Category: Urban Issues

Death of the California Dream

For decades, California has epitomized America’s economic strengths: technological excellence, artistic creativity, agricultural fecundity and an intrepid entrepreneurial spirit. Yet lately California has projected a grimmer vision of a politically divided, economically stagnant state. Last week its legislature cut a deal to close its $42 billion budget deficit, but its larger problems remain.

California has returned from the dead before, most recently in the mid-1990s. But the odds that the Golden State can reinvent itself again seem long. The buffoonish current governor and a legislature divided between hysterical greens, public-employee lackeys and Neanderthal Republicans have turned the state into a fiscal laughingstock. Meanwhile, more of its middle class migrates out while a large and undereducated underclass (much of it Latino) faces dim prospects. It sometimes seems the people running the state have little feel for the very things that constitute its essence — and could allow California to reinvent itself, and the American future, once again.

The facts at hand are pretty dreary. California entered the recession early last year, according to the Forecast Project at the University of California, Santa Barbara, and is expected to lag behind the nation well into 2011. Unemployment stands at roughly 10 percent, ahead only of Rust Belt basket cases like Michigan and East Coast calamity Rhode Island. Not surprisingly, people are fleeing this mounting disaster. Net outmigration has been growing every year since about 2003 and should reach well over 200,000 by 2011. This outflow would be far greater, notes demographer Wendell Cox, if not for the fact that many residents can’t sell their homes and are essentially held prisoner by their mortgages.

For Californians, this recession has been driven by different elements than the early-1990s downturn, which was largely caused by external forces. The end of the Cold War stripped away hundreds of thousands of well-paid defense-related jobs. Meanwhile, the Japanese economy went into a tailspin, leading to a massive disinvestment here. In South L.A., the huge employment losses helped create the conditions conducive to social unrest. The 1992 Rodney King verdict may have provided the match, but the kindling was dry and plentiful.

This time around, the recession feels like a self-inflicted wound, the result of “bubble dependency.” First came the dotcom bubble, centered largely in the Bay Area. The fortunes made there created an enormous surge in wealth, but by 2001 that bust had punched a huge hole in the California budget. Voters, disgusted by the legislature’s inability to cope with the crisis, recalled the governor, Gray Davis, and replaced him with a megastar B-grade actor from Austria.

Yet almost as soon as the Internet bubble had evaporated, a new one emerged in housing. As prices soared in coastal enclaves, people fled to the periphery, often buying homes far from traditional suburban job centers. At first, it seemed like a miraculous development: people cheered as their home’s “value” increased 20 percent annually. But even against the backdrop of the national housing bubble, California soon became home to gargantuan imbalances between incomes and property prices. The state was also home to such mortgage hawkers as New Century Financial Corp., Countrywide and IndyMac. For a time the whole California economy seemed to revolve around real-estate speculation, with upwards of 50 percent of all new jobs coming from growth in fields like real estate, construction and mortgage brokering.

As a result, when the housing bubble burst, the state’s huge real-estate economy evaporated almost overnight. Both parties in the legislature and the governor failed miserably to anticipate the impending fiscal deluge they should have known was all but inevitable.

To many longtime California observers, the inability of the political, business and academic elites to adequately anticipate and address the state’s persistent problems has been a source of consternation and wonderment. In my view, the key to understanding California’s precipitous decline transcends terms like liberal or conservative, Democratic and Republican. The real culprit lies in the politics of narcissism.

California, like any gorgeously endowed person, has a natural inclination toward self-absorption. It has always been a place of unsurpassed splendor; it has inspired and attracted writers, artists, dreamers, savants and philosophers. That’s especially true of the Bay Area—ground zero for California narcissism and arguably the most attractive urban expanse on the continent; Neil Morgan in 1960 described San Francisco as “the narcissus of the West,” a place whose fundamental asset was first its own beauty, followed by its own culture of self-regard.

At first this high self-regard inspired some remarkable public achievements. California rebuilt San Francisco from the ashes of the great 1906 fire, and constructed in Los Angeles the world’s most far-reaching transit system. These achievements reached a pinnacle under Gov. Pat Brown, who in the 1960s oversaw the expansion of the freeways, the construction of new university, state- and community-college campuses, and the creation of water projects that allowed farming in dry but fertile landscapes.

Yet success also spoiled the state, incubating an ever more inward-looking form of narcissism. Even as the middle class enjoyed “the good life” — high-paying jobs, single-family homes (often with pools), vacations at the beach — there was a growing, palpable sense of threats from rising taxes, a restless youth population and a growing nonwhite demographic. One early expression of this was the late-1970s antitax movement led by Howard Jarvis. The rising cost of government was placing too much of a burden on middle-class homeowners, and the legislature refused to address the problem with reasonable reforms. The result, however, was unreasonable reform, with new and inflexible limits on property and income taxes that made holding the budget together far more difficult.

Middle-class Californians also began to feel inundated by a racial tide. This was not totally based on prejudice; Californians seemed to accept legal immigration. But millions of undocumented newcomers provoked fear that there were no limits on how many people would move into the state, filling emergency rooms with the uninsured and crowding schools with children whose parents neither spoke English nor had the time to prepare their children for school. By 1994, under Gov. Pete Wilson, the anti-immigrant narcissism fueled Proposition 187. It was now OK to deny school and medical services to people because, at the end, they looked different.

Today the politics of narcissism is most evident among “progressives.” Although the Republicans can still block massive tax increases, the predominant force in California politics lies with two groups — the gentry liberals and the public sector. The public-sector unions, once relatively poorly paid, now enjoy wages and benefits unavailable to most middle-class Californians, and do so with little regard to the fiscal and overall economic impact. Currently barely 3 percent of the state budget goes to building roads or water systems, compared with nearly 20 percent in the Pat Brown era; instead we’re funding gilt-edged pensions and lifetime guaranteed health care. It’s often a case of I’m all right, Jack — and the hell with everyone else.

The most recent ascendant group are the gentry liberals, whose base lies in the priciest precincts of San Francisco, the Silicon Valley and the west side of Los Angeles. Gentry liberalism reflects the narcissistic values of successful boomers and their offspring; their politics are all about them. In the past this was tied as much to cultural issues, like gay rights (itself a noble cause) and public support for the arts. More recently, the dominant issue revolves around environmentalism.

Green politics came early to California and for understandable reasons: protecting the resources and beauty of the nation’s loveliest landscapes. Yet in recent years, the green agenda has expanded well beyond that of the old conservationists like Theodore Roosevelt, who battled to preserve wilderness but also cared deeply about boosting productivity and living standards for the working classes. In contrast, the modern environmental movement often adopts a largely misanthropic view of humans as a “cancer” that needs to be contained. By their very nature, the greens tend to regard growth as an unalloyed evil, gobbling up resources and spewing planet-heating greenhouse gases.

You can see the effects of the gentry’s green politics up close in places like the Salinas Valley, a lovely agricultural region south of San Jose. As community leaders there have tried to construct policies to create new higher-wage jobs in the area (a project on which I’ve worked as a consultant), local progressives — largely wealthy people living on the Monterey coast — have opposed, for example, the expansion of wineries that might bring new jobs to a predominantly Latino area with persistent double-digit unemployment. As one winegrower told me last year: “They don’t want a facility that interferes with their viewshed.” For such people, the crusade against global warming makes a convenient foil in arguing against anything that might bring industrial or any other kind of middle-wage growth to the state. Greens here often speak movingly about the earth — but also about their personal redemption. They have engaged a legal and regulatory process that provides the wealthy and their progeny an opportunity to act out their desire to “make a difference” — often without real concern for the outcome. Environmentalism becomes a theater in which the privileged act out their narcissism.

