New Geography

Tag: Energy

  • Why the Great Plains are Great Once Again

    On a drizzly, warm June night, the bars, galleries, and restaurants along Broadway are packed with young revelers. Traffic moves slowly, as drivers look for parking. The bar at the Donaldson, a boutique hotel, is so packed with stylish patrons that I can’t get a drink. My friend, a local, and I head over to Monte’s, a trendy Italian place down the street. We watch a group of attractive 30-something blondes share a table and gossip. They look like the cast of the latest Housewives series.

    It might sound like an evening in the Big Apple, but this Broadway runs through downtown Fargo, N.D. A decade ago, this same street was just another unremarkable central district in a Midwestern town: bland restaurants, adequate hotels, no decent coffee. After the local stores closed for the day, the street was mostly populated by a few hard-drinking louts.

    That has all changed, part of a transformation that foreshadows the growth of the vast Great Plains region. “I come from a big city, but I like the lifestyle here,” says Marshall Johnson, an African-American who played football for the nearby University of Minnesota, Crookston, and now works for the local Audubon Society. “In a decade this place will be a small Minneapolis. Everyone sees a bright future ahead.”

    Johnson may be an anomaly in this still homogeneous state—the population is more than 90 percent white, and Native Americans constitute the largest minority by far—but he senses something very real. Throughout the good times and, more important, the bad of this new millennium, the cities of the plains—from Dallas in the south through Omaha, Des Moines, and north to Fargo—have enjoyed strong job growth and in-migration from the rest of the country. North Dakota boasts the nation’s lowest unemployment rate—3.6 percent, compared with the national average of 9.7—with South Dakota and Nebraska right behind it.

    The trend has been particularly strong in urban areas. Based on employment growth over the last decade, the North Dakota cities of Bismarck and Fargo rank in the top 10 of nearly 400 metropolitan areas, according to data analyzed by economist Michael Shires for Forbes and NewGeography.com. Much of that growth has come in high-wage jobs. In Bismarck, the number of high-paying energy jobs has increased by 23 percent since 2003, while jobs in professional and business services have shot up 40 percent.

    That’s not bad for a region best known by East Coast pundits for the movie Fargo. It got so bad a decade ago that even local boosters suggested North Dakota jettison the “North” to make the place seem less forbidding. Two Eastern academics, Frank J. Popper and Deborah Popper, predicted that the region would, in a generation, become almost totally depopulated, and proposed that Washington speed things along and create “the ultimate national park.” Their suggestion: restock the buffalo.

    Certainly, many small towns across the plains—such places as Reeder, N.D., which lost its only school, or Mott, N.D., with its struggling downtown—have withered. Others are likely to disappear altogether. But growth has rebounded in larger towns, according to Debora Dragseth, an associate professor of business at Dickinson State University. She describes places like Fargo—with a population approaching 200,000—as “sponge cities,” absorbing population from rural areas. Just a decade ago, those people fled the region entirely.

    The primary drivers of this new growth, says Dragseth, are basic industries like agriculture and energy. Salaries may be low by coastal standards, but so are living costs. And the prices of commodities like beef, soybeans, and grains have generally continued to rise, due in large part to growing demand from China, India, and other developing countries.

    But the biggest play by far is in energy, including coal, natural gas, and oil, which exist in prodigious quantities from Texas to the Canadian border. Besides the vast reserves of oil that have made it the country’s fourth-largest producer, North Dakota possesses significant deposits of natural gas and coal, as well as huge potential for wind power and biofuels. These industries are drawing hundreds of skilled workers from places like California and Michigan, who are moving into Bismarck, the state’s capital, and towns to the west.

    The energy boom has placed states like the Dakotas and Texas in an enviable fiscal situation. Oil and gas revenues are filling up their coffers, allowing them to eschew the painful cutbacks affecting most coastal states. North Dakota has a $500 million surplus, and next year the cash gusher could rise to more than $1 billion, estimates Dragseth. That could go a long way in a state with barely 600,000 people.

    Of course, the people of the plains have seen booms before—commodity prices soared early in the last century, and there was an oil-fired boom back in the 1970s. But growing demand in developing countries could sustain long-term increases of energy and agricultural products. Niles Hushka, CEO of Kadrmas, Lee & Jackson, a growing engineering firm active in Bismarck, sees other factors working for the plains. The public schools are excellent; the Dakotas, Iowa, Minnesota, Nebraska, and Kansas enjoy among the highest graduation rates in the country. North Dakota itself ranks third and Minnesota fourth (after Washington, D.C., and Massachusetts) in the percentage of residents between 25 and 34 with college degrees.

    Nowhere is this potential clearer than in Fargo, which is emerging as a high-tech hub. Doug Burgum, from nearby Arthur, N.D., founded Great Plains Software in the mid-1980s. Burgum says he saw potential in the engineering grads pumped out by North Dakota State University, many of whom worked in Fargo’s large and expanding specialty-farm-equipment industry. “My business strategy is to be close to the source of supply,” says Burgum. “North Dakota gave us access to the raw material of college students.”

    Microsoft bought Great Plains for a reported $1.1 billion in 2001, establishing Fargo as the headquarters for its business-systems division, which now employs more than 1,000 workers. The tech boom started by Burgum has spawned both startups and spin-offs in everything from information technology to biomedicine. Science and engineering employment statewide has grown by 31 percent since 2002, the highest rate of any state.

    These jobs, and the people they attract, shower cash on Broadway’s busy bars and dining establishments. Both Burgum and his ex-wife, Karen, have been driving forces in this restoration. Karen led the effort to convert the once seedy Donaldson into a stylish downtown hotspot, featuring the work of local artists on the walls and bison on the menu. “People thought I should be put in a padded cell for doing this,” she says. Of course, entrepreneurs like the Burgums will continue to face big challenges to lure customers and workers—cold weather, isolation, and competition from more urban places. But for the first time in generations, parts of the Great Plains have a chance to be great again.

    This article originally appeared in Newsweek.

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

    Hotel Donaldson photo By jeffreykreger

  • The G-20’s New Balance of Power: The Productive Economy Still Matters

    As world leaders gather in Canada this weekend, the nations with the most influence won’t be the high-tech mavens. Joel Kotkin on why traditional industries still matter in the post-information age.

    Are we entering the post-information age?

    For much of the last quarter century, conventional wisdom from some of the best minds of our times, like Daniel Bell, Alvin Toffler and Taichi Sakaiya—in both East and West—predicted that power would shift to those countries that dominate the so-called information age. At the time, this was the right call, but it may increasingly be, if you will, old news. Although there’s no question that iPhones and 3-D movies are nifty—and hedge funds generators of massive wealth for investors and operators—we now may actually be entering what might be called the post-information age.

    As the ministers gather in Toronto this weekend for the G-20, we can see how overblown the efficacy of a virtual economy might be. The current star players on the field in terms of economic growth and fiscal strength generally derive their power not from information technology, media, or financial savvy but by the mundane but still important basic underpinnings of economic growth: agriculture, manufacturing and energy production.

