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  • Too Big To Fail Needs to Go

    One of the causes of last year’s financial collapse was the adoption of the concept, ‘Too Big To Fail’. Washington decided long ago that some firms are so large and so integral to the economy that the failure of one of these firms would put the entire economy at risk. So, the government insures them at no cost.

    The problem with free insurance against failure is that it encourages excessive risk taking. This is the much-talked-about moral hazard problem, and it was a serious contributor to how we got to September 2008 in the first place. Since then, we’ve merged big bad financial institutions with big good financial institutions to create even larger financial firms. This has to stop.

    Why would a firm grow to the size we observe?

    Often, the firms’ managers tell us they merge to diversify. It is not true. Research I did with Bill English while I was at the Fed showed that large banks really didn’t diversify after they merged. They merged with firms much like themselves in similar markets.

    Besides, the argument for diversification is flawed on its face. Financial theory is clear. The investor can diversify more efficiently than the firm can diversify on the investor’s behalf.

    Firms also claim that they are merging to obtain economies of scale. That is not true either. A reasonably large literature is available on economies of scale. This literature is clear. Economies of scale are fully exploited when firms are much smaller than the ones that are currently considered Too Big To Fail. Indeed, diseconomies may exist at the size of our largest financial firms.

    Are there other reasons firms might want to become the size we see? Sure, but the participants are not likely to advertise those reasons. Firms constantly strive for market power, and size can help them achieve that market power. Of course, when firms have market power, the consumer loses.

    Firms might also merge to get the free Too Big To Fail insurance. That is clearly not in the best interest of anyone except the insured firm.

    The two most believable reasons that firms become Too Big To Fail are counter to the public’s interest. That’s worth repeating more forcefully. Firms that are Too Big To Fail serve no public interest. Since the public is funding the insurance, it needs to go.

    Washington’s response has been counterproductive. The preferred model seems to be fewer and even larger firms subject to more government regulation. This makes no sense. There is no evidence that regulation prevents financial collapse. The firms that were involved in last September’s nightmare were all heavily regulated. Indeed, they are among the most heavily regulated firms in the world, and we still saw the most devastating financial collapse since 1929.

    Additional consolidation and regulation is not only counterproductive, it approaches criminal insanity. It guarantees that we will see something like September 2009 again.

    We can only speculate as to why policy makers are responding to the financial crisis by increasing regulation of a consolidated financial sector. The most generous speculation is that fewer larger firms are easier to regulate effectively. Easier, maybe, but not more effectively.

    We would all be better off if there were no firms that were Too Big To Fail. So, let’s provide a strong incentive for them to voluntarily split themselves up into little, more efficient pieces. The easiest way to do this is to apply an onerous tax on any firm considered Too Big To Fail.

    This would be equivalent to overpricing the Too Big To Fail insurance. If the insurance is overpriced, no one will buy it. Instead, they will divide themselves up into several smaller, hopefully more specialized, firms.

    Implementing such a tax would be very easy to do, and it would be far cheaper than the alternatives. We need to get on with it before another crisis comes our way.

    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.

  • Central Banking: Feds Rule The Game

    In mid-September President Barack Obama mounted Theodore Roosevelt’s bully pulpit and railed against market greed to an audience of corporate tycoons. The objects of his derision included, and were limited to, bankers, financiers, and speculators in the ‘private’ financial community. Notably absent from the enemy bankers list were quasi-government banking corporations and America’s central bankers.

    Needless to say, the Wall Streeters convened in New York’s Federal Hall sat on their hands, perhaps wondering what had happened to the options that they underwrote for the Obama presidency when they passed around his campaign contribution hat to chip in $700 million.

    To hear President Obama’s version of recent financial history — echoed both by demonstrators and summiteers at Pittsburgh’s G20 jamboree — rapacious speculators and freebooters hijacked otherwise innocent American investors, stuffed their portfolios with inflated or worthless mortgage-backed securities, paid themselves huge bonuses for the effort, and then left the mess to be cleaned up, to use a George Bushism, by “the good folks in Washington.”

    The September New York meeting should have made for a compelling prime-time encounter session: Progressive president takes on the robber barons. After all, voters are leery of health care reform partly because they feel that, despite good intentions, their government has already bet the ranch by bailing out the banks.

    Such are the mixed metaphors of the Obama presidency that there is a constituency that cannot tell if he is a creeping socialist (too many public options) or a Wall Street front man (making the world safe for Goldman Sachs). Nor is there much consensus around the proposals to cap the bonuses of corporate hierarchs, even those who bled their companies dry.

    Certainly it seems odd that, after a global collapse of so many markets, President Obama cannot ignite a bonfire of the vanities at the head of Wall Street. After the recent speech, the corporate Medicis dismissed the need for comprehensive financial regulations and justified their bonuses much the way Babe Ruth once explained why he was paid more than the President (“Well, I had a better year”).

