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  • Urban Infill With Less Hype and More Serendipity

    By Richard Reep

    Urban infill in cities of the Southeast follows typical patterns: assemblage of several blocks of older building stock at a low price; careful navigation through the zoning and public process to mix uses and increase density; and finally design and construction of parking, office, residential, and retail uses. The next phase is often marked by alienation and departure of the existing surrounding residents, concerns of safety and security within the development, and a socioeconomic wall between new and old.

    This sad pattern is evident in Orlando at Winter Park Village, a 90s New Urbanism infill, where a failed indoor shopping mall was eviscerated and converted to an outdoor retail and entertainment district. Initially it generated a buzz, attracted shoppers, and signed anchor tenants. But the adjacent lower-income residents benefitted not a whit from this development, surrounding land remains fallow or abandoned, and recent store closings call into question the long-term viability of the project.

    Such problems worsened during the real-estate bubble, which promoted residential-driven development. This tore even bigger rifts in the fabric of cities. Sodo, the most recent cluster development opening in south Orlando at the dawn of financially uncertain times, could have a different future. This development is free from preconceptions about urban form and style and does not pretend the world is as simple as it was at the turn of the 20th century. Sodo offers a mix of uses clustered in medium density with access to jobs in the city’s older, denser infrastructure.

    Typically, brave new residents buy into urban infill projects at a higher rate and higher price than the surrounding community, creating a class schism. The surrounding community in need of good jobs is reluctant to become the service workers in these developments, and this uneasy coexistence breeds anxiety and insulation. City planners consider these urban infills successful as they bring ‘higher-end’ residents (translated: higher tax contribution) and create the demand for more such projects. Older residents often despise the new construction and move out, driven out by a combination of increasing property values, loss of neighborhood identity, and a sense of alienation.

    In its infancy, Sodo appears to have the ingredients to become a good alternative to so-called “TND” or Traditional Neighborhood Development, as set forth by the Congress for the New Urbanism. Originally planned as condominium units, Sodo opens as a luxury rental community, which recognizes the current mortgage meltdown and the future of residential real estate in the Southeast. This neighborhood was typically oriented to the surrounding Wadeview railroad industrial district, but Sodo clearly looks north up Orange Avenue, beckoning hip, young, downtown workers.

    With a certain gritty charm, South Orange Avenue winds below downtown, anchored by orange-bricked Orlando Regional Medical Center, a vast complex shoehorned into the old, industrial neighborhood. Sodo is not within walking distance of 300 luxury units worth of anything, not now nor in the near future, which makes it decidedly un-New Urbanist. But as the economy idles, Sodo has attracted some interesting comments from its neighbors that tell a positive story.

    The development’s website is refreshing for what it does not proclaim in its marketing hype. It does not reference New Urbanist ideology anywhere. It does not claim to be a live-work-play solution to all life’s problems. It does not show happy white families riding bikes in parks. Its logo and presentation is simple and direct: Orlando is growing fast, and we want a piece of that pie. Rather than promote ideology, Sodo appears to promote itself as a blank slate upon which the future residents, retail and office tenants may write the future identity of this cluster.

    It is probably dangerous to draw conclusions from blogs, because the bloggers do not represent a broad cross-section of the population. Computer-savvy, opinionated, and sophisticated, bloggers do not include many elderly, minorities, and people too busy with their lives to dash off a few lines about their feelings. Therefore, the local bloggers’ positive attitude about Sodo may not represent the entire range of feelings of people affected by this development.

    However, rather than fear and loathing, Sodo has generated this: “I have had drunken people from the local bar (closing soon…HOORAY) pass out on my front yard. I am thrilled that this development is happening. It will no doubt enhance my quality of life and take us into a direction that the Wadeview Park area has sorely needed.” Similar comments abound, and the overall sense of approval from residents who bother to write about Sodo is a sign that this urban infill development is being welcomed rather than shunned.

    Another sign that Sodo may blend into its neighborhood is the developer’s choice to market it as exclusively rental. Although the rental is “luxury” starting at $1,000 per month for 659 square feet, the economic step between this property and the next-door homes is less than it would have been if these units had been sold as 300 trendy urban condos.

