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January 23, 2014
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January 23, 2014

The Changing Face of European Economics: Liberalism Moves North

Where do we find the nations with the highest tax levels? In the mid-90s the answer was quite clear: in Western Europe. Both Denmark and Sweden had a tax rate of 49 percent of GDP in 1996, followed closely by Finland with a 47 percent level. The tax burden was somewhat lower in France, Belgium, Austria and Italy, where rates ranged from 42 to 44 percent of GDP. Thanks to its oil-wealth Norway could afford a Nordic welfare model with 41 percent taxes, the same level as the Netherlands which had recently slimmed down its welfare system considerably. These Western European welfare states were the nine OECD countries with the highest tax rates. The tenth country was Eastern European Hungary with a rate of 40 percent.

And where do we today find the high-tax nations? Looking at tax data from 2012, the answer is again amongst the Western European welfare states plus Hungary. At first glance, little seems to have changed with time. The only country to leave the top-10 list is the Netherlands, which has recently been replaced by another Western European nation: Luxembourg. But a closer look shows that Western Europe’s welfare states have indeed changed, and are continuing to do so. With time, a significant convergence has occurred.

In 2012 Denmark still lead the tax league, with a 48 percent rate. France and Belgium had climbed to shared second position, with 45 percent tax rates. Rising levels in Italy and lowered ones in Sweden and Finland resulted in the three countries sharing a 44 percent level. Austria and Norway had increased their levels slightly, whilst the Netherlands had implemented further reductions. So, the welfare states with the highest taxes lowered their levels, whilst those with somewhat lower levels raised them. The Netherlands is the exception, as it continued to reduce relatively low taxes. No surprise then that it is the only country to leave the top-10 tax league.

Of course, taxes are far from the only indicator of economic policy. A range of other factors, such as trade openness, business policy and protection of property rights, affect the opportunities for job creation, competition and growth. The Index of Economic Freedom, published by the Heritage Foundation in partnership with the Wall Street Journal, ranks countries based on a broad set of indicators of economic freedom. The Western European welfare states can overall be said to combine large public sectors and high taxation with relatively free economic policies. But the differences between them are significant, and the direction of change has varied considerably during the last decades.

Tax rate % of GDP
	1996	2006	2012	Change 1996-2012
Sweden	49,4	48,1	44,3	-5,1
Finland	47,1	43,5	44,1	-3,0
Netherlands	40,9	39,1	38,6*	-2,4
Denmark	49,2	49,0	48,0	-1,2
Austria	42,8	43,0	43,2	0,4
France	44,2	43,6	45,3	1,1
Norway	40,9	43,1	42,2	1,4
Belgium	43,9	44,4	45,3	1,4
Italy	41,6	40,8	44,4	2,8
* Data given for 2011. Source: OECD Stat Extract and own calculations.

When the index of economic freedom was first published in the mid-90s, it showed that the Netherlands and Austria were the most market liberal of the nine Western European countries listed above. Sweden and Italy were on the other hand found at the bottom. In the latest 2014 edition of the index, Denmark – which compensates for high taxes with market oriented policies, including a liberal labour market – has climbed to become the freest economy amongst the group.

In fact, Denmark ranks on 10th position globally, higher than even the US on 12th position and the UK on 14th. The Netherlands ranks on 15th place globally, followed by Finland and Sweden on the 19th and 20th positions. Belgium on the other hand has gone from being one of the more economically free Western European welfare states to becoming the third least free. Today the country scores on 35th place globally. France is found on a dismal 70th position, and is unique in having reduced its economic freedom score marginally between 1996 and 2014. Italy has merely increased its score by 0.1 points, ranking at 86th place– just below Kyrgyz Republic. The Western European welfare states might seem to have similar policies at first glance, but differences in market adaptation are in fact quite significant.

Heritage/WSJ Economic Freedom Score
	1996	2006	2014	Change 1996-2014
Sweden	61,8	70,9	73,1	11,3
Finland	63,7	72,9	73,4	9,7
Denmark	67,3	75,4	76,1	8,8
Norway	65,4	67,9	70,9	5,5
Netherlands	69,7	75,4	74,2	4,5
Belgium	66,0	71,8	69,9	3,9
Austria	68,9	71,1	72,4	3,5
Italy	60,8	62,0	60,9	0,1
France	63,7	61,1	63,5	-0,2
* Data for 1997 given. Source: Heritage/WSJ Economic Freedom Index and own calculations.

The change in economic freedom parallels that of change in taxation, since taxation is an important part of economic freedom and since tax-reforms and other market reforms have tended to go hand-in-hand. The major changes have happened in the Nordics, particularly in the three high-tax countries which lack Norway’s oil-wealth. Sweden has lowered its taxes by over 5 percent of GDP between 1996 and 2012, by far the greatest change. The country has also increased its economic freedom score by over 11 points, again the most significant change. If Sweden had retained its 1996 score, it would score as the 78th freest economy today, just below Paraguay and Saudi Arabia.

Finland has reduced its taxes by 3 percent of GDP, and improved economic freedom almost as much as Sweden. Denmark still leads the tax league, but has also implemented major increases in economic freedom – quite impressive given that the country had a high economic freedom score already in the mid-90s. Norway has liberalized overall economic policy, but increased taxation somewhat. France and Italy have stagnated at a low economic freedom score, and relied on increasing taxation rather than growth-oriented reforms to fund public services. Belgium and Austria have implemented some economic liberalization, but increased taxes.

The welfare states of Western Europe are quite complex. Their social and economic systems have much in common, but also differ in many ways. Today, as well as during the mid-90s, the countries in the world with the highest tax rates are found amongst this group. Still, major changes have occurred, and more seem on the way. In the upcoming 2014 elections of Sweden, it is more likely than not that the left will emerge victorious. But even the social democrats have, after initial resistance, accepted most of the current center-right government’s reforms. The social democratic government of Denmark is currently focused on reducing taxes, as well as government spending and the generosity of the welfare state. Part of the inspiration at least seem to come from the recent workfare policies of the Swedish right.

As I recently discussed in a New Geography article, the current government of the Netherlands has raised the issue of reforming the welfare state further, to a “participation society” by encouraging self-reliance over government dependency. Finnish policies focus on how new entrepreneurial successes can be furthered. Part of the background is that Nokia, which the country relied so much on, has quickly fallen behind the global competition. On the other hand, the small company behind the game Angry Birds has gained global attention and become a symbol of new Finnish ingenuity. France and Italy still struggle with faltering markets and sluggish development. Perhaps with time the countries will follow the lead of the Nordics and the Netherlands, in reducing the scope of big government, and moving towards lower taxes and increased economic freedom?

It is anything but easy to predict the future development of the Western European welfare states. But one thing is clear: the countries in the region that are doing well today are those that have reformed towards free-market policies and lower tax burdens since the mid-1990s. Given the apparent problems in France and Italy, and the continued interest for market reforms in the more vibrant North, it would seem that increased economic freedom is still the recipe for success.

Dr. Nima sanandaji is a frequent writer for the New Geography. He is upcoming with the book “Renaissance for Reforms” for the Institute of Economic Affairs and Timbro, co-authored with Professor Stefan Fölster.

Creative commons photo "Flags" by Flickr user miguelb.

