New Geography

Tag: middle class

  • The Costs of Smart Growth Revisited: A 40 Year Perspective

    “Soaring” land and house prices “certainly represent the biggest single failure” of smart growth, which has contributed to an increase in prices that is unprecedented in history. This  finding could well have been from our new The Housing Crash and Smart Growth, but this observation was made by one of the world’s leading urbanologists, Sir Peter Hall, in a classic work 40 years ago. Hall led an evaluation of the effects of the British Town and Country Planning Act of 1947 (The Containment of Urban England) between 1966 and 1971. The principal purpose of the Act had been urban containment, using the land rationing strategies of today’s smart growth, such as urban growth boundaries and comprehensive plans that forbid development on large swaths of land that would otherwise be developable.

    The Economics of Urban Containment (Smart Growth): The findings of Hall and his colleagues were echoed later by a Labour Government report in the mid-2000s which showed housing affordability had suffered under this planning regime. Author Kate Barker was a member of the Monetary Policy Committee of the Bank of England, which like America’s Federal Reserve Board, is in charge of monetary policy. Among other things, the Barker Reports on housing and land use found that urban containment had driven the price of land with "planning permission" to many multiples (per acre) above that of comparable land where planning was prohibited. Under normal circumstances comparable land would have similar value.

    Whether coming from the left or right, economists have demonstrated that prices tend to rise when supply is restricted, all things being equal.  Certainly there can be no other reason for the price differentials virtually across the street that occur in smart growth areas. Dr. Arthur Grimes, Chairman of the Board of New Zealand’s central bank (the Reserve Bank of New Zealand), found the differential on either side of Auckland’s urban growth boundary at 10 times, while we found an 11 times difference in Portland across the urban growth boundary. 

    House Prices in America: The Historical Norm: Since World War II, median house prices in US metropolitan areas have generally been between 2.0 and 3.0 times median household incomes (a measure called the Median Multiple). This included California until 1970 (Figure 1). After that, housing became unaffordable in California, averaging nearly 1.5 times that of the rest of the nation during the 1980s and 1990s (adjusted for incomes). Even after the huge price declines from the peak of the bubble, house prices remain artificially high in Los Angeles, San Francisco, San Diego and San Jose, with median multiples of six or higher.

    William Fischel of Dartmouth University examined a variety of justifications for the disproportionate rise of California housing prices and dismissed all but more restrictive land use regulation. He noted that "growth controls (restrictive land use regulations) have the undesirable effect of raising housing prices." Throughout the rest of the nation, more restrictive land use regulations have been present in every market where house prices rose substantially above the historic Median Multiple norm, even during the housing bubble. No market without smart growth has ever reached these heights.

    Setting Up for the Fall: Excessive Cost Increases in Smart Growth Markets: The Housing Crash and Smart Growth, published by the National Center for Policy Analysis, examined the causes of house price increase during the housing bubble. The analysis included all metropolitan areas with more than 1,000,000 population. It focused on 11 metropolitan areas in which the greatest cost increases occurred (the "ground zero" markets), comparing them to cost increases in the 22 metropolitan areas with less restrictive land use regulation (Note 1).

    • Less Restrictively Regulated Markets: In the less restrictively regulated markets, the value of the housing stock rose approximately $560 billion, or 28 percent from 2000 to the peak of the bubble (Note 2). In nearly all of these markets, the Median Multiple remained within the historical range of 2.0 to 3.0 and none approached the high Median Multiples that occurred in the "ground zero" markets.
    • Ground Zero Markets The value of the housing stock rose $2.9 trillion from 2000 to the peak of the bubble in the "ground zero" markets, all of which have significant land use restrictions (Note 3). The 112 percent increase in the "ground zero" markets was four times that of the less restrictively regulated markets. The Median Multiple rose to unprecedented levels in each of the "ground zero" markets, peaking at from 5.0 to more than 11.0, four times the historic norm.

    The 28 percent increase in relative house value that occurred in the less restrictively regulated markets (those without smart growth) is attributed to the influence of loosened lending standards. The excess above 28 percent, which amounts to $2.2 in the "ground zero" markets is attributed to to the supply restricting strategies of smart growth (Figure 2).

    The Fall: Smart Growth Losses

    The largest house price drops occurred in the markets that had experienced the greatest cost escalation, both because prices were artificially higher but also because prices in smart growth markets are more volatile.  The "ground zero" markets, with only 28 percent of the owner occupied housing stock, accounted for 73 percent of the pre-crash losses ($1.8 trillion). Thus, much of the cause of the housing crash, which most analysts date from the Lehman Brothers bankruptcy (September 15, 2008), can be attributed to these 11 metropolitan areas.

    By contrast, the 22 less restrictively regulated markets accounted for only six percent ($0.16 trillion) of the pre-crash losses. These 22 markets represented 35 percent of the owned housing stock (Figure 3).

    If the losses in the ground zero markets had been limited to the rate in the less restrictively regulated markets (the estimated impact of cheap credit), losses would have been $1.6 trillion less (Note 4). The Great Recession might not have been so "Great."

    Economic Denial and Acknowledgement: In his writing forty years ago, Dr. Hall noted that English planners denied the connection between the unprecedented house price increases and urban containment. This same denial also informs smart growth advocates today. This is perhaps to be expected, because, as Hall noted 40 years ago, an understanding of the longer term consequences would have undermined support for these policies.

    To their credit, some advocates recognize that smart growth raises house prices. The Costs of Sprawl – 2000¸ a volume largely sympathetic to smart growth, also indicates that urban containment strategies can raise housing prices. The only question is how much smart growth raises house prices. The presence of urban containment policy is the distinguishing characteristic of metropolitan markets where prices have escalated well beyond the historic norm.

    The Social Costs of Smart Growth: Moreover, the social impacts of smart growth are by no means equitable. Peter Hall says that the "less affluent house-owner … has paid the greatest price for (urban) containment" (Note 5). He continues: "there can be little doubt about the identity of the group that has got the poorest bargain. It is the really depressed class in the housing market: the poorer members of the privately-rented housing sector." Finally, Hall laments as well the impact of these policies on the "ideal of a property owning democracy."

    Hall’s four decades old concern strikes a chord on this side of the Atlantic. Just last week, a New York Times/CBS News poll found that nine out of ten respondents associated home property ownership with the American Dream. Planning needs to facilitate people’s preferences, not get in their way.

    ——–

    Note 1: The housing stock value uses a 2000 base, which adjusts house prices based upon the change in household incomes to the peak.

    Note 2: The underlying demand for housing was substantial in some of the less restrictively markets, which is illustrated by the strong net domestic migration to metropolitan areas such as Atlanta, Austin, Dallas – Fort Worth, Houston, Raleigh and San Antonio. At the same time, some more restrictive markets (smart growth) that hit historically experienced strong demand were experiencing huge domestic outmigration, indicating little in underlying demand. This includes Los Angeles, San Francisco, San Diego and San Jose. Demand, however is driven upward in more restrictively metropolitan areas by speculation which, according to the Federal Reserve Bank of Dallas is attracted by supply constraints.

    Note 3: The 11 "ground zero" metropolitan markets were Los Angeles, San Francisco, San Diego, San Jose, Sacramento, Riverside-San Bernardino, Las Vegas, Phoenix, Tampa-St. Petersburg, Miami and the Washington, DC area.

    Note 4: The pre-crash losses in the 18 other restrictively regulated markets were $0.5 trillion. These markets accounted for 37 percent of owner occupied housing in the metropolitan areas of more than 1,000,000 population, compared to 35 percent in the less restrictively regulated markets, yet had losses three times as high.

    Note 5: The Containment of Urban England also indicates that new house sizes have been forced downward by the planning regulations (see photo at the top of the article).

    Photograph: New, smaller exurban housing in the London area (by author)

    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”

  • Outlawing New Houses in California

    UCLA’s most recent Anderson Forecast indicates that there has been a significant shift in demand in California toward condominiums and apartments. The Anderson Forecast concludes that this will cause problems, such as slower growth in construction employment because building multi-unit dwellings creates less employment than building the detached houses that predominate throughout California and most of the nation. The Anderson Forecast says that this will hurt inland areas (such as the Riverside-San Bernardino area and the San Joaquin Valley) because their economies are more dependent on construction than coastal areas, such as Los Angeles, the San Francisco Bay Area and San Diego.

    Detached Housing Permits Remain Strong in the Historic Context: The Anderson Forecast reports that multi-unit building permits have recovered more quickly than building permits for detached housing. However, any such shift is likely to be highly volatile. Since the peak of the bubble, the distribution of building permits between detached and multi-unit in California has been on a roller coaster. Indeed the Anderson Forecast characterizes the "2010 US Census" as "showing a significant shift in demand toward condominiums and apartments." Actually, the 2010 US Census asked no question from which such a conclusion about housing types or any question from which such a conclusion could be drawn.

    The trends in the building permit data are not completely clear. In 2005, the year before prices started to collapse, 75 percent of building permits in California were for detached housing. This trended downward, reaching a low of 52 percent in 2008. In 2009, the detached housing recovered to account for 73 percent of all housing building permits. Then the figure fell back to 59 percent in 2010.

    With these erratic trends, it is tricky to forecast longer term market trends and consumer demand.  Economic projections in 1934 would have suffered from a similar problem, as the Great Depression was continuing and no one could really tell when it would end. Today’s continuing housing depression may be similar.

    Moreover, as the Anderson Forecast notes, detached housing construction declined in the early 1980s, dropping to 42 percent in 1985. In fact, over the 25 years between 1960 and 1985, detached houses accounted for an average of only 54 percent of new housing construction in California, well below the 2010 figure of 59 percent (Figure 1).

    Equally important, the condominium market remains in a deep depression. In 2010, less than four percent of houses built for sale in the United States were multi-unit buildings, including condominiums (Figure 2), as an increasing majority of multi-unit buildings have been built as rentals (Figure 3). Comparable California data is not available, but from the peak of the bubble (2006/7) to 2009, there was a loss of more than 3,000 owner occupied  multi-unit dwellings with 10 or more units, while owner occupied detached houses increased by nearly 100,000 (Note 1).

