New Geography

Category: Politics

  • General Motors’ IPO: Deal Or No Deal?

    Those who are looking for a feel-good stimulus story, notably members of the Obama administration, cite the recent initial public offering (IPO) in which the federal government sold off 28 percent of its General Motors shares for about $15 billion.

    When the government-owned shares went public, President Obama said: “American taxpayers are now positioned to recover more than my administration invested in GM.” From the headlines and sound bites, you might think that the government was in the money on the $49 billion that the Troubled Asset Relief Program invested in GM during the dark days of the Great Recession.

    To believe that the U.S. government made money on its GM investment is to imagine that former republics of Yugoslavia will get back together so that they can restart the production lines of the Yugo.

    In the GM story, there have been many winners and losers on the road from bankruptcy to IPO. For the most part, the losers include investors, bondholders, taxpayers, and the 65,000 workers laid off so that, in the showroom of American politics, the bailout money could look like a rebate.

    The winner was the United Auto Workers union, which delivered Ohio and Michigan to the Obama campaign in the 2008 election. Without the union’s support in 2012, the president’s handling and maneuvering ability in the electoral college might resemble the torque on a Chevy Vega.

    The GM that went bankrupt in 2008 was not just a car company; it was also an unfunded pension plan, a bad bank (partial ownership of General Motors Acceptance Corporation or GMAC), and a health maintenance organization notable for padded bills.

    As it hit the crash wall, GM had negative equity, $88 billion in losses since 2004, 92,000 workers, 500,000 retirees, and 22% of a domestic car market that had shrunk to 13 million cars a year.

    What sleight of an accountant’s hand turned the originator of the Chevy Nova into an emerging juggernaut (maybe one with “soft Corinthian leather?”) that the market now values at $51 billion?

    Instead of letting GM go through Chapter 11 liquidation, and winding up the company according to bankruptcy laws, the U.S. government stepped in and allocated the spoils according to political rather than legal precedents. In theory, the move was designed to “protect American jobs.” What did these jobs cost?

    The immediate losers were GM shareholders (largely wiped out), and the holders of $95 billion in corporate bonds, now worth about $0.30 on the dollar.

    If you check the price of GM shares today, you will see them trading at around $34 a share. “Not bad,” I can hear you saying, recalling GM at $22 or even $8. But these are the new Government Motors shares; the old ones, which your grandfather owned, are trading for less than $1 on penny stock exchanges. Maybe the certificates are selling at flea markets?

    In the restructuring, the new owners of GM became the U.S. (61%) and Canadian (12%) governments, and the United Auto Workers (17.5 %), whose generous health and retirement packages would have been watered down or lost in a commercial liquidation.

    In the bankruptcy, the UAW retirees were moved ahead of the bondholders to the front of the disassembly line, no doubt because their rust-belt votes count more in presidential elections than those of bi-coastal hedge funders.

    Stakes in the new GM were granted to the union in lieu of cash due on health care and other benefits, which survived the reorganization. In the recent IPO, the unions netted $3.4 billion for a third of their stake.

    Other options thrown into the car deal included the $17 billion given to GMAC, whose losses became a ward of the state, and whose profits go to the hedge fund, Cerberus. It’s been renamed Ally Bank, just so you won’t associate its bad debts with the GM bailout. (“Test drive the new Ally… from zero to $17 billion in six point four seconds.”)

    GM was also allowed to carry forward $45 billion in Net Operating Losses through bankruptcy, a deduction rarely, if ever, granted to other scrapped companies. Clunkers for cash? The company also got a $6.7 billion loan, at below market rates.

    And finally, to promote Chevy Volts, buyers of the new hybrid electric car are given $7500 in federal tax credits. Maybe Ford dealers can match the subsidy on their hybrids by throwing in a set of snow tires?

    The new GM is allowed to operate with an unfunded pension liability, which remains on the books to the tune of about $30 billion. Mark that claim to market (those accounting rules that did so much to collapse the likes of Merrill Lynch), and GM’s IPO stake is hardly worth $15 billion.

    The contrived GM liquidation also kept the auto maker from dumping about $14 billion in promises onto the Pension Benefit Guaranty Corporation, a nominally private company — the board, however, consists of the secretaries of Labor, Commerce, and Treasury — that, with government benedictions, backs up politically correct pension payments.

    There is almost no way to know the total losses that can be attributed to the government’s GM restructuring. But, clearly, the government played Three-card Monte with the company’s bad assets, and kept the good ones for themselves. On Wall Street — the object of so much government venom — this is called “asset stripping.”

    Little wonder that everyone, including its government shareholders, are now upbeat about GM’s prospects. Morningstar writes: “GM can break even at near-depression-like sales volume, and it is selling more units in the U.S. with four brands than old GM did with eight brands in 2009.”

    At the time of GM’s IPO, President Obama sounded like Mr. Goodwrench: “Just two years ago, this seemed impossible. In fact, there were plenty of doubters and naysayers who said it couldn’t be done, who were prepared to throw in the towel and read the American auto industry last rites.”

    What he might have said is this: “We hosed the shareholders and suckered the bondholders down to $0.30 on the dollar. We propped up GMAC with $17.5 billion and then buried the losses in bad bank accounting. We leaned on the accountants to keep $45 billion in Net Operating Losses. We learned something from Bernie Madoff and are letting GM continue to carry $30 billion in unfunded pension liabilities. We dumped GM’s health care obligations, for shares, into a union trust. The rest we moved off the lot. Home run.”

    The government originally threw $49 billion at GM’s cash guzzling problems and then forced another $100 billion on the market in losses. In exchange thus far, it has recouped $15 billion, for about half of it stake in the new GM.

    In Washington, that might pass for a good deal. It might also seem fair in a remake of The Godfather (“The Corleone Family wants to buy me out? No, I buy you out, you don’t buy me out.”) Elsewhere, it sounds like a lemon.

    Photo of Classic Cadillac 2 by Shiny Things: “For-sale Cadillac parked in Morro Bay. How tempting is that?”

    Matthew Stevenson is the author of Remembering the Twentieth Century Limited, a collection of historical essays. He is also editor of Rules of the Game: The Best Sports Writing from Harper’s Magazine. He lives in Switzerland.