It’s even more disturbing that many of the primary apostles of this kind of politics are themselves wealthy high-livers like Hollywood magnates, Silicon Valley billionaires and well-heeled politicians like Arnold Schwarzenegger and Jerry Brown. They might imagine that driving a Prius or blocking a new water system or new suburban housing development serves the planet, but this usually comes at no cost to themselves or their lifestyles.

The best great hope for California’s future does not lie with the narcissists of left or right but with the newcomers, largely from abroad. These groups still appreciate the nation of opportunity and aspire to make the California — and American — Dream their own.

Of course, companies like Google and industries like Hollywood remain critical components, but both Silicon Valley and the entertainment complex are now mature, and increasingly dominated by people with access to money or the most elite educations. Neither is likely to produce large numbers of new jobs, particularly for working- and middle-class Californians.

In contrast, the newcomers, who often lack both money and education, continue in the hierarchy-breaking tradition that made California great in the first place. Many of them live and build their businesses not in places like San Francisco or West L.A., but in the increasingly multicultural suburbs on the periphery, places like the San Gabriel Valley, Riverside and Cupertino. Immigrants played a similar role in the recovery from the early-1990s doldrums. In the ’90s, for example, the number of Latino-owned businesses already was expanding at four times the rate of Anglo ones, growing from 177,000 to 440,000. Today we see signs of much the same thing, though it often involves immigrants from the Middle East, the former Soviet Union, Mexico or South Korea. One developer, Alethea Hsu, just opened a new shopping center in the San Gabriel Valley this January — and it’s fully leased. “We have a great trust in the future,” says the Cornell-trained physician.

You see some of the same thing among other California immigrants. More than three decades ago the Cardenas family started slaughtering and selling pigs grown on their two-acre farm near Corona. From there, Jesús Sr. and his wife, Luz, expanded. “We would shoot the hogs through the head and sell them off the truck,” says José, their son. “We’d sell the meat to people who liked it fresh: Filipinos, Chinese, Koreans and Hispanics…We would sell to anyone.” Their first store, predominantly a carnicería, or meat shop, took advantage of the soaring Latino population. By 2008, they had 20 stores with more than $400 million in sales. In 2005 they started to produce Mexican food, including some inspired by Luz’s recipes to distribute through such chains as Costco. Mexican food, notes Jesús Jr., is no longer a niche. “It’s a crossover product now.”

Despite the current mess in Sacramento, this suggests some hope for the future. Perhaps the gubernatorial candidacy of Silicon Valley folks like former eBay CEO Meg Whitman (a Republican), or her former eBay employee Steve Wesley (a Democrat), could bring some degree of competence and common sense to the farce now taking place in Sacramento. Sen. Dianne Feinstein, who’s said to be considering the race, would also be preferable to a green zealot like Jerry Brown or empty suits like Los Angeles Mayor Antonio Villaraigosa or San Francisco’s Gavin Newsom.

But if I am looking for hope and inspiration, for California or the country, I would look first and foremost at people like the Cardenas family. They create jobs for people who didn’t go to Stanford or whose parents lack a trust fund. They constitute what any place needs to survive: risk takers who are self-confident but rarely selfish. These are people who look at the future, not in the mirror.

This article originally appeared at Newsweek.

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.

February 21, 2009
The “To Do” List for Middle-Class New Yorkers

This month, a new report from The Center For An Urban Future, Reviving The City of Aspiration, examines the squeeze on middle class New Yorkers.

The struggle to afford life’s basics—and a few indulgences, too—is nothing new to urbanites of modest means. A 1907 New York Times piece headlined ‘Very Soon New York Will Be A City Without Resident Citizens’ reported, “Life in the big city is becoming impossible to the average householder, living on an average income.” ‘Average’ necessities were identified as rent, home-cooked meals, servants wages, ice, and coal. Occasional luxuries included theater and restaurant visits.

Over the hundred-plus years that have followed, the list of must-haves for the “average” New Yorker has evolved a bit. Herewith, a historical and current

New York Middle-Class “To Do” List

1) Buy A Home: In the 1950s, the blue and white collar families who bought homes in the city’s boroughs — Brooklyn, Queens, the Bronx, Staten Island — were still considered ‘typical’ New Yorkers. A 1960s Times feature profiled the spending habits of one Queens family: truck driver, at-home-mother, and kids. They owned a two-family house, drove an eight-year-old Buick, carried no debt, and had some savings. Butcher bills were a headache. “Incidentals” were small appliances and occasional take-out meals, movies, ballpark tickets, ice cream and candy, alcohol, and birthday gifts, as well as carpeting and the kids’ music lessons.

2) Or Rent An Apartment: Ira Levin’s bestselling 1960s novel, Rosemary’s Baby, depicted a newlywed couple’s life in a gothic Upper Westside apartment on the income of a marginally employed actor. The film version became a celebrated ode to The Dakota apartments. While Hollywood has a history of grandiosification, this particular scenario was described by New Yorker film critic Renata Adler as “almost too extremely plausible”. The neighborhood really was a Mecca for barely middle-class bohos and academics. By 2008, the price for an apartment in The Dakota hit $20 million.

3) Pay Painlessly for The Basics: Says Kevin Finnegan, a union attorney for health care aides at the low end of New York’s middle class, “Our workers live in poor neighborhoods in the boroughs. They decide between groceries and Metro tickets. Their kids, if they finish school, might work in retail and move into somewhat better neighborhoods, but there are many parts of Brooklyn that they couldn’t possibly afford. The inner suburbs are way out of financial reach, except for a couple of small pockets. As for the distant suburbs, even if they could find something affordable, they couldn’t pay for the commute. When I worked on Wall Street, I saw a different situation. There, the secretaries and managers” — New York’s traditional center middle class — “commuted from as far as Pennsylvania, some of them two hours each way.”

4) Take An Occasional Vacation And Night On The Town: Congressional researchers cite “the relative income hypothesis”: You measure your financial comfort in comparison to that of your neighbors. Nowhere was this more apparent than in the environs of Wall Street during the ascension of upper-middle-class yuppies and wealthy “have mores” during the 1980s. The perception of a “little” middle-class luxury leaped from good seats at a Yankees game to, say, a week at a Southwestern spa.

5) Send the Kids — All of Them — To College: “The key ingredient for upward mobility in the middle class formula is higher education,” wrote New York journalist William Kowinski in 1980. “Some families are pressed because they are trying to send two or three children through college simultaneously, whereas their own parents might have attempted to send only one at a time… ”

6) Safety First — Relocate That Home! Influential Harvard economist Elizabeth Warren, recently tapped by the Obama administration, has identified another key to middle class identity. Along with education she cites safety, saying that both are perceived to be more elusive now than a generation ago, with middle class families stretched to the breaking point to afford homes in safe neighborhoods and “better” school districts. “The cost of being middle class has shot out of the reach of the median family,” says Warren.

7) Use Quality Day Care: Until the 1990s, this item was labeled ‘Family Has A Stay-At-Home Mom’. The trick for urbanites since then has become for both parents together to earn enough to afford good day care…if they can find it.

8) Access Good Health Care: In New York City, this can be as difficult for the center and upper tiers of the middle class as it is for the lower rungs. In the boroughs, where health workers constitute perhaps a third of private-sector employees, some receive benefits through their union, Service Employees district 1199. Government clerks and managers, along with municipal police officers, firefighters, and teachers are also protected. But the issue has escalated for workers and managers at small companies, and even for corporate employees, where co-pays now take a substantial bite. Hardest hit are the self-employed: small retailers, manufacturers, restaurateurs (including donut shop and pizzeria owners), and artisans, as well as waiters, bartenders, cabbies, writers, artists, and performers.