    The reason the U.S. administration does not get more traction with the panegyric of financial outrage is that many Americans now see little difference between the speculators on Wall Street and those running the government in Washington.

    After all, the biggest bets on sub-prime were made at two quasi-government corporations, Fannie Mae and Freddie Mac, and many of the bailed-out corporations earn their daily bread floating and trading U.S. government securities. In that sense, Wall Street treats President Obama as a cranky client, someone who often complains about the fees and commissions, but who has few alternatives to discount his paper.

    Teddy Roosevelt was able to take on corporate interests because, during the early 20th century, the U.S. government wasn’t in the banking businesses. President Andrew Jackson had driven a stake through the heart of the Second Bank of the United States, and throughout the 19th century the economy was in private, non-governmental hands.

    That private oligopoly was broken with the Federal Reserve Act of 1913, which put the U.S. government in the money game of issuing and regulating the currency.

    After 1913, it wasn’t just railroad speculators like Daniel Drew who could water the stock. The regional branches of the Federal Reserve System were also in the business of manipulating prices and values in the American economy. But that does not mean that the regulators always got it right.

    One way to read the history of the Great Depression is as a cautionary tale on the fallibility of central banking and the risks of government intervention in a market economy.

    That is a thesis of Liaquat Ahamed’s Lords of Finance, an account of the European and American central banks that “regulated” their economies into the failures of the 1930s. He makes the compelling case that the central bankers of Britain, France, Germany, and the United States fiddled with exchange rates, gold parity, currency issuance, and interest rates until the market crash of 1929-30 became the Great Depression of the 1930s.

    Central banks are, he asserts, above all political and not economic machines, and that for much of the early twentieth century, the government bankers never had “much of a year.”

    Leading up to the Great Depression, Britain pegged its currency to gold at too high an exchange rate, which led to collapse as traders relentlessly exchanged weakening pounds for Bank of England gold. France (like China today) played the game of low exchange rates, and subsidized its exporters with a cheap French franc, which undercut the European competition and hampered Germany’s re-integration into Europe.

    For its part, the United States insisted that France and England repay its war loans, which, indirectly, kept the economic pressure on Germany, which owed billions in reparations to the former Allies. And the German central bank, at various moments, chose to lessen its debt load with runaway inflation, which wiped out not just interest payments, but savings accounts and democratic government.

    In many ways, in steering the U.S. economy away from Great Depression, Part II, the Obama administration is facing the same dilemmas that confronted the Bank of England, if not the German government, after the 1929 Crash. Although the U.S. dollar is not pegged to gold, it is fixed to an artificially high standard of American living, which is supported with massive debt at all government and household levels.

    To pay off these obligations, the government can let the dollar sink, which will subsidize exporters, but infuriate foreign creditors, such as China. This route would also prime the pump of inflation, which is a tax on savings and a gift to debtors, such as the indebted U.S. government.

    Or Washington can push a strong dollar policy, which our allies and creditors would prefer. But that will make the United States a poorer nation, as national wealth and assets will need to be transferred to pay off the borrowing binge.

    Little did President Obama acknowledge, when he stood at Federal Hall in the shadow of George Washington’s first inaugural, that the speculator he should have been denouncing was none other than the government that he heads. This does not excuse the self-congratulatory bonuses of Wall Street punters or the failures that they engineered, and which President Obama papered over with bailout money and stimulus packages. But it does suggest why few in the crowd, or the electorate at large, cried “bully” when he was finished. They are in the same game.

    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.

  • Bifurcated American Politics

    Bifurcated means to split or divide something into two parts. It is a term often used to describe trees, but today it can also be applied to our politics in America. It seems that right and left, liberal and conservative, Republican and Democratic have never been more at odds than in our recent history.

    Politics has always been blood sport. A quote often attributed to President Harry Truman is, “If you want a friend in Washington, get a dog.” This may have been true about our politics, but our legislative process was much more collegial. Elected leaders worked together, shared power, listened to the other point of view, and knew how and when to compromise. Today, lines in the sand have become chasms, and compromise is viewed as retreat. What happened? .

    Robert Bork, by any objective criteria, would be judged to be highly qualified to become Justice of the Supreme Court. He was a renowned legal scholar who had the misfortune of also being a strict constructionist of the constitution. In 1987, he was nominated by then-President Ronald Reagan to fill a vacancy on the court. Within an hour of his nomination, Senator Edward Kennedy stated, “Robert Bork’s America is a land in which women would be forced into back-alley abortions, blacks would sit at segregated lunch counters, rogue police could break down citizens’ doors in midnight raids, schoolchildren could not be taught about evolution, writers and artists could be censored at the whim of the Government…” At that point civility ended. Bork’s nomination was withdrawn and the process has not been the same since. Ted Kennedy defined the fears America harbored about conservatives, and a new word was added to the American lexicon – “borked” – which is defined of a savaging of a candidate because of what they believe.

