New Geography

Tag: middle class

  • The Changing Demographics of America

    Estimates of the United states population at the middle of the 21st century vary, from the U.N.’s 404 million to the U.S. Census Bureau’s 422 to 458 million. To develop a snapshot of the nation at 2050, particularly its astonishing diversity and youthfulness, I use the nice round number of 400 million people, or roughly 100 million more than we have today.

    The United States is also expected to grow somewhat older. The portion of the population that is currently at least 65 years old—13 percent—is expected to reach about 20 percent by 2050. This “graying of America” has helped convince some commentators of the nation’s declining eminence. For example, an essay by international relations expert Parag Khanna envisions a “shrunken America” lucky to eke out a meager existence between a “triumphant China” and a “retooled Europe.” Morris Berman, a cultural historian, says America “is running on empty.”

    But even as the baby boomers age, the population of working and young people is also expected to keep rising, in contrast to most other advanced nations. America’s relatively high fertility rate—the number of children a woman is expected to have in her lifetime—hit 2.1 in 2006, with 4.3 million total births, the highest levels in 45 years, thanks largely to recent immigrants, who tend to have more children than residents whose families have been in the United States for several generations. Moreover, the nation is on the verge of a baby boomlet, when the children of the original boomers have children of their own.

    Between 2000 and 2050, census data suggest, the U.S. 15-to-64 age group is expected to grow 42 percent. In contrast, because of falling fertility rates, the number of young and working-age people is expected to decline elsewhere: by 10 percent in China, 25 percent in Europe, 30 percent in South Korea and more than 40 percent in Japan.

    Within the next four decades most of the developed countries in Europe and East Asia will become veritable old-age homes: a third or more of their populations will be over 65. By then, the United States is likely to have more than 350 million people under 65.

    The prospect of an additional 100 million Americans by 2050 worries some environmentalists. A few have joined traditionally conservative xenophobes and anti-immigration activists in calling for a national policy to slow population growth by severely limiting immigration. The U.S. fertility rate—50 percent higher than that of Russia, Germany and Japan and well above that of China, Italy, Singapore, South Korea and virtually all the rest of Europe—has also prompted criticism.

    Colleen Heenan, a feminist author and environmental activist, says Americans who favor larger families are not taking responsibility for “their detrimental contribution” to population growth and “resource shortages.” Similarly, Peter Kareiva, the chief scientist at the Nature Conservancy, compared different conservation measures and concluded that not having a child is the most effective way of reducing carbon emissions and becoming an “eco hero.”

    Such critiques don’t seem to take into account that a falling population and a dearth of young people may pose a greater threat to the nation’s well-being than population growth. A rapidly declining population could create a society that doesn’t have the work force to support the elderly and, overall, is less concerned with the nation’s long-term future.

    The next surge in growth may be delayed if tough economic times continue, but over time the rise in births, producing a generation slightly larger than the boomers, will add to the work force, boost consumer spending and generate new entrepreneurial businesses. And even with 100 million more people, the United States will be only one-sixth as crowded as Germany is today.

    Immigration will continue to be a major force in U.S. life. The United Nations estimates that two million people a year will move from poorer to developed nations over the next 40 years, and more than half of those will come to the United States, the world’s preferred destination for educated, skilled migrants. In 2000, according to the Organisation for Economic Co-operation and Development, an association of 30 democratic, free-market countries, the United States was home to 12.5 million skilled immigrants, equaling the combined total for Germany, France, the United Kingdom, Australia, Canada and Japan.

    If recent trends continue, immigrants will play a leading role in our future economy. Between 1990 and 2005, immigrants started one out of four venture-backed public companies. Large American firms are also increasingly led by people with roots in foreign countries, including 15 of the Fortune 100 CEOs in 2007.

    For all these reasons, the United States of 2050 will look different from that of today: whites will no longer be in the majority. The U.S. minority population, currently 30 percent, is expected to exceed 50 percent before 2050. No other advanced, populous country will see such diversity.

    In fact, most of America’s net population growth will be among its minorities, as well as in a growing mixed-race population. Latino and Asian populations are expected to nearly triple, and the children of immigrants will become more prominent. Today in the United States, 25 percent of children under age 5 are Hispanic; by 2050, that percentage will be almost 40 percent.

    Growth places the United States in a radically different position from that of Russia, Japan and Europe. Russia’s low birth and high mortality rates suggest its overall population will drop by 30 percent by 2050, to less than a third of the United States’. No wonder Prime Minister Vladimir Putin has spoken of “the serious threat of turning into a decaying nation.” While China’s population will continue to grow for a while, it may begin to experience decline as early as 2035, first in work force and then in actual population, mostly because of the government’s one-child mandate, instituted in 1979 and still in effect. By 2050, 31 percent of China’s population will be older than 60. More than 41 percent of Japanese will be that old.

    Political prognosticators say China and India pose the greatest challenges to American predominance. But China, like Russia, lacks the basic environmental protections, reliable legal structures, favorable demographics and social resilience of the United States. India, for its part, still has an overwhelmingly impoverished population and suffers from ethnic, religious and regional divisions. The vast majority of the Indian population remains semiliterate and lives in poor rural villages. The United States still produces far more engineers per capita than India or China.

    Suburbia will continue to be a mainstay of American life. Despite criticisms that suburbs are culturally barren and energy-inefficient, most U.S. metropolitan population growth has taken place in suburbia, confounding oft-repeated predictions of its decline.

    Some aspects of suburban life—notably long-distance commuting and heavy reliance on fossil fuels—will have to change. The new suburbia will be far more environmentally friendly—what I call “greenurbia.” The Internet, wireless phones, video conferencing and other communication technologies will allow more people to work from home: at least one in four or five will do so full time or part time, up from roughly one in six or seven today. Also, the greater use of trees for cooling, more sustainable architecture and less wasteful appliances will make the suburban home of the future far less of a danger to ecological health than in the past. Houses may be smaller—lot sizes are already shrinking as a result of land prices—but they will remain, for the most part, single-family dwellings.

    A new landscape may emerge, one that resembles the network of smaller towns characteristic of 19th-century America. The nation’s landmass is large enough—about 3 percent is currently urbanized—to accommodate this growth, while still husbanding critical farmland and open space.

    In other advanced nations where housing has become both expensive and dense—Japan, Germany, South Korea and Singapore—birthrates have fallen, partly because of the high cost of living, particularly for homes large enough to comfortably raise children. Preserving suburbs may therefore be critical for U.S. demographic vitality.

    A 2009 study by the Brookings Institution found that between 1998 and 2006, jobs shifted away from the center and to the periphery in 95 out of 98 leading metropolitan regions—from Dallas and Los Angeles to Chicago and Seattle. Walter Siembab, a planning consultant, calls the process of creating sustainable work environments on the urban periphery “smart sprawl.” Super-fuel-efficient cars of the future are likely to spur smart sprawl. They may be a more reasonable way to meet environmental needs than shifting back to the mass-transit-based models of the industrial age; just 5 percent of the U.S. population uses mass transit on a daily basis.

    One of the urban legends of the 20th century—espoused by city planners and pundits (and a staple of Hollywood)—is that suburbanites are alienated, autonomous individuals, while city dwellers have a deep connection to their neighborhoods. As the 2001 book Suburban Nation puts it, once suburbanites leave the “refuge” of their homes they are reduced to “motorist[s] competing for asphalt.”

    But suburban residents express a stronger sense of identity and civic involvement than city dwellers. A recent study by Jan Brueckner, a University of California at Irvine economist, found that density does not, as is often assumed, increase social contact between neighbors or raise overall social involvement; compared with residents of high-density urban cores, people in low-density suburbs were 7 percent more likely to talk to their neighbors and 24 percent more likely to belong to a local club.

