New Geography

Tag: middle class

  • The American Suburb Is Bouncing Back

    From the very inception of the current downturn, sprawling places like southeast California’s Inland Empire have been widely portrayed as the heart of darkness. Located on the vast flatlands east of Los Angeles, the region of roughly 3 million people has suffered one of the highest rates of foreclosures and surges in unemployment in the nation.

    Yet now George Guerrero, a top agent at Advantage Real Estate in Chino Hills, says he can see the light, with sales picking up and inventories finally beginning to drop. “There’s been a real surge in sales,” Guerrero says. “The market has come back to where it should be. I think we are ahead of the curve here of the overall recovery.”

    Of course, for the moment, much of this growth is concentrated in foreclosure sales. However, even developers of new properties, such as Brookfield Homes , also report a strong uptick in sales. In his new developments in the Inland Empire, notes Adrian Foley, head of Brookfield’s Los Angeles area office, sales are up 150% since six months ago.

    Although the economy is still hurting, the housing trend has become much more positive. Statewide, existing home sales have jumped 30% over the past year, taking the inventory from an estimated 16.7 months to less than seven months. In Chino Hills, it is down to six months.

    Most encouraging, this activity is taking place exactly where the market was hit hardest in the beginning – in the suburbs and at the lower end of the market, which in the Inland Empire means between $150,00 to $300,000. This could presage the resurgence of the suburbs and the prospects for the middle and working classes once again to purchase their piece of the American dream.

    Nor is this merely a Californian phenomenon. Nationwide, existing home sales – predominately in the suburbs – have been on the rise for the last few months. The strongest growth is occurring in Sunbelt markets in Arizona, Nevada and Florida, as well as in California. These places experienced some of the greatest surges in prices, which forced many buyers to turn to subprime and interest-only loans.

    These loans are largely not available today, Guerrero notes. Instead of financial quackery, lower prices – sometimes as much as 50% below peak – are allowing new buyers to buy affordably. In 2007, Inland Empire median house prices were roughly seven to 10 times the average annual income of potential buyers. Now they are settling close to the historic norm of three times.

    But not everyone will be happy to see life return to the suburban housing tracts. Indeed, for some self-proclaimed urbanists, planners and pundits, this development might seem almost nightmarish.

    Long the Rodney Dangerfield of American geographies, suburbs have never been popular with the country’s intellectuals, academics and planners. The destruction of community, racial segregation, expanding waistlines and a host of environmental sins – from consuming too much gas to helping create global warming – all have been blamed on the suburbs.

    When the mortgage crisis first hit, some urbanists, not surprisingly, were quick to blame the suburbs – instead of Wall Street – for the financial meltdown. With energy prices on the rise, they persuaded themselves and the ever-gullible mainstream media that the long-awaited “back to the city” jubilee was imminent.

    In contrast, the suburbs and exurbs, crowed Brookings’ Chris Leinberger, were soon to become “the new slums.” As the middle classes trudged their way back to Boston and other suitably dense big cities, James Howard Kunstler – the “shock jock” of the new urbanist movement and a leading apostle of the “peak oil” thesis – happily proclaimed, “Let the gloating begin.”

    Yet as George Guerrero could tell them, a dream is not a thing so easily destroyed. The American landscape continues to change, but perhaps not entirely in the ways so eagerly projected by urban boosters and their media claque.

    For one thing, even with the higher energy prices of last year, there seems to be, in fact, no notable shift of population to the urban core. Instead, as demographer Wendell Cox has pointed out, the recession may have slowed migration, but the trend toward the suburbs and sprawling Sunbelt cities has not ended or reversed.

    At the same time, the once-widely ballyhooed market for dense urban living has unraveled. The “gospel of urbanism” may be accepted as such by most of the mainstream press, most notably The New York Times and Atlantic Monthly, but on closer examination the new religion has limited numbers of converts. In many locales – from Massachusetts to Los Angeles – inner-city condominium projects are losing value at least as much or more than suburban single-family houses. In San Diego, for example, condo prices have dropped in some developments by 70% since 2007, twice the decline in the overall market.

    The problem has much to do with timing. In many areas, urban condominium developers continued to build even as the economy soured, largely due to the longer lead times and financing arrangements around such projects. Yet as the prices of houses have dropped many potential condominium dwellers have opted to purchase single-family homes – or are sitting anxiously on the sidelines waiting for prices to drop further.

