suburban vote in 2016 and beyond will inherit the political future.

    This piece originally appeared at The Daily Beast.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

    Suburbs photo by Bigstock.

  • The Demographics That Sank The Democrats In The Midterm Elections

    Over the past five years, the Democratic Party has tried to add class warfare to its pre-existing focus on racial and gender grievances, and environmental angst. Shortly after his re-election in 2012, President Obama claimed to have “one mandate . . . to help middle-class families and families that are working hard to try to get into the middle class.”

    Yet despite the economic recovery, it is precisely these voters, particularly the white middle and working classes, who, for now, have deserted the Democrats for the GOP, the assumed party of plutocracy. The key in the 2014 mid-term elections was concern about the economy; early exit polls Tuesday night showed that seven in 10 voters viewed the economy negatively, and this did not help the Democratic cause.

    “The Democrats have committed political malpractice,” says Morley Winograd, a longtime party activist and a former top aide to Vice President Al Gore during the Clinton years. “They have not discussed the economy and have no real program. They are offering the middle class nothing.”

    Winograd believes that the depth of white middle- and working-class angst threatens the bold predictions in recent years about an “emerging Democratic majority” based on women, millennials, minorities and professionals. Non-college educated voters broke heavily for the GOP, according to the exit polling, including some 62% of white non-college voters. This reflects a growing trend: 20 years ago districts with white, working-class majorities tilted slightly Democratic; before the election they favored the GOP by a 5 to 1 margin, and several of the last white, Democratic congressional holdovers from the South, notably West Virginia’s Nick Rahall and Georgia’s John Barrow, went down to defeat Tuesday night.

    Perhaps the biggest attrition for the Democrats has been among middle-class voters employed in the private sector, particularly small property and business owners. In the 1980s and 1990s, middle- and working-class people benefited from economic expansions, garnering about half the gains; in the current recovery almost all benefits have gone to the top one percent, particularly the wealthiest sliver of that rarified group.

    Rather than the promise of “hope and change,” according to exit polls, 50% of voters said they lack confidence that their children will do better than they have, 10 points higher than in 2010. This is not surprisingly given that nearly 80% state that the recession has not ended, at least for them.

    The effectiveness of the Democrats’ class warfare message has been further undermined by the nature of the recovery; while failing most Americans, the Obama era has been very kind to plutocrats of all kinds. Low interest rates have hurt middle-income retirees while helping to send the stock market soaring. Quantitative easing has helped boost the price of assets like high-end real estate; in contrast middle and working class people, as well as small businesses, find access to capital or mortgages still very difficult.

    The Republicans made gains in states in New England and the upper Midwest where the vast majority of the population, including the working class, remains far whiter than the national norm of 64% Anglo, such as Massachusetts, where a Republican was elected governor, Michigan, Arkansas and Ohio. Anglos constitute 89% of the population in Iowa and 93% in the former working-class Democratic bastion of West Virginia, two states where the Republicans picked up Senate seats. In Colorado, another big Senate pickup for the GOP, some 80% of the electorate is white. In Kentucky, where Senator Mitch McConnell won a surprisingly easy re-election, only 11% of voters were non-white, down 4% from 2008.

    A more intriguing danger sign for Democrats has been the surprisingly strong GOP performance among the educated professionals that embraced Obama early on. This can be seen in gubernatorial victories in deep blue Massachusetts and Maryland,  and a close race in Connecticut; in all three states concerns over taxes have shifted some voters to the GOP. Voters making over $100,000 annually broke 56 to 43 for the GOP, according to NBC’s exit polls. College graduates leaned slightly toward the Republicans, but among white college graduates the GOP led by a decisive 55 to 43 margin.

    In Colorado, Senator-elect Cory Gardner, like many successful GOP candidates, also did well with middle-income voters (annual salaries between $50,000 and $100,000), who basically accounted for his margin of victory. These are voters that some Republicans are targeting to instigate a new “tax revolt,” like the one that helped catapult Ronald Reagan into the presidency. The potential may be there if the Republicans can wake up from their blind instinct to protect large corporations and big investors. Certainly Obama’s call for higher income taxes on the wealthy has alienated small business owners and professionals, though barely impacting tech oligarchs, whose wealth is taxed at far lower capital gains rates.