    Suburbs epitomize much of what constitutes the American dream for many people. Minorities, once largely associated with cities, tend to live in the suburbs; in 2008 they were a majority of residents in Texas, New Mexico, California and Hawaii. Nationwide, about 25 percent of suburbanites are minorities; by 2050 immigrants, their children and native-born minorities will become an even more dominant force in shaping suburbia.

    The baby boom generation is poised for a large-scale “back to the city” movement, according to many news reports. But Sandra Rosenbloom, a University of Arizona gerontology professor, says roughly three-quarters of retirees in the first bloc of boomers appear to be sticking close to the suburbs, where the vast majority reside. “Everybody in this business wants to talk about the odd person who moves downtown,” Rosenbloom observes. “[But] most people retire in place. When they move, they don’t move downtown, they move to the fringes.”

    To be sure, there will be 15 million to 20 million new urban dwellers by 2050. Many will live in what Wharton business professor Joseph Gyourko calls “superstar cities,” such as San Francisco, Boston, Manhattan and western Los Angeles—places adapted to business and recreation for the elite and those who work for them. By 2050, Seattle, Portland and Austin could join their ranks.

    But because these elite cities are becoming too expensive for the middle class, the focus of urban life will shift to cities that are more spread out and, by some standards, less attractive. They’re what I call “cities of aspiration,” such as Phoenix, Houston, Dallas, Atlanta and Charlotte. They’ll facilitate upward mobility, as New York and other great industrial cities once did, and begin to compete with the superstar cities for finance, culture and media industries, and the amenities that typically go along with them. The Wall Street Journal noted that commercial success has already turned Houston, once considered a backwater, into “an art mecca.”

    One of the least anticipated developments in the nation’s 21st-century geography will be the resurgence of the region often dismissed by coastal dwellers as “flyover country.” For the better part of the 20th century, rural and small-town communities declined in percentage of population and in economic importance. In 1940, 43 percent of Americans lived in rural areas; today it’s less than 20 percent. But population and cost pressures are destined to resurrect the hinterlands. The Internet has broken the traditional isolation of rural communities, and as mass communication improves, the migration of technology companies, business services and manufacturing firms to the heartland is likely to accelerate.

    Small Midwestern cities such as Fargo, North Dakota, have experienced higher than average population and job growth over the past decade. These communities, once depopulating, now boast complex economies based on energy, technology and agriculture. (You can even find good restaurants, boutique hotels and coffeehouses in some towns.) Gary Warren heads Hamilton Telecommunications, a call center and telecommunications-services firm that employs 250 people in Aurora, Nebraska. “There is no sense of dying here,” Warren says. “Aurora is all about the future.”

    Concerns about energy sources and hydrocarbon emissions will also bolster America’s interior. The region will be pivotal to the century’s most important environmental challenge: the shift to renewable fuels. Recent estimates suggest the United States has the capacity to produce annually more than 1.3 billion dry tons of biomass, or fuels derived from plant materials—enough to displace 30 percent of the current national demand for petroleum fuels. That amount could be produced with only modest changes in land use, agricultural and forest-management practices.

    Not since the 19th century, when the heartland was a major source of America’s economic, social and cultural supremacy, has the vast continental expanse been set to play so powerful a role in shaping the nation’s future.

    What the United States does with its demographic dividend—its relatively young working-age population—is critical. Simply to keep pace with the growing U.S. population, the nation needs to add 125,000 jobs a month, the New America Foundation estimates. Without robust economic growth but with an expanding population, the country will face a massive decline in living standards.

    Entrepreneurs, small businesses and self-employed workers will become more common. Between 1980 and 2000 the number of self-employed individuals expanded, to about 15 percent of the work force. More workers will live in an economic environment like that of Hollywood or Silicon Valley, with constant job hopping and changes in alliances among companies.

    For much of American history, race has been the greatest barrier to a common vision of community. Race still remains all too synonymous with poverty: considerably higher poverty rates for blacks and Hispanics persist. But the future will most likely see a dimming of economic distinctions based on ethnic origins.

    Since 1960, the proportion of African-American households at or below the poverty line ($22,000 annually for a family of four in 2008 dollars) has dropped from 55 to 25 percent, while the black middle class has grown from 15 to 39 percent. From 1980 to 2008, the proportion who are considered prosperous—households making more than $100,000 a year in 2008 dollars—grew by half, to 10.3 percent. Roughly 50 percent more African-Americans live in suburbs now than in 1980; most of those households are middle class, and some are affluent.

    The most pressing social problem facing mid-21st-century America will be fulfilling the historic promise of upward mobility. In recent decades certain high-end occupation incomes grew rapidly, while wages for lower-income and middle-class workers stagnated. Even after the 2008 economic downturn, largely brought on by Wall Street, it was primarily middle-class homeowners and jobholders who bore the brunt, sometimes losing their residences. Most disturbingly, the rate of upward mobility has stagnated overall, as wages have largely failed to keep up with the cost of living. It is no easier for poor and working-class people to move up the socio-economic ladder today than it was in the 1970s; in some ways, it’s more difficult. The income of college-educated younger people, adjusted for inflation, has been in decline since 2000.

    To reverse these trends, I think Americans will need to attend to the nation’s basic investments and industries, including manufacturing, energy and agriculture. This runs counter to the fashionable assertion that the American future can be built around a handful of high-end creative jobs and will not require reviving the old industrial economy.

    A more competitive and environmentally sustainable America will rely on technology. Fortunately, no nation has been more prodigious in its ability to apply new methods and techniques to solve fundamental problems; the term “technology” was invented in America in 1829. New energy finds, unconventional fuel sources and advanced technology are likely to ameliorate the long-prophesied energy catastrophe. And technology can ease or even reverse the environmental costs of growth. With a population of 300 million, the United States has cleaner air and water now than 40 years ago, when the population was 200 million.

    The America of 2050 will most likely remain the one truly transcendent superpower in terms of society, technology and culture. It will rely on what has been called America’s “civil religion”—its ability to forge a unique common national culture amid great diversity of people and place. We have no reason to lose faith in the possibilities of the future.

    This article originally appeared in Smithsonian Magazine

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

    Photo by clevercupcakes

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

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

    Are we entering the post-information age?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    This article originally appeared in TheDailyBeast.com.

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

    Photo by rjason13

  • China’s Urban Challenge: Balancing Sustainable Economic Growth and Soaring Property Prices

    Today, Beijing seeks to balance strong economic growth and soaring prices amidst a severe global crisis and debt turmoil in advanced economies. The challenge is colossal – to provide urban space for more than 600 million people in the coming decades.

    For months, the famous hedge fund wizard, James Chanos, has been predicting a severe Chinese property slump. As he puts it, “Dubai times 1,000 – or worse,” with the “potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.”

    The contrarian investor Chanos made his fortune on Wall Street by foreseeing the collapse of Enron and other high flying companies whose stories were “too good to be true.” He is not the only skeptic on China, but certainly one of the most prominent and articulate. And yet, China’s real estate market is very different from those of the U.S. or Dubai.

    In Dubai, the problem had to do with too much leverage. In China, consumers buying residential properties are required to put down 30 percent before taking out a mortgage. For a second home, the down payment is 50 percent, irrespective of their net worth. Home purchase is predicated on affordability.

    In the pre-crisis U.S., perverse incentives were magnified by low interest rates, sometimes minimal down payment and loans to those with poor credit histories. Excessive debt was sliced, repackaged and securitized into mortgages. Banks and ratings agencies engaged in unethical conduct. Appropriate regulatory oversight was absent.

    In the long-run, the containment of rapid price increases is vital for China’s economic growth and social cohesion. In the short-run, volatile price fluctuations are difficult to avoid in the large urban centers. These large agglomerations are evolving into “global cities”, which are driven not just by local conditions, but by global trade and investment.

