New Geography

Category: Politics

  • So Much for Europe’s Superiority

    For much of the last quarter century, European pundits, particularly in France, have been promoting the notion that the old continent sat on the verge of a grand resurgence. The events of the past month—culminating in a trillion dollar rescue of the Euro—should, at least, put that dodgy notion to rest.

    Although the financial crisis may have originated on Wall Street, it’s been Europe and the Euro that now represent the big threat to drive world markets back into recession. The show stealers are India, China and Brazil. Still the big boy on the block, the American economy is growing, albeit not spectacularly.

    What a change from the heady predictions of the European elites just a decade ago. Back then Jacques Attali, eminence grise for former French President Francois Mitterrand, asserted that “Japan and Europe” would likely “supplant the United States as the chief superpowers wrangling for global economic supremacy.” More recently, author Jeremy Rifkin wrote a book about what he defined as The European Dream, a green-tinged, social democratic ode to enlightened diversity that he predicted would supplant the declining dirty, unruly model forged by the United States on the world stage.

    You can blame the spendthrift Greeks for this trouble, or even the lack of geeks in Europe (anyone found a continental Google or Apple lately?). But Euro-stagnation is nothing new. It’s deeply rooted and longstanding. Indeed, since 1970 it has not been the U.S. that has faded before the onslaught from the East, but the core 15 nations of the European Union. Over that 40-year period the EU-15’s share of world GDP has plummeted from roughly 37 percent to under 28 percent; the American chunk, roughly 27 percent, has stayed remarkably even. Basically Asia, and particularly China and India’s gain, largely has been at Europe’s expense, not our’s.

    In stating the case for European superiority, much has been made by boosters of Europe’s different institutional framework, tax or regulatory structure. No question these have advantages and disadvantages compared with those of the United States, but there’s little case for arguing that the “Euro-model” has been a rip-roaring economic success. It’s imploding on its weak periphery, and the collapse is threatening even bigger players, including the United Kingdom.

    Europe’s problems extend well beyond policy, into the realm of culture and demographics. Even in France, people and what they do actually matter more than abstract ideas. A culture that believes in itself, not only to have children, but also start businesses and innovate will overcome one, however theoretically well managed, that does not. This is the fundamental problem of Europe as whole, although it does not apply equally to every individual country in the union.

    One key element is demographics. According to the most conservative estimates, the United States by 2050 will be home to at least 400 million people, roughly 100 million more than live here today. In contrast, the populations of much of the EU, as well as most of East Asia, will be stagnant or falling over the next few decades. Like other advanced countries, the United States will be aging but not nearly as quickly. By 2050, there may be close to 40 percent of the population in Japan and Germany over 65; in the United States that proportion should be closer to 25 percent.

    If there’s going to be a European dream, they better start importing people or creating them. Otherwise, the European workforce will be dying out, literally. Between 2000 and 2050 the population of the U.S. between 14 and 64 is projected to expand by some 44 percent, while that of the EU contracts by 25 percent and Japan’s by over 40 percent.

    With its growing workforce, the United States will require substantial economic growth in order to stave off downward mobility of its young population. Europe’s prime challenge will be to pay for its aging population with a diminished workforce, and perhaps find ways to invest in faster growth economies. Europe’s future may be as the world’s coupon-clippers, consultants and waiters.

    Yet this may not be the fate of all Europe, particularly if the grand neo-Bonapartist European is allowed to fizzle and national characteristics can reassert themselves. The aptly named PIGS (Portugal, Italy, Greece and Spain) make clear that you can not enjoy a Scandinavian welfare state with a Mexican-style economy. You have to earn the right to six weeks of vacation and Porsche-level heath-care plans.

    This contrasts with the productive, disciplined countries of the north—roughly today’s version of the Medieval Hanseatic League—who continue to export goods and services enough to sustain their expansive, and generally less corrupt, welfare states. Essentially you have the sunny, good food and times countries—an arc from Portugal to Spain—and the gloomier places like Scandinavia, the Netherlands and Germany.

    A secular kind of Protestant ethic is alive and well in post-Christian Europe. In some countries like Sweden and Denmark, blond and red-haired baby-making is making a modest comeback, lifting the future prospects for these countries. As for the Mediterranean crowd, get used to African or Arab chefs cooking your pasta. It might not be too bad, as long as the weather holds up.

    This article originally appeared in The Daily Beast.

    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 Febuary, 2010.

    Photo by alibaba0

    May 16, 2010

  • Jobs, Environmental Regulation, and Dead French Economists

    The debate over the repeal of California’s global-warming regulation, AB32, has degenerated into a shouting match, each side claiming economic ruin if the other side wins. A couple of long-dead French economists can help us think about the debate.

    The great French economist Leon Walras (1834-1910) showed that perfect markets result in an allocation of goods and services that can’t be improved on, in the sense that no one could be made better off without someone else being made worse off.

    Of course, we don’t have completely unfettered markets. In fact, they have never existed. They will never exist. In particular, we economists like to talk about what we call negative externalities. These occur when I do something, but an unintended consequence is that it hurts you, and you have no recourse.

    An example may make things clearer. Suppose I have a factory that spews out a deadly chemical, one that destroys all life downwind for ten miles. Obviously I’ve reduced the property values for the downwind property owners. (We’re simplifying here. There are many other issues.) There is no market for the damage I’ve done, and downwind landowners may not be able to afford to sue me, and there was a time when they would have likely lost such a case.

    Society’s solution to the problem of negative externalities has been regulation. Until recently, the concept of negative externalities has been the rationale for most environmental regulation. Negative externalities’ victims have also been extended to include non-humans: flora, fauna, and “mother earth.”

    Climate change regulation, though, is a bit different. In the first place, we don’t know how much of its justification, the claim of manmade global warming with long-term negative economic impacts, is accurate. Some, the “non-believers” completely deny the possibility of man-caused global warming. Others, “the believers” believe in man-caused global warming with a fervor that matches that of any religious zealot. Another group, me included, believes that manmade global warming is a possibility that should be considered as a factor in making long-term economic policy.

    If manmade global warming was a certainty, you could reasonably argue that negative externalities justify regulation, the parties being hurt are just not yet born. That’s essentially what the believers are trying to say when they point to the imminent destruction of all life on earth.

    However, once the existence of manmade global warming becomes a probability, it becomes an insurance question. This dramatically increases the level of complexity of the problem, and it dramatically complicates the political problem of reaching consensus about what to do.

    So, proponents of climate-change regulation have tried to simplify the issue. One approach has been to turn everyone into believers, either by attempting to convince the skeptical—as it turns out by using gross exaggeration if necessary—or, failing conversion, excommunicating even the mildest skeptics from civil society.

    Climate-change regulation proponents have also tried, with success, to use the novel argument that climate-change regulation is not only costless but will generate economic growth. The most enthusiastic proponents of this argument, California’s Governor Schwarzenegger among them, describe a utopian future of happy people enjoying previously-unknown prosperity in a pristine earthly heaven.

