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  • GOP Needs Economic Populism

    You would think, given the massive dissatisfaction with an economy that guarantees mega-bonuses for the rich and continued high unemployment, that the GOP would smell an opportunity. In my travels around the country — including in midstream places like suburban Kansas City and Kentucky — few, including Democrats, express any faith in the president’s basic economic strategy.

    Ask a local mayor or chamber of commerce executive in Kentucky or Kansas City about the stimulus, and at best you get a shrug. Many feel the only people really benefiting from Obamanomics are Wall Street grandees, public employees, subsidized “green” companies and various other professional rent seekers.

    It’s not surprising, then, that most Americans — upward of 60 percent — feel the country is headed in the “wrong direction.” Most of these malcontents are not zealots such as those you might find at a tea party. They are more akin to villagers watching in horror as two armies, each fighting in their name, wage war on each other, leaving desolation in their wake.

    Yet it’s unlikely that the independent-minded will move to the GOP until the party comes up with a credible economic plan that addresses popular concerns. One big problem lies in the very nature of the Republican Party. Since Theodore Roosevelt, the party has devolved into a de facto shill for large corporate interests. One notable exception, to some extent, was Ronald Reagan, whose rise challenged the hegemony of some in the corporate establishment, first in California, when he was governor, and later nationally.

    Republicans may now find it convenient to rail against the Troubled Asset Relief Program, but it’s something many supported under George W. Bush. Even now, most are loath to fight excessive pay and bonuses at places like Goldman Sachs. Instead, it’s populists like North Dakota Democrat Byron Dorgan and Vermont independent Bernie Sanders who seem most outraged by the massive rip-off of taxpayers.

    Republicans also do not seem sympathetic to pro­posals by former Fed chief Paul Volcker and others to break up “too big to fail” banks or reimpose distinctions between investment and mainstream banks. If anything, this illustrates that for all the rhetoric about self-sufficiency and small business, they remain more attuned to Wall Street and K Street than Main Street.

    Yet there may be new opportunities for Republicans on the economic front. This winter, the focus of political debate will shift from health care to energy legislation. Whatever the negatives associated with President Barack Obama’s proposals, Republicans’ long-standing inability to reform clearly flawed health care systems has undermined their credibility. The health insurance industry and right-wing ideologues may applaud their efforts, but it’s unlikely to impress the many middle- and working-class Americans for whom the current system is not working.

    In sharp contrast, the coming debate over energy and climate plays to the weaknesses of the Democrats. All the administration’s talk of reducing our “addiction” to foreign energy can be painted as fraudulent, since the powerful green lobby will militate against developing our country’s huge natural gas and other fossil-fuel deposits, as well as nuclear power.

    In the past election, some of the few good moments for John McCain came in the wake of his embracing a nationalistic, growth-oriented “Drill, baby, drill” agenda. This approach remains popular not only with conservatives but also with moderates and independents, particularly in energy-producing states.

    Obama’s climate change proposals offer an additional opportunity. The mainstream media remain slavishly tied to the Al Gore warming thesis, but skepticism toward the anti-carbon jihad is building via the Web. In recent months, Gallup, Pew and Rasmussen have reported reduced enthusiasm for radical steps to battle climate change. Right now, this seems to be a major concern for barely one in three Americans.

    Yet the “cap and trade” proposals could prove a boon to some of the very corporate interests — on Wall Street and among utilities — still considered core supporters by some Republicans. GOP leaders seem simply incapable of comprehending the discreet charm that Timothy Geithner’s collusive capitalism holds for many corporate chieftains. In this, they resemble the boyfriend who ignores the implications of finding someone else’s Jockeys on his girlfriend’s bed.

    Sadly, those who do tend toward populism, like current front-runners Mike Huckabee and Sarah Palin, appear too socially regressive to appeal to the suburban independents who will decide the elections in 2010 and 2012. Americans may yearn for an economically populist alternative, but not if they think it will bring back the Inquisition.

    In the end, economic populism, not social conservatism, can transform Republicans into something other than a scarecrow party. And they could make this strategy work, if they only had a brain.

    This article originally appeared at Politico.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 next book, The Next Hundred Million: America in 2050, will be published by Penguin Press early next year.

  • Healthcare Reform or Health Insurance Bailout?

    What is the real endgame of healthcare debate in Washington? Is it going to be a bailout of the insurance industry as opposed to a plan to provide healthcare for every American? The original jumping off point for this entire debate was that the United States is the only major industrialized country that does not have a national healthcare system. The debate has moved away from “how do you get healthcare” to “how do you get health insurance.”

    Even if we accept that the discussion is more properly about reforming insurance than providing healthcare, the debate still focuses on how insurance could be paid for rather than how insurance could be fair. Funny thing is, when Congress voted to bailout the financial institutions, no one asked how they would pay for it. Millions of Americans wrote, emailed, faxed and called their representatives in Washington in opposition to the 2008 bailout. That bill was passed. Yet, with millions of Americans clamoring for healthcare, decades passed with no action. Even now, as we become accustomed to the idea that the federal government will take a stand on how healthcare is paid for – without the government actually paying for it – there are 5 different bills, topping 1,500 pages each, and nothing is even close to being done. George Will told This Week anchor George Stephanopoulos that Congress won’t spend the five minutes it would take to put all five versions of the bill on the internet because then people will know what’s in it – and Congress doesn’t want that. Imagine the hell we-the-voters would rain down on them if we knew what they are up to?

    The scariest part of the potential legislation is the notion of creating an “insurance exchange.” It appears the federal government has already forgotten the trouble that these market exchanges create. The requirement that you give your retirement money (IRA, 401k, etc.) to a financial institution to qualify for favorable tax treatment from the IRS may have done more to inflate the stock market (investment exchange) bubble than all the risk-loving financial institution CEOs combined. All that pension and retirement money is the fuel that the financial institutions used to inflate the bubble. The “market exchange” idea did nothing for air pollution. Similarly, it will likely do nothing for improving access to or the cost of healthcare.