    This is true among both the advanced countries as well as the developing ones. The stars of the West are not the brainy Brits or the entrepreneurial “creative” Americans but places like host Canada and Australia, whose place in the world economy relies heavily on the production of raw materials like uranium, iron ore, oil, timber, grains, fish and beef. Sure, they have some cutting-edge companies, nice (often heavily subsidized) film industries, and lots of smart people (after all, my wife is from Montreal!). But it’s the basics that drive their economies.

    So much so that Australia, braced by rising exports to Asia, has been growing well enough to let its interest rates rise, something that is all but unthinkable for the U.S. Fed, at least until the November elections. Due in large part to its commodity-based economy and more enlightened regulation, Canada’s banking system is widely considered the most stable in the advanced industrial world, with a rate of leverage 18 to 1 compared with the U.S.’s 26 to 1 and the EU’s scary 61 to 1. Budget deficits? Hardly an issue. Bank bailouts? Nary one.

    The flip side of the Canada-Australia coin are the high-performers who now excel in the field most of our high-tech pundits—starting with Megatrends’ John Naisbitt 20 years ago—generally disdain: manufacturing. Naisbitt called manufacturing “a declining sport” and was roundly applauded by Wall Street and other sources of economic “wisdom.” The most obvious contrary example is China, the modern equivalent of 19th-century Britain’s “workshop of the world.” But other, faster-growing economies among the G-20—Brazil, Turkey, India and South Korea, for example—also are rising fast largely on the back of manufacturers.

    None of this suggests that high-tech or information are unimportant. But by their nature industries like software are exceedingly mobile. In contrast, the basics in these rapidly growing economies involve large-scale investment and the presence of the right resources. It’s easier to move software development to Bangalore than soybean production or natural gas.

    In any case, it’s not smart to give up the basics—unless perhaps you are Liechtenstein or Monaco—and hope to have enough money left to sustain your drive into high-tech industry. Do you really think that the rising industrial powers have any intention of ceding media, finance, and technology to Americans, Japanese or Europeans? I would not count on it.

    History serves as an excellent guide here. Take the example of Great Britain—home of the Industrial Revolution—which should be considered a cautionary tale. In the 19th century and much of the 20th, even though the country depended on manufactured goods for its livelihood, British elite schools, financial institutions, and media all worked against “the needs of industry” to create what historian Martin Wiener has called “two unequal capitalist elites,” the more powerful of which had little interest in, and even disdain for, industrial activities. The “best” talent, and the most social prestige, favored the financial sector over the industrial. Production was particularly looked down upon: it was “the Cinderella of British industry.”

    There are also more recent examples supporting the notion that hard work and attention to the basics still matter. In the 1980s, Japanese firms that were widely written off as “copycats” eventually became primary innovators, particularly in automobiles, semiconductors, and computer games. Koreans were often then dismissed by both Americans and Japanese as unimaginative imitators; today South Korea’s electronics and car companies are surging not only in America but across the world. Now they have their gaze fixed on biotechnology and videogames.

    In the coming decades Chinese and Indian companies will seek to move from low-wage work to more specialized, and increasingly innovative, kinds of products—in everything from pharmaceuticals to fashion and finance. The enormous profits to be made from less “sexy” activities—ranging from manufacturing to call center and code writing—will provide the funds to invest in both the hard infrastructure and the necessary training to move decisively into ever higher-end activities.

    This contempt for production underpinned the decline of Britain as a great power, and could prove disastrous in mid-21st entury America as well. In the America envisioned by the advocates of the “creative economy,” our productive facilities would serve mainly as tourist attractions, much as we now visit restored pioneer villages. The problem is that it may work for a small, highly educated class and some financial managers, but not for the vast majority of Americans.

    In reality a more prosperous future is possible, but only if the country focuses both on developing the intellectual prowess of its citizenry and on maintaining the physical infrastructure necessary for key basic sectors like agriculture, energy, and manufacturing. A single-minded emphasis on nontangible industries—notably finance—is a dangerous delusion, as is particularly clear in both the Wall Street disaster of 2008 and the current devastation of the even more finance-dependent British economy and its exchequer.

    Fortunately, there is still time for America—still by far the world’s pre-eminent economy—to adjust to the realities of the post-informational economy. We remain the world’s leading agricultural power, and global demand for food, particularly proteins, will soar as the global population expands from six to nine billion by 2050. Many of these people will be more affluent, and provide prime markets for such American exports as soybeans, nuts, fruits, wine, beef, and chicken. Only a small number of Americans may work on farms, but over 10 percent are involved in some way with the marketing, processing, financing and research of agricultural-related activities.

    Similarly America can also enjoy the kind of energy-generated wealth that underpins Canada, Australia, and G-20 members Russia, Brazil, and Saudi Arabia. Our ruinous trade deficit in energy is largely a failure of will, faulty regulation and lack of proper incentives. In the short run, we have ample supplies of relatively clean natural gas—particularly in the Great Plains—as well as significant on-shore oil supplies and a prodigious capacity for renewable energy. In 10 years, with a pragmatic focus on these industries, we might not be an energy exporter but we could be fairly self-sufficient, perhaps only importing from our close Canadian cousins.

    At the same time, there is no compelling reason why America needs to abandon industry. Unlike Europe we will have an expanding workforce and growing domestic market. The manufacture of hard goods, which requires a sophisticated infrastructure and is generally energy-intensive, could turn out to be relatively easy to salvage for American workers. Like agriculture, manufacturing directly may employ a relatively small number of people, but many others benefit from the service industries that depend on it. Manufacturers also boost the tech sector; roughly one in four U.S. scientists and engineers work for industry.

    Although it may not be obvious to our trendy information-age pundits and their admirers among economic journalists, or perhaps some in the current administration, the U.S. is well-positioned to meet the requirements of the emerging post-information age. If we add our natural resource base and industrial capacity to our prodigious ability to innovate, the U.S. could not only compete against, but out-perform every major country in the G-20. The key now is summoning national and political will to exploit our advantages, assets that America sadly now appears to have in short supply.

    This article originally appeared in TheDailyBeast.com.

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

    Photo by rjason13

  • Energy’s Other Side

    The BP oil spill disaster likely spells the slowing down, or even curtailing, of offshore oil drilling for the foreseeable future. You can take California, Florida and much of the east coast off the energy-drilling map for years, perhaps decades.

    But if the oil, gas and coal industries are widely detested on the coasts, people in Bismarck, N.D., have little incentive to join an anti-energy jihad. Like other interior energy centers, people in this small Missouri river city of over 100,000 see their rising oil-, gas- and coal-based economy as the key to a far more lucrative future.

    “We have so much work that we don’t know what to do,” explains Niles Hushka, co-founder of Kadrmas, Lee and Jackson, a Bismarck-based engineering firm active in Great Plains energy development. In the next three weeks Hushka’s firm plans to add 70 more people, most of them skilled technicians and engineers.