    Sadly, this better-than-a-free-lunch deal is not likely to materialize. It is true that clever economists have constructed models where such an outcome is possible—models having to do with large-scale inefficiencies existing because of historical accident—but large-scale unrecognized opportunities are unlikely in today’s economy.

    It is also true that some economists have found some evidence of small un-captured gains. I’ve participated in this literature. However, those gains are also unlikely to be of the scale necessary to achieve the promised new economic age. Indeed, most economists doubt their existence, arguing, reasonably, that the researchers failed to measure all of the relevant costs. Economists have a hard time believing that markets are so bad that unrecognized profitable opportunities exist in abundance.

    Today, California is considering the repeal or postponement of its landmark global-warming regulation, AB32. Oddly, both sides are using the same argument. The forces arguing against the repeal of AB32 argue that the repeal will cost jobs. Those arguing for the repeal argue that failure to repeal will cost jobs.

    They are both correct, and they can both prove it with their warring models, which brings us to our second great dead French economist.

    Frederick Bastiat (1801-1850), not long before his death, wrote a piece What is Seen and What is Not Seen. In the essay, Bastiat gives the example of jobs created by breaking windows. The broken window creates work for the glazier, a multiplier is attached to that work, and it looks as if economic activity has increased. However, society is not better off. The problem is that we see, and account for, the work, but we do not see or count the costs associated with the initial destruction of capital.

    So it is with California’s regulation. Proponents of the regulation have research to support their claim of job creation. The “green jobs” created by the regulation are seen and counted. The jobs lost to the regulation are not seen and are not counted.

    The opponents of California’s regulation have estimated the jobs lost to the regulation, mostly a consequence of higher energy costs, but that research—the portion I’m aware of at least—has been criticized for ignoring the jobs created by the regulation. More importantly, they do not see the jobs that might be lost if global warming kills jobs. They only see, and show, the jobs lost to failure to repeal the regulation.

    Creating jobs is easy; creating real economic growth is harder. Banning the use of any productivity-enhancing technology will create jobs, but this could occur at the cost of societal well being. We could achieve full employment by banning all agricultural technology created after the 17th century. There is no unemployment in a Malthusian economy. We’d all have “idyllic” jobs on the farm, yet this would in reality be back-breaking work. Many people would live on the edge of starvation. I don’t think anyone really wants that outcome. It is also easy to create subsidized jobs, even if those jobs add nothing to, or worse detract from, society’s well being.

    Instead of jobs, the argument should focus on such things well being, consumption, income, probabilities, and the like. It is complicated by the uncertainty surrounding the theory of manmade global warming, and the uncertainty surrounding the economic impacts of any warming. But, the stakes are high. People’s lives will be changed. The debate deserves a higher-level of discourse than we’ve seen. Frenetic predictions of job losses or overly optimistic projections of employment created by a green economy will not do. Instead, let’s recognize the complexity of the issue and have a reasoned discussion.

    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 Diogo Martins.

  • The States and Economic Development, Identifying Top Performers

    This is an excerpt from “Enterprising States: Creating Jobs, Economic Development, and Prosperity in Challenging Times” authored by Praxis Strategy Group and Joel Kotkin. The entire report is available at the National Chamber Foundation website, including highlights of top performing states and profiles of each state’s economic development efforts.

    States throughout American history have done everything they can to cultivate, attract, retain, and grow the businesses that comprise the most fundamental building blocks of their economy. Even in today’s volatile global economy states with severe unemployment and budget woes can point to policies, programs, and investments that foster new economic opportunities and create jobs.

    Read the full report.
    Read part one in this series: The Jobs Imperative: Power to the States

    Many state economic development organizations were originally established with business recruitment and attraction as their primary focus. But today’s mix of state approaches to economic development has moved well beyond earlier, sometimes singularly focused attempts to lure footloose businesses with huge financial incentives and/or by offering a business climate based on cheap labor, low taxes, and lenient regulations.

    States, nonetheless, still compete with each other for companies in “traded sectors” and jobs in the global economy, either directly or by virtue of unique assets and resources, and this sometimes involves financial incentives and tax abatements. But there is growing momentum among governors and state legislatures to grow their economies from within by creating a new set of competitive advantages that include building human capital through workforce development and training, harnessing the power of science and technology assets, making strategic investments in infrastructure, reaching out to global markets, developing opportunities related to energy and the environment, and spurring entrepreneurship and innovation.

    Generally, state economic development efforts include an interrelated array of policies, programs and investments, falling into three major categories: (1) an entrepreneurial approach focusing on new business and technology-based development, oftentimes with a focus on bolstering productivity and innovation; (2) recruitment, expansion, and retention strategies emphasizing financial incentives or investments and other programs, including international trade and export promotion; and (3) “fertile soil” policies28 that create the conditions for growth that will benefit almost any type of business by streamlining governmental regulation, optimizing taxes, investing in infrastructure, and/or by providing a better-educated, more highly skilled work force.

    While it is up to state governors and legislators to set the environment for development to flourish, ultimately economic development success is defined by execution at the local and regional level. With well designed state-implemented development tools, effective workforce development and skills training systems, and strong infrastructure, states can give local economic developers the power to assist the growing businesses, to broker the key partnerships, and to lead the key initiatives that create the jobs needed to sustain our growing population.

    Most of all, states must carefully weigh policy to refrain from constructing barriers to private enterprise growth. Many of the most effective economic development initiatives start from grassroots efforts or private sector business leaders, so supporting these efforts from the state level is imperative.

    Measuring the States: A List of the Top Performers
    A primary goal of any state economic development program is not only to increase the number of jobs in the state, but to improve the quality of jobs and the overall prosperity of the state’s residents.

    This study combines metrics for each economic development policy area to measure overall high performers in each policy topic area. States are compared in each metric and top states are determined by a composite comparison of all metrics in overall performance and in each policy area. For a full description of all metrics and results for each state as well as top performers in exports, innovation, workforce development, infrastructure, and tax and regulation, see the full report.

    To establish the overall best performers we combined measures of Job growth rate since 2000 and since 2007; Gross State Product (GSP) measures: real GSP growth since 2000, GSP per job 2008, Growth in GSP per job 2000-2008; and income: per capita personal income growth 2000-2009 and median four person family income adjusted for cost of living, 2009.