January 23, 2014

Why State Economic Development Strategies Should Be Metro-Centric

Globalization, technology, productivity improvements, and the resulting restructuring of the world economy have led to fundamental changes that have destroyed the old paradigms of doing business. Whether these changes are on the whole good or bad, or who or what is responsible for bringing them into being, they simply are. Most cities, regions, and US states have extremely limited leverage in this marketplace and thus to a great extent are market takers more than market makers. They have to adapt to new realities, but a lack of willingness to face up to the truth, combined with geo-political conditions, mean this has seldom been done.

Three of those new realities are:

1. The primacy of metropolitan regions as economic units, and the associated requirement of minimum competitive scale. It is mostly major metropolitan areas, those with 1-1.5 million or more people, that have best adapted to the new economy. Outside of the sparsely populated Great Plains, smaller areas have tended to struggle unless they have a unique asset such as a major state university. Even the worst performing large metros like Detroit and Cleveland have a lot of economic strength and assets behind them (e.g., the Cleveland Clinic) while smaller places like Youngstown and Flint have also gotten pounded yet have far fewer reasons for optimism. Many new economy industries require more skills than the old. People with these skills are most attracted to bigger cities where there are dense labor markets and enough scale to support items ranging from a major airport to amenities that are needed to compete.

2. States are not singular economic units. This follows straightforwardly from the first point. As a mix of various sized urban and rural areas, regions of states have widely varying degrees of economic success and potential for the future. Their policy needs are radically different so the one size fit all nature of government rules make state policy a difficult instrument to get right. Additionally, many major metropolitan areas that are economic units cross state borders.

3. Many communities may never come back, and many laid-off workers may never be employed again. Realistically, many smaller post-industrial cities are unlikely to ever again by economically dynamic no matter what we do. And lost in the debate over the n-th extension of emergency unemployment benefits is the painful reality that for some workers, especially older workers laid off from manufacturing jobs, there’s no realistic prospect of employment at more than near minimum wage if that. As Richard Longworth put it in Caught in the Middle, “The dirty little secret of Midwest manufacturing is that many workers are high school dropouts, uneducated, some virtually illiterate. They could build refrigerators, sure. But they are totally unqualified for any job other than the ones they just lost.” This doesn’t even get to the big drug problems in many of these places. This isn’t everybody, but there are too many people who fall into that bucket.

I want to explore these truths and potential state policy responses using the case study of Indiana. An article in last week’s Indianapolis Business Journal sets the stage. Called “State lags city with science, tech jobs” it notes how metropolitan Indianapolis has been booming when it comes to so-called STEM jobs (Science, Technology, Engineering, Math). Its growth rate ranked 9th in the country in study of large metro areas. However, the rest of Indiana has lagged badly:

Indiana for more than a decade has blown away the national average when it comes to adding high-tech jobs. But outside the Indianapolis metro area, there isn’t much cause for celebration.

Careers in science, technology, engineering and math—typically referred to as STEM fields—have surged in growth compared to other careers in Marion and Hamilton counties. It’s a boon for economic development, considering the workers earn average wages almost twice as high as all others, and employers sorely need the skills. Dozens of initiatives focus on building STEM jobs in the state.

A recent report ranked the Indianapolis-Carmel metro area ninth in the country in STEM jobs growth since the tech bubble burst in 2001. But while the metro area has grown, the rest of Indiana has barely budged from the early 2000s, an IBJ analysis of U.S. Bureau of Labor Statistics found.

Indianapolis grew its STEM job base by 39% since 2001 while the rest of the state grew by only 10% (only 6% if you exclude healthcare jobs). Much of the state actually lost STEM jobs.

This divergence between metropolitan Indianapolis (along with those smaller regions blessed with a unique asset like Bloomington (Indiana University), Lafayette (Purdue University) and Columbus (Cummins Engine)) and the rest of the state is a well-worn story by now. Here are a few baseline statistics that tell the tale.

Item	Metro Indianapolis	Rest of Indiana
Population Growth (2000-2012)	15.9%	4.1%
Job Growth (2000-2012)	5.9%	-7.2%
GDP Per Capita (2012)	$50,981	$34,076
College Degree Attainment (2012)	32.1%	20.1%

Additionally, there does appear to be something of a brain drain phenomenon, only it’s not brains leaving the state, it’s people with degrees moving from outstate Indiana to Indianapolis. From 2000-2010 a net of about 51,000 moved from elsewhere in Indiana to metro Indianapolis. As Mark Schill put it in the IBJ:

“Indianapolis is somewhat of a sponge city for the whole region,” said Mark Schill, vice president of research at Praxis Strategy Group, an economic development consultant in North Dakota.

The situation in Indiana, Schill said, is common throughout the United States: States with one large city typically see their engineers, scientists and other high-tech workers flock to the urban areas from smaller towns.

Even I find it very surprising that of my high school classmates with college degrees, half of them live in Indianapolis – this from a tiny rural school along the Ohio River in far Southern Indiana near Louisville, KY.

What has Indiana’s policy response been to this to date? I would suggest that the response has been to a) adjust statewide policy levers to do everything possible to reflate the economy of the “rest of Indiana” while b) making subtle tweaks attempt to rebalance economic growth away from Indianapolis.

On the statewide policy levers, the state government has moved to imposed a one size fits all, least common denominator approach to services. The state centralized many functions in a recent tax reform. It also has aggressively downsized government, which now has the fewest employees since the 1970s. Tax caps, a comparative lack of home rule powers, and an aggressive state Department of Local Government Finance have combined to severely curtail local spending as well. Gov. Pence took office seeking to cut the state’s income tax rate by 10% (he got 5%), and now wants to eliminate the personal property tax on business. Indiana also passed right to work legislation.

I call this “the best house on a bad block strategy.” I think Mitch Daniels looked around at Illinois, Ohio, and Michigan and said, “I know how to beat these guys.” Indiana is not as business friendly as places like Texas or Tennessee, but the idea was to position itself to capture a disproportionate share of inbound Midwest investment by being the cheapest. (I’ll get to Pence later).

The subtle tweaks have been income redistribution from metro Indianapolis (documented by the Indiana Fiscal Policy Institute) and using the above techniques and others to apply the brakes to efforts by metro Indy to further improve its quality of life advantage over many other parts of the state (see my column in Governing magazine for more). One obvious example is a recent move by the Indiana University School of Medicine to build full four year regional medical school campuses and residency programs around the state with the explicit aim of keeping students local instead of having them come to Indianapolis for medical training.

What there’s been next to nothing of is any sense of metropolitan level or even regional thinking. The state does administer programs on a regional level, but the strategy is not regionally oriented and the administrative borders don’t even line up. Here are the boundaries of the various workforce development boards:

There’s a semi-metropolitan overlay, but as I’ve long noted places like Region 6 are economic decline regions, not economic growth regions. Here’s how the Indiana Economic Development Corp. sees the world:

These are not just agglomerations of the workforce districts, there are numerous differences between them. The point is that clearly the organization is driven by administrative convenience and the political need for field offices, not a metro-centric view of the world or strategy.

Add it all up and it appears that Indiana has decided to fight against all three new realities above rather than adapting to them. It rejects metro-centricity, imposes a uniform policy set, and is oriented towards trying to reflate the most struggling communities. I don’t think this was necessarily a conscious decision, but ultimately that’s what it amounts to.

When you fight the tape, you shouldn’t expect great results and clearly they haven’t been stellar. Since 2000, Indiana comfortably outperformed perennial losers Michigan and Ohio on job growth (well, less job declines), but trailed Kentucky, Wisconsin, Minnesota, Iowa, and Missouri. But notably, Indiana only outpaced Illinois by a couple percentage points. That’s a state with higher income taxes (and that actually raised them) that’s nearly bankrupt and where the previous two governors ended up in prison. Yet Indiana’s job performance is very similar. What’s more, Hoosier per capita incomes have been in free fall versus the national average, likely because it has only become more attractive to low wage employers.

