New Geography

Category: Politics

  • LA is as Safe as 1956, Fact or Political Spin?

    In the weeks leading up to the tepid re-election of Los Angeles Mayor Antonio Villaraigosa last month, Bill Bratton, the statistics-driven chief of the Los Angeles Police Department, appeared on TV in a political advertisement paid for by the Villaraigosa campaign. He cited a seemingly amazing figure about this city’s livability.

    “Crime is down to levels of the 1950s,” said a confident-looking Bratton, who wore a black jacket and dark tie as he sat in an office conference room with downtown views.

    Flashing across the screen as he delivered the line with his heavy Boston accent was a Los Angeles Daily News headline from early 2008 borrowed by the Villaraigosa campaign to further emphasize the chief’s claim. It read in bold, black letters: “Safest streets since ’56.”

    On March 2, 24 hours before Election Day, Villaraigosa and Bratton teamed up again. This time, they appeared together at a morning press conference at the Police Academy in Elysian Park, where a statement from the Mayor’s Office made the rounds and trumpeted a “citywide crime-rate drop to the lowest level since 1956, the total number of homicides fall[ing] to a 38-year low. Gang homicides were down more than 24 percent in 2008.”

    The 1956 number was simply incredible — Los Angeles had time-warped back more than 50 years to the era of the Beat Generation, Elvis Presley and Howdy Doody, when serious crime was still so titillating that murder trials featuring unknown faces were followed like big celebrity events. It wasn’t the first time Bratton made the claim — the chief had also made the bold comparison in 2006 and again in 2008, lugging it out to warn voters that the low crime rate could be jeopardized if they didn’t pass the City Council’s telephone-utility-tax referendum, a phone tax that Villaraigosa and Bratton said was needed for the hiring of more cops.

    The press barely challenged the notion that Los Angeles has somehow been transported back five decades, and some instead focused on Bratton’s widely criticized political endorsement of the mayor — an unsettling and, many people believe, unethical move for a hired hand like a chief of police to engage in. One of the first to criticize Bratton’s claim was long-shot mayoral candidate Walter Moore. Moore couldn’t wrap his mind around the idea that Los Angeles is now as safe as the year that the L.A. Angels played baseball at a now-destroyed civic landmark — the beautiful old Wrigley Field in then-quiet, then-tidy South-Central Los Angeles.

    “I’ve talked to people who grew up here in the 1950s,” Moore argued to nodding heads during a February debate between several mayoral candidates, held in the hilly, suburbanlike community of Sunland-Tujunga (sans Villaraigosa). “And believe me, nobody in L.A. remembers crime in the 1950s being like it is today.”

    Moore isn’t the only one who finds it fishy, and just plain strange, to attempt to paint the city as similar to a time when 2.3 million residents lived in a far more suburban and far less dense metropolis, one in which residents often did not bother to lock their doors.

    “It’s a silly comparison,” Malcolm Klein, professor emeritus of sociology at USC and a gang-crime expert, says bluntly. An author of numerous books on gang crime, Klein says that when Bratton starts publicly comparing crime levels of the 1950s to today, “You’re not listening to a chief of police, you’re listening to a politician.”

    Read the extended version of this piece at LAWeekly.com

  • The Republican Party, Pennsylvania and Arlen Specter

    Senator Arlen Specter switched parties. A five term Senator switching parties is certainly news, but it also represents a far greater statement about the challenges facing the Republican Party in Pennsylvania going forward.

    Pennsylvania has been a dependable “Blue State” in presidential races since 1988. Currently, Democrats have a 1.2 million voter registration advantage. Less than a decade ago the margin was less than 500,000. What changed over the past decade?

    The changes in the political and demographic make-up of the five county Philadelphia region forced Specter’s flip. Specter’s base had been eroding as a result of other popular Democratic politicians seeking statewide and national offices and needing moderate Republicans to switch parties to support them in tough Primary Elections.

    It began with now Governor Ed Rendell who faced a fierce Primary Election in 2002 against Bob Casey, Jr. – the son of a former Pennsylvania Governor. The former Philadelphia Mayor needed a strong turnout in the Philadelphia area and he managed to flip more than one hundred thousand Republicans for the primary.

    Rendell defeated Casey by 162,648 votes statewide, but his victory total was 305,641 in the five county Philadelphia area where he won 81.3% of the vote and 56.5% of his total vote statewide.

    The 2002 primary proved the central role of the Philadelphia region, especially the suburbs. Rendell was able to win even while losing the total vote in the other 62 counties of Pennsylvania. The shift in moderate Republicans in the suburbs to Rendell was the critical factor.

    This was again the case in the general election; Rendell would carry this region by 515,000 votes on his way to winning his first term as Governor by 323,827.

    The 2002 election marked a turning point in Pennsylvania politics. From that point forward no candidate for statewide office could win without carrying at least one of the four suburban Philadelphia counties. All were becoming increasingly Democratic in voter registration.

    In the 2004 Primary, Arlen Specter faced conservative ex-Congressman Pat Toomey. Specter likely underestimated the impact of the change is southeast voting patterns. He was overconfident that his moderate Republican suburban base would carry the day. They did, but more narrowly than most suspected. Specter won the election by 17,146 votes statewide but he carried the southeast by 41,719 votes.

    Like Rendell in 2002, Specter lost the rest of the state but won in the five county region by enough of a margin to secure victory statewide. Unlike Rendell, his total in the southeast region only accounted for 31.4% of his statewide total votes as compared to Rendell’s 56.5%.

    Also, significant was the fact that he only defeated Toomey, who is far more conservative than former Senator Rick Santorum, by 34,669 votes in the four suburban counties. The moderate base was shifting to the Democrats, leaving the remnants of the GOP more conservative. This was a harbinger of Specter’s diminishing prospects as a Republican.