    Examined closer, Sodo makes some concessions to reality. It connects to the surrounding street grid on 3 sides, and the sense of safety and security within Sodo is beefed up with private security. The apartments have uninspiring views into their own parking garages, and the lack of green space throughout is harsh and startling. In order to accommodate parking, the anchor retail store parks its cars on the roof; shoppers are treated to the novelty of an outdoor shopping cart escalator, which should be interesting during the monsoon season of Orlando’s summer.

    While all this is encouraging, Sodo is not an example of organic growth, blending new and old seamlessly. For example, it is doubtful that Sodo residents and existing locals will bond over coffee in the Starbucks or burritos in the Taco Bell. Exclusively private, Sodo has no library, park, school, or other public amenity except for its shopping sidewalks, and it seems strange to think of Sodo hipsters venturing into the local community to worship, walk the streets, or volunteer. Sodo seems to be a social oasis, at least for the present moment.

    Sodo therefore exemplifies the problems of growth with which Orlando grapples: if taken in lumps, like Sodo, growth represents a jarring socioeconomic schism between the old and the new. If taken in lower density, like subdivisions, growth represents huge tracts of land being gobbled up, a jarring ecological schism between the natural and the manmade. Less lumpy than most, Sodo seems to have timing in its favor, with the slower growth of the near future allowing it to enter the economic slipstream at a lower speed.

    What is refreshing about Sodo, besides its crisp, clean, architecture, is that it does not carry the baggage of ideology and fetish for form that recent urban infill developments seem to carry. It is therefore free to evolve its identity by delivering safety and security to its residents, a sustainable mix of shopping and office spaces, and a sense of place that transcends the physical. Success is measured by functional yardsticks – not form yardsticks – and urban infill projects across the country can be measured the same way. Sodo may represent a realistic model of urban infill, welcomed by the community, able to assert its identity through the social and economic futures of its businesses and residents. This is the way healthy cities grow.

    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.

  • The Transmission Infrastructure Dilemma

    Last week, Bismarck, ND was host to the second annual Great Plains Energy Expo and Showcase. Hosted by Bismarck State College and Senator Byron Dorgan, the conference focused on North Dakota’s growing energy industry, including the wind energy sector, with presenters such as T. Boone Pickens discussing the opportunities and challenges facing the industry.

    Wind is a readily available resource on the plains of North Dakota, which have been referred to as the “Saudi Arabia of wind”. According to David Hadley of the Midwest ISO, a transmission coordination agency, North Dakota is the top state in the nation for wind energy potential. At 40% capacity, the state would have over 345,000 MW of potential generation capacity.

    Current generating capacity is a minuscule fraction of this potential output. However, North Dakota has seen a major increase in investment in wind energy projects over the past several years. In 2005, there was only 80 MW of wind generation in the state. As of June, 2008, that number stands at “716 MW either in service or under construction, plus another 807.5 MW that has either been site permitted or is in some stage of the siting process.” According to the Midwest ISO, potential North Dakota projects being discussed or currently under way add up to 7656 MW of potential generation. One major project under discussion would include 2000 MW of generation, costing around 4 billion dollars. The development is, in the words of one elected official interviewed by the Bismarck Tribune, “truly eye-popping.”

    Standing in the way of exploiting the Great Plains’ wind bonanza is a major challenge- transmission capacity. North Dakota currently has a transmission export limit of 1950 MW, which is fully subscribed by current power producers. While several upgrades to the system are in the works, they will fall far short of the massive build up in transmission infrastructure needed to allow for continued rapid expansion of generation capacity. As one presenter at the Great Plains Expo put it, the region is “a victim of [its] own location.”

    In August the New York Times discussed the challenge posed by transmission limitations, noting that “North Dakota and South Dakota, could in principle generate half the nation’s electricity from turbines. But the way the national grid is configured, half the country would have to move to the Dakotas in order to use the power.” If unaddressed, the inadequacy of the electric grid will serve as a check on energy driven economic development on the Great Plains. Rick Sergel, President of the North American Electricity Reliability Corp. (NERC), argues that “Without new transmission development needed to support these resources,” it is likely “only a fraction,” of currently proposed wind projects will be built. Speaking to Reuters, Sergel called for serious consideration of “comprehensive plans that cross state lines and international borders to build the clean-energy superhighway that will provide everyone equally with access to carbon-free generation”.