    In 1988, Rush Limbaugh syndicated his talk radio program nationally. He was unabashedly conservative and a ratings sensation. His three hour show usually does not include any guests. To his audience, he is a “lovable little fuzz ball,” but to his enemies he is the personification of mean-spirited Republicanism that is anti-Black, anti-woman, and anti-environment. Limbaugh set the stage for conservatives like Sean Hannity, Glenn Beck and Laura Ingraham to follow and achieve talk radio dominance for the conservative point of view. Limbaugh provides daily talking points to his listeners in the form of arguments against what he deems liberal policies. His “dittoheads” now form a network of followers throughout America who can be quickly mobilized into opposition.

    Liberals tried and failed to match Limbaugh by launching “Air America” and other programming, but their programs have all been ratings failures, leaving the right firmly in command of talk radio content. Talk radio has divided America not so much along party lines as along ideological propensity, liberal and conservative.

    Trust in our elected leaders has been greatly diminished over the past few decades. Republican trust was shattered when George H.W. Bush broke his “read my lips” promise not to raise taxes. The wound deepened when Newt Gingrich “flamed out” in 1998. Democrats circled the wagons around Bill Clinton during his impeachment. His impeachment was viewed as criminal by Republicans, while his actions were considered minor, personal issues by Democrats. George W. Bush was elected in a disputed ballot election. From that point forward, to Democrats he was “selected not elected.” Our trust in our elected leaders is at an all time low as evidenced at recent town hall meetings on health care and polling data that puts Congressional approval below 30 percent.

    The powerful nightly news programs and newspapers at one time were the primary shapers of opinion in America. No longer. New internet based media and content providers simply beat them to the punch on a daily basis. This has caused a divide in how we get news. Fox News is soaring in the ratings with its “fair and balanced” tagline. In response, other mainstream media has moved left. What is troubling is that stories that are broken by Fox, using good journalism, are not even carried in the mainstream media. Two recent examples are reporting on Obama appointee Van Jones, and Fox’s explosive reporting on ACORN. The New York Times missed the Jones story. When he resigned they explained their lack of coverage, writing, “Our Washington bureau was somewhat short-staffed during the height of the pre-Labor Day vacation.” Charles Gibson, anchor at ABC, when asked about the ACORN scandal laughingly stated, “It’s a mystery to me.”

    The way our “two media” view tea parties, town hall protesters and the September 12th March on Washington goes far beyond a mere gap in perception or difference of opinion on what constitutes news. It defines the camps in a divided America

  • Can Silicon Valley Attract the Right Workforce for its Next Turnaround?

    In less than 30 years, Silicon Valley has rocketed to celebrity status. The region serves as the top magnet for innovation, often occupying the coveted #1 position of global hot spot rankings. More of an informal shared experience than a physical place, Silicon Valley capitalizes on being centrally located in the San Francisco Bay Area, a broader regional zone that is an economic powerhouse.

    Keeping this leadership position requires constant transformation. The region has weathered and reinvented itself through previous downturns. These next few years, in the wake of what some have termed the Great Recession, will provide another test of economic recovery and relevance.

    Based on a recent in-depth research study of global innovation networks, several elements will be essential to the future success of the Bay Area. Two critical but often overlooked factors are specifically community colleges and local demographics. Both are tied directly to people.

    Almost any conversation of innovation assumes that the top research institutions are prerequisites. Boston has MIT and Harvard; the Bay Area has Stanford University and the University of California at Berkeley. One university professor said frankly, “Stanford is part of what the outside world sees as part of the Silicon Valley secret.”

    These tier-one universities do play a critical role within the local economy, receiving the greatest doses of federal research dollars and enjoying their pick of top young talent. They also soak up the spotlight, so much so that the tiers below them are often ignored by local policymakers.

    This elitist mentality dominates the top of the Bay Area food chain. An eminent faculty leader of a biotech institute was astounded when asked about the role of the other local schools for regional growth. He remarked, “We are more focused on the entrepreneurs than the foot soldiers. We kind of believe that [latter] part will take care of itself.”

    This kind of thinking is delusional. In truth, community colleges provide the bedrock for the region’s university ecosystem. They channel bright students up the local educational chain, helping train and transfer them to the upper tiers. Within the Bay Area, the Foothill-De Anza Community College has served a diverse student body, which includes a combination of younger, older, and re-entry students, for over 50 years.

    In particular, community colleges serve as a gateway to ambitious foreign-born talent. Foothill-De Anza admits more international students than any other community college in the U.S., notes Peter Murray, Foothill’s Dean of Physical Sciences, Mathematics and Engineering. Many of these students from outside the U.S. seek a natural entry to Silicon Valley. Once on a student visa, they aggressively pursue their career interests, often transferring to another state school, such as Stanford or the University of California system, to finish their degrees and join the local workforce. Others gain critical technical skills – such as in database management or bioinformatics – critical to operating sophisticated, technology-based companies.