    All of the Sunday morning talk shows (October 25, 2009) debated the “public option.” This sub-debate apparently holds the political key to getting legislation passed, whether or not enough senators and representatives will vote “yes” that there won’t be a filibuster or a veto. The “public option” comes in three flavors. One version is that health insurance will be mandatory and the government will provide an insurance program at a (presumably) very competitive price to consumers. The second version has an opt-out component: insurance is not mandatory so you could opt-out of coverage even under the government’s insurance program. The third version, known as the “trigger”, would set up a deadline, say two to three years after passage, during which time either the insurance industry will stop abusing policyholders – for example, by canceling your insurance the first time you get sick – or the federal government will enter the industry and provide some real competition. According to John Podesta, President and CEO of the Center for American Progress, the public option is key to getting enough votes to pass this in the Senate. He seems to have forgotten that only the House of Representatives can authorize the federal government to spend money – this is not properly the Senate’s turf.

    Cynthia Tucker, of the Atlanta Journal-Constitution, stated it with perfect clarity on ABC’s This Week: The provision of the public option is only a sliver of healthcare reform. It is neither the panacea that the left-wing believes it to be nor the evil plan envisioned by the right-wing. It is all about the 60 votes required to overcome a filibuster in the Senate.

    If only it were as simple as right-wing/left-wing, red-state/blue-state divisions. Democratic Senator Russ Feingold told CBS’s Bob Schieffer on Face the Nation that the lack of a public option “would be a serious gap” in any legislation. He spoke forcefully about the need to control abuses by insurance companies. He went so far as to say that the trigger version of the public option would simply give the insurance companies two or three years to manipulate the system to their advantage. “We need to take action now,” Feingold said, to slow insurance company abuse.

    Not surprisingly, Feingold was not among the Senators receiving Clusters of Cash from the Health Care lobbyists and their clients in the most recent campaign fundraising cycle, according to the Center for Responsive Politics. That might explain his position – or maybe his position explains the lack of contributions.

    Back in October 2008, then Treasury Secretary Paulson advised insurance companies they could qualify for TARP bailout funds. On April 8, 2009, now Treasury Secretary Geithner opened the tap to send TARP funds to insurance companies. One month later, Neal S. Wolin was confirmed by the Senate to serve as the Deputy Secretary to Geithner at Treasury. Until 2008, Wolin worked for The Hartford Financial Services Group, Inc. as President and Chief Operating Officer. On June 12, 2009, Hartford announced that it would receive $3.4 billion under the TARP. Several other insurance companies that applied back in October eventually declined to take TARP money.

    If you still don’t see how cozy the insurance industry is with the federal government in that series of events, listen to Bill Moyers explain it on PBS. “Money not only talks, it writes the prescriptions.”

    During the summer, I thought the Republicans were opposed to the public option as a Trojan Horse – meant only to move us one step closer to a single payer system that would have the federal government paying for all healthcare. Now that it’s just about the federal government paying for all health insurance, Republicans seem to be favoring it. Wonder who will end up the loser at the end?

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • Yes, Manufacturing Matters

    Manufacturing employment has fallen below 12 million jobs for the first time since 1941, and manufacturing jobs as a percentage of total employment has fallen below 9%, the lowest level since the Bureau of Labor Statistics started collecting data in 1939. But annual manufacturing output per worker is also at a record high: $223,915 (in constant 2000 dollars). That’s almost 3 times as much output per worker as in the early 1970s, and twice as much output per worker compared to the mid-1980s.

    That has been the trend over the last 40 years: more output with fewer workers. That’s a good thing, or inevitable, or both – isn’t it? I used to think so; now I’m not so sure.

    Reversing Industrial Decline
    A recent report by the Lexington Institute spells out the depressing picture: After dominating global industrial activity for a century, the United States is losing its edge in manufacturing to other nations. Over the last 30 years, manufacturing has fallen from a quarter to an eighth of the domestic economy, while the share of manufactured goods consumed in America but produced by foreigners has risen from a tenth to a third. The decline of US manufacturing is reflected in record merchandise trade deficits, the loss of over 40,000 manufacturing jobs every month in the current decade, and the shrinking role of American producers in global industries such as electronics, steel, autos, chemicals and shipbuilding.

    US manufacturers continue to generate over 20% of global industrial output and have increased productivity by a third in this decade, but if current trends continue America will cease to be the biggest manufacturing nation in the near future. Many factors have contributed to the slippage in US standing, including high corporate taxes, burdensome regulations, globalization of the economy, and the efforts of trading partners to protect their economies.

    If the erosion of US manufacturing persists, America will become more dependent on offshore sources of goods and the nation’s trade balance will weaken. That will undercut the role of the dollar as a reserve currency and diminish US influence around the world, eventually having an adverse impact on our national security. This can’t be a good thing.

    China Gains in Manufacturing
    China is on its way to surpassing the US as the world’s largest manufacturer far sooner than expected. Does that matter? In terms of actual size, the answer is no. But if size is a proxy for the relative health (and prospects) of each nation’s economy, the answer could be yes.

    The US remains the world’s largest manufactuer. In 2007, the latest year for which data are available, the US accounted for 20% of global manufacturing; China’s share was 12%. The gap, though, is closing rapidly. According to IHS/Global Insight, China will produce more in terms of real value-added by 2015.

    US manufacturing is shrinking, shedding jobs and, in the wake of this deep recession, producing and exporting far fewer goods, while China’s factories keep expanding. Given the massive trade gap between the two nations and uncertainty in the US over when and to what degree manufacturing will recover, China’s ascent has become a point of growing friction.

    Many economists argue that the shrinking of US manufacturing – both in terms of jobs and share of gross domestic product – is a normal economic evolution that started long before China emerged as a manufacturing powerhouse. From their point of view, the shrinking would happen regardless and is actually a sign of health: the sector doesn’t need to be big to be productive.