    The problem in Bismarck is not so much creating jobs but filling positions; the city can be a hard sell due to its relative isolation and harsh climate. Still there’s some virtue to having opportunities. Even at the pit of the recession Bismarck has continued to experience job growth. Today its unemployment rate stands at well under 4%, the lowest rate in the country.

    This economic record is not unique to Bismarck. Other domestic energy centers like Anchorage, Alaska, and Morgantown, W.Va., also rank high among the strongest job markets in the country.

    Many energy towns are not only getting lots of jobs, but they are also becoming richer. One study, done by economist Mike Mandel, finds the highest per capita income growth in regions of Oklahoma, West Texas and Louisiana, where energy growth has driven the economy. Between 2000 and 2008 these areas enjoyed soaring per capita income gains, while many centers of the “creative economy” such as San Jose, Calif., Raleigh-Durham, N.C., and even Austin, Tex., have experienced per capita income declines.

    But few areas are enjoying a greater boom than Bismarck and surrounding parts of western North Dakota. It enjoys a vast array of energy resources, from fossil fuels to biofuels as well as prodigious potential for wind power.

    The real big action now, however, is in oil. New drilling technologies have allowed for the tapping of oil deposits far deeper below the surface. The U.S. Geological Service recently increased its estimate of North Dakota’s economically recoverable oil–much of it in the massive Bakken and Three Forks formations–25-fold to 4.3 billion barrels. These formations also extend to large swaths of northern Montana and southern Saskatchewan, Canada.

    Unlike past oil booms, such as the one that crashed in the 1980s, this one will last a long time. For one thing the voracious demands on energy coming from India, China and other developing countries will keep energy prices high. At the same time resistance to drilling tends to be weaker in remote areas with few residents, notes Debra Dragseth, a professor of business at Dickinson State University.

    The prospect of long-term prosperity tied to oil and gas wealth is already beginning to change the long dismal demographics of the area. A long-term boom could attract a new flow of blue- and white-collar workers to Bismarck and other parts of the plains. This is already starting. Long a net exporter of people–the state’s population is less than it was in 1930–today Bismarck and the state of North Dakota enjoy positive in-migration from the rest of the country.

    Part of the lure is something North Dakota had previously lacked: a plethora of high-paying jobs. Truck drivers in the industry earn as much as $80,000 a year, and wages for skilled professionals tend to go well over $100,000 annually. Meanwhile the cost of living is low, with housing prices a third or less of those on the coasts.

    Of course, work in the oil or gas fields isn’t easy–and it is sometimes dangerous, particularly in the often brutal winters. But opportunities in tough times can prove an irresistible lure to younger people, which is critical for what has been among the country’s most rapidly aging states. “It’s a petroleum land rush,” says 30-year-old Jerry Haas, who now looks for oil sites for the Dallas-based Petro-Hunt interests. “People see it as a great place of opportunity among people my age.”

    Haas, a native of North Dakota, sees more and more out-of-staters coming to Bismarck, in search of generally high-paying, energy-related employment. He has helped organize a 200-member young professionals group to lobby for more youth-oriented amenities in this decidedly conservative Great Plains town.

    The shifts in migration and particularly income–due largely to energy–represent a huge boost to an area that has long suffered from an exodus of young talent and a dearth of high-paying jobs. The key issue now is finding ways to turn the current boom into longer-term prosperity. North Dakota certainly has an unprecedented opportunity to build up its human and physical infrastructure. While other states struggle with huge budget shortages, North Dakota’s government enjoys an oil-driven surplus that is expected to grow in the next year from $500 million to over $1 billion.

    Dragseth believes the energy boom will allow North Dakotans, long ignored or at best dismissed as hopeless rubes, to start dreaming in ways impossible in much of the country. They can envision a future where, for instance, post-secondary education is free and used to lure the top students from around the world. North Dakota could use its good fortunes to gain the human capital it sorely needs. The Gulf disaster may put an ugly face on energy exploration, particularly oil, for many Americans. But in the nation’s oft-ignored interior, the development of new fuels offers the prospect of a previously unimagined prosperity.

    This article originally appeared in Forbes.com.

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

    Photo by k.landerholm

  • The Limits Of The Green Machine

    Environmentalism is strangely detached from the public’s economic goals.

    The awful oil spill in the Gulf–as well as the recent coal mine disaster in West Virginia–has added spring to the step of America’s hugely influential environmental lobby. After years of hand-wringing over global warming (aka climate change), the greens now have an issue that will play to legitimate public concerns for weeks and months ahead.

    This is as it should be. Strong support for environmental regulation–starting particularly under our original “green president,” Richard Nixon–has been based on the protection of public health and safety, as well as the preservation of America’s wild spaces. In this respect, environmentalists enjoy widespread support from the public and even more so from the emerging millennial generation.

    Conservatives who fail to address this concern will pay a price, even more so in the future. The Bush administration’s apparent clubbiness with conventional energy interests has undermined the GOP’s once-proud legacy on environmental causes. The oil spill could prove a great campaign issue for Democrats assigning blame for the disaster on lax Republican regulators and their oil company chums.

    But there’s also a danger for Democrats who tilt uncritically toward “green” policies. Instead of following the environmentalists’ party line, they should adopt a balanced approach adding both economic and social needs to their concept of “sustainability.”

    Sadly, many in the administration seem anxious to extend environmental regulation into virtually every aspect of life. Legitimate concerns over pollution and open space preservation, for example, have now been conflated with a renewed drive to strangle suburbia in favor of forced densification.

    The administration’s “livability” agenda, as suggested by Transportation Secretary Ray LaHood, for example, proposes policies that favor dense urban development over the dispersed living preferred by most Americans. This, notes analyst Ken Orski, represents an unprecedented federal intrusion over traditional local zoning and local decisions.

    This centralizing tendency supports a wide array of interests, notably big city mayors and urban land speculators, and also is eagerly promoted by many architects, the media and planning professors. Not surprisingly, less intrusive ways to reduce energy use, such as telecommuting or the dispersion of worksites closer to people’s homes, have elicited very little administration support.

    Herein lies the Achilles heel of environmentalism–its profound disconnect from public preferences and aspirations. By embracing such a radical social engineering agenda, the greens may end up undermining their own long-term effectiveness.

    The first sign of this pushback, notes analyst Walter Russell Mead, can be seen in growing skepticism about climate change policies both here and in Europe. At a time of severe economic challenges, greens and their political allies need to consider how specific environmental costs threaten an already beleaguered middle and working class.

    Voters, for example, may support strong penalties and stricter controls of energy giants such as British Petroleum or Massey Energy, but roughly six in 10, according to a post-spill NBC/Wall Street Journal poll, continue to back the idea of expanded offshore oil drilling. Voters may embrace new environmental improvements but they also want to keep their jobs.