Fiscal discipline, low taxes, and business friendly regulations are important. But they aren’t the only pages in the book. Workforce quality counts for a lot, and this has been Indiana’s Achilles heel. (My dad, who used to run an Indiana stone quarry, had trouble finding workers with a high school diploma who could pass a drug test and would show up on time every day – hardly tough requirements one would think). Also aligning with, not against market forces is key.

I will sketch out a somewhat different approach. Firstly, regarding the chronically unemployed, clearly they cannot be written off or ignored. However, I see this as largely a federal issue. We need to come to terms with the reality that America now has a population of some million who will have extreme difficulty finding employment in the new economy (see: latest jobs report). We’ve shifted about two million into disability rolls, but clearly we’ve to date mostly been pretending that things are going to re-normalize.

For Indiana, the temptation can be to reorient the entire economy to attract ultra low-wage employers, then cut benefits so that people are forced to take the jobs. I’ve personally heard Indiana businessmen bemoaning the state’s unemployment benefits that mean workers won’t take the jobs their company has open – jobs paying $9/hr. Possibly the 250,000 or so chronically unemployed Hoosiers may be technically put back to work through such a scheme – eventually. But it would come at the cost of impoverishing the entire state. Creating a state of $9/hr jobs is not making a home for human flourishing, it’s building a plantation.

Instead of creating a subsistence economy, the focus should instead be on creating the best wage economy possible, one that offers upward mobility, for the most people possible, and using redistribution for the chronically unemployed. You may say this is welfare – and you’re right. But I would submit to you that the state is already in effect a gigantic welfare engine. In addition to direct benefits, the taxation and education systems are redistributionist, and the state’s entire economic policy, transport policy, etc. are targeted at left-behind areas (i.e., welfare). Even corrections is in a sense warehousing the mostly poor at ruinous expense. So Indiana is already a massive welfare state; we are just arguing about what the best form is. I think sending checks is much better than distorting the entire economy in order to employ a small minority at $9/hr jobs – but that’s just me. Again, we are in uncharted territory as a country and this is ultimately going to require a national response, even if it’s just swelling the disability rolls even more. I do believe people deserve the dignity of a job, but we have to deal with the unfortunate realities of our new world order.

With that in mind, the right strategy would be metro-centric, focusing on building on the competitively advantaged areas of the state – what Drew Klacik has called place-based cluster – and competitively advantaged middle class or better paying industries.

Contrary to some of the stats above, this is not purely an Indianapolis story. Indiana has a number of areas that are well-positioned to compete. Here’s a map with key metro regions highlighted:

This may look superficially like the maps above, but it is explicitly oriented around metro-centric thinking. Metro Indy has been doing reasonably well as noted. But Bloomington, Lafayette, and Columbus (sort of small satellite metros to Indy) have also done very well. In fact, all three actually outperformed Indy on STEM job growth.

Additionally, three other large, competitively advantaged metro areas take in Indiana territory: Chicago, Cincinnati, and Louisville. These are all, like Indy, places with the scale and talent concentrations to win. True, none of the Indiana counties that are part of those metros is in the favored quarter. But they still have plenty of opportunities. I’ve written about Northwest Indiana before, for example, which should do well if it gets its act together.

This covers a broad swath of the state from the Northwest to the Southeast. It comes as no surprise to me that Honda chose to locate its plant half way between Indianapolis and Cincinnati, for example.

The state should align its resources, policies, and investments to enable these metro regions to thrive. This doesn’t mean jacking up tax rates. Indiana should retain its competitively advantaged tax structure. But it should mean no further erosion in Indiana’s already parsimonious services. The state is already well-positioned fiscally, and in a situation with diminishing marginal returns to further contraction.

Next, empower localities and regions to better themselves in accordance with their own strategies. This means an end to one size fits all, least common denominator thinking. These regions need to be let out from under the thumb of the General Assembly. That means more, not less flexibility for localities. Places like Indianapolis, Bloomington, and Lafayette would dearly love to undertake further self-improvement initiatives, but the state thinks that’s a bad idea. (I believe this is part of the subtle re-balancing attempt I mentioned).

It also means using the state’s power to encourage metro and extended region thinking. For example, last year within a few months of each other the mayors of Indianapolis, Anderson, and Muncie all made overseas trade trips – separately and to different places. That’s nuts. The state should be encouraging them to do more joint development.

This also means recognizing the symbiotic relationship that exists between the core and periphery in the extended Central Indiana region, clearly the state’s most important. The outlying smaller cities, towns, and rural areas watch Indianapolis TV stations, largely cheer for its sports teams, get taken to its hospitals for trauma or specialist care, fly out of its airport, etc. Metro Indianapolis and its leadership have also basically created and funded much of the state’s economic development efforts (e.g., Biocrossroads) and many community development initiatives (the Lilly Endowment). Many statewide organizations are in effect Indianapolis ones that do double duty in serving the state. For example, the Indiana Historical Society. (There is no Indianapolis Historical Society).

On the other side of the equation, Indianapolis would not have the Colts and a lot of other things without the heft added from the outer rings out counties that are customers for these amenities. It benefits massively from that, particularly since it’s a marginal scale city. One of the biggest differences between Indy and Louisville is that Indy was fortunate enough to have a highly populated ring of counties within an hour’s drive.

So in addition to aligning economic development strategies around metros, and freeing localities to pursue differentiated strategies, the state should encourage the next ring or two of counties that are in the sphere of influence of major metros to align with their nearest larger neighbor.

Contrary to popular belief, this is a win-win. When I was in Warsaw, Indiana, people were concerned that many highly paid employees of the local orthopedics companies lived in Ft. Wayne. From a local perspective, that’s understandable and obviously they want to be competitive for that talent and should be all means go for it. On the other hand, what if Ft. Wayne wasn’t there for those people to live in? Would those orthopedics companies be able to recruit the talent they need to stay located in small town Indiana?

It’s similar for other places. Michael Hicks, and economist at Ball State in Muncie, said, “Almost all our local economic policies target business investment and masquerade as job creation efforts. We abate taxes, apply TIFs and woo businesses all over the state, but then the employees who receive middle-class wages (say $18 an hour or more) choose the nicest place to live within a 40-mile radius. So, we bring a nice factory to Muncie, and the employees all commute from Noblesville.” Maybe Muncie isn’t completely happy about this, understandably. But would they have been able to recruit those plants at all (and the associated taxes they pay and the jobs for anybody who does stay local) if higher paid workers didn’t have the option to live in suburban Noblesville? Would the labor force be there?

I saw a similar dynamic in Columbus. Younger workers recruited by Cummins Engine chose to live in Greenwood (near south suburban Indy). Columbus wants to keep upgrading itself to be more attractive – a good idea. But the ability to reverse commute from Indy is an advantage for them.

Louisville, Kentucky has one of the highest rates of exurban commuting the country because so many Hoosiers in rural communities drive in for good paying work.

This is the sort of thinking and planning that needs to be going on. Realistically, most of these small industrial cities and rural areas are not positioned to go it alone and they shouldn’t be supported by the state in attempting to do so. They need to a align with a winning team.

