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

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

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

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

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

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

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

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

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

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

    That’s nice.

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

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

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

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

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

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

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

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

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

    Photo by pirate_renee

  • How Tough Times May Lead to Better Architecture

    By Richard Reep

    While Ben Bernanke fantasizes about the Recovery, most people in the building industry – especially in overbuilt Florida – will correct this gross error immediately and emphatically. The recession may be over for the Fed Chairman, but unemployment in the design and construction professions is probably in the 25-30% range, matching that of the Great Depression.

    Even so, tiny glimmers of light shine in what many design professionals call the “microeconomy” of building – small commercial renovations, house additions, tenant improvements, and other projects normally too small to even be counted. Although they lack the whallop, or the profits of big stuff – hotels, hospitals, or new towns – these do count, and are anecdotally turning towards local vernacular design and even contemporary architectural design as a strategy to beat the system, possibly pointing the way for the future.

    Architectural styles are a slow-moving parade of fashions, too often divorced from climate, regional characteristics, or the cultural backgrounds of those who choose them. For most commercial and residential architecture that sprang up around neighborhoods, a mix of Victorian and Spanish Mediterranean styles seemed to be universally implemented by developers trying to please the largest quantity of people in the shortest period of time. Homes with terra cotta tiles and beige arches seemed to lurk behind bland Victorian Main Streets that sprouted everywhere from Montana to Alabama, betrayed by skin-tight fixed windows and paper-thin detailing. As branding elements, these styles nationalized what was once regional and climate-specific design.

    Once again, we seem to be repeating history. In the 1870s and 1880s, suburbs began in many cities, and for the first time homeowners could choose custom-designed houses rather than production homes. Relative peace and prosperity begat a rush to consumerism matched only by our recent ambitions, and the Victorians became well known for an architecture and interior design style that promoted fussy detailing, the display of ornate and exotic materials, and homes overlaid with a frenzy of patterned wood siding, stained glass, carved woodwork, and high-pitched rooflines so that even the roof shingles could be a place to show off wealth. Furniture makers and material suppliers invented new products to feed the demand for consumer goods.

    Yet this all crashed right at the turn of the 20th century, mostly because of the economic transitions suffered going back to the Panic of 1893. Suppressed until that time, modernism came out as a style in the Edwardian era that was much more sensitive to the modest budgets of homeowners building in the 20th century. Even Frank Lloyd Wright, whose career was famously independent of the vagaries of fashion, conceded that affordability was part of the appeal of his style – his “usonian” architecture reveled in simplicity and he took low-budget commissions to prove that good design need not be cluttered with doodads.

    Today, after a similar consumerist run-up, residential architecture is suffering from a similar hangover, as we recover from the granite countertops and carved stone lions of the pre-recession era. These egregious displays of affluence may be gone for a long, long time. But people are still going about the business of adjusting their homes and businesses to suit their needs – and there is a steady microeconomy of residential and small commercial construction.

    Cost, however, is the single overriding factor in most small projects today, and a focus on localism favors the budget. For one thing, a region’s vernacular style usually responds best to the climate, and typically employs materials that can be locally sourced – no stone from Chinese quarries is necessary. In Florida, for example, the vernacular style suspends the floor over a crawl space and includes deep roof eaves extending over the walls – both in response to the combination of harsh sun and heavy rains that task the building envelope. The benefit of this style is lower construction cost (gone are all the elaborate carved woodworking pieces, the high rooflines with multiple dormers and turrets) and also lower energy costs.

    Other clients are waking up to the simple fact that contemporary architecture costs less. Like the Edwardians before who developed a taste for the modern, owners building homes and additions in today’s economy have a newfound simplicity in their styles. With a few choice materials around the entry, some simple, strong lines, and a restrained approach to details, contemporary architecture is making a comeback in the residential market. Midcentury modern, a residential style all but forgotten in the McMansion era, was particularly suited to the returning GIs after World War 2 who desired a home but possessed the most modest of budgets. This affordability is the key driving factor to the rise of this style, and is also a naturally “green” architectural style because of what it does without. Modernist Mies Van Der Rohe’s dictum “less is more” can mean here that less ornament and fussy detailing means more money in the owner’s pocketbook at the end of the day.

    Even more interestingly, house additions and remodeling still seems to exist in this economy. Owners are taking advantage of the construction market’s reduced material costs, are building in more home offices, and enlarging their homes to accommodate a multigenerational lifestyle – parents living at home, or grown children living at home. Larger family clusters within single residences point to reduced mobility, and an evolving, relatively easy re-densification of suburbs that have been winnowed by a plethora of empty nesters.

    This new respect for budget has some naturally green outcomes, as families cluster together to save money and energy, and home offices save commuting. By adapting a home in a budget conscious way, taking advantage of vernacular architecture and developing a taste for simple, clean design, many owners are unconsciously working with sustainable strategies already. If sustainability means the preservation of future generation’s choices, then by conserving money and aggregating closer together, owners have already implemented their own sustainability policy.

    Green design should be seen as a grassroots response to the local climate, rather than a prescriptive code forced down from above. And it can produce a magnificent architecture in a timeless style. No federal program or international design guru can impact this like the microeconomy; instead people are making pragmatic choices, and once again discovering that the local vernacular architecture has a lot of good, commonsense clues about how to live a sustainable lifestyle.

    Richard Reep is an Architect and artist living in Winter Park, Florida. His practice has centered around hospitality-driven mixed use, and has contributed in various capacities to urban mixed-use projects, both nationally and internationally, for the last 25 years.