    This conflict will be on display in the coming struggle over the “cap and trade” proposals in the Senate. Strongest opposition comes from those states and regions most adversely impacted by strict limits on carbon, clustered in the south and Midwest.

    Mitch Daniels, governor of coal-dependent Indiana, even has denounced such proposals as Washington “imperialism.” But Daniels’ opposition also is shared by many Democrats from fossil-fuel-rich states such as North Dakota, West Virginia and Louisiana. Cap and trade even manages to offend many on the left, who see it as yet another opportunity for Wall Street to profit from complex federal regulation.

    On the state level, more draconian mandates on shifting to renewable fuels, such as those in place in California, could also cause future power shortages, as the state auditor warned recently. Such concerns are routinely brushed aside by environmentalist and their prodigious PR machines who prattle on about our coming economic salvation through the creation of “green jobs.”

    In reality, given their dependence on massive subsidies from both taxpayers and rate-payer, it’s unlikely that renewables, as opposed to relatively clean alternatives such as plentiful natural gas, will produce a net positive impact on the economy for years or even decades. Certainly highly aggressive subsidies for wind and solar have not proved any kind of elixir in countries like Spain, where such policies have been long in place but now are being scaled back due to their drain on both the economy and the public budget.

    To some extent, the hype over “green jobs” sometimes appears as something of a PR smokescreen. Prominent greens have long been opposed to the very idea of economic growth and wealth creation, particularly in advanced industrial countries. For decades John Holdren, President Obama’s science advisor, has favored what he calls “de-development” of Western countries in order to preserve natural resources and reduce pollution.

    This approach appears to be gaining support even as the pain of economic dislocation has devastated the advanced countries of the West. Boston University sociologist Juliet Schor, writing in the influential left-leaning The Nation, even attacks “progressive economists”- such as those calling for a second New Deal- for focusing on “climate destabilizing growth” as a way to create new jobs and raise middle class incomes.

    In the Huffington Post one-time investment banker Ann Lee, now an economics professor at NYU, has called for “a new economic ideology” that focuses on “human dignity, creative and degrees of freedom” instead of following traditional measurements of material well-being. This “new” economy, she argues, would provide greater returns to favored groups like artists and, of course, teachers, who she considers severely underpaid.

    This kind of low-carbon academic “esteem” economy appeals to people who already enjoy considerable material wealth and can count on the support of the state. It is not so promising on the West’s aspirational middle and working classes, particularly those employed in the private sector, whose individual strivings would now be compensated by a deadly combination of high taxes and slow growth.

    Until the issues of growth are tackled honestly, the green movement will continue to depend on tragic events such as the Gulf oil spill to maintain its public support. But in the long run, environmentalism will not remain politically “sustainable” if it fails to balance a green future with the economic aspirations of current and future generations.

    This article originally appeared in Forbes.com.

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

    Photo by just.Luc

  • It’s the Jobs, Stupid: Infrastructure Matters

    It may surprise you to know that some policy makers and academics believe that “nothing matters” when it comes to infrastructure — the physical structures that make water, energy, broadband and transportation work — and economic prosperity. The thrust of the idea that infrastructure doesn’t matter may have started with Larry Summers, appointed by President Obama as Director of the National Economic Council in 2009. The New York Times says he is “the only top economic adviser with a West Wing office” – meaning he is very powerful in Washington terms.

    His most vocal critic in the matter of infrastructure is Representative Peter DeFazio (D-Oregon). DeFazio appeared on MSNBC’s Rachel Maddow, criticizing Summers, saying that Obama is “ill-advised by Larry Summers” in regards to using stimulus money to cut taxes for businesses. “Larry Summers hates infrastructure,” says DeFazio, who argues that more of the stimulus should have gone to infrastructure. Summers backed away from any earlier comments when he told the Financial Times last June that there may also be “a case for carefully designed support for infrastructure investment.”

    The question seems obvious. What good is it to stimulate business if they don’t have the tools they need to work with?

    Summers’s attitude could make it difficult to generate major new investments in things like roads, bridges, and the broadband communication access that businesses – small and large – need to get the job done. Companies choose to locate where infrastructure is better. Businesses will leave areas where infrastructure is missing or deteriorated – taking jobs with them.

    Certainly U.S. firms look for good infrastructure when they consider placing offices overseas, and foreign firms must do the same when they consider locating here. The idea that good infrastructure would enable economic specialization and lower costs – making U.S. businesses more efficient, more competitive, and therefore able to create more U.S. jobs – is clearly reflected in the way that businesses behave. Emerging market countries remain economically competitive, and are constantly building and rebuilding their infrastructure as their economies develop. Can the U.S. remain competitive if our infrastructure doesn’t keep up with them? It is becoming increasingly clear that deteriorating infrastructure in the United States may actually be contributing to increased costs (and decreased efficiency) of American businesses.

    Recently, the U. S. Chamber of Commerce initiated a project under the Let’s Rebuild America initiative to find a way to measure the performance of infrastructure and the role it plays in economic prosperity. Over the next year, a team of experts (of which I am a member) led by Michael Gallis & Associates will create an Infrastructure Index that can be used to explore the contribution infrastructure makes in keeping American businesses competitive in an increasingly global economy.

    What is innovative about the project team’s approach is that it measures the performance of infrastructure, and not just the size. Thirty years ago researchers on this subject limited their measurement of “infrastructure” to “government spending on public projects” to analyze the impact on economic growth and productivity. This approach is flawed for several reasons.

    First, not all money designated for infrastructure is spent the same way. Government inefficiencies and political corruption plus purchasing power in local economies contribute to inconsistency in quantity and quality of infrastructure based on money spent. Measuring infrastructure in terms of spending alone doesn’t cover the impact of growth on infrastructure. In other words, that a growing economy can afford more infrastructure is just as likely a cause of positive statistical results as the possibility that more infrastructure helps the economy grow. Further, where spending is used to measure infrastructure, the studies usually consider only public spending, ignoring the contribution of investments from private companies (e.g., the contribution of private satellites to communications infrastructure).

    Less than half of the statistical studies using expenditure-based infrastructure measures find that developing or maintaining infrastructure has significant positive effects on the economy. In contrast, over three-fourths of the studies using physical indicators – the number of phone lines, the miles of high-quality road — find a significant positive contribution from infrastructure to the economy.

    There is no dispute that economic growth is necessary as long as there is an increasing population, which will be the case over the next four decades in America as well as Canada and Australia. We need to address the question: is it possible for the economy to “hit a wall” because it runs out of usable infrastructure? In other words, the question is not if infrastructure helps the economy but rather can a lack of infrastructure impede the economy? Can the economy outgrow its infrastructure?

    As the economy changes, so will the demands for infrastructure. The four components of infrastructure – transportation, energy, water and broadband – need to be made relevant across decades, even as the role of one industry may change within the economy. For example, while it is obvious that information-workers, such as computer programmers and software developers who increasingly work from remote locations, require access to broadband infrastructure, they also alter the way that transportation infrastructure is used. Some knowledge-based activities relying on spatial agglomeration place greater importance on rail/subway and less importance on roads. Yet, that does not mean that a knowledge-based economy will need fewer roads – someone has to service those computers and that technician will likely travel to its customers on roads.