    It appears that expansion and modernization of transmission infrastructure will receive significant attention from the incoming administration. President-elect Obama stated in an interview on MSNBC that “the most important infrastructure projects that we need is a whole new electricity grid,” and that he wants such projects “to be able to get wind power from North Dakota to population centers, like Chicago.” With the current economic slowdown increasing calls for an economic stimulus package, investment in infrastructure, including grid expansion and modernization, appears set to take a central role in policy discussions in the coming year.

  • Maps of United States Manufacturing and Finance Industry

    For our War of the Regions piece I went through BLS data and calculated location quotients for a few key diverging industries, namely manufacturing and securities, commodities and investments side of the finance industry. These are the kind of numbers that really benefit from geographic visualization.

    A LQ tells us not where the most jobs are in any given industry, but how much of a state’s employment is clustered in the given industry.

    I’ve been following FortiusOne for a while but this is the first time I’ve gotten a chance to play around with their GEOCommons Finder! and Maker!, a new social production platform for agglomerating, sharing and visualizing geographic data. It’s a fantastic platform.

    Click on the map images here to explore them on the GEOCommons platform. You can see a lot of dark color in the rust belt, but at this point, the states of Indiana, Wisconsin, Arkansas, Iowa, Alabama, and Mississippi are at or ahead of Michigan and Ohio in state dependence on Manufacturing. Part of this is due to growth in the South and Great Plains, and part is due to manufacturing job losses in the Rust Belt, causing the concentration there to slip.

    Finance here is limited to Securities, Commodity Contracts, and Other Financial Investments and Related Activities (NAICS 523). Not surprisingly, this industry is clustered in the Northeast. You see Illinois, Minnesota, and Colorado shaded darker due to the role of Chicago, Minneapolis, and Denver as regional trade centers.

    Take some time to explore GEOCommons and some of the other visualizations created by others, and watch for more maps in this space as we do the same.

  • In Ethnic Enclaves, The U.S. Economy Thrives

    Dr. Alethea Hsu has a strange-seeming prescription for terrible times: She is opening a new shopping center on Saturday. In addition, more amazingly, the 114,000 square foot Irvine, Calif., retail complex, the third for the Taiwan native’s Diamond Development Group, is just about fully leased.

    How can this be in the midst of a consumer crack-up, with credit card defaults and big players like General Growth struggling for their existence? The answer is simple: Hsu’s mostly Asian customers – Korean, Chinese, Taiwanese, Japanese – still have cash. “These are people who have savings and money to spend,” she explains. “Asians in Orange County are mostly professionals and don’t have the subprime business.”

    To Hsu, culture explains the growing divergence between ethnic markets and that of the general population. Asians, she notes, whether in their native lands or here in California, tend to be big savers. In tough times, they still have the cash to buy goods, while others stay home or go way down-market.

    Nor is the Diamond Development Group’s experience an isolated case. Throughout the country, ethnic-based businesses continue to expand, even as mainstream centers suffer or go out of business. The key difference, notes Houston real estate investor Andrew Segal, lies in the immigrants’ greater reliance on cash. “When cash is king,” observers Segal, president of Boxer Properties, “immigrants rule.”

    This is true not just of well-heeled Asians or Middle Easterners, but also for Hispanics, who generally have lower incomes, notes Segal’s partner, Latino retail specialist Jose de Jesus Legaspi. For example, the recession has barely taken hold at La Gran Plaza, the recently opened 1.1 million square foot retail center in Ft. Worth, Texas, where Legaspi serves as part owner and operating partner.

    The center, reconstructed from a failing old mainstream mall purchased in 2005, is now roughly 90% occupied. “We are doing so well that we are expanding the mercado,” Legaspi says, referring to the thriving centers dominated by very small businesses run from attached stalls that are a popular feature of many Latino-themed centers. “It’s all cash economy. They pay their bills with cash. The banks and credit card companies are not involved. It’s true capitalism, and it works.”

    Latino shoppers, he suggests, also have been less impacted by the stock market collapse than other consumers. After all, relatively few, particularly immigrants, have large investments on Wall Street. In addition, even if they have lost their jobs, particularly in construction, Legaspi adds, they tend to pick up other employment, even at lower wages, often in the underground economy. “They get paid in cash, and they pay in cash.”

    Another key advantage lies in close connections many ethnic merchants have to economies such as Korea, China, Taiwan and India, where enormous amounts of cash have accumulated in recent years. “Many of these merchants have family and other ties to the international economy,” observes Thomas Tseng, a principal at New American Dimensions, a multicultural marketing group in Los Angeles.