    It can be argued that changing demographics will make this year’s blowout a temporary setback. Among Latinos, a key constituency for the Democrats’ future, economic hardships and disappointment at the Democrats’ failure to achieve immigration reform have blunted but hardly reversed voting trends. This year, according to exit polls, Latinos remained strongly Democratic, but down from the nearly three-quarters who supported President Obama in 2012 to something slightly less than two-thirds.

    One encouraging sign for Republicans: Texas Governor-elect Abbott won 44% of the Hispanic vote.

    Perhaps the more serious may be shifts among millennials, a generation that, for the most part, stands most in danger of proleterianization. Once solidly pro-Democratic, this generation has become increasingly alienated as the economy has failed to produce notable gains. In states across the country, the Republican share of millennial votes grew considerably. According to exit polls, their deficit with voters under 30 has shrunk to 13%. The Republicans actually won among white voters under 30, 53% to 44%, even as they lost 30- to 44-year-olds, 58 to 40. If these trends hold, the generation gap that many Democrats saw as their long-term political meal ticket may prove somewhat less compelling.

    If they are losing the middle and working classes, and even some millennials, what are the Democrats left with? They did best in states like California and New York, where there is a high concentration of progressive post-graduates and non-whites, and where many of the sectors benefiting most from the recovery have thrived, notably tech, financial services, and high-end real estate.

    Yet these areas of strength could also prove a problem for the Democrats. A party increasingly dominated by progressives in New York, Los Angeles, the Bay Area and Seattle may embrace the liberal social and environmental agenda that captivates party’s loyalists but is less appealing to the middle class. Unless the Democrats develop a compelling economic policy that promises better things for the majority, they may find their core constituencies too narrow to prevent the Republicans from enjoying an unexpected, albeit largely undeserved, resurgence.

    This piece originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

    Illustration by Flickr user DonkeyHotey.

  • Choosing Fortune Over Freedom

    “If the 19th [century] was the century of the individual (liberalism means individualism), you may consider that this is the ‘collective’ century, and, therefore, the century of the state.”

    Benito Mussolini, “The Doctrine of Fascism” (1932), translated by Barbara Moroncini.

    Where goes the 21st century? Until recently, it could be said that, with the defeat of fascism, in 1945, followed by the collapse of the Soviet Union about a half century later, that we had seen the demise of what the Italian dictator Mussolini envisioned as “a century of authority.” But, now, liberalism’s global triumphal march, as was so brazenly predicted in some corners just two decades ago, seems to have slowed, and may even be going into reverse.

    Increasingly, authoritarian regimes are rising around the world, led by a pesky, resource-rich Russia and a new full-blown superpower, China. Today, few regimes are becoming more democratic, and many, such as Turkey, are evolving toward one-party, voter-blessed, autocracies. These regimes, like their fascist and communist antecedents, often show a kind of contempt for the messy work of pluralistic decision-making and constitutional restraint.

    Elections, long iconic for Americans, are increasingly beside the point. The regimes in Russia and Iran, like that of Turkey, can claim voter mandates, even if their electoral process is twisted by government control of the media and occasional outright repression. Adolf Hitler liked to boast that he, too, took power in Germany in 1933 through legal means.

    But, China, the most important authoritarian country, has little pretense of free elections, so it has become inconceivable that anyone other than the Communist Party will be in control for the foreseeable future. For Chinese whose concerns extend beyond material benefit to such concepts as secure property rights, artistic, political or religious freedom, the obvious option is not to agitate but migrate to one of a diminishing number of spots where such rights are guaranteed.

    But most people in China, like their counterparts elsewhere, are more concerned with their well-being than the freedom of a handful of writers, artists or even businesspeople. Having witnessed a remarkable shift from poverty to growing prosperity and power, the Chinese model, rather than seen as anachronistic, has evolved into the gold standard for many countries, particularly in the developing world.

    This is not surprising, given the rapid progress that country has made in recent years. China has expanded its share of global gross domestic product from 2 percent in 1995 to 12 percent in 2012. Its economic model – communist control of thought and politics but welcoming to most enterprise – has vastly outperformed that of the strongest democracies, the United States, the European Union and Japan, particularly in light of the Great Recession. This recalls the 1930s, where Germany’s state-directed economy and that of the Soviet Union seemed to cope far better with the Depression than their Western democratic counterparts.

    As in the 1930s, we are even seeing the emergence of a new authoritarian Axis. We can see this with Turkey’s decision to increase food exports to Russia to make up for sanction-tightened imports from the U.S. and the EU. Argentina, an increasingly authoritarian democracy, is also set to increase food exports to Moscow.