    Soaring prices
    In “China bubble” predictions, Chinese property markets are typically portrayed as unitary or homogeneous. Yet, there is huge variation among cities and regions. In 2009, the urban GDP per capita was highest in Shenzhen reaching almost US$13,800 USD, whereas in Hefei it was about US$6,100.

    Until recently, the concern for the soaring prices in the property markets has been focused primarily on the high-end segment of the first-tier cities. Since the 1980s, the economic ripple effect of the successful first-tier cities – such as Shenzhen, Beijing, and Shanghai – has been spreading into new generations of Chinese cities.

    By the early 2000s, second-tier cities – from Suzhou and Shenyang to Chengdu and Chongqing – attracted significant attention with investments from global corporate giants. Third-tier cities – from Ningbo and Fuzhou to Wuxi and Harbin – have been following in the footprints, while inspiring still others, such as Kunming and Hefei.

    Yet for the most part soaring prices characterize primarily residential properties – almost exclusively the high-end segment of the most prosperous first-tier cities.

    In March, property prices in 70 Chinese cities soared by a record 11.7 percent from the previous year. In response, the government rolled out a series of measures to curb the domestic housing market amid concerns over asset bubbles.

    In early May, the People’s Bank of China raised the reserve requirement ratio for major banks by half a percentage point. Property stocks were expected to face further decline. Following Beijing and Shenzhen, the Shanghai municipal government released regulations for the property sector to curb housing speculation and soaring prices.

    Some observers worried that tightening policies may deter property developers from starting new projects and purchasing land, thereby cutting the supply and pushing up prices next year. And yet, despite these measures, housing prices rose 12.8 percent in April from a year earlier. At the same time, China’s urban fixed-asset investment increased by 26.1 percent year-on-year to $684.63 billion. The growth rate was 4.4 percentage points lower from the same period of 2009.

    As public concern over “skyrocketing housing prices” continued to simmer, the real estate tycoon Ren Zhiqiang was hit by a shoe at a forum in Dalian. The attacker was fuming over soaring housing prices.

    Last month, home prices in 70 Chinese cities rose by 12.4 percent year-on-year. The growth rate was 0.4 percentage points lower than in April, as property sales in first-tier cities (including Beijing, Shanghai and Shenzhen) contracted following the string of government measures. New home prices rose 15.1 percent year-on-year, down 0.3 percentage points from April.


    In a bid to curb soaring prices, the government has tightened scrutiny of developers’ financing, curbed loans for third-home purchase, raised minimum mortgage rates and tightened down-payment requirements for second-home purchases.

    By early summer, new home sales in Beijing were down 70 percent. Property transactions in Shanghai slumped around 70 percent and in Shenzhen by 62 percent month-on-month in May.

    Why have prices soared so frantically and what could be done about it?

    Toward new developments and new business models
    In the West, the great urban centers – from Paris to New York City and Tokyo – evolved into great metropolises in a century or two. In China, the first-tier cities – such as Shenzhen, Beijing, and Shanghai – are morphing into global cities in barely decades.

    Understandably, the residents of the first-tier cities would like to own an apartment in their home city. However, these cities also attract the wealthy across China, prosperous investors in East Asia and multinational property companies worldwide.

    Additionally, the high price-to-rent ratios have been driven by speculation, the desire for long-term investment, and few investment instruments.

    Even buyers contribute to soaring prices. To facilitate the marriage of their son or daughter, parents are often willing to devote their savings to real estate. As the young couple and their parents put income and savings into a purchase of a single apartment, excessive prices are driven even higher.

    In addition to great demand, the soaring prices reflect supply dilemmas. Currently, residential real estate development is geared to high-end and high-margin properties, which ensure a significant cash flow for cities. In the leading cities, the direct and indirect GDP contribution by real estate can amount to some 25-35 percent of the GDP; in other cities, this contribution is relatively higher. Ironically, luxury developments support local incomes, which maintain economic growth nationwide.

    As long as high-end real estate offers high margins where affordable housing does not, regional governments, which possess the land rights, have an incentive to prioritize luxury projects.

    The government seeks to sustain real estate market development and thus to support growth critical for China’s economy. It also seeks to ensure affordable housing vital to Chinese people. As debt problems are escalating in the West, reconciling these goals – economic growth and affordable housing – poses a difficult challenge.

    A shift towards affordable mass-market – reportedly only 10 percent of total residential sales – is critical. In the current business model, high margins come from a very narrow high-end segment of the market. This made sense in the early days of Chinese real estate when only few wealthy people could afford a home.

    Today, far more Chinese are able and willing to acquire a home. A new era requires a new business model, which can be based on the broad middle-class segment of the market.

    Conclusion: China is not Japan déjà vu
    In China’s property markets, some argue that the risks are now so great that a decade of little or no growth, as Japan experienced in the 1990s, can no longer be dismissed. They see parallels with Japan in the late 1980s, when authorities responded to the export slump caused by the revaluation of the yen after the 1985 Plaza Accord. As Tokyo adopted a low interest rate policy to boost an expansion in domestic demand, it also created conditions for a massive economic bubble.

    Yet, contemporary China’s situation is very different. First of all, in China, there remains a large shortage of residential property that meets new living standards.

    In Japan, property price increases were more than 30 percent in the latter half of the 1990s. In China’s prosperous coastal cities, they have been around 12 percent in 2003-2009.

    In Japan, the health of the banks deteriorated rapidly with the asset bubble. In China, the share of non-performing loans declined from almost 20 percent to less than 2 percent in the 2000s.

    In Japan, the asset bubble occurred after the eclipse of the high-growth era. Instead of a potential growth rate of 3-4 percent, China, assuming stability in the international and domestic operating environment, may enjoy relatively high growth for another decade or two. In such circumstances, even rapid price fluctuations in the first-tier cities can be tolerable, even if they are not preferable.

    Ultimately the difference between Japan and China is reflected by demand. Japan in the 1980s was already highly urbanized and its city population was plateauing. In China, the situation is very, very different.

    Today, there are some 360 million urban residents in China. In the next three decades, the figure is expected to grow to 970 million. What Beijing is trying to achieve is unique in history – to create urban space to more than 610 million people, within a single generation.

    In such an environment, periods of overheating will occasionally be accompanied by dramatic price increases.

    China, the urbanization rate is about 45 percent, whereas in Japan and other advanced countries it is more than 80 percent. As these nations reflect very different levels of economic development and different levels of individual prosperity, their real estate markets are different as well.

    Despite its rapid pace of expansion, China’s real estate is still at a very preliminary stage. The marketplace is so colossal that there are no precedents, no simple models.

    Yet the prospects for a robust growth remain intact. The key will be not to allow that growth to become threatened by a property bubble – while providing affordable housing for the rapidly-expanding new middle-class.

    Dr. Dan Steinbock is Research Director of International Business at India, China and America Institute (USA) and Senior Fellow at Shanghai Institutes for International Studies (China). The brief is part of the author’s ongoing project on emerging megapolises worldwide. A highly abbreviated version of the brief has been published by China Daily, China’s leading English-language daily in May.

    Photos and Illustrations: Dan Steinbock and China’s National Bureau of Statistics

  • Planning’s Cultural Cringe?

    First it was Portland, Oregon, touted as a poster child for urban planning in Australia. Now, Vancouver, Canada, is the comparison, and are we seeing another incarnation of Australia’s infamous cultural cringe?

    Advocates of higher density and the “brawl against sprawl” in Australia frequently cite overseas cities as model case studies. Portland, Oregon, was for a long time cited as a good example of pro-density housing strategies which sought to limit ‘sprawl’, to promote public transport by investing in things like light rail, and to promote cycling and a range of other planning ‘solutions’ that would sound remarkably familiar in Australia.