9) Stay Out of Debt: The average cost nationally of a middle-class family to raise one child is estimated at $269,000. But that’s only until age 17. It doesn’t include High School senior year, or education costs, or college. There’s no bulk discount for siblings, either. To parents in New York and everywhere else, credit cards and home equity loans have been the — increasingly rare — coin of the realm.

10) Save For Retirement: Fuggedaboudit. Scratch this item off the list, too. One breezy but well-circulated estimate recently put the value of a New York dollar at 76 cents. Incorporate the costs above and think twice before you dare do the math.

One more important measure defines membership in the middle class: the often-maligned “striving” urge. It’s the expectation that one’s life, and that of one’s children, is moving upwards. City dwellers everywhere are notoriously tough, and New Yorkers are famously resilient. But if this hope were to be lost, then the New York “without resident citizens” — a century in the making — might actually come to pass.

Zina Klapper is Deputy Editor of New Geography.

February 19, 2009

Housing Downturn Moves Into Phase II

The great housing turndown, which started as early as 2007, has entered a second and more difficult phase. We can trace this to Monday, September 15, 2008 just as October 29, 1929 – “Black Tuesday” – marked the start of the Great Depression. September 15 does not yet have a name and the name “Black Monday” has already been taken by the 1987 stock market crash. The 1987 crash looks in historical perspective like a slight downturn compared to what the world faces today.

On September 15 – let’s call it “Meltdown Monday” – the housing downturn ended its Phase I and burst into financial markets leading to the most serious global recession since the Great Depression. Indeed, International Monetary Fund head Dominique Strauss-Kahn now classifies it a depression.

Phase I claimed its own share of victims; Phase II seems likely to hit many more.

Phase I of the Housing Downturn

Whether in depression or recession, parts of the United States housing market were already in a deep downturn well before September 15. Phase I of the housing downturn started when house prices reached an unprecedented peak in some markets and began fell into decline. By September of 2008, house prices in the “ground zero” markets of California, Florida Las Vegas, Phoenix and Washington, DC had dropped from 25 percent to 45 percent from their peaks. These markets represented 75 percent of the overall lost value among the major metropolitan areas (those with more than 1,000,000 population).

The Varieties of House Price Escalation Experience: In Phase I, the house price escalation and subsequent losses were far less severe in other major metropolitan areas. This depended in large part to the degree of land use controls – such as land rationing (urban growth boundaries and urban service limits), building moratoria, large lot zoning and other restrictions on building routinely – that helped drive prices up to unsustainable levels. This effect, cited by a number of the world’s most respected economists, was exacerbated by the easy money policies adopted by mortgage lenders.

On the other hand, in the “responsive” land use regulation areas, the market (people’s preferences) was allowed to determine where and what kind of housing could be built. In these areas housing prices rose far less during the housing bubble and fell far less during Phase I of the housing downturn.

Leading to the International Financial Crisis: These radically differing house price trends set up world financial markets for ”Meltdown Monday.” The easy money led to a strong increase in foreclosure rates, an inevitable consequence of households having sought or been enticed into mortgage loans that they simply could not afford. Yet it was not foreclosure rates that doomed the market. It was rather the unprecedented intensity of those losses in particular markets.

Foreclosures were not the problem: Foreclosures happened all over. Foreclosure rates rose drastically in California and the prescriptive markets, but had relatively less impact in the responsive markets of the South and Midwest, where house prices changed little relative to incomes.

Intensity of the losses was the problem. The problem lay largely in the scale of house value losses in some markets, particularly the most prescriptive ones. Lenders faced foreclosure and short sales losses on houses that had lost an average of $170,000 in value in the ground zero markets. In the responsive markets, on the other hand, average house value losses were less than one-tenth that, at $12,000 per house (http://www.demographia.com/db-hloss.pdf).

By the end of Phase I of the housing downturn, house value losses in the prescriptive markets had reached nearly $2.3 trillion, accounting for 94 percent of the total losses in major metropolitan markets (those with more than 1,000,000 population). If the market had been allowed to operate in these markets, the losses in the prescriptive markets could easily have been one-fifth this amount. Most likely the mortgage industry and the international economy might have been able to handle such losses, sparing the world the current deep financial crisis.

True, the housing bust would not have happened without the easy money. Neither easy money nor prescriptive land use regulation were sufficient in themselves to send the world economy into a tailspin. But together they conspired to create the conditions for “Meltdown Monday”.

Phase II of the Housing Downturn

The Panic of 2008: By September 15, the “die had been cast.” The holders of mortgage debt could no longer sustain the losses that were occurring in the ground zero markets. This led to the Lehman Brothers bankruptcy and then to a financial sector that seems to be accelerating faster than the taxpayers can pick up the pieces. The ensuing “panic” – a 19th century synonym for a severe economic downturn – has led to millions of layoffs, decreases in demand across the economy and taxpayer financed bailouts around the world. Many have seen their retirement funds wiped out. Others have lost their jobs. American icons, such as General Motors and Bank of America have been relegated to begging on Washington’s K Street.

Housing Downturn Broadens and Deepens: The panic has now brought about a new phase in the housing downturn – what I label Phase II. In Phase II, a deteriorating economy starts to kick the bottom out of the rest of the housing market. With evaporating confidence in the economy and the drying up of demand, house prices have begun a free-fall in virtually all markets, regardless of the extent to which their prices had bloated.

Our analysis of National Association of Realtors data shows this. In almost all markets house price declines accelerated during the fourth quarter of 2008 (the first quarter following Meltdown Monday). In just three months, median house prices fell an average of more than 12 percent in the major metropolitan markets. In the ground zero markets, house prices dropped 14 percent, with the average loss from the peak exceeding 40 percent. In the responsive markets, prices fell 11 percent, approximately double the previous reduction from the peak (See Table).

Thus, the difference is that in Phase I, house price declines were in proportion to the previous price escalation. In Phase II, the percentage declines are generally similar without regard to the house price increases.

House Price Deflation from Peak
By Phase of the Housing Downturn
	PRESCRIPTIVE LAND USE MARKETS			RESPONSIVE LAND USE MARKETS
Factor	Ground Zero	Other	All	RESPONSIVE LAND USE MARKETS	ALL MARKETS

Prices: To Phase I	-31.70%	-11.10%	-20.80%	-5.90%	-17.90%
Prices: To Phase II	-41.40%	-21.40%	-30.80%	-16.60%	-28.00%

Prices in Phase II	-14.20%	-11.60%	-12.60%	-12.40%	-14.20%

Loss per House: To Phase I	($193,800)	($42,400)	($96,300)	($12,200)	($66,900)
Loss per House: To Phase II	($253,000)	($81,800)	($142,700)	($34,200)	($104,800)

Loss per House in Phase II	($59,200)	($39,400)	($46,400)	($37,900)	($59,200)

Gross Losses (Trillions): To Phase I	($1.82)	($0.46)	($2.29)	($0.16)	($2.44)
Gross Losses (Trillions): To Phase II	($2.40)	($0.99)	($3.39)	($0.44)	($3.82)

Gross Losses (Trillions): in Phase II	($0.58)	($0.52)	($1.10)	($0.28)	($1.38)

Phase I: To September 2008
Phase II: To December 2008
Major Metropolitan Markets (over 1,000,000 population)
For markets by classification see: http://www.demographia.com/db-hloss.pdf

Recession or Depression?