    Right now, the new Axis is changing global politics. Vladimir Putin’s break with the West reflects, in part, his confidence that his nation’s future lies more with the Middle Kingdom than with the whining democracies of the EU. For less-developed countries, it is more compelling to see in the Chinese model the quickest way to achieve a strong economy.

    Even in democratic and pluralistic India, the new government has sought stronger ties to China, under new Prime Minister Narendra Modi, who has a strongly authoritarian bent, which previously worked well in his management of Gujarat state.

    Chinese success has made it painfully clear that globalization of capitalism does not require pluralism or Western standards of legality. Nor has it done much to promote global understanding, in the China Sea or elsewhere in the world. Religious and ethnic divisions are, if anything, ever more pronounced. The failure of the much-heralded Arab Spring to create anything remotely pluralistic epitomizes this trend, leaving the West with the dilemma of selecting which repressive regimes to ally with to defeat even more heinous entities, like Hamas or the Islamic State.

    This rise of authoritarianism is not limited to the developing world. In the West, these tendencies are also getting stronger, and from both right and left. One powerful spur has been the growing sense among a once-comfortable middle class – beset by 15 years of flat or shrinking incomes – that they are being “proletarianized.”

    Such fear leads normally conservative or moderate people to look at more extreme solutions. Historian Eric Weitz notes that such fears abetted the rise of the National Socialist movement in Germany. Today, across Europe, nativist parties, albeit still far less terrifying than the Nazis, are on the upswing, from traditionally liberal and prosperous Scandinavia to increasingly impoverished Greece.

    Ukraine, facing dismemberment by Putin’s Russia, also has seen the rise internally of the neofascist and anti-Semitic Svoboda movement. The most notable example can be found in France, where the National Front’s Marine Le Pen is leading in the polls to become the Fifth Republic’s next president.

    Perhaps the first neoauthoritarian to gain power in Europe, Hungary’s Prime Minister Victor Orban, has suggested that the recession of the past decade marked the end of what he called “the era of liberal democracies.” For Hungary, he claims, inspiration in the future won’t come from America or the rest of the EU, but from such authoritarian countries as China, Russia, Turkey and Singapore.

    Far less discussed has been the rising authoritarianism on the Left. President Obama’s excessive use of federal regulations to circumvent troublesome Republicans in Congress demonstrates a new surge of executive and bureaucratic power. After the November election, there is good reason to suspect that, particularly if his party loses the Senate, the president’s approach in his final two years in office will increasingly resemble Louis XIV’s L’etat c’est moi.

    If the Right’s authoritarian priorities, including those of some elements aligned with the Tea Party, seek to protect traditional culture, values and the middle classes, the Left favors centralized control to redress wrongs done to selected groups – women, gays, undocumented immigrants – through regulation and taxation. Environmental activists, notably those mobilized around climate change, increasingly despair of addressing their concerns through legislative action, where support is often limited, relying mostly on executive action.

    When liberals abandon liberal principles, we lose one of the most important brakes on expanding central power. As we can see already in California and other places, decisions on virtually everything about how we live – from transportation, to housing and, most particularly, how we generate energy – are increasingly being made not by our elected representatives but through the administrative bureaucracy. The notion of “checks and balances,” of getting buy-in from the opposition and dissenters in your own party, means little to those who have found the “truth” and are determined to impose it on everyone else.

    In some ways, Mussolini, executed by his fellow Italians in 1945, may have been more prescient than his enduring image as a posturing buffoon might suggest. In 1934, Mussolini noted that “as civilization becomes more and more complex, individual freedom is more and more restricted.”This was clearly true in the industrial era, but may also characterize our current transition to a post-industrial, information economy.

    This view diverges from the popular wisdom that information technology is inherently liberating. The visionary MIT analyst Nicholas Negroponte maintained that “digital technology” could turn into “a natural force drawing people into greater world harmony.”

    It turns out that technology is not liberating by itself and can be corralled just as easily for authoritarian purposes. The media’s emphasis on young people posting on Facebook in places like Egypt, Iran and Russia gave us a false impression of how those societies operate. Governmental suppression and organized violence subsequently proved more powerful than digital technology. Smartphones, the Internet and the increasing reach of information technology are not sufficient to spawn conditions for pluralistic democracy. As anyone who spends time in China can attest, great things can be achieved without fundamental individual freedom.