    Top Overall Growth Performers

    1. North Dakota – While North Dakota’s low unemployment and recession resistance is often attributed to healthy agriculture and energy sectors, its construction and manufacturing sectors are relatively healthy and the state has seen 42% job growth in professional and technical services and 36% in management of companies since 2002. North Dakota is the top job performer since the 2007 peak and is fifth since 2000. The state also places first in growth in GSP per job (productivity increase), second in GSP growth and third in per capita income growth. Recent investments in research and development (R&D) infrastructure are beginning to pay off as the state is the fastest growing in science, technology, engineering, and mathematics (STEM) job growth.
    2. Virginia – Already a professional and technical services powerhouse in 2002, Virginia added another 135,000 jobs in that sector since that time, fueled by 90,000 new jobs in computer systems design and management and technical consulting services. The state’s high incomes and slightly below average cost of living placed it first on our cost of living adjusted family income measure.
    3. South Dakota – South Dakota is a strong overall performer, doing best in productivity and output measures. Partly due to an enterprise-friendly regulatory structure, the state has 30% more finance industry employment than the national norm and has added 18% growth in finance employment since 2002. The state’s manufacturing sector actually gained jobs since 2002, led by growth in signs, chemicals, communications equipment, and construction equipment, all averaging more than $43,000 in earnings per worker.
    4. Maryland – Maryland landed in the top 20 or better on all seven performance metrics. Maryland saw strong growth in technical consulting and computer systems design, but especially private scientific research and design services, a sector more than 2.5 times as concentrated in Maryland than the nation as a whole and paying nearly $95,000 in earnings per worker.
    5. Wyoming – Wyoming’s growth is powered by a rapidly expanding energy cluster, which added more than 18,000 jobs since 2002 and now holds 30% of all employment in the state. The energy growth has spilled over into business services sectors such as environmental consulting, surveying and mapping, and testing laboratories. Its overall manufacturing supersector also gained jobs, seeing the fabricated metal and electrical equipment clusters begin to emerge.
    6. New York – While New York saw average job growth through the beginning of the decade, it has weathered the recession better than most other states, and its high productivity and productivity gains help place it among our top performers. Accounting for about 8% of all jobs in the state, the professional and technical services sector added more than 115,000 jobs for 15% growth.
    7. Texas – Texas has seen strong job growth this decade and has weathered the recession well, fueled by 20% expansion of a now 1.1 million job energy cluster. Recently machinery manufacturing and transportation equipment manufacturing clusters are emerging, both growing to more than 90,000 jobs. This has helped stimulate a 15% expansion in transportation and logistics including warehousing and storage and many freight and specialized trucking sectors.
    8. Iowa – A solid performer across most of our metrics Iowa’s strength is perhaps in its stability. The state’s largest cluster, agribusiness, food processing and technology, grew at a 1% rate since 2002, significantly better performing than the same group of industries nationally. Iowa’s other most competitive clusters include machinery manufacturing (farm and construction equipment, refrigeration and heating systems, and other commercial equipment) transportation and logistics, and advanced materials (search and navigation equipment and machine shops).
    9. Nebraska – Nebraska has added 15,000 jobs to its business and financial services cluster since 2002, led by management and technical consulting, management of enterprises, and credit intermediation, all adding at least 3,000 jobs and averaging $55,000 to $90,000 in earnings per worker. The state’s railroads and support industries and freight trucking support a strong transportation and warehousing cluster, and the state has seen a boom in marketing consulting and market research sectors.
    10. Montana – While Montana’s energy and mining clusters added a combined 8,400 high-paying jobs to the state since 2002, Montana’s greatest source of national dominance came from the collection of arts, entertainment, recreation, and visitor industries, perhaps a sign that the rest of the nation is beginning to discover the Big Sky country. Montana is also beginning to see the emergence of smaller clusters in chemicals, apparel and textiles, and fabricated metal products.

    Growing Jobs: How Do They Do It?

    A review of which states are high performing shows a diverse group—some big, some small; some rural, some urban; some inland, some coastal—but a closer examination shows a shared pattern of policies by these high performers.

    There is no such thing as single a silver bullet strategy for job creation. Among our top ten performers, all ten have seen at least 4% job growth since 2002 in mid-level jobs requiring at least long term on-the-job training but less than a four-year degree. Five of the ten states increased those jobs more than 10%. At the same time all ten increased science, technology, engineering, and mathematics (STEM) jobs by at least 4% over the same period, with 7 of 10 growing STEM jobs at least 14%.29

    An assessment of top performing states, regardless of by what measure, eventually gets down to a state’s ability to execute successful initiatives. Aside from minding the basics of primary education and supportive infrastructure, success begins with an understanding of a state’s economy and demographics, including its strong points and its gaps. States that can mobilize the relevant partners to put together the strategic networks to build upon those strengths while addressing the weaknesses will be winners in the long run.

    Adequately financing any initiative is paramount to its success. Top performing states have come up with winning formulas often based on combining state funding with federal programs and private sources. As regional workforce skills gaps become more acute, non-governmental agencies and private enterprises more are willing to join new collaborative development projects.

    Programs such as Kentucky’s “Bucks for Brains” which requires universities to match state funds with donations from philanthropists, corporations, foundations, and other non-profit agencies, or Florida’s use of American Recovery and Reinvestment Act (ARRA) funding in combination with existing state funds to tackle major infrastructure programs illustrate unique solutions to sufficiently financing winning initiatives.

    Examples of strong partnerships featuring open communication are especially evident in high performing export states. Export programs are based upon effective communication between the importing country, the exporting manufacturer or business, and the state program helping to facilitate the connection.

    The TexasOne program creates promotional materials to market the state and its manufacturers to importing countries and leads trade missions to importing countries and hosts reverse trade missions to the state. Nevada works with a network of trade representatives in targeted markets throughout Asia, North America and Europe, focused on cultivating distribution channels and facilitating opportunities for foreign direct investment in Nevada enterprises.

    Many high performing states offer an array of corporate, manufacturing, and land tax programs. So too, many states are shying away from direct subsidies for promised job growth in favor of highly targeted tax credit programs that require direct investment by the firm or venture investors wherein the tax benefits are only realized after new jobs are in place. Other credit programs target historically underdeveloped geographical regions.

    Other states such as North Dakota, Florida, and Mississippi have turned to comprehensive tort reform as another key element enterprise-friendliness. Whether these reforms are specific to a particular industry or issue, they ultimately help businesses, large and small, remain competitive and free of excessive burdens from excessive litigation.

    Private sector and academic collaboration is one of the most readily identifiable attributes of high performing states across all measures. Whether it is successful innovation and entrepreneur programs such as Montana’s TechRanch, Oregon’s Innovation Council, Rhode Island’s Center for Innovation and Entrepreneurship, or job creation and economic development initiatives such as Momentum Mississippi, these private and academic partners are providing critical input, oversight, and resources to bolster the effectiveness of state efforts.

    Many states are locating business incubators adjacent to universities in partnership with the schools while others are building laboratory spaces and other specialized infrastructure to offer to growing companies on an a la carte basis. In either case, this business and scientific infrastructure can reduce start-up costs for new enterprises and provide students the chance for experiential learning while earning their degrees.