    The community colleges also learn to do more with less. Although state-assisted, Foothill-De Anza funds students at a relatively low rate of $4019 per student, even compared to other national community colleges that average $8041 per student, according to Community College League of California statistics. This is far below what it costs to send students to Berkeley or Stanford.

    Most recently, the school’s administration has faced painfully deep state budget cuts, re-juggling curriculum priorities and teaching staff loads. They adjust by being flexible. The community college system recently announced a partnership with the University of California at Santa Cruz with ambitious plans to build a new billion-dollar multi-university campus at the NASA Ames Research Center. Carnegie-Mellon University in Pittsburgh and San Jose State University in San Jose, Calif., have joined the unique venture that mixes private, public, and industry spheres.

    The new campus will include a new School of Management, major science laboratories, engineering facilities, classrooms, and homes for 3,000 people on 75 acres. The backers are hopeful that this will lead to a “sustainable community for education and research.” If all goes accordingly to plan, this university will offer a new model of education that combines the best of a local community college, local metropolitan school, two universities at a distance, and a strong industry partner.

    Education constitutes only one part of the region’s human capital outlook. Local population trends can reflect the overall strength of the workforce and its ability for continued growth. On a more fundamental level, innovation efforts rest on people who start and grow new ventures. By understanding current demographics, you garner strong hints for future gaps and issues.

    Looking just at Silicon Valley, the area’s population grew modestly by 1.6% to a total of 2.6 million residents for 2008, according to the latest Silicon Valley Index. Compared to California and the U.S., Silicon Valley’s population consists of fewer children and more people between working ages (25–64). This combination bodes well for work productivity, but also indicates that many who start families soon drift to other states to raise the next set of young workers.

    Silicon Valley does better attracting and retaining foreign talent, who seek new opportunity and prosperity. AnnaLee Saxenian, a dean at the University of California at Berkeley, considers this global migration and circulation to be critical in maintaining regional advantage. Foreign immigration has driven Silicon Valley’s population growth. Looking solely at U.S. Census data estimates for the period of 2000 and 2003, foreign migration to the metropolitan cluster of San Francisco, Oakland, and Fremont rose by 10 percent each year, while domestic migration dropped by nearly 14 percent on average.

    Another good sign is that foreign students, particularly those receiving degrees in science and engineering, continue to stay higher in Silicon Valley than other U.S. regions. Unfortunately, when the student visas end, many of these bright workers, who would otherwise stay in the area, take their skills and dreams back home.

    More worrying, college graduates – both foreign and domestic – are leaving the region on their own volition. No city in the greater Bay Area sits in the top 20 list of places to work after college. If American youth are relocating to other areas, then the region may be destined to simply age in place. Local parents in my recent research study simply did not make the connection that nearly all their grown children lived elsewhere – and what that implication entailed for long-term regional vitality.

    Part of this difference in understanding can be explained by generational biases. Each generation brings a dominant set of traits that shape the tone and direction for local innovation. Baby Boomers (born 1943–1960) are focused on their own pursuits. Even when retired, Boomers stay active as consultants and independent contractors, partly to offset decreased life savings as well as enjoy a self-sufficient lifestyle. Often criticized for being narcissistic, they can help to influence innovation activities for others through policy and funding decisions. A senior research policymaker said emphatically, “What are we going to do for the generations out ahead of us? That’s what I care more about than anything.”

    Generation X (born 1961–1981) is the most entrepreneurial generation in U.S. history, but the smallest in size, so policymakers easily overlook them. Certain tensions exist with the prior generation. Research from Neil Howe and William Strauss show that the Boomers are increasingly resisting the decisions made by Gen X to the point of overlooking their contributions in favor of the next generation.

    This is a drastic mistake for two reasons. First, the average age for a U.S.-born technology entrepreneur to start a company is 39, which sits squarely in Gen X. This generation has already become the primary engine for Silicon Valley. Second, this generation has the best academic training and international experience in American history. They may be small in their weight class, but Gen X packs a hefty punch overall. The challenge will be for the Bay Area to retain this population group, as their family and career needs shift.

    In contrast, the Millennials (born 1982–2005) are generally focused on social bonding, authority approval, and civic duty – attributes that may make parents happy, but do not usually drive new economic growth. As the largest generation in American history, they are proving to be massive consumers of technology and social advocates. By and large, Millennials steer away from high-risk ventures, preferring community-oriented activities, and they bring a different set of demands to the Bay Area.

    In the innovation lifecycle, if Boomers serve as advisors and Gen Xers as the entrepreneurs, then the Millennials could provide potent networkers. Each plays an essential role in regional growth, and all frequently vote with their feet. The critical question is whether the Bay Area is positioned to retain the right workforce mix to harness its next turnaround, or whether the dynamism will shift to other regions both in America and abroad.