It’s critical to note that the decline is by no means as deep as in the 1930s. On the other hand, there is no indication that conditions are going to improve markedly in the short run. Millions of households who saw their retirement accounts devastated are likely to curb consumption for years to come. The key question is whether we are in the equivalent of 1933, in the pit of the downturn, or in the equivalent of the late 1930s, soon to begin a long, slow climb out.

For housing though, this is a depression. Never before over the last half-century have house prices fallen as they have in the prescriptive markets during Phase I of the housing downturn. And since the bust, during Phase II, overall price declines are on a par with the worst years of the Great Depression. “Meltdown Monday” has incited a downward spiral whose course will be the topic of future commentaries on this site.

The classifications of the major metropolitan markets and price declines for each market are shown in http://www.demographia.com/db-hloss.pdf.

Also see: Mortgage Meltdown Graphic: http://www.demographia.com/db-meltdowngraphic.pdf

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

February 18, 2009

Dubai, Mumbai, Shanghai : Destiny or Hype?
The assonant phrase “Dubai, Mumbai, Shanghai or Goodbye” was credited to Andrew Ross Sorkin of the New York Times in late 2007 at the beginning of the financial crisis on Wall Street. For years, New York, London and Tokyo held sway as the world’s financial capitals. Then the tectonic plates of the financial world began to move and these new cities were going to be the prime beneficiaries.

Global shifts of financial power are not uncommon in history but they are dramatic. In the 15th Century, we saw the rise of Western Civilization. In the 19th Century, we experienced the emergence of the United States of America, followed by the rise first of Russia, Germany and Japan, and then China and India.

The question now: has the time of London, New York and Tokyo come to an end? The basis for this assertion certainly exists. In 2008, the United States trade deficit with China topped $246 billion. In this new century, just eight years old, the United States trade deficit sent $1.4 trillion to China. This pattern alone would seem to secure Shanghai’s future preeminence.

So it would also seem for Dubai. Crude oil hit $147/barrel in July, 2008. At that level, western democracies were sending $1 trillion per year to the Persian Gulf in exchange for 20 million barrels of oil. Dubai claimed possession of the tallest building in the world when the Burj Dubai topped 165 floors. This title, along with the world’s largest airport, world’s tallest hotel, and world’s tallest apartment are just a few of the superlatives used to describe Dubai.

India’s trade surplus with the United States grew to $80 billion in 2008 as their economy exploded. An Indian car company shocked the world by purchasing legendary marquees Jaguar and Land Rover from Ford Motor Company. Mumbai was working towards becoming a true contender.

At the beginning of the financial crisis “Dubai, Mumbai, Shanghai or Goodbye” did seem to identify the future locus of job openings in the financial world. Look at some of the records once owned by United States companies and who owns them today:
- Tallest building : Dubai
- Largest publicly traded company : China
- Largest passenger airplane : Europe
- Largest investment fund : Abu Dhabi
- Largest movie industry : India
- Largest casino : Macao
- Largest shopping mall : Dubai
So it looked in 2008. It is now early 2009. Lehman Brothers is gone. Wachovia was swallowed by Wells Fargo. Merrill Lynch was eaten by Bank of America. Citicorp lost 90% of its equity and struggles for its own survival. The Fed has pumped $700 billion to rescue the system and fears it may take $2 trillion to finish the job. The CEOs of General Motors and Chrysler publically beg Congress for a bailout as their share prices hit 60-year lows. Wall Street has lost 40% of its value in less than six months.

London is no better off. The British pound has hit a 23 year low. The Royal Bank of Scotland required a $142 billion bailout to stave off collapse. Lloyds Banking Groups slid 42% in value to its lowest levels since the 80s. Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview with Bloomberg Television, “I would urge you to sell any sterling you might have. It’s finished. I hate to say it, but I would not put any money in the U.K.”

Tokyo fell from financial power in the 1990s and never recovered. They steered clear of the subprime fiasco, holding just $8 billion of the world’s $1 trillion subprime portfolio. Yet Japan has not been immune: Toyota suffered its first operating loss in 71 years. Its export-centered economy is now reeling.

Yet if the old standbys are reeling, it now seems that the new guys are not as ready for prime time as was widely believed. The price of crude oil tumbled from $147/barrel in July 2008 to $32/barrel in December and the global economy was rocked. The loss of revenue had differing impacts worldwide.

Suddenly the new players in the game seemed weaker. Russia, whose cost of production in the frozen tundra of Siberia is more than $60/barrel, lost its swagger. Prime Minister Putin became silent and Russia’s Backfire bombers stopped flying sorties to the American coastline. Russia is effectively bankrupt.

But the biggest impact was in the Middle East. The drop in oil prices eliminated $839 billion per year from the income ledgers of the Persian Gulf alone. Some in the Middle East can tolerate the temporary loss of revenue. The Abu Dhabi sovereign wealth fund, for example, already held $850 billion in surplus and the cost of producing a barrel of oil remains just $4/barrel.

But what of the new financial center of the Middle East? Dubai has seen its global market of new condominium buyers evaporate. Prices have collapsed and there is no end in sight. Price declines of 40% have been reported in the last two months. The mighty Burj Dubai, proud symbol of Dubai, has seen its values plummet 50% in the last two months. Sales in Dubai have simply come to a halt. More than half of the construction projects in the United Arab Emirates – worth $582 billion – were put on hold in 2008 according to the Dubai Chronicle. Look for further weakening in 2009.

The impact on China has been arguably the most dramatic. More than 10,000,000 Chinese have been thrown out of work in the last 90 days. This is a new phenomenon in China, which has experienced 9% growth for years. Thousands of factories have been closed and civil unrest is rising. China has raised 400,000,000 people out of poverty in just one generation by moving them from villages into the cities. There are 24 million new workers added to the labor market each year. A slowdown in their export-driven industry will have a disastrous effect on these new workers.

India has not been as adversely impacted as the western economies. Like Japan, India was not a player in the subprime mess. But this economic immunity did not protect the people of Mumbai from terrorist attack. Its global importance made it an attractive target to Islamic terrorists. On November 26th, 2008, eighty innocent people were killed in a series of coordinated attacks on Mumbai.

So will the tectonic plates keep shifting? Will the financial power return to New York, London and Tokyo? Or will new financial power centers emerge? As of now the financial crisis has humbled everyone. Who will emerge when the bleeding stops is something we still cannot predict.

Robert J. Cristiano Ph.D. has more than 25 years experience in real estate development in Southern California. He obtained financing from the Middle East following the collapse of the savings & loan industry in the early 90s and has become an expert on that region. He is a resident of Newport Beach, CA.
February 15, 2009
Industry And The Urge To Cluster

What drives industry to locate in one region and not in the next?

Economic geography – the distribution of economic activity over physical space – has always been central to economic development. Policy-makers trying to encourage economic activity to locate in under-developed regions want answers: Is it infrastructure? Fiscal incentives? Good business environment? Or could it be agglomeration – the compounding effect of industry clustering in a particular location?

And if the key factor is indeed this critical mass, can the effect run from one type of industry to another? Do existing, more traditional manufacturing clusters attract newer services industry?

The question of where and how services firms decide to locate themselves has become exceedingly central to understanding economic growth and development. Services, and especially knowledge-based services, now account for a greater proportion of advanced-country GDPs, and increasingly so for emerging economies.