    While there are obviously other policies or initiatives that high performing states share there are some commonalities: building on momentum; delivering adequate funding for initiatives; developing strong relationships and communication strategies; enterprise-friendly tax and regulation systems; and vigorous collaboration between business, government, and education institutions.

    Read the full report.

    Praxis Strategy Group is an economic development, analysis, and strategic planning firm. Joel Kotkin is executive editor of NewGeography.com and author of The Next Hundred Million: America in 2050

  • Bungled Parliament:: The Price of Pursuing Safe Society Over Growth and Opportunity

    On May 6 British voters handed themselves a hung Parliament for the first time since 1974. No political party has a governing majority. This has surprised most pundits who have assumed for several years that the Conservatives would reclaim government in Britain by 2010, ending 13 years of Labour rule and the tenure of Gordon Brown, the prime minister everyone loves to hate.

    The reasons for the conservative’s disappointing performance are complex. Certainly the surprisingly adroit performance in the first-ever prime ministerial debates by Nick Clegg, the even-more-telegenic-than-David Cameron leader of the Liberal Democrat party, did not help. But Clegg’s lustre – which became known as “Cleggmania” – eventually wore off by election day, and the Lib Dems ended up losing five seats.

    The real reason for the Conservatives disappointing performance lay elsewhere. To many, it seemed that David Cameron, the Conservatives’ young and telegenic leader, represented a new type of Tory politician – one concerned with social justice and the environment while remaining true to core beliefs about smaller government and enterprise.

    Yet the bigger issue may well be this: the Conservatives, like their rivals, failed to make a compelling case how to restore an environment of growth and opportunity capable of bringing Britain out of its profound economic doldrums.

    Given Britain’s fiscal situation and a widely spread sense of economic malaise, the overall paucity of good policy ideas and public messages about opportunity and economic recovery is difficult to fathom. The fact that the Conservatives – erstwhile harbingers of enterprise and growth – managed to remain vague on economic fundamentals is particularly astounding.

    Days before the election, only 29 percent of voters said they trusted the Conservatives to do the best job dealing with unemployment, compared to 28 percent who preferred Labour. On the economy overall, 37 percent believed Conservatives were the best party compared to 36 percent who preferred Labour’s approach, an amazing result given the fact that Labour has controlled the government for thirteen years. Only on taxes did the British public clearly prefer the Tories to Labour, 31 to 24 percent, which is likely owing to the fact that the Conservatives very publicly opposed Labour’s promise to raise the National Insurance tax (similar to the payroll tax in the U.S.). This ended up as the only economic issue for which Tories showed any public passion in the weeks leading up to the election, and the opinion polls suggest their message got through. But they didn’t capitalize on the lesson.

    The roots of the problem run deep. British politicians have grown too accustomed to thinking about safety and security rather than policies that would require taking some risks for growth. Each party admitted in one way or another that public spending cuts would be necessary to deal with Britain’s deficit, but none – including, shockingly, the Conservatives – laid out an aggressive vision of how these cuts could be combined with the types of policies needed to increase entrepreneurship, create more jobs, attract investment, and promote greater overall opportunity in the economy.

    Consider the third and final televised party leader debate, which focused on the economy. Cameron, to his credit, was the only one to use the word “entrepreneur” or one of its derivatives. He did so three times. The three candidates together only spoke of “growth” six times, and no one ever said anything about creating opportunity. They spoke a lot about the importance of jobs but talked about what is required to create them less than a half dozen times. Meanwhile, Clegg used the word “fair” or one of its derivatives 19 times, and Brown did the same 12 times – addressing everything from the need to make tax increases fair to making compensation for bankers fair. Cameron never engaged in fairness drivel, but he also never countered by laying out a strong growth oriented agenda. In a fundamental way, he punted away his best issue.

    Months earlier, the Conservatives launched an ad campaign with Cameron’s face plastered all over England with the less-than-comprehensible slogan: “We can’t go on like this. I’ll cut the deficit, not the NHS.” With a budget deficit of 11.1 percent of GDP and a national debt of nearly £1 trillion (the interest on which costs the government more than it spends on education), you don’t have to be a financial wizard to know you can’t cut the deficit without touching the NHS.

    Then, at the end of the campaign, Cameron’s team began using the expression “Big Society” as its unifying theme. No one really knew what to make of it. Was it the same as a Fat Society? Was Big better than Effective or Strong? In other words, total tripe. The Conservatives seemed to be promoting social rotundity while saying little about the future of growth, enterprise, education reform (for which the party has a very forward-looking plan) and anything that would create opportunity in this increasingly fragmented, class-bound society.

    All of this is somewhat surprising, given that the Conservative manifesto has important things to say about creating an environment favorable to investment, lower taxes, and progress through important growth sectors such as high-tech exports. It certainly compares well with Labour’s manifesto, which talks blithely about tax hikes and a growing public sector with no sensible formula to restore long-term growth. That the Tories did not exploit this difference seems inexplicable but as a result, they did not look different enough from their competitors to earn the solid majority that was once seen as all but inevitable.

    Ryan Streeter is a Senior Fellow at the London-based Legatum Institute.

    Photo by bixentro

  • Arizona’s Short-Sighted Immigration Bill

    Arizona’s recent passage of what is widely perceived as a harsh anti-immigrant bill reflects a growing tendency–in both political parties–to focus on the here and now, as opposed to the future. The effort to largely target Latino illegal aliens during a sharp recession may well gain votes among an angry, alienated majority population, but it could have unforeseen negative consequences over time.

    In terms of the Arizona law, this is not simply a case of one wacko state. The most recent Gallup survey shows that more Americans favor the law than oppose it, with independents and Republicans showing strong support. Despite the negative coverage in the media, the Arizona gambit could somewhat pay off in November. A weak economy tends to exacerbate nativist sentiments, something that has been constant throughout much of American history.

    But there is a distinct danger for the GOP here, not only in Arizona but in the rest of the country as well. As Bill Frey of the Brookings Institute points out, there is a growing gap between the electorate, which is still largely white and older, and the much younger, far more rapidly growing Latino population. In Arizona Frey says the “cultural generation gap” between the ethnicity of seniors and children is some 40%, meaning that while 83% of senior are white, only 43% of children are. Nationwide, Frey estimates the gap in the ethnic composition of seniors and youths stands at a still sizable 25 points.

    Arizona’s large disequilibrium in the ethnicity of its generations is a product, in part, of the state’s historic pull to white retirees. Yet its formerly booming economy, based largely around construction and tourism, required a massive importation of largely Latino, low-wage labor, much of it illegal. As a result over the past two decades, Arizona’s Latino population has grown by 180%, turning what had been a 72% Anglo state to one that is merely 58% white.