    Tamara Carleton is a doctoral student at Stanford University, studying innovation culture and technology visions. She is also a Fellow of the Foundation for Enterprise Development and the Bay Area Science and Innovation Consortium.

  • Executive Editor JOEL KOTKIN on The Guardian regarding California politics

    “‘They came here, they educated their kids, they had a pool and a house. That was the opportunity for a pretty broad section of society,’ says Joel Kotkin, an urbanist at Chapman University, in Orange County. This was what attracted immigrants in their millions, flocking to industries – especially defence and aviation – that seemed to promise jobs for life. But the newcomers were mistaken. Levine, among millions of others, does not think California is a utopia now. ‘California is going to take decades to fix,’ he says.”

    Joel on The Guardian

  • Contributing Editor RICK COLE on California City News

    “Twitter allows just 140 characters per ‘tweet,’ including spaces and punctuation. After a Republican member of Congress was ridiculed for tweeting during the State of the Union address this past February, Twitter usage exploded 3,700 percent in less than a year. By the time you pick up this article (or read it online), monthly U.S. Twitter users will outnumber the population of Texas—or possibly California.”

    Rick Cole on California City News

  • Executive Editor JOEL KOTKIN is referenced on LA Observed regarding California politics

    “Joel Kotkin predicts a move toward the political center due to California’s economic woes and realization that ‘California’s experiment with ultra-progressive politics has gone terribly wrong.’ New Geography”

    Joel on LA Observed

  • Mexico’s Real War: It’s Not Drugs

    Balding, affable and passionate, Uranio Adolfo Arrendondo may not be a general or political leader, but he stands on the front lines of a critical battle facing Mexico in the coming decade. This struggle is not primarily about the drug wars, which dominate the media coverage–and thus our perceptions–of our southern neighbor. It concerns the economic and political forces stunting the aspirations of its people.

    For the past 36 years, Arrendondo’s small family-owned school, Liceo Reforma Educativa, where he is principal, has served as an incubator for Mexico City’s aspiring middle class. Modest and reasonably priced, the school has offered small-business owners, professionals and mid-level managers a way to propel their children up the economic ladder.

    Yet today Arrendondo finds many parents lacking the resources for even a modest alternative to Mexico’s troubled state-run schools. “The middle class in Mexico is going down,” Arendondo told me in his office by the courtyard of the brightly painted school in the largely lower-middle-class Iztacalco, one of Mexico City’s 16 diverse delegaciones, or boroughs. “The middle class is predated by both the super-rich and the criminal poor. We are squeezed in the middle of the sandwich.”

    This predicament is not unique to Liceo Reforma, which has some 245 students. Data from the Asociacion Nacional de Escuelas Particulares estimate that as many as 400,000 people have pulled their children out of small private schools over the last few years, placing them instead in the generally much inferior public ones.

    This is just one sign of a worrisome trend toward downward mobility, greatly exacerbated by the economic crisis. And it is all the more painful, as it represents a reversal of progress toward an expanding middle class in the 1970s and 1980s. In those decades, Mexico–spurred by its energy wealth and an expanding industrial base–was finally beginning to break away from its age-old pattern of being a society dominated by a few rich and many very poor.

    To be sure, Mexico City’s sprawling expanse still exhibits this legacy of upward mobility. A good number of the capital’s 20 million people can be seen crowding elegant shopping centers, driving late model cars and eating in crowded restaurants. With the elegant Polanco, not far from the central district, lovely Lomas de Chapultepec, or sprawling, ultra-modern Santa Fe, Mexico City can seem very much a first-world city.

    At the same time, however, much of it–including lower-middle class Iztacalco–needs considerable repair. The root of the problem lies in demographics. Although Mexico’s population growth has slowed, labor-force growth still outpaces economic fecundity. Victor Manuel, director general of a leading high-tech institute in Mexico City, estimates the country’s gross domestic product needs to grow at 7% annually to produce the 2 million new jobs needed each year to keep up with labor-force growth. Over the past decade, that growth has been roughly 3%, and last year declined by as much as 7%.

    In the immediate future, many economists expect Mexico’s recovery to lag that of both the U.S. and its Latin neighbors, particularly Brazil and Peru. The most recent survey of expectations among industrialists conducted by Canacintra, a leading national business chamber of manufacturers, found more than half expected conditions to get worse, 10 times as many who expressed optimism.

    The sluggish economy has had its most dramatic impact on the poor, who constitute upward of 25% to 30% of the population. In contrast to earlier decades, their ranks may now be growing, suggests Alfonso Celestino, a social scientist who works for the government of the sprawling Districto Federal, which includes Mexico City. “Mexico is a first-world city, but large parts are like third-world African cities,” he asserts

    Particularly notable has been the growth of the so called “misery suburbs” or pueblos nuevos, sprouting in the outer periphery of the city. In these areas, as well as poor inner city neighborhoods, unemployed young people are being “absorbed,” as Celestino puts it, into the illicit economy. This burgeoning criminal infrastructure preys directly on the super-rich through kidnappings and their bloody feuds that discourage both investors and tourists.