    As a result, foreclosure rates for condominiums, according to the Federal Deposit Insurace Corp., are on average one-third higher than for single-family residences. You do not have to travel to the outer exurbs to find zones of foreclosures, bankruptcies and the turning of ownership properties to rentals. Towers are either unoccupied or have gone to rental in markets as diverse as Miami, central Atlanta and downtown L.A. Even Chicago, the poster child for urban gentrification, now suffers from abandoned “condo ghost towns.”

    Manhattan, too, which long saw itself as immune to the housing downturn, is now experiencing the most precipitous price decline since 1980. Big urban developers across North America are filing for bankruptcy, including the largest private landowner in downtown Los Angeles, just like suburban builders were last year.

    As someone who lives in – if you consider L.A. a city – and likes cities, I do not greet the urbanization of the housing crisis as an unalloyed positive. Yet one can hope that lower prices and interest rates – as well as the administration’s tax credits for up to $8,000 for first-time buyers – could allow more people to consider an urban option, if that’s what they want.

    However, this will not be where the bulk of the action will take place. Surveys consistently show that between 10% and 20% of people want to live in dense cities. In a country that will gain 100 million people over the next four decades, that’s 20 million, not exactly what you’d call chopped liver.

    But the bulk of growth will continue to be in the ‘burbs. The main reason is simple enough for almost anyone but a planning professor, architect or pundit to comprehend: preference. Virtually every survey reveals that the vast majority of Americans – and around 80% of Californians – prefer single-family homes that generally are affordable only in suburban areas. The fact that jobs have also continued to move inexorably to the periphery – as a newly released Brookings report demonstrates to liberal think tanks’ own undisguised horror – makes living in the ‘burbs even more attractive.

    These trends lead developers like Randall Lewis in Upland, Calif., who has suffered the downturn in the Inland Empire, not to dismiss the suburban future. He takes note of a recent 10% to 20% surge in sales among the 18 projects his company is now working on, all in suburban projects in California and neighboring states.

    “The basics of the suburbs are still there,” Lewis suggests. “Schools are important, but also people like the sense of place. But the basic amenities are children, grandchildren, where people go to church, where their work networks and friends are.”

    Lewis also rightly adds that a somewhat different suburbia will emerge from the crash. It will be a “melting pot,” he suggests, “not just by race, but by ages and lifestyle.” You will see more singles, empty-nesters and retirees as people choose to “age in place” close to where they have settled. There likely will be more smaller-lot, townhouse and other mixed-density developments closer to burgeoning suburban job centers.

    But even as they change, the allure of suburbs – and the single-family house – will not fade and could even grow as they develop more city-like amenities. The fundamental desire to own a place of your own, to possess some private space and a relatively quiet environment has not died. Nor is it likely to without the imposition of a draconian planning regime.

    For right now, it’s all enough to make George Guerrero a born-again optimist. “There’s something healthy just beginning to happen out here,” he says. “This time people with good credit are getting good deals at good prices. It’s a wonderful thing to see.”

    This article originally appeared at Forbes.

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

  • Slumdog Entrepreneurship: Entrepreneurship Holds Key for India’s Slums

    The stealth Oscar winner Slumdog Millionaire, the Indian fable of love, heartbreak and overcoming the odds set against the backdrop of one of the world’s biggest urban slums has won fans all over the advanced industrial world – but may be less popular in India.

    One Indian film director who viewed the film at the Toronto Film Festival said flatly “All the Indian[s] hated it. The West loves to see us as a wasteland, filled with horror stories of exploitation and degradation.” One viewer in India claimed the film’s makers simply “cashed in on starvation, genocide, child prostitution, and overwhelming oppression.” Famed novelist Salman Rushdie panned the movie to an audience at Emory University after it won the Best Picture Academy Award for piling on “impossibility onto impossibility” to arrive at a contrived and implausible conclusion.

    The plot line — an “uneducated” slum dweller winning a million dollars on India’s version of the hit program “Who Wants to Be A Millioniare” — may well be unrealistic, but also obscures an important, often misunderstood point: the slums, themselves a product of heavy-handed land regulation and price controls, are centers of entrepreneurial activity and social stability.