New Economic Geography (NEG) theory would argue that agglomeration advantages lock business activity into core regions. The core also supports the existence of intermediate industry in the periphery, and so specialized input-suppliers co-locate close by. For instance, think of Detroit’s production of automobiles and the auto-parts manufacturers who locate in geographically proximate Michigan, Ohio and Indiana.

The theoretical business-economics literature would also argue that manufacturing and services are intricately linked in the production chain. For example, marketing services add the finishing touches in the final stages of a manufacturing process, or research and development services result in increased production within the “real” economy. Service inputs into production, such as design, technological refinements, and branding, account for a major part of value added in manufacturing industries. The result is that it is becoming difficult to identify where the product ends and where the service begins.

These theories have been challenged by claims that services, as compared to manufacturing, are liberated from the tyranny of space, owing to advances in information and communication technologies. In addition, the ability to splice the service production chain more thinly, goes the argument, means that proximity may cease to be an important factor with regard to these industries.

But some empirical research suggests that agglomeration forces may actually be stronger in the case of services – that service industries actually tend to cluster more strongly and more closely to existing urban or manufacturing agglomerations.

How do we know this? It is true that while the interest in urban, regional and spatial economic theory has grown dramatically in the last few decades, empirical research has followed in fits and starts. Some historical evidence shows that manufacturing does indeed precede services, specifically producer services, in a city or city-region. Research in the United States in the mid-1990s, and then more recently, also demonstrates that financial and professional services firms often chose to locate themselves in geographic proximity to established manufacturing industrial areas.

More macro-level North-South models of development also seem to lend credence to the idea that services cluster close to existing manufacturing companies. Research on firm location in Sweden has shown that producer services locate themselves close to manufacturing industry to benefit from accessibility to their customers, but that many producer services also look to supply other service industries. Similar research in Denmark shows that manufacturing and services can be so intricately linked in their production chains that firms across both types may decide simultaneously to choose one location over another.

And there is yet another possibility. Research in Japan’s urban areas revealed that the presence of a large and growing service sector in an existing urban cluster could lead to the displacement of manufacturing units.

There are two basic causes of clustering. The first is regional endowments such as land, climate, and waterways. The second is circularity in location choice, implying that firms want to be where large markets are, and large markets are where many firms are located.

This logic may seem obvious now, but, as economist Paul Krugman notes, that wasn’t really the case before 1991. In the latter half of the 19th century, the emergence of the manufacturing belt in the United States was a turning point in the economic geography of the country. The belt – mainly New England, Middle Atlantic and east-North-Central regions – contained the majority of manufacturing employment up until the first half of the 20th century. It was a classic example of how concentration of firms in one region increased local demand and thus made the area attractive for other firms. Services industries, catering to both final consumption and to manufacturing, soon followed.

What does all this tell us about how governments should focus their energies? If the whole point of policy were to encourage industrial growth in regions that were not previously favored by economic activity, then a multitude of factors would need to be considered: investments in educational infrastructure, and training and development of skilled labor are just some examples.

If policy was aimed at the development of producer services industries, then it seems that a healthy manufacturing sector is vital to a healthy services sector. There is, however, an ongoing blurring of the distinction between what constitutes manufacturing and what constitutes services, and this transformation has stimulated new support functions that feed the production processes of both.

If so, and if the different types of industry do simultaneously co-locate, then…the discussion is akin to going round the Mulberry bush.

Megha Mukim is currently reading for a Ph.D at the London School of Economics. Prior to this she was a visiting fellow at the MacMillan Center for International and Area Studies at Yale University.

February 15, 2009
A Tale of Two Blizzards

January 1979 saw one of the worst blizzards in city history hit Chicago, dumping 20 inches of snow, closing O’Hare airport for 46 hours, and paralyzing traffic in the city for days. Despite the record snowfall, the city’s ineffectual response was widely credited for the defeat of Mayor Michael Bilandic in his re-election bid, leading to Jane Bryne becoming the city’s first female mayor.

In January 1978, a similar blizzard had struck the city of Indianapolis, also burying the city in a record 20 inches of snow. Mayor Bill Hudnut stayed awake nearly two days straight, coordinating the response and frequently updating the city on the snow fighting efforts through numerous media appearances. Nevertheless, the airport closed and it was several days before even major streets were passable. But when it was all over, Hudnut emerged a folk hero and went on to become arguably the most popular mayor in city history, serving four terms before voluntarily stepping aside.

While major snow is much less frequent in Indianapolis than Chicago, and Hudnut’s response certainly bettered Bilandic’s, these twin blizzards illustrate a powerful difference in citizen expectations between these two cities, reflecting two of the broad approaches to urban service provision in America today.

People in Chicago expect and demand high quality public services. Chicago is the “City that Works”, and woe be to the mayor when it doesn’t. That’s why every mayor since Bilandic has treated snow clearance like a military operation, deploying a division of armored snow trucks to assault the elements at the merest hint of a flake, often leaving more salt than snow in their wake. If Chicagoans pay relatively higher taxes than the rest of the country, at least its citizens know that they are getting something for their money, whether it be snow clearance, garbage collection, street lighting, landscaped boulevards, or bike lanes.

In Indianapolis, by contrast, public services are not the main concern. People gripe if snow is not cleared, but are not outraged. No Indianapolis mayor ever lost his job for failing to deliver good services. Rather, taxes have always been the primary issue. Nothing illustrates this better than the most recent mayoral election. Buoyed by an emerging demographic super-majority, a large campaign war chest, and the support of almost every establishment figure of both parties, Mayor Bart Peterson confidently raised city income taxes by 0.65 percentage points shortly on the heels of a major property tax jump. In the fall, however, he lost his re-election bid to political neophyte Greg Ballard, who ran on a taxpayers first platform. Ballard won without significant backing from his own Republican party, supported only by a collection of grass roots activists, bloggers, and his own relentless door-knocking campaign.

The divergent citizen and policy preferences of both cities continue to the present, amply illustrated by this very winter. Mayor Daley, facing a recession-induced budget gap, decided to save money by ordering that residential streets not be cleared by workers clocking overtime. Citizen unhappiness over the state of the streets during December snows led even the widely popular Daley to backtrack on this experiment, reverting to the traditional all out assault for the balance of winter.

In Indianapolis, after 12.5 inches blanketed the city this January, crews took several days to clear its snow routes and, as per its standard operating procedure, did not plow residential streets at all. The local media carried tales of people’s laments, but ultimately the city government knows that the response to the snow will be forgotten soon after it melts. Higher tax bills, by contrast, are long remembered. In an inverse situation to Chicago, people in Indianapolis sleep at night knowing that, if services haven’t been all that great, they at least have more money in their pockets.

While both cities have long seemed happy pursuing their respective courses, storm clouds are gathering over both strategic models of operation.

Backing down from a high service stance in government is almost impossible. Government spending only ever seems to go one way. Faced with that logic, and the clear expectations of its citizens, Chicago in effect decided to double down. With the much celebrated resurgence of urbanism, Chicago put its chips on a soaring Loop economy driven by an emerging status as one of the top global cities, a real estate boom, and a series of tax and fee increases. It embarked on a civic transformation epitomized by community showplaces like Millennium Park, miles of top quality streetscape improvements, a new terminal at Midway Airport and the start of a multi-billion dollar O’Hare modernization, one of the nation’s best bicycling infrastructures, and perhaps most ambitiously, a bid for the 2016 Olympic Games.