There are two groups of places that require special attention. One is the mid-sized metro regions of Ft. Wayne, Evansville, and South Bend-Elkhart. These places are too far from larger metros and aren’t large enough themselves to have fully competitive economies. No surprise two of the three lost STEM jobs. Evansville has done better recently on the backs of Toyota, but has a vast rural hinterland it cannot carry with its small size. The region has done ok of late, but it has also received gigantic subsidies in the form of multiple massive highway investments, and now a massive coal gasification plant subsidy. I don’t believe this is sustainable. These places need special assistance from the state to devise and implement strategies.

The other grouping consists of rural and small industrial areas that are too far outside the orbit of a major metro to effectively align with it. This would includes places like Richmond or Blackford County. They might get lucky and land a major plant, but realistically they are going to require state aid for some time to maintain critical services.

For the last two groups especially, there also needs to be a commitment by the state’s top brain hubs – Indy and the two university towns – to applying their intellectual and other resources to the difficult problem at hand. Part of that involves helping them be the best place of their genre that they can. While cities are competitively advantaged today, not everybody wants to live in one. So there is still an addressable market, if not as large, for other places.

Put it together and here’s the map that needs to be changed. It’s percentage change in jobs, 2000-2012:

Pretty depressing. Urban core counties had some losses, but suburban Indy, Chicago, and Cincy did decently (Louisville’s less well), plus Bloomington area, Lafayette, and Columbus. You see also the strong performance of Southwest Indiana which is fantastic, but the sustainability of which I think is in question. Wages are higher in metro areas too, by the way. Here’s the average weekly wage in 2012, which shows most of the state’s metros doing comparatively well:

In short, I suggest:

– Retain lean fiscal structure but limit further contractions
– Goal is to build middle class or better economy, not bottom feeding
– Align economic development efforts to metro areas, particularly larger, competitively advantages locations. Align capital investment in this direction as well.
– Greater local autonomy to pursue differentiated strategies for the variegated areas of the state
– Special attention/help to strategically disadvantaged communities, but not entire state policy directed to servicing their needs.
– Utilization of transfers for the chronically unemployed pending a federal answer, but again, not redirection of state policy to attract $9/hr jobs.

This requires a lot of fleshing out to be sure, but I think is broadly the direction.

Back to Gov. Mike Pence, would he be on board with this? He’s Tea Party friendly to be sure and interested in fiscal contraction. But he’s not a one-trick pony. He’s actually taken some interesting steps in this regard. He is subsidizing non-stop flights from Indianapolis to San Francisco for the benefit of the local tech community. He also wants to establish another life sciences research institute in Indy. And he’s talked about more regionally focused economic development efforts. It’s a welcome start. I think he groks the situation more than people might credit him for. Keep in mind that he did not establish the state’s current approach, which arguably even pre-dated Mitch Daniels, and he has to deal with political realities. And if as they say only Nixon could go to China, then although a reorienting of strategy is not about writing big checks, still perhaps only someone with conservative bona fides like Pence can push the state towards a metro-centric rethink.

Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile, where this piece originally appeared.

January 22, 2014

California’s Potholed Road to Recovery

California’s economy may be on the mend, but prospects for continued growth are severely constrained by the increasing obsolescence of the state’s basic infrastructure. Once an unquestioned leader in constructing new roads, water systems, power generation and building our human capital, California is relentlessly slipping behind other states, including some with much lower tax and regulatory burdens.

The indications of California’s incipient senility can be found in a host of reports, including a recent one from the American Society of Civil Engineers, which gave the state a “C” grade. Roads, in particular, are in bad shape, as many drivers can attest, and, according to another recent study, are getting worse. The state’s shortfall for street repair is estimated at $82 billion over the next 10 years.

Remarkably, given how Californians spend and tax ourselves, we actually bring up the rear in terms of road conditions. Indeed, one recent survey placed California 47th among the states in road quality. In comparison, low-tax Texas notched No. 11, showing that willingness to spend money is not the only factor.

Greater Los Angeles is particularly affected; L.A. roads have been ranked by one Washington-based nonprofit as the worst in the nation. Bad roads cost L.A. drivers an average $800 a year in vehicle repairs, and a full quarter of roadways were graded “F,” meaning barely drivable. The region that gave birth to the freeway and the dream of quick, efficient travel, now has worse roads than some much poorer, less-important, lower-tax cities, such as Houston, Dallas or Oklahoma City. Not surprisingly, Los Angeles has been ranked has having the worst traffic congestion in the nation, but San Francisco and San Jose also make it to the 10 metros with the worst traffic.

But it’s not just the roads that are in bad shape. Other basic sinews of the state’s infrastructure – ports, water systems, electrical generation – are increasingly in disrepair. Conditions are so poor at Los Angeles International Airport, admits new L.A. Mayor Eric Garcetti, that “there’s nothing world class” about the aging facility. This is critical for a city and region with significant global pretensions. Since 2001, LAX traffic has declined by more than 5 percent, while double-digit gains in passenger traffic have been logged by such competitors as New York, Miami, Atlanta and Houston.

Meanwhile the Los Angeles-Long Beach port system, facing greater competition from the Gulf Coast, as well as other Pacific Coast ports, has been beleaguered by regulations that, among other things, mandate moving heavy loads with zero-emission but expensive, underpowered electric trucks that further undermine port productivity. Rather than see the ports as job and wealth generators, ports also have become increasingly sources for revenue for hard-hit city budgets.

Overall, the bills are mounting; California faces an enormous shortfall in infrastructure. One study, conducted by California Forward, puts the bill for the next 10 years at $750 billion.

The case for addressing infrastructure needs should be compelling on its own but, given fiscal limitations, it’s critical first to set some sense of priority. California, particularly under the current governor’s father, the late Edmund G. “Pat” Brown, spent upward of a fifth of its budget on basic infrastructure; today that share is under 5 percent. Rather than build the infrastructure that might spark the economy, as the elder Brown did, we have chosen, instead, to spend on government salaries and pensions, which, however well-deserved, require a transfer of wealth from the private sector to the public sector that brings only minimal benefits.

These shortfalls are made even worse by ideological considerations that, in this one-party-rule state, overcome even the most rational approach to infrastructure development. The ruling class in Sacramento speaks movingly about the Pat Brown legacy, but has little interest in mundane things like roads, bridges, port facilities and other economically useful infrastructure. Instead, the powerful green and planning clerisy is focused on transforming the state into a contemporary ecotopia, where people eschew cars, live in crowded apartment towers and ride transit to work. Economic considerations, upward mobility and the creation or retention of middle-class jobs are, at best, secondary concerns.

This ideological bent leads to grossly misplaced priorities. Consider, for example, the billions of dollars being proposed for building Gov. Jerry Brown’s signature project, a $68 billion, 800-mile high-speed rail system, even as state highways erode. The bullet train, which even liberals such as Kevin Drumm at Mother Jones magazine have pointed out, has devolved into a boondoggle with costs far above recent estimates and, given the lack of interest from private investors, something unlikely to offer much of an alternative to commuters for decades to come. Unlike many liberal commentators, who tend to favor crony-capitalist projects with a “green” cast, Drumm denounced the entire project as being justified with projections, such as for ridership, that are “jaw-droppingly shameless.”

In addition, the project’s future has been clouded by legal challenges from a host of complainants stretching from Central Valley farmers to suburbanites on the San Francisco peninsula. In December, Superior Court Judge Michael Kenny in Sacramento County accused the state high-speed rail authority of ignoring provisions in the authorizing legislation for the project designed to prevent “reckless spending.”