    If there is an intrinsic pent-up preference for condominium living, it is not evident in the poor performance of high-density developments even in such theoretically desirable places as Santa Monica, San Francisco, Oakland, San Jose and North Hollywood. Condominium prices, for example, have fallen 52 percent in the major California metropolitan areas, compared to 48 percent for single-family houses (Figure 4). Naïve developers, relying too much on the much promoted notion that suburban empty-nesters were chomping at the bit to move to new housing in the core area, often watched their empty units liquidated at $0.50 or less on the dollar or turned into rentals.  Further, if people are moving to apartments, it’s not for love of density but more likely due weakening economic circumstances.

    Inland California Continues to Grow Faster: The Anderson Forecast also suggests that growth in interior California will suffer because "workers are less likely to move inland into an apartment and commute toward the coast." This assumption of slower inland growth reflects the conventional wisdom that areas outside the large coastal metropolitan areas have stopped growing since the burst of the housing bubble as people flock towards the coastal urban core (Note 2). The reality is different, as interior California and the peripheral metropolitan areas of the larger metropolitan regions (Note 3) continue to grow more strongly even in bad economic times. After the burst of the bubble, from 2008 to 2010 (Figure 5):

    • In the Los Angeles area, the adjacent Riverside-San Bernardino ("Inland Empire") and Oxnard metropolitan areas, combined, have grown at seven times the rate of the core Los Angeles metropolitan area.
    • In the San Francisco Bay area, the adjacent Napa, Santa Cruz, Santa Rosa and Vallejo metropolitan areas, combined, have grown nearly twice as quickly as the core San Francisco and San Jose metropolitan areas.
    • California’s deep interior, the San Joaquin Valley has grown even faster than the exurban areas of Los Angeles and San Francisco.

    One key reason: most people who move to interior areas do not commute toward the core.  For example, less than 10 percent of workers in the Riverside-San Bernardino metropolitan area commute into Los Angeles County, a market share that declined 15 percent between 2000 and 2007. Many also simply cannot afford the higher cost of living in the coastal metropolitan areas, which likely will continue to retard growth in the core metropolitan areas.

    The Policy Threat to New Houses : A survey by the Public Policy Institute of California suggests a vast preference (70%) for detached housing among the state’s consumers.  This continuing preference is demonstrated by detached housing prices that are generally two times historic norms relative to incomes in the coastal metropolitan areas (Los Angeles, San Francisco, San Diego and San Jose).

    Yet now, this choice is under a concerted assault by both the state and many local governments, cheered on by most media and the academic community.  For years, planning regulations have driven land prices so high that house prices have risen to well above the rest of the nation (Figure 5) under regulations referred to by terms such as "smart growth" and "urban containment." The regulations and the inevitably resulting speculation propelled a disproportionate rise (nearly $2 trillion) in California house prices compared to national norm. If California house prices had risen at the same rate relative to incomes as in more liberally regulated areas, the loss to financial markets could have been hundreds of billions of dollars less when the bubble burst (Figure 6).

    Planning for Crowding and Density: California’s assault on detached housing is taking on a distinctly religious fervor.  The state’s global warming law (Assembly Bill 32) and urban planning law (Senate Bill 375) is providing a new basis to impose draconian limits on the construction of detached housing. For example, in the San Francisco Bay area, it has been proposed that 97 percent of new housing be built within the existing urban footprint. That would mean an emphasis on multi-unit housing and little or no new housing on the urban fringe. The option of a single family home will be all but non-existent for   even solidly middle income Californians.

    Planning authorities in the Bay Area seem oblivious to the fact that destroying affordability also destroys growth, already evident by the state’s poor economic performance and ebbing demographic vigor.    Planners rosily project 2 million more people between 2010 and 2035 in the San Francisco Bay area. The growth rate over the past 10 years suggests a number less than half that (Figure 7) and given the rapid aging of the area, even this estimate may be too high. The planners also project more than 1.2 million   new jobs, something difficult to believe given the more than 300,000 job loss (Note 4) that occurred in the Bay Area between 2000 and 2010 (Figure 8).

    The Environmental "Fig Leaf:" The environmental justification for these policies is fragile . Research supporting higher density housing has routinely excluded the greater emissions from construction material extraction and production, building construction itself and common greenhouse gas emissions from energy consumption that does not appear on consumer bills. Further, higher densities are associated slower and more erratic speeds, which retards fuel efficiency and increases greenhouse gas emissions, a factor not sufficiently considered.

    The report seems to ignore any other options besides rapid densification, which as McKinsey Global Institute has pointed out is not at all necessary to reduce GHG emission reductions. They point to other factors as more fuel efficient cars.   

    Oddly, the San Francisco Bay Area proposal does not even mention working at home (much of it telecommuting), the most environmentally friendly way of accessing employment. Working at home has grown six times the rate of transit since 2000 in the Bay Area.

    Outlawing New Houses Detached housing remains the overwhelming choice of Californians. There is no indication that this preference is about to be replaced by a preference for high-density housing.  Current and future middle class Californians could be corralled into more crowded conditions, because questionable planning doctrines mandate that detached housing should be outlawed.

    —-

    Notes:

    1. Calculated from 2006, 2007 and 2009 American Community Survey data. The over ten unit category is used because is more generally reflective of the dense condominium development generally favored by densification advocates (Latest data available).

    2.  Another questionable tenet of conventional wisdom is that the price declines in the outer suburbs were greater than in the cores. When the price declines reached their nadir, core California markets were generally at least as depressed from their peak prices as suburban markets.

    3. Metropolitan region refers to combined statistical areas, which have a core metropolitan area, such as the Los Angeles MSA and include surrounding metropolitan areas, such as the Riverside-San Bernardino MSA and the Oxnard MSA.

    4. Annual, 2000 to 2010, calculated from California Economic Development Department data.

    Lead photo: Houses in Los Angeles. Photograph by author.

    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”

  • Enterprising States: Hard choices now, hard work ahead: State Strategies to Renew Growth and Create Jobs

    This is an excerpt from "Enterprising States: Creating Jobs, Economic Development, and Prosperity in Challenging Times" authored by Praxis Strategy Group and Joel Kotkin. The entire report is available at the National Chamber Foundation website, including highlights of top performing states and profiles of each state’s economic development efforts.

    Read the full report.

    Read part one in this series.

    America has the world’s largest economy, the world’s leading universities, the most robust entrepreneurial culture and many of its biggest companies—yet many see this as a diminishing advantage.31 Stagnation, many predict, will extend into the foreseeable future because the economy’s low-hanging fruit has disappeared and so the pace of innovation has slowed; by this argument we are now on a “technological plateau” that will make further growth challenging.32 The United States remains a leader in global innovation, but better-funded, higher-performing hubs of innovation are emerging among determined competitors, notably China.

    In contrast, we believe America’s prospects for competing with other countries are better than commonly assumed, and we are convinced that our strategy for the future is unlikely to be found elsewhere. Unlike our major competitors, we enjoy a huge base of natural resources—such as food and energy—which are likely to become ever more in demand as countries like China and India grow their economies. Most important of all, the United States, particularly in contrast with Europe and East Asia, enjoys relatively youthful demographics, promising an expanding workforce, new consumers and a new flood of entrepreneurs.

    Yet our demographics and resources require intelligent policies that fit our particular situations. As a young country, we will have to find employment for an additional 20 million Americans in this decade. Slow growth, which could be accommodated in rapidly aging Japan or Germany, is not an option for the United States. We will also need to harness all forms of energy, from renewables to fossil fuels. Today, half of our trade deficit consists of energy, and yet we have the oil and gas resources to supply the vast majority of our needs. As we invest in renewables for the long run, the country needs to use the resources that are readily available in order to reduce the deficit and spark job growth.

    Our ability to compete, particularly on the state level, could be compromised by an inability to address our budgetary challenges. According to the Center on Budget and Policy Priorities, states are struggling with budget shortfalls for fiscal 2012 that add up to $112 billion. The most recent Fiscal Survey of the States anticipates considerably more financial stress in the states as the substantial funding made available by the American Recovery and Reinvestment Act of 2009 will no longer be available.

    Most states have already taken actions to streamline and downsize government to meet the new economic realities. This has proven to be challenging given the increased demand for state services during the national recession. Surely, more redesign, streamlining and reform is on the way. To recoup lost revenue, states have taken such actions as eliminating tax exemptions, broadening the tax base, and in some cases increasing rates as well as raising a number of fees. Low tax rates by themselves are not a silver bullet for growth, but it has become clear that outdated state tax systems can undercut economic vitality.

    States are the fulcrum of change in key areas of education, infrastructure, energy, innovation and skills training—something that was confirmed on many fronts in the first Enterprising States study. States and localities are far better positioned than the federal government to foster strategic investment, regulations, taxes and incentives that encourage private sector prosperity. In large part, this is because they are more responsive to local conditions.

    Equally important, a diversified portfolio of opportunity agendas implemented by the individual states will go a long way toward renewing growth and prosperity in the national economy.

    New Era of Leadership by the States?

    As the 2010 Enterprising States study was being completed, the states were implementing sweeping changes to deal with a growing number of challenges. Since then twenty-nine new governors have started their terms. Governors of every state, along with their legislative counterparts, are taking steps to grow their states’ economies, create jobs and compete globally. They want to help businesses prosper, to produce an educated and skilled workforce, and to provide other essential services and infrastructure that foster the entrepreneurship and innovation that will lead to greater productivity and competitiveness.

    The dramatic shortage of job opportunities has driven up the unemployment rate, pushed a large number of workers into part-time jobs, increased underemployment problems, and reduced the number of people who were expected to be active participants in the labor force. There is universal agreement that we need policies and programs that create jobs now, alongside investments to lay the foundations for long-term economic growth. “To keep the American dream of widely shared prosperity alive,” one commentator has argued, “we need to choose entrepreneurship and competition over the vested interests of the status quo.”

    Restoring confidence in the economy by creating a meaningful and compelling plan for moving forward is a top priority for elected officials as well as leaders from business, education, and labor groups throughout the country.

    There is also a stark recognition among the states that solving their fiscal problems is directly connected to creating an economic climate that will foster job creation. Any state with a budget tilting towards insolvency is in a weak position to make and maintain investments in its workforce and economic infrastructure. A state’s fiscal health also has immediate consequences by affecting its credit rating and, thereby, the cost of borrowing money. Unfunded pension obligations, viewed historically as soft debt, are now being considered together with the total value of state bonds to come up with a credit rating.