    The sad truth is that we may be entering an era where classical liberalism – market capitalism, freedom of speech and safety from government intrusion – may be somewhat in retreat. As during most of world history, pluralistic democracy remains a fragile achievement that thrives only in a relative handful of places. For that reason, we need – more than ever – to cherish it.

    This piece originally appeared at The Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

    Benito Mussolini photo by Bundesarchiv, Bild 102-08300 / CC-BY-SA [CC-BY-SA-3.0-de], via Wikimedia Commons

  • Trustafarians Want to Tell You How to Live

    Americans have always prided themselves on being a nation of the self-made, where class and the accident of birth did not determine success. Yet increasingly we are changing into a society where lineage does matter—and likely this process has just started, threatening not only our future prosperity but the very nature of our society.

    In some ways the emerging age of inheritance stems from the success Americans enjoyed over the past half century. Think not only of the wealthy entrepreneurs, but the vast middle class that purchased their homes, often for what in hindsight look like very low sums, and which now can be sold at massively higher prices. In part this reflects the reality that previous generations simply had an easier time accumulating real estate and other assets at low prices. As a friend once told me, “A chimpanzee could have made money in L.A. real estate—and many did.”

    The oldsters have also have benefited more from the asset-led economic recovery, according to a St. Louis Federal Reserve study, in part because they tended to buy their homes earlier and tend to have larger stock holdings. By 2017, according to Nielsen (PDF), Americans over 50 will control some 70 percent of the nation’s disposable income.

    And the boomers—at least those in the more affluent classes—are about to get yet another windfall. As the members of World War II’s “Greatest Generation” die off, they are set to pass on between $8.4 trillion and $11.6 trillion to their Baby Boomer descendants, according to a study by MetLife.

    In the coming decades this tsunami of inherited money will likely accelerate class divisions, as those in the current top decile (in terms of income) gather in more than a million in parental bequests, while those in the lower class will at best count their inheritances in the thousands. Among boomers who will receive an inheritance, the top 10 percent will receive more than every other decile combined.

    This is just the beginning of the process. The well-born members of the millennial generation are set for an even greater inheritance, which will distort the economy even more. The Social Welfare Research Institute at Boston College estimatedthat a minimum of $41 trillion would pass between generations from 1998 to 2052. This huge transfer, the researchers believe, will usher in what they call “a golden age of philanthropy.” Even as most younger Americans struggle to obtain decent jobs and secure property, the Welfare Institute concluded, America is moving toward an “inheritance-based economy” where access to the last generation’s wealth could prove a critical determinant of both influence and power.

    These trends will affect everything from geography to culture and politics. For one thing, we are likely to see people settling in areas depending on their class status. For example, an examination of income data by Mark Schill of the Praxis Strategy Group finds that, with the exception of retirement communities, the areas with the greatest dependence on rents, dividends, and interest are concentrated in the expensive “luxury cities” New York, Boston, and the San Francisco Bay Area (and their surrounding pricey suburbs).

    With some areas, the differences are stark in terms of where this windfall lands. Manhattan, for example, was among the leaders of the nation’s core cities in asset-based wealth while the Bronx, just across the Harlem River, ranked at the absolute bottom. This inherited wealth is increasingly diffused among multiple cities as the expanding ranks of the ultra-rich purchase apartments in favored locations.

    In contrast, it’s still hard to find concentrations of inherited wealth in historically poorer regions such as the South, even in booming growth regions such as Houston, Dallas-Ft. Worth, and Atlanta. These are places that you don’t have to use family money—or parental co-signers—to afford a decent home, as is often the case in places like San Francisco, Manhattan, or Brownstone Brooklyn—all places where, as the Financial Times’ Simon Kuper has noted, you no longer go to be someone; you only live there once you are already successful or living on inherited largess. They are, as Kuper puts it, “the vast gated communities where the one percent reproduces itself.”

    In the coming decades, these trends could grow, particularly as economic and population growth slow. Of course, there have always been rich people, and wealthy enclaves, but the impact of inherited wealth on politics and culture—like that on real estate—may be more profound in the future. One key difference is education, which increasingly determines social status and wealth.