  • Holiday Greetings from New Geography

    Here’s to the end of our 31st month publishing NewGeography.com. It’s been another good year of steady growth. Thanks for reading, for the good natured arguments, and your submissions. We hope your holiday season is relaxing and safe (for me it’s a 350 mile drive across the frozen tundra.)

    Here’s a look at of some of our most popular pieces over the past year.

    January
    The War Against Suburbia
    Reducing Travel Congestion and Improving Travel Options in Los Angeles
    Housing Affordability as Public Policy: The New Demographia International Housing Affordability Survey
    Beyond Neo-Victorianism: A Call for Design Diversity

    February
    America on the Rise
    A Race of Races

    March
    What American Demographics Will Look Like in 2050
    Midwest Success Stories
    New Traffic Scorecard Reinforces Density-Traffic Congestion Nexus
    Let’s Not Fool Ourselves On Urban Growth

    April
    Best Cities Rankings
    Finding Good in this Bad Time

    May
    Is it Game Over for Atlanta?
    Bungled Parliament: The Price of Pursuing Safe Society Over Growth and Opportunity
    Shanghai: The Rise of the Global City

    June
    The Future of America’s Working Class
    Time to Dismantle the American Dream?
    The Suburban Exodous, Are We There Yet?

    July
    How Texas Avoided the Great Recession
    ”James Drain” Hits Cleveland
    Civic Choices: The Quality Vs. Quantity Dilemma

    August
    The Golden State’s War on Itself
    The Beginning of the Great Deconstruction
    Urban Legends, Why Suburbs Not Dense Cities are the Future
    City Thinking is Stuck in the 90s
    Can the Suburban Fringe be Downtown-Adjacent?

    September
    The New World Order
    City Size Does Not Matter Much Anymore

    October
    The Smackdown of the Creative Class
    Greetings from Recoveryland, Ten Places to Watch Coming out of the Great Recession
    The World’s Fastest Growing Cities
    The Privitization-Industrial Complex

    November
    I Opt Out of California
    The Rise of the Efficient City
    The Other Chambers of Commerce

    December
    Hasta La Vista, Failure
    If California is so Great, Why are So Many Leaving?
    Cities that Prosper, Cool or Not

    Photo by Fusionpanda

  • The California Cheerleaders Are at it Again

    State Treasurer Bill Lockyer and economist Stephen Levy published a piece in the Los Angeles Times that argues that California doesn’t really have any fundamental problems. In their piece, Lockyer and Levy don their rose-colored glasses and give us the same tired old excuses, twisted logic, and factual inaccuracies.

    I’ll begin with the factual inaccuracies:

    Lockyer and Levy claim that California is the state with the youngest population. That is just incorrect. The U.S. Census website has a map. California is not even the same color as that used to identify the lowest-aged states.

    The authors’ claim that California’s high unemployment rate is due to the loss of 600,000 construction jobs is also wrong. Since November 2007, the month before the recession started, California’s construction industry has lost 334.7 thousand jobs. This represents less than 25 percent of California’s 1.36 million job losses since the recession’s inception. The story is still wrong if we choose the starting date for calculating job losses as the date that most supports L&L’s argument. California’s construction jobs peaked at 948.3 thousand in February 2006. It appears to have bottomed out at 529.2 thousand in September 2010. This is a huge number of job losses, over 400,000, but it is only two-thirds of the 600,000 claimed, and it certainly does not explain all of California’s high unemployment or California’s million plus non-construction recession job losses.

    Lockyer and Levy claim that California’s budget crisis stems strictly due to revenue shortfalls, saying,

    “Our critics say we are addicted to spending. But the numbers show that isn’t true….California’s current budget woes have been caused by the devastation visited on our revenue base by the recession, not a failure to curb spending. In the three fiscal years preceding this one, general fund expenditures fell by $16 billion.”

    This is just disingenuous. Lockyer knows as well as anyone that the general fund comprises less than half of California’s spending, and while the general fund expenditures have indeed reflected a decline in taxes, total State spending has increased from $194.3 billion in fiscal year 2007/08 to $216 billion in the 2010/11 year. Furthermore, when the composition of State spending is evaluated, we see that virtually all of the cuts in the general fund have been in local assistance. State operations have been almost completely spared.

    Besides, California’s budget problems didn’t begin with the recession. Do Lockyer and Levy think that our memories are so short that we forgot that Gray Davis was thrown from office because of budget problems, and that Arnold came in office pledging to fix California’s persistent budget deficits?

    We are also again treated to Lockyer’s mantra that California has a constitutional requirement that it not default on bonds, adding,

    “During the current fiscal year, general fund revenues are expected to total $89.4 billion. Education spending under Proposition 98 will total $36 billion. That leaves $53.4 billion available to pay debt service on bonds — more than eight times the $6.6 billion the state will need.”

    That’s wonderful, but constitutional requirements and revenues don’t pay debt. Cash pays debt, and California does run out of cash. When California runs out of cash it issues vouchers. Already some banks have refused to accept California vouchers. What will the State do if all banks refuse to honor vouchers?

    I’m sure the Treasury sets aside funds for debt repayment before they issue vouchers. Whatever they set aside will probably not be enough if California finds itself in a situation where vouchers are not accepted. Do we think the unions will let their people work if they are not being paid? Would the workers want to work if they are not being paid? Would contractors work? Will there be anybody around to write a check, even if the reserves are there?

    The fact is that if vouchers are not accepted, California will be plunged into a very serious crisis, a crisis in which case California’s constitutional requirement to pay would have no more meaning than its constitutional requirement that it have a balanced budget by June.

    Lockyer and Levy ludicrously claim that California’s business environment is good. But disinterested groups that issue reports that consistently rank California as among the least attractive states are wrong, groups like the Tax Foundation and Chief Executive Magazine. Lockyer and Levy cite Public Policy Institute of California (PPIC) research that business relocations cause smaller percentage job losses in California, but the PPIC can’t measure jobs that aren’t created when businesses that could reasonably be expected to expand in or move to California don’t.

    Lockyer and Levy also repeat Brett Arends’s claim that California’s share of the World’s venture capital has increased to 50 percent, but they neglect to note that the amount is declining, a lot, as Tim Cavanaugh showed here. California is getting a larger share of a rapidly declining pie. The net result is a huge decrease in California’s venture capital.