    Photo by cliff1066™

  • Governance in Los Angeles: Back to the Basics

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

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

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

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

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

  • Can David Cameron Close the Deal?

    With the Labour Government exhausted and its supporters dismayed, why isn’t the Conservative Party leader David Cameron sailing home to victory?

    Under the leadership of Prime Minister Gordon Brown, all the weaknesses of the Labour Party have been painfully exposed. British Prime Ministers are elected by the House of Commons, and the Members of that Parliament by the people; so when Brown’s predecessor Tony Blair resigned, his replacement as Labour Party leader became Prime Minister without a general election. In the country, Brown had been a popular figure – if only because he seemed to be the more trustworthy next to the mercurial Blair. But once he took office, Brown’s weaknesses were on view.

    Just as much as Blair, Brown was the architect of the ‘New Labour’ project that shed the party’s welfare state socialist image for a ‘Third Way’. Modelled on Bill Clinton’s revamp of the Democratic Party, the programme demanded that Labour stop using government to provide for its urban poor and trade union constituencies – supporters who would frighten away more aspiring middle class voters.

    But clearing the old-school socialists out of Labour’s policy-making bodies left an ideological vacuum that was filled by environmentalists, the culturati and NGO-enthusiasts for action over the third world. New Labour had freed itself of its traditional socialism only to become beholden to the enthusiasms of the educated political classes. Attention-grabbing ‘humanitarian interventions’ into third world countries were avowedly not in Britain’s national interests, but in pursuit of an ethical foreign policy. Money was directed into subsidising arts centres and other cultural projects.

    Government took on policies that protected the environment, but damaged industry: ‘traffic-calming’ measures – bus and cycle lanes, speed restrictions, congestion charge zones – were put in place with the express purpose of dissuading people from using the roads. Meanwhile road building was put on hold; licenses for new power stations were withheld, so that the country is facing blackouts in six years’ time; bans were put in place on use of GM crops.

    Labour did listen to the City of London’s financial lobby – Goldman Sachs’ Gavyn Davies was a close advisor, as was ‘Shrieky’ Shriti Vadera of UBS Warburg. Labour kept the Conservatives’ banking deregulation but retained Britain’s extraordinary legal controls on land development, so that credit to buy homes was readily available, but very few were built. Anyone sentient could have predicted the result: prices went sky-high putting home ownership beyond the reach of working class people.

    Given his subservience to the City, it was not surprising that when British banks over-extended position led to collapse in late 2008, Brown bailed them pushing public debt into the trillions. Labour’s traditional working class supporters were asking why their party was subsidising million pound bailouts to banks, while their own jobs were disappearing. Most Britons are proud of their armed services, but they had to ask why they were losing their lives in Afghanistan and Iraq. And they wondered how it was that the income gap between rich and poor was getting so much worse under Labour.

    Public disaffection with the political class reached fever pitch when newspapers published details of the Members of Parliament’s own expense claims. MPs were seen to have lied about their addresses to get the taxpayer to pay the mortgage, just as they put their relatives down as researchers and assistants.

    David Cameron ought to have been in the best possible place to take advantage of the government’s difficulties. But Cameron has proven for too much in the same mould as Gordon Brown, and Tony Blair.

    Cameron got to be Tory Party leader after three successive general election defeats. The lesson that the party drew from its experiences in 1997, 2001 and 2005 was that it was the Tory Party’s core brand that was at fault. Cameron was chosen largely by saying that the party should imitate Blair’s ideology-lite, environmentally-conscious, caring, dash for the ‘middle ground’. The Conservatives had to get over their ‘nasty party’ image.

    Cameron dropped a lot of the party’s traditional MPs, and invited people who were not mainstream Tories on board. Cameron’s remodelling of the Conservative Party followed the Brown-Blair model of pushing the core constituency aside to let in new faces. But the new faces that rushed in had the same gentry-liberal preoccupations as those that had taken over the Labour Party in 1997.

    Here’s an example of the new Conservative. As well as running an organic hobby farm, Zac Goldsmith is Cameron’s dashing prospective Tory Party candidate for Richmond Upon Thames. For the last ten years he has been proprietor and editor of The Ecologist magazine, Britain’s foremost green media voice. Zac inherited £300 million from his father, asset-stripping financier Sir James Goldsmith, using the proceeds to finance his pet causes through his own grant-making bodies, the JMG Foundation and the Isvara Foundation. He gives money to his own small-farmers groups FARM, which is committed to stopping private housing developments, has underwritten the Ecologist’s debts of £864,675. He has financed his own web-site SpinWatch to ‘expose’ corporate lobbying – though as Private Eye pointed out, its attack on the nuclear industry was curiously selective, mentioning no Tories, only Labour-backing investors (26 May 2006).

    Well-heeled voters in Richmond might not be too bothered that Zac has written a book The Constant Economy saying we need an end to growth, because they are already enjoying theirs.

    Another key Cameron supporter is advisor Philip Blond whose manifesto Red Tory bemoans the loss of England’s traditional charm under the twin evils of state socialism and the free market ideologies he blames upon the (conveniently foreign-sounding) Milton Friedman. Blond’s traditionalist fantasy of Merrie England is drawn from the backward-looking dreams of G.K. Chesterton and Hilaire Belloc, who railed against modernity back in the early twentieth century.