    The media focuses on huge surpluses spent by major corporations or sovereign wealth funds, but a substantial amount of the money being made in places like China or India also accumulates into family networks. They often funnel this cash to relatives’ enterprises in North America, where many also retain second homes and often educate their children.

    This combination of cash-spending customers and well-endowed investors explains why in many places, the immigrant market remains one of the few still aggressively expanding. Even in thriving Houston, notes architect Tim Cisneros, the credit crunch has stopped many projects by clients from the mainstream real estate development community. In contrast, Cisneros’ Chinese, Indian and other Asian clients continue to build and expand.

    “I am doing an Asian-Mexican sushi chain that isn’t hurt by the credit crunch since they are doing this out of the checkbook,” Cisneros told me. “And the Indian reception hall I am building is doing well. The action is from these developing companies much more than the old Anglo groups.”

    If the immigrant markets helping Cisneros through the credit crush represent one of the few bright spots in the present, they also will likely become even more important in the future – even if immigration slows down dramatically. By 2000, one in five American children already were the progeny of immigrants, mostly Asian or Latino; by 2015, they will make up as much as one-third of American kids.

    Given these underlying trends, look for developers like Dr. Hsu to keep prescribing more of what she calls “multicultural shopping centers,” focused both on immigrants and their children. As long as these newcomers, both affluent and working class, continue to save, covet cash and work hard, they are likely to continue thriving through the recession and beyond.

    “We are leased up, and we think the supply [of shopping] is not enough,” Hsu says. “We are ready to go Saturday and feel great trust in the future.” At a time when most mainstream American retailers are hiding under their desks, such sentiments are not only welcome; they may also indicate who might be leading the retail recovery when it finally comes.

    This article originally appeared at Forbes.com.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • Island of Broken Dreams

    A The New York Times editorial wonders why foreclosure rates are so high in the two Long Island counties it rightly calls the “birthplace of the suburban American Dream.” After all, the area has “a relative lack of room to sprawl.” which in Times-speak should be a good thing, since “sprawl” is by definition both bad and doomed.

    Yet it is precisely the constraints on new housing that has served as a principal cause for Long Island problems. Long Island was the birthplace of the suburban American Dream, in principal measure because new housing development was permitted to occur at land prices reflecting little more than its agricultural value plus a premium to the selling farmer. The same financial formula expanded the American Dream throughout the country and many parts of the world, at least until urban planners were able, in some instances, to drive the price of land so high that housing was no longer affordable to average households.

    Indeed, land use regulation throughout the New York suburbs downstate, in New Jersey and Connecticut has long since rationed land for development. As a result, once loose mortgage loan standards became the practice, house prices escalated. Throughout the New York metropolitan area, the Median Multiple – median house prices divided by median household incomes rose from 3.2 to 7.0, in the decade ending in 2007. In traditionally regulated markets – like Long Island in the past and still much of the country in the present – the Median Multiple has been 3.0 or less for decades.

    Various regulations have led to this precipitous decline in the area’s housing affordability, virtually all of them falling under the category of “smart growth.” There are the regulations that have placed large swaths of perfectly developable land off limits for housing. There are large lot zoning requirements that have forced far more land than the market would have required to house the same number of people, producing an entirely artificial “hyper-sprawl.” Much of this ostensibly has been done in the interests of controlling “sprawl.” Where quarter acre lots would have been the market answer, planning authorities often have required one-half acre, one-acre and even more as minimum lot sizes.

    In fact, however, Long Island’s housing cost escalation has not been visited anywhere with more traditional liberal land use policies. From the first world’s three fastest growing metropolitan areas of Atlanta, Dallas-Fort Worth and Houston, to much of the South (excluding Florida), to the Midwest, housing prices rose little relative to incomes during the period of profligate lending. The difference, of course, was that the liberal land use regulations in these places allowed sufficient housing to be built that supply kept up with demand, thus accommodating new demand. Speculators saw no potential windfall profits to bring them into the market.

    The Times is not alone in misunderstanding the dynamics of land use regulation and housing affordability. But there is a very clear, demonstrated relationship – where land use regulations constrain development, prices are forced upward. This is because scarcity raises prices of goods that are in demand.