This model is increasingly showing signs of strain, however. Many taxes and fees, including the nation’s highest sales tax at 10.25%, appear to be close to maxed out. The real estate crunch hit hard at Chicago’s transfer tax revenue, another key source of city funds. This, in combination with a weak economy, has hammered the city’s budget, leaving Daley with tough, often unpopular choices to make. The CTA recently raised fares. City parking meter rates will be quadrupling under a privatization plan recently signed, hopefully plugging operating budget holes – something Daley had previously resisted. As with New York City, Chicago may be faced with the cold reality of both service cuts and tax increases.

More importantly, as with the dot-com bubble before it, there are real questions as to whether the financial and real estate driven economy that fueled Chicago’s boom will come back in full force any time soon. In the meantime, the economy and cost of living in the city are squeezing the middle class harder by the day, and despite perhaps America’s biggest condo boom, the city’s population is slowly shrinking. All this leaves Mayor Daley, although still very popular, with perhaps the toughest leadership challenge of his tenure.

Meanwhile Indianapolis faces problems of its own. It too has budget challenges, just as years of deferred investment are finally catching up with the city. Indianapolis has a $900 million unfunded backlog of curb and sidewalk repairs alone. It is the 13th largest municipality in America, but has the 99th largest transit system. And, more troubling, the city now finds itself outflanked by its own suburbs.

At one time Indianapolis could comfortably decide to purchase bronze-level services while other cities paid more for gold. But now its own suburbs are offering silver, and at a lower price point in taxes than the city is selling bronze. Many of its suburbs today not only have better schools and safer streets than the central city, they feature fully professional fire departments, large park acreage, lavishly landscaped parkways exceeding city standards, and even better snow removal. In the recent storm, upscale north suburban Carmel finished plowing its cul-de-sacs before Indianapolis finished its main arteries. When people can pay less and get more just by moving to the collar counties, that’s what they do. Tens of thousands of people have left the merged central city-county in recent years. Only a large influx of the foreign born has kept Indianapolis from losing population.

The current economy is exposing the long term structural weaknesses of both civic strategies. Chicago and Indianapolis show that both higher service and lower service models face big challenges and that neither approach represents a safe harbor in the current economic storm.

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

February 14, 2009
A Washington, D.C. Arts & Innovation District: “Sonya’s Neighborhood”

A recent widely-read piece in the Washington Post, “The Height of Power,” noted the great prospects of Washington’s rise to the top, not only in politics but in publishing, media, business and the arts. In this way, it said, Washington’s evolution will follow the pattern of other great capitals like London, New York, Paris or Tokyo.

As a seventh-generation Washingtonian, born here and baptized in the National Cathedral, this is a prediction I am delighted to hear. I spent almost ten years producing avant garde experimental theater in the US and on tour in Europe, but I was based in San Francisco, not in Washington; my Washington artistic presence consisted of my last production, Actual Shō, playing the Kennedy Center Opera House in 1988. As an MIT bachelor of science graduate (in architecture), I know and greatly appreciate the spirit of innovation and experimentation that is at the core of America’s entrepreneurial, adventurous approach to life.

There are many reasons why America needs Washington to enter the first rank of innovative cultural centers. Dearest to me is that playwrights, screenwriters, novelists, and all the artists who take on the portrayals of politicians, politics, and power will become part of the same milieu as the political leaders. The result will be that members of each group develop a more sophisticated understanding of the other.

The key to transforming Washington into a center of cultural and scientific innovation is to establish a stimulating neighborhood, such as New York city’s SoHo/Tribeca, that attracts creative people who cross-fertilize each other, and who become part of the everyday social circle both of the political leadership and of the city’s African-American core community.

Where should Washington build the creative, innovative neighborhood it needs to accomplish this? I know just the place: A parcel of some 100 acres, now occupied by wholesale grocery and souvenir warehouses, light industry, a federal Park Service truck maintenance yard, and little-used, dilapidated municipal facilities. Its bare, windswept hilltop is the last unoccupied “commanding height” in the city. It doesn’t have any residences (and thus no residents to oppose the project), yet it’s within just a mile of the Capitol Dome.

I’m a member of a family that has been present in Washington for more than 200 years. Our family lands included this property, which was a large woodland estate, started in about 1800. It included all the land west of today’s Gallaudet University to the railroad tracks (plus some land on the other side of the tracks), north of Florida Avenue, and, on the north, included not only the ground on which today New York Avenue lies, but also the railroad yards north of New York Avenue.

Just south of New York Avenue, the land rises steeply to a hilltop, and then falls away gently. This hilltop is now home to a National Park Service maintenance yard and the Brentwood Reservoir, but from about 1811 to 1915 it was the site of a mansion built by Congressman Joseph Pearson (Federalist – NC) for his second wife, Eleanor, daughter of the first mayor of Washington, Robert Brent. From the 1820s through the 1880s the Brentwood Mansion was a social center of Washington, scene of many a dinner and ball as horse-drawn carriages conveyed the wealthy and powerful up the hill, through the well-kept forest to the mansion. For aficionados of Jane Austen’s Pride and Prejudice, it was the closest thing Washington ever had to the fictional Pemberly of Mr. Darcy – and it was built in precisely the era of Jane Austen. Now the site is strewn with rusting machine parts and Park Service dumpsters. Sic transit gloria mundi (“so passes worldly glory”).

As the city grew it surrounded the estate, but the estate itself was never developed. The city took pieces of it, built New York Avenue over part of it, and put railroad tracks on one side. As the city developed, the isolated, aging mansion never gained access to modern utilities, and the family moved away and neglected it. Eventually, in the early 1920s, my grandfather developed a wholesale food market and managed the land until his death in 1948. One of his brothers died in 1951; a third lived far away; the fourth tried to manage the property from his home in Connecticut but gave up and sold it all.

This large parcel that once was our family land is now again in disrepair. The city government and owners of various pieces of it are hoping to develop it: the usual mix of office-buildings and townhouses, with no particular theme or vision of a unique, exciting neighborhood.

What I propose is to develop this entire large area – not just the parts subject to the present plans, but almost all of the former family property, including the mix of federal and DC-government land – as a neighborhood specifically dedicated to be stimulating and exciting for creative people. The property offers an ideal place to create an “arts and innovation district,” a kind of SoHo or San Francisco in DC. It’s large, contiguous, and self-contained. It already has an institution of higher learning, Gallaudet, along one side, and a Metro stop at one corner.

Since the property is south of New York Avenue, I think of it as SoNYA = Sonya = “Sonya’s Neighborhood,” which sets the tone for the concept as personal and human, rather than the bureaucratic feel of calling it a “district” or “zone.” This large-scale project would be a major job-generator, exactly in-line with the new Stimulus Bill, and the existing federal and DC-government ownership means that it is an ideal public-works project for President Obama and Mayor Adrian Fenty to promote.

The fact that the site includes a prominent hilltop gives the project a glittering opportunity to achieve instant national and international status. If you fly into Washington, you will see a prominent hilltop gothic cathedral, the National Cathedral. It symbolizes the importance of religion in American life. And, of course, anyone coming to Washington sees the Capitol Dome, which symbolizes democratic government, and sees the monuments to the Presidents – Washington, Lincoln, Jefferson – that symbolize the importance of history.

The hilltop where the family mansion stood is a place where Presidents, Senators, Cabinet Members, Justices, and Representatives dined, drank, and danced long ago. It should now be the site of a highly-visible, signature building of innovative design to serve as an Arts & Innovation Center. The ground is at an elevation of 175 feet above sea level. Any tall building placed on this “commanding height” not only will have commanding views down across the city, it will also “be seen” from many places around the city, as are the National Cathedral, the Capitol, and the Washington Monument. This prominent building will symbolize the importance to America of innovation and creativity. As core tenants, I propose the federal agencies the National Endowment for the Arts and the National Endowment for the Humanities, who would move their headquarters from the Old Post Office. The building could also house a Washington branch of the new Singularity University based in Silicon Valley (see http://singularityu.org/.)