    Many governors and state legislatures are attempting to strike a balance between budget cuts that could hold back the recovery by putting more people out of work, and spending cuts and government reforms that would create a more business-friendly environment, leading to greater business confidence, private-sector investment and job creation. How this balance is achieved depends on each state’s unique set of circumstances and available assets. Moreover, at their core, these debates reflect the fundamental tensions between the two major visions of American progress, namely: creating equality of condition by boosting wages, improving working conditions, and guaranteeing basic services, and creating equality of opportunity, by creating the conditions whereby individuals can elevate themselves through industry, perseverance, talent, and righteous behavior.

    As noted in The Economist, private capital is mobile and it goes where government works. So while political considerations and ideological rationalizations certainly do influence the mix of austerity measures and public investments, the real opportunity today is for states to redesign government for the 21st century. That means cutting programs that do not spur economic growth and shifting resources, where possible, to those existing or planned programs that will.

    While spending cuts will help control deficient budgets, so will increased revenue brought by economic growth. As states enact budget austerity measures, what job creation initiatives are surviving or receiving increased investment? What are the new priorities for job creation? How are states balancing cuts with critical job-creating initiatives that will stimulate innovation, build infrastructure, provide skills training, and unleash the dynamism of small business?

    Job-Centric States Are Redesigning Government and Investing in Opportunity

    Determining where to cut and where to invest40 is the central challenge of the day. States must carry out short-term strategies to jump-start and/or sustain an as-of-yet lackluster recovery, and cut costs to make state government more efficient and to avoid financial calamity. Simultaneously, though, they must craft and invest in innovations and structural solutions that will foster long-term economic growth while reining in taxes and regulations that stifle job creation.

    In most states, revenues remain stubbornly down from where they were before the recession, and job growth is proving to be more elusive than in most previous recoveries. The strategies now being planned or undertaken by each state are based on their unique sets of interests, resources and capabilities, aligned with the opportunities that they see on the horizon and believe are conceivably within their grasp. Yet all states “will likely need a new network of market-oriented, private-sector-leveraging, performance-driven institutions”41 to restore and revitalize their economies.

    The 2011 Enterprising States study highlights state-driven initiatives to 1) redesign government, including measures to deal with excessive debt levels that inhibit economic growth and job creation, and 2) forward-looking, enterprise-friendly initiatives whose primary goal is to create the conditions for job creation and future prosperity.

    The policy initiatives and programmatic efforts are related to the five policy areas that were included in the original Enterprising States report.

    • Entrepreneurship and Innovation
    • Exports, International Trade and Foreign Direct Investment
    • Workforce Development and Training
    • Infrastructure
    • Taxes and Regulation

What’s different in 2011 and for the foreseeable future is that for many states the imperative for change is real. The choice is simple. To remain a job-creating, fiscally robust economy, states will either change on their own or change will continue to be forced upon them.

Investing In Opportunity

States are taking a hard look at making investments in and implementing initiatives to create and sustain high-growth, higher-wage, 21st century industries.States play a key role in the higher education landscape, so there is considerable support for and investment in programs that educate the future talent pool and foster collaboration between business, education and government on science and technology, technology transfer and entrepreneurial programs. As states evaluate their return on investment, performance-based funding has become a best practice for aligning colleges and universities as partners in workforce preparation and sources of opportunity, growth, and competitive advantage.

High-growth start-ups are the best generators of new jobs, accounting for nearly all net job creation in America in the last twenty-plus years. They are also the firms most likely to raise productivity, a basis for economic growth. They also create jobs that did not previously exist, and solve problems in a way that makes a difference in people’s lives.

States have stepped up their efforts to help companies scale up and grow in order to capture growing domestic and international markets. A number of states have established or expanded seed and growth-stage financing funds. Some have implemented economic gardening programs deliberately designed to focus on expanding existing second-stage companies that have viable growth opportunities. Several states have undertaken initiatives to fix deficiencies in the market that inhibit private-sector investment and entrepreneurial activity. Tax credits for angel investors and state-backed venture capital funds are just two examples.

Companies with a global reach that bring together multiple technologies or complex expertise—such as advanced manufacturing, investment banking, construction and engineering, and natural resources—are likely to drive the nation’s global competitiveness in the next few years, along with more focused technology companies that are part of complex virtual networks.44 For that reason, several states are implementing, and having considerable success with, programs to help companies expand into global markets by assisting in the development of a customized international growth plan. And, some states have made significant headway using focused and purposeful strategies to attract foreign direct investment.

Public-private partnerships and privatization initiatives for economic development and the provision of infrastructure are proliferating throughout the states. Building funds and bonding programs that involve private-sector investors are now widely used to construct specialized facilities for research, demonstration, and technology transfer in key economic sectors. Building on the lessons of the past, states have become considerably more adept at avoiding what Robert Fogel has called “hothouse capitalism,” in which government assumes much of the risk while private contractors and financiers take the profit.

While unemployment remains high, many currently available jobs go unfilled. America faces a shortfall of almost two million technical and analytical workers in the coming years, a situation that stands to thwart economic growth.45 Painfully cognizant of this dilemma, many states are establishing workforce training and development programs that address structural unemployment problems and the mismatch between available jobs and the skills of the existing workforce. The goal is to align training and academic programs with in-demand regional occupations, and to add greater flexibility to workforce training programs that have left some re-trainable individuals slipping through the cracks.

Forward-looking states are modernizing their education and workforce training initiatives by developing people-focused approaches that help and train workers in navigating their careers, provide assistance for entrepreneurs, make lifelong learning loans, and offer wage insurance plans. The goal is to empower people to find better jobs and/or to create new ones. Plainly, making America more globally competitive is vital, but the increasingly obvious gap in our economic discussions is an agenda for making Americans more personally competitive. In this view, forging a new economics for the Individual Age will require rethinking our economy from the bottom up in order to realize future growth and prosperity.

Finally, because energy issues, both current and future, have become such critical factors in business and for economic growth, states are getting serious about policies, initiatives and investments to provide clean, secure, safe and affordable energy tailored to regional, state and local resources. These include renewable energy standards, investments in research, development and commercialization of energy technologies and processes, and the establishment of new financing authorities to build the infrastructure that will extract and transport energy to the places where it will fuel new growth.

Redesigning Government

The fiscal situation of many states has caused them to reconsider the level of services they are providing and, certainly, the way that they deliver them. According to the Government Accountability Office, “Because most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest the fiscal pressures the sector faces and foreshadow the extent to which these governments will need to make substantial policy changes to avoid growing fiscal imbalances.”

In The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis, David Osborne and Peter Hutchinson contend that Industrial Age government is just not up to the tasks and challenges at hand. Centralized bureaucracies, hierarchical management, rules and regulations, standardized services, command-and-control methods, and public monopolies are simply not aligned to Information Age realities. Today, government must be restructured and prepared for rapid change, global competition, the pervasive use of information technologies, and a public that expects quality and has lots of choices.

The keys, according to Osborne and Hutchinson, are to 1) get rid of low-value spending, 2) move money into higher-value, more cost-effective strategies and programs and 3) motivate all managers to find better, cheaper ways to deliver results. In sum, government needs to provide incentives, expect accountability, and allow the freedom to innovate.48
Government redesign efforts that are now underway or in the planning stages often follow the simple guidelines outlined above. Yet various approaches are now being used by state governments, including:

  • Consolidation, reorganization, or elimination of agencies, boards and commissions.
  • Regionalization of governance to decentralize decision-making and to customize and align service delivery with local circumstances.
  • Streamlining and modernizing bureaucratic processes to increase productivity and improve service delivery, often by deploying services online.
  • Experimenting with charter agencies that commit to producing measurable benefits and to saving money—either by reducing expenditures or increasing revenues—in exchange for greater authority and flexibility.

Steps to curb spending and reform taxation in the states have varied widely. States with the most serious fiscal problems are laying off workers, imposing hiring freezes, reducing spending for education and health care and ending or curtailing social services. Aid to local governments has been cut. For many states, current obligations for public pension funds and health insurance costs are unaffordable and future obligations represent a
looming financial disaster. Cuts, concessions and larger contributions from employees are now a necessary part of balancing the state’s checkbook.

Taxes and tax policies vary considerably among the states. To make up for lost revenues, most states have taken such actions as eliminating tax exemptions, broadening tax bases, and in some cases increasing rates as well as raising a number of fees. States have enacted increases in all of the major taxes they levy, including personal income taxes, general sales taxes, business taxes, and excise taxes. However, many states did reduce business taxes with new credits or expanded existing credits to encourage investment and growth in targeted industries.
Uncertainty, above all, is the antagonist of growth, investment, and job creation. States that cannot rid themselves of onerous DURT49 (delays, uncertainty, regulations and taxes) are in peril of putting the heaviest burdens on new and small businesses and on entrepreneurs, the real job creators in a growing economy. In a tight economy these considerations become more stringent for entrepreneurs and companies that are making economic decisions simply because the levels of uncertainty and the stakes are so much higher. Eliminating employment regulations and time-consuming processes that place unreasonable burdens on business can have a significant impact on job creation.

Moreover, the competitive identity of a state today relies increasingly on the degree to which the actions of the private, public and civic sectors are aligned with and corroborate the identity claimed or brand promise. A story must be backed up by actions: to simply proclaim an enterprise-friendly environment is no longer adequate.
States that are doing it right today are responsive and are taking a cooperative, supportive approach to dealing with new and existing companies. Their attitude and operating systems are customer-centric and their emphasis is on streamlining processes for obtaining permits, licenses, and titles.

Many state governments across the country are adopting a fast-track approach to achieving a better balance between the requirements of regulation and the need for new jobs and industry, so that that results have a higher priority than rules. This is the mindset that must guide the interface between government and business.
operating budgets, the declining fiscal conditions shown in our simulations suggest the fiscal pressures the sector faces and foreshadow the extent to which these governments will need to make substantial policy changes to avoid growing fiscal imbalances.”