    Yet it is perhaps more dangerous, as violence has grown and poverty increased, that the middle class has begun to recede. Unlike the very poor and the elderly, such families receive little public assistance and often make do by working in the massive “informal economy” that, by some estimates, constitutes as much as 40% of the entire country’s gross product.

    Even before the economic crash in 2007, large percentages of educated Mexican workers were finding it difficult to get placed in high-skilled jobs. Miguel Angel Juarez Noguez, a junior-high math instructor, graduated with a degree in computer science in 2006, but says few of his friends have found employment inside the information sector.

    He believes his parents, both mathematics instructors, enjoyed far better prospects than he and his family–including two children–now face due to a weak job market and rising cost of living. “Today” he suggests, “you need more education to get less.”

    These problems have been exacerbated by the deep recession in the U.S., whose market created many relatively high-paying industrial and technical jobs. Meanwhile, workers remittances from Mexicans in the U.S., the second-largest source of income for the country after oil, have begun to dry up.

    Many discouraged Mexican immigrants have returned home, notes Celestino, but they find few employment opportunities. And Mexico’s border boomtowns, which once offered considerable opportunity, are now suffering not only from the American recession but from the shift of production to China. Coastal communities have been decimated by a decline in tourism, a result not only of the recession but also of concerns over violence and swine flu epidemic.

    Ultimately, many concede that the basic problem lies not in the outside world but in Mexico itself. Although much can be said for greater transparency and economic liberalism under the current PAN government, most believe the entrenched system of crony capitalism has been barely affected by the political change.

    This system–where bribery is commonplace and connections are necessary to build even a small business–stymies growth by undermining innovation, notes technology entrepreneur Victor Manuel. “People come back from schools, or from the United States, with all sorts of skills and money,” he notes, “but there’s no system here to create an economy they can contribute to.”

    Such frustrations are heightened by a sense that other countries–notably the BRIC nations of Brazil, Russia, India and China–are rushing ahead while the once-promising Mexico falls behind. These countries appear to be tapping their human and material resources more efficiently and strategically than Mexico. “There is no vision from the state,” Manuel says, echoing a common refrain.

    Edgar Moreno, a 37-year-old M.B.A. who currently works for Hewlett-Packard at the ultra-modern Santa Fe district southeast of the city, agrees that political dysfunction is the main impediment to progress. Corruption and inefficiency hamper the development of the nation’s potentially huge energy resource, and that’s one reason why Mexico lacks the capital to develop new enterprises. Real interest rates for entrepreneurial ventures start at 12%.

    Moreno’s own ambition, to develop renewable fuels based on sugar, corn and other crops, is also held back by bureaucratic obstacles that discourage such ventures. “It’s not the location of the country that keeps us from developing the way we should,” he points out. “It’s the laws, the framework, how the government does things. Mexicans have lots of ideas and a lot of interests, but the system is stacked against us.”

    The surge in drug violence–over 7,000 died just last year–adds to the perception that Mexico may be on the verge of becoming a “failed state.” Mexican author Enrique Krauze believes the crime wave constitutes Mexico’s “most serious crisis” since the bloody 1910 Revolution, an upheaval that cost more than 2 million deaths.

    Yet, however terrible the violence, Arrendondo believes the decline of the middle class and upward mobility presents Mexico with a more lethal, long-term threat. The parents of the Liceo’s students, he argues, may not “take up a pistol” like their forebears a century ago but might embrace a return to the anti-American authoritarianism and protectionism of the past.

    This would not be good news for America. Mexico stands as our second export market, well ahead of China. Mexicans are also our closest cousins in terms of blood–four in 10 claim to have relatives in the U.S.–and our tastes in food, music and culture increasingly converge.

    This suggests that what happens to the kids and their parents at Liceo Reforma Educativa matters to us as well. A thriving Mexico would need to send us less of their poor and could buy more of what we produce. Mexico’s fate has at least as much relevance to our future as developments in Iraq, Afghanistan, Europe or even China, where our media and politics focus most of their attention.

    “These kids’ parents are struggling with opportunities lost and destroyed,” Arrendondo told me. “We have to change that. Mexico has to become a place where opportunities are created for kids like these. That’s the most important thing to determine the future.”

    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.

  • On Cities, GHG Emissions, Apples & Oranges

    Every day or so a new greenhouse gas emission report crosses my desk. Often these reports are very useful, other times they add little of value to the subject. The problem is separating the “wheat” from the “chaff.”

    This dilemma is well illustrated by a paper called “Greenhouse Gas Emissions from Global Cities,” authored by 10 academics. I had received notification of the paper from Science Daily, a useful website that provides notification of new research on a wide range of scientific subjects.