    The truth about Portland, however, didn’t match the hype of its city planners. Much of the boosterism focused on the mostly downtown area of Portland. Like Melbourne, or Sydney, this is its own municipality, with its own Mayor and its own planning officials. As they aggressively sold a story about the virtues of their planning strategy for the city core, they omitted the inconvenient broader metropolitan facts as they went.

    The story of the real Portland, including the surrounding suburban areas, is different than what these policy promoters would have you believe. Portland today, despite hundreds of millions invested in a new light rail system and the promotion of inner city housing density, has fewer public transport trips as a percentage of total travel than in 1980. Urban Growth Boundaries introduced by Oregon State in the 1970s led to housing price pressures which eventually excluded the middle and working class. Leading US city demographer Joel Kotkin describes it as an ‘elite city’ which is ‘remarkably white, young and childless.’ And as international housing market expert Wendell Cox has pointed out, the suggestion that Portland has much to crow about in terms of urban consolidation doesn’t match the official statistics. Portland is as guilty of ‘sprawl’ as Los Angeles.

    The same can be said of Vancouver. Touted by its city officials as a paragon of virtue in planning policy, the Vancouver story is almost entirely limited to its geographically confined downtown. Here, in the wake of overbuilding of office properties in the downtown core, city officials rezoned excess commercial capacity to permit high density residential housing in what we would call the CBD. This ‘living first’ strategy produced a wave of new residential development which saw the core population grow by 20,000 people to around 60,000, and to potentially 90,000 by 2015. Redundant waterside areas have been coverted into residential precincts, and commuting by public transport, cycling or walking are favoured over private vehicles.

    Taken in isolation, the Vancouver story could start to sound convincing. But there are some glaring omissions. The City of Vancouver is home to around 600,000 people. The downtown area – the subject of much of the planning hype – is home to 60,000 people. The broader metro region, based on the same sorts of urban definitions we might use for Brisbane, or Sydney or Melbourne, is home to 2 million people. There is precious little said about the lives of the 1.4 million people who aren’t residents of the City of Vancouver, or the more than 1.9 million who don’t live in the revitalized urban core.

    For these Vancouverites, life isn’t a rosy as the planning hype would have you believe. The most glaring omission about life in Vancouver is that it also happens to be one of the world’s least affordable cities in which to live. According to both the Reserve Bank of Canada and Demographia, Vancouver’s housing rates as severely unaffordable, eating up some three quarters of the region’s median pre-tax household incomes. The problem is so chronic that it has prompted an online game “Crack Shack or Mansion” where visitors are asked: “Can you tell the difference between a crack shack and a Vancouver, BC mansion, listed for one or two million dollars?” Play the game yourself, it’s an eye opener. [A Crack Shack, for the uninitiated, is a den of inequity where illegal drugs are produced].

    That’s hardly the sort of model city you’d want to tout as a planning example we could learn from. The other glaring omission from the planning fairy tale of Vancouver is that life in the city core is vastly different from the overwhelmingly suburban conditions of the vast majority. To the south of Vancouver’s downtown lies an endless suburban grid of detached housing, with limited parklands or open space. Check it out for yourself on Google Maps or Google Earth. Jump into Google Street View and take a walk down a typical Vancouver street. Do that with a housing price list from “Crack Shack or Mansion” in hand and then convince me this is a model for any Australian city.

    A final glaring omission is the climate. This from the official Living in Canada website: “Snow depths of greater than 1 cm are seen on about 10 days each year in Vancouver compared with about 65 days in Toronto. Vancouver has one of the wettest and foggiest climates of Canada’s cities. At times, in winter, it can seem that the rain will never stop.” Summers aren’t so bad though: for two months of the year, the average daily maximum even exceeds 20’c!

    So Vancouver as the next poster child of planning for any Australian city is looking shaky. It’s hopelessly unaffordable (and we have enough problems of our own in that regard), the quality of its majority suburban environment is lower than the standards we already enjoy, and the climate could not be less similar.

    The same can be said of other city-regions often described as examples of how Australian cities could develop. Copenhagen, Paris, or Venice have all in their time been selectively extolled as models for Australian urban planning.

    Maybe this fascination with irrelevant urban models stems from a form of cultural cringe? Whatever the reason, the analogies can be dangerous, especially when they omit the more essential economic or lifestyle based criteria such as housing affordability, share of economic wealth amongst a city/region’s residents, or climate and lifestyle factors.

    It might instead be more helpful if Australian planners referring to overseas examples also kept in mind some of these pragmatic metrics. For example, benchmarking cities with more affordable housing markets than ours and with strong local economies where wealth and standards of living are enjoyed across a wide spectrum of society would produce some very different case studies. Factor in similar climate patterns (which largely dictate recreational and lifestyle behavior) to our own and the choice of comparable cities reduces further.

    We might even start to find that our own cities offer plenty of examples of ‘getting it right.’ Instead of this cultural groveling we could start to define the things we like most about our own existence and plan ways of replicating that, rather than imposing on our cities forms of existence that, appealing as elements might be, are incapable of replication in the Australian context.

    Ross Elliott is a 20 year veteran of property and real estate in Australia, and has held leading roles with national advocacy organizations. He was written and spoken extensively on housing and urban growth issues in Australia and maintains a blog devoted to public policy discussion: The Pulse.

    Photo by ecstaticist

  • Time to Dismantle the American Dream?

    For some time, theorists have been suggesting that it is time to redefine the American Dream of home ownership. Households, we are told, should live in smaller houses, in more crowded neighborhoods and more should rent. This thinking has been heightened by the mortgage crisis in some parts of the country, particularly in areas where prices rose most extravagantly in the past decade. And to be sure, many of the irrational attempts – many of them government sponsored – to expand ownership to those not financially prepared to bear the costs need to curbed.

    But now the anti-homeowner interests have expanded beyond reigning in dodgy practices and expanded into an argument essentially against the very idea of widespread dispersion of property ownership. Social theorist Richard Florida recently took on this argument, in a Wall Street Journal article entitled “Home Ownership is Overvalued.”

    In particular, he notes that:

    The cities and regions with the lowest levels of homeownership—in the range of 55% to 60% like L.A., N.Y., San Francisco and Boulder—had healthier economies and higher incomes. They also had more highly skilled and professional work forces, more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being. (Note)

    Florida expresses concern that today’s economy requires a more mobile work force and is worried that people may be unable to sell their houses to move to where jobs can be found. Those who would reduce home ownership to ensure mobility need lose little sleep.

    The Relationship Between Household Incomes and House Prices

    It is true, as Florida indicates, that house prices are generally higher where household incomes are higher. But, all things being equal, there are limits to that relationship, as a comparison of median house prices to median house prices (the Median Multiple) indicates. From 1950 to 1970 the Median Multiple averaged three times median household incomes in the nation’s largest metropolitan areas. In the 1950, 1960 and 1970 censuses, the most unaffordable major metropolitan areas reached no higher than a multiple of 3.6 (Figure).

    This changed, however, in some areas after 1970, spurred by higher Median Multiples occuring in California.

    William Fischel of Dartmouth has shown how the implementation of land use controls in California metropolitan areas coincided with the rise of house prices beyond historic national levels. The more restrictive land use regulations rationed land for development, placed substantial fees on new housing, lengthened the time required for project approval and made the approval process more expensive. At the same time, smaller developers and house builders were forced out of the market. All of these factors (generally associated with “smart growth”) propelled housing costs higher in California and in the areas that subsequently adopted more restrictive regulations (see summary of economic research).

    During the bubble years, house prices rose far more strongly in the more highly regulated metropolitan areas than in those with more traditional land use regulation. Ironically many of the more regulated regions experienced both slower job and income growth compared to more liberally regulated areas, notably in the Midwest, the southeast, and Texas.