    Historically, education was one way the middle and working classes, and even the poor, ascended the class ladder. But we may be seeing the end of this trend, given what some see as the “death of meritocracy,” particularly if you also count the enormous advantage in education that comes from going to an elite private school or a well-placed suburban public school. Over the past two generations, notes former Treasury Secretary Larry Summers, the gap in educational achievement between the children of the rich and the children of the poor has doubled. While the college enrollment rate for children from the lowest quarter of income distribution has increased from 6 percent to 8 percent, the enrollment rate for children from the highest quarter has risen from 40 percent to 73 percent.

    So we have a graduate of Choate or Beverly Hills High who attends Wharton, and goes to work for, say, Goldman Sachs. And yes, this individual may work hard. But whether he or she works hard or not, the chances of success are much greater than those of an equally talented, equally diligent person who has to pay off college loans and whose choices about where to live—outside of places like New York or San Francisco—are driven as much by cost as they are by opportunity.

    This represents a sea change from the past, where the inheritors earned their “gentlemen’s Cs” while the aspiring class busted for As. After all, who needs good grades to simply engage in traditional charity work—like feeding the poor or supporting their churches? But now many of the rich feel compelled to “make a difference.” No longer satisfied to suck gin and tonics at the country club, they want to find fulfillment, and impress their friends with their cleverness and social worth.

    One place we can see this is in the cultural sphere. Hollywood, in particular, has always had a weakness for helping its own. Dorothy Parker once noted that “the only ‘ism’ Hollywood cares about is plagiarism.” But increasingly there is another “ism”—nepotism. And the trend can be seen across the the entertainment industry in such families as the Paltrows, Fondas, Douglases, and Smiths. You can see the wheels turning when someone like Jay Z puts his newborn baby’s cries—no doubt a budding rapper—on his songs.

    But some of the most obvious places where dynastic power can be seen are on the executive side of the business. In the early years, the big powers were often rough, self-made men such as Jack Warner or Louis B. Mayer. People like David Geffen who worked their way up from the mailroom are increasingly rare. Today the hottest new producers tend to come from the richest classes, such as William Pohlad, son and heir of a Minnesota billionaire; Gigi Pritzker, an heir to the Pritzker fortune; and Megan Ellison, daughter of Oracle Founder Larry Ellison, one of the world’s 10 richest men.

    At the same time, the media itself, particularly in its most visible manifestations, is increasingly populated by the children of prominent politicians and by those who come from the ranks of the plutocracy. Middle-class parents may have to grind their teeth and empty their wallets as their kids work in unpaid internships in pricey Gotham, but this is not the fate of the offspring of the Reagans, Bushes, Clintons, McCains, Pelosis, or Kennedys, all of whom have ascended to levels of media power that mere mortals take years to achieve, if ever. If you need a show for millennials, why not hand it over to Ronan Farrow, the offspring of celebrity parents. In my time, generally speaking, the icons of a generation were likely to be outsiders; the “screwed generation” of millennials get to have theirs defined by whose birthright landed them on third base.

    But perhaps the biggest long-term impact may come from the nonprofit institutions that the wealthy fund. Nonprofit foundations have been growing rapidly in size and influence since the late ’20s, paralleling the expansion of other parts of the clerisy like the universities and government. Between 2001 and 2011, the number of nonprofits increased 25 percent to more than 1.5 million. Their total employment has also soared: By 2010, 10.7 million people were employed by nonprofits—more than the number of people working in the construction and finance sectors combined—and the category has expanded far more rapidly than the rest of the economy, adding two million jobs since 2002. By 2010, nonprofits accounted for an economy of roughly $780 billion and paid upwards of 9 percent of wages and 10 percent of jobs in the overall economy.

    Nonprofits, due to their accumulated wealth, are able to thrive even in tough times, adding jobs even in the worst years of the Great Recession.

    In the past these organizations might have tended to be conservative, as inherited wealth followed the old notions of noblesse oblige and supported traditional aid to the poor, such as scholarships and food banks. But the new rich, particularly the young, tend to be more progressive, or at least gentry liberal. The direction of this rapidly expanding part of the clerisy will be increasingly important in the future, and already many of the largest foundations—Ford, Rockefeller, Carnegie, and MacArthur—veer far toward a left social-action agenda.This is particularly ironic since their founders were conservative, or even reactionary, and generally held strong, sometimes fundamentalist, religious beliefs.