    Fortunately, not everyone at the Times shares the wrongheaded views of its editorial department. Had the editors walked down the virtual hall of their own department, or taken the train down to Princeton, where he lives, they would have encountered someone who understands all this. He is Paul Krugman, Times economic columnist and, much more importantly, Nobel Laureate. In August of 2005, Krugman noted that house prices had escalated strongly in the more regulated markets, but had changed little in the less regulated markets. He further rightly associated the less regulated markets with more sprawl, not less. In January of 2006, Krugman noted: that the highly regulated markets accounted “for the great bulk of the surge in housing market value over the last five years.” Krugman further predicted “a nasty correction ahead.”

    Meanwhile the non-Nobelist Times also make a point to bemoan the high levels of racial segregation on Long Island. Is it beyond them to understand that the very policies they favor are at fault? When one considers that ethnic minorities tend to have lower than average incomes and that land rationing nearly doubled the price of housing relative to incomes, it’s not surprising that they have not moved en masse to expensive places like Long Island, with the exception of Hempstead and a few other pockets. There are costs to restrictive land use regulation. One of the most pernicious consequences is the denial of the American Dream to groups of citizens that have so long been excluded from the economic mainstream.

    It is time to recognize that the regulations that raise the price of housing – however well-intentioned – work against housing affordability and represent one of the prime contributors to the high levels of foreclosures in many communities across the country.

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

  • Influence of ‘Creative Class’ Ideas in Sweden

    By Nima Sanandaji, Johnny Munkhammar, and Peter Egardt

    The American academic Richard Florida has gained international attention for his theories about the “creative class”. According to Florida, the key to urban success lies in attracting certain groups of people, such as artists, scientists and twenty-something singles. Florida insists that this can be accomplished through nursing a specific type of culture within a city: hip cafes, art galleries and other manifestations of indigenous street-level culture.

    Florida’s theories have become rather popular in Sweden, the country which tops the list of his creativity index. In a recent study about urban development in Sweden, we have found that Florida’s ideas mainly attract the political left. The Social Democratic Party, as well as the former communist party, embrace Florida’s ideas on their party web pages. The Social Democrats go as far as to quote Florida in a parliamentary bill.

    In Sweden, Florida’s ideas are used by those who wish to argue that public funding of cultural events, rather than a competitive business climate, is the way to achieve economic growth. These urban planners quote Florida in their development strategies, shifting focus from business friendly reforms to attracting “unusual shops” in order to bring development to communities struck by high unemployment and other social ills.

    Swedish cities thus risk choosing the same strategy as Berlin, where the focus of administrators for many years has been to attract art galleries, fashion shows and hip cafes, but where basic conditions for development have been neglected. The bureaucracy in Berlin has a less-than-business-friendly attitude, and taxes for those with typical means of income, as well as for entrepreneurs, remain high.

    The result of these policies, aiming to market Berlin as “a city of glamour” to attract the creative class, has been rampant unemployment. Between 2000 and 2006 The European Union spent close to 2 billion US dollars (1.3 billion Euros) to attempt to curb the economic crisis in the city.

    Florida has, together with two Swedish co-writers (amongst others), recently published an index of creativity in Swedish municipalities. The results of this index are interesting to examine. In accordance with observations made by Harvard Professor Edward L. Glaeser, Florida’s definition of the creative class builds upon the inclusion of well educated people; municipalities with high percentages of educated people are defined as being creative.

    However, in many cases, the rankings in Florida’s Swedish index have little to do with actual creativity or the fundamentals for growth and progress within a municipality. Among 290 Swedish municipalities, the one best fitting Florida’s criterion of creativity is Södertälje.

    This is quite astonishing, since Södertälje is seldom seen as a role model for other municipalities. Among the 26 municipalities in the Swedish capital region, Södertälje has the second highest unemployment rate. The business climate there ranks, according to the Confederation of Swedish Enterprise, as only the 199th most business friendly amongst Swedish municipalities.

    The municipality in the capital region that has the highest unemployment rate is Botkyrka. It is number 233 in business climate. In Florida’s index, however, Botkyrka gains a respectable position as the 22nd most creative municipality.

    While places with failing business climates, high unemployment, high crime rates and overall failing development can be ranked as highly creative in Florida’s Swedish index, actual creativity is not always acknowledged.