Public support for this misguided venture has been fading, thankfully. Even before Judge Kenny’s decision, a USC/Los Angeles Times poll showed statewide voter opposition rising to 53 percent, while 70 percent would like to have a new vote on the legislation that authorized the project.

At the same time, federal funding, critical to keeping this failing project afloat, grows increasingly unlikely. California Congressman Jeff Denham, also a former supporter of the project, joined with Congressman Tom Latham to ask the federal Government Accountability Office if further federal disbursements could be illegal, given the uncertainty of the state funding needed to “match” the federal dollars. With Republicans likely to retain the House after the 2014 elections, it seems all but certain that high-speed rail – at least the statewide system proposed by its advocates – is heading to a less-than-spectacular denouement.

This tendency to allow ideological considerations to overcome logic suffuses virtually the entire planning process across the board. For example, devotion to alternative energy sources leads the state to reject the expanded use of clean, cheap and plentiful natural gas in favor of extremely expensive renewable fuels, notably wind and solar. This may have much to do with the investments by crony capitalists close to Democratic politicians – think Google or a host of venture-capital firms – as with anything else. Under the right circumstances, such as government mandates, even unsound investments can make some people rich, or, in this case, even richer.

But the cost to the rest of society of such Ecotopian policies can be profound, and could cost as much as $2,500 a year per California family by 2020. High energy prices will severely affect the state’s already-beleaguered middle- and working-class families, particularly in the less-temperate interior of the state.

The commitment to expensive energy also makes bringing new industry – such as manufacturing or logistics – that can provide jobs ever more problematical. Similarly, money poured into follies like high-speed rail also weaken the state’s ability to fund, directly or through bonds, more-critically needed, if less-politically correct, transport infrastructure.

Given these clear abuses of the public purse, it is not surprising that some Californians may simply want to close their wallets. Yet this would be a disservice to future generations, who will need new roads, ports, bridges and electrical generation. California needs to rediscover its historic commitment to being an infrastructure leader, but only after acquainting ourselves once again with the virtues of common sense.

This story originally appeared at The Orange County Register.

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

January 21, 2014

Correcting Priorities: The 10th Annual Demographia Housing Affordability Survey

Alain Bertaud of the Stern School of Business at New York University and former principal planner of the World Bank introduces the 10th Annual Demographia International Housing Affordability Survey by urging planners to abandon:

"…abstract objectives and to focus their efforts on two measurable outcomes that have always mattered since the growth of large cities during the 19th century’s industrial revolution: workers’ spatial mobility and housing affordability".

This year’s edition has been expanded to nine geographies, including Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the United Kingdom, and the United States. A total of 85 major metropolitan areas (of over 1,000,000 population) are covered, including five of the six largest metropolitan areas in the high income world (Tokyo-Yokohama, New York, Osaka-Kobe-Kyoto, London, and Los Angeles). Overall, 360 metropolitan markets are included.

View the map with housing data for all markets created by the New Zealand Herald.

The Affordability Standard

The Demographia International Housing Affordability Survey uses a price-to-income ratio called the "median multiple," calculated by dividing the median house price by the median household income. Following World War II, virtually all metropolitan areas in Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States had median multiples of 3.0 or below. However, as urban containment policies have been implemented in some metropolitan areas, house prices have escalated well above the increase in household incomes. This is exactly the effect that economics predicts to occur where the supply of a good or service is rationed, all things being equal.

Even a decade ago, there was considerable evidence of the rapidly deteriorating housing affordability in markets with urban containment policy. Yet, governments implementing these policies were largely ignoring not only the trends, but also any reference to the extent of the losses in historic context. Co-author Hugh Pavletich of Performance Urban Planning and I established the Demographia International Housing Affordability Survey to draw attention to this policy driven attack on the standard of living.

The Demographia Survey rates housing affordability as follows:

Demographia Housing Affordability Rating Categories
Rating	Median Multiple
Severely Unaffordable	5.1 & Over
Seriously Unaffordable	4.1 to 5.0
Moderately Unaffordable	3.1 to 4.0
Affordable	3.0 & Under

Affordability in the 9 Geographies

Among the nine geographies and all 360 markets, Ireland emerges has the most affordable, with a median market multiple of 2.8. The United States follows at 3.4, and Canada at 3.9. Japan’s median market multiple is 4.0, while the United Kingdom is at 4.9 and Singapore at 5.1 The other geographies are all well into the severely unaffordable category, including Australia and New Zealand, at 5.5, and far worse Hong Kong, at 14.9 (Figure 1).

Costly Hong Kong & Vancouver, Affordable Pittsburgh and Atlanta

For the fourth year in a row, Hong Kong is the least affordable major metropolitan area, with a median multiple of 14.9, three times its early 2000s ratio. Vancouver is again the second most unaffordable major market, with a median multiple of 10.3, three times its pre-urban containment level. Housing affordability in coastal California is well on the way to the stress of the 2000s. San Francisco ranks third most unaffordable at 9.2 and nearby San Jose is at 8.7, with San Diego (7.9) and Los Angeles (7.7) following closely. Sydney, at 9.0, ranks fourth with Melbourne at 8.4 and Auckland at 8.0.All of these metropolitan areas have had serious deterioration of housing affordability since adopting urban containment policy.

All of the affordable major metropolitan areas are all in the United States. Pittsburgh is the most affordable, at 2.3. There are 13 additional major affordable housing markets, which include growing and over-5 million Atlanta as well as Indianapolis and Columbus, with their strong economies (Figure 2).

Japan

Notably, Japan’s two largest metropolitan areas, Tokyo-Yokohama and Osaka-Kobe-Kyoto have avoided the severely unaffordable territory occupied by the other three megacities (New York, Los Angeles, and London). Osaka-Kobe-Kyoto has the best housing affordability of any megacity, at 3.5 (moderately unaffordable) and Tokyo-Yokohama is at 4.4 (seriously unaffordable).

House Size

This year’s Demographia Survey also provides information on average new house size in the nine geographies (Figure 3). The largest houses are in the United States, which is second only to Ireland in affordability. The smallest houses are in Hong Kong, which also has the least affordable housing. In living space those who pay the most get the least, while those who pay the least get the most.

The Imperative for Reform

Housing is the largest element of household budgets, and its cost varies the most between metropolitan areas. Where households pay more than necessary for housing, they have less dicsretionary income and lower standards of living and there is more poverty. This is a natural consequence of planning policies that place the urban form above the well-being of people. One of the principal justifications is environmental, but the gains from urban containment policy are scant and exorbitantly expensive.

Virtually all of the geographies covered in the Demographia Survey are facing more uncertain economic futures than in the past. As is always the case in such situations, lower income households tend to be at greatest risk, while younger households have much less chance of living as well as their parents (except those fortunate enough to inherit their wealth or housing).

There is no more imperative domestic policy imperative than improving the standard of living and minimizing poverty. Planning must facilitate that, not get in the way. Bertaud is hopeful:

"But if planners abandoned abstracts and unmeasurable objectives like smart growth, liveability and sustainability to focus on what really matters – mobility and affordability – we could see a rapidly improving situation in many cities. I am not implying that planners should not be concerned with urban environmental issues. To the contrary, those issues are extremely important, but they should be considered a constraint to be solved not an end in itself."