    Finally, I’ll conclude with my favorite Lockyer and Levy quote:

    “California no doubt faces serious challenges. But our obstacles are not insurmountable.”

    That’s exactly right, but the problems are not insurmountable until you confront California’s real, fundamental, problems.

    Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org.

    Photo by Kevin Cole

  • A New Era For The City-state? The New World Order

    The city-state, a relic dating back to Classical or Renaissance times, is making a comeback. Driven by massive growth in global trade, shifts in economic power and the rise of emerging ethnic groups, today’s new independent cities have witnessed rapid, often startling, economic growth over the past decade.

    The contemporary city-state has flourished primarily in two regions: the Persian Gulf and Southeast Asia. The development of Hong Kong and Singapore provided a critical stage for Southeast Asia, which has been home to the world’s the greatest economic expansion. Hong Kong, now a quasi-independent part of China, competes with London’s West End as the world’s most expensive office market. By one account, it is experiencing the fastest growth in rents of major office markets in the past year. Once known for their poverty and destitution, these Asian city-states now boast incomes comparable to many European and North American cities.

    The Persian (or, as some like to call it, Arabian) Gulf constitutes the other hot bed for 21st Century city-states. Over the past decade, a string of once obscure cities from Dubai and Abu Dhabi to Qatar and Bahrain have risen to positions of global significance. Qatar, a tiny emirate with roughly 1.7 million people, will host the 2022 World Cup–an announcement that surprised nearly everyone. Abu Dhabi, a desert metropolis of some 2 million people, is undergoing the largest cultural development project on the planet, financed by the emirate’s huge oil wealth. This includes three massive museums: an outpost of the Louvre, a branch of the Guggenheim 12 times the size of the New York original, and a museum on maritime history.

    These city-states may share religious and political affiliations, but like their Phoenician, Greek and Renaissance forebears, they compete ferociously with one another. Today Dubai, which like Abu Dhabi is part of the United Arab Emirates, easily represents the most evolved expression of the modern Gulf city-state. Not much more than a tiny fishing and pirate haven until modern times, the city had less than 400,000 residents in 1985; it now has close to 2 million. In the past decade Dubai has become a city of superlatives: the world’s largest office tower; the Middle East’s largest port, airport and financial center.

    In many ways Dubai’s strengths are those of traditional city-states. Unlike other Gulf Arabs, the Dubai Emiratis have depended more on trade than oil for their wealth. Highly anxious to seize one of the most critical corridors of world trade, they have built the Middle East’s largest port at Jeber Ali and the massive Dubai International Airport, one of the largest and best-run on the planet.

    And to an extent largely unmatched in the Arab world, Dubai and its ruler, Mohammed bin Rashid Al Maktoum, have fostered an environment well-suited for global trade. Muslim cultural tendencies (like Friday holidays and largely halal food) are gently followed, but there’s room for a great deal of flexibility for expatriates.

    Inside the financial towers, it’s not unusual to see people dressed as they would in London or Wall Street–men in smart suits and women in knee-length skirts. Alcohol is readily available in the hotel restaurants, and the cab drivers are as likely to be Hindus from India as Muslims from an Arab country. Restaurants tend to be Lebanese, Persian or Western; there are karaoke clubs, bars and pubs across the city. Business in Dubai is conducted in many languages among a plethora of ethnic groups ranging from Americans and Brits to Indians, Russians, Pakistanis, Koreans and Lebanese, among others.

    “Funny” business, as in most trading cities, also fuels the Dubai’s dynamism. The city-state has been a convenient laudromat for money out of sanctioned Iran. Indeed, the Dubai Creek area near the souk is crowded with dhows being packed with crates ready to ship across the Gulf to the Islamic Republic. These can include some relatively harmless consumer goods like televisions, but some allege that some of the cargo includes materials for Iran’s nuclear program.

    Then there are the corrupt south Asian politicians, Russian Mafiosi or Southeast Asian drug dealers, who reside part time in the city and also deposit their cash there. Included in this cash in-flow, according to Wikileaks, are many millions of U.S. and other NATO aid dollars skimmed off by our wonderful Afghan allies. (Your tax dollars at work!)

    Both the predominate legitimate business and, probably, the thieves see much benefit in Dubai’s largely efficient authoritarian order. There are incidents of violence on occasion, but nothing on the scale of Karachi or Juarez, Mexico, gang wars. A safe place attracts all kinds of business, as was true back in the days when the Doges ran Venice.  Backed both by social order and monumental  infrastructure investments and high social order, Dubai now boasts the fourth most office space per capita of any large city on the planet–behind only New York, Paris and London.

    Since the 2008 financial crisis the office market has become severely overbuilt, transforming Dubai from one of the world’s hottest commercial markets to one of the sickest. Estimates of actual office vacancy rates start at 15% but could rise to 25% or even 50%, according to a recent Jones Lang estimate. However, a walk through the massive new “Business Bay” development–planned as 64 million square feet of office, commercial and residential space–resembles a walk through the real estate landscape left from a neutron bomb. You don’t see much in the way of people except   security guards and occasional day laborer. Even optimists, counting on a renewal of global economic growth, do not expect a major improvement in the overall property market until 2013 or 2014.

    A more serious and long-term problem may prove political. Unlike Singapore and Hong Kong, where most work is done by citizens, Dubai and the other gulf city-states rely almost completely on imported labor. Expatriates seem to do almost everything from city planning and administration work to running the hotels and basic infrastructure maintenance. This is not surprising as less than 1 in 5 residents is an Emirati.

    Some foreign residents live luxuriously, in communities like the Palm that look more like Newport Beach, Calif., than parts of the developing world. Many others inhabit dismal labor camps that are collections of cinderblocks in the desert. These camps, notes Kevin Phillips, a local evangelical missionary who works in Dubai, are plagued with problems typical of any settlement made up of young, temporary males workers: crime, drugs, fist-fights and prostitution.

    But arguably the biggest danger to Dubai–and to other Gulf city states–lies in the numbers of Arabic speaking workers and professionals who, despite sharing a language and religion with the Emiratis,  often feel only a tenuous stake in the city’s success. Unlike their counterparts in Singapore, they have virtually no chance to become citizens. Commitment to the long-term health of the city is not always evident among people who consider themselves mere sojourners.