    Blond’s call for people to rely less on the state is well-made, but his anti-capitalism must have alarmed the party’s core supporters: ‘economic liberalism has often been a cover for monopoly capitalism and is therefore just as socially damaging as left-wing statism.’ Blond’s solution, though, is some state-enforced localism, with legal controls to redirect investment into municipal authorities – what he calls a ‘distributist state’. If this is David Cameron’s big idea, redistributing wealth through local government, it is not surprising that he has not made a great deal of headway in the polls given that everyone understands the real issue is the penurious state of the country’s finances.

    Throughout the election, Cameron has led in the opinion polls, but not by enough to guarantee a majority in parliament. When the country held its first ever televised leaders debate, something that the Tory leader had demanded, he was up-staged by Nick Clegg, leader of Britain’s third party, the Liberal Democrats. In truth Clegg’s appeal is not programmatic – he is pretty much more of the same as the other two. But what he did very effectively was to position himself as the outsider, not a part of the old two party system, a kind of younger, more attractive Ross Perot.

    Clegg’s appeal to the politically disaffected ought to have worked for David Cameron. But Cameron’s failing lies in the fact that he simply has replicated the New Labour project, just as the public were falling out of love with it. Environmentalism, stopping urban sprawl, and ‘restoring communities’ are the preoccupations of a narrow strand of British society: the kind of people who occupy the lower rungs of government service. It is not that most Britons want to trash the environment, or concrete over the countryide, nor indeed support community breakdown. It is just that they do not understand why their own self-betterment always has to give way to those concerns.

    Tragically, the only party that has made an issue of Britain’s chronic housing shortage is the far-right British National Party. Neither the Tories, nor Labour, less still the Liberal Democrats, have the courage to face down the NIMBY opponents of new building. The Tories’ own supporters (like the Lib Dems) have made it to the suburbs and do not want to share or expand them. Labour cannot give up its grip on government planning laws. With no-one willing to free up land for development, the BNP’s call to drive immigrants out is the loathsome conclusion of anti-growth sentiment.

    When they look at the Eton-educated front bench team that Cameron is putting up, voters see the kind of people who have made (or inherited) their stash, and now are pulling up a drawbridge behind them. All of the pious talk about looking after the poor sounds like parish charity, not giving people a chance to help themselves.

    David Cameron’s Conservatives are still the favourite to win the General Election, the only puzzle is why are they finding it so hard to close the deal – a puzzle until you look at their policies, that is.

    James Heartfield works for the Audacity.org think tank, and most recently wrote Green Capitalism: Manufacturing Scarcity in an Age of Abundance (Mute, 2009). His website is at www.heartfield.org

    Photo by: conservativeparty

  • Drew Carey and John Stossel Tell Cleveland to Learn From Houston

    What started as a humble video segment for Reason TV has mushroomed into a lot of positive PR for Houston (and less than positive for Cleveland).  It started with famous actor and comedian Drew Carey working with the libertarian Reason Foundation on a video series about saving Cleveland, his hometown.  Houston is held up as a “best practice” example for land use regulation.  There are lots of suggestions and positive comparisons to Houston on red tape (minutes 29:20 thru 32), zoning (37:30), and opportunity (47:50). Yours truly has a short cameo at 38:55. (If you want to be able to jump around, the trick is to start playing it, then hit Pause. You’ll see the grey loading indicator continue to download the video. Come back later after it’s fully loaded and you’ll be able to jump to any point you like.)
    After the series was released to the internet and Forbes declared Cleveland the Most Miserable City in America, John Stossel at FOX Business News picked it up.  A friend of mine loaned me a DVD of the 45 minute show (thanks Nolte), but I haven’t been able to find it online.  There are shorter segments about it here and here.  The first one jumps right into talking about Houston 16 seconds in, and the second one jumps into Houston around 40 seconds and 58 seconds in.  The Cleveland newspaper writes about the show here.
    Unfortunately, one of the professors he has on the show to present the other side brings up another one of those Houston myths that just won’t die: that you can build anything next to anything, including a strip club next to a day care center or school.  No, we have narrow nuisance and SOB regulations to prevent that.   We also have private deed restrictions. You don’t have to prescriptively control everything to prevent the worst-case scenarios.
    Then Bill O’Reilly picks up the story in an interview with Stossel (hat tip to Jessie):

    STOSSEL: People go to where the weather is good. We already have…

    O’REILLY: Well, you can’t blame the city for the weather. I mean, look at Chicago. Great city, bad weather. Boston, come on. You can’t blame the city for the weather.
    STOSSEL: You can rank them for that. And you can blame the politicians for saying we’re going to raise taxes to build our wonderful projects, and that’s going to make things better. The cities that prosper like Houston are the cities that have fewer rules and lower taxes.
    O’REILLY: But remember Houston used to be the crime capital? They cleaned that place up pretty well.
    STOSSEL: But Cleveland has 22 zoning categories. Houston has none.
    O’REILLY: Twenty-two zoning categories? Very hard.
    STOSSEL: In Cleveland, to start a business, a politician bragged, “We could get you in there in just 18 months.” In Houston, one day.
    O’REILLY: One day? The problem with no zoning is you can have, you know, the No-Tell Motel right next to you. And…
    STOSSEL: You could. But that rarely happens. And it’s not an ugly city, Houston.
    O’REILLY: No, I didn’t say it was ugly. Who said it was ugly?
    STOSSEL: Lots of people. No zoning. The city planner said it will be ugly. You will have…
    O’REILLY: We have a lot of Houstonians watching “The Factor,” and I love going to Houston. All right. There you are, the Forbes magazine list, and Stossel laying it down.