Download the full report (pdf): 10th Annual Demographia International Housing Affordability Survey

Photo: Suburban Tokyo (by author)

January 19, 2014

The Story of How Marin Was Ruined

Marin County is a a picturesque area across the Golden Gate Bridge from San Francisco of quaint walkable towns, with homes perched on rolling hills and a low rise, unspoiled feel. People typically move to Marin to escape the more urbanized South and East Bay and San Francisco. Eighty-three percent of Marin cannot be built on as the land is agricultural and protected open space.

This is not stopping ABAG, developers, social equity, housing and transit advocates from pushing for high density housing near transit in Marin. Plans for high density housing have sprung up the length of the county – multiple Marin communities found themselves declared Plan Bay Area "Priority Development Areas" (PDAs) making them targets for intense high density development. These designations occurred with little or no consultation by the elected officials that had volunteered them, and without any clear understanding of obligations to develop or impact.

Residents finally came together and said they’d had enough after an unsightly 5 story, 180 unit apartment complex appeared adjacent to an existing freeway choke-point – the city that allowed it had little choice due to onerous ABAG housing quotas that if unmet left the town open to litigation by housing advocates with crippling legal bills and penalties. The last straw was the publication of a station area plan to generate transit ridership that suggested 920 more high density units be built in nearby Larkspur – another freeway bottleneck.

This video, put together by Citizen Marin, a coalition of neighborhood groups seeking to restore local control, was put together to drive awareness of this accelerated urbanization. For Marinites the video serves as a wake up call – most moved to Marin to live in a more rural / suburban location. Marin offers some of California’s most walkable and attractive downtowns already: Sausalito, Mill Valley and San Rafael. All offer the kind of small town charm that are a model for others to emulate and attract visitors and residents.

The video was written and produced by Citizen Marin’s Richard Hall. The video’s narrator is from San Rafael – not San Rafael in Marin County but San Rafael, Argentina, and the animation was put together by a team from Kathmandu Nepal.

January 18, 2014
The Divisions In The One Percent And The Class Warfare That Will Shape Election 2014

There’s general agreement that inequality will be the big issue of this election year. But to understand how this will play out you have to go well beyond the simplistic “one percent” against everyone else mantra that has to date defined discussion of inequality.

Instead our politics increasingly are being shaped by a complex interplay of class interests across the electorate; class, not merely inequality, is emerging as the driving force of our politics. As Marx among others recognized, class structures can be complicated and contain many separate tendencies. For example, even the much-discussed “one percent” is hardly a cohesive group, but one deeply divided in ideology, geography and industry.

For example, out of the 20 richest Americans on the 2013 Forbes 400 list, six have a record of favoring the Democrats in political donations, including the top two, Bill Gates and Warren Buffett. Eleven reliably back Republican candidates and causes, while Google founder Larry Page has only donated to his company’s PAC, Larry Ellison has funded both sides and Michael Bloomberg defies easy categorization.

All three of the top individual political contributors last year — the Soros family, Jets owner Fred Wilpon and Facebook co-founder Sean Parker — also lean to the “party of the people.”

The Democrats’ new and ascendant oligarchy, based in Silicon Valley, Hollywood, Wall Street and the media, are generally concentrated in the country’s most unaffordable cities, places with high degrees of inequality.

This alliance is based not solely on attitude, but also sometimes self-interest. Hedge funds siphon up money from public pension funds desperate for the large gains necessary to meet the extravagant, unfunded benefits increases of Democratic politicians. Venture capitalists and companies and core Democratic supporters invest in “green” technology, made profitable largely by mandates, subsidies and government-backed loans.

These oligarchs represent very different interests than the more traditional plutocracy, based largely in such mainstream endeavors as fossil fuel energy, agribusiness, manufacturing and suburban home development. These worthies, too, are obviously not slum-dwellers, but also live in more dispersed locations such as Houston, Dallas-Fort Worth, Atlanta, Oklahoma City and a host of much more obscure places, at least part of the time. They reflect the somewhat more conservative, fiscally particularly, world view of the broader 1% than their more left-leaning counterparts.

With the power of money and access to media (particularly the new oligarchs), the two competing factions of the “one percent” will pour millions into trying to win over the other classes. The two key ones are what I call the yeomanry — the small property-owning, private-sector middle class — and America’s modern-day “clerisy”: university professors and administrators, government bureaucrats and those business interests tied closest to the governmental teat.

One can expect with fair assurance that the clerisy will strongly support the president and the progressive wing of the Democratic Party. There are few groups as lock-step liberal as the universities, particularly the most important and influential ones. In 2012, A remarkable 96 percent of all donations from Ivy League employees went to the president, something more reminiscent of Soviet Russia than a properly functioning pluralistic academy. Public employee unions, charter members of the clerisy, have been among the biggest contributors to federal candidates, overwhelmingly Democrats over the past decade.

Less certain are the political leanings of the yeomanry. These are not the people who generally benefit from the expansion of government; they are basically stuck being taxpayers. Their distaste for regulation varies, but is most strongly felt when it impacts their businesses or their communities. In 2008, rightfully disgusted by the failures of the Bush administration, they were divided, but in 2012 small business shifted decisively to the right — not enough to save the awful Romney campaign, but they still helped maintain the GOP majority in the House.

The political calculus of the yeomanry, however, is very complex. Those who are older, and those who already own property, are likely to keep shifting toward the right, as long as the Republican lunatic fringe is kept under control. Obamacare taxes and the cancellations of individual insurance plans hit this group directly in the bottom line, and may do so even more in the future. But for younger members of this group, struggling to buy property or launch proper careers, may look to Washington to provide their health care and provide breaks on their student loans.

Arguably the yeomanry will determine the winners in 2014. The big issue here may be over expectations for the future. Today there are many, on both right and left, who are telling the yeomanry that their day in the sun is over. Tyler Cowen suggests in the future “the average” skilled worker can expect to subsist on rice and beans. If they stay on the East or West Coast, they also may never be able to buy a house. On the left, particularly among greens and urban aesthetes, the message is not so different except they tend to think abandoning property ownership is a good thing, since multi-unit rental housing is more environmental friendly and communal.

Sadly many member of the yeoman class — the vast majority of Americans today — believe that the pessimists are correct, and expect their children, will fare worse in the future. If they accept this conclusion, they may be tempted to join the third of Americans who consider themselves “lower” class. With increasingly little prospect of upward mobility, these voters understandably look to Washington and state capitals to redistribute wealth up to them.

How this class politics plays out this year will determine the 2014 results, and likely politics for the generation to come. Oligarchs favoring Republicans will focus on how redistribution takes from the yeomanry to give to the poor and associated crony capitalists. The failings of Obamacare, the rise in taxes and regulations all play to their advantage. This will play well with the income categories – $50,000 to $200,000 annually — that now constitute the class base of the GOP.

In opposition, the new oligarchs, and their allies in the clerisy, will seek to convince enough of the yeoman class that they need the government to enjoy anything like a middle-class life. The Obama cartoon The Life of Julia, with its emphasis on the helping hand of government , is not directed at the poor but what used to be an upwardly mobile class. Julia implicitly rejects traditional American middle-class values such as property ownership, marriage and family and embraces a new vision tied to growing dependency to both the Democratic Party and the state.

Sadly, neither of these approaches addresses the key issue: weak economic growth and a decline in upward mobility. Republicans, in particular, do not tend to associate these things. They seem to believe that faster GDP growth will rebalance our inequality, or at least make it palatable. This misses the fact that we have just gone through one of the most unequal recoveries in history, accelerating the concentration of wealth in ever fewer hands. Growth, clearly, is not enough; what kind of growth must be part of the discussion.