    Yet for all these problems, one should not rule out Dubai or other Gulf urban areas like Abu Dhabi and Qatar as potential future great city-states. In a world where cross-cultural trade remains an ascendant phenomenon, we are likely to see the emergence of an expanding number of city-states over the coming years. Athens, Carthage or Venice may have constituted the great city-states of the past, but the 21st century is likely to  create its own batch  of luxuriant successors.

    This article originally appeared at Forbes.com

    Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and an adjunct fellow of the Legatum Institute in London. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

    Photo by *Crazy Diamond*

  • The Tax Cut that Killed California?

    I studied with the Austrian economists at New York University. The Austrian school of economics (as contrasted to Keynesians or Chicago school economists) work with a theory about business cycles that essentially starts from the understanding that what appear to be almost mechanical, regular ups and downs in the economy are actually caused by the periodic disappointment of the expectations of entrepreneurs. The alternative is to suggest that business owners periodically and collective wake up stupid one morning and start making a lot of bad decisions. A connection to the routine horizons of fiscal policy – for example, the 5-year funding cycle for federal highways – is a more likely cause of what appear to be “cycles”.

    A current example of how government spending policy can make a disaster of the economy by confounding decision making is the changes/not-changes in US tax policy. What if you are a business owner who has a fiscal year that runs from July 1 to June 30? All of your plans for the first half of 2011 would have been based on the tax cuts expiring (which is the reasonable thing to do – don’t change your plans until the law is changed). If the tax cuts are extended, then the last half of your budget is completely changed. In this case, there will be more net income. Being unable to plan for this, according to economic principal-agent theory, will put a lot of cash in the hands of managers who may not spend it in the best interests of the shareholders. The failure of managers to invest wisely when government stimulates business through unexpected and excessive free cash flow is well-documented.

    Now imagine you are a state whose tax policy mirrors the federal policy. Tax cuts to businesses and individuals translate into revenue cuts for states, counties and cities. Any state that opts out of mirroring whatever Washington D.C. passes risks being cut-out of certain federal funding programs in the future. Nebraska, for example, passes a biannual budget. The last one covered the fiscal-years 2009-2011, which was based on the tax cuts expiring at the end of 2010. The difference if the tax cuts are extended will be a $200 million shortfall. Nebraska is a relatively small state, so consider what this will do to the budgets of all the states, plus counties and cities in the U.S. This could be the event that brings the global financial crisis in public debt home, especially to states like California which are already in trouble.

    Note: A good source for more on Austrian economic theory is the Mises Institute at Auburn University. Click this for a brief on “The Austrian Theory of the Business Cycle” from Roger Garrison – who is an expert on the subject.

  • Toward a Continental Growth Strategy

    North America remains easily the most favored continent both by demography and resources. The political party that harnesses this reality will own the political future.

    America cannot afford a prolonged period of slow economic growth. But neither Democrats nor Republicans are prepared to offer a robust growth agenda. Regardless of what happened in the November midterm elections, the party that can outline an economic expansion strategy suitable to this enormous continental nation will own the political future.

    Economic expansion that barely exceeds the current 2 percent or less is woefully insufficient for the United States. Such meager growth could perhaps work in countries with very low birthrates and limited immigration, such as in much of Europe and Japan, but not in the demographically vibrant United States.

    In the years between 2000 and 2050, Europe’s workforce will decline by 25 percent; Japan’s by 44 percent; China’s by 10 percent. In contrast, America’s workforce is expected to expand by more than 40 percent, adding millions of new entrants from an increasingly diverse population.

    Given the growth in workforce, it is impossible to see how the country succeeds without rapid expansion not only of employment but also a broad-based wealth creation. Despite conservative attempts to dress up the numbers, the vast bulk of all the gains in wealth since 2000 have been achieved by the relatively small number of Americans with incomes significantly above the poverty level. Meantime many middle-tier educated and skilled workers have lost ground while the rate of upward mobility has stagnated.

    The collapse of the housing bubble has eliminated the one way that middle class families took advantage of economic growth during the Bush years. Under Obama, virtually all the gains have been to the stock market (up 30 percent) and corporate profits (42 percent). Meanwhile, weekly earnings, jobs, and home sales price all stagnated or declined. But the biggest price may be paid by young people; even those with degrees have lagged behind in wage growth as they crowd into a labor market potentially far tougher than the one their boomer parents faced.

    All this suggests an emerging “aspiration gap” that could define our politics for much of the next few decades. Today, belief in the achievability of the “American dream,” according to a recent survey by Strategy One, has dropped to the low 40s. Americans may still overwhelmingly believe in the ideal of upward mobility but, as individuals, now only a minority feel they can achieve it themselves.

    The “aspiration gap” fundamentally does not advantage either party at the moment. Democrats are set for large losses in the 2010 election. But party identification and approval for the GOP remain low, particularly among the rising minority and millennial constituencies. Even in suburbia, amid rapidly rising middle class angst, the Republicans, according to a recent Hofstra University poll, have lost more support than the Democrats since 2008. Independents have been the big winner and constitute the largest faction of suburbanites—more than 36 percent, compared to just 30 percent two years ago.

    Our Failing Parties: The Democrats

    Let’s start with the Obamacized Democratic Party. Up through the 1990s, the Democrats still maintained strong links to small businesses, private sector unions, and the old Midwest industrial economy. This gave them reasons to favor growth-inducing policies that could close the “aspiration gap.”

    But today the party has become captured largely by the coastally oriented alliance of public employees, their charges, greens, and the professiorate—what Fred Siegel calls an alliance of the “overeducated and the undereducated.” For the most part, these constituencies are largely detached from the private sector, and thus only tangentially interested in economic growth. Even high unemployment, unsurprisingly, was not the primary concern for an administration dominated by longtime public servants and tenured professors—people who rarely lose their jobs.

    This indifference stems not so much from a traditional socialist agenda, as imagined by some conservatives, but by the nature of the party’s constituencies. It is more a dictatorship of the professoriate than that of the proletariat.