    We’ve come a long way.  Five or ten years ago, you couldn’t find many people – including libertarians – that were willing to hold Houston up as a land-use model in public because our reputation was so bad.  But now they do, and it’s (slowly) changing our national reputation for the better.

    This post originally appeared at HoustonStrategies.com

  • Finding the Good in This Bad Time

    This year’s best places rankings held few great surprises. In a nation that shed nearly 6.7 million jobs since 2007, the winners were places that maintained or had limited employment declines. These places typically had high levels of government spending (including major military installation or large blocs of federal jobs) or major educational institutions. Nor was the continued importance of the energy economy surprising in a nation where a gallon of gas is still about $3 a gallon.

    Even including part of 2010, only 13 cities (out of 397) showed growth, reflecting the breadth and depth of the downturn. In an economy where the most promising statistic is a “limited” decline in the number of new job losses from month to month, where is the proverbial silver lining?

    It is found in two places: (1) areas that show some resilience in this dour economy; and (2) a newly retooled American economy positioned to compete more strongly in the future.

    Read how we pick the best cities.

    Regions of Current Hope
    With disaster as a backdrop, the early signs of buoyancy in the economies of the Intermountain West, the Great Plains, and even parts of the Midwest are quite impressive. Many predicted these areas would mirror the collapse of their larger, high-growth counterparts in California, Florida, Arizona and Nevada. To the contrary, these relatively rural locations are emerging as beacons of hope.

    In the big cities, there have been across-the-board declines in most sectors led by the collapse of construction and financial services. Thousands of small businesses have disappeared in addition to huge layoffs by large employers. You see many “For lease” signs now at what were once your favorite shops and watering holes.

    In a business climate like this, a lot can be said for slow and steady. Comparatively, slower-growing cities across the middle parts of the country are recovering more easily and more quickly.

    Perhaps the most important lesson is that the economies of the future are not all about the “knowledge class” and that “too-good-to-be-true” high wage jobs may be just that. As seen in the dot-com bubble and in this real estate bubble, those fancy, high-wage finance and tech jobs are highly vulnerable to swings in the economy and high-paying construction jobs are only as good as the housing market.

    This is simply because markets eventually adjust. In the case of overheated stock and real estate markets, the losses are felt by the knowledge class, financiers and construction workers. In the case of manufacturing, as the price is bid up through labor costs, other places become more competitive.

    During volatile times, places with the broad-based growth strategies — like Texas and Utah — do best. Cities that are heavily dependent on a narrow set of industries leave themselves vulnerable, paying back the gains of good years in poor years.

    Part of the success of Texas is not just energy (as the modest performance of Midland and Odessa shows), but rather to the state’s adjustments to a past crisis, the savings and loan crisis of the 1980s. The state instituted new laws that imposed a range of disciplines on financial markets — such as limiting home equity lines — thereby minimizing the damage to the state’s economy as those markets went topsy-turvy.

    Regions of Future Hope
    There remains hope for the future in the story of this recession. One of the defining aspects of this recession was not just that certain sectors were hit hard, but that it was also broadly distributed across the economy. This pervasiveness extended deeply enough to cause every enterprise in America to seriously reconsider their business model and re-engineer how they served their customers.

    Consequently, the American economy is leaner and cleaner than it was three years ago. Businesses are more in touch with what makes them successful. While growth will be slower, it will be focused on areas that will bring about quick increases in productivity across the economy and bring new, real wealth to the local economies.

    Where will this happen most quickly? In those places where businesses survived best. Expect the Intermountain West and smaller manufacturing hubs across the United States to lead the charge (because of their lower costs), but large metros like Los Angeles, Chicago, Houston, Minneapolis, and Dallas, with their deep inventories of manufacturers and large labor pools, should see these returns before too long.

    Similar stories can be told for nearly every sector although the beneficiaries will be different. Much of the growth in information sector, for example, will continue to take place outside Silicon Valley. Business services will grow most rapidly where there is growth in business overall, initially outside the core hubs. Midsized and small communities will lead this recovery, and the big cities will eventually follow.

    Economies open to a wide array of occupations will do better than those that are less diversified. Places like Portland and Atlanta, so deeply focused on attracting high-wage, knowledge-based jobs are likely to miss out on the “basic” job growth that will fuel the first stage of the American recovery. Venture capital is still tight across the nation and capital markets are uncertain, especially with new government regulations up in the air. Consequently, high-end, white collar, and high tech jobs, with their insatiable need for investment capital, will develop more slowly. Even among the high-tech superstars, high profits will not lead to huge surges in hiring.

    Why Government Holds the Key
    Government’s actions over the next six to 12 months will define potential and the pace of this recovery. With an election looming, all sides will be jockeying for electoral advantages in November. They will cater legislation to many competing constituencies, fostering tremendous uncertainty in the private sector.

    One thing is certain, however. The current pace of government spending is unsustainable. Not even the US economy can support ongoing deficits in excess of $1.5 trillion per year. Either government spending must slow or someone must pay a lot more. The only alternative — high inflation — will have its own negative effect. One way or another some combination of the three MUST happen.

    Additionally, current regulatory initiatives will change the dynamics and employment patterns within some important sectors. Whether it is the complete restructuring of the health care industry (part of one of the only bright spots in the current economy), or the prospective new regulation in the financial services sector, potentially destabilizing change is coming.