This perspective is critical if we are to address our class divide. Simply put we need to go beyond both “trickle down” economics — which both sets of oligarchs are understandably fine with — and a redistributionist approach, something that strengthens the hand of the clerisy and the politically connected at the expense of the yeomanry. What we need is something that combines largely free-market, libertarian economics with something like the traditional goal of social democracy.

“We can have democracy in this country, or we can have great wealth concentrated in the hands of a few,” noted Justice Louis Brandeis,“but we can’t have both.” Over time, even conservatives and libertarians have to recognize that a republic irrevocably divided between the rich and the dependent poor can not turn out well. And for their part, progressives need to realize that the middle class can not be expected to serve as a piggy bank to assuage their delicate consciousness.

The real issue before us is not inequality per se, but how to spread the ownership of property and improve opportunity; without this America devolves from the world’s exemplar into a second-rate Europe, with less charm, more division, and a national dream finally extinguished.

This story originally appeared at Forbes.com.

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

Creative Commons photo “Income Inequality” by Flickr user mSeattle.

January 16, 2014
Female Executives Across the European Union

A great divide exists between European countries when it comes to the issues of women’s career opportunities. Some countries have high female work participation and values that promote gender equality, while others lag behind. But a closer look shows that the share of women in managerial positions is in odds with other indicators of equality. Scandinavia, where we might expect to find most female directors and chief executives, has in fact the lowest share. Many more women have reached the top of the business sector in countries with relatively low female labor participation, and far from gender equal attitudes. Other factors, such as the scope of welfare state monopolies and hours invested in work, seem to crucially affect women’s chances to reaching the top of the business world.

The European Union has set the goal to achieve an employment level of 75 percent amongst women. So far, only Sweden exceeds this ambition with an employment level of fully 77 percent. Denmark, Finland, the Netherlands, Germany and Austria follow closely behind. In these five countries seven out of ten women working age are employed. It doesn’t seem a coincidence that these northern European nations share similar cultural and political attributes. The expansion of welfare states has historically encouraged womens’ entry into the workforce. Still today public childcare encourages women to invest time at work, whilst high taxes make it difficult to live on only one salary.

Overall, the Eastern- and Central European countries have a lower share of women working, since it is more common with housewives. The three former Soviet states Estonia, Lithuania and Latvia are in particular interesting to look at. Not only are they Eastern European, and strongly committed to low taxes and free markets, but they also share Nordic cultural attributes. The three Baltic states have a respectably high level of two thirds of women in employment. This is somewhat higher than the European average, and considerably more so than in parts of Southern Europe. In Malta and Greece, fewer than half of the women work. In Italy exactly half of them do.

Northern and Western European countries also tend to have more equal gender attitudes. A special edition of the Eurobarometer has focused on the issue of women in decision-making positions. One key indicator is how many disagree with the statement “women are less interested than men in positions of responsibility”. Sweden again stands out, with 84 percent of the public disagreeing with this notion. Although culturally and politically similar Denmark is found at the other end, with only 49 percent disagreeing with this idea, the overall trend is clear. The general publics in Nordic and Western European countries more strongly reject the notion that women are less interested in reaching positions of responsibility while Southern-, Eastern-, and Central European countries are found at the opposite end of the spectrum.

We would expect to find many more women in top positions in the egalitarian Nordic nations, as well as Germany, the Netherlands and other similar countries. And indeed we do. At least when it comes to politics, the public sector and company boards. All too often the analysis stops here. But it is important to realize that representation on boards is a poor measure of women’s progress in the private sector of many European countries. Many boards in Nordic nations for example have relatively formal roles, meeting a few times a year to supervise the work of the management. The select few who end up on the boards – many of whom reach this position after careers in politics, academics and other non-business sectors – enjoy prestigious jobs. They are however not representative of those taking the main decisions in the business sector. The latter role falls on executives and directors. Public sector managers tend to have less overall power, working within the scope of large bureaucratic structures.

Chief executives and directors in the private sector are responsible for taking much of the crucial decisions in the business world. One typically only reaches a high managerial position after having worked hard in a certain sector, or successfully started or expanded a firm as an entrepreneur. The share of women reaching this position is a good proxy of women’s opportunities in the business world as a whole.

Astonishingly, the data show that the gender equal Nordic nations all have lower levels of women at the top of businesses than their less progressive counterparts. In Sweden and Denmark, only one out of ten directors and chief executives in the business world are women. Finland and the UK, two other nations with large public sector monopolies, fare only slightly better.

In contrast, in the average Eastern- and Central European country fully 32 percent of the directors and chief executives are women. This can be compared to 21 percent in Western European countries, 17 percent in Southern European nations and merely 13 percent in the otherwise egalitarian Nordic nations. In Bulgaria, with lower than EU-average levels of female work participation, and not a bastion of egalitarian attitudes, women fill almost half the positions.

It should be noted that other measures of the share of women at top of businesses supports this general trend. Eurostat for example also publishes a broader measure of business leaders, including also middle-managers. In the Baltics Estonia has the lowest share of women in these positions, 36 percent. Lithuania and Latvia fare better with 39 and 45 percent respectively. In Sweden the share is 35 percent and in Denmark 28 percent. Based on interviews with 6 500 companies around the world, the firm Grant Thornton estimates that around four out of ten managers in the three Baltic nations are female, compared with around a quarter in the Nordic nations. The overall picture is clear: fewer women in the Nordic nations reach the position of business leaders, and even fewer manage to climb to the very top positions of directors and chief executives.

How can egalitarian Nordic countries, in most regards world leaders in gender equality, have the lowest rates of female directors and chief executives, whilst the nations in Eastern- and Central Europe are leaders in the same regard? I have previously touched upon this perhaps unexpected relation in the Swedish book “Att Spräcka Glastaken” (Breaking the glass window), a short report in English co-authored with Elina Lepomäki for Finnish think tank Libera and also in a column for the New Geography.

Key here is the nature of the welfare state. In Scandinavia female dominated sectors such as health care and education are mainly run by the public sector. The lack of competition has not only reduced the overall pay, but also lead to a situation where individual hard work is not rewarded significantly (wages are flat and wage rises follow seniority, according to labour union contracts, rather than individual achievement). Some opportunities for entrepreneurship do exist, as private competition has been allowed in particularly the Swedish welfare sector in recent years. But overall, the Nordic political systems still create a situation for many women where their job prospects are mainly limited to the public sector . Women in Scandinavia can of course become managers within the public sector, but their wages and influence in these positions are typically more limited compared to in private enterprises.

The former planned economies in Eastern- and Central Europe are well behind in terms of female employment and attitudes. But they have also since the times of socialist economies had systems where women who are employed work almost as many hours as the men. During recent years the nations have transitioned to market economies, in many regards more free-market systems than in other European countries. Employed women have continued to invest heavily in their workplaces in the former planned economies.

The situation is quite different in the Nordic welfare states, where high taxes and public benefits create incentives for women to work, but often to work relatively few hours. For example 10 percent of the employed women in Latvia and Lithuania, and 14 percent in Estonia, work part time. In Sweden, the share is fully 41 percent. To put it differently, the average employed man in the Scandinavia works between 16 percent (Finland) and 27 percent (Norway) hours more than the average woman. In Lithuania the same gap is 13 percent, and in Latvia and Estonia merely 7 percent. Bulgaria is unique as the only European Union nation where women actually work more (1 percent more) hours than men. Women in Eastern- and Central Europe reach managerial positions by working hard and, contrary to the men, staying away from alcohol and other social ills.