    To those with this view, China’s rise is normal, healthy and beneficial, for it is the natural course of things for national economies to progress along the continuum from agriculture to manufacturing to services. We have trod that path, and now China is following.

    But another school of thought, held by “manufacturing fundamentalists,” contends that US manufacturing decline is not natural, healthy or beneficial, and must be reversed to retain America’s economic power and well-being. From this perspective, the idea that we can be a nonmanufacturing society – and still be rich, free and independent – is nonsense and folly. Such thinking has led, and will lead, to the collapse of civilizations.

    Even in its weakened state, manufacturing remains a surprisingly large part of the US economy. The sector generates more than 13% of the nation’s GDP, making it a bigger contributor to the economy than retail trade, finance or the health-care industry. Thus it would be devastating if US manufacturers now being hit by the economic downturn never recover.

    Manufacturing Not In Decline
    And yet, according to the Cato Institute, notwithstanding the recent recession that has affected all sectors of the economy, US manufacturing has been thriving in recent years. How can this be so? Again, it’s the productivity. Real US manufacturing output has increased by 81% since 1987. American real manufacturing value-added – the market value of manufactured goods, over and above the costs that went into their production – reached a record-high level in 2007.

    Manufacturing as a share of gross domestic product peaked in 1953 at about 28% of the economy and has been trending downward ever since. Today manufacturing accounts for about 12% of our services-dominated economy, but manufacturing output and value-added are higher than ever in real terms.

    According to the United Nations Industrial Development Organization, US factories are the world’s most productive, accounting for 25% of global manufacturing value-added. By comparison, Chinese factories account for 10.6%.

    That may be hard to fathom, says Cato, given that US factories tend not to produce the sporting goods, toys, tools, and clothing found in Wal-Mart and other retail outlets nowadays. But US factories make pharmaceuticals, chemicals, technical textiles, sophisticated components, airplane parts, and other products. American factories have moved up the value chain.

    In comparison, the percentage of Chinese value-added in high-tech exports is quite small. Economists at the US International Trade Commission estimate that only about 50% of the value of US imports from China is actually Chinese value-added; the rest is value added in other countries and embedded in the components, design, engineering, and labor.

    In iPods, for example, the Chinese value-added is a few dollars on a product that costs $150 to produce and retails for $299. Further, their sale in the United States and elsewhere supports high-paying American engineering, marketing, and logistics jobs, while providing Apple with the profits to conduct R&D to employ more engineers and keep the virtuous circle going. Without complementary Chinese and other foreign labor, far fewer American manufacturing ideas would come to fruition.

    American manufacturing is therefore not in decline, right?

    The Plight of American Manufacturing
    No, that’s not right, and yes, manufacturing is in decline, and therefore so is America. That’s the case strongly made in Manufacturing A Better Future for America, published by Alliance for American Manufacturing.

    The United States is broke because it has stopped producing what it consumes, writes the book’s editor, Richard McCormack, who is also the editor and publisher of Manufacturing & Technology News. Even an increase in consumer demand, he notes, will not put Americans back to work as the spending will only help workers making products overseas.

    About 40,000 US manufacturing plants closed between 2001 and 2008, resulting in the loss of millions of good-paying jobs, according to AAM. Offshoring of production means that the United States is not generating enough wealth to pay its mounting and massive debts. The mindset among America’s economic elite – that the country does not need an industrial base – has put the country and the world economy in a ditch.

    The book refutes some widely promoted myths, including that the US economy can thrive with just service industries as good-paying jobs are replaced by other sectors. It also debunks the notion that lost manufacturing plants will not mean lost research and development. It details the unfair trading practices China employs, and explains the social costs of the decline in manufacturing.

    It is often said our economic future is dependent on innovation and/or job training. These factors are supported most strongly in manufacturing.

    Conclusion
    You can see why I have developed doubts that the diminishing of a manufacturing base and loss of manufacturing jobs are natural, inevitable, or good for the United States and its citizenry. A post-industrial economy does not obviate the need for industry. A large and rising value of intangible goods does not obviate the need for the production of tangible things. And a “new economy” does not obviate the need for a manufacturing base.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Report from Orlando: The Spirit Rocks On

    By Richard Reep

    “In hard times, people turn to God or alcohol” jokes Bud Johnson of Constructwire, a database that tracks planning and construction projects nationwide. Johnson, 50, is an industry veteran and has never seen a recession like this in his career. “This is an exceptionally broad-based downturn,” he says, “and Orlando has been hit harder than most in the South, what with your only real industries being housing and tourism.” Both industries have been trapped like mammoths in a glacier as the credit market stays stubbornly frozen in a modern banking Ice Age.

    At the bottom of the glacier, however, the meltwater continues to flow, and bars and liquor stores seem to be thriving. With 10 new ABC stores open this year, this privately held Orlando-based liquor retailer is doing just fine, enabling many of us to stay sane, if not sober, while waiting for The Recovery. The alchoholic spirits are not the only mood-shifting business doing well in these hard times. Sacred space may not be exactly booming, but religious buildings are being built at a more comfortable pace than nearly any other building type in Central Florida.

    “Ecclesiastical architecture is falling at a rate close to that of a paper airplane, while my other building types have the glide ratio of a rock,” says Peter Kosinski, the architect responsible for the renovation of St. James Cathedral in downtown Orlando. With most other projects on hold, including a share of churches, Kosinski Architecture has still seen most of his religious work proceed, despite the Great Recession. Funding largely comes from donations, and for secular not-for-profits cultural outfits like United Arts, giving has evaporated. Spiritual needs, however, seem to be drawing a steady stream of money to expand or add to temples, churches, synagogues, and other sacred spaces to meet a growing demand in the Central Florida area.

    If the credit Ice Age is a part of a great karmatic rebalancing, it was long overdue and has hit especially hard in our overheated, consumer-driven culture. The cynics, who knew the cost of everything and the value of nothing, drove sacred space largely underground as new subdivisions engorged Orlando with not a square inch reserved for community worship. Religious uses simply don’t fit the profit model of late capitalism, and while our older neighborhoods are dotted with small, walk-to churches, not a cross can be found in the landscape of most newer developments. To the development industry, collective religious worship represents someone else’s unprofitable land sale.