In The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis, David Osborne and Peter Hutchinson contend that Industrial Age government is just not up to the tasks and challenges at hand. Centralized bureaucracies, hierarchical management, rules and regulations, standardized services, command-and-control methods, and public monopolies are simply not aligned to Information Age realities. Today, government must be restructured and prepared for rapid change, global competition, the pervasive use of information technologies, and a public that expects quality and has lots of choices.

The keys, according to Osborne and Hutchinson, are to 1) get rid of low-value spending, 2) move money into higher-value, more cost-effective strategies and programs and 3) motivate all managers to find better, cheaper ways to deliver results. In sum, government needs to provide incentives, expect accountability, and allow the freedom to innovate.48

Government redesign efforts that are now underway or in the planning stages often follow the simple guidelines outlined above. Yet various approaches are now being used by state governments, including:

  • Consolidation, reorganization, or elimination of • agencies, boards and commissions.
  • Regionalization of governance to decentralize • decision-making and to customize and align service delivery with local circumstances.
  • Streamlining and modernizing bureaucratic processes • to increase productivity and improve service delivery, often by deploying services online.
  • Experimenting with charter agencies that commit • to producing measurable benefits and to saving money—either by reducing expenditures or increasing revenues—in exchange for greater authority and flexibility.

Steps to curb spending and reform taxation in the states have varied widely. States with the most serious fiscal problems are laying off workers, imposing hiring freezes, reducing spending for education and health care and ending or curtailing social services. Aid to local governments has been cut. For many states, current obligations for public pension funds and health insurance costs are unaffordable and future obligations represent a
looming financial disaster. Cuts, concessions and larger contributions from employees are now a necessary part of balancing the state’s checkbook.

Taxes and tax policies vary considerably among the states. To make up for lost revenues, most states have taken such actions as eliminating tax exemptions, broadening tax bases, and in some cases increasing rates as well as raising a number of fees. States have enacted increases in all of the major taxes they levy, including personal income taxes, general sales taxes, business taxes, and excise taxes. However, many states did reduce business taxes with new credits or expanded existing credits to encourage investment and growth in targeted industries.
Uncertainty, above all, is the antagonist of growth, investment, and job creation. States that cannot rid themselves of onerous DUR (delays, uncertainty, regulations and taxes) are in peril of putting the heaviest burdens on new and small businesses and on entrepreneurs, the real job creators in a growing economy. In a tight economy these considerations become more stringent for entrepreneurs and companies that are making economic decisions simply because the levels of uncertainty and the stakes are so much higher. Eliminating employment regulations and time-consuming processes that place unreasonable burdens on business can have a significant impact on job creation.

Moreover, the competitive identity of a state today relies increasingly on the degree to which the actions of the private, public and civic sectors are aligned with and corroborate the identity

States that are doing it right today are responsive and are taking a cooperative, supportive approach to dealing with new and existing companies. Their attitude and operating systems are customer-centric and their emphasis is on streamlining processes for obtaining permits, licenses, and titles.

Many state governments across the country are adopting a fast-track approach to achieving a better balance between the requirements of regulation and the need for new jobs and industry, so that that results have a higher priority than rules. This is the mindset that must guide the interface between government and business.

Read the full report, including highlights of top performing states and profiles of job creation efforts in all 50 states.

Praxis Strategy Group is an economic research, analysis, and strategic planning firm. Joel Kotkin is executive editor of NewGeography.com and author of The Next Hundred Million: America in 2050

  • Enterprising States: Recovery and Renewal for the 21st Century

    This is an excerpt from "Enterprising States: Creating Jobs, Economic Development, and Prosperity in Challenging Times" authored by Praxis Strategy Group and Joel Kotkin. The entire report is available at the National Chamber Foundation website, including highlights of top performing states and profiles of each state’s economic development efforts.

    Read the full report.

    Read part two in this series.

    Restoring Growth and Upward Mobility: A Call to the States

    Over a year and a half into the recovery, the condition of the American economy is far from satisfactory. For the vast majority of Americans, conditions have improved only marginally since the onset of the Great Recession. Unemployment remains high, job creation meager, and American workforce participation has dropped to near record depths — the lowest rate in a quarter of a century.

    Not surprisingly, this spring’s Washington Post-ABC poll revealed that far more Americans feel the economy is getting worse than getting better. There seems to be what the New York Times described as “a darkening mood” among Americans about the future. Confidence in the Federal Reserve’s policies on the money supply has eroded among economists, as few benefits have accrued to smaller businesses and middle-class households.3 Times are particularly tough for entry level workers, including those with educations, and have been worsening since at least the mid-2000s.

    This stress is felt keenly by state and local officials, even in areas that aren’t suffering from the highest rates of indebtedness or pension liabilities. Without pension reform, the state of Utah, for example, would have seen its contributions to government workers’ pensions rise by about $420 million a year, an amount equivalent to roughly 10 percent of Utah’s spending from its general and education funds. The states often must deal with declining revenues at a time when the demand for services caused by the recession has increased. And, unlike the federal government, states can neither print their own money nor buy their own bonds.

    In the past, states could look to Washington for assistance. Now, whatever the intentions or real achievements of the stimulus package, future increases in federal spending seem likely to be meager at best. The 2010 election effectively ended the nation’s experiment with massive fiscal stimulus from Washington. Indeed, leaders of both parties, President Obama, and perhaps most importantly the capital markets, now acknowledge that deficit reduction will be a priority in the coming years.

    This presents a new, and perhaps unprecedented, challenge for the states. With Washington effectively forced to the sidelines, states will now have to address fundamental economic issues relating to growth and employment on their own. Most will have to do so without significantly increasing their own spending.

    For many states, the short-term prognosis is dire. Altogether, 44 states and the District of Columbia are projecting budget shortfalls for 2012 amounting to $112 billion. The upcoming fiscal year, according to the Center on Budget and Policy Priorities, will be “one of the states’ most difficult budget years on record. Retiree benefits for state employees add yet another strain, with the states facing a $1.26 trillion shortfall.”

    As a result, states and localities increasingly find themselves forced to impose tough, even draconian cuts in spending. This affects not only newly minted conservative Republicans, but new liberal Democratic governors such as California’s Jerry Brown and New York’s Andrew Cuomo. The only real debate now is how much to rely on taxes and how much on cuts in spending to address the fiscal issues ahead. One casualty: infrastructure spending, which was boosted by the stimulus, now seems to be winding down as well.

    This report will try to address the nature of this dilemma and suggest ways to best deal with it. Although we agree with the notion of fiscal probity, ultimately, states can deal with the fundamental problems only by spurring growth and upward mobility. This will not only create new revenues, but also dampen the demand for social services.

    A state can neither cut nor tax itself into prosperity. Weak public infrastructure combined with low taxes has failed through history to create strong state economies, as was long the case in the Southeast. But at the same time many large states—California, New York, Illinois—have raised taxes and spending and have suffered a strong out-migration of middle class citizens and jobs for decades.

    Now, faced with enormous deficits, there is a temptation to reduce those very “crown jewels,” such as the California public university system, into what University of California President Mark Yudof describes as “tatters.” In trying to balance their budgets, states run the risk of undermining their own long-term recoveries.

    The great danger that looms here, in our estimation, is not bankruptcy. Rather, it is long-term stagnation, in which growing demands for social services, combined with weak revenues. foster pressure for more taxes, reduced services or a deadly combination of both. This represents something of a existential problem in a country where the prospect for a better future has long been a hallmark.

    The founders of the republic understood the critical importance of maintaining this aspiration, and European observers were struck by the remarkable social mobility in America’s cities. In the 19th century, American factory workers and their offspring had a far better chance of entering the middle or upper classes than their European counterparts. In politics and in daily life, expansion of opportunity was seen as essential to the American experiment. Writing in 1837, one Whig lawyer in Pittsburgh suggested, “If you deny the poor man the means to better his condition . . . you have destroyed republican principles in their very germ.”

    Today, this traditional faith is being sorely tested in much of the country. Although both stock prices and corporate profits have rebounded, little has been done that has stimulated employment. Large companies may be sitting on large caches of cash, in part due to low interest rates and a buoyant stock market, but capital remains scarce for the small businesses that create most of America’s new jobs. Indeed, entrepreneurial growth, as the Kauffman Foundation recently found, has now slowed down among most segments of the population.

    Of course, there have been remarkable stories of wealth creation and success despite these hard times. But even in Silicon Valley—home to such high-fliers as Google, Apple and Facebook—the overall impact on jobs has been minimal. Of the nation’s 51 largest metropolitan regions, San Jose, the Valley’s heartland, has suffered the largest net loss of jobs over the past decade of any major metropolitan region outside Detroit. The San Francisco area suffered job losses only slightly lower, on a percentage basis, than hard-hit Cleveland.11 Due in part to financial controls, investment in promising new companies has become ever more undemocratic, with the bulk of new money pouring into firms like Facebook coming not from public markets, but from a small, well-heeled cadre of private investors. Venture-backed technology companies, notes Intel co-founder Andy Grove, now find it expensive to “scale” their operations and add employees in California or even the United States. As a result, he suggests, companies tend to indulge in “an undervaluing of manufacturing” that erodes employment. This contrasts with, for example, China, where job creation is considered “the number one objective of state economic policy.”

    Much the same can be said of New York, where the paper economy has been boosted by Fed policy but the creation of middle-income jobs continues to lag. New York City’s current financial boom—Wall Street pay hit a new record in 2011—simply reinforces a level of income inequality that is the highest in the nation. Unemployment in the toniest Manhattan precincts reaches barely five percent, while it’s 20 percent in working-class Brooklyn. Not surprisingly, the city’s distribution of wealth is now twice as unequal as in the rest of the nation. It may seem a model recovery on Wall Street, but it is less so on the streets of the nation’s premier city.

    In contrast, the states that have fared best in creating middle-class jobs have been either those close to the expanding federal government, another major beneficiary of the stimulus, or those that have attended to more basic industries, such as energy production, agriculture and manufacturing. These industries have propelled widespread expansions in the Great Plains, parts of the Intermountain West, Alaska and Texas.

    More interestingly, many of these states have also experienced a surge in STEM—science, technology, engineering and mathematics—related employment. In some states, this has come as a result of continuing state investment in education and training; in most cases, these states have simply tended to create a business-friendly atmosphere for companies of all sorts. They have also generally kept housing costs low, something critical to young families.