    The Science Daily article indicated that Denver produces the most greenhouse gases per capita annually, while Barcelona produces the least. I am always interested in reports that compare the performance of “cities,” both out of general interest and because of the gross errors that often are the result of invalid comparisons. So, immediately I ran down the report, and to my surprise the report dealt with only 10 “cities.” This seems rather a small number, since the smallest in the sample, Geneva, is not even among the top 700 urban areas in the world. This seems to be a rather incomplete sample: 10 out of more than 700.

    That was just the beginning. There were serious problems of comparison between the 10 “cities.” Whenever someone starts talking about “cities,” it is best to ask what they mean. The word “cities” has so many meanings and is subject to such confusion that I generally avoid using it.

    “Cities” might be municipalities, such as the city of New York or the ville de Paris.

    Cities could be urban areas (urbanized areas or urban agglomerations), which are the urban footprints one observes from an airplane on a clear night.

    “Cities” could be metropolitan areas, which are labor markets and are generally larger than urban areas, because people commute from rural areas (outside the urban footprint) to work in the urban area.

    In nearly the entire world, with the exception of China, urban areas and metropolitan areas are larger than municipalities.

    Or, “cities” could be used in the sense of Chinese prefectural, sub-provincial or provincial level cities, which tend to be far larger than any reasonable definition of a metropolitan area. Nearly all of China is divided into cities, in the same way that most of the United States is divided into counties.

    These Chinese “cities” themselves often contain county level “cities” that are separate from the principal urban areas.

    These differing definitions of municipalities make any international comparison of these entities difficult and often misleading. The ville de Paris represents barely 20 percent of the Paris region. The “city” of Atlanta represents barely 10 percent of its metropolitan area. The “city” of Melbourne represents only 5 percent of its metropolitan area. Yet, other “cities” are larger than their metropolitan areas, such as Chongqing, China, which has at least five times the population of its genuine metropolitan area (the “city” covers an area the size of Austria or Indiana). The city of San Antonio, with its vast stretches of suburbanization is surely not comparable to the city of Hartford, which is dominated by an urban core.

    Any genuine comparison of “cities” must be at the metropolitan area or urban area level. These definitions both represent the city as the organism it is, rather than simply the happenstance of municipal boundaries. Of course, comparisons must be either between metropolitan areas or urban areas to be valid. It will not do to compare metropolitan areas with urban areas; they are as apples and oranges. Moreover, there are no international standards for delineation of metropolitan areas, which makes metropolitan comparisons more complex.

    All of this raises the principal problem with the “Global Cities” paper. There is no consistency to the city definitions the paper uses and its results are thus meaningless (though “headline grabbing”). For example, “Global Cities” uses the geographic areas of the following barely comparable “cities”:

    The municipality of Barcelona, which represents less than one half of the urban area and excludes the expansive suburbs that stretch in every direction but the Mediterranean.

    The municipalities of Bangkok, Denver and New York, which are only parts of their respective metropolitan or urban areas.

    The municipality of Cape Town, which could be considered a metropolitan area because of the large expanse of rural area under its jurisdiction.

    The canton (province) of Geneva might probably qualify as a metropolitan area, except that it excludes the suburbs in France, from which virtually free movement of labor is permitted.

    The Greater London Authority which is nearly co-existent with the London urban area, while Prague as the report defines it is somewhat larger than its urban area.

    The Greater Toronto Area which meets none of the “city” definitions above and is larger than both the metropolitan area and the urban area as defined by Statistics Canada.

    Los Angeles County, which meets none of the “city” definitions and is part of the larger Los Angeles-Orange County metropolitan area.

    All in all, as charitably as it can be put, the “Global City” compares four municipalities, three metropolitan areas, two urban areas, one area larger than a metropolitan area and one that is part of a metropolitan area. Put another way, it tries to make comparisons between four apples, three oranges, two peaches, one banana and one sweet potato.

    Granted, the paper indicates the geographical definitions it uses. That, does not, however, change the fact that treating apples and oranges as comparable is simply invalid.

    There are other problems with the “Global Cities” paper, but one more is enough. In the obligatory fashion, the authors stress how important it is to adopt “smart growth” policies in North America. They cite a US Department of Transportation study to indicate that a doubling of density reduces vehicle miles traveled by 40 percent.

    A bit closer reading would have indicated that the study says doubling density would reduce new vehicle miles by 40 percent, where population densities are already 6,000 to 7,000 per square mile. Only two large urban areas in the United States have densities that high, San Francisco and Los Angeles (which the authors characterize as having urban densities at least 40 percent below the US Bureau of the Census number for the Los Angeles urban area). A 40 percent reduction in “new” vehicle miles means that overall vehicle miles traveled increase 60 percent when the population is doubled, rather than 100 percent. Thus, even with the high density qualification in the US Department of Transportation study, vehicle miles would increase 60 percent as population densities double.

    Maybe tomorrow will bring a better report. One can always hope.