    Cobbling together 15 or 20 acres therefore became a new art form for many evangelical pastors as the late 20th century saw the rise of the megachurch. These huge, Sunday-traffic-nightmares offer sophisticated audio/visual Christian themed entertainment in an arena setting, a perfect way for many to fulfill their spiritual needs. Others, stuck in these vast residential tracts devoid of sacred space, use the house-church method, gathering in groups of 8 or 10 at a member’s residence, taking heart in what Pope Gregory the Great (an early leader) stated: “The real altar of God is the mind and the heart of the just.” And some do both.

    Either way, the religious needs of the people of Central Florida are expanding, and the sanctuaries, temples, synagogues, and mosques are noticeably busier. The 2-year-old Guang Ming Temple, housing the local Renzai Humanist Buddhists, is experiencing a surge in attendance locally. Temple Director Chueh Fan confirms that there is a strong need for a communal spiritual facility. “We feel the hardship of people right now,” she states. “Although the Asian community here is stable, we have been growing over the last 2 years. And we are a middle-sized temple; there are some much bigger in other states.” Guang Ming offers Dharma classes in Spanish, English, Vietnamese and Chinese, and class enrolment is growing quickly.

    Other clerics, such as Reverend Reginald Dunston, also see a need for more religious-based education, and are planning new schools as well as sanctuaries. “Agape Word Ministry is planning a bible-based school,” he explains, “as an alternative to the schools in the area.” Other pastors, such as Jeff Cox of Salem Lutheran Church in Bay Hill, agree that it is important to expand their offerings to include a religious-based education. Education is the one tangible asset that a community is willing to purchase from a house of worship, and while most religions in America struggle for relevance, their schools remain in demand.

    Christianity, exploding in a pluralism not seen since the Reformation, is especially sensitive to its status as the dominant American religion. While over 4,000 new churches open nationwide annually, another 3,700 close, according to David T. Olson in his 2008 book “The American Church in Crisis.” This is near status quo, despite population growth, suggesting a shift away from collective religious worship for many. Hispanics, traditionally more observant, are building megachurches at a far faster clip than non-Hispanics, pointing to a loss of interest in collective Christianity for the majority of the population.

    Locally then, the house of worship is entering a phase of experimentation as new forms, such as megachurches, are tried; it is discarded altogether by the house-church movement; and it is growing in some religions such as Buddhism, with their new temple, and Judaism, with the construction of the new JCC South Campus on Apopka Vineland Road. The mainline Christian denominations that dominate downtown’s skyline serve less and less as a model for new buildings as malls are repurposed, warehouse buildings are adapted, and more novel programs and designs are tried.

    Hindu, Jain, and Muslim traditions are also represented in Orlando, and generally playing to full houses. The Masjid Al-Haqq mosque on West Central Boulevard on a Friday afternoon was brimming full, with more worshippers arriving by car and by foot. Collective spiritual worship of all forms is clearly a rising force within Orlando, and space on pews, benches, chairs and prayer mats are at a premium.

    Missing from many lives, crucial to others, religion is at an odd crossing in Central Florida’s history. To balance empty pocketbooks, some people are filling their cups with booze but others are also imbibing a perhaps long-delayed return to spirituality. This return, however, is marked by a mosaic of multiple religions, rather than a return to the few mainstream denominations that characterized early Orlando’s growth. If Bud Johnson is right, and this surge in spirituality lasts through The Recovery, Orlando will see a boom in new religious architecture that might make up for lost time, creating a revival in sacred space in the Central Florida landscape.

    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.

  • New York Migration Study, the State Continues to Lose Residents

    The Empire Center for New State Policy has released “Empire State Exodus,” which details New York’s continuing loss of people and their incomes to other states. The report was authored by E. J. McMahon, senior fellow with the Manhattan Institute and director of the Empire Center and me.

    Since the beginning of the decade, New York has experienced a net domestic migration loss of more than 1,500,000, the largest loss in the nation. The extent of this loss is illustrated by the fact that Katrina/Rita/defective dike ravaged Louisiana lost a smaller share of its population than New York, which also led in relative terms.

    The report uses the latest Census Bureau and Internal Revenue Service (IRS) data to examine how many New Yorkers have left the state, where they have gone and how much income they have taken with them. It includes detailed breakdowns of population migration patterns at a regional and county level.

    More than 85% of the domestic migration loss was from the New York City region (combined statistical area) of New York State and more than 70% of the loss was from New York City itself. The data shows a continuing exodus from the city, to the suburbs and to elsewhere in the nation.

    The annual net loss of New Yorkers to other states has ranged from a high of nearly 250,000 people in 2005 to a low of 126,000 last year, when moves nationwide slowed down sharply along with the economy.

    Households moving out of New York State had average incomes 13 percent higher than those moving into New York during the most recent year for which such data are available. In 2006-07 alone, the migration flow out of New York drained $4.3 billion in taxpayer income from the state. New York taxpayers moving to other states had average incomes of $57,144, while those
    moving into New York averaged $50,533 as of 2007, according to the report.

    “Even with its large domestic migration losses, New York’s total population has grown slightly since 2000, thanks to a large influx of immigrants from foreign countries,” the report says. “But New York’s share of U.S. population is still shrinking. A continuation of the domestic migration trends highlighted here will translate into slower economic growth and diminishing political influence in the future.”

    The report is available at EmpireCenter.org.

  • Let Freedom Ring: Democracy and Prosperity are Inextricably Linked

    With autocratic states like China and Russia looking poised for economic recovery, it’s often hard to make the case for ideals such as democracy and rule of law. To some, like Martin Jacques, author of When China Rules, autocrats seem destined to rule the world economy.