    Further obscuring the growth agenda is the fact that some key advisors consider growth itself inherently evil. Take for instance the president’s science advisor John Holdren. A protégé of the Malthusian Paul Ehrlich, Holdren long has favored the planned “de-development” of Western economies in order to reduce consumption.

    The “de-development” agenda has been bolstered by the growth of the climate change industry. Proposals for “cap and trade” rules or Environmental Protection Agency regulations on greenhouse gases represent profound threats to basic industries like manufacturing, housing, and agriculture. In contrast, they have proven boffo for university research grant-seekers and Silicon Valley venture capitalists, who increasingly focus on “clean” technologies subsidized by government grants and edicts favoring their technologies.

    The climate change agenda also distorts the administration’s approach to infrastructure. Instead of focusing on transportation bottlenecks effecting companies and commuters on a daily basis, the administration has favored massive boondoggles such as high-speed rail or sometimes poorly conceived light-rail systems. These are often too expensive compared to alternatives, and not well-suited to the needs of most American communities or companies.

    Our Failing Parties: The Republicans

    Today, with as many as 25 million Americans unemployed or underemployed, the Democratic Party still seems to be missing a coherent program to put them back to work. Sadly, much the same can be said of the Republicans, who benefit from populist outrage about the stimulus, but also lack an answer to the deepening aspirational gap.

    The fundamental problem is obvious at the level of the Tea Party, the grassroots driving force behind today’s GOP. Tea partiers know what they are against—higher taxes and government spending—but have not developed much in the way of approaches to spur growth.

    This is epitomized by the career of the movement’s patron saint, Sarah Palin. Celebrated by many in the “lower 48,” Palin is widely seen among Alaska’s predominately Republican business community as indifferent to economic growth. As governor, they maintain, she proved more interested in redistribution to the middle class—through larger checks from the state’s energy fund—than in investing in things like new infrastructure.

    “She epitomizes the whole idea of we get a piece and no sense of planning for the future, about thinking about what we need to do,” notes Jim Egan executive director of Commonwealth North, a local think tank.

    Long-term growth, in Alaska and elsewhere, Egan suggests, needs government to play a critical supporting role. The fact that the Obama administration missed its opportunity to focus on basic infrastructure in its bungled, politically driven stimulus does not mean that investing in the future is an inherently bad idea.

    The Republican embrace of austerity represents good policy when it comes to reducing wasteful spending, notably on public employee pensions. But knee-jerk resistance to any government spending could prove detrimental in an increasingly competitive world.

    Needed: A Continental Strategy

    To promote economic growth, the country needs to develop a new national consensus around which I call “a continental strategy.” This would focus on taking advantage of the unique demographic and resource assets of this country as well as its North American neighbors, Mexico and Canada.

    Today the United States faces formidable competitors, notably from China, India, and Brazil. These are proud, vast countries with considerable resources and an expanding middle class population. At least in the short run, they suffer neither the ruinous demography of Japan nor the elaborate welfare burdens of Western Europe.

    Already these countries are investing in their basic infrastructure so that they can tie their vast landmass together and profit from it.

    Hard as it is to imagine amid the wreckage of the stimulus, American history is replete with examples of how government can actually do good things. The public support for canals, railway lines, the New Deal engineering and construction projects, the Interstate Highway, and space programs all greatly benefited the country’s economy. They underpinned first American leadership in the industrial age, and then in the information economy. In recent decades, public investment in basic infrastructure construction and maintenance has declined, even in the face of considerable population growth.

    “One looks back at that map ‘Landscape by Moses,’” writes the sociologist Nathan Glazer, about the legacy of New York City’s “master builder” Robert Moses, “and if one asks what has been added in the 50 years since Moses lost power, one has to say astonishingly: almost nothing.”

    Restoring our priority towards binding together and improving our continental infrastructure remains critical to achieving greater economic growth. Rather than a policy of retrenchment, it would represent a return to an approach that sparked our original ascendency and could gain broad bipartisan support.

    Even today, what makes a continental strategy so compelling lies with this often overlooked reality: North America remains easily the most favored continent both by demography and resources. It possesses the world’s second-largest oil reserves and massive, still largely untapped natural gas supplies.

    North America also constitutes by far the world’s richest agricultural area, with the most arable land. This is a huge advantage as global food demands grow over the next few decades. Critically, the continent also boasts more than four times as much water per capita as either Asia or Europe.

    Most important still, North America retains a unique demographic vitality among all advanced countries. It continues to lure upwardly mobile people from around the world: roughly half of the world’s educated migrants come to America, and a considerable number also head for Canada.

    Ultimately a continental strategy meets the needs of large segments of the country—ranging from immigrants and their children to millennials—who will dominate our emerging job market. These same groups in the coming decades will also shape our political future.

    The party that offers these new voters the greatest opportunities for work, raising a family, and buying a house will be the one that dominates the political future. As generational chroniclers Mike Hais and Morley Winograd, both committed Democrats, have pointed out, millennials are essentially nonideological; they will be attracted to those policies that work, both for society and for their young families.

    Although this year’s political results may please conservative ideologues, they should recognize that this represents only the defeat of poorly executed Obamian statism. The future belongs to whichever party emerges as the true party of growth.

    This article originally appeared at The American.

    Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

    Photo by IronRodArt – Royce Bair

  • Don’t Touch My Junk – At the Airport OR at the Zoning Office

    Until recently, “Don’t touch my junk” was only a rallying cry for people who liked to accumulate broken down cars in their yards, in defiance of local nuisance ordinances. The internet meme radiating from San Diego International Airport puts an entirely new spin on the phrase.

    Americans have a strong tradition of equality, enshrined in the Equal Protection clause of the 14th Amendment to the United States Constitution: “no state shall … deny to any person within its jurisdiction the equal protection of the laws”. Next to the implied right to privacy—the right to be left alone—we value the fact that the law holds each of us as equals, whether we’re old or young, rich or poor, white, black, brown or purple. We’re Americans, darn it, and we should all be treated the same.

    However, we balance the blind scales of justice with countervailing impulses of forgiveness and righteousness, charity and perseverance. The vaunted Puritan work ethic makes sense—you work hard, you should enjoy the fruits of your labor. On the other hand, our better nature implores us to give a helping hand up, to right wrongs and to make the world a better place. Sometimes we don’t treat people the same because they worked harder or because they need a little extra help. We balance our values, and that’s OK.