    Specter won the primary with 166,944 votes from the southeast region. Two years earlier in the primary, Mike Fisher, the Republican candidate from Pittsburgh who was running for Governor without opposition, won 161,103 Republican votes in this region. Fisher outpolled Specter’s 2004 vote in 2 of the 5 counties. It was only the last minute support Specter received from President George W. Bush and Senator Rick Santorum that saved Specter from defeat in 2004.

    In the General Election, Specter walloped his Democratic opponent Joe Hoeffel, a former southeast Congressman and Montgomery County Commissioner, by nearly 600,000. He would carry all five counties in the southeast by wide margins mainly because he had significant support from Democrats and Independents.

    The trend of greater Democratic power – and Specter’s dependence on them – continued to build. In 2006, Bob Casey defeated incumbent Senator Rick Santorum by 17.4 percentage points statewide despite the fact that Santorum would spend $31 million and was the number three in Republican Senate Leadership. Casey would carry all five counties in the southeast region proving that conservative Republicans could no longer win in this critical area in a contested General Election. By 2008, Barack Obama put the icing on the cake. The President racked up huge margins in the southeast repeating what Rendell had done in 2002. The change was now complete.

    It is safe to say that Arlen Specter simply could not win a Republican Primary Election in 2010. This said it is also safe to say that he would have likely won the General Election with relative ease regardless of who was the Democratic candidate. This is the dilemma that faced a Republican Party increasingly alienated from Specter, but facing increasingly stiff odds in its former suburban Philadelphia strongholds.

    The question now is will the Republican Party stand with conservative Pat Toomey to challenge Democrat Arlen Specter in the General Election? With promised support from President Obama, Vice President Biden and Governor Rendell the likelihood of a primary challenge for Specter is remote in his new party.

    Revenge is rarely as sweet as anticipated. It seems unlikely that a conservative Republican can win statewide without support in the Philadelphia suburbs. But data and history show that this is highly unlikely for a conservative Republican. There’s a cost to party purification. Unless the Republicans can find a way to appeal to the wayward suburban voters, it will take a major shift in the political dynamic – perhaps a more decided Democratic move to the left – to put Pennsylvania back in play.

    Dennis M. Powell is president and CEO of Massey Powell an issues management consulting company located in Plymouth Meeting, PA.

    Photo: KyleCassidy

  • Illinois: When in Doubt, Jack up Taxes

    The Illinois state budget is on life support, with a $4 billion shortfall projected for this year and even more in 2010. So what’s a state to do?

    In a move that has some scratching their heads, Governor Pat Quinn has proposed an increase on the tax rate for both personal and corporate income tax.

    For a state ranked 48th in overall economic performance and 44th in economic outlook, such a tax hike seems questionable. Corporate and personal income is lagging. According to a recent study, non-farm payroll employment has only risen 3.6 percent and the growth of per capita income ranks 39th in the nation.

    The state’s private sector is largely responsible for fueling a well-funded public sector. Such a tax increase could further suffocate growth, which in turn will impact the public sector as well.

    Along with its persistent corruption, Illinois’ poor economic showing may become yet another embarrassment to an administration whose top leadership comes from the increasingly bedraggled Land of Lincoln.

  • Germany’s Green Energy Goals Are Potentially Unrealistic

    The world looks to Germany to be a leader in Green Energy. There’s been a great deal of hype surrounding Chancellor Angela Merkel’s very ambitious goals of dramatically reducing the county’s emissions by 2020.

    Yet the German experience should also provide some pause to President Obama and others proposing such changes in the United States. It turns out that goals are potentially unrealistic, perhaps even dangerous, for numerous reasons. One reason that makes them so unrealistic is that they are seriously hamstrung by effectively cutting off the single largest source of CO2-free energy available anywhere in the world right now: Nuclear Power.

    This reflects how much Germany has been influenced by green politics. In the years of the Socialist-Green government stretching from 1998 – 2005, nuclear power was considered an anathema. The Green party has its roots in the anti-nuclear power movement of the seventies. One of the most important items on their agenda when they came into power was to completely eliminate Germany’s use of nuclear power in the now infamous Atomaustieg or Nuclear exit which mandated that Germany no longer use nuclear power by the year 2020.

    When Chancellor Merkel took power under the Grand Coalition of Christian Democrats and Social Democrats, this policy remained in place even as the government pledged it would dramatically lower Greenhouse Gases by 2020 as well. Although the Christian Democratic Union (CDU) has been arguing for a repeal of the ban on nuclear power, the coalition continued to eliminate this most effective means of GHG reduction, placing its bets on conservation and renewable energy.

    Ironically Germany remains one of the leading countries when it comes to nuclear technology. Areva, France’s nuclear leviathan has a large R&D facility here in Germany, where I myself once worked as an English language trainer. The German engineers working here in Erlangen are regularly sent abroad to help with the building and maintenance of nuclear plants throughout Europe and the rest of the world. German engineering is being used in Finland, Bulgaria, and Sweden. Some of the engineers have even helped build a high-pressure reactor in Lynchburg, Virginia. I have worked with these people and they include some of the best minds in the field.

    Germany’s desire to reduce greenhouse gases and live without nuclear power has taken some almost absurd turns over the years. For one thing, Germany appears to be turning to its single cheap and abundant supply of energy, albeit a very dirty one, coal. Germany has both some cleaner anthracite and a lot of very dirty bitumen mines. These mines provide an enormous portion of Germany’s electricity and are also one of the reasons why Germany’s lights won’t go off even if all the nuclear plants are turned off. Coal power plants are being built across the country – even the Greens in the Hamburg government have allowed massive plant to be built in the city with some very strict regulations.

    The single most absurd aspect of the Green’s desire to eliminate Germany’s reliance of nuclear power are massive subsidies that it has provided for both solar and wind power generation. Germany, while not the gloomiest country in Europe, is not exactly sunny. It has huge annual amounts of precipitation and dark, grey winters. Subsidies, as well as its renowned industrial prowess, have turned the country into one of the leading producers of solar power.