    India’s urban slums are not just teeming masses of exploitation and degradation. The slums are populated by people that have real jobs and earn real income. They include white-collar workers, policemen, and even bureaucrats. They include tanneries, restaurants, makeshift pharmacies, tailors, cleaners, and hundreds of other micro businesses and entrepreneurs. Peeking inside one of those huts, typically less than the size of an American child’s bedroom, one will often find a small TV, radio or DVD player, purchased with legitimate income, although powered by illegal taps into the city electrical wires.

    The denizens of these slums are “quality of life poor, not cash poor,” as one World Bank official told me on a tour through Dharavi, perhaps the world’s largest urban slum. And this is where the story of Jamal, an orphan raised in the poverty, exploitation and harsh realities of India’s slums, tells a gripping story about India containing important lessons for the rest of the world.

    Unlike a generation ago, a smart orphan boy now can grow up and get a respectable job. If he (and increasingly she) is clever enough, he can run a business and even become rich. Unfortunately, this story is missing from Slumdog Millionaire.

    Upward mobility is not the first thing that comes to mind flying into Mumbai, India. The hills and gullies are thick with tin and wood shacks, sheltering thousands of men, women, and children. Many slum dwellers are recent immigrants from India’s hinterlands, but some have lived in these shacks for generations. Even an air-conditioned limo can’t keep the bracing poverty away from westerners ferried into the center of India’s most economically vibrant economic capital.

    Indeed, as soon as I left Mumbai’s airport in a local taxi, I was struck by the destitute poverty all around me. It was a visual reminder of the stories my grandmother used to tell of her travels to India as a tourist. She loved this nation and its people, but also recognized the dirt, grime, and poverty.

    But it would be a mistake to dismiss these areas as a “wasteland.”

    The slums also reflect what’s going on right in India in addition to the challenges that great nation still faces.

    Unfortunately, by ignoring the economic dynamism within an illegal city of one million people, the movie missed out on telling India’s truly remarkable story of growth and development.

    Many have heard the story of software giants like Infosys, the 1.5 billion dollar information technology business founded in 1981, or about the scores of U.S. and European firms investing in India. Microsoft not too long ago announced plans to invest $1.7 billion in India and create 3,000 new jobs over four years.

    But the real test of India’s economic rebound lies in the small business community, especially the ones that find their way in the mainstream economy. These small businesses, popping up spontaneously to meet global needs and demand, are the ones that will eventually determine whether India will become the next Asian Tiger.

    Deepak Parekh is the CEO of Sureprep of India and former senior accountant for a multinational corporation. Sureprep prepares U.S. personal income tax returns, processing more than 25,000 each year. Business is booming, and Parekh anticipates annual growth of 40 percent or more.

    “We did a pilot project in 2000,” Mr. Parekh says as he recalls the initial stages of the company’s founding. After all, why should an Indian firm prepare tax returns for Americans? U.S. trained accountants would seem to have a natural comparative advantage. Not so. “We looked hard at the quality numbers,” he says. “We found that Indians were among the top performers and dedicated workers, willing to work 24-7 to get the job done.” American accountants made more errors on average than Indians, but were paid more and expected more time off. Sureprep now employs more than 200 Indian accountants and software engineers.

    Sureprep’s success — and that of India’s service sector — came about in part, oddly enough, due to socialism. Once the poster child for post-World War II socialism in the developing world, India erected one of the most regulated and protected economies in the world.

    Yet this legacy did not impact much of the technology sector – which largely did not exist at the time of Independence — or the largely informal sector that thrives in places like Mumbai’s slums.

    Dharavi, located north of the central business district and east of the airport, squeezes 900,000 people on just 2 square kilometers. That’s ten times more dense than Manhattan. By most estimates, more than half of Bombay’s population lives in ramshackle slums such as Dharavi.

    Yet economic opportunity is thriving in India’s cities. The slums are large enough to have economies internal to themselves — maids, clothing repair, plastic recycling. Few are homeless.

    The lack of housing is evidence of a significant planning failure. Ramakrishan Nallathiga, a housing economist in Bombay, studied land use and regulation in the city’s 20 wards and found density restrictions were the strictest in the most dense parts of the city. This forced non-profit organizations to step in and build the housing themselves after securing special land development privileges from the local government where they could. However, most of the poor scramble for any sliver of land they can find to put together a makeshift home. Since private land is off limits, they settle on public land — parks, open space, railroad right of way.