This building would serve as the keynote for the entire development, which would spread-out to the south on the slope below it, down towards Florida Ave. “Sonya’s Neighborhood” should be mixed-use, residential and office, with the ambience of New York’s SoHo or of San Francisco’s denser neighborhoods, and a feel similar to Venice, Italy – lots of narrow pedestrian-only streets, with bistros, art galleries, clubs, etc. – a place where creative people like to hang out.

A local surface transit system can connect from the Metro stop through all of the development up to the hilltop Arts & Innovation Center building. It could extend into the Gallaudet campus, and to the nearby Ivy City neighborhood as it is redeveloped.

There is much more to the proposal, including relocation of the grocery and souvenir wholesalers, and the Park Service maintenance facilities, to a new facility built overtop of the railroad yard north of New York Avenue (as in Manhattan, where Park Avenue is built overtop of railroad lines running to Grand Central Terminal). I encourage anyone who is interested to contact me via e-mail at sissoed@hotmail.com (no “n” in “sissoed”) to learn more.

Edward Sisson is a Washington D.C.-based attorney. If there is sufficient interest in developing the Arts & Innovation Building and Sonya’s Neighborhood, he expects to take a leading role as “producer” of that exciting project, utilizing his unique background in Washington, in architecture, in the arts and the sciences, and in law to solve the many hurdles and obstacles that will confront the project.

February 12, 2009
Housing Price Bubble: Learning from California

In a letter to The Wall Street Journal (February 6) defending California’s greenhouse gas (GHG) emissions policies, Governor Arnold Shwarzenegger’s Senior Economic Advisor David Crane noted that California’s high unemployment is the result of “a bust of the housing bubble fueled by easy money.” He is, at best, half right.

The “bust of the housing bubble” occurred not only because of “easy money,” but also because of the very policies California has implemented for decades and is extending in its battle against GHG emissions.

The nation has never had a housing bubble like occurred in California. The Median Multiple (median house price divided by median household income) in California’s coastal metropolitan areas had doubled and nearly tripled over a decade. Housing costs relative to incomes reached levels twice as high as those experienced in the early 1990s housing bubble, which was bad enough.

This is all the more remarkable because even before the bubble the Median Multiple in the Los Angeles, San Francisco, San Diego and San Jose metropolitan areas was already elevated at 1.5 times the historic norm.

“Easy money,” by itself, does not explain what caused the unprecedented housing bubble in California. If “easy money” were the sole cause, then similar house price escalation relative to incomes would have occurred throughout the country.

Take, for example, Atlanta, Dallas-Fort Worth and Houston. These are the three fastest growing metropolitan areas in the developed world with more than 5,000,000 population. Since 2000, these metropolitan areas have grown from three to 15 times as fast as Los Angeles, San Francisco, San Diego and San Jose. While 1,800,000 people have moved out of the four coastal California metropolitan areas to other parts of the country, 700,000 have moved to Atlanta, Dallas-Fort Worth and Houston from other parts of the country. This is where the demand would have been expected to produce the bubble. But it did not. House prices remained at or near historic norms and average house prices rose one-tenth that of the California coastal metropolitan areas.

These three metropolitan areas were not alone. Throughout much of the nation, in metropolitan areas growing both faster and slower in population than coastal California, house prices simply did not explode relative to household incomes.

In touting “smart land use” as a strategy for greenhouse gas emissions, Crane misses the other half of the equation. Indeed, it is so-called “smart land use” (“smart growth”) that intensified the housing bubble in California. “Smart land use” involves planners telling the market where development will and will not occur. In the process it ignores the price signals of the market. Owners of land on which development is permitted naturally and rationally raise their asking prices, while owners of land not so favored can expect little more than agricultural value when they sell. The result is that the land element of housing prices exploded, fueling the unprecedented bubble. Restrictions on supply naturally lead to higher prices, whether in gasoline, housing or anything else.

California has placed restrictions on development with a vengeance. For nearly four decades, California has woven a tangled web of land use restrictions that have made the state unaffordable. When the demand rose in response to the “easy money” the land use planning systems were unable to respond and a rapid escalation in housing prices followed. The same thing occurred in other areas with excessive land use regulation, such as Las Vegas, Phoenix, Seattle, Portland, New York, Washington and Miami, though the house price escalation was not so extreme as in coastal California.

On the other hand, where land use still allowed a free interplay of buyers and seller (consistent with rational environmental requirements), the housing bubble was largely avoided. Average house prices in Atlanta, Dallas-Fort Worth and Houston rose only one-tenth that of Los Angeles, San Francisco, San Diego and San Jose.

When the bubble burst, the far higher house prices naturally tumbled more than in other areas. The price was paid well beyond California and the other “smart land use” markets around the nation. From Washington to Wall Street to Vladimir Putin and Chinese Premier Wen at Davos, everyone knows that the international finance crisis was precipitated by the US mortgage meltdown.

It all might not have occurred if there had been no “smart land use” markets with their exorbitant and concentrated losses. Overall, the “smart land use” markets represent little more than 30 percent of the nation’s owned housing stock, yet produce more than 85 percent of the housing bubble values at their peak. California style “smart land use” intensified the overall mortgage losses by more than five times. If the losses had been more modest, there might not have been anything like the current mortgage meltdown. With more modest losses, the world financial system might have been able to handle the damage without catastrophe, just as it did with the “dot-com” bubble earlier in the decade. The many households that have lost much of their life savings or retirement income would not be facing the future with fear. And even personally frugal taxpayers of the world would not be the principal stockholders in failing banks.

California needs to wake up and face the reality. The intensity of the housing bubble was of its own making. More “smart land use” is just what California does not need. This is the lesson the rest of the nation needs to learn rather than repeat.

Sources:
David Crane letter to the editor: http://online.wsj.com/article/SB123381050690451313.html
Domestic migration data: http://www.demographia.com/db-metmic2004.pdf
Analysis of the housing bubble: http://www.heritage.org/Research/Economy/wm1906.cfm
House price losses by peak Median Multiple: http://www.demographia.com/db-usahs2008y.pdf
Las Vegas Land Market Analysis: http://www.demographia.com/db-lvland.pdf
Phoenix Land Market Analysis: http://www.demographia.com/db-phxland.pdf

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

February 11, 2009
Stimulus Plan Caters to the Privileged Public Sector

Call it the Paulson Principle, Part Deux.

Under the now thankfully-departed Treasury secretary, we got the first bailout for the undeserving – essentially, members of his own Wall Street class.

Now comes the Democratic codicil to the P. Principle. It’s a massive bailout and expansion of the public-sector workforce as well as quasi-government workers in fields like health and education. Not so well-rewarded – except for expanded unemployment benefits – will be those suffering the brunt of the downturn, such as construction and manufacturing workers, whose unemployment is now heading north of 10%.

Indeed, a close look at the current stimulus plan shows that as little as 5% of the money is going toward making the country more productive in the longer run – toward such things as new roads, bridges, improved rail and significant new electrical generation. These are things, like the New Deal’s many construction projects, that could provide a needed boost to our sagging national morale.

Instead, we are focusing once again on those who have been getting the best deal for doing the least. The Bureau of Labor Statistics reports state and local government workers get paid 33% more than their private sector counterparts. If you add in the pensions and other benefits, the difference is over 40%. In New York alone, public-sector wages and benefits since 2000 have grown twice as fast as those of the average private-sector worker.