    In the wake of 9/11, we have balanced many rights against the greater good of protecting our national security. This week’s dust-up with the TSA’s enhanced security systems is illustrative of that balancing act. Americans will put up with a lot when there is a genuine consensus that the end result benefits the greater good, but eventually government will overreach. Even on—or especially on—issues of grave national concern, we risk going a bridge too far.

    Each day I work with communities and the people who live in them to build better places to live. Like an entrepreneur puts together a business plan evaluating assets and liabilities, revenues and expenses, communities put together comprehensive land use plans to chart their shared course forward. Those plans are implemented through local ordinances and policies, such as zoning regulations or economic development programs.

    The 2005 US Supreme Court case of Kelo v. City of New London (545 US 469) was a case of a bridge too far for local government policy. As you may recall, the city put together a redevelopment plan that promised over 3,000 new jobs and over $1 million a year in new tax revenue. The price to be paid was the Fort Trumbull neighborhood, which was slated to be acquired by eminent domain, demolished and rebuilt by private developers. In this case the Court upheld the existing balance between property rights and community development, ruling that the city’s acquisition of private property for economic development is a permissible “public use” under the takings clause of the Fifth Amendment, applied by the Due Process Clause of the 14th Amendment.

    This was a pyrrhic victory at best, as across the nation people rebelled at the notion, not just of takings—the property owners were due just compensation—but of imposing so great a cost on an individual for the dubious betterment of so many. If they could do this to Susette Kelo in New London, Connecticut, they could take any of our homes if a big enough carrot comes to town. As Ilya Shapiro at Cato Institute noted this summer, in the five years since the Supreme Court decision nine state high courts have limited eminent domain, and almost all state legislatures across the country have passed some type of property rights reform. The consensus comes undone when we reach too far.

    Now I am a planner, by training and craft. I don’t believe, as some say, that “central planning is superior to free-market competition.” Comprehensive planning is a statement of a community’s shared goals and visions for the future. As the Cheshire Cat told Alice, “If you don’t know where you are going, any road will get you there.” The federal government sinks billions of dollars into roads, rail and air networks, so it makes sense to do some transportation planning. Local governments sink untold millions into water, sewer, and road infrastructure, so it makes some sense to spend those scare funds prudently. That said, there is no sense in robbing Peter to pay Paul. Peter needs to pay for Peter’s problems and Paul needs to pay for Paul’s.

    The same questions arise countless times in local government. We write a rule to fix a problem and then the rule creates another problem. For example, local zoning regulations often require special conditional use permits for places of worship. Traditionally churches, synagogues and mosques have been sited in residential neighborhoods, limiting the traffic increase to once-a-week worship services. As a practical matter it wasn’t much of a problem. More recently, many of these buildings have added day care and other week-day services more typical of commercial land uses. So should they be treated the same as commercial uses that attract traffic and impact residential livability? Or following the First Amendment should freedom of religion exempt places of worship from local land use requirements?

    Congress stepped in to this zoning question with the Religious Land Use and Institutionalized Persons Act (RLUIPA) in 2000, prohibiting any “substantial burden” on religious exercise unless a “compelling government interest” can be demonstrated. Religious expression is a constitutionally protected freedom,yet there may be compelling public interest in balancing that expression. In the case of airport security, we all recognize the public interest in security, yet part of the current public outcry stems from the perception that the government may not be consistent in how they treat people based on their religious practices.

    We are still struggling to interpret RLUIPA in cities and counties across the country as well as in our courts. Boulder County, Colorado, recently appealed to the US Supreme Court a decision holding that the county had not treated a proposed church campus expansion similarly to a non-religious use on equal terms. The County’s long-standing commitment to “curbing urban sprawl, maintaining open space to preserve the county’s rural character, and sustaining agriculture”, as expressed in the Comprehensive Plan and implemented in the Land Use Code, was insufficient to balance the protected religious expression. However that case turns out one thing is clear: we have to treat everyone the same, be they a Christian cathedral, a Buddhist temple or a non-denominational retreat center.

    Whether it’s the political correctness of security pat-downs or land use regulations, we inevitably get in trouble when we forget the great American traditions of equality, charity and justice. All men are created equal, at the airport or at the zoning office.

    John C. Shepard, AICP, works in regional development in Southwest Minnesota and is a member of the American Institute of Certified Planners. John has experience in local economic and community development across the Great Plains and Rocky Mountain states. He blogs on life, liberty and the pursuit of Americana at jcshepard.com.

    Photo by phidauex, Sam Ley

  • Chicago Magazine Asks Why Illinois is So Corrupt

    Chicago Magazine has an interesting article on the sore subject of Illinois corruption. The article was written by Shane Tritsch who interviews several experts on Illinois political history. There’s no “good old days” of clean government in the Land of Lincoln. Tritsch explains a major reason for Illinois’ historical graft:

    Owing to historical factors, Illinois developed a labyrinthine governmental structure that offered fertile ground in which corruption could sprout. The Illinois constitution of 1870, in effect until 1970, limited the amount of debt counties and municipalities could carry and taxes they could levy. When cities needed to fund improvements, they got around those constraints by creating new units of government with the capacity to borrow—a library district, for example, would be created to build and administer a new library. “The 1870 constitution almost forced you into multiple units of government if you were going to deliver services beyond your municipality or modernize your municipality,” says Redfield. Today the state contains almost 7,000 separate governmental fiefs—far more than any other state—ranging from counties, towns, and school and fire districts to water reclamation and mosquito abatement districts. Most have budgets to protect and authority to wield. “It’s very hard to stay on top of it all, and it creates many more opportunities for patronage,” says Cindi Canary. “It creates ways for small islands of graft and corruption to stay hidden.”

    It appears that Illinois’ luck is running out. According to Forbes, Illinois is number two on the list of states Americans are fleeing behind New York:

    at No. 2. Illinois is expected to lose 27,000 people this year, consistent with its average annual loss over the last five years. The losses are likely linked to the state’s economy and tax structure. Job losses in manufacturing and industrial machinery are likely pushing people out of the state

    The bond market has taken notice of Illinois’ debt problem. While Illinois can’t go legally bankrupt, creditors can refuse to extend credit. Illinois faces massive public pension crisis in the coming years. Unfunded liabilities will make Illinois a less desirable place to invest.