    Gnosjö is a small Swedish municipality made famous by its frequent use as an example of how a spirit of entrepreneurship can lift up a community. The unemployment rate is much lower in Gnosjö than in the rest of Sweden. Gnosjö is indeed full of creativity, but in Florida’s index it only ranks as the 141st most creative municipality. Florida’s index fails to catch the real origins of creativity and cultural development in Sweden.

    Abroad, many believe Sweden to be the very showcase for social democratic welfare states. However, ambitious reforms implemented during the past few decades have transformed Sweden into a competitive economy with an increasing degree of economic freedom and strong growth.

    In the wake of this development, culture, fine food and the arts have all blossomed in Swedish cities. Tourists, as well as businesses, are attracted not least to the capital city of Stockholm. The strategy underlying this development has been based on a sound business-and-growth-friendly policy orientation, not a Berlin style emphasis on public subsidies of culture over families and businesses. Cultural development has occurred as the result of a growing economy, not the opposite.

    Nima Sanandaji is President of the think tank Captus. Johnny Munkhammar is President of the consulting agency Munkhammar Advisory. They are authors of a report for the Stockholm Chamber of Commerce about urban development. Peter Egardt is President of the Stockholm Chamber of Commerce.

  • A Great Philadelphia

  • Rick Cole

  • Up Next: The War of the Regions?

    By Joel Kotkin and Mark Schill

    It’s time to throw away red, blue and purple, left and right, and get to the real and traditional crux of American politics: the battle for resources between the country’s many diverse regions. How President-elect Barack Obama balances these divergent geographic interests may have more to do with his long-term success than his ideological stance or media image. Personal charm is transitory; the struggle for money and jobs has a more permanent character.

    To succeed as president, Obama must find a way to transcend his own very specific geography – university dominated, liberal de-industrialized Chicago – and address the needs of regions whose economies still depend on agriculture, energy and industry. In the primaries, most of these went to Sen. Hillary Rodham Clinton.

    The geographic concentration of manufacturing prepared by Praxis Strategy Group presents a particular complex roadmap for the new president. Although Indiana and Wisconsin top our list of states most dependant on manufacturing employment, the next four are either in the Great Plains, Iowa, or in the south, Arkansas, Alabama and Mississippi. In fact eight of the top 13 industrial states on a per capita basis are located in the South; only one of these manufacturing hotbeds, North Carolina, supported the new president.

    In terms of industry, the auto industry represents the most difficult challenge. Great Lakes political leaders, like Michigan’s clueless Gov. Jennifer Granholm, now a top Obama advisor, will twist the new president’s arm to bail out the crippled U.S.-based auto manufacturers, essentially socializing the industry. Yet in bailing out Detroit, Obama could undermine a thriving, growing auto complex developing in the old Confederacy and along the southern rim of Midwest.

    Although also hit by the recession, companies like Toyota, Honda, Hyundai, Mercedes and BMW have brought unprecedented prosperity to these areas, which include some of historically poorest regions of the country. This is also where many of the most fuel-efficient “green” vehicles in America are being produced. The workers they employ may not belong to the unions so influential among liberals, but their interests matter mightily to Democrats as well as Republicans who represent them.

    Energy issues may be even more challenging from a regional perspective. The nation’s fossil fuel resources are heavily concentrated in the west and South, led by Wyoming, Alaska, West Virginia, Oklahoma, Louisiana, New Mexico, Texas, Montana, North Dakota and Kentucky. Sen. Obama only took one of these states, New Mexico. The new president’s statements against coal and other fossil fuels were not popular in areas where these provide not only reliable low cost energy but also well-paying jobs.

    Not just oil-riggers, heartland miners and coal companies have an interest in an expansive approach to energy policy. If enacted, Obama’s “cap and trade” proposals could raise the cost of Midwestern energy, largely coal-based, by between 20 to 40 percent, according to a recent study by Bernstein Research. This would create yet another disadvantage for U.S. manufacturers, particularly against largely unregulated competitors in developing countries.

    In contrast, reliable and affordable domestic energy supplies from all sources – including from nuclear facilities – would be a major boon manufacturers across the country. Obama must recognize that many states with coal and oil reserves also possess strong wind and bioenergy potential. He should favor expansion of both. The resulting lower cost electrical power could boost an incipient electric car industry that may be the last, best hope for hard-pressed General Motors.