    Yet this is not an unalloyed advantage – despite the constant claims made about “green jobs“ here in Europe as well as North America. Solar power is enormously expensive and inefficient here, most notably lacking the reliability needed by all major power suppliers. It only produces power when the sun shines, and it is very tricky to store the energy created, especially with photovoltaic sources making it enormously expensive. Some forms of solar power have been able to store off-peak power production; the parabolic-trough plants in Andalusia or the Mojave deserts use molten salts stored en masse to assure 24-hour supply, but these technologies, though provided by German companies, cannot be implemented in Germany itself due to the lack of intense sunshine about 6 months out of the year.

    And then there’s wind. Wind has all of the drawbacks of solar but the advantage that Germany is at least fairly windy. Wind power has taken off here and the Baltic and North Sea coasts are dotted with enormous wind parks. The costs are still enormous and wind or solar power are still far more expensive than standard sources of power. A May 12, 2008 editorial in the Wall Street Journal stated: “For electricity generation, the EIA concludes that solar energy is subsidized to the tune of $24.34 per megawatt hour, wind $23.37 and ‘clean coal’ $29.81. By contrast, normal coal receives 44 cents, natural gas a mere quarter, hydroelectric about 67 cents and nuclear power $1.59.”

    Costs have come down recently due to the explosive growth in the sector over the last few years. The U.S. Energy Information Administration estimates that wind costs $55.80 per MWh, coal at $53.10/MWh and natural gas at $52.50, and the costs for wind fail to take into consideration the costs of owning and operating a conventional power plant to provide energy when the wind is not blowing. Explosive growth over the last few years has allowed companies to exploit the economies of scale created by large-scale production. German wind-turbine producers have been able to maintain a fairly large presence on the market but have been muscled out recently by American and Indian manufacturers. Wind-power will never be able to provide more than 20% of the power mix by most projections. As with solar, there is insufficient storage technology affecting solar; the appropriate areas have been built out. There have been murmurs about the possibility offered by off-sea wind parks but these are also enormously expensive to build and maintain.

    Germany has shunned nuclear and coal in an attempt to use wind and solar. Renewable sources are not only much more expensive but also cannot begin to provide the amount of energy at economical rates. Germans are also big fans of natural gas but the problem is Germany has very little of it. Germany has had to import its natural gas, some from fairly reliable partners like the Netherlands and the United Kingdom but mostly from an increasingly assertive and authoritarian Russia.

    So rather than promote independence in energy, Germany’s green policies are making it ever more dependent on an autocracy. Even under the Soviets, Germany’s wet winters were made more commodious with the pleasant warmth provided by Russian gas. Schroeder and Putin were the best of friends, aided by the fact that Putin spoke fluent German from his time running the KGB station in Dresden, Germany. When Schroeder was fired by the German people he quickly found employment as a lobbyist for Gazprom, the Russian energy titan.

    This leaves Germany with a series of problems with no pleasant solution. It can either lift the ban on nuclear power or extend the lives of its plants as Sweden has already done. It can build a lot more coal-fired power plants, which Vattenfall is now trying to do in Hamburg, or it can opt for conservation, renewable energy and economic stagnation. The latter seems to be the path that Germany has chosen. Economic stagnation or even moderate economic growth or slight contraction might not be so bad for Germany. It has none of the demographic pressures driving dynamism and growth in America. The green ideologues driving German policy argue that renewable and conservation of energy are Germany’s only hope. To them, green principles are well worth the price in demographic and economic stagnation.

    Kirk Rogers resides in Bubenreuth on the outer edges of Nuremberg and teaches languages and Amercan culture at the University of Erlangen-Nuremberg’s Institut für Fremdsprachen und Auslandskunde. He has been living in Germany for about ten years now due to an inexplicable fascination with German culture.

  • Mr. Cloghessy Deserves Better – And So Do the Rest of Us

    The role of politicians in the corruption of our civic spirit – a national problem that has led us to the current economic mess – has me thinking a lot about Joe Cloghessy.

    Mr. Cloghessy lived in my childhood neighborhood. He was big and strong and worked hard for a living, like most of the men in the neighborhood. He might have had more money than his neighbors, but that never came up. He did have a pool in his backyard – he built it himself – and that made his house a rarity in those parts.

    Mr. Cloghessy was just as rare as his house. He let every kid on our block swim in his pool between 2 p.m. and 4 p.m. from the day school let out for summer until we went back to classes in the fall.

    Mr. Cloghessy was good with woodworking, too, and the nooks and crannies around his pool were filled with small bridges through garden plots adorned with wind chimes and figurines. It was as close to a country club as I was going to get, and that was just fine with me.

    Then one day I was playing around, doing the sorts of tricks that kids do, and I broke a railing on one of the bridges. I propped up the broken wood so it might pass for undamaged just long enough for me to slink away from the scene.

    Later that day one of my sisters mentioned the mishap, and my mother overheard. She immediately gave me a stern reminder that someone could have gotten hurt if they had counted on that railing to support them as they walked over Mr. Cloghessy’s backyard bridge. She told me that Mr. Cloghessy worked hard for a living – and nearly as hard to craft the handiworks that made his backyard such a special place. She made it clear that our fine neighbor was under no obligation to let every little kid on the block into his yard – into his life – every day of every summer.

    My mother also made it clear to me that it’s wrong to break something and not own up to the damage – especially when it’s something that belongs to someone who’s been good to you. Then she made me walk down the block and tell Mr. Cloghessy about the broken rail. She told me to apologize for breaking the rail – and for having lacked the courage to be forthcoming about the damage I had done.

    I was embarrassed and scared as I approached Mr. Cloghessy in the workshop of his garage that evening. He nearly gave me a pass right off the bat, just because he was that sort of guy. I think he figured out that my mother had sent me down for a lesson, though, so he got serious, telling me to come right to him if it ever happens again. Someone could have gotten hurt on that busted rail, he said.