    The Illinois economic situation was born in Illinois’ history of corruption. Shane Tritsch’s article is a decent history on Barack Obama’s home state. The Chicago segment of Illinois corruption is certainly unique. Below is an excellent segment from a National Geographic TV special on how Chicago was taken over by the Mob.

  • Hasta La Vista, Failure

    In his headier and hunkier days, Arnold Schwarzenegger spoke boldly about how “failure is not an option.” This kind of bravado worked well in the gym–and in a remarkable career that saw an inarticulate Austrian body-builder rise to the apex of Hollywood and California politics.

    But Schwarzenegger’s soon-to-be-ended seven-year reign as California’s governor can be best described in just that one simple world: failure.  It has been so bad that one even looks forward to having a pro, the eccentric Machiavellian master, Jerry Brown, replace him.

    Schwarzenegger never grew beyond the role of a clueless political narcissist. As the state sank into an ever deeper fiscal crisis, he continued to expend his energy on the grandiose and beyond the point: establishing a Californian policy for combating climate change, boosting an unaffordable High-Speed Rail system, and even eliminating plastic bags. These may be great issues of import, but they are far less pressing than a state’s descent into insolvency.

    The Terminator came into office ostensibly to reform California politics, reduce taxation and “blow up the boxes” of the state’s bureaucracy. He failed on all three counts. The California political system–particularly after the GOP’s November Golden State wipeout–is, if anything, more dominated by public employee unions and special interests (including “green” venture capitalists) than when Gray Davis ruled. Taxes, despite efforts by members of Schwarzenegger’s own Republican Party, have steadily increased, mostly in the form of sales and other regressive taxes. The bureaucracy, with its huge pension costs,  continued to swell until this year even as state unemployment climbed well over double digits.

    Schwarzenegger’s fiscal street cred was undermined by his support for unessential new bond issues for such things as stem cell research and high-speed rail. He threw financial prudence out the window in order to appease his business cronies and faithful media claque, particularly those working for mainstream eastern media.

    Looking back, it seems difficult to remember that Schwarzenegger’s election initially thrilled the business community, who saw him as a counterweight to the dominant axis of unions and green zealots. “An army of entrepreneurs,” as I wrote around the 2003 recall, rallied around a self-made man who seemed to understand the challenges of running a business.

    In the end Schwarzennegger failed these California optimists miserably. He ignored the impending crash of the state’s real-estate-driven “boom” and instead waxed lyrical on California as “the new Athens and Sparta,” destined to lead not only the nation but the world “into the future.” Sadly, a more apt classical analogy might be Carthage–except the burning and salting of the California has been committed by its own leaders.

    Today few governors, much less foreign leaders, would regard California’s government as anything other than a cautionary tale in colossal mismanagement. Many others, particularly newly elected Republican governors, regard the state’s persistent mismanagement as a mega opportunity for poaching jobs and companies  for the benefit of their constituents.

    At the heart of the Terminator’s failure lies the politics of delusion, perhaps not surprising for someone whose greatest success was based on fantasy.  Traditionally California Republican governors focus on the hoary economic fundamentals. But Schwarzenegger’s main economic advisor, San Francisco investment banker David Crane, has clung to the notion that California’s creative skills would allow the state to flourish amid “creative destruction.”

    This delusion has failed to materialize. Silicon Valley’s venture capitalists, the much celebrated architects for a creative revival, increasingly seem a spent force, investing fewer funds with less success than a decade ago.  2009 saw fewer new venture fund financing than in any year since 2003, while actual dollars raised have been dropping since the late 1990s.

    And for all their self-importance, the venture capitalists are hardly the game-changing visionaries of the past; instead, they seek federal subsidies or back social networking start-ups that provide far less  in the way of employment prospects than legendary successes like Intel or Apple. The Google-Facebook economy has wowed the business media, but their direct  impact on jobs is largely concentrated  in a few affluent areas around Palo Alto and parts of San Francisco. Despite the celebrations of these companies, much of the more decidedly middle-class parts of the Valley remain in a deep recession, with over 15 empire state buildings worth of empty space.

    Of course, apologists point out, quite correctly, that many signature corporations are keeping their headquarters in the Golden State–after all not many CEOs are anxious  to leave the climatically blessed environs of Atherton, Palo Alto, San Diego or West Los Angeles for a new life in  Salt Lake, Shanghai or even Austin.  But these same CEOs are shifting manufacturing, tech support and. increasingly. research at a rapid clip to places with lower taxes, more accommodating business climates and a better chance for the non-filty-rich to live a good life.

    This slow but steady leakage is draining the state economy. California’s share of the nation’s jobs and national income continues to drop.  In the last seven years, California has underperformed the nation in generating both middle-income and tech-oriented jobs. Unemployment has remained two points or more higher than the national average.

    The draconian greenhouse gas reductions now proudly touted by Schwarzenegger could make this worse. If the nation was following similar regulations, something conceivable prior to the November elections, the pain may have been more equally shared and an aggressive stategy aimed at “green” industries could more likely have proved  a decent bet. Now companies in California and a handful of other similarly minded states simply will have to cope with regulatory overkill and much higher energy costs against   competitors domestically and around the world.

    The production sector, the most vulnerable target of the green machine, is already reeling. Manufacturing losses, over 32% since 2001, have remained well above the national average–with a toll of over 600,000 jobs .  Over the last three years the state ranked dead last among the nation’s 25 largest states in terms of adding new manufacturing capacity.

    This, of course, has had little impact on those who inhabit the upper echelons of Hollywood or Silicon Valley. Arnold’s failure has been toughest on California’s working and middle classes, the very people who once saw in him a savior.

    Now, in an act of what seems like desperation, Californians have brought back that quirky dinosaur, Jerry Brown, who at least one can never call either stupid or naive. Brown’s campaign scored well by linking his amateurish opponent, Meg Whitman, to Arnold’s patent lack of political savvy. Brown recognized that  Schwarzenegger had done a great job in discrediting both himself and the state GOP. The  Terminator, who once enjoyed a 65%  approval rating,  suffers the  lowest popularity rating of any California governor in the past 50 years –a dismal 22%, according to the latest Field Poll.