    Home Ownership and Metropolitan Economies

    The major metropolitan areas Florida uses to demonstrate a relationship between higher house prices and “healthier economies” are, in fact, reflective of the opposite. Between August 2001 and August 2008 (chosen as the last month before 911 and the last month before the Lehman Brothers collapse), Bureau of Labor Statistics data indicates that in the New York and Los Angeles metropolitan areas, the net job creation rate trailed the national average by one percent. The San Francisco area did even worse, trailing the national net job creation rate by 6 percent, and losing jobs faster than Rust Belt Pittsburgh, St. Louis, and Milwaukee.

    Further, pre-housing bubble Bureau of Economic Analysis data from the 1990s suggests little or no relationship between stronger economies and housing affordability as measured by net job creation. The bottom 10 out of the 50 largest metropolitan areas had slightly less than average home ownership (this bottom 10 included “healthy” New York and Los Angeles). The highest growth 10 had slightly above average home ownership (measured by net job creation). Incidentally, “healthy” San Francisco also experienced below average net job creation, ranking in the fourth 10.

    Moreover, housing affordability varied little across the categories of economic growth (Table).

    Net Job Creation, Housing Affordability & Home Ownership
    Pre-Housing Bubble Decade: Top 50 Metropolitan Areas (2000)
    Net Job Creation: 1990-2000 Housing Affordability: Median Multiple (2000) Home Ownership: Rate 2000
    Lowest Growth 10  7.4%                                2.8 62%
    Lower Growth 10 14.9%                                3.1 63%
    Middle 10 22.8%                                3.2 64%
    Higher Growth 10 30.9%                                2.6 61%
    Highest Growth 10 46.9%                                2.9 63%
    Average 24.7%                                2.9 62%
    Calculated from Bureau of the Census, Bureau of Economic Analysis and Harvard Joint Housing Center data.
    Metropolitan areas as defined in 2003
    Home ownership from urbanized areas within the metropolitan areas.

    Home Ownership and Happiness

    If Gallup Polls on happiness were reliable, it would be expected that the metropolitan areas with happier people would be attracting people from elsewhere. In fact, people are fleeing with a vengeance. During this decade alone, approximately one in every 10 residents have left for other areas.

    • The New York metropolitan area lost nearly 2,000,000 domestic migrants (people who moved out of the metropolitan area to other parts of the nation). This is nearly as many people as live in the city of Paris.
    • The Los Angeles metropolitan area has lost a net 1.35 million domestic migrants. This is more people than live in the city of Dallas.
    • The San Francisco metropolitan area lost 350,000 domestic migrants. Overall, the Bay Area (including San Jose) lost 650,000, more people than live in the cities of Portland or Seattle.

    Why have all of these happy people left these “healthy economies?” One reason may be that so many middle income people find home ownership unattainable is due to the house prices that rose so much during the bubble and still remain well above the historic Median Multiple. People have been moving away from the more costly metropolitan areas. Between 2000 and 2007:

    • 2.6 million net domestic migrants left the major metropolitan areas (over 1,000,000 population) with higher housing costs (Median Multiple over 4.0).
    • 1.1 net domestic migrants moved to the major metropolitan areas with lower house prices (Median Multiple of 4.0 or below).
    • 1.6 million domestic migrants moved to small metropolitan areas and non-metropolitan areas (where house prices are generally lower).

    An Immobile Society?

    Florida’s perceived immobility of metropolitan residents is curious. Home ownership was not a material barrier to moving when tens of millions of households moved from the Frost Belt to the Sun Belt in the last half of the 20th century. During the 2000s, as shown above, millions of people moved to more affordable areas, at least in part to afford their own homes.

    Under normal circumstances (which will return), virtually any well-kept house can be sold in a reasonable period of time. More than 750,000 realtors stand ready to assist in that regard.

    Of course, one of the enduring legacies of the bubble is that many households owe more on their houses than they are worth (“under water”). This situation, fully the result of “drunken sailor” lending policies, is most severe in the overly regulated housing markets in which prices were driven up the most. Federal Reserve Bank of New York research indicates that the extent of home owners “under water” is far greater in the metropolitan markets that are more highly restricted (such as San Diego and Miami) and is generally modest where there is more traditional regulation, such as Charlotte and Dallas (the exception is Detroit, caught up in a virtual local recession, and where housing prices never rose above historic norms, even in the height of the housing bubble). Doubtless many of these home owners will find it difficult to move to other areas and buy homes, especially where excessive land use regulations drove prices to astronomical levels.

    Restoring the Dream

    There is no need to convince people that they should settle for less in the future, or that the American Dream should be redefined downward. Housing affordability has remained generally within historic norms in places that still welcome growth and foster aspiration, like Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Columbus and elsewhere for the last 60 years, including every year of the housing bubble. Rather than taking away the dream, it would be more appropriate to roll back the regulations that are diluting the purchasing power and which promise a less livable and less affluent future for altogether too many households.

    —

    Note. Among these examples, New York is the largest metropolitan area in the nation. Los Angeles ranks number 2 and San Francisco ranks number 13. The inclusion of Boulder, ranked 151st in 2009 seems a bit curious, not only because of its small size, but also because its advantage of being home to the main campus of the University of Colorado. Smaller metropolitan areas that host their principal state university campuses (such as Boulder, Eugene, Madison or Champaign-Urbana) will generally do well economically.

    Photograph: New house currently priced at $138,990 in suburban Indianapolis (4 bedroom, 2,760 square feet). From http://www.newhomesource.com/homedetail/market-112/planid-823343

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

  • L.A.’s Economy Is Not Dead Yet

    “This is the city,” ran the famous introduction to the popular crime drama Dragnet. “Los Angeles, Calif. I work here.” Of course, unlike Det. Sgt. Joe Friday, who spoke those words every episode, I am not a cop, but Los Angeles has been my home for over 35 years.

    To Sgt. Friday, L.A. was a place full of opportunities to solve crimes, but for me Los Angeles has been an ideal barometer for the city of the future. For the better part of the last century, Los Angeles has been, as one architect once put it, “the original in the Xerox machine.” It largely invented the blueprint of the modern American city: the car-oriented suburban way of life, the multi-polar metropolis around a largely unremarkable downtown, the sprawling jumble of ethnic and cultural enclaves of a Latin- and Asian-flavored mestizo society.

    Yet right now even the most passionate Angeleno struggles to feel optimistic. A once powerful business culture is sputtering. The recent announcement of Northrop Corp.’s departure to suburban Washington was just the latest blow to the region’s aerospace industry, long our technological crown jewel. The area now has one-fourth as many Fortune 500 companies as Houston, and fewer than much-smaller Minneapolis or Charlotte, N.C.

    Other traditional linchpins are unraveling. The once thriving garment industry continues to shift jobs overseas and has lost much of its downtown base to real estate speculators. The port, perhaps the region’s largest economic engine, has been mismanaged and now faces severe threats from competitors from the Pacific Northwest, Baja, Calif., and Houston. Although television and advertising shoots remain strong, the core motion picture shooting has been declining for years, with production being dispersed to such locations as Toronto, Louisiana, New Mexico, Michigan, New York and various locales overseas.

    Once a reliable generator of new employment, over the past decade L.A. has fared worse than any of the major Sun Belt metros–including hard-hit Phoenix–losing over 167,000 jobs between 2000 and 2009. Historic rival New York notched modest gains, while the rising big metro competitors, Dallas and Houston, enjoyed strong and steady growth. L.A. may not be Detroit, and probably never will be, but its once proud and highly diversified industrial base is eroding rapidly, losing one-fifth of all its employment since 2004. In contrast to the rest of the country, unemployment still continues to rise.