    All of this makes me think of our current crop of politicians, who have busted more than a few rails but have yet to own up to the damage. It’s almost as though they are children who have misbehaved for a long time. It seems that nobody ever told them that fellows like Joe Cloghessy work hard and deserve better than to see their contributions to the common good left broken by someone who doesn’t even have the courage to admit to the damage.

    This immaturity in our political system has been a long time in coming. Voters helped make the problem – we haven’t done much to hold our child-pols accountable for many years.

    Now is the time for a fresh start – time to tell the politicians that they’ve disappointed us and must face some discipline.

    Many of the politicians will survive – there are some sincere ones out there, after all, and others who have a sufficient store of good deeds to ride out their missteps.

    Some shouldn’t get a pass because they’ve simply gone too far with the pay-for-play and other selfishness.

    In any case, it’s time to realize that the world has changed dramatically in just the last few months. It’s quite clear that none of us are going to get anywhere until our politicians own up to their mistakes and start mending their ways.

    It’s now up to everyone who’s concerned about our country and its civic spirit to call our politicians to account. We’re the only ones who can demand that they stop breaking things – starting with the public trust.

    Jerry Sullivan is the Editor & Publisher of the Los Angeles Garment & Citizen, a weekly community newspaper that covers Downtown Los Angeles and surrounding districts (www.garmentandcitizen.com)

  • Can Eddie Mac Solve the Housing Crisis?

    Every downturn comes to an end. Recovery has followed every recession including the Great Depression. In 1932, John D. Rockefeller said, “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” The question is not ”IF”, rather it is “WHEN” recovery will begin. The age-old question remains: what can government do to get the nation out of recession?

    Government can act wisely. In the past, it used tax legislation (the mortgage interest deduction) to create the highest home ownership rate in the industrialized world. It can also act stupidly by promoting “Sub-Prime” mortgages, “105%” financing and the “No-Doc” loan that got us into this financial mess. As many as 4.4 million more Americans could lose their homes – unless drastic action is taken to stop the process.

    Much of this was built on good intentions. One example of poor planning can be seen in Department of Housing Development’s “Dollar Homes” program. The HUD website describes this as an altruistic program “to foster housing opportunities for low and moderate income families” by selling homes for $1 after the Federal Housing Authority has been unable to sell them after six months.

    This sounds like a good idea but the program has become consumed by fraud and waste and has delivered little benefit to the parties intended. First, the policy eliminated any ability to sell the properties at market since it is clear that the value will be marked down to $1 in six months. The result was massive losses to the government as previously saleable properties were re-priced to $1. Second, the homes were snatched up by businessmen and the cronies of politicians who knew how to game the system. These homes were then sold on the retail market for huge profits. Very few homes made it to the needy parties intended. This dumb legislation created and fed a lazy, corrupt, bloated, ineffective and expensive bureaucracy.

    In contrast, smart legislation can end the housing crisis that threatens to send our economy reeling into the next Great Depression. A simple but effective governmental action does not have to cost a lot of money and more importantly, does not require a new permanent and expensive bureaucracy. It can be a win-win-win for federal government, local government and working families. This smart legislation is called Eddie Mac, which stands for the Empower Direct Ownership Mortgage Corporation.

    The genesis of Eddie Mac comes from the “good old days” when home prices were high. The most common complaint heard from police, fire, teachers, nurses and municipal workers was that they could not afford to live in the very communities where they worked. The lower wages of these groups forced them onto the freeways to more affordable neighborhoods in distant suburbs. The commute of hundreds of thousands of city workers across the nation clogged our roads, added harmful emissions to our atmosphere and exacerbated our dependence on foreign oil.

    Simply stated, the Eddie Mac program allows local government to buy vacant foreclosed homes from the banks and institutions. Local government then stimulates the local economy by hiring local realtors, appraisers and contracting with local labor to fix up the deteriorated properties. It then leases the properties to police, fire, teachers, nurses and municipal workers who otherwise could not afford to live in their own communities. Local government enters into an “Empower Direct Ownership Lease Option” with their employees so that the employees have the right to purchase the homes in the future using their rental payments to build equity. The Empower Direct Ownership Lease Option allows the employee to acquire the home in five years for the original purchase price plus 50% of the appreciated value.

    Instead of concentrating power in Washington, Eddie Mac empowers local government to solve their own local real estate economy. Eddie would employ local realtors to identify vacant foreclosed properties qualified for the Eddie Mac program. Realtors would earn a 1% fee for identifying and assisting local government with the acquisition. The purchase price would be set by a local appraiser who would also earn an appraisal fee. Use of local appraisers avoids banks profiting unfairly from a government program. The free market system would set the value. The purchase price would include an estimate of costs to bring the home back to local standards, using local workers to fix up these properties. Local government would obtain 100% financing for the acquisition from Eddie Mac bonds that would be sold on Wall Street along side of Fannie Mae, Freddie Mac and Ginnie Mae guaranteed loans.

    A $200,000 home, foreclosed upon, vacant and allowed to deteriorate has likely deteriorated to just $120,000. Its actual value will be determined by appraisal. At $120,000, a 4% guaranteed Eddie Mac mortgage would cost local government just $4,800 per year. Local government would be able to rent that home for $400 per month making it affordable to police, fire, teachers, nurses and municipal workers.

    The Empower Direct Ownership Lease Option allows the employee to acquire the home in five years for the original purchase price plus 50% of the appreciated value. If the baseline value is $120,000 and the home appreciates at 5% per year, it will increase in value $6,000 per year or $33,153 over 5 years. The employee’s Empower Direct Ownership Lease Option allows them to acquire the home in five years for the original purchase price plus 50% of the appreciation or $136,577. The price is $16,577 below market price, creating equity for the home buyer of $16,577 which can be used as the future down payment to acquire the home.