    Perhaps the best way to look at our evolving economy is not so much from the point of view of companies or industries, but of individuals. States often focus on their largest employers, but those companies have been cutting jobs for the past decade. Since 2000, large corporations—which employ roughly one-fifth of American workers— have stopped hiring, as they did in the previous decade, and actually reduced their payrolls by nearly three million while adding 2.4 million jobs abroad.

    Andrei Cherny, an Arizona Democrat writing in the journal Democracy, suggests that “both progressives and conservatives have offered little in the way of new answers as their long-held orthodoxies run headlong into new realities.” Cherny admits that the stimulus and the Fed’s strategy of loose money—what he calls “government by hot check”—failed to address the needs of the nation’s large class of small entrepreneurs.

    Left out of the equation are the small businesses that, according to the Bureau of Labor Statistics, employ half of all workers and create 65 percent of all new jobs. Most of these firms are small, under-capitalized, and run by single proprietors or families.

    In this environment, notes economist Ying Lowery, “Business creation is job creation.” The states that will do best are those that create the conditions to lure and retain those who start companies or who are selfemployed. Policies that target managers of hedge funds, venture firms, or large corporations have their place, but the real action—particularly in a world of ever-changing technology and declining long term employment—lies in the movement of individuals.

    Under these conditions, where individuals migrate or decide to settle will have a critical impact on which states or regions grow. Three dynamic population segments— educated workers, immigrants and downshifting boomers—illustrate the factors that drive their migration patterns. In many ways they represent the “canaries in the coal mine”; where they go is generally where the air is good for entrepreneurship.

    The movement of educated workers has become a much discussed topic among pundits and economic developers in recent years. One common assumption is that “the best” migrants tend to move to “hip and cool” locales, generally on one of the coasts. These workers then form the core of growing industries and, more importantly, new ones. Yet the evidence tells a somewhat different, perhaps surprising, story. An analysis of recent Census data on the migration of educated workers finds that the biggest net growth has taken place not in New York, San Francisco and Boston, but in places like Nashville, Houston, Dallas, Austin, and Kansas City. Indeed, many of the leading “creative class” states, notably California, Massachusetts and New York, fared considerably worse than regions in states such as Missouri, Kansas, Texas and Tennessee in terms of net migration numbers.

    These location choices have to do with how individuals make decisions: people move primarily for reasons related to jobs, family, and housing. An analysis of the migration of educated workers, for example, reveals that, for the most part, these workers are moving away from expensive, dense regions to more affordable, generally less dense places. This migration also tends to parallel moves to those states that generally impose fewer regulatory burdens on business.

    Perhaps even more surprisingly, we see a similar pattern in minority and immigrant entrepreneurship. These groups now constitute a growing percentage of business startups. Overall, according to the Kauffman Foundation, foreignborn immigrants in 2010 constituted nearly 30 percent of all new businesses owners, up from 13.4 percent in 1996. This has also been the one outstanding segment of the population whose entrepreneurship rate has grown throughout the current recession.

    As with the case of educated migrants, minority entrepreneurs tend to establish themselves in less expensive, more business-friendly, and generally less heavily regulated metropolitan regions. A recent survey of minority migration and self employment by Forbes found that the best conditions for non-white entrepreneurs were in metropolitan areas in Georgia (Greater Atlanta), Tennessee (Nashville), Arizona (Phoenix), Oklahoma (Oklahoma City), and several Texas cities (Houston, Dallas, San Antonio and Austin). In contrast, most regions in California and the Northeast, outside of the Washington, D.C. metropolitan area, did quite poorly.

    Jonathan Bowles, president of the New York-based Center for an Urban Future, has traced this poor performance to a myriad of factors including sky-high business rents, which stymie would-be entrepreneurs in minority communities. “[Entrepreneurs] face incredible burdens here when they start and try to grow a business,” Bowles suggests. “Many go out of business quickly due to the cost of real estate and things like high electricity costs. It’s an expensive city to do business in without a lot of cash.”

    Boomers are unique compared to traditional senior populations. According to the Kauffman Foundation, they tend to be more likely to start businesses than are younger age groups. In 1996, people between 55 and 64 years of age accounted for 14 percent of entrepreneurs; in 2010 they represented 23 percent.

    Less is known about the migration of aging boomers, a large segment of the population, but evidence so far suggests that they, too, are moving to such states. According to AARP, most boomers prefer to stay close to where they live—mostly in suburbs—or where their children tend to move, that is, to the low-regulation states of the South and West.

    States can draw on these migration patterns in developing their economic policies. Generally, people migrate to states with jobs, and states with population gains generally produce more employment than those with slower growth. Indeed, despite the great disruptions of the mortgage crisis, regions such as Orlando, San Bernardino-Riverside and Las Vegas all recorded double-digit employment gains over the last decade.

    More recent developments suggest that future growth may depend on several critical factors. It is clear, for example, that investments in education—for example in Austin, Raleigh-Durham and parts of the Great Plains—have paid off by attracting both individuals and industries, and have made these areas among the healthiest employment markets in the country. Some of these states have suffered less fiscal distress than states elsewhere in the nation, and have benefited from their educational investment through hard times. Investments in community colleges may prove to be particularly essential, since their role in providing skilled workers has been critical in many states.

    States that have invested in new infrastructure such as ports, airports, roads and improved transit tend to have a leg up on others that have failed to do so. Even relatively low-tax states such as Texas have invested heavily in recent years in roads and port facilities, which are critical to industries locating there. Even during the recession, many industries—from manufacturing and environmental firms to health care and information technology—have had trouble hiring skilled workers. States are responding by creating job-oriented training programs in states like Ohio, New York, Tennessee, Washington and Wisconsin, which have all established technical institutions separate from community colleges. Tennessee alone has 27 such “technical centers” offering one-year certificates for certain jobs.

    Overall, as Delaware Governor Jack Markell has pointed out, businesses generally do not want to eliminate government, but rather want it to be useful for economic growth. Markell, who has done some considerable budgetcutting himself, believes that the focus needs to be on expanding the economy, which will requires improvements not only in schools, but in transportation infrastructure that will make the free market work better.

    Perhaps even more important has been creating a favorable business climate. California, for example, possesses the greatest basic economic attributes of any state: a mild climate, location on the Pacific Rim, a world-class university system, and a legacy of strong infrastructure investment. Yet today, despite the presence of leading global industrial zones such as Hollywood and Silicon Valley, as well as the country’s richest agricultural sector, California’s unemployment remains well above the national average and job growth has remained relatively tepid. After many years in denial, even some of the state’s most progressive politicians realize that something is amiss. In a remarkable development, for example, California leaders including Lieutenant Governor Gavin Newsom recently visited Texas to learn from the large state that has fared best during the long recessionary period. Given the political gap between Californians like Newsom, a former mayor of San Francisco, and Texas Governor Rick Perry, this represents something of a “Nixon in China” moment.

    This is not to say that California, or any other state, should draw its economic policy from another state. Those states that attempt to use tax incentives to “lure” industries with no overwhelming need to relocate — as shown in recent findings about Illinois incentives to movie-makers — are often disappointed. In many cases, the incentive game becomes a classic “race to the bottom,” in which the benefits of new jobs often prove transitory. Since the 1990s, just two percent of job growth and decline has been due to businesses relocating across state borders, yet the costly practice of using unfocused tax expenditures to poach companies continues.

    Nor can states reliably predict which industries will need more workers over the long term. In the 1990s, economist Michael Mandell predicted that cutting-edge industries like high-tech would create 2.8 million new jobs; in reality, notes a 2010 New America Foundation report, they actually shed 68,000.30 Each state and each region has its own peculiar economic DNA. States with exportable products—for example the Great Plains or the Upper Midwest—may need to focus on ways to get their output efficiently to market. Already affordable, they may also choose to increase their attractiveness to high value-added companies and educated individuals by boosting their education systems and making their metropolitan regions more congenial to well-educated migrants.

    In other states such as New York or Massachusetts, the economy is focused on intangible exports like financial services and software. Making themselves more affordable for both individuals and companies may be the best way for states to improve competitiveness. Over the long term, no state economy can sustain its people if it only focuses on the “luxury” sectors; the large number of unemployed and underemployed workers will drain state resources. As those state resources become more limited, decisions about how to structure tax incentives or where to place education and infrastructure investments must be based upon a deep understanding of this economic DNA. Strategic investments will limit wasteful spending and maximize impact in the economic sectors where a state is most likely to grow.

    Ultimately, there is only one route to sustainable state economies, and that is through broad-based economic growth. The road to that objective can vary by state, but the fundamental goal needs to be kept in mind if we wish to see a restoration of hope and American optimism about the future.

    Read the full report, including highlights of top performing states and profiles of job creation efforts in all 50 states.

    Praxis Strategy Group is an economic research, analysis, and strategic planning firm. Joel Kotkin is executive editor of NewGeography.com and author of The Next Hundred Million: America in 2050

  • Sweden: A Role Model for Capitalist Reform?

    Sweden is often held up as a role model for those wishing to expand the size of government in the U.S. and other nations. The nation is seen as combining a large public sector with many attractive features, such as low crime rates, high life expectancy and a high degree of social cohesion.

    But in actuality the success of the Swedish society lies not with the extent of its welfare state, but as the result of cultural and demographic factors as well as a favourable business environment throughout most of Sweden’s modern history.

    First, it should be noted that Sweden experienced even higher rates of growth and impressive social outcomes well before the start of the Social Democratic era in 1936. Sweden was an impoverished nation before the 1870s, as evidenced by the massive emigration to the United States. As a capitalist system evolved out of the agrarian society, the country grew richer.

    Property rights, free markets and the rule of law in combination with an increasingly well-educated workforce created an environment in which Sweden enjoyed an unprecedented period of sustained and rapid economic development. Famous Swedish companies like IKEA, Volvo, Tetra Pak and Alfa Laval were all founded during this period, aided by business friendly economic reforms and low taxes.

    Between 1870 and 1936, the start of the Social Democratic Era, Sweden had the highest growth rate in the industrialized world. In contrast, between 1936 and 2008 the growth rate was merely the 18th highest of 28 industrialized nations.