    You don’t have to go very far–in fact just across the California border–to see what awaits Arizona’s nativist Republicans. The Grand Canyon state’s future has already emerged there. In the 1970s and 1980s California’s generally robust economy made it a primary destination for immigrants from both Asia and Latin America. Comfortable in their Anglo-ness, papers like the Arizona Republic were dismissing California as a “third world state,” particularly in the wake of the 1992 LA riots.

    Like their Arizona counterparts today, many white Californians then were sickened by pictures of mass Latino participation in looting during the riots. Many were also concerned with soaring costs of providing social services to a largely poor immigrant population. Sensing an opportunity, in 1994 Gov. Pete Wilson–locked in tough re-election battle amid a deep recession–endorsed Proposition 187, a measure designed to prevent illegal aliens from accessing public services. The measure passed easily, with support from both whites and African-Americans. The strong backing among Independents and even some Democrats helped Wilson win re-election with surprising ease.

    But the long-term consequences of 187 reveal the longer-term consequences for the GOP. During the Reagan era and even the first Wilson term, Latino voters split their votes fairly evenly between the parties. But after 1994 there was a distinct turn toward the Democrats, with the GOP share at the gubernatorial level falling from nearly half in 1990 to less than a third in subsequent election. In some cases, right-wing Republicans garnered even smaller portions of Latino voters.

    This is a classic case of the past waging war on the future. Since 1990 Latino and immigrant population has continued to grow. Overall, the percentage of foreign-born residents, according to USC demographer Dowell Myers, has grown from roughly 22% to 27%. One-third of Californians in 2000 were Latino; Myers projects Latinos will constitute almost 47% of the state’s population in 2030.

    The political consequences will only get worse for Republicans. Latino population voting power already has doubled from roughly 10% of the total in 1990 to 20% in 2006.

    This Latino population will become increasingly active and engaged. It is, for one thing, ever more English-fluent, and increasingly dominated by the second and third generations. This group could become permanently estranged, like African-Americans, from the GOP. If that happens, notes longtime Sacramento columnist Dan Weintraub, Republicans could “all but become a permanent minority party in California.”

    And the rest of the country will feel these trends; between 2000 and 2050, the vast majority of America ‘s net population growth will come from racial minorities, particularly Asians and Hispanics. Already one out of every five American children–tomorrow’s voters–is Hispanic.

    Of course, as Latinos integrate and intermarry, they may become less particular in their world view and share more in common with other middle-class Americans. Yet memories of slights against a particular group can overcome even economic self-interest. Blood often proves thicker than bank accounts. The tendency of Jews, a largely affluent and entrepreneurial tribe, to back often harshly anti-business Democrats has its roots in old world scars left from the pogroms in czarist Russia as well as the right-wing genocide in Nazi Germany. Some older voters recall the rabid anti-Semites once prominent in the American far-right as well as the more genteel exclusionism practiced by more refined upper-class Republicans.

    In the future, today’s images of shrill, anti-immigrant right-wing activists could resound for coming generations of Latinos as well as Asians and other newcomer groups. It could essentially deprive the Republican Party of voters who might otherwise consider the GOP option, handing the Democrats a permanently expanded base, not only in southwest but in much of the country.

    None of this is necessary or good for the country. Political competition for ethnic groups is a healthy thing for national interests and for the individual groups. Lock-step support by African-Americans may make them powerful within the Democratic Party, but it also means they can also be taken for granted when push comes to shove. And, of course, when they are in power, Republicans have little real political stake in confronting the serious issues facing black America.

    All this is particularly disturbing since competition for Latino voters should be intense. Heavily employed in construction and manufacturing industries, they have been badly hurt in the recession and their interests were not particularly addressed in the Obama stimulus plan. Many are also socially conservative, supporting, for example, California’s Proposition 8 ban on gay marriage.

    In coming months other proposed steps by the administration and its congressional allies, such as the proposed cap-and-trade legislation, could prove very tough on industries that tend to employ Latinos. Climate change-inspired moves against single-family homes–already in place in California–conflict directly with the aspirations of many Latinos as well as other immigrants who, unlike the usually affluent, homeowning white population, are still seeking the chance to buy their own home.

    But instead of fighting for their economic interests, the Arizona law has handed the Democrats a golden opportunity for to engage their own demagogy on race issues. Instead of having to defend their plans to restart the economy and reorient them to middle and working class needs, Democrats now can play to narrow racial concerns among Latinos while further bolstering the self-righteousness of their affluent, white, left-wing base.

    The reversion to racial politics prompted by the Arizona law ultimately does no good for anyone except “base-oriented” partisan campaign consultants, nativists and ethnic warlords. With all the long-term economic and social challenges that face this growing country, Phoenix’s folly marks an unfortunate step backward to our more shameful past and away from a potentially promising future.

    This article originally appeared in 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 Febuary, 2010.

    Photo by Caleb Alvarado

    May 4, 2010

  • A Carbon Added Tax, Not Cap and Trade

    Paul Krugman devoted a recent lengthy New York Times Magazine article to the promotion of a disastrous “cap and trade” regime for reducing carbon emissions. Though he doesn’t outright endorse it, he strongly suggests that the Waxman-Markey bill that passed the House would be acceptable to him. Krugman then proceeds to pooh-pooh the carbon tax idea, one that I believe has far more merit.

    Cap and trade would be a debacle for a slew of reasons. The most important is that it won’t even reduce carbon emissions. Two of the EPA’s own San Francisco attorneys dismissed the Waxman-Markey cap and trade regime as a “mirage” that would not reduce carbon because of the ability of polluters to obtain fictitious carbon offsets, among other problems.

    Even if cap and trade would require American producers to reduce carbon emissions, it would do nothing about overseas polluters. An American manufacturer could escape cap and trade simply by moving production to China. Given China’s massive coal-based electricity infrastructure and other notoriously polluting practices, carbon emissions would likely only get worse as a result, in addition to the US jobs lost.

    Krugman suggests this can be fixed with a carbon tariff, but that’s dangerously naïve. There’s no guarantee a carbon tariff would be put in place after cap and trade passed. In effect, it requires two completely separate policy mechanisms be put in place and kept synchronized over time, which seems dubious. Our trading partners would surely chafe at any carbon tariff, which would be vulnerable to challenge under international trade treaties.

    Cap and trade also has huge distortive impacts within the United States. The Brookings Institution crunched the numbers and found that cap and trade costs vary widely across the country. Compliance costs would be minimal in California and rest of the West and Northeast, while the Midwest, Mid-Atlantic, and the South get pummeled. It should come as no surprise that it is California Rep. Henry Waxman who’s pushing the bill. One can’t help but suspect these regional disparities are the real implicit goal of the bill. Indiana Gov. Mitch Daniels denounced cap and trade as “imperialism”.

    Perhaps the most diabolical part of cap and trade is in its very name. The operative word is “trade”. Who do you think will be doing the trading? Why, none other than the very people who got us into the economic mess we’re in today. Cap and trade is a gigantic giveaway to Goldman; it’s yet another instrument for speculation; it’s another way for the profiteers on Wall Street to line their pockets at our expense.