    Six in ten Californians now think Schwarzennger is leaving the state in worse shape than he found it, and they are right.  So what do you call a star who has lost the admiration and support of his fans? There’s just one word in this script: failure.

    This article originally appeared at Forbes.com

    Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

    Photo by Nate Mandos

  • Building the Train to Nowhere

    The California High Speed Rail Authority has approved building its first 54 miles in the San Joaquin Valley. A somewhat longer route, 65 miles, has been indicated in a number of press reports, but Authority documents indicate that only 54 miles of high speed rail track will be built. The route would start in Corcoran, and go through Fresno to Borden, a small, unincorporated community south of Madera. All of this would cost $4.15 billion. The route would include two stations, in Fresno and Hanford/Visalia.

    The segment was adopted under pressure by the United States Department of Transportation, which was interested in ensuring that the line would be usable (have “independent utility”) by Amtrak should the high speed rail project be cancelled due to lack of funds. The first section of the California high speed rail line would instead be a somewhat incongruously high-tech Corcoran to Borden spur, or perhaps more accurately stub to the region’s rather sparse conventional rail services.

    There are appear to have been concerns that growing opposition movements in the San Francisco and Los Angeles areas could have delayed construction, which could have put the federal money at risk. The Sacramento Bee’s Dan Walters, perhaps the leading political columnist in the state implied an ulterior motive:

    “You’d have to be terminally naive not to believe that the splashy announcement, made personally by an Obama administration official in Fresno, was to help an embattled local congressman, Democrat Jim Costa, stave off a very stiff Republican challenge.”

    Officials representing communities – many of them with high levels of unemployment – on the segment itself were elated, as any would be at the prospect of a rush of new construction jobs, regardless of what was being built. But, most everywhere else the reaction to the selection largely has been negative. Walters labeled it the “train to nowhere” in a November 29 commentary. State Senator Alan Lowenthal, who chairs the legislative committee overseeing the high speed rail project said that the Authority “could be creating an ‘orphan’ stretch of track, that will never be used by high-speed trains.”

    Richard Tolmach, president of the California Rail Foundation, an intercity rail advocacy organization, told Authority members ” It’s a crazy idea. He went on to say that “You guys are gonna be a laughingstock in Congress.”

    Already, problems are building in the now more decidedly more conservative Congress. California Republican Congressman Jerry Lewis and 27 colleagues have introduced the “American Recovery and Reinvestment Rescission Act,” which would apply unspent stimulus money to the deficit, including $2 billion that has been promised to the California high speed rail line.

    Batteries (and Trains) Not Included: Even after the $4.15 billion has been spent, the Corcoran to Borden rail stub will be incomplete. The Authority’s plan includes only the building of the rail bed and the necessary viaducts. There is no money for trains. There is no money for the electrical infrastructure necessary to power the trains. Trains and electricity infrastructure would add at least 15 percent to the bill, based upon previous California High Speed Rail reports. Thus, when and if completed, the trains and electrification would lift the cost of the Corcoran to Borden high speed rail stub to at least $4.8 billion.

    Bare Bones Stations: The plan calls for building only “basic” stations, with two tracks (one in each direction). That is fine if the line is serving Amtrak and there are only a few trains per day. But the high speed rail plan assumes frequent trains, including some that stop at all stations, some express trains that skip some stations and some express trains running non-stop from the Transbay Terminal in San Francisco to Union Station in Los Angeles. The only place that an express train can pass a slower train is at a station. That means that passing tracks must be built at virtually all stations. The passing tracks (two interior tracks in addition to the two tracks for stopped trains) required in stations are illustrated in this California High Speed Rail illustration (also above).

    The full system, or (perhaps the more likely outcome) a truncated San Jose to Palmdale line (with slower running lines over the commuter rail tracks into San Francisco and Los Angeles), would require passing tracks at the Fresno and Hanford/Visalia stations. Rebuilding these stations would increase the cost above the $4.8 billion, and that’s before the seemingly inevitable cost escalation.

    Indeed, the Corcoran to Borden stub entails a potentially large cost increase compared to previous California High Speed Rail Authority documents. After making all of the necessary adjustments to update the last available segment costs to the cost accounting method (“year of expenditure” dollars), the cost of the Corcoran to Borden stub could be at least 30 percent higher than would have been expected in the present $43 billion San Francisco to Anaheim cost.

    Applied to the entire line, a 30 percent cost escalation could take the price of the San Francisco to Anaheim line to more than $55 billion. Based upon cost ratios released by the Authority in 2008, the later extensions to Sacramento and San Diego would lift the bill to more than staggering $80 billion. Even that does not pay the entire bill, because promises have been made in state legislation for improvements across Altamont pass from Stockton to the East Bay and Oakland.

    Not that coming up with any of this money will be easy, particularly with a more deficit conscious Congress. Congressman John Mica of Florida, who will likely lead the House of Representatives Transportation and Infrastructure Committee has promised a review of all federal high speed rail grants. The Authority expects to obtain funding from local governments in California, a number of which are teetering toward financial insolvency.

    The Authority expects between $10 and $12 billion from private investors. These potential investors will all be aware of the fact that virtually every dollar of private investment in new high-speed rail lines has been lost or required a government bailout. They will not participate without subsidies, which are prohibited by California law. Finally, all these elements of the financing plan will be made even more problematic if the first phase of the project continues to rise from $43 billion to $55 billion.

    Washington analyst C. Kenneth Orski noted that the Corcoran to Borden stub could “become a huge embarrassment for the Administration” and that by its train to nowhere ”casts doubt on the soundness of the entire federal high-speed rail program and its decision-making process.”

    Then, even if California gets to keep the federal money, there are still formidable financial barriers. A likely result is high speed rail in Amtrak mode which probably won’t make much difference to passengers riding the infrequent San Joaquin service. After the Authority action, Bill Bronte, who heads the rail division of the California Department of Transportation said that “The improvements in performance might be less than one would expect.” But that might not bother contractors and consultants who can feast on what might prove to be the most expensive conventional intercity train project in history.

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