    Second, more attention needs to be paid to social and cultural factors. This reflects factors
    such as the Lutheran work ethic and the cohesion of a largely homogeneous population with
    particular social values. The perceived advantage of Swedes over other countries rose before
    the rise of the welfare state. In 1950, before the rise of the high-tax welfare state, Swedes
    lived 2.6 years longer than Americans. Today the difference is 2.7 years. Sweden’s lower
    income inequality also stems back to at least the 1920s.

    These same factors can be seen in the success of Swedes abroad. The approximately 4.4 million Americans with Swedish origins are considerably richer than the average American, as are other immigrant groups from Scandinavia. If Americans with Swedish ancestry would form their own country their per capita GDP would be $56,900, more than $10,000 above the earnings of the average American and 53 percent above the Swedish GDP level of $36 600.

    A Scandinavian economist once stated to Milton Friedman: “In Scandinavia we have no poverty.” Milton Friedman replied, “That’s interesting, because in America among Scandinavians, we have no poverty either.” Indeed, the poverty rate for Americans with Swedish ancestry is only 6.7 percent, half the U.S. average. Economists Geranda Notten and Chris de Neubourg have calculated the poverty rate in Sweden using the American poverty threshold, finding it to be an identical 6.7 percent.

    Critically, those Swedes who immigrated to the U.S., predominately in the 19th century, were anything but elite. Many were escaping poverty and famine. What has made Sweden uniquely successful is not the welfare state, as much as the hard-won Swedish stock of social capital.

    Third, the recent strong performance of the Swedish economy has its roots in labor market and other reforms enacted by center-right governments. Perhaps least appreciated, Sweden has dramatically scaled back the size and scope of government starting in the 1990s, which spurred the recovery of the growth rate.

    Indeed, modern Sweden’s success can be seen as more a shift away from the far left policy that predominated from the 1960s till the end of the century. During recent years Swedish policies have shifted strongly to the center-right, placing the once dominant Social Democrats in deep crisis.

    An important explanation is that the Swedish electorate wishes to again strengthen the ethical norms that have been eroded during the high tax regime. The center-right government that took office in 2006 and was re-elected in 2010 has implemented stepwise and rather large tax reductions.

    Few other nations demonstrate as clearly the phenomenal economic growth that results from adopting free-market economic policies. School vouchers have successfully been introduced, creating competition within the frame of public financing. Similar systems are increasingly being implemented also in other public programs, such as health care and elderly care. Another example is that the pension system has been partially privatized, giving citizens some control over their mandated retirement savings.

    Where is Sweden headed?

    Yet this is not to say Sweden can not go further into a free market direction. Although taxes have been lowered, research publication reveal they still impact to the level of entrepreneurship and crowding out private sector job creation. One study has for example shown that for each additional Swedish Kronor levied and spent by the government, the efficiency losses in the private sector can be as high as 1-3 additional Kronor.

    One particular challenge lies with immigrants. In the past Sweden was highly successful in integrating immigrants. In 1950 the level of employment for foreign-born was 20 percent higher than the average citizen. In 2000 the level of employment was 30 percent lower for the foreign-born.

    In 1968 foreign citizens living in Sweden had 22 percent higher income from work compared to those born in Sweden. In 1999 foreign citizens had 45 percent lower incomes. While racism had decreased significantly as time had passed, the situation of those born abroad in the labour market had worsened dramatically.

    A government study has shown that in 1978 foreign born from outside the Nordic nations had an employment level that was only seven percent lower than ethnic Swedes. In 1995 the gap had expanded to 52 percent.

    Looking forward, it’s clear that Sweden’s great advantages lie not in socialism, but in circumstances. In addition to its considerable human capital, Sweden has an abundance of natural resources, another that the nation was not involved in either of the worlds wars, which tore up other industrialized nations.

    There remain many problems connected to the welfare state. Amongst others Jan Edling, former economist at the labor union LO which has close ties to the Social Democratic party, has discussed this high hidden unemployment and the connection to over-utilization of welfare systems. Around one fifth of the working age population in Sweden are supported by one form or another of government handouts rather than work.

    The Swedish welfare state, of course, does create some social good, by for example providing relatively generous social security nets. But it is clearly not solely responsible for the low poverty and long lifespan in the nation.

    Many in the United States and elsewhere who tend to see Sweden as a social democratic role model fail to understand the history and trajectory of Swedish society. Indeed, much of the success of Sweden, and other Scandinavian nations, relate to strong norms and entrepreneurship.

    To be sure, Swedish society is not necessarily moving away from the idea of a welfare state, but continuous reforms implemented towards economic liberty have strengthened the society. The rise of government has been stopped and clearly reversed during the past years. Sweden is again returning to the free market policies which have served it so well in the past.

    Nima Sanandaji, is President of the Swedish think-tank Captus.

    Photo by Hector Melo A.

  • The Other China: Life on the Streets, A Photo Essay

    We all know or have heard about the overwhelming development going on in China. Journalists enthuse and analysts throw magnificent statistics of what seems to be a miracle. Yet there is little discussion of the daily life of the common people, and their struggle. There are miracles aplenty in China, but the astounding figures only partially reflect the reality.

    Thousands of people from rural areas move to the big cities of China in search of job opportunities. Strenuous work funds an often meager existence. No social security, no benefits of any kind. Like immigrants from Europe to America’s cities in last century, they often find in the streets an answer to their needs.

    In the year 2011, in the streets of Chengdu, one of the fastest growing cities in the world, many people still have no other option than fixing their dentures under the most unimaginable poor hygiene conditions. For about 20 RMB a street dentist will fix it for you.

    It takes only 4RMB to get yourself a haircut, right there, on your block.


    And add 5 RMB more to the bill for a deep, though dubious, ear cleaning in one of the many neighbourhoods in Shanghai still south side of the mass production of crystal-clad skyscrapers.

    In those neighbourhoods of all-in-one houses (all-in-one-room), the space is so reduced that the food needs to hang out of the windows. For many neighborhoods that still inconveniently survive in areas of real estate dementia and speculation of the 21st century, it may be just a matter of time until they disappear.

    In China, everything is cheap, and that wonderful home appliance that you just got in the shopping center at a ridiculous price even includes delivery costs. All stores include the cost in the price. There are hundreds of hands out there ready to take everything right to your door for a few coins.

    Real estate developments constantly reconfigure the skyline of Chinese cities selling wonderland views of the contaminated horizon of the Chinese skies. England New Town in Chengdu seems to offer it all, summed up in fantastic Chinglish phrase: “Leads a pious life by the city by view mountain keeping in good health.”

    And even though the children of some will go to the new IMAX around the corner, the people who build the miracle that others can enjoy go to the movies only at improvised movie theaters around the construction sites where they live.

    In the meanwhile, the garbage produced by the miracle accumulates in the suburbs. There are still people ready to make the most out of it.

    They never get the English right, but the Chinglish we find everyday on the streets usually defines the country’s situation better than the proper English. Protect Circumstance: Begin with me. I think Ayn Rand has some followers in the People’s Republic.

    Born and raised in Buenos Aires, Argentina, Nicolas Marino is a 33 year-old architect and photographer currently based in Chengdu, China. For the last 6 years he has chosen a bicycle as means of transport to reach the most remote regions of the world where he focuses most of his documentary work. Some of his journeys include a 10.000km ride from Tehran to Shanghai and several trips around remote and rural China where he has now cycled over 8000km.

  • California’s Green Jihad

    Ideas matter, particularly when colored by religious fanaticism, wreaking havoc even in the most favored of places. Take, for instance, Iran, a country blessed with a rich heritage and enormous physical and human resources, but which, thanks to its theocratic regime, is largely an economic basket case and rogue state.

    Then there’s California, rich in everything from oil and food to international trade and technology, but still skimming along the bottom of the national economy. The state’s unemployment rate is now worse than Michigan’s and ahead only of neighboring Nevada.  Among the nation’s 20 largest metropolitan regions, four of the six with the highest unemployment numbers are located in the Golden State: Riverside, Los Angeles, San Diego and San Francisco. In a recent Forbes survey, California was home to six of the ten regions where the economy is poised to get worse.

    One would think, given these gory details, California officials would be focused on reversing the state’s performance. But here, as in Iran, officialdom focuses more on theology than on actuality.   Of course, California’s religion rests not on conventional divinity but on a secular environmental faith that nevertheless exhibits the intrusive and unbending character of radical religion.

    As with its Iranian counterpart, California’s green theology often leads to illogical economic and political decisions. California has decided, for example,  to impose a rigid regime of state-directed planning related to global warming, making a difficult approval process for new development even more onerous.  It has doubled-down on climate change as other surrounding western states — such as Nevada, Utah and Arizona — have opted out of regional greenhouse gas agreements.

    The notion that a state economy — particularly one that has lost over 1.15 million jobs in the past decade — can impose draconian regulations beyond those of their more affluent neighbors, or the country, would seem almost absurd.

    Californians are learning what ideological extremism can do to an economy. In the Islamic Republic, crazy theology leads to misallocating resources to support repression at home and terrorism abroad. In California green zealots compel companies to shift their operations to states that are still interested in growing their economy — like Texas. The green regime is one reason why CEO Magazine has ranked California the worst business climate in the nation.

    Some of these green policies often offer dubious benefits for the environment. For one thing, forcing California businesses to move to less energy-efficient states, or to developing countries like China, could have a negative impact overall since shifting production to Texas or China might lead to higher greenhouse gas production given California’s generally milder climate.   A depressed economy also threatens many worthy environmental programs, delaying necessary purchases of open space and forcing the closure of parks. These programs enhance life for the middle and working classes without damaging the overall econmy.

    But people involved in the tangible, directly carbon-consuming parts of the economy — manufacturing, warehousing, energy and, most important, agriculture — are those who bear   the brunt of the green jihad. Farming has long been a field dominated by California, yet environmentalist pressures for cutbacks in agricultural water supplies have turned a quarter million acres of prime Central Valley farmland fallow, creating mass unemployment in many communities.