    We need to move away from the “one-size-fits-all” approach to infrastructure development toward better integration with the economic activity that uses it. Each region needs to assess its own needs and base their investment decisions on conditions that exist within their region.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. She will be participating in an Infrastructure Index Project Workshop Series throughout 2010. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • Florida and Oil

    By Richard Reep

    Some say it took Mrs. O’Leary’s cow to make Chicago the city of great architecture that it is today: after the fire of 1871 that destroyed many of its buildings, leading citizens recognized the critical importance of their built environment. Today, we have a city that boasts some of the world’s best architecture. If BP’s oil disaster is a new millennium cow starting another conflagration, the nation may ironically benefit from seeing the ominous oil slick spreading across the gulf, spelling the end to our dependence on oil as the dominant energy source for the nation.

    Cries of “drill baby drill” are suddenly silent as the horror of rusty streaks spreads from MC252, and Florida’s governor Charlie Crist has already viewed the oil slick twice – aware that the tourism industry, already on its knees, will suffer yet another blow amid unemployment, the credit freeze, and state depopulation. The massive disaster looming in the Gulf of Mexico appears to be a giant, ugly metaphor for some choices that America will make in the near future. If we are going to stay dependent upon oil as our energy source of choice, we better grit our teeth, clean it up, and hope for a technological fix to reduce the risk of this happening again.

    Instead of reducing our dependence upon foreign oil, this disaster is causing many in Florida to question whether we should depend on oil at all, foreign or domestic. Ironically, in a state that has consistently banned offshore drilling to prevent such as disaster, Florida’s beaches are likely to suffer from environmental damage anyway. 4,000 or so oil rigs exist in the Gulf of Mexico making this event likely to occur again in the future, and as the engineers experiment with one repair after another it is evident that we are a long way from making these rigs risk-free.

    Over in Florida, the dismay over this event is palpable, and since nothing can be done about it, there is only speculation about what direction to head in the future. Despite the “sunshine state” moniker, the oil industry’s grip on the state is so strong that solar energy is losing market share rather than gaining as an energy resource. The legislature, starved for money to balance the budget, had to kill a rebate program that subsidized building owners when they add solar energy systems to their property. Florida, despite its abundance of renewable energy potential, has yet to see policy that diversifies the energy needs of the state, and sources like solar energy require extraordinarily heavy subsidies to be palpable to most owners.

    While the recession is pushing most prices downward, energy costs are rising across the country, whether fossil fuels or notFlorida is heavily dependent upon fossil fuels, making renewable energy resources someone else’s profit center, judging from California, Oregon, Washington, and Minnesota’s contribution to the top ten cities using renewable energy. Florida, with vast agricultural lands beset by freezes that destroyed much of the cold-sensitive citrus crop this year, has yet to consider energy crops like sugar cane, sorghum, switchgrass, or other biofuels.

    So while Florida sits and watches the oil slick move closer to its shores, some big questions deserve to be asked, and answered. Individuals without the means are generally conserving energy by driving less, biking more, and slowing their lives down to match the pace of their income. All of this is natural conservation of energy is occurring without nannies and big brother shaking a code book at people and may, in the long run, do more to reduce energy consumption than anything else.

    It will take a fundamental shift in thinking to really abandon oil, foreign or otherwise, in Florida or elsewhere. It will take recognition of the incredible abundance of other forms of energy that exist and a passion to seek out ways to use this energy effectively for our needs. This will be only successful with a combination of grass roots and top-down thinking, and perhaps the disaster in the Gulf of will have a legacy similar to the 1969 Santa Barbara oil spill, after which came the Environmental Protection Agency, the Clean Air and Water Act, and a galvanizing of the fledgling environmental movement.

    Sustainability is about preserving the future generation’s ability to choose its own destiny. With this criterion, we should move forward with a pluralist approach to finding energy sources, and consciously step towards them. We won’t abandon oil tomorrow, or the next day, but we can begin to say goodbye to atrocious wastes of nature like the one unfolding in the Gulf of Mexico right now, and we can begin to say hello to a transformation of our lifestyle to embrace different forms of energy for different needs. If this disaster is truly Mrs. O’Leary’s cow, then future generations must truly benefit from the event in order for it to have meaning.

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

    Photo by Fabio – Miami

  • Jobs, Environmental Regulation, and Dead French Economists

    The debate over the repeal of California’s global-warming regulation, AB32, has degenerated into a shouting match, each side claiming economic ruin if the other side wins. A couple of long-dead French economists can help us think about the debate.

    The great French economist Leon Walras (1834-1910) showed that perfect markets result in an allocation of goods and services that can’t be improved on, in the sense that no one could be made better off without someone else being made worse off.

    Of course, we don’t have completely unfettered markets. In fact, they have never existed. They will never exist. In particular, we economists like to talk about what we call negative externalities. These occur when I do something, but an unintended consequence is that it hurts you, and you have no recourse.

    An example may make things clearer. Suppose I have a factory that spews out a deadly chemical, one that destroys all life downwind for ten miles. Obviously I’ve reduced the property values for the downwind property owners. (We’re simplifying here. There are many other issues.) There is no market for the damage I’ve done, and downwind landowners may not be able to afford to sue me, and there was a time when they would have likely lost such a case.

    Society’s solution to the problem of negative externalities has been regulation. Until recently, the concept of negative externalities has been the rationale for most environmental regulation. Negative externalities’ victims have also been extended to include non-humans: flora, fauna, and “mother earth.”

    Climate change regulation, though, is a bit different. In the first place, we don’t know how much of its justification, the claim of manmade global warming with long-term negative economic impacts, is accurate. Some, the “non-believers” completely deny the possibility of man-caused global warming. Others, “the believers” believe in man-caused global warming with a fervor that matches that of any religious zealot. Another group, me included, believes that manmade global warming is a possibility that should be considered as a factor in making long-term economic policy.

    If manmade global warming was a certainty, you could reasonably argue that negative externalities justify regulation, the parties being hurt are just not yet born. That’s essentially what the believers are trying to say when they point to the imminent destruction of all life on earth.

    However, once the existence of manmade global warming becomes a probability, it becomes an insurance question. This dramatically increases the level of complexity of the problem, and it dramatically complicates the political problem of reaching consensus about what to do.

    So, proponents of climate-change regulation have tried to simplify the issue. One approach has been to turn everyone into believers, either by attempting to convince the skeptical—as it turns out by using gross exaggeration if necessary—or, failing conversion, excommunicating even the mildest skeptics from civil society.

    Climate-change regulation proponents have also tried, with success, to use the novel argument that climate-change regulation is not only costless but will generate economic growth. The most enthusiastic proponents of this argument, California’s Governor Schwarzenegger among them, describe a utopian future of happy people enjoying previously-unknown prosperity in a pristine earthly heaven.