    So in a sense it’s also another way that, perhaps unintentionally, the richest sectors, the upper classes, and the financial centers like New York, Boston and San Francisco are being favored over the poor Main Street rubes who have taken it on the chin during this recession without a bailout. If you think things are bad now, just wait until CDS stands for “carbon default swap”. It’s pouring fuel on the fire of inequality between the haves and have nots.

    Cap and trade is nothing more than another tranche in the never-ending merry-go-round of bailouts for the financiers. And didn’t we learn anything from Enron’s electricity trading shenanigans? When an Iowa farmer opens up in his electric bill that’s suddenly spiked, or has to pay double to fuel his farm equipment, it’s not too much to ask that it be in the service of actual carbon reduction, not houses in the Hamptons, owned by people to whom the added cost is not material given their wealth.

    There is a better way, and that’s the Carbon Added Tax. Similar to a European-style Value Added Tax, a CAT tax would directly tax the quantity of carbon emissions added to the atmosphere in each stage of the production cycle. The tax could be set at a level that would provide certainty of price such that investments in lower carbon technologies are financially feasible right now, not decades from now.

    Also, similar to the US income tax system, the CAT would apply to the carbon emitted globally, not just in the United States. A deduction would be permitted for any bona fide carbon taxes paid in a foreign jurisdiction, up to the level of the US tax. A true-up on the carbon tax due would be paid at the point of import into the United States. That is, an importer would have to pay the CAT on products brought into the country, less any deductions for foreign carbon taxes paid, at the port of entry.

    While this global approach is a widely, and correctly, maligned feature of the US income tax code, it has important benefits from a carbon reduction perspective. First, it is location neutral. Since the tax is the same whether the carbon is emitted in China or the United States, it doesn’t encourage business to move offshore. But it also doesn’t discriminate against foreign producers. (Like any anti-carbon regime, it would raise costs in the US, affecting both domestic consumers and the competitiveness of exports).

    The CAT is also functionally equivalent to a carbon tariff, but is a unitary regime. That is, you don’t have to figure out how to bundle in or pass a separate carbon tariff as part of implementing a domestic cap and trade system. You simply pass a CAT on global carbon emissions and you are done.

    And this system allows each country to decide on its own level of carbon taxation. If countries like China want to have no tax, that’s their choice. Or, European countries could decide to have a higher tax. The complexity would come in figuring out the allowed deductions for emissions in countries that adopted other schemes like cap and trade, but this should be a readily solvable technical issue.

    There will still be divergent regional domestic impacts under a CAT. This is unavoidable in a nation where carbon emissions are unevenly distributed. But by preventing the financiers from skimming off the top, the total burden is reduced, and a CAT is a more location neutral, transparent mechanism for carbon reductions.

    A Carbon Added Tax is a far superior way to reduce carbon emissions than a cap and trade system only a Wall Street trader could love.

    Aaron M. Renn is an independent writer on urban affairs based in the Midwest. His writings appear at The Urbanophile.

    Photo by Gilbert R.

  • Growing America: Demographics and Destiny

    Over the next four decades, American governments will oversee a much larger and far more diverse population. As we gain upward of 100 million people, America will inevitably become a more complex, crowded and competitive place, but it will continue to remain highly dependent on its people’s innovative and entrepreneurial spirit.

    In 2050, the U.S. will look very different from the country in 2000, at the dawn of the new millennium. By mid-century, the U.S. will no longer be a “white country,” but rather a staggering amalgam of racial, ethnic and religious groups, all participants in the construction of a new civilization whose roots lie not in any one country or continent, but across the entirety of human cultures and racial types. No other advanced, populous country will enjoy such ethnic diversity.

    The implications of this change will be profound for governments-perhaps in ways not now commonly anticipated. Many “progressives” believe a more diverse, populous nation will need more guidance from Washington, D.C., but a more complex and varied country will increasingly not fit well into a one-size-fits-all approach.

    Although the economic crisis of 2008 led to a rapid rise of federal power, there has been a stunning and largely unexpected push-back reflected, in part, by the tea party movement. Some states have passed laws that seek to restrict federal prerogatives on a host of issues. More importantly, public opinion, measured in numerous surveys, seems to be drifting away from major expansions of government power.

    Of course, most Americans would accede to the federal government an important role in developing public works, national defense and regulations for health and safety. But generally speaking, they also tend to believe that local communities, neighborhoods and parents should possess the power to craft appropriate solutions on many other problems.

    This also reflects our historical experience. From its origins, American democracy has been largely self-created and fostered a dispersion of power; in many European countries, and more recently in parts of Asia, democracy was forged by central authorities.

    Other periods of massive government intervention, most notably after the New Deal and the Great Society, also elicited reactions against centralization. But the current push-back’s speed and ferocity has been remarkable. Yet the often polarizing debate about the scope of federal power largely has ignored the longer-term trends that will promote the efficacy of an increasingly decentralized approach to governance.

    Perhaps the most important factor here is the trajectory of greater growth and increasing diversity of who we are and how we live. Not only are Americans becoming more racially diverse, but they inhabit a host of different environments, ranging from dense cities to urbanized suburbs, to smaller cities and towns, that have different needs and aspirations.

    Americans also are more settled than any time in our history-partially a function of an aging population-and thus more concerned with local developments. As recently as the 1970s, one in five Americans moved annually; in 2004 that number was 14 percent, the lowest rate since 1950. In 2008, barely one in 10 moved, a fraction of the rate in the 1960s. Workers are increasingly unwilling to move even for a promotion due to family and other concerns. The recession accelerated this process, but the pattern appears likely to persist even in good times.

    Americans also prefer to live in decentralized environments. There are more than 65,000 general-purpose governments; the average local jurisdiction population in the United States is 6,200-small enough that nonprofessional politicians can have a serious impact on local issues. This contrasts with the vast preference among academic planners, policy gurus and the national media for larger government units as the best way to regulate and plan for the future.

    Short of a draconian expansion of federal power, this dispersion is likely to continue. Roughly 80 to 90 percent of all metropolitan growth in the last decade took place on the periphery; at the same time, the patterns of domestic migration have seen a shift away from the biggest cities and toward smaller ones. As Joel Garreau noted in his classic Edge City, “planners drool” over high-density development, but most residents in suburbia “hate a lot of this stuff.” They might enjoy a town center, a paseo or a walking district, but they usually resent the proliferation of high-rises or condo complexes. If they wanted to live in buildings like them, they would have stayed in the city.

    Attempts to force major densification in these areas will be fiercely resisted, even in the most liberal communities. Some of the strongest anti-growth hotbeds in the nation are areas like Fairfax County, Va., with high concentrations of progressives-well educated people who might seem amenable to environmentally correct “smart growth”-advocating denser development along transit corridors. As one planning director in a well-to-do suburban Maryland county put it, “Smart growth is something people want. They just don’t want it in their own neighborhood.”