    Photograph: The “city” of Chongqing (part of its vast rural countryside)

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

  • Germany’s Role in the Green Energy Economy

    Germany likes to brag about its green credentials. It is a source of pride and it is justified to a certain extent. The country, which is located on the same latitude as Canada, had the largest number of installed solar panels as of 2007.

    The key to growth clearly has not been abundant sunshine, but massive subsidies. Germany sponsors its solar industry with generous tax credits that take the form of feed-in tariffs, i.e. payment above the going market rate for energy from renewable sources like solar panels, it can run anywhere from twice to three times the market rate for a conventionally produced kilowatt. These tariffs can run high. They are being lowered slowly but perhaps a bit too slowly. As we have recently seen with the disasters impacting Spain’s renewable energy industry, dependence on subsidies can create a potential catastrophic downturn once the spigot is turned off.

    Would a similar model be appropriate for sponsoring renewable energy in the US? Probably not, in large part the technology is already developed. The Germans and now the Chinese have already subsidized their industries. The legwork has been done and anti-greenhouse legislation will sustain the market without massive subsidization.

    The first factor is that most of the investment in research and development has created the pre-conditions for grid parity within the next few years for southern countries. Even Germany will achieve it by 2012 according to the German business newspaper Handelsblatt. The economies of scale are sinking unit costs dramatically and production technologies like thin film are allowing solar cell manufacturers to produce ever more efficient panels with less and less silicon. Several silicon production plants are set to come on line in China soon.

    The US, whose fiscal situation is parlous compared to China and even Germany, wants to waste years developing already available technologies from scratch. It could try the European approach but would probably be much better off to follow the same path that it followed with the automobile or the motion picture: allow other countries to get the basic technology in place and concentrate its exceptional energy on marketing and scaling up the technologies from abroad.

    China’s entry into the market seems destined to create a dramatic collapse in the price of what was until a few years ago essentially a cost plus industry. China has low labor costs and inflation busting economies of scale. China’s entry into the silicon wafer market already has depressed prices for the once dear raw material. They are also working on a massive power plant with First Solar of the United States.

    Some are predicting that China’s entry into the renewable energy market will have the same effect as its entry into the consumer electronics market, i.e. it will make the expensive affordable and then cheap. German solar cell production companies have suffered much like its chip producers but to the general benefit of the economy. China will drive production costs further down. Germany is still coming to terms with this.

    A recent article in Die Zeit illustrates the growing discrepancy between renewable energy policy and the market potential. The feed-in tariffs have the perverse effect of making solar energy far more expensive than it actually needs to be. The government subsidies are essentially shielding domestic producers from China making the consumers pay the higher rates. Germany needs to focus on its traditional strengths in producing industrial machinery and carve a niche for itself. The US would be better off to maintain trade relations with China and let Adam Smith’s invisible hand work its magic. It would be far cheaper than trying to use protectionist measures to protect domestic manufacturers.

    All this is predicated on the assumption that the price of oil will only increase in price in the coming decades as China and India motorize their masses. This in turn will drive up conventional power costs. Even at its current price of around $70 a barrel, oil is still 7 times more expensive than it was just a decade ago. Some are predicting that that last year’s prices of almost a $150 a barrel represent a taste of what will confront the world when the economy begins to grow again

    This, however, will be a gradual process, based on undulating prices. The hysterical claims of Peak Oil have been delayed again and again by technological improvements. The latest finds off of Brazil and the Gulf of Mexico represent dramatic examples. Massive new gas reserves in North America represent another countervailing force. In the end, fossil fuels will be more expensive, but they will make renewable energy more competitive only at reasonable price points.

    Politics will also play a role. Climate change and the perceived need to combat it has gained enormous currency among world leaders including German Chancellor Angela Merkel. Regardless of what one thinks of the arguments calling for action, we will probably see some sort of carbon tax in the future, whether it be cap and trade or some other means of increasing the costs of carbon emissions. Conventional fuels like coal, oil, and natural gas are only going to get more expensive for political if not economic reasons. The growing consensus, regardless of its veracity, is set to create huge costs for non-renewable sources of energy.

    Over time, this will make renewable energy more attractive and unit costs will shrink as economies of scale start to kick in. The European cheerleaders of climate legislation are not doing it out of the goodness of their heart. They want to see a return on the billions spent on developing renewable technology. The US would be ill-advised to simply try to create technologies that are already up and running. Take the technology, commercialize it and thank the Europeans for footing the bill.

    The US would be well advised to keep their renewable energy markets open. The Europeans will come and are coming. The solar energy trade fairs in Germany focus on the immense potential available in the US market. Several large German producers are expanding aggressively on the American market bringing with them the technologies that they have created. China will also start to flood the market with cheap silicon wafers and further reduce solar panel costs. The US does not need to subsidize this technology lavishly. It simply needs to allow the companies that have it to sell it on their market. The initial support provided by countries like Germany was more than enough to get the technology to the point where it is ready to survive on the free market.

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