    Much of this shift reflects the social phenomena of inheritors in general. Not involved with making their fortunes, and sometimes even embarrassed by how those fortunes were made, the new generation of “trust-fund progressives” often adopt viewpoints at odds with those of their ancestors. One particularly amusing, and revealing, development has been the recent announcement by the Rockefeller heirs that they would divest themselves of the very fossil fuels that built their vast fortune.

    Of course, there remain many conservative foundations, such as those funded by the Koch brothers, who wield their fortunes for highly conservative causes. But roughly 75 percent of the political contributions of nonprofits tend to go in a left, green, or progressive direction.

    This trend is likely to accelerate, as millennials—who will inherit the most money and may be the most inheritance-dominated generation in recent American history—enter adulthood. Schooled in political correctness, and not needing to engage in the mundane work of business, this large cadre of heirs to great fortunes will almost surely seek to shape what we think, how we live, and how we vote. They may consider themselves progressives, but they may more likely help shape a future that looks ever less like the egalitarian American of our imaginings, and ever more like a less elegant version of Downton Abbey.

    This piece originally appeared at The Daily Beast.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

    Photo: Trustafarian Handbook by Brian Griffin.

  • Silicon Valley’s Chips off the Old Block

    Silicon Valley long has been hailed as an exemplar of the American culture of opportunity, openness and entrepreneurship. Increasingly, however, the tech community is morphing into a ruling class with the potential for assuming unprecedented power over both our personal and political lives.

    Rather than the plucky entrepreneurs of legend, America’s rising tech oligarchy constitutes a narrow emerging elite. They are primarily beneficiaries of the limited pools of risk capital – nearly half of which is concentrated in Silicon Valley. They also have access to a highly incestuous club of skilled professional managers, lawyers, PR mavens and accountants that counterparts elsewhere are unlikely to enjoy.

    In contrast to the intense competitive environment that defined industries such as semiconductors, disc drives and personal computers in the 1980s, today’s “lords of cyberspace,” as author Katherine MacKinnon describes them, enjoy oligopolistic market shares that would thrill the likes of John D. Rockefeller. Google, for example, accounts for more than two-thirds of the market for Internet search. The fantastic wealth amassed by Bill Gates, like that of the other oligarchs, stems in large part from these kinds of “monopoly” rent; in his case, for consistently mediocre but dominant software.

    Of course, these oligarchs, like feudal lords or rival gangs, sometimes fight among themselves, say, Google versus Apple over operating systems or, increasingly, over hardware segments of the industry. Yet, this struggle between oligarchs is far from a competitive free for all: Together, these two firms provide almost 90 percent of the operating systems for smartphones.

    Faux Progressivism

    Normally, progressives would be expected to decry such concentrations of wealth and power. But Silicon Valley has largely insulated itself from such criticism by taking “progressive” policy stances, notably on climate change, and by cultivating both a “hip” image and close ties to the Obama administration. When Steve Jobs died in 2011 during the Occupy Wall Street movement, the passing of this brilliant, but often ruthless, 0.00001 percenter was openly mourned as if he was a counterculture hero.

    But this should not mask the fact that Silicon Valley entrepreneurs have turned out to be every bit as cutthroat – and odious to the individual – as any industrial group in modern American history. As technologist and author Jaron Lanier has suggested, the current oligarchical ascendency rests not on improving productivity or sparking broad-based growth, but mining the private lives of every consumer in order to reap riches from advertisers.

    Google, while a prime offender, is hardly alone in pursuing violations of privacy. Consumer Reports has detailed Facebook’s pervasive, and often deepening, privacy breaches. Ironically, as one blogger noted, even as Facebook has been loosening privacy restrictions for teenage users of its site, company founder Mark Zuckerberg acquired property around his Palo Alto estate to better-protect his privacy.

    Once seen as a liberating force, the social media firms are morphing into an overweening Big Brother. Apple’s new devices, the tech publication Wired recently noted, are aimed at “building a world in which there is a computer in your every interaction, waking and sleeping.” The ambition for control is remarkable. As Google’s Eric Schmidt put it: “We know where you are. We know where you’ve been. We can, more or less, know what you’re thinking about.”

    Political, social implications

    In the emerging era of the tech oligarchs, the rights of the individual computer user look increasingly like those of farmers or small-business people shipping products by rail at the turn of the 20th century; sitting at a home office or kitchen table, the individual computer user has precious little leverage.

    These odds will be made even longer as Silicon Valley leadership pursues sweeping ambitions to influence the political class. “Politics for me is the most obvious area [to be disrupted by the Web],” suggests former Facebook president Sean Parker.