    And the feds are not the only destabilizing government actors. California’s aggressive climate legislation, for example, and the mixed signals it is sending businesses across the state’s 28 MSAs will certainly shape their near and midterm economic futures.

    So what should the federal and state governments be doing at this time? Most importantly, they need to ensure stability: stable capital and lending markets, a consistent and stable tax code, focusing interventions on broad-based, low-shock actions, and developing a plan for moderating and containing the national deficits and mounting national debt. The key to continued prosperity in these times is a growing private job base, not a growing government sector.

    Moreover, government needs to learn the lessons of the private sector. Even as private firms retrench, governments at all levels need to reduce their cost structures. This is happening in many localities, at least on a temporary basis, as even unionized local employees are accepting wage and benefit reductions to retain jobs. Localities and states must recognize the true cost of the services they provide. They must either find consistent ways of providing funding for them, or eliminate them to preserve more critical services.

    Finally, public and private sectors alike must learn that this has been a transformational recession. Unlike downturns in the past, business and government cannot expect things will return to the way they were. Markets and banks will not be printing imaginary value increases in real property for consumers to spend any time soon and capital markets are cautious about financial good news,,preferring the old tried and true winners to novelties.

    Government and government employees are behind the curve understanding this transformation. Wage and benefit concessions given up during this recession are not likely to reappear. The concepts of furlough and unpaid time off are here to stay. Even as the private sector has been forced to reconsider its baseline practices, so, too, the political pressure now will be on government to retain savings obtained during the recession.

    Michael Shires, Ph.D. is a professor at Pepperdine University School of Public Policy.

  • The Worst Cities For Jobs

    In this least good year in decades, someone has to sit at the bottom. For the most part, the denizens are made up of “usual suspects” from the long-devastated rust belt region around the Great Lakes. But as in last year’s survey, there’s also a fair-sized contingent of former hot spots that now seem to resemble something closer to black holes.

    Two sectors have particularly suffered worst from the recession, according to a recent study by the New America Foundation: construction, where employment has dropped by nearly 25%, and manufacturing, which has suffered a 15% decline. The decline in construction jobs has hit the Sunbelt states hardest; the manufacturing rollback has pummeled industrial areas such as the Great Lakes as well as large swaths of the more recently industrialized parts of the Southeast.

    Read how we pick the best cities.

    Then there is California, a state that should be doing much better given its natural advantages and vast human capital but whose regions–with the exception of government-rich Hanford–share various degrees of distress. The bursting of the real estate bubble has hit the Golden State hard, but seeing so many poor performances in my adopted home state is distressing and points to much deeper problems. Rankings author Michael Shires, pointing to the looming prospect of high taxes and expanding regulation, notes that “While California’s economy has come roaring back many times before, a resurgence this time will be slowed by the state’s increasing willingness to aggressively tax and regulate those who will make it happen.”

    Rust Belt Ruins

    The traditional manufacturing heartland long has suffered, and in this recession industrial jobs have declined rapidly and only now seem to be slowly expanding. Ever since we started these surveys back in the early 2000s, cities and towns along the rust belt have inhabited the bottom rungs.

    Starting up from the last place finisher, No. 397 Warren-Troy, Mich., these old industrial cities dominate the nether regions; of the bottom ten finishers overall, six come from the Wolverine State, including long-suffering Detroit, which ranks 394th overall and 65th on the list of large metros (next to its neighbor, Flint, in last place). Other rust belt bottom-dwellers include No. 395 Elkhart and No. 392 Kokomo in nearby Indiana.

    Perhaps more disturbingly, many of those at the bottom come from what used to be called “the new South,” cities that industrialized late and often benefited from the flow of jobs from the old rust belt. Places such as No. 396 Morristown, Tenn., No. 390 Dalton, Ga., and No. 389 Hickory-Lenoir-Morganton, N.C., have suffered from a recession that has either forced companies to shut down or move overseas.

    Sun Belt Busts

    Ever since the collapse of the housing bubble in 2007, we have seen a remarkable turnaround in many Sunbelt regions. Traditionally, these led the list as emerging boomtowns. Now many appear more like bust-towns.

    Take a look at the rapid decline of such hot spots as Las Vegas, which now ranks 57th out of the 66 largest metros in the country; Phoenix, now lurking at No. 51; and No. 61 West Palm Beach, No. 56 Fort Lauderdale, No. 54 Tampa and No. 45 Miami, all in Florida. Many of these cities stood proudly near the top of the list as recently as three years ago. Perhaps nothing illustrates the reversal of fortunes than the fall of Reno, once our fastest-growing mid-size region, now No. 92 in the same category.

    California: The Great Disaster

    No state has suffered a greater reversal of fortunes than California. Five or six years ago California regions generally inhabited the top half or third of our lists. Today they generally have fallen even faster than the other Sunbelt states, even though the state’s economy boasts many assets beyond merely real estate speculation.

    California now accounts for a remarkable 7 of the bottom 20 regions on our big metro list. The diversity of the disaster spans both the urban centers and the exurbs–witness exurban Riverside-San Bernardino at No. 63 and the city of Oakland at No. 62. Historic high-flyers No. 59 Los Angeles and neighboring Santa Ana-Anaheim Irvine, which checks in at an abysmal No. 60, didn’t fare much better.