Egregious stories of overpaid public workers are legion. In suburban Chicago, for example, some school administrators are making over $400,000 with benefits and incentives. Recent reports out of Boston suggest hundreds of firefighters and police officers make well in excess of $100,000 a year. And of course, there are the California prison guards who can make upwards of $300,000 a year with overtime.

Of course, most public sector employees are not so lucky. But, for the most part, these workers enjoy protections, like health care for life, that most others could only dream about. Many also have pensions that allow them to retire in their 50s, while some of us will be hod-carrying well into our 70s.

This all means that the potential price tag for swelling the public workforce could ultimately run into the trillions, a number Washington and Wall Street now use the way we used to talk about billions. At very least, we should be asking new public workers, or those whose jobs are being bailed out by the stimulus package, to make the kind of sacrifices demanded, say, of those working at General Motors. We could, for example, make them wait ’til age 60 or even 65 to retire.

To no one’s surprise, much of this favoritism has to do with party politics. The basic truth is that auto and other industrial workers, like those in construction, have become somewhat expendable in the eyes of some Democrats – in part because they do not always follow the party line. In contrast, public-employee unions are the politically correct rock upon which much of the party now rests.

This oversized influence is relatively recent. Yet as private-sector unions have waned, those in the public sector have waxed. They have been able to extort enormous benefits out of City Halls, counties, states and, of course, Congress.

In the process, they have become – like the Wall Street financiers before them – a kind of privileged class. In the case of some Chicago garbage men, they often don’t work anything near 40 hours a week but are paid as if they did. Others engage in elaborate schemes to take advantage of injuries, real or imagined. Who would have thought that punching tickets for the Long Island Rail Road would be so hazardous that many retired employees use these “injuries” to collect disability money – in order to play golf or take another job?

This can all get very expensive, especially given the poor immediate prospects that the stock market can finance these additional pensions. Some day the millennial generation should initiate a class action suit for placing this unconscionable burden on them.

Right now, though, there’s little reason to expect President Obama and the majority Democrats will change direction. The public sector unions are often among the largest contributors to Democratic campaigns. They have also cultivated strong ties with the Washington media – some of whom, like The Washington Post’s Harold Meyerson, have argued over the years that these public workers are increasingly synonymous with the future middle class.

There’s certain logic to this. Insulated from global competition, public employees have the ability to ratchet up their demands almost without serious limit. After all, even the most radical Republicans are not proposing to have the postal system transferred to Vietnam. We certainly don’t want to outsource our police services to China or Russia.

So what’s not to like? Well, nothing – if the Roman Empire or China’s Qing Dynasty is your idea of a historical role model. Those regimes epitomize what happens when most of a nation’s wealth goes to support an ever-expanding bureaucracy and associated private-sector rent-seekers at the expense of both private commerce and public infrastructure. Look in the dictionary under the word decline.

We can already see its early signs. Across the country, cities are being forced to choose between maintaining their basic infrastructure and honoring the medical, retirement and other pension obligations owed to retired public workers. The head of the Atlanta Fire Fighters’ Pension fund described groups like his as “the 800-pound gorilla in the room.” This primate has the power to stomp on the ability of states, cities and counties to put money into improving much of anything or even considering lowering taxes.

Over time, though, one can hope President Obama will adjust his course. At some point, the middle- and working-class stiffs in the private sector – unionized or not – will question a stimulus that neglects their aspirations at the expense of protecting the imagined rights of yet another privileged class. Individually, public employees may not be as noxious as John Thain, but there are more of them. And over time, they could cost us even more.

As a charismatic leader with strong union support, Obama could try to pull a “Nixon in China” and insist on reforming the benefits enjoyed by public workers as a condition of federal help. He wouldn’t be the only leader attempting a return to sanity. The idea of challenging public sector privilege has gained some currency in Ireland and France, as well as among the Liberal Democrats in the U.K.

Such a bold initiative would earn President Obama not only gratitude from private sector workers but also posterity. But it would take courage, too; the mere suggestion of reform could result in a rash of strikes (as in Greece) and ceaseless yammering from union lobbyists and their allies on Capitol Hill.

Of course, public-sector unions and their supporters will argue that they constitute an important part of the nation’s middle class and that their benefits are therefore sacrosanct. Yet it’s increasingly evident that this strata of middle-class workers live in a different reality than typical private sector shmoes. As George Orwell suggested in Animal Farm, it seems some animals are more equal than others.

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.

February 10, 2009
Seattle Joins the Recession

At the time of the election, less than 3 months ago, Seattle seemed to be riding above the fray, escaping the worst features of the recession, such as mass layoffs, even despite weakness in the housing market. Seattle area voters even approved a series of huge tax measures, including $30 billion for rail rapid transit, befitting what folks here like to consider a world-class city.

The story recently is much more somber, reeling somewhat from a series of high-level hits to the economy. In contrast to neighboring Oregon, unemployment is not yet severe, about 6.3% for the metropolis, but there remains a degree of denial that the Emerald City is in for an actual decline! Giant Amazon actually did well over the holiday season and Costco reasonably well, considering its dependence on national consumption.

The largest layoff, reminiscent of past recessions, was to Boeing which might drop as many as 10,000 jobs, and a yet unknown number to PACCAR, maker of Kenworth and Peterbilt trucks and the stalwarts of Seattle’s unionized and well-paid manufacturers. Starbucks is closing many stores and contracting at the headquarters. Mighty Microsoft will not occupy expected space, as it has also been hit by the recession and will experience selective layoffs.

The decline in the housing market and new construction, residential and commercial, has collectively impacted hundreds of firms in finance, architecture, and construction. The Seattle housing market, like that of Portland, which held up longer than California’s now may experience serious declines.

Perhaps the biggest loss, however, is the collapse of WAMU (Washington Mutual), a pacesetter in the bad practices that brought on the recession. WAMU’s demise is hurting many local investors, charities, tax revenues, as well as employment at all levels, probably leading to a downtown job loss of 20,000.

Another casualty is the port business. A substantial part of Seattle’s growth and wealth is tied up in international trade. Container traffic has slowed markedly and is at further risk, especially if there is a rise in protectionism in Congress. Overall, the eventual losses in the in the finance, housing and perhaps even high-tech sectors of the “new economy” may be greater than the more visible problems of Boeing, PACCAR and even Starbucks, whose output and income will recover as the world economy recovers (but not until). Hard times are coming not just for Joe the Plumber, but the vaunted “creative class” as well.

Other soft indicators are that 30 percent of homes are selling at a net loss, and that the current forecast for the next three months is for a 3-percent decline in regional product and a loss of 50,000 jobs. The recession is viewed as having “officially arrived in Seattle” in December 2008, following the layoff plans of Seattle’s iconic firms and recognition that construction employment has dropped like a “piece of concrete,” in the words of Dick Conway, a well-known Puget Sound Economic Forecaster.

The imminent closure of the Seattle Post-Intelligencer fits into this bleak picture. This is the story of an economy that is decelerating after convincing itself it was all but recession-proof. In Detroit or even LA, they expect hard times. Up here we have all but forgotten that our economy is also cyclical, and has much vulnerability. The question is will we see again the famous billboard erected in the 1973 recession, which asked “Will the Last person leaving SEATTLE – Turn out the lights.”

Richard Morrill is Professor Emeritus of Geography and Environmental Studies, University of Washington. His research interests include: political geography (voting behavior, redistricting, local governance), population/demography/settlement/migration, urban geography and planning, urban transportation (i.e., old fashioned generalist)

February 8, 2009