    To give you an idea how much L.A. has sunk, look to this year’s Forbes best city rankings, which measures both short- and mid-term job growth. Once perched in the upper tier of major cities, Los Angeles now ranks a pathetic 59th out of 66 large metro areas, far below not only third-place Houston and fourth-place Dallas but also New York and even similar job-losing giants like San Francisco and Philadelphia.

    It takes a kind of talent to sink this low given L.A.’s vast advantages: the best weather of any major global city, the largest port on this side of the Pacific, not to mention the glamour of Hollywood, the Lakers and one of the world’s largest and most diverse populations of creative, entrepreneurial people.

    Jose de Jesus Legaspi, a prominent local developer, pins much of the blame for this on what he describes as “a parochial political kingdom”–with Antonio Villaraigosa, mayor since 2005, wearing the tinsel crown. A sometimes charming pol utterly bereft of economic acumen, Villaraigosa is a poor manager who is also highly skilled at self-promotion. His idea of building an economy revolves around subsidizing downtown developers and pouring ever more funds into the pockets of public sector workers. No surprise then that L.A. suffers just about the highest unemployment rate of any of the nation’s 10 largest cities outside Detroit. One in five county residents receive some form of public aid.

    But the real power in L.A. today is not so much Villaraigosa but what the Los Angeles Weekly describes as a “labor-Latino political machine,” whose influence extends all the way to Sacramento. These politicians represent, to a large extent, virtual extensions of the unions, particularly the public employees.

    The rise of the Latino-labor coalition does stir some pride among Hispanics, but it has proved an economic disaster for almost everyone who doesn’t collect a government paycheck–L.A.’s city council is the nation’s highest paid–or subsidy. Although perhaps not as outrageously corrupt as the Chicago machine, it is also not as effective. L.A.’s version manages to be both thuggish and incompetent.

    According to an analysis by former Mayor Richard Riordan, the city’s soaring pension liabilities will grow by an additional $2.5 billion by 2014, by which date the city will probably be forced to declare bankruptcy.

    So is the city of the future doomed for the long term? Not necessarily. Although Latino politicians and “progressive” allies strive to derail entrepreneurialism, our grassroots remains stubbornly entrepreneurial. This is particularly true of Latino and other immigrant businesspeople in Los Angeles. In 2006, for example, roughly 10% of the foreign born population was self-employed, almost twice the percentage of the native born.

    To be sure, much of this activity takes place in smaller area municipalities–Burbank, Glendale, Lynwood, Monterey Park–that are mercifully outside the reach of the City of Los Angeles, which accounts for somewhat less than half of L.A. County’s 10 million people. But as Legaspi, who came to L.A. from Zacatecas, Mexico, in 1965, points out, ethnic enterprises–Armenian, Iranian, Israeli, Korean, Chinese as well as Mexican and Salvadoran–continue to thrive even within the city limits. You rarely find in L.A. the kind of desolation found in dying cities like Detroit or Cleveland or even large swaths of New York or Chicago.

    All this suggests there’s still hope for Los Angeles to blossom further as a hub for international trade, global culture and fashion. But to achieve that goal the city needs a government that will nurture its grassroots rather than stomp or extort them. “Los Angeles is a potential great world city, but it needs to be ruled like a world city,” Legaspi points out. Until that happens, our putative city of the future will exist more as dreamscape than reality.

    This article originally appeared in Forbes.com.

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

    Photo by k.landerholm

  • An Awakening: The Beginning of the Great Deconstruction

    The federal debt climbed above $13 trillion this month. An easier way to define the national debt is to comprehend that we each owe more than $39,000 to the Chinese, Japanese, and Arabs of the Persian Gulf. The budget deficit will exceed $1.5 trillion this year and forty-seven states are running deficits. California has a $19 billion deficit and its legislature’s landmark response was to pass a law banning plastic bags. Our cities are in worse shape. The former mayor of Los Angeles, Richard Riordan, says that a bankruptcy by that city is inevitable. At the same time, the United States’ Congress voted themselves a 5.8% pay increase. It is no wonder why Americans are nervous.

    Americans are stressed out because of debt, according to an Associated Press-GfK poll. They are trimming their debt at the fastest rate in more than six decades, according to the Federal Reserve. The average amount owed on credit cards is $3,900, the poll said. That’s down from $5,600 last fall and $4,900 last spring. Household debt fell 1.7 percent last year to $13.5 trillion, according to the Fed. It was the first annual drop, based on records going back to 1945. As Americans get their own house in order, the approval rating for Congress has fallen to an all time low. The public will likely make them pay for their angst in November.

    The American people are about a year ahead of the politicians. The spending by Washington, Sacramento, Los Angeles, and by politicians in general, is unsustainable. The people understand that it must be changed. As Senator Tom Coburn (OK) told me last week, either we change our ways or they will be changed for us. Leaders like Senator Coburn will begin The Great Deconstruction. The nation can no longer afford the government it has created.

    The Department of Energy was created by President Carter in 1977 after an OPEC embargo caused gas lines and rationing. In 1977, America imported 33% of its oil. The DoE’s goal was to eliminate our dependence on imported oil. The DoE budget for 2010 was $26.4 billion. It employs 116,000 workers. We now import 66% of our oil. America can no longer afford such an inefficient bureaucracy. Bureaucracies like the DoE that have lost sight of their purpose must be deconstructed.

    Senator Coburn is preparing legislation to rescind $120 billion in 2010 spending by rescinding 2010 budget increases, consolidating 640 duplicative governmental agencies, returning unspent appropriations and cutting wasteful spending. A few examples:

    • Congress has a discretionary budget of $4.7 billion per year. They voted themselves a 6% increase in 2010. Coburn wants this increase rescinded for a saving of $250 million.
    • The Department of Education spends $64.2 billion per year. They spend $1 billion each year administering 207 separate programs at 13 different federal agencies to “encourage” students to take math and science.
    • The Department of Agriculture owns 57,523 buildings. More than 4,700, valued at $900 million, are vacant. Despite this vacant space they spend $193 million per year renting an additional 11 million square feet.

Our politicians have perfected the art of spending money, or as we now know, wasting money. Last year, they loaded spending bills with $11 billion of earmarks – after spending $860 billion on a Stimulus Bill. A new breed of politician, like Senator Coburn, will begin the long process of deconstruction.

There is precedent for deconstruction. In 1945, federal spending ballooned to $106 billion, $93 billion of which was for defense. The deficit jumped from $40 billion in 1938 to $253 billion in 1945. A Democrat President and a Republican Congress established the Commission on Organization of the Executive Branch of the Government in 1947. President Truman put a former Republican President, Herbert Hoover, in charge. It became known as the Hoover Commission. It created the structure of government that exists today and generated savings of $7 billion at the time. A total of 273 recommendations were presented to Congress in a series of nineteen separate reports. A 1955 study concluded that 116 of the 273 recommendations were fully implemented and that another 80 were mostly or partly implemented. By 1949, the federal budget had fallen to $40 billion.

It will come to be known as The Great Deconstruction because it must occur at every level of government. Federal spending is unsustainable. Moody’s is already speculating that we may lose our AAA rating. The states are in crisis with 46 in deficit. The press is referring the California as a “failed state” and “our Greece”. The $860 billion Stimulus Bill sent approximately 30% to the states to support their public employees. But it was a one-year fix. This year, the states are burning through their reserves and next year, they will be forced to cut services, raise taxes, or both. Connecticut, the wealthiest state on a per capita basis with personal income of $54,397 in 2009 (Department of Commerce) saw its Fitch rating lowered from AA+ to AA. Connecticut needs to borrow $956 million to close a budget gap this fiscal year and it borrowed $947.6 millionto cover last year’s deficit.