    “California cannot have it both ways, a desire for economic growth yet still overregulating in the areas of labor, water, environment,” notes Dennis Donahue, a Democrat and mayor of Salinas, a large agricultural community south of San Jose. Himself a grower, Donahue sees agricultural in California being undermined by ever-tightening regulations, which have led some to expand their operations to other sections of the country, Mexico and even further afield.

    Other key blue collar industries are also threatened, from international trade to manufacturing. Since before the recession California manufacturing has been on a decline.  Los Angeles, still the nation’s largest industrial area, has lost a remarkable one-fifth of its manufacturing employment since 2005.

    California’s ultra-aggressive greenhouse gas laws will further the industrial exodus out of the state and further impoverish Californians.  Grandiose plans to increase the percentage of renewable energy in the state from the current unworkable 20% to 33% by 2020 will boost the state’s electricity costs, already among the highest in the nation, and could push the average Californian’s bill up a additional 20%.

    Ironically California, still the nation’s third largest oil producer, should be riding the rise in commodity prices, but the state’s green politicians seem determined to drive this sector out of the state.. In Richmond, east of San Francisco, onerous regulations pushed by a new Green-led city administration may drive a huge Chevron refinery, a major employer for blue collar workers, out of the city entirely. Roughly a thousand jobs are at stake, according to Chevron’s CEO, who also questioned whether the company would continue to make other investments inside the state.

    Being essentially a religion, the green regime answers its critics with a well-developed mythology about how these policies can be implemented without economic distress.  One common delusion in Sacramento holds that the state’s vaunted “creative” economy — evidenced by the current bubble over   surrounding social media firms — will make up for any green-generated job losses.

    In reality the creative economy simply cannot  make up for losses in more tangible industries. Over the past decade, as the world digitized, the San Jose area experienced one of the stiffest drops in employment of any of the 50 largest regions of the country; its 18% decline was second only to Detroit.  Much of the decline was in manufacturing and services, but tech employment has generally suffered. Over the past decade California’s number of workers in science, technology, engineering and math-related fields actually shrank. In contrast, the country’s ranks of such workers expanded 2.3% and prime competitors such as Texas , Washington and Virginia enjoyed double-digit growth.

    So who really benefits from the green jihad? To date,  the primary winners have been crony capitalists, like President Obama’s newly proposed commerce secretary, John Bryson, who built a fantastically lucrative  career (he was once named Forbes’  “worst valued chief executive”) while  running the regulated utility Edison International. A lawyer by training, Bryson helped found the green powerhouse National Resources Defense Council. He’s been keen to promote strict  renewable energy  standards  that also happen to benefit solar power and electric car companies in which he holds large financial stakes.

    Other putative winners would be large international companies, like Siemens, that hope to build California’s proposed high-speed rail line, the one big state construction project favored by the green-crony capitalist alliance. Fortunately , the states dismal fiscal situation and  rising cost estimates for the project, from $42 to as high as $67 billion, as well as cuts in federal subsidies, are undermining support for this project even among some liberal Democrats.  Even in a theocracy, reality does, at times, intrude.

    Finally, there are the lawyers — lots of them. A hyper-regulatory state requires legal services just like a theocracy needs mobs of mullahs and bare knuckled religious enforcers. No surprise the number of lawyers in California increased by almost a quarter last decade, notes Sara Randazzo of the Daily Journal. That’s two and a half times the rate of population growth.

    The legal boom has been most exuberant along the affluent coast.  Over the past decade, the epicenter of the green jihad, San Francisco, the number of practicing attorneys increased by 17%, five times the rate of the city’s population increase. In the Silicon Valley, Santa Clara and San Mateo counties boosted their number of lawyers at a similar rate. In contrast, lawyer growth rate in interior counties has generally been far slower, often a small fraction of their overall population growth.

    If California is to work again for those outside the yammering classes, some sort of realignment with economic reality needs to take place.  Unlike Iran, California does not need a regime change, just a shift in mindset that would jibe with the realities of global competition and the needs of the middle class. But at least with California we won’t have to worry too much about national security: Given the greens anti-nuke proclivities, it’s unlucky the state will be developing a bomb in the near future.

    This piece originally appeared at Forbes.com.

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

    Photo by msun523

  • The Katrina Effect: Renaissance On The Mississippi

    In this most insipid of recoveries, perhaps the most hopeful story comes from New Orleans. Today, its comeback story could serve as a model of regional recovery for other parts of the country — and even the world.

    You could call it the Katrina effect. A lovely city, rich in history, all too comfortable with its fading elegance and marred by huge pockets of third-world style poverty, suffers a catastrophic natural disaster; in the end the disaster turns into an opportunity for the area’s salvation.

    Had Katrina never occurred New Orleans would likely have continued its inexorable albeit genteel decline; the area’s population dropped from 627,000 in 1960 to 437,000 in 2005, the year the hurricane occured. Instead the disaster brought new energy and a sense of purpose to the Big Easy.

    I first realized that New Orleans was going through some kind of renaissance when looking at some numbers.  In our list of the country’s biggest brain magnets — based on analysis of where college-educated adults were moving to by demographer Wendell Cox —  New Orleans ranked No. 1, ahead of such hot spots as Raleigh-Durham, N.C., and Austin, Texas.

    Then came our analysis of the best large cities for jobs: New Orleans ranked No. 2 in our survey, up a remarkable 46 places. New Orleans’ performance was particularly impressive in the information field, which includes software and entertainment, and in which the Big Easy grew the most — over 30% last year alone – among our major metros.

    Yet numbers do not tell the whole story. Sometimes statistics simply look great against the background of catastrophic decline. New Orleans was so far down and received so much recovery money that recent improvements could be explained as a short-term bounce back from a disaster.

    But the resurgence of New Orleans, whose population is now back to almost 350,000, represents something far more significant and long-term. For one thing, the storm undermined the corrupt, inept political regimes that had burdened the area for decades. “Katrina shattered the networks and broke down the old hierarchies,” notes Tim Williamson, a New Orleans native and founder of Idea Village, a nonprofit focused on aiding local entrepreneurs.  ”People felt we were dying. Now we feel like we are refounding a great American city.”

    For example, inept leaders like former Mayor Ray Nagin and the equally lost Kathleen Blanc have been replaced by more effective figures like Mayor Mitch Landrieu and Gov. Bobby Jindal. Equally important, according to a recent Brookings report, New Orleanians have become noticeably more engaged with their community. Particularly impressive have been improvements in the local schools, once among the nation’s worse. Last year, the majority (61%) of public school students in Orleans Parish (counties in NOLA are called parishes) attended charter schools, which are now attracting some middle class families.

    Most impressive, this once stagnant region has transformed into an entrepreneurial hot bed. “Five years ago people thought we were crazy to be here,” says Matt Wisdom, founder of Turbosquid, a firm with 45 employees that provides three-dimensional images to corporate clients. “Now instead of people being amazed we are here, they want to get here to ride the wave.”

    Walking along Magazine Street from the edge of the Garden District to the Central Business District, you still pass some rough areas. But the way is peppered with scores of independently owned shops and small businesses, many of them opened since the hurricane. Their owners for the most part appear to be younger than 40.

    “We used to have this huge brain drain to the Northeast, the West Coast and Texas, but this has changed,” Williamson says. “After Katrina everyone was forced to become an entrepreneur. The dominant concept for the rebuilding has become one of resiliency and self-employment — it’s been bottom up. It’s become as much of our identity as Mardi Gras or the Jazzfest.”

    Since its founding back in 2000 Idea Village has assisted 1,000 local companies with business plans, financing and focus. Most are small, but some of what Williamson calls post-Katrina generation companies, like Naked Pizza, founded in 2006, have expanded rapidly. Specializing in a healthy, organic version of the traditional high-fat fast food, Naked Pizza has won financial backing from Dallas Maverick owner Mark Cuban. The company, which employs 40 employees at its New Orleans headquarters, expects to have over 70 franchises by the end of the year  .

    Many rapidly rising businesses specialize in digital media, attracting talent from other places like the West Coast and New York. 37-year-old Kenneth Purcell, founder of Iseatz, moved his entertainment and travel business from New York to NOLA in 2009 and has since grown his company from seven people to 25.

    One big advantage of starting a business in New Orleans is its affordable housing. Based on median price against median household income, the region’s prices are roughly 50% less than those in New York or San Francisco. This is particularly attractive both to middle-aged couples with children who can afford a spacious suburban home that are far less expensive than their equivalents in Los Angeles, Westchester or Silicon Valley.

    It also is attractive to the smaller subset of employees, many of them young, who are drawn to traditional cities. Some New Orleans neighborhoods remind me of pre-1980 Greenwich Village, offering a charming urban environment without either the extortionate price tag or oppressive density.

    Immigration, much of it from Mexico, also is contributing to the regional remake. Over the past decade, as both white and black populations dropped, the Asian population grew by 3000 and Hispanics by 33,500, most of them settling in suburban Jefferson Parish.  Once predominately African-American, New Orleans is returning to its more multi-racial past while re-establishing its strong cultural and social ties to Latin America.

    Yet despite all positive signs, it may be too early to proclaim, as some boosters do, a “New Orleans miracle.” After all, the city’s population remains over 100,000 below its depressed pre-Katrina levels. There are still over 47,000 vacant housing units in the city, many of the uninhabitable, notes Allison Plyer, who runs the Greater New Orleans Community Data Center. Overall, the recovery remains stronger in the suburbs, many of which suffered less damage from the storm. The share of regional population living in Orleans Parish, where the city of New Orleans is located, has slipped to 29% compared with 37% in 2000. Jefferson Parrish now has more jobs than the city across all income categories.

    Plyer believes the priority for the entire region lies in restoring the higher-paid blue-collar and middle-class jobs that for decades have disappeared from the city.  Young tech and media firms can help gentrify parts of a city, but they are not sufficient to provide opportunities to the vast majority of its residents. To do this, Plyer suggests, the region will have to focus more on “export” oriented jobs in industries such as  energy, manufacturing and trade.

    Critically these fields can provide decent salaries for a broad swath of workers.  Right now, Plyer adds, 45% of the workforce earns less than $35,000 a year, one byproduct of the domination of the generally low-paying tourism industry. Jobs connected to shipping pay twice as much on average as tourism; energy three times as much. A new steel plant announced recently by Nucor in suburban St. James Parish could create more than 1200 jobs with average pay of $75,000 annually.