    A columnist for the Guardian, Jacques predicted that by 2050 China will easily surpass America economically, militarily and politically. The belief in the power of autocracy even extends to such leading American capitalists as Warren Buffett and Bill Gates, who have nothing but high praise for what Gates enthusiastically describes as a “brand-new form of capitalism.”

    Fortunately a new study released Monday by my colleagues at the Legatum Institute refutes the notion that the road to worldly riches lies in autocracy and repression. In a careful study of everything from economic opportunity, education and health to security, freedom of expression and societal contentment, the Legatum “Prosperity Index” makes a powerful case for the long-term benefits of democracy, free speech and the rule of law.

    Some of this stems from how Legatum measures prosperity. The survey takes into account both wealth and well-being, and finds that the most prosperous nations in the world are not necessarily those that just have a high GDP, but that also have happy, healthy, free citizens.

    The top of the list, which ranks 104 countries, is dominated by flourishing democracies. The only exception in the top 20 is No. 18’s Hong Kong, which ranks first in economic fundamentals and continues to be ruled, if not quite democratically, under a far more permissive system than the rest of mainland China. The next semi-autocratic state on the list is Singapore, at No. 23 – another Confucian-style autocracy with great economic and human capital fundamentals.

    This linking of democracy and prosperity with well-being is by far the most significant aspect of the study. But what else determines the success of nations in the modern world?

    1. Small democracies do best.

    The denizens of the Greek city-states or their Renaissance counterparts would have recognized something of themselves in the small, well-managed countries that dominate the top of the list. The top five, Finland, Switzerland, Sweden, Denmark and Norway – as well as the Netherlands at No. 8 – certainly fit this description. These countries rank highly on the quality of life measurements, and, not surprisingly, their main cities also tend to dominate the most-livable-cities lists. With the exception of Switzerland and the Netherlands, these places do not perform as well in terms of basic economics, scoring between 10th and 18th. Although some might ascribe these rankings to successful social democratic policies, virtually all these mini-states have instated significant market-oriented reforms in recent years.

    Other top players Australia (No. 6) and Canada (No. 7) are far larger than their European rivals. And though their citizens are not as socially coddled as in Scandinavia, they enjoy strong democratic institutions, high levels of social well-being and good governance and education.

    And in purely economic terms Australia and Canada boast better economic fundamentals than the Scandinavian countries. One reason may be their enormous stockpiles of natural resources, now in high demand from countries like China and India. These countries also benefit by a large and often skilled migration from these and other Asian countries.

    2. Among the mega-countries, the U.S. is still way ahead

    Don’t cry for me, America. In terms of the large countries, both in population and size, no one comes close to the No. 9-ranked U.S. Indeed there’s not another country with over 100 million people on the list until you get to Japan at No. 16.

    Like all big countries, America is a complicated place, with distinct areas of strength as well as disturbing weaknesses. The U.S. leads all countries in entrepreneurship and innovation and ranks second in the stability of its democratic institutions – the Swiss are No. 1. Less than optimal health and safety rankings, however, push America from the top. Its economic fundamentals are also sub-prime, ranking only 14th, which isn’t surprising in light of persistent current account and now government deficits.

    Despite its problems, the U.S. still outperforms its other large rivals, not only Japan but also the U.K. (No. 12), Germany (No. 14) and France (No. 17). Yet judged within the ranks, all four of these economies have to be considered successful in terms of delivering prosperity and a reasonably high quality of life to their citizens.

    3. Breaking down the BRICs

    The Index’s most fascinating findings can be found a bit further down. The focus of the world’s economy has been shifting to countries that have been – and in some cases remain – governed by Communist, military or single-party dictatorships.

    Democracy’s efficacy can be seen clearly in success enjoyed by the former European Communist states – the Czech Republic, Poland, Latvia, Estonia, Slovakia and Hungary – all of which land in the first third of the ratings. Similarly, Taiwan (ranked 24th) and South Korea (26th), long ruled by military-dominated dictatorships, show how democratization and rising prosperity can flourish together.

    This pattern can also be seen among the “big boys” of the economic upstarts – the so-called BRIC countries. Here the leaders of the pack are both functioning democracies, Brazil (No. 41) and India (No. 45). These rapidly growing economies are kept out of the top tier by significant shortcomings in vital fields such as education, health and public safety.

    The other two BRIC powers, China and Russia, neither of which can be considered anything close to open societies, lag behind. Russia’s mineral wealth gets it a respectable 39th in economic fundamentals, but a lack of democracy, personal freedom and personal safety – as well as poor governance and corruption – drags it down to a paltry 69th. China, ranked a disappointing No. 75, also performs admirably on economic fundamentals, clocking in at No. 29, but is hammered for glaring shortfalls in democracy, personal freedom and governance as well as health and education.

    4. Autocracy may seem to pay, but not in the long run

    Throughout modern history, autocracy has proved effective in sparking fast growth, but a pervasive democratic deficit, poor governance and lack of personal freedom seem likely to constrain long-term progress. For one thing, the ruling elite in the dictatorship is under no strong compulsion to adjust to the needs of its population. Short of forestalling outright rebellion, nest-feathering tends to gain the upper hand.

    As you get to the bottom of the list, the price of dictatorship rises higher still. In this nether-region, there is nary a democratic state. Some of the low-ranking Third World countries are obvious – like Cameroon (No. 100) or Yemen (No. 101) – but some potentially rich but despotically ruled nations do poorly as well.

    Take, for example, No. 94 Iran, a country with enormous natural resources, a well-educated population and a rich cultural heritage. A reasonably enlightened Iran would likely sit in the top third of the list instead of skipping toward the bottom.

    Even the bottom-ranked country, Zimbabwe, left its colonial period with a thriving agriculture sector and great mineral wealth. Here again despotic rule has shown itself an adept destroyer of economic promise.

    In these times of acute self-doubt not only in America but across the democratic world, the Legatum ratings validate the idea that if democracy is not the inevitable wave of the future it represents by far the most efficient way to manage a society. In the end, democracy and prosperity prove not two distinct elements, but, in fact, inextricably linked to each other.