    Here’s another case where regional politics could prove sticky for Obama. Any attempt to boost non-renewable energy supplies would run into opposition from the largely coastally-centered green lobby. These groups generally oppose virtually any fossil fuel development, and most remain hostile to nuclear power. While well-intentioned, increasingly restrictive environmental regulations on manufacturing could push production to parts of the world with dirtier industries and over reliance on shipping long distances. The net reduction in carbon emissions, as a result would seem somewhat ephemeral.

    The current recession and falling energy prices could provide political cover for Obama to shift his energy policies. Hard times have already eroded support for strict curbs on greenhouse gases in Europe and strong advocacy for carbon taxes clearly hurt the Liberals in the recent Canadian elections. A similar reaction could also emerge in this country, excepting the deepest blue coastal enclaves.

    Finally there remains one other regional constituency that must be addressed, that of the financial community. Our analysis shows securities and commodity trading industries to be regionally concentrated, with the largest clusters in greater New York, vice President-elect Biden’s home state of Delaware, followed by New Hampshire and Illinois. They are all now bedrock “blue states” and backed Obama generally by large margins.

    Yet this presents yet another regional dilemma. Simply put, the rest of the country detests Wall Street. They see the bailout benefiting big players in cities like New York or Chicago, but doing little for smaller banks who do much of the lending outside the big money centers. This sentiment cuts across party lines, particularly in the West and South, as the initial anti-bailout votes in the House show.

    All presidents face such regional challenges in governing this vast and diverse country. The weak politicians, like George W. Bush, tend to fall back on an ever-narrower band of regional alliances that, once threatened, easily break apart.

    Transformative leaders, like Franklin Roosevelt and Ronald Reagan, learn to extend their appeal to as many industries and regions as possible. In the next four years, we will get to see what kind of leader Barack Obama intends to be.

    This article originally appeared at Politico.com

    Joel Kotkin is a Presidential Fellow at Chapman University and executive editor of NewGeography.com. Mark Schill, a strategy consultant at the Praxis Strategy Group, is the site’s managing editor.

  • The Case for Optimism on the Economy

    With the prospect of a long, deep recession staring us in the face, are there any reasons for optimism?

    You betcha!

    The central characteristic of the American economy – resiliency – is now being severely tested. But there are ample reasons to believe it will pass that test. Simply put, even after this crisis the US will still have the world’s largest, most dynamic, most productive, most innovative, most technologically advanced, most competitive and most venturesome economy. Combined with population and household growth (the only first-world, industrial economy that can so claim), the US still has the best prospects for sustainable economic growth (which is a good thing, because we will need to return to a growth path to be in a position to solve the many challenges we will be facing in the years and decades ahead).

    What is the case for optimism? Past experience and the fundamentals.

    Globalism
    “If sensible rescue efforts continue – and they will – the immediate crisis will quickly pass. Shell-shocked businesses and consumers won’t recover rapidly from the trauma of recent months, especially as we now cope with recession. But the downturn shouldn’t be prolonged: The economy here and those overseas should start to pick up no later than next spring.” So writes Steve Forbes, publisher of the magazine that bears his family name, in an essay entitled “Capitalism Will Save Us.”

    Despite the crisis, Forbes points out, the global economy still retains enormous strengths. Between the early 1980s and 2007 we lived in an economic Golden Age: worldwide, 70 million people a year were joining the middle class. Even the much-maligned US economy has been doing well in recent years. Between year-end 2002 and year-end 2007 US growth exceeded the entire size of China’s economy.

    As a result, the world is flush with cash. It’s frozen because of fear, but the important things is: cash is there. And the US remains the premier destination for investment capital. So the global boom should resume next year, slowly at first and then with increasing momentum.

    One word of caution: if we continue down the path of criminalizing business failures (think KMPG, Arthur Andersen), we risk undermining the basic idea of limited liability, and the risk-taking it encourages and engenders. That would be catastrophic. Limited liability is arguably the single most important innovation of the modern age, the most significant enabler of the explosive economic growth, development and widespread affluence we have seen since the 19th century. The punitive and costly Sarbanes-Oxley Act, passed in a fit of Congressional pique to punish financial crime, has done no good but lots of harm.