    This is a win-win-win scenario. Stopping the slide in home values by buying up foreclosed homes with federally insured 4% bonds is a low tech, low cost effort to put the brakes on the recession. And it entails no new bureaucracy. The Federal government is the big winner because they would be footing the bill for the bail-out if the economy continued to unravel. Local government wins by solving an age old dilemma of how to house its local work force. The local economy wins as fresh stimulus is put into the economy to locate, appraise, acquire, insure, repair, repaint and refurbish these homes. The city/county/municipal workers win with an opportunity to enjoy the American dream of home ownership in the very communities where they work. The environment wins as we take commuters off the road and lessen the environmental impact of their commute. And, we help reduce our dependence on Middle East oil as the ripple effect of tens of thousands of Eddie Mac homes are leased to local employees who now live and work in their own communities.

    Eddie Mac can become the firebreak to the mortgage crisis, the game changer needed to change market momentum. The hundreds and thousands of vacant foreclosed home sales generated by the implementation of the Eddie Mac program would send a strong signal to the public that the market has bottomed and the recovery has begun. Vacant homes would be acquired, fixed up and occupied by stable, important and long-term members of our communities.

    John D. Rockefeller once stood on the floor of the New York Stock Exchange and quieted the panic by firmly proclaiming; “Buy” in the dark days of the 1929 collapse. Our government can help stop the slide in prices by standing with our local governments and firmly encouraging “Buy” in the local markets. Reckless government got us into this mess. Smart government can get us out.

    Robert J. Cristiano Ph.D. has more than 25 years experience in real estate development in Southern California. He is a resident of Newport Beach, CA.

  • Solving the Economic Crisis: Fix the Banks

    Economic forecasts today reflect a remarkable variation. Some economists are predicting a rapid increase in economic activity within just a few months. Some are forecasting an economic decline that persists for years.

    At the root of the debate lies the question: where is the heart of darkness? Primarily, forecasters are focusing on the impact of the fiscal stimulus and the efficacy of monetary policy. Yet they have been less forthcoming to center on the real problem, which is fixing the banks.

    Government spending as economic stimulus is typically rejected by economists based on either a crowding-out or a Ricardian Equivalence theorem. The crowding out theory says that government spending can replace, or “crowd out”, more productive private investments. The perverse result is that the economy may slow down even more.

    The Ricardian Equivalence theory holds that future taxpayers, recognizing their increased tax obligations, simply increase savings by an offsetting amount. The result is no change in economic activity. Though I’ve simplified the respective cases, crowding-out and Ricardian Equivalence arguments are persuasive for most states of the world. So, for the moment, let’s reject fiscal stimulus as a way out of recession.

    What about monetary policy? One of Ben Bernanke’s contributions to monetary policy has been the notion that the central bank still has policy tools even when interest rates fall to zero. The FED can still purchase all sorts of assets. Those purchases increase the monetary base and directly impact targeted non-liquid markets. Continued action after interest rates reach zero addresses one criticism of Japan’s response to the 1990s in which their central bank essentially did nothing once interest rates reached zero.

    First we need to consider how monetary policy affects economic activity. We teach students that monetary policy works through a money multiplier. The money multiplier is based on lending by a fractional reserve banking system. The money goes to the banks, and the banks lend it out. The reserves are provided by FED purchases of financial assets.

    Of course the multiplier depends on the bank’s lending. What happens when banks don’t choose to lend? Scott Sumner, an economist at Bentley University, has pointed out that this is exactly the situation we have right now. The FED has been increasing reserves, but the banks are not lending. Since October, bank reserves and vault cash has grown to over a trillion dollars but lending has declined. Sumner recommends a penalty on excess reserves, but more is needed to restore bank lending.

    I see three significant issues that are driving the banks’ apparent reluctance to lend. First, banks appear to expect deflation. Fear of deflation is not unfounded. Prices are falling in many markets, impacting bank behaviors.

    I keep hearing that “Cash is king.” This is exactly what one would expect in a deflationary environment, and there is no obvious way to deal with it. You can tax excess reserves and vault cash. You can tax bank deposits. You cannot tax money that is under the mattress, and money under the mattress is profitable in a deflationary world.

    This is what some call Keynes’ famous liquidity trap. Technically, a liquidity trap is when zero interest rates make monetary policy ineffective. As Scott Sumner and others point out, the described situation is really an expectations trap. The problem isn’t zero interest rates, the problem is deflationary expectations.

    But if the “trap” makes monetary policy ineffective the arguments against fiscal stimulus are much weaker. This is where Paul Krugman says we are today, and it changes everything. We need to go back to fiscal policy to find hope for effective policy.

    If we are in a trap, it bolsters Krugman’s criticism that the existing stimulus is too little. To be effective, the stimulus would need to be very large, perhaps 40 to 50 percent of gross product. This would imply a stimulus package in the range of 6 to 8 Trillion dollars!

    But even if we were to follow this notion, I would argue that the composition of the stimulus would have to change. To be effective, government spending would have to create assets that significantly increase the productivity of private assets. We have examples from history. The Tennessee Valley Authority in the Southeast and Hoover Dam in the West cut private industry’s production costs by providing abundant and cheap energy. California’s water system, with its dams and canals, expanded agriculture’s productivity and range.

    Sadly, in spite of its size, the current stimulus plan has nothing that will significantly enhance private-sector productivity. And even any attempt to boost productivity investments is likely to run into roadblocks from the very powerful, well-connected green lobby which enjoys a far more favorable press than does business.

    Are we doomed then to deflation and slow growth? I don’t think so. The federal deficit, monetary policy, the impending Social Security and Medicare crisis, and baby-boom demographics imply eventual inflation.

    The real problem is with the banks. Banks can fail because of a lack of liquidity or a lack of equity. Last fall banks faced a liquidity crisis. There was a run on the entire financial sector. Today banks are probably facing an equity crisis, and the Treasury’s Toxic Asset Plan is exhibit one.