    Sadly, this better-than-a-free-lunch deal is not likely to materialize. It is true that clever economists have constructed models where such an outcome is possible—models having to do with large-scale inefficiencies existing because of historical accident—but large-scale unrecognized opportunities are unlikely in today’s economy.

    It is also true that some economists have found some evidence of small un-captured gains. I’ve participated in this literature. However, those gains are also unlikely to be of the scale necessary to achieve the promised new economic age. Indeed, most economists doubt their existence, arguing, reasonably, that the researchers failed to measure all of the relevant costs. Economists have a hard time believing that markets are so bad that unrecognized profitable opportunities exist in abundance.

    Today, California is considering the repeal or postponement of its landmark global-warming regulation, AB32. Oddly, both sides are using the same argument. The forces arguing against the repeal of AB32 argue that the repeal will cost jobs. Those arguing for the repeal argue that failure to repeal will cost jobs.

    They are both correct, and they can both prove it with their warring models, which brings us to our second great dead French economist.

    Frederick Bastiat (1801-1850), not long before his death, wrote a piece What is Seen and What is Not Seen. In the essay, Bastiat gives the example of jobs created by breaking windows. The broken window creates work for the glazier, a multiplier is attached to that work, and it looks as if economic activity has increased. However, society is not better off. The problem is that we see, and account for, the work, but we do not see or count the costs associated with the initial destruction of capital.

    So it is with California’s regulation. Proponents of the regulation have research to support their claim of job creation. The “green jobs” created by the regulation are seen and counted. The jobs lost to the regulation are not seen and are not counted.

    The opponents of California’s regulation have estimated the jobs lost to the regulation, mostly a consequence of higher energy costs, but that research—the portion I’m aware of at least—has been criticized for ignoring the jobs created by the regulation. More importantly, they do not see the jobs that might be lost if global warming kills jobs. They only see, and show, the jobs lost to failure to repeal the regulation.

    Creating jobs is easy; creating real economic growth is harder. Banning the use of any productivity-enhancing technology will create jobs, but this could occur at the cost of societal well being. We could achieve full employment by banning all agricultural technology created after the 17th century. There is no unemployment in a Malthusian economy. We’d all have “idyllic” jobs on the farm, yet this would in reality be back-breaking work. Many people would live on the edge of starvation. I don’t think anyone really wants that outcome. It is also easy to create subsidized jobs, even if those jobs add nothing to, or worse detract from, society’s well being.

    Instead of jobs, the argument should focus on such things well being, consumption, income, probabilities, and the like. It is complicated by the uncertainty surrounding the theory of manmade global warming, and the uncertainty surrounding the economic impacts of any warming. But, the stakes are high. People’s lives will be changed. The debate deserves a higher-level of discourse than we’ve seen. Frenetic predictions of job losses or overly optimistic projections of employment created by a green economy will not do. Instead, let’s recognize the complexity of the issue and have a reasoned discussion.

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

    Photo by Diogo Martins.

  • A Carbon Added Tax, Not Cap and Trade

    Paul Krugman devoted a recent lengthy New York Times Magazine article to the promotion of a disastrous “cap and trade” regime for reducing carbon emissions. Though he doesn’t outright endorse it, he strongly suggests that the Waxman-Markey bill that passed the House would be acceptable to him. Krugman then proceeds to pooh-pooh the carbon tax idea, one that I believe has far more merit.

    Cap and trade would be a debacle for a slew of reasons. The most important is that it won’t even reduce carbon emissions. Two of the EPA’s own San Francisco attorneys dismissed the Waxman-Markey cap and trade regime as a “mirage” that would not reduce carbon because of the ability of polluters to obtain fictitious carbon offsets, among other problems.

    Even if cap and trade would require American producers to reduce carbon emissions, it would do nothing about overseas polluters. An American manufacturer could escape cap and trade simply by moving production to China. Given China’s massive coal-based electricity infrastructure and other notoriously polluting practices, carbon emissions would likely only get worse as a result, in addition to the US jobs lost.

    Krugman suggests this can be fixed with a carbon tariff, but that’s dangerously naïve. There’s no guarantee a carbon tariff would be put in place after cap and trade passed. In effect, it requires two completely separate policy mechanisms be put in place and kept synchronized over time, which seems dubious. Our trading partners would surely chafe at any carbon tariff, which would be vulnerable to challenge under international trade treaties.

    Cap and trade also has huge distortive impacts within the United States. The Brookings Institution crunched the numbers and found that cap and trade costs vary widely across the country. Compliance costs would be minimal in California and rest of the West and Northeast, while the Midwest, Mid-Atlantic, and the South get pummeled. It should come as no surprise that it is California Rep. Henry Waxman who’s pushing the bill. One can’t help but suspect these regional disparities are the real implicit goal of the bill. Indiana Gov. Mitch Daniels denounced cap and trade as “imperialism”.

    Perhaps the most diabolical part of cap and trade is in its very name. The operative word is “trade”. Who do you think will be doing the trading? Why, none other than the very people who got us into the economic mess we’re in today. Cap and trade is a gigantic giveaway to Goldman; it’s yet another instrument for speculation; it’s another way for the profiteers on Wall Street to line their pockets at our expense.

    So in a sense it’s also another way that, perhaps unintentionally, the richest sectors, the upper classes, and the financial centers like New York, Boston and San Francisco are being favored over the poor Main Street rubes who have taken it on the chin during this recession without a bailout. If you think things are bad now, just wait until CDS stands for “carbon default swap”. It’s pouring fuel on the fire of inequality between the haves and have nots.

    Cap and trade is nothing more than another tranche in the never-ending merry-go-round of bailouts for the financiers. And didn’t we learn anything from Enron’s electricity trading shenanigans? When an Iowa farmer opens up in his electric bill that’s suddenly spiked, or has to pay double to fuel his farm equipment, it’s not too much to ask that it be in the service of actual carbon reduction, not houses in the Hamptons, owned by people to whom the added cost is not material given their wealth.

    There is a better way, and that’s the Carbon Added Tax. Similar to a European-style Value Added Tax, a CAT tax would directly tax the quantity of carbon emissions added to the atmosphere in each stage of the production cycle. The tax could be set at a level that would provide certainty of price such that investments in lower carbon technologies are financially feasible right now, not decades from now.

    Also, similar to the US income tax system, the CAT would apply to the carbon emitted globally, not just in the United States. A deduction would be permitted for any bona fide carbon taxes paid in a foreign jurisdiction, up to the level of the US tax. A true-up on the carbon tax due would be paid at the point of import into the United States. That is, an importer would have to pay the CAT on products brought into the country, less any deductions for foreign carbon taxes paid, at the port of entry.