To reach the top of the business world, high employment and gender equal values are not enough. These factors must be complemented with political structures that allow for competition and entrepreneurship, as well as systems where women in their careers are encouraged to invest the time needed to climb the career ladder. It is quite telling that the Baltic nations, as well as other Eastern- and Central European countries, manage to outperform the rest of Europe in their share of female directors and chief executives. They do so by having systems with limited public monopolies and smaller differences between hours worked by men and women. It is equally telling that the Nordic nations underperform in the same regard, as their Social Democratic systems encourage many women to work, but hinder them from reaching the top of the business world. The map of gender equality in Europe is more complex than it might appear at a first glance.

Dr. Nima Sanandaji has written two books about women’s carreer opportunities in Sweden, and has recently published the report “The Equality Dilemma” for Finnish think-tank Libera.

January 16, 2014
Britain’s Planning Laws: Of Houses, Chickens and Poverty

Perhaps for the first time in nearly seven decades a serious debate on housing affordability appears to be developing in the United Kingdom. There is no more appropriate location for such an exchange, given that it was the urban containment policies of the Town and Country Planning Act of 1947 that helped drive Britain’s prices through the roof. Further, massive damage has been done in countries where these polices were adopted, such as in Australia and New Zealand (now scurrying to reverse things) as well as metropolitan areas from Vancouver to San Francisco, Dublin, and Seoul.

A healthy competition has developed between the Conservative-Liberal Democrat coalition and the Labour Party to finally address the problem of the resulting land and housing shortage that has driven prices up so much relative to incomes.

It probably helps that public opinion seems to be changing. A recent MORI poll found that 57 percent of respondents considered rising house prices to be a bad thing for Britain, compared to only 20 percent who though it a good thing.

It has been more than a decade since Kate Barker, then a member of the Monetary Policy Committee of the Bank of England (the central bank) was commissioned by the Blair Labor government to examine the issues. Her conclusions were clear. Britain has a serious housing affordability problem and its restrictive land use policies were the cause. These higher housing costs, the largest element or household expenditure have reduced the standard of living and increased poverty beyond what would have occurred if urban containment regulation had not destabilized house prices. The Economist notes that home ownership is falling and that the number of couples with children who are renting has tripled since the late 1990s.

Planning and Chickens

This week, The Economist weighed into the debate (Britain’s planning laws: An Englishman’s home):

"Now that the economy is at last growing again, the burning issue in Britain is the cost of living. Prices have outstripped wages for the past six years. Politicians have duly harried energy companies to cut their bills, and flirted with raising the minimum wage. But the thing that is really out of control is the cost of housing. In the past year wages have risen by 1%; property prices are up by 8.4%. This is merely the latest in a long surge. If since 1971 the price of groceries had risen as steeply as the cost of housing, a chicken would cost £51 ($83)."

For those of us unfamiliar with the cost of chicken in British hypermarkets, The Daily Mail says it is about £2 ($3). Indeed, even the chicken industry suffers, as planning restrictions are getting in the way of adding the chicken farms Britain requires.

Moreover, the high costs cited by The Economist are after the house prices increases that had already occurred by 1970. Even then, before such inflationary pressures were seen elsewhere, Sir Peter Hall characterized soaring land and house prices as the biggest failure of the 1947 Act. Hall had led a major research effort on the subject, which produced a two-volume work, The Containment of Urban England (See The Costs of Smart Growth Revisited: A 40 Year Perspective).

From Affordable to Unaffordable

While the historic relationship between household incomes and house prices (the "median multiple") was under 3.0 across the United Kingdom as late as the 1990s, it has now deteriorated to more than 7.0 inside the London Greenbelt. Unbelievably it has risen to elevated levels even in the less prosperous the north of England. For example, depressed Liverpool has a median multiple over 5.0, which is 60 percent above the maximum historic range and making the metropolitan area "severely unaffordable." Liverpool is probably best compared to Cleveland in the United States for its economic distress.

The shortage of housing in Britain has become acute. There are additional concerns that the globalization of housing markets has hit London particularly hard and is driving households out of the housing market.

More Money, Less House

Through all of this, Briton’s are getting less for their money. Since 1920, the average size of a new large family house has been reduced 30 percent. Semi-detached houses are 44 percent smaller and townhouses (terrace housing) is 37 percent smaller (Figure 1). Britain now has some of the smallest new housing in the world. The average new house in continental Europe is 50% or more larger than in England and Wales. New houses are two to three times as large in Canada, New Zealand, Australia and the United States (Note 1). In some US cities, residents can build "granny flats" which are larger than new houses in Britain. For example, San Diego’s limit for granny flats of 850 square feet exceeds Britain’s average new house size of 818 square feet.

Paving Over Ohio?

Of course, those who see urban expansion (the theological term is "sprawl") as ultimate evil imagine an England and Wales being literally paved over by allowing people to live as they prefer. They need not worry.

For example, England and Wales is less crowded than spacious Ohio, with its rolling hills and extensive farmland. According to the 2011 census, only 9.6% of the land in England and Wales is urban, the other 90.4% is rural. In Ohio, on the other hand, 10.8% of the land is urban and only 89.2% of the land is rural. Even the state of Georgia, with the least dense large urban area in the world, Atlanta, has roughly as much rural land (91.7 percent) as England and Wales (Figure 3).

Every Gram is Sacred?

Originally, urban containment was justified on social and aesthetic grounds. However, curbing greenhouse gases is now used as the raison d’etre for highly restrictive housing policies. Urban policy in England and Wales and elsewhere has been hijacked by a philosophy that any gram of greenhouse gas that can be reduced must be, regardless of its impact on society, the economy, the standard of living or poverty.

One of the worst conceivable strategies for reducing greenhouse gas emissions is to waste money on costly and ineffective measures. The Intergovernmental Panel on Climate Change (IPCC) has indicated that sufficient reductions in greenhouse gas emissions can be achieved for a range of from $20 to $50 per ton. Urban containment policy cannot deliver for this price. In contrast, improving automobile fuel efficiency is forecast improve greenhouse gas emissions, even as driving continues to rise with a growing population (see Urban Planning for People). In addition, the higher house prices associated with urban containment policy are well beyond the IPCC range.

No program can produce substantial greenhouse gas emission reductions that does not focus on higher value strategies. Urban containment has no high value strategies.

Planning, People and Poverty

Britain’s land policy competition between the political parties is long overdue. Coalition Communities Secretary Eric Pickles, decries "the way families are trapped in ‘rabbit hutch homes’." The Labour Party opposition has promised that, if elected in 2015, steps will be taken to increase land supply and housing affordability, so that "working people and their children" have the "decent homes they deserve."

The Economist states the issue squarely:

"Building on fields in a country that is as crowded as England will always rile some people, however well-designed the system. But the alternative is worse: a nation of renters and rentiers, where only the rich own houses."

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Note 1: As Figure 2 indicates, Hong Kong housing is considerably smaller than that of England and Wales. Hong Kong really is the ultimate smart growth or urban containment city. It has the highest urban population density in the high income world. It has the highest share of its commuters using mass transit to get to work. Its traffic congestion is intense. And, predictably, it has the highest house prices relative to incomes yet documented in the high income world.

We need to be spared the "sun rises in the west" economic studies claiming that somehow the laws of economics, that work so relentlessly to drive up prices where supplies are constrained in other industries (such as petroleum, corn, etc.) have no effect on land and housing.

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

Photo: St. Pancras Station (London), by author

January 15, 2014