    The Treasury’s Plan does not make sense as presented. The plan is to leverage private sector resources, expertise and cash, with government funds to purchase underpriced toxic assets. This would supposedly reveal a true price for toxic assets. However, Gary Becker and Jeffrey Sachs have convincingly shown that the plan provides strong incentives to dramatically overprice the assets at the taxpayers’ expense. What if those toxic assets are already correctly priced?

    The Treasury’s Toxic Asset Plan does make sense if the banks are insolvent, and policy makers are unwilling or unable to more directly and transparently tackle the problem. To me, the Toxic Asset Plan looks a lot like a backdoor way to recapitalize the banks. If so, we have a problem. Insolvent banks must deleverage as rapidly as possible. That is, they must reduce assets, and a bank that is reducing assets in not a bank in the lending business.

    Here our problem is a variation of the problem faced by the Japanese in the 1990s. Their economic malaise continued for a decade in large part because they would not or could not clean up their banks. We and the rest of the World told Japan, time and again, that there was a toxic asset problem at their banks. Informed observers, inside Japan and out, knew that the core problem was bad bank assets.

    Today, the United States is probably in the same position. Our banks and other financial institutions are in trouble. They are sitting on a bunch of bad assets. If the banks recognize their bad assets, their equity is inadequate. The banks’ unpopularity prevents a bailout or a restructuring, but policy makers are afraid to let them fail. The other solution would be the Swedish solution, but policy makers don’t want to be accused of nationalizing the banks. Right now even President Obama lacks the political capital to address the problem. So, we get the convoluted Treasury Plan.

    What we need is political courage. We need to clean up the banks, and it doesn’t much matter how. We could crank up the bankruptcy courts, or we could implement the Swedish plan. Inaction will only prolong the economic pain. Backdoor plans from an unpopular Secretary of the Treasury aren’t going to get the job done. The sooner we clean up the banks, the sooner they will return to the business of lending, and the sooner we will have a recovery.

    Bill Watkins, Ph.D. is the Executive Director of the Economic Forecast Project at the University of California, Santa Barbara. He is also a former economist at the Board of Governors of the Federal Reserve System in Washington D.C. in the Monetary Affairs Division.

  • Entrepreneurs Overlooked in Recovery Plans

    As most recently spelled out in The Economist , one of America’s most potent advantages – even in the current economic crisis – lies in its entrepreneurialism. America’s entrepreneurs are the proverbial wellspring of innovation and creators of most of the country’s new economic opportunities. Entrepreneurs, or global heroes as The Economist calls them, are not only important here in this country but are the best hope for creating the innovations that will get sufficient traction to resuscitate the world economy.

    Year in and year out Small Business Administration data confirm that small businesses drive employment. Firms with fewer than 500 employees account for most, if not all, net new jobs while large firms with 500 or more employees exhibit a net loss of jobs. About 99 percent of all businesses are small businesses.

    In that case one would expect that government would be doing more to encourage individuals to start businesses and create jobs, which is ultimately the long-term solution for the country’s economic woes. Not so says a recent study by the Kauffman Foundation – Entrepreneurship and Economic Recovery: America’s views on the best ways to stimulate growth.

    The key findings of the report include the following:

    • By a margin of three to one (63 percent to 22 percent) Americans favor business creation policies as opposed to government creating new public and private sector jobs. In fact, 79 percent of respondents say entrepreneurs are critically important to job creation, ranking higher than big business, scientists, and government.
    • Only 21 percent of all survey respondents say that the stimulus package supports entrepreneurial activity and 33 percent believe it will retard entrepreneurship.
    • While 78 percent of survey respondents say innovation is important to the health of our economy, only 3 percent say they believe the stimulus package will encourage innovation.
    • Americans think the government does little to encourage entrepreneurship, despite its importance; 72 percent of respondents say the government should do more to encourage individuals to start businesses. Almost half of respondents think the laws in America make it more difficult to start a business.

    So even now, entrepreneurship is widely recognized as more important than the stimulus package in creating long-term economic stability. Yet, Americans doubt that the stimulus package will spur the entrepreneurship that they hold as so important.

    Americans Want Small Business Innovation
    If entrepreneurship and innovation are the keys to revitalizing our economy, how can the federal government spur this on without the delay involved in creating a new bureaucracy? Is there a proven mechanism in place for evaluating, vetting and administering research funds that can be used to address some of our nation’s most pressing challenges related to the environment, a dwindling industrial base, our defense capability, or the health of our nation?

    Of course there is, and it is somehow – amazingly – overlooked. It’s called the Small Business Innovation Research (SBIR) Program, an existing highly competitive program that funds the most promising scientific and engineering ideas from the nation’s small, high-tech, innovative businesses. It’s so competitive that some, if not most, agencies only fund 1 out of 9 Phase 1 proposals.

    Eleven federal departments now participate in the SBIR program; five departments participate in the companion Small Business Technology Transfer (STTR) program, which requires partnerships with universities to harness the intellectual capital of our universities and the market capabilities of small business. Altogether the SBIR/STTR programs award a little over $2 billion each year to small high-tech businesses.

    Since its inception in the late 70s and early 80s the program has awarded $26 billion to over 80,000 Phase 1 projects and about 31,000 Phase 2 projects, resulting in small businesses filing 67,600 patents and attracting over $41 billion in venture capital. Over 650 SBIR companies have gone public. Increasingly, large firms and mid-sized firms have entered into various forms of collaborative relationships with SBIR awardees to commercialize their technologies.

    Despite having a rigorous independent scientific and commercialization review process in place, and despite its record of success, the program now languishes with little support in either Congress or the White House.

    Now let me admit that I’ve been actively involved in the SBIR program since 1992 – now having served as an eight-time principal investigator for Phase 1 and Phase 2 projects. Our company’s innovations are in community-based solutions for technology-based economic development, related to capital investment, trade and technology linkages and infrastructure investment. Our company is a 1997 recipient of the Tibbetts Award, named after the National Science Foundation’s Roland Tibbetts, awarded for success in the program and for the pursuit of science-based solutions to our nations challenges and opportunities.