    While this global approach is a widely, and correctly, maligned feature of the US income tax code, it has important benefits from a carbon reduction perspective. First, it is location neutral. Since the tax is the same whether the carbon is emitted in China or the United States, it doesn’t encourage business to move offshore. But it also doesn’t discriminate against foreign producers. (Like any anti-carbon regime, it would raise costs in the US, affecting both domestic consumers and the competitiveness of exports).

    The CAT is also functionally equivalent to a carbon tariff, but is a unitary regime. That is, you don’t have to figure out how to bundle in or pass a separate carbon tariff as part of implementing a domestic cap and trade system. You simply pass a CAT on global carbon emissions and you are done.

    And this system allows each country to decide on its own level of carbon taxation. If countries like China want to have no tax, that’s their choice. Or, European countries could decide to have a higher tax. The complexity would come in figuring out the allowed deductions for emissions in countries that adopted other schemes like cap and trade, but this should be a readily solvable technical issue.

    There will still be divergent regional domestic impacts under a CAT. This is unavoidable in a nation where carbon emissions are unevenly distributed. But by preventing the financiers from skimming off the top, the total burden is reduced, and a CAT is a more location neutral, transparent mechanism for carbon reductions.

    A Carbon Added Tax is a far superior way to reduce carbon emissions than a cap and trade system only a Wall Street trader could love.

    Aaron M. Renn is an independent writer on urban affairs based in the Midwest. His writings appear at The Urbanophile.

    Photo by Gilbert R.

  • Telecommute Taxes On The Table

    The Obama Administration has recently been shining a spotlight on the need to eliminate barriers to telework and its growth. Now Congress has legislation before it that would abolish one of telework’s greatest obstacles, the risk of double taxation Americans face if they telecommute across state lines. The Telecommuter Tax Fairness Act (H.R. 2600)would remove the double tax risk.

    H.R. 2600 can and should be enacted as a stand-alone measure. However, Washington is also currently developing or considering a variety of other legislative packages, any one of which would be significantly strengthened if the provisions of H.R. 2600 were added to it. These packages include energy/climate legislation (expected to be unveiled later this month), transportation legislation and small business legislation. Each of these packages, we have been told, would double as a jobs bill.

    Telework is a critical component of any plan to create jobs, as well as any plan to improve our energy security, slow climate change, ease traffic congestion, reduce transportation infrastructure costs and boost small businesses. Congress must not miss the important opportunity that H.R. 2600 and these emerging packages provide to get rid of the tax barrier to telework.

    The Obama Administration’s Focus on Removing Obstacles
    On March 31, the White House hosted a first-of-its kind forum on workplace flexibility, bringing together businesses, employees, advocates, labor leaders and experts to talk about the importance of expanding the use of telework and other practices that enable workers to meet the competing demands of job and family. Obama identified workplace flexibility as an issue that affects “the success of our businesses [and] the strength of our economy – whether we’ll create the workplaces and jobs of the future we need to compete in today’s global economy.” Discussing a new effort within the federal government to increase the number of federal teleworkers, the President said,

    “…this isn’t just about providing a better work experience for our employees, it’s about providing better, more efficient service for the American people – even in the face of snowstorms and other crises that keep folks from getting to the office…. It’s about attracting and retaining top talent in the federal workforce and empowering them to do their jobs, and judging their success by the results that they get – not by how many meetings they attend, or how much face-time they log, or how many hours are spent on airplanes. It’s about creating a culture where, as [the Administrator of the General Services Administration] puts it, “Work is what you do, not where you are.”

    The Federal Communications Commission (FCC) is also urging greater reliance on telework. In the National Broadband Plan delivered to Congress on March 16, the FCC reported that “[m]aking telework a more widespread option would potentially open up opportunities for 17.5 million individuals.” For example, the FCC said, telework can spur job growth among Americans living in rural areas, disabled Americans and retirees. To make the telework option more available, the FCC recommended that Congress “consider eliminating tax and regulatory barriers to telework.”

    What regulatory barrier did the FCC target? The “convenience of the employer” rule – the state tax doctrine that subjects interstate telecommuters to the risk of double taxation. Specifically, a state with a “convenience of the employer” rule can tax nonresidents who telecommute part-time to an employer within that state on the wages they earn at home, even though their home states can tax the same income.

    For many people, the threat of owing taxes to two states can put a long-distance job out of reach. By making telework unaffordable for workers, the tax penalty also thwarts businesses and government agencies trying to tap the cost-saving and other economic benefits telework offers.

    The Telecommuter Tax Fairness Act would bar states from taxing the income nonresidents earn in their home states, and it would prohibit them from applying a “convenience of the employer” rule. Congress should follow the FCC’s counsel to “consider addressing this double taxation issue that is preventing telework from becoming more widespread.”

    Congressional Opportunities to Remove the Tax Barrier
    As noted above, H.R. 2600 can and should be passed as a stand-alone bill. However, Congress could also seize the opportunity to include the provisions of H.R. 2600 in the energy/climate package, the transportation package, or the small business package that lawmakers are working on, and, in the process, make that package more effective.

    How would telecommuter tax fairness strengthen energy and climate legislation? By substituting the use of broadband for the use of cars and mass transit, telecommuters conserve fuel and reduce greenhouse gas emissions. The National Broadband Plan reported that “[e]very additional teleworker reduces annual CO2 emissions by an estimated 2.6-3.6 metric tons per year. [Further, replacing] 10% of business air travel with videoconferencing would reduce carbon emissions by an estimated 36.3 million tons annually.” How can Congress enact an energy bill that does not include such savings?

    The same kind of fairness is a necessary addition to any transportation bill, because broader use of telework can slash transportation costs. By decreasing the demand for roads and rails, telework minimizes wear and tear on existing infrastructure and reduces the need to build more. As a result, telework limits the expense of repairs, maintenance and expansion. The new transportation funding bill should focus more on creating jobs laying broadband conduits and less on jobs laying asphalt. The transportation bill would also benefit from the addition of telecommuter tax fairness, because, by decreasing traffic congestion, telework decreases the hobbling cost of lost productivity.

    Small business legislation? Telework can help small firms hire new people at lower cost: Employers can increase staff without increasing real estate, energy and other overhead expenses. They can also select the most qualified applicants from the broadest geographic area while spending less on recruitment. Telework can increase company efficiency and, as President Obama noted at the workplace flexibility forum, help employers assure continuity of operations when emergencies arise. These are bottom line benefits Washington can offer small businesses without adding to the federal deficit.

    Finally, the success of any legislation designed to jumpstart hiring should include telecommuter tax fairness. It would enable the unemployed — especially those who cannot relocate because their homes are unsalable — to widen the area where they can look for work.

    The Telecommuter Tax Fairness Act was introduced by Representatives Jim Himes (D-CT) and Frank Wolf (R-VA). It has bi-partisan support from lawmakers all around the country. Stakeholders endorsing it include the Telework Coalition, the National Taxpayers Union, the American Homeowners Grassroots Alliance and the Small Business & Entrepreneurship Council, along with the Association for Commuter Transportation and Take Back Your Time. Workplace Flexibility 2010, a public policy initiative at Georgetown University Law Center, has also recommended the elimination of the telecommuter tax penalty.