    Perhaps more shocking is the poor performance handed in by the state capital, Sacramento, a former high-flyer now mired at No. 54, and San Diego, a high-tech haven with a near-perfect climate, that resides at No. 48. Even No. 47 San Jose/Silicon Valley has done poorly, despite all the consistent hype about the world class tech center. The likes of Steve Jobs of Apple and Eric Schmidt at Google may be minting money, but the region, paced by declines in construction, manufacturing and business services, now has 130,000 fewer jobs than a decade ago. San Francisco does not do much better, clocking in No. 42, just ahead of its equally celebrated alter-ego Portland, Ore.

    Prognosis From the Emergency Room

    If this list tells us the current occupants of intensive care, what then are the prognoses for recovery? It seems the story differs for each of our three basic categories. For the rust belt cities, relief will only come when the country decides to reprioritize industry, while allowing for the restructuring of firms and contracts. On the bright side is the recovery of Ford and the potential for a second life for a greatly reduced General Motors and even Chrysler. A modest surge in production of these firms and related industries, such as steel and electronics, could help some selected regions rise up from the bottom.

    The recovery of the Sunbelt economies seems likely to take hold first. Despite the giddy predictions of East Coast pundits that places like Las Vegas, Phoenix, Orlando and Tampa are doomed to what Leon Trotsky allegedly described as the “dustbin of history,” this is not the first time these areas have suffered a setback. They have still not shown much life yet, but I would not count them out for the long term. There is a lot to be said for a sunny climate, greatly enhanced affordability and what many see as a high quality of life.

    Ultimately, notes Rob Lang, director of Brookings Mountain West and professor of sociology at the University of Nevada-Las Vegas, the assets of these regions have either not changed–pro-business administrations and warm weather–or, in the case of housing affordability, have become more attractive. “Phoenix and Las Vegas will be fine,” Lang predicts, noting that Las Vegas is working to reinvent itself beyond gaming to becoming a “convening capital” for the world economy. Similar dynamics could also boost cities in Florida, particularly if they begin focusing beyond tourism and housing.

    And then there is California, which by all rights should be leading, not lagging, the current recovery. Statewide unemployment, already 12.6%, has been rising while most states have experienced a slight drop. Silicon Valley companies, Hollywood and the basic agricultural base of the state remain world-beaters. But the problem lies largely in an extremely complex regulatory regime that leads companies to shift much of their new production and staffing to other states as well as foreign countries. The constant prospect of a state bankruptcy, in large part due to soaring public employee pension obligations, does not do much to inspire confidence among either local entrepreneurs or investors.

    Hopefully this will be the year when Californians decide that it needs an economy that provides opportunities to people other than software billionaires, movie moguls and their servants. It will have to include much more than the endlessly hyped, highly subsidized “green jobs.” More than anything, it will take rolling back some of the draconian regulations–particularly around climate-change legislation–that force companies, and jobs, to go to places that, while not as intrinsically attractive, are friendlier to job-creating businesses.

    This article originally appeared at Forbes.com.

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

    Photo: JSFauxtaugraphy

    April 27, 2010

  • Guns, Guts, And Geithner

    Calls for more bank regulators remind me of a regulatory go-round with an erratic European bank chairman to whom I once reported. Almost eighty years old, with a failing memory and a fondness for mid-day Martinis, he once interrupted a luncheon to call his wife and ask that she send his revolver over to the bank.

    At one time in his life he might have had a license to carry a firearm, but the permit had long expired. He wanted the great equalizer on this particular afternoon because the television was full of possible terror threats against financial interests, and he figured, after his second highball, that outside agitators might rush the corporate dining room.

    The meal continued, and in due course his chauffeur arrived carrying a white plastic bag, which looked like it was packing lunch more than heat. The chairman removed the pistol, checked it for ammunition, and tucked it into the waistband of his Savile Row suit, as if he had made a loan against a Maltese Falcon.

    News of the lock-and-load chairman circulated around the bank, and eventually reached the ears of the board of directors and the regulators, who, as part of their mandate, had to insure the fitness of the chairman to serve in his capacity. I was present when the regulators were informed that the bank had a chairman who was eighty years old, had no memory, and was loaded not just with booze but for bear.

    Regulators are being celebrated everywhere today as the champions of free markets and fair competition. You might think that they had earned a track record in this regard and — for example, in this instance — would have questioned the chairman’s ability to remain in office.

    Instead, even after they heard about his piece and judged his inability to understand the business of the bank, the regulators did nothing to change the composition of the board. They took the position that there was nothing that they could do, and left him on the job for another few years, during which time the gun would come and go in his briefcase, and occasionally fall on to the conference room table when he was searching for a document. It brought new meaning to the corporate phrase, “Let’s stick to our guns.”

    Does my experience necessarily mean that all banking regulators, notably those charged with implementing financial reform, will be slow on the draw when it comes to cleaning up Dodge City’s balance sheets?

    In general, regulators tend to be recent college graduates who are padding their resumes until going to business or law school, or they are career bureaucrats, immersed in one or two minor regulatory issues. Most miss the big picture, as nearly every regulator did in reviewing the balance sheets of A.I.G., Merrill Lynch, or Washington Mutual. For better or for worse, financial profits — to regulators challenged to understand the strike prices of futures contracts — look like magic.

    The problem with entrusting them with the health of the financial system is that few, at least in my experience, understand anything about how banks, brokerage businesses, and hedge funds operate or how they make money.

    As the ideal regulator, look no further than Treasury Secretary Timothy Geithner, who now is pushing financial reform as hard as he once peddled deregulation and “market solutions” for most banking problems.

    Geithner owes his financial expertise to political expedience, first to that of Henry Kissinger and his associates, and later to presidents Clinton and Obama, all of whom take the view — to use the phrase of historian Richard Hofstadter — that they came to office to defend property as opposed to democracy.