    I’ve also been an advocate for sustaining and building the program along with numerous colleagues in other small technology businesses and representatives of government from the technology-based economic development community. I’ve made this personal commitment because the program makes a significant difference in the opportunities that are available to small business and because the program works in creating new economic opportunities based on science, engineering and technology.

    Instead of watching the SBIR program evaporate we should be doubling if not tripling our investment. At a minimum a $5 billion SBIR program should be put in place. It will get us much more in growth than the Treasury bailouts of the banks, or General Motors. It represents both what America wants – Small Business Innovation – and needs in these times of economic stress.

    Delore Zimmerman is president and CEO of Praxis Strategy Group and publisher of Newgeography.com

  • We Must Remember Manufacturing

    General Motors‘ reorganization and contemplated bankruptcy represents one possible – and dismal – future trajectory for American manufacturing.

    Unlike highly favored Wall Street, which now employs fancy financial footwork to report a return to profitability, the nation’s industrial core is increasingly marginalized by an administration that appears anxious to embrace a decidedly post-industrial future.

    Indeed, a recent survey of manufacturers found that most see the stimulus as only “slightly effective” for them. This is no surprise, since the lion’s share of the $800 billion is going to bolster the banks, with scraps spread out to green projects, health care and education.

    The administration’s priorities reflect a new political consciousness that, if not openly anti-industrial, seems to minimize manufacturing’s role in the nation’s long-term future.

    Just examine the demands placed upon General Motors and Chrysler. Their workers are being asked to make huge sacrifices – 1,600 new layoffs announced just this week – while their executives are largely shunned and demeaned compared with the generally more gentle treatment Wall Street malefactors get.

    This disparity reflects the close ties between Treasury Secretary Timothy Geithner, chief economic adviser Larry Summers and other top administration officials with the increasingly Democratic financial elite.

    Perhaps most revealing has been the somewhat bizarre choice to make mega-contributor and investment banker Steve Rattner as the “car czar” overlooking Detroit’s fate. Rattner, after all, has limited experience with the auto industry. (His expertise is largely in media.) “About all he knows about cars,” joked one person who has worked with him, “is that his chauffeur drives one.”

    Rattner may yet lose his post because of his involvement in New York’s latest pension fund scandal – but his appointment speaks volumes about the disdain with which the administration views the industrial economy.

    It also reflects an attitude – common among the academics, financiers and high-tech executives closest to the administration – that “smart” people can solve any problem better than someone with more hands-on experience but perhaps a less lofty IQ or a less tony advanced degree.

    To be sure, we should be wary of an approach like the Bush administration’s well-demonstrated embrace of mediocrity. But it is also dangerous to embrace a mindset that disdains all practical skill and areas of business not dominated by the cognitive elite.

    These days this mentality appears alongside an overall contempt for the tangible economy. Very few Obama appointees have ties to the country’s core productive sectors: manufacturing, agriculture, energy. Veterans of investment banking, academia or the public sector, they seem to see the economy more in terms of making media, images and trades – as opposed to actually making things.

    Such an approach also reinforces the administration’s surprising radicalism on the environmental front. Most industrial firms understand that precipitous moves to limit greenhouse gases and decimate domestic fossil fuels threaten America’s international competitiveness. Apparently, patience with and sympathetic understanding for Wall Street’s foibles is one thing; figuring out sustainable economic and energy policies that are friendly to industry is another.

    Unless something is done soon, the Obama policy could end up eroding more than just the nation’s industrial base. The president’s much-ballyhooed expansion of “green jobs” to make up for massive manufacturing layoffs worked well on the stump – but in reality it’s largely a fantasy.

    Certainly windmills and solar panels won’t rescue many of the communities at the bottom of our recent list of best cities for job growth. Industrial towns like Lansing and Flint, Mich., as well as Janesville, Wisc. may only see more devastation.

    Since 2007, these areas have lost somewhere between 15% and 25% of their industrial jobs. In Flint, nearly half have disappeared since 2003. These are the places where the American dream is dying most rapidly; Big Three bastions Michigan and Ohio have seen the quickest declines in per-capita incomes for most of this decade.

    The situation may be getting worse. Industrial decline could even be spreading to areas – like Houston, Texas, Fargo, N.D., Tulsa, Okla., or Anchorage, Alaska – that have actually been gaining industrial jobs. One culprit here may prove to be the administration’s anti-fossil fuels agenda, which could undermine even healthy firms and healthy regions. Even if Congress refuses to approve draconian rules for cap and trade or new taxes on greenhouse gas emissions, the “green” agenda could be imposed by the federal apparat anyway, through bureaucratic fiat. One harbinger could be the EPA’s recent actions to regulate carbon dioxide as a pollutant.

    All this doesn’t bode well for the country’s prosperity and for the prospects of millions of Americans. As demographer Richard Morrill has pointed out, traditionally, regions with industrial economies have been more egalitarian than the finance-driven areas. If this anti-manufacturing trend continues, more of America will resemble New York, Los Angeles or Chicago, places sharply divided between a growing class of low-wage workers and a relative few hegemons in finance, academia and media.

    Perhaps even worse, by stimulating everything but industry, the administration risks accelerating the very imbalance between production and consumption that is one key reason for the nation’s economic woes. Padding incomes by handing out money without increasing production may indeed prove a great way to stimulate economies – that is, those of industrial exporters like Germany, Japan and, most critically, China.

    Over time, Republicans may try to make these points. But economic conservatives have tended, if anything, to be at least equally clueless about the importance of industry. As far back as 1984 – the peak of the Reagan era – the New York Stock Exchange issued a report stating that “a strong manufacturing economy is not a requisite for a prosperous economy.”

    Disdain for industry has since grown as industrial employment has ebbed and the finance, service and media industries – and other non-tangible fields – have gained workers. Yet few understand how a swelling manufacturing trade deficit, which has grown ten-fold since 1984 to over $800 billion in 2007, has undermined the nation’s financial position. It has shifted so much wealth to countries focused on productive industry and energy.