    Telework is an important part of the solution to the nation’s most urgent problems, including unemployment, foreign oil dependence, climate change, clogged and crumbling travel arteries and the struggle workers face to meet their responsibilities as employees, family members and members of their communities. As federal lawmakers tackle these challenges, they should consider the Administration’s focus on getting rid of regulatory roadblocks to telework. They should heed the FCC’s call to take up the issue of the telework tax penalty, and they should finally enact the Himes-Wolf bill.

    Photo: Representative Jim Himes (D-CT)

    Nicole Belson Goluboff is a lawyer in New York who writes extensively on the legal consequences of telework. She is the author of The Law of Telecommuting (ALI-ABA 2001 with 2004 Supplement), Telecommuting for Lawyers (ABA 1998) and numerous articles on telework. She is also an Advisory Board member of the Telework Coalition.

  • Power in Los Angeles: The High Price of Going Green

    Greece and Los Angeles are up against a financial wall. Los Angeles had its bond rating cut on April 7. Greece managed to hold out until April 9. Greece has endured public employee strikes as it has attempted to reign in bloated public payrolls. Los Angeles Mayor Antonio Villaraigosa drew the ire of the city’s unions and city council opposition in proposing two-day a week furloughs for city employees.

    A Bankrupt Los Angeles?

    Most recently, the context of discussions has been an expected $73 million payment to the city from the Los Angeles Department of Water and Power (DWP). Mayor Villaraigosa raised the possibility of a city bankruptcy if the payment was not received.

    The Mayor attempted to encourage the city council to approve an electricity rate increase, which was sought by DWP. In support of the rate increase, Villaraigosa submitted a report to the city council saying that “Council rejection of the DWP board’s action [to increase rates] would be the most immediate and direct route to bankruptcy the city could pursue.”

    DWP Interim General Manager S. David Freeman added such action would lead the “utility would think twice about sending” the money o to the city. Despite these warning, the city council then rejected the proposed rate increase.

    The Price of Renewable Energy

    For its part, DWP says that that the rate increase is necessary to cover the costs of investing in renewable energy sources, as required by state and federal regulations. They cited a Mayoral directive to increase generation from renewable sources (solar and wind). Right now the bulk of Los Angeles’ power comes from fossil fuels, much of it from coal-fired plants outside the state.

    Switching from this relatively inexpensive energy is proving very expensive. Indeed, the rejected rate increase is just the first of four planned hikes. The result, if all four increases are ultimately granted by the city council, would be to increase residential electricity bills up to 28% and commercial electricity bills up to 22%.

    How Much Will the People Pay?

    There is a much larger story here than the immediate financial difficulties faced by the city of Los Angeles. It is clear that council members are concerned about the impact of rate increases on their constituents. It is a particularly challenging for consumers in the city of Los Angeles. Unemployment is high, with Los Angeles County consistently above the national average The city, with its higher concentration of poverty, is likely to be somewhat higher. Many households are having difficulty paying their inflated mortgages and hardly in the position less more for electricity. The city has more than its share of poverty. And, finally, the city’s lack of business competitiveness is so legendary that it repeatedly ranks near or in the Kosmont “cost of doing business” surveys.

    This larger story is likely to be played out in communities around the nation, as politicians, such as the President, who expect and perhaps even would favor that electricity bills “skyrocket.” One would think rising expenses in any critical sector are a “non-starter” in the presently hobbled economy. It will be interesting to see what eventually gives in Los Angeles those who advocate for consumers (including some on the city council) , or those, including the DWP and its unions, who wish to add additional costs to the budgets of those already in distress. In the longer run, this will not be sustainable, in Los Angeles or anywhere else, because the public appetite for higher prices is not unlimited.

    But the behavior of DWP is a matter of curiosity, regardless of how or why the city of Los Angeles reached its present financial embarrassment.

    What if it Were Southern California Edison?

    As is indicated from its name, DWP is a publicly owned utility, owned by the city of Los Angeles. Its rate increases are subject to approval by the city council. DWP appears intent on withholding payment from the city because its proposed rate increase have not been approved. Imagine, if instead, the city of Los Angeles were served by a private but publicly regulated electricity utility, such as Southern California Edison (SCE). Imagine further that the California Public Utilities Commission denied a rate increase and that, in response, SCE announced that it “would think twice” about sending some or all of its taxes to the state in response. When DWP officials undertake such a strategy, there is apparently no legal sanction. The legal sanctions against SCE would be manifold. It is a paradox that a publicly owned utility can be less subject to restraint than one that is, in essence, owned by the taxpayers.

    Who is in Charge?

    But there is an even more curious situation. The Los Angeles Department of Water and Power is, in fact, an agency completely under the control of the city of Los Angeles. The Mayor and the city council represent the sum total of the policy authority over the city of Los Angeles and all of its commissions, departments and other instrumentalities. The DWP board of directors is appointed by the Mayor and must be confirmed by the city council.

    Regardless of the Mayor’s authority to remove DWP board members, he has considerable persuasive political power, which could be used to encourage a more cooperative attitude on the part of the DWP. This was proven in 1984, when predecessor Mayor Tom Bradley asked for (Note 1), and received, the resignations of all 150 city commissioners, as well as his two appointees to the Southern California Rapid Transit District.

    Mayor Bradley then announced a practice that required new appointees to submit an undated letter of resignation upon appointment, to ease removal should it be necessary. This became a bi-partisan practice, also followed by Bradley’s successor, Mayor Richard Riordan (Note 2).

    The Crisis Passes

    Within the last couple of days, the immediate crisis appears to have passed, but the fundamental problems wil continue to fester. The city has found $30 million, the result of higher property tax collections. The Mayor is now asking DWP to pay $20 million, instead of $73 million. However, as Mayor Bradley showed, the Mayor can do much more than “ask.”

    The Mayor’s two-day furlough plan for city workers now has been shelved. Ray Ciranna, the city’s Acting Administrative Officer told the Los Angeles Times that: “We are still in a budget crisis, but we will end the year paying all of our bills.” Things, however, may not be so rosy for residents facing stiff electricity rate hikes tied to the inordinate costs of renewable energy. Many of them already face financial distress every bit as serious as the city’s was just a few days ago. This is one Hollywood movie that, sad to say, we may see repeated in other locations around the country as cities, localities and citizens try to cope with the high costs of draconian “green” energy policies.

    Note 1: The author was, at the time, a Tom Bradley appointee to the Los Angeles County Transportation Commission. He was not included in the Mayor’s call for resignations.

    Note 2: While elective offices in the city of Los Angeles are non-partisan, Bradley was a Democrat and Riordan was a Republican.

    Photo: John Ferraro Department of Water & Power Building (City Council President Ferraro was the first chairman of the Los Angeles County Transportation Commission, whose meetings were normally held in the DWP board room).

    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.”