    Had Geithner been a claims adjuster in the arson division of Geico, he might have been less inclined to believe that Wall Street was doing “God’s work.”

    Think, too, of the iconography of Goldman Sachs, which within the last three years has gone from the “culture of success” to America’s most wanted. In between, depending on the country’s mood, it was either the stock pond for Treasury secretaries or in need of a bailout. All the while, the regulators no more understood Goldman’s businesses than did their counter-parties, who were loading up on subprime while the partners went short.

    Despite the high moral tone of Senator Dodd’s proposals to fit bankers with bespoke hair shirts, the challenge of the proposed new financial regulations is how Congress can dress up yet more loopholes and shop them as reforms.

    What Congress will pass is lofty legislation that promises to unleash “consumer watchdogs,” with Volker Rules against proprietary trading and denunciations of derivatives, and it will extend the amount of time that homeowners can live in a house on which the mortgage is in default. Even better, members of Congress will finally have a good safe menace, Wall Street greed and ruin, to run against in November 2010.

    In exchange for the effigy, many of the proposals could have been written by bank lawyers, as these “reforms” subsidize, rather than challenge, bank earnings. Banks love nothing more than a guarantor of bad loans. My feeling is that, whatever the particulars of the federal financial reform package, it will use government dollars to bailout underwater consumers and feed banking bottom lines, much the way health care reform could well have been called the Insurance Industry Full Employment Act of 2010.

    Rather than buy into the prowess of regulators, time and effort should be spent in setting guidelines that will allow the market to ensure the health of good financial institutions or the failure of bad ones. The effect of most regulations, however, is to prop up speculation, if not bad banks, in the interest of preserving “the system” (which sounds a lot like Michael Corleone’s “family”).

    For example, if the financial reform bill did nothing more than require that all banks and bank-like companies maintain 20 percent of their risk assets in capital that is liquid and available within seventy-two hours, it might constrain economic growth. But few banks would fail. Nor would be they be in a position to pay out fat bonuses, as most would have returns on equity like those of hardware stores.

    What wiped out many banks in the recent financial crisis was inadequate capital and mismatched balance sheets. At its risk peak, Lehman had assets thirty-one times its capital, so even a small down move in markets made it insolvent. Even now, Goldman’s balance sheet is more that of a pyramid scheme than a bank.

    A second proposal might mandate the close matching of all financial assets and liabilities, so that future Lehmans could not fund mortgage-backed securities (with the tenors of underlying loans extending to thirty years) using ninety-day commercial paper. Mortgages are fine if they have a cushion of capital and are match funded.

    To protect credit card consumers, cap the interest charged on credit cards to five percent more than three-month interbank borrowing rates, and require that once every two years consumers “clean up” their outstanding balances. The mall will be less crowded, but the banks will not swell with bloated profits.

    The limits of bank regulators could be seen even in fifteenth century Florence, where a financial reformer asked Cosimo the Elder to help stop gambling in the clergy. In response, the head of the Medici clan said: “Maybe first we should stop them from using loaded dice.”

    Matthew Stevenson is the author of Remembering the Twentieth Century Limited, and editor of Rules of the Game: The Best Sports Writing from Harper’s Magazine.

  • 123bee

  • Las Vegas: The World’s Convening City?

    Conventional wisdom, and in many cases wishful thinking, among many urbanists holds that America’s sunbelt cities are done. Yet in reality, as they rise from the current deep recession, their re-ascendance will shock some, but will testify to the remarkable resiliency of this emerging urban form.

    Origins: Bright Light City

    The epicenter of the sunbelt rebound will be Las Vegas. The desert city has taken a unique road to a world city status. Most places get there by being financial, trade or manufacturing hubs, or can have a concentration of all three in the case of the biggest and most connected world cities. In contrast Las Vegas has achieved world city status via one key sector: entertainment.

    Just about no one saw Las Vegas coming as a world city. Even in the late 20th century few would predict that the region could ever get to 1 million residents, let alone reach two million. In 1970 Jerome Pickard, a demographer working at the ULI—the Urban Land Institute in Washington, DC, projected U.S. metropolitan area populations to the year 2000. These estimates were nearly perfect, but for one major exception—he missed Las Vegas.

    Las Vegas at the time seemed like, to make a bad pun, a one trick town. Its main industry, gambling (or “gaming” in local parlance), was pretty much unique to Nevada. Sure, the city already had landmark hotels and the famous “Strip” was by then iconic enough to influence American architectural theory, but the idea of an overgrown honky-tonk town as a true world city seemed a stretch.

    A generation later, what changed? To start, gambling began to spread throughout the U.S. and indeed the world. First, Atlantic City, NJ, allowed gaming in the late 1970s and soon the floodgates opened. Soon people could gamble on riverboats in the Mississippi and off the Gulf Coast. Then a Supreme Court ruling allowed Native Americans to build and operate casinos—and they did just about everywhere.

    Every time gaming expanded, analysts predicted the demise of Las Vegas. Yet history has shown that the widespread diffusion of gambling only induced a bigger appetite. In this socio-cultural-legal-lifestyle transition, Las Vegas became the epicenter of gaming. Many people who gambled in a nearby Indian reservation were really just warming up for Las Vegas.