    Monetary Policy, Energy Costs, Housing
    Jeffrey Lacker of the Federal Reserve Bank of Richmond agrees growth will return next year; he expects the US economy to regain positive momentum sometime in 2009 for several reasons. First, monetary policy is now quite stimulative. The federal funds target rate is 1 percent, below the expected rate of inflation. Second, the major shocks that dampened economic activity this past year have already subsided or are in the process of doing so. Energy prices have reversed most of the earlier run-up; that will free up a portion of consumer budgets for spending on other goods and services. And third, the drag from housing seems likely to lessen in the next year, and in fact, we should see a bottom in housing construction around the middle of 2009.

    These are trying times, admits Lacker, but we have weathered economic downturns and banking distress before, both nationally and globally. The fundamental creative process that drives innovation and improves well-being over time has not been mortally wounded, and that bodes well for the long-term.

    Velocity
    If there is a slowdown in the turnover of money – say a 5% decline – the impact on nominal GDP growth is no different than if the money supply itself shrinks by 5%. And that’s exactly what caused the sharp drop in growth (with some panic thrown in for good measure). This sharp drop in growth is due to a temporary drop in velocity, not a typical recession caused by fundamental, economy-changing events such as higher tax rates, tighter money, protectionism or other public policies that stifle innovation or entrepreneurship.

    But there is good news. After ham-handing the rescue operation for months, the cavalry has finally arrived. The Fed has injected massive amounts of liquidity, driving the federal funds rate to roughly 1%.

    Moreover, the Treasury Department has drawn a line in the sand. It has decided that no more banks will fail due to a lack of liquidity. Despite the downside this represents for the ideal of free markets, these actions by the Fed and Treasury will help unlock the credit markets and turn velocity upward. With velocity and the money supply both heading up, a “V” shaped recovery is likely.

    Rather than being the first of several negative quarters of economic growth, economists like Brain Wesbury and Robert Stein of First Trust Advisers predict a healthy period of growth in the second half of 2009. To be precise, they expect real GDP to be flat in Q1-2009 but then grow at an average annual rate of 3% in the final three quarters of next year, with only a temporary hit to earnings. The Dow Jones industrials average should recover to 11,000 by the end of this year, with another 20% climb in 2009 all the way up to 13,250.

    We Have Been Here Before
    The US economy has blossomed for 25 years, and can and will again. If, however, we regress by adopting protectionism, higher taxes, too much regulation and other key policy mistakes, the effect on our economy could be devastating. With the prospect of a new Democratic administration and Congress, these are not insubstantial fears. The Bush tax cuts will expire after 2010 if action is not taken to extend them. The capital gains tax rate will go up; the dividend tax rate will go up; the death tax will jump from 0% to 55% in 2011. These automatic tax increases we have the makings of an economic calamity. Same goes for increased protectionism and new regulations. But it will be with eyes wide open.

    Innovation is Key
    Pessimism about America’s future has been growing, at least until the recent election of Barack Obama. Yet beneath the gloom, economists and business leaders across the political spectrum are slowly coming to an agreement: Innovation is the best – and maybe the only – way the US can get out of its economic hole. New products, services, and ways of doing business can create enough growth to enable Americans to prosper over the long run.

    But here’s the conundrum: If money alone were enough to guarantee successful innovation, the US would be in much better shape than it is today. Since 2000, the nation’s public and private sectors have poured almost $5 trillion into research and development and higher education, the key contributors to innovation. Nevertheless, employment in most technologically advanced industries has stagnated or even fallen.

    The new field of innovation economics addresses this gap between spending and results. Economists are increasingly studying what drives successful innovation to learn how companies can get more bang from the bucks spent on R&D and higher education.

    One of the hottest areas in the field is the use of government aid to cultivate “innovation clusters,” or collections of local companies and academic institutions working together to create new products and processes. Ideally, those alliances would build on existing expertise in a region.

    It’s possible the longstanding partisan debate over tax rates and budget deficits may soon become a sideshow. If it is realized that the main purpose of economic policy is to spur innovation and growth, then the two political parties will have to stop fighting and coalesce around policies that promote innovation.

    So let’s keep things in perspective. Reports of our demise are premature.

    Dr. Roger Selbert is a business futurist and trend guy. He publishes Growth Strategies, a newsletter on economic, social and demographic trends, and is a professional public speaker (www.rogerselbert.com). Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American representative for its US Consumer Demand Index.