The cities are no better off with many states raiding their reserves. Many cities are exploring municipal bankruptcy, Chapter 9, as a way out of unsustainable contracts. The Great Deconstruction will take a decade or more. Like the Hoover Commission before it, this process will transform the role of government, and the image of government as it transforms the cost of the people’s business.

***************************************************

The Great Deconstruction is a series written exclusively for New Geography. Future articles will address the impact of The Great Deconstruction at the national, state, county and local levels.

Robert J. Cristiano PhD is the Real Estate Professional in Residence at Chapman University in Orange County, CA and Director of Special Projects at the Hoag Center for Real Estate & Finance. He has been a successful real estate developer in Newport Beach California for twenty-nine years.


Other works in The Great Deconstruction series for New Geography
The Great Deconstruction :An American History Post 2010 – June 1, 2010
The Great Deconstruction – First in a New Series – April 11, 2010
Deconstruction: The Fate of America? – March 2010

  • It is Time to Plant

    It is springtime in Kentucky – think foals and mares in the pristine meticulously fenced pastures. But, in another part of the state – the Appalachia region of eastern Kentucky – it is time to plant on those rocky hillsides. As my 90 year old father puts it, you plant your corn when tree buds are the size of squirrel ears. I confess to not having given a thought to whether squirrels even have ears or not … but my father knows. He was born and raised in a part of the world where they know things like that, typical of the mostly Scots-Irish who settled there. He knows the land like the back of his hand, he is self-reliant and stubborn to a fault and he knows what it is like to be poor and bereft of opportunity.

    Appalachia Eastern Kentucky – take just one geographic area out of a huge region spread over several states – is negatively depicted in popular imagery and academic literature as a drag on the Kentucky economy. The whole region is enigmatic like the underachieving child in a family of superstars. Until now, that is. With the financial collapse having brought America to her knees, it is a bit like the screaming headline about Toyota’s debacle: “the A student flunked the class.” Perhaps that underachieving C student finally has her chance to shine. After all, who would have given Ford a chance a few years ago?

    But Appalachian eastern Kentucky is after all a land where every manner of program has been tried, books written, studies undertaken, and mournful music sung. It is where the failed War on Poverty was launched in the 1960s. The reason for a “new day dawning” is that there is a stir across the land that signaling an epochol shift in the evolution of the American Dream. Call it by wonky titles like “new localism” or call it “choosing who I want to be and where I want to do it.” But whatever it is, it is impacting on our lives dramatically and will do more so in the future.

    The prestigious Economist Magazine (May 15, 2010) recently reflected that in the future people will have unprecedented choices of living in big vibrant cities or in smaller more nurturing rural settings. And, the stories abound. Take Patty who left the factories of the north to return to her native land. Always known for her shrewd business acumen, she took over and renovated “The Old Schoolhouse” antique gallery located near Cave Run Lake. She scours the region for her “goods” and is visited daily by weary travelers seeking the authenticity of a culture too long locked in the shadow of conventional definitions of success. Likewise, despite the long held belief that they are leaving, young people are finding ways to stay in the region, such as the young man in a recent audience who has taken advantage of “tele-learning” and plying his trade as a graphic artist for a west coast software company.

    There appears to be a convergence of forces at work that could prove transformational for regions like Appalachia. Brought on by the Great Recession, people have to make choices about their priorities and perhaps even to downsize lifestyle appetites. But that’s not all. These forces will impact all places but particularly rural places like Kentucky, places of great beauty and tranquility and appeal waiting for the right moment that may finally be here.

    These converging forces are driven in large part by technology and the realization of its earlier promise that we truly can live and work anywhere. It is about participating in the preservation of a precious culture locked for too long in the closet of neglect and stigmatized with the label of backwardness. It is about an ability to do more than scrape out a meager living in the rocky hillsides. Evidence can be seen in a migration pattern that is, for the first time in decades, giving Kentucky and surrounding states a positive net migration from the rest of the country. We are seeing youthful retirees coming home in some instances and young families putting down roots in places that feel right for their chosen way of life. And there is a growing business culture that knows about the world but sees no paradox in growing itself in Appalachian soil – and using the culture to its advantage.

    Just take note of Kentucky “ham” country if you want to partake of successful business stories. Recently profiled in the New York Times Magazine (May 23, 2010), Kentucky’s home grown hams are making their way onto the world stage. The author marveled at the ham store owner’s chatter about attending a ham conference in Spain and the desire of buyers to travel to a small town to buy nitrate free bacon. Imagining Kentucky hams being worth a wait in noisy New York City restaurants defies explanation except to acknowledge that the song is right that “somethin’s happenin’ here.”

    What must the Appalachian region of eastern Kentucky and the rest of Appalachia do to take advantage of this new opportunity? It must reinvent itself as with many other aspects of the American Dream under the new rules of the 21st century. Reinvention will require answering the question “what is success”? With extreme partisanship and 30,000 foot politics at other levels of government, it is no longer viable to look in the direction of the “higher ups.” We must look to ourselves. Only we can provide the basis for community building and ensure the investments we need to make in health and education.

    Ah, springtime. Nature has taught us well; re-invention is to see the possible and to seize the moment. The moment is now.

    Sylvia Lovely is an author, commentator and speaker on issues relating to communities and how we must adapt to the new landscape that is the 21st century.

    Photo by J. Stephen Conn.

  • Can Europe’s Economy Turn Around If Its Great Cities Continue To Wither?

    Europe’s Greece crisis has turned the world’s attention to the continent’s fundamental flaw: burgeoning public spending and sluggish growth in some of its national economies.

    To the extent that Europe’s more economically fragile countries cannot fix this flaw, Europe poses a global financial risk as toppling EU countries cannot meet their obligations and those left standing cannot prop them up. Only fiscal discipline and boosting growth can save Europe in the long-run.

    And for this reason, we ought to worry about Europe’s cities. Why? Because as large cities increasingly drive national economies in our rapidly urbanizing global community, Europe’s urban growth patterns look alarmingly tepid.

    Around the world, people are clustering together faster than ever at a time when it seems technology should allow them to disperse more easily than ever. As it turns out, innovation and a growing services sector flourish best when lots of people and firms are geographically proximate. Ideas, knowledge and valuable skills are transferred more easily in denser areas.

    There is a direct relationship between economic competitiveness in the 21st century and the growth of metropolitan areas. But Europe’s cities show signs of trouble. They have almost entirely lost the momentum that has driven European pre-eminence for the past 200 years.

    In 1800, only 3% of the world’s population lived in urban areas, and the only Western cities among the world’s 10 largest urban areas were London and Paris. Neither had a population greater than 1 million. Just 100 years later, though, nine of the world’s 10 largest cities were in the West — with four of the top six located in Europe, propelled by their economic predominance through industrialization.

    Other countries followed the model. By the mid-20th century, 30% of the world’s population lived in urban areas, a considerable increase since 1800. But that was only the beginning of an explosive era in urbanization. Between 1960 and 2000, the number of people living in cities worldwide skyrocketed to 3 billion from 750 million.

    Currently, the world’s largest 100 cities generate 25% of global GDP, a figure that will continue to rise over the next few decades — and which will increasingly exclude Europe’s cities.

    Asia and Africa, often regarded poetically as agrarian societies, are leading the global urbanization boom. Today, London is the only European city among the world’s largest 20 metropolitan areas. Paris is 22nd. Among the top 25 cities, they are two of the three slowest-growing areas.

    Late-20th century growth has been driven almost entirely by suburban expansion around core cities. Nevertheless, central cities worldwide have added population on average over the past half century — except in Europe. It is the only continent where core cities have lost population over the past 45 years. While its suburban growth has kept its metropolitan areas growing overall, its net urbanization rate since 1965 is the slowest worldwide.