    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 next book, The Next Hundred Million: America in 2050, will be published by Penguin Press early next year.

  • The Week New Urbanism Died?

    It has been a bad media week for New Urbanism.

    “The day that New Urbanism Died?” was the headline of the St. Louis Urban Workshop blog that detailed the Chapter 11 bankruptcy of Whittaker Builders, developer of the “New Town at St. Charles,” a premier New Urbanist community located in the St. Louis exurbs (beyond the suburbs).

    The author notes that “New Town will not disappear, plenty of people are happy to live there, but its promise is gone. It’s become just another suburban enclave and will face the same challenges as other suburban developments; lack of retail, long commutes, etc.” The blog’s headline is a play on a characterization by postmodern architect Charles Jenks, who referred to the demolition of the infamous Pruitt-Igoe public housing project as “The Day Modern Architecture Died.”

    The Northwest Indiana Times detailed the failure of a new urbanist community (Coffee Creek) in an October 23 article. The article noted that the planned 2,000 home mixed use development, located in the exurbs 45 miles from Chicago’s Loop had attracted only 12 homes and an apartment building. Much of the empty land has been purchased by another developer, who indicated an affection for the new urbanism concept, noting however that it probably would not work here. The article notes that a more modest New Urbanist development is doing better, in nearby Burns Harbor, with 75 homes occupied out of a planned 300.

    Perhaps the unkindest cut of all was a survey, reported by the Oregonian, to the effect that residents of Orenco Station travel by car to work nearly as much as people who live in the unremarkably conventional and sprawling suburbs of Portland.

    Despite these unhappy stories, the death of New Urbanism is not imminent. True, to the extent that New Urbanism requires subsidies it is likely to prove unsustainable in the longer term, like its Pruitt-Igoe type predecessors. On the other hand, to the extent that New Urbanism represents a genuine response of architects, builders and developers to actual, rather than imagined demand, New Urbanism could be with us for some time to come.

  • Executive Bonuses: The Junta In The Boardroom

    Public companies and their management boards are run with all the democratic coziness of banana republics. The object of the junta is to transfer the wealth of the shareholders into the bonuses and stock options of the management. As they used to say in China, “business is better than working.”

    Amidst the outcry over excessive executive pay, it is worth noting that, in the caudillo management culture of many public corporations, there is nothing more annoying than a shareholder with an interest in the company that he or she partly owns. The most dreaded corporate day of the year is that of the annual meeting, when outside consultants are hired to screen bothersome questions and choreograph the happy gathering.

    During the meeting itself the greatest scorn is reserved for nosy shareholder questions about executive compensation and board composition, neither of which is deemed to be in the sphere of shareholder influence.

    The annual meeting ends with the appointment of outside auditors, a few planted questions, and — for those meetings held at some remote subsidiary, to keep activist shareholders from showing up — a trip to a regional airport.

    Archaic company by-laws explain why it will be nearly impossible for various regulators to cap the amounts that companies pay to executives. In short, the shareholders work for the managers, not the other way around. (If Goldman Sachs has so much extra cash, why don’t they raise the dividend?)

    Start with board composition, which is usually the domain of one executive: the chairman and chief executive officer. In a functioning system of corporate governance, the jobs would be separate. Chief executives would not also be assigned the job of monitoring their own performance, which is now the case in most public U.S. companies. Good European companies have a supervisory board, which oversees the performance and pay of the senior management.

    In the U.S., not only do foxes run the chicken coops, they get to eat most of the eggs and then write off the meals on their expense accounts.

    Most chairmen/CEOs stack their board and compensation committees with party-line stalwarts, who vote in favor of excessive pay packages in the hope that the recipient or one of his friends will not forget the favor. To break such a back-scratching system should be relatively easy, especially in companies regulated by the Securities and Exchange Commission. Simply mandate that management cannot sit on its own board of directors.

    Cumulative voting or proportional representation of the shareholders is another way to start breaking the management oligopoly of board composition. Board seats could also be allocated to representatives of retired personnel (who built the company) and those who now work in the company.

    Another way to limit excessive pay packages is to impose a binding ratio that caps executive pay based on the compensation of the company’s lowest paid workers. At the moment, CEOs in big public companies have packages that pay them more than a thousand times that of their employees’ lowest wages.

    J.P. Morgan thought the boss should only be paid twenty times the salary of the average company employee. Such an idea might not cap fat cat bonuses, but it would certainly improve the minimum wage.

    How then to claw back executive pay when the big bosses bet the ranch on something like sub-prime mortgages and lose?

    For starters, boards independent of management self-interest will be less forgiving when executives ruin a company or even turn in mediocre results. That so few banking executives were fired after the Great Collapse of 2008 is testament to the lack of shareholder representation on most boards of directors. Who fires the CEO when he reports to himself?

    Next, mandate that incentive compensation like stock options only be paid into segregated retirement accounts, which ought to align performance with long-term success.

    In financial services, the reward for failure should be just that: failure. In the recent crisis, deposed chairmen and chief executives were marched into the sunset with multi-million dollar severance packages. Remember the $64 million sayonara given to Citigroup’s Charles Prince, about the time the company’s shares lost $275 billion in market capitalization?

    A side affect of the government bailouts was to comfort bad managers. But while these corporate executives were pinning medals on their own chests (very much in the tradition of Latin strongmen), the reason given for the sweetheart loans, especially to banks, was to protect depositors. Under this variation of mutual assured destruction, financial institutions with a large depositor base can never be put to the wall, which gives them an effective government guarantee.

    To replace this kind of dependence on bankers who can gamble with deposits without consequences, there needs to be a mechanism that will protect depositors while allowing the larger financial companies to fail.

    For example, depositors could be given the option of buying deposit insurance — privately funded insurance, unlike that offered by the Federal Deposit Insurance Corporation — much in the way that air travelers buy accident insurance. That the FDIC caps out at $100,000 is neither here nor there. Under this scheme, insurance would be available for all amounts, large and small. It would be paid for in the market, not given as a government gift.