    Meanwhile, Bombay’s population has skyrocketed 137% since 1975 to 17.1 million according to the United Nations. It’s now about the size of the New York urban area, but Bombay squeezes its metropolitan population onto about 8 percent of the space according to Demographia.com.

    The New York area only grew by 15 percent over the same period. The only U.S. metropolitan area among our top ten that grew near Bombay’s rate over the same period was Atlanta (188%). Miami and Houston, next in line in terms of growth, merely doubled their populations. In each of these cases, though, the metro population is less than one-third Mumbai’s.

    India has a lot further to go in areas other than housing as well. Many traditional industries are still shackled by labor rules that limit their ability to adapt. A World Bank analysis of the business environment found that managers reported spending 16 percent of their time with the bureaucracy in India compared to just 5 percent in Latin American countries and about 10 percent in post-Communist Eastern European countries.

    India’s economic future fundamentally lies in the entrepreneurial attitude of its citizens. A recent popular movie called Swapes, or “Foreign Land,” follows Mohan Bhargava, a young, talented Indian project manager for NASA who returns to rural India to build a hydroelectric power plant that provides electricity reliably 24-7. He uses the technology he developed and uses everyday to build critical infrastructure in some of the most remote areas of his native land. Our bright, talented Indian hero has the knowledge, brains, and technology to build a company in his homeland and compete with the big boys. And India’s making it a better and better place to do that everyday. And more and more Indians are willing to move back to their homeland to take advantage of these opportunities.

    Of course, India still has a long way to go. The Economic Freedom Index of the World published by the Frasier Institute in Canada still ranks India a paltry 67th. To move they will need to change in labor laws to weaken the power of the unions, continue efforts at tax reform, make India even more friendly to foreign investment while reducing regulation much, much more.

    With these changes, Mumbai could become the next Hong Kong or Shanghai. The hardy and remarkably able denizens of Mumbai’s slums do not need Western pity. On the contrary, they need the freedom to build their own lives and fashion economic opportunity out of little more than hard work and a clever turn at a business.

    Westerners need to scratch beyond the surface of the films and superficial criticism. They need to see the real stories of heartbreak, innovation, and perseverance that make these harsh and unbending slums potential incubators of economic dynamism — reflecting the very optimism that made Slumdog Millionaire such an attractive film.

    Samuel R. Staley, Ph.D. is director of urban policy at Reason Foundation (www.reason.org) and co-author of Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century (Rowman & Littlefield, 2008).

  • From Bush’s Cowboy to Obama’s Collusive Capitalism

    Race may be the thing that most obviously distinguishes President Barack Obama from his predecessors, but his biggest impact may be in transforming the nature of class relations — and economic life — in the United States.

    In basic terms, the president is overseeing a profound shift from cowboy to what may be best described as collusive capitalism. This form of capitalism rejects the essential free-market theology embraced by the cowboys, supplanting it with a more managed, highly centralized form of cohabitation between the government apparat and the economic elite.

    Never as pure as its promoters suggested, cowboy capitalism always depended on subsidies to businesses such as corporate farming, suburban development, pharmaceuticals, energy and aerospace. George W. Bush and the Republican majorities of the early 2000s simply drove this essential hypocrisy to a disastrous extreme by increasing deficits and allowing deregulated financial markets to run wild. In the process, they helped drive the world economy off the cliff.

    Not surprisingly, Obama and his backers see their mission to reverse the course. However, the path they are taking may prove no friendlier — and perhaps less so — to the interests of American democracy and the middle class than those of the now-deposed cowboy posse.

    The Obama policy of collusive capitalism is most evident in the financial bailout. He has placed his economic program in the hands of a man — Treasury Secretary Timothy Geithner — who can best be called, as analyst Susanne Trimbath puts it, a “lap dog of Wall Street.” A protégé of former Treasury Secretary and Citicorp board member Robert Rubin, Geithner played a pivotal role in the original Bush bailout of the Wall Street elite.