    The great long-term spur to successful dispersion will come from technology, as James Martin first saw in his pioneering 1978 book, The Wired Society. A former software designer for IBM, Martin foresaw the emergence of mass telecommunications that would allow a massive reduction in commuting, greater deconcentration of workplaces and a “localization of physical activities … centered in local communities.”

    Technology would allow skilled people to congregate in communities of their choice or at home. Today not only knowledge workers but also those in construction trades, agriculture and other professions are home-based, conducting their operations out of trucks, vans or home offices.

    Many leading-edge companies now recognize this trend. As much as 40 percent of IBM’s work force operates full time at home or remotely at clients’ businesses. Siemens, Hewlett-Packard, Cisco, Merrill Lynch and American Express have expanded their use of telecommuting, with noted increases in productivity.

    At the same time, employment is shifting away from mega-corporations to smaller units and individuals; between 1980 and 2000, self-employed individuals expanded tenfold to include 16 percent of the work force. The smallest businesses, the microenterprises, have enjoyed the fastest rate of growth, far more than any other business category. By 2006 there were some 20 million such businesses, one for every six private-sector workers.

    Hard economic times could slow this trend, but recessions have historically served as incubators of innovation and entrepreneurship. Many individuals starting new firms will have recently left or been laid off by bigger companies, particularly during a severe economic downturn. Whether they form a new bank, energy company or design firm, they will do it more efficiently-with less overhead, more efficient Internet use and less emphasis on pretentious office settings. In addition, they will do it primarily in places that can scale themselves to economic realities.

    Simultaneously the Internet’s rise allows every business-indeed every family-unprecedented access to information, something that militates against centralized power. Given Internet access, many lay people aren’t easily intimidated into accepting the ability of “experts” to dictate solutions based on exclusive knowledge since the hoi polloi now possess the ability to gather and analyze information. Even the powerful media companies are rapidly losing their ability to define agendas; there are too many sources of information to mobilize mass opinion. The widespread breakdown of support for climate change is a recent example of this phenomenon.

    Once the current drive for centralization falters, support for decentralization will grow, including progressive communities that now favor a heavy-handed expansion of federal power. Attempts to impose solutions from a central point will be increasingly regarded as obtrusive and oppressive to them, just as they would to many more conservative places like South Dakota. In the coming era, in many cases, only locally based solutions-agreed to at the community, municipal or state level-can possibly gather strong support.

    This drive toward dispersing power will prove critical if we hope to meet the needs of an unprecedentedly diverse and complex nation of 400 million. New forms of association-from local electronic newsletters to a proliferation of local farmers markets, festivals and a host of ad hoc social service groups-are already growing. Indeed, after a generation-long decline, volunteerism has spiked among Millennials and seems likely to surge among downshifting baby boomers. In 2008, some 61 million Americans volunteered, representing more than one-quarter of the population older than 16.

    It’s these more intimate units-the family, the neighborhood association, the church or local farmers market-that constitute what Thomas Jefferson called our “little republics,” which are most critical to helping mid-21st-century America. Here, our nation of 400 million souls will find its fundamental sustenance and its best hope for the brightest future.

    This article originally appeared in GOVERNING Magazine.

    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 Febuary, 2010.

    Photo by slynkycat

    May 3, 2010

  • Is Sweden a False Utopia?

    By Nima Sanandaji and Robert Gidehag

    Sweden is often held up by American pundits and experts as a kind of Utopia, a country to be emulated. As is often the case when dealing with Utopias however, the complexities of history, culture and policy frequently are shoved aside.

    Rather than being guinea pigs in a progressive experiment in social engineering, Swedes are a unique people with a long history. Therefore, we should question the lazy assumption that good Swedish outcomes (long life expectancies, social equality) are due to particular Scandinavian policies (the welfare state).

    After all, even before the high-tax welfare state, Sweden was characterized by an even distribution of income, low poverty and long life spans, the same phenomena that today are said to be the result of high-tax welfare policies. In 1950, before the high-tax welfare state, Swedes lived 2.6 years longer than Americans. Today the difference is 2.7 years.

    A more reasonable view of why Sweden performs well on many social metrics has its basis in history and sociology: Swedes have for hundreds of years benefited from sound low-level institutions, such as a strong work ethic and high levels of trust and cooperation.

    These cultural phenomena do not disappear when Swedes cross the Atlantic to the supposedly inferior “cowboy” country. On the contrary, they appear to bloom fully. The 4.4 million Americans with Swedish origins are considerably richer than the average American. If Americans with Swedish ancestry would form their own country their per capita GDP would be $56,900, more than $10,000 above the earnings of the average American.

    The old Sweden, in contrast, has not done as well in economic terms. In 1960 taxation stood at 30 percent of GDP, roughly where the US is today. As taxes rose, economic growth decreased, with Sweden dropping from being the 4th richest country in 1970 to being the 12th richest in 2008. Swedish GDP per capita is now $36,600, far below the $45,500 of the US, and even further behind the $56,900 of Swedes in America.

    A Scandinavian economist once stated to Milton Friedman: “In Scandinavia we have no poverty.” Milton Friedman replied, “That’s interesting, because in America among Scandinavians, we have no poverty either.” Indeed, the poverty rate for Americans with Swedish ancestry is only 6.7%, half the U.S average. Economists Geranda Notten and Chris de Neubourg have calculated the poverty rate in Sweden using the American poverty threshold, finding it to be an identical 6.7%.

    Ironically, this points us towards the conclusion that what makes Sweden uniquely successful is not the welfare state, as is commonly assumed. Rather than being the cause of Sweden’s social strengths, the high-tax welfare state might have been enabled by the hard-won Swedish stock of social capital. It was well before the welfare state, when hard work paid off, that a culture with strong protestant working ethics developed.

    As taxes in Sweden have grown rapidly towards taking up half of the economy, that social capital is being eroded. In the 1990s, supposedly hyper-healthy Sweden established itself as being sickest country in the rich world, in terms of sick-leave. In addition, half a million working-age people (compared to a total labor force of four million) were placed in health-related “early retirement”.

    Labor union economist Jan Edling calculated that a fifth of working-age Swedes were supported by some form of public unemployment support, including sickness related leave in 2004, when the economy was growing strongly.

    The high-tax state has also created an increasingly threatened middle class. In a recent study, the Swedish Taxpayers association noted that wealth formation among the middle classes is weak. There is little correlation between earnings and wealth amongst Swedes.

    Instead of building capital, Swedes go into debt: 27 percent of Swedish households in fact have more debts than wealth, compared to between 16 and 19 percent in the US. With middle class wealth formation being held back by high taxes, Sweden has ironically developed a more unequal wealth distribution than the US. The Gini coefficient for ownership is almost 0.9 in Sweden, compared to slightly above 0.8 in the US.