    When customers deposited money somewhere, they would decide if they wanted to insure the deposit or not. Those that wanted coverage would pay for it. Those that wanted to reply on their bank’s full faith and credit would leave their money uninsured and hope they have not found the next Lehman Brothers.

    Publishing rates on deposit insurance, much like posted interest rates, would be yet another indicator of a company’s financial health, much like the credit default swaps that are traded in institutional markets.

    The goal is to alert customers to good banks and bad ones, and to make clear that the bad ones will be allowed to fail, which is nature’s way of telling executives that they are overpaid.

    My last modest proposal is to encourage reconstituted boards of directors to auction off the positions of senior management.

    At the moment, managers justify their self-worth with a lot of encomiums about how big salaries and bonuses are necessary to insure that “we get the best people.”

    From what I can see, all that the big salaries insure is that companies keep a lot of mediocre executives, many of whom, judging by recent performance, then spend their time buying wine and sprucing up their vacation homes. Remember what was said, in Henry Ehrlich’s book of business quotations, about the compensation policies of Harold Geneen at ITT: “He’s got them by their limousines.”

    Under my revised system, top executives would be required to show the board that they have, in writing, a comparable offer from a competing firm (baseball works like this). As well, under the auction system, boards could entertain bids by senior executives to fulfill the roles of senior management.

    Clearly, chief executives have a good time in their corporate jets and swank hotel suites, which might lower what other senior managers would need every month to handle the top jobs.

    My guess is that a number of competent executives could be found willing to do the jobs of Fortune 500 CEOs, and for a lot less than what the current occupants charge the companies for their services (the average is over $10 million). Something tells me that Citigroup could have found a CEO for less than the $38 million that it paid to Vikram Pandit in 2008. Maybe it should have looked on eBay?

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch.

  • Property Owners Pay for City’s Dysfunction Under L.A.’s New Graffiti Ordinance

    Graffiti is a bane of urban life, a form of vandalism that demoralizes entire neighborhoods and invites worse crime.

    Graffiti is an art form and an outlet for expression amid the jumble and obvious strains of urban life.

    You’ll hear arguments from both of those viewpoints, depending on who you talk to about graffiti.

    The Garment & Citizen is of the firm opinion that anyone is free to consider graffiti an art form – but all should be mindful that such status doesn’t give anyone the right to express themselves by painting, etching or otherwise tagging someone else’s property. Pablo Picasso himself would not have had any right to create his “Guernica” on the side of someone else’s building, as far as we’re concerned.

    It would have been a loss to the world, of course, if Picasso had gone through life with no canvass for his genius. The world needs Picassos, and it’s important to remember that such talent sometimes grows on tough corners.

    It would be an ideal situation if we had a school system that could consistently engage such talented individuals…and parents with the time to nurture youngsters inclined toward art…and an overall outlook as a society that values art as something more than a commodity to be marketed.

    We’re lacking to some degree or another on each of those counts.

    Consider what goes on before some kid decides to emblazon graffiti on someone else’s property.

    First, there’s been some breakdown in the family unit. Sometimes it’s a parent or parents who don’t care enough to warn their children off such behavior. Other times they are too busy trying to feed and clothe their kids, leaving little time to teach them right from wrong.

    You can bet that many cases also involve a school that has failed to engage and educate the youngster.

    There’s probably a lack of after-school resources, too, leaving kids to find camaraderie with mischief makers while their parents are still working.

    All of these factors come into play on graffiti in our city. They all point to the dysfunction that has found a cozy spot in Los Angeles for decades.

    We live in a city where the minimum wage is $8 an hour, which will bring $320 for a 40-hour week – hardly enough for rent. Is it any wonder that folks at the bottom end of the pay scale might have to spend more time working and fewer hours on their child’s upbringing?

    Everyone knows that the drop-out rates at Los Angeles Unified School District (LAUSD) campuses are sky high in general, and higher still as you move down the socio-economic ladder. Yet not much ever changes when it comes to expectations of how well the organization teaches our children.

    Then there’s the Los Angeles Police Department (LAPD), which recently came close to a roster of 10,000 officers, the highest mark in the agency’s history. Compare that to other major cities in the U.S. and you’ll see that we still don’t have enough cops. We have never had enough cops. And now there’s talk of trimming staffing levels for LAPD because the city is short on money.

    These are the pillars of the dysfunction that we have lived with for years in Los Angeles. How does a city go so far down a path of ignoring all these problems and allowing the ground for graffiti vandals to grow so fertile?

    Look no further than City Hall. That’s where members of the City Council recently passed an ordinance that will require any new commercial or residential buildings to include anti-graffiti coatings on the structures. The only exception comes if a property owner signs a lifetime contract to remove any graffiti within a week.

    There you have it – this problem rolls downhill. Failure upon failure leads to the doors of property owners. They must, under the ordinance, join city officials in giving up on any thoughts about directly addressing graffiti vandalism. They must, our elected officials say, pay good money to prepare to be vandalized.

    The new ordinance is one way to raise revenue, but it also raises a white flag of surrender – a de facto confirmation that our elected officials lack the governmental skill and political will to face up to graffiti vandals and address the various factors behind the crime.

    That’s a dictionary definition of dysfunction – and it passed the Los Angeles City Council unanimously.

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

  • Fixing the Mortgage Mess: Why Treasury’s Efforts at both Ends of the Spectrum Are Failing

    To get a better idea why the Obama Administration’s efforts to stem the home foreclosure crisis have failed at both ends of the problem, you need only go back to that great scene in Frank Capra’s classic, “It’s A Wonderful Life,” where protagonist George Bailey (Jimmy Stewart) is on his way out of Bedford Falls with his new bride and high school crush, the former Meg Hatch (Donna Reed). The newlyweds are heading toward the train station to leave on their honeymoon when Meg notices a commotion outside the Bailey Bros. Building & Loan Association, founded by George’s revered but now deceased father, Henry, and Henry’s bumbling brother, Billie.