    The gaming industry in Las Vegas also matured in two key ways, offering a host of complimentary activities to go along with gambling. The first was the Las Vegas tie into Hollywood and live entertainment. By the 1980s, Las Vegas became one of the world’s largest venues for entertainment, surpassing even Broadway in New York. The city then began to add function after function related to tourism—food, shopping, and perhaps most importantly of all: conventions.

    Las Vegas’s rise also was directly tied to infrastructure. Completed in the 1930s, Hoover dam provided Las Vegas with ample power and water. The other major improvement was a new highway to Los Angeles, which led to Vegas’s discovery by Hollywood figures.

    At the same time, a series of complimentary economic drivers transformed the city over several decades. The casino and entertainment complex constructed in Las Vegas by 1970 soon engendered a proliferation of airline connections and convention business. The city had enough business to warrant non-stop links to just about every other major city in the U.S. The scale of tourism worked to keep landing fees among the lowest of any major American city. In 2008, McCarran Airport ranked 15th in the world for passenger traffic, with 44,074,707 passengers passing through the terminal, and 6th in airplane “movements,” which includes take offs and landings.

    The other advantage Las Vegas possesses is lots of hotel rooms. In fact, nine of the top ten largest hotels in the world can be found on the Las Vegas Strip (which technically lies outside the city proper in unincorporated Clark County, NV). The presence of so many hotel rooms facilitated the emergence of the nation’s largest convention business.

    The city is also a leading center of producer services specific to gaming. Las Vegas is to gaming what Houston is to energy, the command and control center in a booming global business. Like Houston, whose initial energy business growth came from nearby oil wells, Las Vegas’s initial advantage derived from being home to the first large-scale gaming industry. Many overlook the fact that the U.S. is a service exporting powerhouse, with almost a half trillion dollars in overseas sales last year. In fact the U.S. captures over 14 percent of total world service trade, which performed much better in the current recession than did goods trade. Las Vegas is now grabbing a bigger share of these exports.

    As gaming spread, Las Vegas firms that specialize in building and managing mega-resort and entertainment complexes often built, designed, or consulted on new gambling centers from Atlantic City in New Jersey to Macau in China (which recently passed Las Vegas in total gambling revenue). In the current recession, as gaming revenue plummeted in Las Vegas, properties in much of the rest of the world kept performing, especially China. This geographic diversification strengthened the bottom line for such Las Vegas-based companies as MGM-Mirage and Wynn and sustained the local firms that export gaming services.

    To consolidate its gaming and entertainment gains, Southern Nevada must still diversify its industrial mix to reach a multi-dimensional world city status as say Los Angeles. Fortunately Las Vegas has the capacity to further leverage its core industry. At the same time some other key sectors look promising, especially data storage and transmission, and alternative energy technology such as solar and geothermal.

    Finally, Las Vegas is working to improve its transportation links to nearby Southern California and the Sun Corridor complex of Phoenix and Tucson. These regions are increasingly integrated with one another. Las Vegas’s inclusion in the larger Southwestern U.S megaregion should further connect it to the global economy and lift its status as a world city in full.

    The Convening City

    Ultimately, the Las Vegas case for world city status lies in its role as the globe’s leading convening space. There are more face-to-face exchanges in Las Vegas during a major convention than key financial exchanges in New York or London. Las Vegas, on any given week, may comprise the world’s most expert cluster in a particular industry.

    The convening role that Las Vegas plays in the world economy comprises perhaps the biggest opportunity for additional diversification, especially given the way business is evolving in sectors such as business services. These gatherings provide a means of overcoming coordination and incentive problems in uncertain environments. It becomes an environment to create a critical “buzz” around a company, product or industry.

    Most Las Vegas conventions are really about deal making. Conventions also are used for industry education, vendor networking, competitor insights, networking with prospects, hosting an exhibit, and seeing customers. Another dimension to building trust in Las Vegas lies in the fact that it is very much an adult place. It is a wide open, non-moralizing, libertarian place where grownups get to have fun. Las Vegas is a place where you can, and maybe even should, mix business with pleasure.

    To move forward, Las Vegas needs to tweak its branding in a way that signals its dual personalities as a play hard and work hard city. This shift is already under way. The Las Vegas Convention and Visitors Authority now use the tagline “Only Vegas” and an omnibus identity for the city. Their website has two links: one aimed at business community: VegasMeansBusiness.com with the tagline: “Close the deal and make new opportunities.” and one for tourists: VisitLasVegas.com which uses the tagline: “What happens in Vegas, Stays in Vegas.”

    So far Las Vegas has not leveraged its role as convening place to create something on par with the New York Stock Exchange or the Chicago Board of Trade. However, the convention business can be used as the basis of what may become a permanent trade show.

    A harbinger of this future potential for Las Vegas can be seen in its new giant furniture mart, the World Market Center. This grew out of the city’s role in hosting the largest furniture/home wear convention every year. Las Vegas has developed a year round trade show capacity in furnishing with big annual events. This city is now poised to be a leading design center. Architectural and industrial design firms will follow. In this way, Las Vegas could emerge as the Milan of the U.S., where design leads to industrial spin offs.

    Las Vegas can expand this model to host permanent trade shows in a multiple fields from home entertainment and biotechnology to alternative energy. Rather than become a new ghost town, as some urbanists imagine, the city in fact has a bright future, one that will continue to befuddle its many critics while enriching the opportunities of its citizens.

    Robert E. Lang, Ph.D. is one of America’s most respect urban analysts. He is director of both Brooking Mountain West and the Lincy Institute and is a professor of Sociology at the University of Nevada, Las Vegas.

    Photo: by Roadsidepictures