    In the long run, too, it’s not just forlorn factory towns that get hurt. A strong manufacturing sector also boosts science and technology; the industrial workforce is increasingly dominated by engineers and highly trained technicians, many of whom are in increasingly short supply. Marketers, media firms, advertising agencies and software companies all benefit when industry expands.

    Fortunately, the situation isn’t hopeless. Despite commonly held assumptions, American can still compete industrially – and could do even better with the right investments in both human and physical infrastructure. In fact, despite unfavorable trade policies and growing regulatory burdens, American factories have remained among the most productive in the world; output has doubled over the past 25 years, and productivity has grown at a rate twice that of the rest of the economy.

    Clearly, not all American factories are run by the kind of boobs who governed General Motors and other failed enterprises. A 2008 McKinsey study noted American factories actually were, on average, considered the best-managed in the world – ahead, albeit slightly, of competitors based in advanced nations like Germany, Sweden and Japan, and considerably better than their counterparts in key emerging competitors China and India.

    To take advantage of these assets, American industry needs government to recognize their importance. We need incentives for improved productivity and investment, including ones for those companies employing “green” technologies. Another step would be to include accurate “carbon accounting” of goods produced elsewhere – particularly in places like China, whose production tends to generate more pollutants than those in more regulated countries like the U.S. Greening may be good, but it should not become another excuse for American de-industrialization.

    Finally, President Obama should recognize that expanding industry presents some of our best chances for future growth. Once the world recovers from the current financial crisis, there will be another surge in demand, particularly from developing countries, for the basic products that the U.S. can produce at prodigious levels, such as foodstuffs and airplanes, as well as farm, energy and construction equipment. The strategic opening for American firms may indeed be greater than any other time since the years after World War II.

    “We’re in the midst of 2 to 4 billion people around the world rising out of abject poverty and demanding a better living standard,” notes Daniel R. DiMicco, head of Nucor, the nation’s largest steelmaker. “That means we have a 20- to 30-year bull market in basic stuff.”

    Hopefully the Obama administration will overcome its preoccupation with post-industrial and green industries and allow American firms and workers to take advantage of this historic opportunity. If they fail to do so, the Great Lakes, Appalachia, parts of the Southeast and other regions can expect ever more economic devastation. Rather than delivering much-anticipated “hope” to the most beleaguered parts of the country, the administration could instead leave a legacy of wasted potential and economic misery that will haunt communities, and the entire country, for generations.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • HOPE for Only One Homeowner with a $300 billion Price Tag

    The Housing & Economic Recovery Act of 2008 was passed last August. It created the HOPE for Homeowners Program, which the Congressional Budget Office estimated would help 400,000 homeowners to refinance their loans and stay in their homes. Here’s a stunning revelation: According to the Federal Housing Authority (FHA), in the first six months since the law was passed, exactly one (1) homeowner refinanced under the program!

    You can listen to the story on NPR, “Investors Support Overhauling Homeowner Program“. One such investor, PIMCO, supports programs that would reduce the principal balance on mortgages by a small amount in order to keep the cash flow coming from mortgage payments. Given what we know about investment strategies to push companies into bankruptcy in order to benefit from credit default swap payouts, I was initially leery of such statements coming from bond investors. Then I remembered the problem with the paperwork on the mortgages – if bondholders can’t prove ownership of the lien the homeowner keeps the house with no further payments. That’s when it started to make sense.

    Of course, if they can get the homeowners to come in for a re-fi they can correct the paperwork mistakes. It could be worth it to investors without default protection to accept principal reductions – if the homeowner goes into bankruptcy they may not be able to prove they own the mortgage without the new paperwork. With the re-fi, they get all new documentation.

    These programs were designed for homeowners who are current on their mortgage payments but whose homes are “underwater”, that is, the principal balance on the mortgage is more than the market value of the house. Some can keep up their payments with the hope that the market price of the home adjusts in the distant future; others might benefit by the modest reductions in principal favored by some bond investors. But in a situation described by a Stockton (CA) homeowner the principal reduction is unlikely to be enough – the home is worth $220,000 and the mortgage balance is $420,000. These homeowners’ best financial strategy is to take the hit to their credit report and default on the mortgage. Investors like PIMCO might, if their paperwork is good, get half their investment back by taking possession of the property; they’ll get it all back if they bought the credit default swap; and they get nothing if the paperwork is screwed up.

    How many mortgages are underwater? Bank of America’s annual report says that 23 percent of their residential mortgage portfolio has current loan-to-market value ratios greater than 90 percent. When they include home equity loans in the calculation, totaling lending on a residential property, the share with less than 10 percent equity rises to 37 percent. At the end of 2008, Bank of America held $248 billion in residential mortgages and $152 billion in home equity loans, after taking write-offs of about $4.4 billion last year. On the other hand, Wells Fargo did not specifically report the share of their portfolio with loan-to-market value ratios greater than 90 percent. It’s hard to tell just how many mortgages are how far underwater at an aggregate level. I would imagine that these numbers are being checked in the Treasury’s stress testing of individual banks.

    In any event, Congress is not giving up (although we almost wish they would before this gets any worse). The House Committee on Financial Services combined with the House Judiciary Committee has introduced a new bill to improve the old bill’s version of Hope for Homeowners. Trying to take it a step further, the House Financial Services Committee is holding hearings on a Mortgage Reform Bill next week. The plan is to set lending standards for all mortgage originators. Chairman Barney Frank (D-MA) is of the view that the “great economic hole” we are in was started by“ policymakers’ distrust of regulation in general, their enduring belief that markets and financial institutions could effectively police themselves.”

    With this we do agree: self-regulation in financial services is a root cause of our current economic disaster. Until it is completely removed – not just from mortgage lending but from all financial products and services – nothing Congress does will prevent another crisis.