    In short, there is much to admire in Sweden. But when it comes to economic policy and copying Swedish institutions, Americans are probably better off being inspired by Swedes in America, rather than Swedes in Sweden.

    Nima Sanandaji, is President of the Swedish think-tank Captus and Robert Gidehag is president of the Swedish Taxpayer´s association. They were assisted by Tino Sanandaji and Arvid Malm, chief economists at Captus respectively the Swedish Taxpayers Association.

  • California is Too Big To Fail; Therefore, It Will Fail

    Back in December I wrote a piece where I stated that California was likely to default on its obligations. Let’s say the state’s leaders were less than pleased. California Treasurer Bill Lockyer’s office asserted that I knew “nothing about California bonds, or the risk the State will default on its payments.” My assessment, they asserted, “is nothing more than irresponsible fear-mongering with no basis in reality, only roots in ignorance. Since it issued its first bond, California has never, not once, defaulted on a bond payment.”

    For good measure they labeled as “ludicrous” my comment that the Governor and Legislature may not be able to solve the budget problem next year because “debt service is subject to continuous appropriation. That means we don’t even need a budget to make debt service payments.”

    The Department of Finance was also not amused. They resented my prediction that California is on the verge of a default of its bond debt. They insisted that the state has

    “multiple times more cash coverage than we need to make our debt service payments.“

    “There are three fail-safe mechanisms in place to ensure that debt service payments are made in full and on schedule.”

    “Going back as far as the Great Depression, California has never — ever — missed a scheduled payment to a bondholder or a noteholder. Not during the recession of the early 1980s. Not during the collapse of the defense industry in the early 1990s. Not during the dot-com collapse of the early 2000s. And not now. And we, along with the Treasurer and the Controller, will continue to ensure that this streak will never be broken.”

    I am not alone in being taken to the state woodshed. More recently, Lloyd C. Blankfein, Chairman of the Board and CEO of Goldman, Sachs & Co. received this letter from Lockyer’s office, a letter that was ridiculed by The Financial Times’ Spencer Jacob here.

    Once you get past the name calling, California has two arguments. One argument is that California has never defaulted; therefore it will never default. This is, of course, absolutely absurd, insulting our intelligence. Every person, corporation or other entity that has ever defaulted on a loan has been able to say, at least once, that they have never defaulted. As they say in finance: Past performance is not a guarantee of future performance.

    California’s second argument is that it has both a constitutional requirement to meet certain debt payments and the cash to do so.

    That’s nice.

    I have no idea what a constitutional requirement to meet debt payment means, but it doesn’t mean that California will always pay its bills. California has a constitutional requirement to have a balanced budget every June. That constitutional requirement is ignored almost every year. It was ignored last year. It will be ignored this year. It will be ignored next year, unless the Feds have bailed out California, relegating the state’s legislature to rubber-stamp status.

    California’s constitutional requirement to meet debt payments will mean nothing when the state’s financial crisis comes. It won’t mean anything if a debt issue or rollover can’t be sold. It won’t mean anything if the state has no cash, and banks refuse to honor California’s vouchers.

    The relevant analysis begins with the recognition that California is too big to fail, which means it will fail.

    Since there is no procedure for a state to file bankruptcy, the solution to California’s financial crisis will be chaotic. What does it look like when the government of the world’s eighth largest economy can’t pay its employees, or pay its suppliers, or meet its obligations to school districts, counties, cities or other local government agencies?

    It looks ugly, ugly enough to have huge economic ramifications far beyond California’s borders. It looks ugly enough to mean that California is too big to fail, and that’s why we will have a financial crisis.

    Once something (a bank, a car manufacturer, a state) is too big to fail it has perverse incentives. A moral hazard is created because of the free insurance. In California’s case, the moral hazard is exacerbated by a system that assigns responsibility to no one. The super-majority requirement means that both parties will escape blame, and the required cooperation of the legislature will absolve the governor. The governor will blame the legislature. The Republicans will blame the Democrats. The Democrats will blame the Republicans. The citizens will blame the political class. Talking heads will blame an allegedly fickle electorate. Everyone will point fingers, but the blame will not settle on anyone.

    In the end, blame will not matter. No one in a position of power in California has the incentive to make the tough decisions needed to avoid a crisis. So, no one will. Indeed, at this point everyone has an incentive to not make any hard decisions. A bailout from the Feds will be a wealth transfer from the citizens of other states to California’s citizens. The incentive is to drag things out, to appear to be working on the problem, to maximize the eventual windfall.

    I’d love to see California’s political class show some leadership, step up, and effectively deal with the state’s financial problems, but that really is unlikely, requiring as it will, tough decisions on spending priorities and taxes and foregoing a windfall. Ultimately, money usually trumps character.

    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 pirate_renee

  • Governance in Los Angeles: Back to the Basics

    Few would want to be in Los Angeles Mayor Antonio Villaraigosa’s shoes. The Mayor, a tireless ally of public employee unions through his career is in the uncomfortable position of being forced to choose between his allies and the taxpayers. To his credit, as hard as it is, the Mayor seems inclined to favor the interests of the citizens who the city was established to serve in preference to the interests of those who are employed to serve the people. But the circumstances place the Mayor of having to approach the city’s unions with an inappropriateness that lays bare fundamental flaws in the public sector collective bargaining arrangements that have emerged over the past one-half century. Noting that the unions have a choice between layoffs and cutting pay, the Mayor told The Wall Street Journal I was a union leader now. Rather than lay off workers and cut services, I’d agree to a pay cut.

    The Mayor has been relegated to asking the city’s unions to make decisions that should only be made by the city itself. The Mayor has asked the unions to accept pay cuts, so that impending public service cuts can be minimized. In effect, the unions are being asked to make a fundamental policy choice that should be the city’s alone to make. The city of Los Angeles, the Mayor and the city council, are the legal policymaking body for the city of Los Angeles. There is no state statute or provision of the city charter that grants policy making authority to others.

    Yet, under the public sector labor bargaining system that has emerged, the city may have no choice, unless it is willing to file Section 9 bankruptcy to void the union contracts and impose a solution that favors the interests of the citizenry. A predecessor, former Mayor Richard Riordan has called for such a filing. Short of that, perhaps the city should require some sort of a “sovereignty” clause in the next round of negotiation that permits labor contract provisions to be altered during emergency situations, so that public service levels can be preserved.

    Whatever the solution, the union public policy authority is an ill-gotten gain. This is not to suggest that the unions are wrong for having exercised the power; that is only natural. However, they should never have been able to gain such a position.

    It is fundamentally wrong for the city of Los Angeles and countless other municipal jurisdictions around the nation, to have abdicated its policy authority over recent decades. There is a need for a new public employment paradigm in which the incentives of governance favor the interests of the households that make up the cities, towns and counties.