    The success with which technology assisted President Obama’s re-election effort offers clear support to Parker’s assertion. And, not surprisingly, when Obama’s top aides leave government, several have landed lucrative jobs with the tech elite.

    Some see this ascendency as a positive. One tech booster foresees the old “nexus” between Wall Street and Washington being replaced by one between Silicon Valley and the federal leviathan, which will usher the world into a “new age of abundance, connectivity, innovation and sharing.” This viewpoint is beyond naïve, and closer to delusional.

    We often forget that, despite their green and counterculture allure, the tech oligarchs are, indeed, oligarchs, who live fantastically luxurious and consumptive lives. Google executives, for example, have burned the equivalent of upward of 59 million gallons of crude oil – for many years at subsidized federal rates – from 2007-13 on their private jets, even as they hectored regular consumers to cut back on energy use.

    But nothing so mimics the arrogance and hubris of the tech oligarchs as their largely successful efforts to avoid taxation. Bill Gates had voiced public support for higher taxes on the rich but tech companies, including Microsoft, have bargained over, and legally avoided paying, their own taxes while higher taxes fell on affluent, but hardly megarich, taxpayers.

    Similarly, the founders of Twitter have developed elaborate plans to avoid taxation and protect their suddenly vast estates. Facebook paid no taxes in 2012, despite making a profit of over $1 billion. Apple, which the New York Times described as “a pioneer in tactics to avoid taxes,” has kept much of its cash hoard abroad to keep it away from Uncle Sam.

    The Road to Oligarchy

    Emboldened by their access to individual data, the tech oligarchs could form the core of what a recent report from the professional services giant PWC described as virtual “ministates,” with control over markets and employees that more resemble an Orwellian nightmare than a technological utopia.

    This influence will be enhanced by growing control of the media. In the past, more hardware-oriented companies provided the “pipelines” through which traditional media disseminated their products. But, increasingly, the oligarchs – taking advantage of the online shift – are devastating traditional media. Google’s ad revenue in 2013 surpassed that of newspapers.

    The Valleyites are also moving into the culture business, with both YouTube (owned by Google) and Netflix getting into the entertainment content business. The oligarchs may need to source content from more-established vendors on the East Coast or in Hollywood, but they increasingly will control the financial purse strings as well as the critical pipelines.

    Diminishing benefits to society

    Tech industry boosters, such as UC Berkeley’s Enrico Moretti, claim the new tech oligarchs represent the key to a growing economy and greater regional well-being. This claim, however, is dubious, even in Silicon Valley. Tech companies restrain their employees’ wage growth through informal agreements to prevent poaching of each others’ employees and by importing relatively low-paid “technocoolies” to do their programming. Expanding this category of workers has become a major priority for tech firms – despite a surplus of American IT workers – such as Facebook.

    Rather than enhancing middle-class opportunities, high-technology industries have promoted an economy with sharp divisions between the top employees and low-wage workers in retail and other service industries such as janitors, clerks and cashiers. The mostly white and Asian employees at firms like Facebook and Google enjoy gourmet meals, child-care services, even complimentary housecleaning; but wages for the region’s African-American and large Latino populations, roughly one-third of the total, have actually dropped, notes a 2013 Joint Venture Silicon Valley report. As Russell Hancock, the group’s president, observed, “Silicon Valley is two valleys. There is a valley of haves, and a valley of have-nots.”

    In San Francisco, Silicon Valley companies provide free and more luxurious transport for the privileged few they employ, providing a daily reminder of the growing segregation between rich and poor. Increasingly large sections of the Bay Area resemble a gated community, where much of the working and middle classes fork over a large portion of their incomes in rent and often are forced to commute huge distances to jobs serving the Valley’s upper crust.

    There is no denying that the tech oligarchs will continue to play a critical role in the American economy; and, as Mike Malone, among others, suggests, they likely may become even more dominant in the years ahead. This will not be all bad; the country similarly benefited from the often-ruthless actions of the industrial moguls. But, at some point, the public has to weigh how much power and money can be concentrated in a relative handful of companies and people without posing a threat both to our individual rights and democracy itself.

    This piece first appeared at the Orange County Register.

    Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. 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.

    Photo by TechCrunch (4S2A2079Uploaded by indeedous) [CC-BY-2.0], via Wikimedia Commons