    Because developed countries are already highly urbanized, their metropolitan areas grow more slowly than those in emerging economies. But Europe’s rate is unusually slow compared to its peer group of developed nations.

    Europe’s main metropolitan areas grew just 28% since 1965, a period during which the United States essentially doubled its urban population. Australia and New Zealand have seen urbanization rates of 90% during the same period. Worldwide, the growth average in urban areas has been 135% since 1965.

    Europe is the only continent with cities growing at less than 1% annually. In Eastern Europe, the growth rate is actually negative. Some cities, such as Munich and Warsaw, have grown at respectable rates and mitigate Europe’s well-known population decline problems. For instance, each city grew between 2000 and 2010, while Germany and Poland each contracted as a whole.

    However, urban growth rates in Europe will likely stay low in coming years, which raises questions about whether Europe’s economy will continue to grow enough to help the continent out of its present troubles.

    European leaders’ disconnect with this important reality was on display several weeks ago when the European Commission chose to announce major carbon emissions in 500 cities at the same time its finance ministers were structuring the massive Greece bailout.

    However important greening urban areas may be, if Europe should be doing anything with its cities these days, it should be figuring out how to put them at the forefront of its economic recovery. The European habit of implementing growth-inhibiting policies — especially in its cities — has to change if the continent hopes to have a prosperous future.

    Given the increasingly metropolitan nature of economic growth around the globe, the health and vitality of Europe’s cities will be key to the continent’s future prosperity. Policymakers need now more than ever to ask serious questions about the origins of future growth. To answer those questions, they need to pay serious attention to their cities.

    This article first appeared at Investors Business Daily.

    Ryan Streeter is a senior fellow at the London-based Legatum Institute, an independent, nonpartisan organization that researches and advocates an expansive understanding of global prosperity.

  • The Future Of America’s Working Class

    Watford, England, sits at the end of a spur on the London tube’s Metropolitan line, a somewhat dreary city of some 80,000 rising amid the pleasant green Hertfordshire countryside. Although not utterly destitute like parts of south or east London, its shabby High Street reflects a now-diminished British dream of class mobility. It also stands as a potential warning to the U.S., where working-class, blue-collar white Americans have been among the biggest losers in the country’s deep, persistent recession.

    As you walk through Watford, midday drinkers linger outside the One Bell pub near the center of town. Many of these might be considered “yobs,” a term applied to youthful, largely white, working-class youths, many of whom work only occasionally or not at all. In the British press yobs are frequently linked to petty crime and violent behavior–including a recent stabbing outside another Watford pub, and soccer-related hooliganism.

    In Britain alcoholism among the disaffected youth has reached epidemic proportions. Britain now suffers among the highest rates of alcohol consumption in the advanced industrial world, and unlike in most countries, boozing is on the upswing.

    Some in the media, particularly on the left, decry unflattering descriptions of Britain’s young white working class as “demonizing a whole generation.” But many others see yobism as the natural product of decades of neglect from the country’s three main political parties.

    In Britain today white, working-class children now seem to do worse in school than immigrants. A 2003 Home Office study found white men more likely to admit breaking the law than racial minorities; they are also more likely to take dangerous drugs. London School of Economics scholar Dick Hobbs, who grew in a hardscabble section of east London, traces yobism in large part to the decline of blue-collar opportunities throughout Britain. “The social capital that was there went [away],” he suggests. “And so did the power of the labor force. People lost their confidence and never got it back.”

    Over the past decade, job gains in Britain, like those in the United States, have been concentrated at the top and bottom of the wage profile. The growth in real earnings for blue-collar professions–industry, warehousing and construction–have generally lagged those of white-collar workers.

    Tony Blair’s “cool Britannia,”epitomized by hedge fund managers, Russian oligarchs and media stars, offered little to the working and middle classes. Despite its proletarian roots, New Labour, as London Mayor Boris Johnson acidly notes, has presided over that which has become the most socially immobile society in Europe.

    This occurred despite a huge expansion of Britain’s welfare state, which now accounts for nearly one-third of government spending. For one thing the expansion of the welfare state apparatus may have done more for high-skilled professionals, who ended up nearly twice as likely to benefit from public employment than the average worker. Nearly one-fifth of young people ages 16 to 24 were out of education, work or training in 1997; after a decade of economic growth that proportion remained the same.

    Some people, such as The Times’ Camilla Cavendish, even blame the expanding welfare state for helping to create an overlooked generation of “useless, jobless men–the social blight of our age.” These males generally do not include immigrants, who by some estimates took more than 70% of the jobs created between 1997 and 2007 in the U.K.

    Immigrants, notes Steve Norris, a former member of Parliament from northeastern London and onetime chairman of the Conservative Party, tend to be more economically active than working-class white Britons, who often fear employment might cut into their benefits. “It is mainly U.K. citizens who sit at home watching daytime television complaining about immigrants doing their jobs,” asserts Norris, a native of Liverpool.

    The results can be seen in places like Watford and throughout large, unfashionable swaths of Essex, south and east London, as well as in perpetually depressed Scotland, the Midlands and north country. Rising housing prices, driven in part by “green” restrictions on new suburban developments, have further depressed the prospects for upward mobility. The gap between the average London house and the ability of a Londoner to afford it now stands among the highest in the advanced world.

    Indeed, according to the most recent survey by demographia.com, it takes nearly 7.1 years at the median income to afford a median family home in greater London. Prices in the inner-ring communities often are even higher. According to estimates by the Centre for Social Justice, unaffordability for first-time London home buyers doubled between 1997 and 2007. This has led to a surge in waiting lists for “social housing”; soon there are expected by to be some 2 million households–5 million people–on the waiting list for such housing.

    With better-paid jobs disappearing and the prospects for home ownership diminished, the traditional culture of hard work has been replaced increasingly by what Dick Hobbs describes as the “violent potential and instrumental physicality.” Urban progress, he notes, has been confused with the apparent vitality of a rollicking night scene: “There are parts of London where the pubs are the only economy.”

    London, notes the LSE’s Tony Travers, is becoming “a First World core surrounded by what seems to be going from a second to a Third World population.” This bifurcation appears to be a reversion back to the class conflicts that initially drove so many to traditionally more mobile societies, such as the U.S., Australia and Canada.

    Over the past decade, according to a survey by IPSOS Mori, the percentage of people who identify with a particular class has grown from 31% to 38%. Looking into the future, IPSOS Mori concludes, “social class may become more rather than less salient to people’s future.”

    Britain’s present situation should represent a warning about America’s future as well. Of course there have always been pockets of white poverty in the U.S., particularly in places like Appalachia, but generally the country has been shaped by a belief in class mobility.

    But the current recession, and the lack of effective political response addressing the working class’ needs, threatens to reverse this trend.

    More recently middle- and working-class family incomes, stagnant since the 1970s, have been further depressed by a downturn that has been particularly brutal to the warehousing, construction and manufacturing economies. White unemployment has now edged to 9%, higher among those with less than a college education. And poverty is actually rising among whites more rapidly than among blacks, according to the left-leaning Economic Policy Institute.

    You can see the repeat here of some of the factors paralleling the development of British yobism: longer-term unemployment; the growing threat of meth labs in hard-hit cities and small towns; and, most particularly, a 20% unemployment rate for workers under age 25. Amazingly barely one in three white teenagers, according to a recent Hamilton College poll, thinks his standard of living will be better than his parents’.

    It’s no surprise then that Democrats are losing support among working-class whites, much like the now-destitute British Labour Party. But the potential yobization of the American working class represents far more than a political issue. It threatens the very essence of what has made the U.S. unique and different from its mother country.

    This article originally appeared in Forbes.com.

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

    Photo by MonkeyBoy69