    The “commotion” is actually a run on the bank. George – bless his heart, and with the full encouragement of the new Mrs. Bailey – hops out of Ernie’s cab to see if he can quell the growing crowd assembling outside the locked doors of the Building & Loan. With his usual calm George assesses the situation, asks Uncle Billie to unlock the doors to let the gathering mob into the Building & Loan, and then proceeds to talk (most of) them out of closing their accounts and being refunded the value of their shares.

    George patiently explains to his anxious Association members that he can’t give each of them 100% of the value of their Bailey Brothers Building & Loan Association shares because the funds from those shares have already been loaned out to worthy borrowers so they can afford to build or buy houses in the community. States George from behind the teller counter:

    “…you’re thinking of this place all wrong. As if I had the money back in a safe. The, the moneys not here. Well, your money’s in Joe’s house…that’s right next to yours. And in the Kennedy’s House, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay you back as best they can. Now what are you going do? Foreclose on them?”

    Just as George appears to be making progress, however, a now former Association member comes running into the Building & Loan pronouncing that Old Man Potter (Lionel Barrymore), who owns the bank and every other business in Bedford Falls, is offering to buy Bailey Brothers Building & Loan shares at 50 cents on the dollar (in an obvious effort to take advantage of the situation by running George Bailey out of business). Saving the day, and confirming that George has indeed made a life-changing decision in his choice of mates, the new Mrs. Bailey, with $2,000 in cash in her purse for their honeymoon, offers the money to the anxious Association members filling the building lobby. George then adroitly parses out their honeymoon money in the smallest increments he can persuade folks to accept under the circumstances.

    The scene tells us much about what went wrong with the residential real estate market nationwide. It is more than merely nostalgic to long for such elegant simplicity in the manner in which deposited funds were invested in things such as home mortgages. However, the only thing quainter than that scene in “It’s a Wonderful Life” is the idea of a bank or other financial institution originating, owning, and servicing the same mortgage. And therein lies the rub for efforts by the Treasury Department to help right the residential mortgage ship of state through the Making Home Affordable mortgage modification program and the Legacy Asset Recovery program.

    The root the problem lies with the complete disconnect between those who actually own the notes secured by the vast majority of residential mortgages in this country and those who “service ” those mortgages. Right now there is little if any incentive for those servicers to participate in the Treasury Department’s mortgage modification initiative (the Making Home Affordable mortgage modification program or “MHAP”), originally projected to foster the modification of 2.5 million mortgages but having resulted in only a fraction of that number in modified mortgages. This is at least in part because the fee structure under the existing servicing agreements does not adequately compensate the servicer for the amount of effort required to accomplish a mortgage modification. Further, there’s no clearly and easily identifiable “owner” of the notes that are secured by the underlying mortgages putting pressure on the servicers to modify these mortgage

    The national mega-banks that have received the lion’s share of Treasury’s multi-trillion bail-out of the banking industry have been, by far, the worst offenders in not embracing and implementing this program. And the problem can’t easily be fixed because it is structural in nature, the by-product of a system ironically intended to keep credit flowing into the residential sales market. For example, in Treasury’s recently released Servicer Performance Report through September 2009, Bank of America had modified under the MHAP only 11% of its approximately 876,000 home mortgages delinquent by 60 days or more (thereby making them eligible for modification under MHAP).

    The structural problems prevail at the investor-end of this morass as well. After much Congressional rhetoric and even more Wall Street teeth-gnashing over mark-to-market legislation late in 2008 that would have forced the holders of mortgage-backed securities (“MBS”) to mark down the value of their mortgage loan portfolios based on reductions in the underlying collateral value, Congress declined to take such action. The Legacy Asset Recovery program (so-called by Treasury because, quite honestly, who wants to invest in “toxic” assets), the investment component of Treasury’s Public-Private Investment Program or “PPIP,” pairs private capital with Treasury capital and then makes up the difference with federal low-cost debt. This program is intended to mitigate potential risks and rewards for these new equity participants by halving the amount of private equity that must be raised (since half of the total equity is provided by the government) and providing all of the required debt. As with any program whose purpose is to encourage private investments in bad debts – recalling the RTC program from the early 90s – potential profit is directly correlated to discounting the Legacy Asset purchasing entity can achieve in negotiations with the MBS holders.

    Regrettably, the assumptions underpinning the theory quickly prove not to be reasonable. At its core, the problem is that, in order for this initiative to work, the MBS holders need to do that one thing they’ve absolutely refused to do thus far: Take any losses.

    MBS holders are betting on their ability to hold onto their mortgage pools for as long as it takes for the excess housing inventory in the marketplace to get absorbed. They are also waiting for the end of the recession (perhaps around the corner but perhaps not) to turn into a full-fledged economic recovery, so that underlying real estate values start to catch up to portfolio values.

    Will this strategy work? Likely not if there’s a slow, largely jobless recovery that doesn’t support the housing market. As of now, the most recent projections for economic recovery in the real estate sector are looking to 2013. In the meantime, Treasury’s programs at both ends of the mortgage crisis will have done very little to stem foreclosures or stabilize capital flows to the housing market.

    Compounding the structural infirmities of these two “recovery” programs is that job growth is most likely to come first in states that have relatively few problems (Washington, D.C.-Metro Area; Great Plains; Texas) and will be far slower in many of the most troubled states, notably California, Michigan and Ohio, and parts of the Northeast. Hindsight being 20/20, rather than focusing so much attention and so many resources on helping the financial industry, which has been by far the largest recipient of Washington’s largess, the focus should have been on job preservation and job creation. The links, after all, between mortgage performance, housing values, and employment are undeniable.

    Peter Smirniotopoulos, Vice President – Development of UniDev, LLC, is based in the company’s headquarters in Bethesda, Maryland, and works throughout the U.S. He is on the faculty of the Masters in Science in Real Estate program at Johns Hopkins University. The views expressed herein are solely his own.