    “We’ve allowed Houston and Biloxi to move ahead in a lot of these other industries,” she explains.  ”We have to move ahead in engineering and services and energy to compete with Texas. We can’t be just a tourism economy.”

    Ultimately, New Orleans’ long-term recovery may depend on exploiting historic raison d’etre: location. The region  stands astride the primary corridor for the Midwest grain trade and sits in the middle of the Gulf trade routes. It also boasts some of the nation’s richest energy deposits.

    Coupled with its enormous cultural appeal, resurgence in the  more traditional economy could spark the most remarkable urban comeback story of the new century. Once the poster child for urban despair, New Orleans may develop a blueprint for turning a devastated region into a role model not only for other American cities but for struggling urban regions around the world.

    This piece originally appeared at Forbes.com.

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

    Photo by Adam Reeder

  • Goodbye, New York State Residents are Rushing for the Exits

    For more than 15 years, New York State has led the country in domestic outmigration: for every American who comes to New York, roughly two depart for other states. This outmigration slowed briefly following the onset of the Great Recession. But a new Marist poll released last week suggests that the rate is likely to increase: 36 percent of New Yorkers under 30 are planning to leave over the next five years. Why are all these people fleeing?

    For one thing, according to a recent survey in Chief Executive, New York State has the second-worst business climate in the country. (Only California ranks lower.) People go where the jobs are, so when a state repels businesses, it repels residents, too. It’s also telling that in the Marist poll, 62 percent of New Yorkers planning to leave cited economic factors—including cost of living (30 percent), taxes (19 percent), and the job environment (10 percent)—as the primary reason.

    In upstate New York, a big part of the problem is extraordinarily high property taxes. New York has the 15 highest-taxed counties in the country, including Nassau and Westchester, which rank first and second nationwide. Most of the property tax goes toward paying the state’s Medicaid bill—which is unlikely to diminish, since the state’s most powerful lobby, the political cartel created by the alliance of the hospital workers’ union and hospital management, has gone unchallenged by new governor Andrew Cuomo.

    New York City doesn’t suffer from outmigration to the extent that the state does; in fact, the city grew slightly over the past decade, thanks to immigration. And there’s more work in Gotham than in the state as a whole. The problem is that the kind of work available shows that the city accommodates new immigrants much better than it supports middle-class aspirations. A recent report from the Drum Major Institute helps make sense of the Marist numbers: “The two fastest-growing industries in New York are also the lowest paid. More than half of the city’s employment growth over the past year has been in retail, hospitality, and food services, all of which pay their workers less than half of the city’s average wage.” Worse yet, more than 80 percent of the new jobs are in the city’s five lowest-paying sectors. Parts of the country are seeing a revival of manufacturing—traditionally a source of upward mobility for immigrants—but not New York City, whose manufacturing continues to decline. The culprits here include the city’s zoning policies, business taxes, and declining physical infrastructure.

    Then there’s the cost of living in New York City. A 2009 report by the Center for an Urban Future found that “a New Yorker would have to make $123,322 a year to have the same standard of living as someone making $50,000 in Houston. In Manhattan, a $60,000 salary is equivalent to someone making $26,092 in Atlanta.” Even Queens, the report found, was the fifth most expensive urban area in the country.

    The implications of Gotham’s hourglass economy—with all the action on the top and bottom, and not much in the middle—are daunting. The Drum Major report, which noted that 31 percent of the adults employed in New York work at low-wage labor, came with a political agenda. The institute wants the city to subsidize new categories of work by expanding the scope of “living-wage” laws, which require higher pay than minimum-wage laws do, to all businesses that receive city funds or contracts. But that would mean higher taxes for the middle class and a further narrowing of the hourglass’s midsection.

    Governor Cuomo is calling for a property-tax cap, but without “mandate relief” for localities—for example, relaxing state laws that require localities to pay out exorbitant pension benefits. Mayor Michael Bloomberg has pledged not to increase local taxes, but even at their current level, city taxes and regulations will keep serving as an exit sign for aspiring twentysomething workers. In short, we can expect New York to lead the country in outmigration for the near future.

    This piece first appeared in the City Journal.

    Fred Siegel is a contributing editor of City Journal, a senior fellow at the Manhattan Institute, and a scholar in residence at St. Francis College in Brooklyn.

    Photo by Christopher Schoenbohm

  • Asia’s New Landless Peasants?

    Landless people have long sparked instability in Asia. From the days of the Qin dynasty (3rd century B.C.), through the huge Taiping rebellion in the mid-19th century, to the successful Communist revolutions in China and Vietnam and a nearly successful insurrection in Malaysia during the mid-20th, the property-less have historically risen against those in power.

    Today as East Asia grows more affluent, landlessness is again on the rise. Although peasants in many places remain both poor and restive, the real threat is in the region’s dynamic cities, where rapid increase in housing prices threatens to push hundreds of millions outside the property-buying market.

    This boost in prices is due to the rapid economic and population growth in many Asian cities. Across China the price of housing per square meter more than doubled over the past decade, according to the National Statistical Bureau. Prices-compared-to-incomes in the diaspora hot beds of Singapore and Hong Kong are now, according to research from the consultancy group Demographia, the highest in the advanced world — at least 50% higher than New York, San Francisco, Toronto, Sydney or London.

    There are some good market-based reasons for these high prices. Most major Asian cities are thriving economically and growing far more rapidly than their Western counterparts. Over the past decade, the population of Shanghai, China’s largest city, rose 35%, or by nearly 6 million, which is more than the population of any Western European city besides London, Paris and Essen-Dusseldorf. Beijing’s population rose by 6 million in the past 10 years to nearly 20 million. And Singapore’s far more affluent population jumped 20%, a rate exceeded in the advanced world only by Atlanta, Ga., among urban areas of more than 4 million.

    The recent spike in prices, particularly in the more affluent cities, also stems from high liquidity, low interest rates and rising inflation, notes Cheong Koon Hean, CEO of Singapore’s Housing and Development Board. To these factors she adds what she calls “a herd mentality” as people rush to invest in property as a hedge against inflation.

    The traditional Chinese obsession with property ownership exacerbates these factors. As  Nanjing-based blogger and social critic Lisa Gu writes, “Owning a property is the greatest life-goal for most Chinese citizens.”

    In mainland China the rush to own is bolstered by the lack of a strong social safety net or popular trust in other investment vehicles, such as stock and bonds. ”China lacks good investment channels besides housing,” says Han Hui, senior partner in prominent Beijing real estate law firm. “People put money into real estate because they still don’t trust anything else.”

    The appeal of home-ownership in China is particularly marked since it’s more of a land-use right, which in the case of residential property, expires after 70 years (40 years for commercial property). The lease begins to run out on the date that the real estate developer signs for the land, and not on the homeowner’s date of purchase.

    Whatever its cause, this Asian form of irrational exuberance is clearly boosting inequality across the region’s cities.

    This is becoming a key issue, particularly for the younger generation.  ”House price” ranked third on the list of the top 10 most popular phrases used by Chinese netizens, says Lisa Gu. Many young Chinese, she notes, are giving up on the ideal of owning a house before marriage and starting their lives together as renters. This is widely called “getting married naked.”

    For young professionals this now might just prove a temporary annoyance, but it could evolve into something more bothersome as they age. Some might opt to avoid very expensive cities, such as Beijing or Shanghai, for up-and-coming smaller urban centers such as Chengdu, the provincial capital of agriculturally fecund Sichuan province. This city has a growing tech center but offers housing prices as much as one third those in China’s existing megacities. Although salaries are also lower, overall affordability remains much higher than in the established urban regions.

    For the many millions of poorer Chinese, including the many migrants from the countryside, the housing crunch presents a more serious issue. Most have moved to the big cities, particularly in eastern China, for better opportunities and quality of life. Virtually all the net growth in Beijing and Shanghai, according to the most recent Chinese census, came not from registered residents but among migrants — those lacking hokou status. They constitute now over one third of the population in these megacities.

    Such migrants include people of various incomes, but also a large impoverished population.  Some live in sub-standard conditions not often associated with the gleaming epicenters of Asian capitalism. Like residents of the slums of third-world cities, many are landless peasants, a group now estimated at 70 million or 80 million.

    This problem of landless peasants is likely to grow as more land is set aside for urban and industrial development. Many will face difficulty finding a decent place to live even as more affluent Chinese snatch up multiple apartments for speculative investment. This has accelerated a worsening gap between rich and poor that is of major concern to the country’s Communist rulers.

    Of course, no one suggests anything like a new peasant rebellion is in the offing. It is critical to recognize that, for all its imperfections, China’s astounding rise has lifted hundreds of millions of people out of the grip of unceasing poverty.

    But unaddressed, the property crisis could well slow east Asian capitalism’s rapid ascent. High housing prices may already be contributing to depressed birthrates — even in places where the “one child” policy does not apply, such as Singapore, Taiwan and South Korea.

    Such long-term problems are overshadowed by more immediate concerns. Fallout about cascading house prices led the Chinese central government earlier this year imposed new restrictions aimed at slowing rampant speculation — such as requiring 60% payments for second homes and restricting the purchases of additional homes.

    The interior city of Chongqing has taken even more drastic steps. The hardline government there has embraced a distinctly uncapitalist response to the housing crisis: a massive program to increase the supply of rental as well as state-owned apartments that would be available to poorer residents, including those from the countryside. This contrasts with programs in Singapore, where 80% of the population live in the public housing, but some 95% own flats purchased from current owners or the Housing Development Board.

    In China, the failure of the housing market to find places for the poor and working class could provide a rationale for expanding the state’s role in managing the economy. It certainly provides fuel for Chongqing’s active affirmation of what is seen as a revival of “red culture.”

    Beyond such ideological implications, the housing crisis could threaten both the long-term social stability and economic growth of East Asia. Unless addressed, growing dissatisfaction among a large bloc of property-less citizens has the potential to become a politically destabilizing force and a brake against market-friendly liberalization. As East Asia remains the primary driver of the world’s economic engine, this could prove bad news not only for upwardly mobile Chinese but everyone else as well.

    This piece originally appeared at Forbes.com.

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

    Photo by Colin Manuel