    Most recently, he proposed selling toxic assets to hedge funds and other financiers, a plan widely denounced by a host of liberal commentators, notably Paul Krugman and Joseph Stiglitz. The Geithner plan, Stiglitz noted this week in a New York Times op-ed, represents “the kind of Rube Goldberg device that Wall Street loves: clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets.”

    The winners in the plan are the top guns of the financial industry, who would welcome further government-sponsored financial consolidation. For them, this would be vastly preferable to the more democratic alternative of selling the remaining assets of the failed large firms to dispersed, healthy, usually smaller, regional institutions.

    Largely missing from even these critiques is precisely why Obama has adopted this collusive approach while mostly avoiding anything smacking of populist anger. Perhaps one has to start with the very obvious fact that the president — despite occasional attacks on the greed of Wall Street — did not run against the financial markets but, rather, with their strong support. As early as the 2008 Democratic primaries, noted New York Times Wall Street maven Andrew Ross Sorkin, Obama had “nailed [down] the hedge fund vote.”

    This group includes the notorious currency speculator George Soros, a major backer of liberal groups in Washington who recently admitted to London’s Daily Mail that he was having “a nice crisis.” Whatever Geithner is doing seems to be working well for Soros and his ilk, although not so beneficently for the people who are losing their jobs and homes.

    I do not mean to suggest the shift to collusive capitalism represents a conspiracy; it simply reflects a changing of the guard among the American elite. The new hegemons include not only financial barons but also powerful interests such as the burgeoning green industry, the high-tech/venture capital complex, urban landowners and, at least in the category of useful idiots, Hollywood and much of the media.

    The new collusive capitalist class differs from the cowboys in its view of government. The collusive capitalists — notably, powerful IT companies and venture capitalists — now look to spur “green” technologies, which are seen as their next meal ticket.

    Others standing to benefit from the rise of collusive capitalism include the university and nonprofit research establishment. Universities have become critical linchpins for the new Democratic Party — providing student shock troops and professorial financial contributions as well as the basic ideological underpinnings and much of the key personnel.

    Are there any dangers for the administration from this approach? In the short run, they certainly have little to fear from the Republicans, whose strident claims about a lurch toward socialism have about as much credibility as their supposed born-again faith in fiscal conservatism.

    A potentially more dangerous threat lies from those parts of the non-gentry left, who fear that collusive capitalism will promote a dangerous further concentration of wealth and power. More immediately, it may also suffer from the limitations of a top-down, green-obsessed strategy that is unlikely to generate enough private-sector jobs, particularly for blue-collar workers.

    This large job creation deficit may take years to become evident but could have a long-term impact on middle-class voters and, perhaps most important, the generally pro-Obama millennial generation workers who are among the prime victims of the current economic malaise. Hopefully, before then, the president will recognize the limitations of collusive capitalism and set out on a broader, more democratic wealth-creating agenda.

    This article originally appeared at Politico.

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

  • London Calling: Bad News For Home Buyers

    The demand for housing in London has outstripped supply since the post-war period, making housing unaffordable to a majority of the city’s low and middle-income families. And although the house price growth of the last two decades has reversed itself recently, it is far from clear that London’s housing problems are in any way diminished. The opportunities for first-time buyers to get into the game may be worse than at any time in recent decades.

    In some ways, the London housing market is unique. The buy-to-let market is almost entirely dominated by private individuals, rather than by big investment funds. For instance, in 2006, two-thirds of the buyers of new private homes in the city were mostly small investors, and the remaining were owner-occupiers. Over half of the buyers are UK-nationals; the rest are of foreign origin. Overseas buyers have been attracted by the idea of holding investments in Sterling, a currency historically seen as stable and appreciating. For instance, South Africans have been enthusiastic investors in London housing as a hedge against the Rand. The city is made up of 3 million dwellings, most of which were built before the 2nd World War, and so the market is almost entirely for second-hand property . In fact, newly built housing in any year constitutes less than half a percent of total stock in London.

    The city is also unusual in that most Londoners are 20 to 39 year-olds. The city’s in-migrants tend to be young, while out-migrants are likely to be older. As a result, not only has the number of households been growing faster than the overall population, but the average size of the household has been falling. The supply of three or more bedroom-flats has shrunk rapidly as a proportion of total supply; it fell to 14% in 2007-08, less than half the level 10 years ago. The supply of new one and two bedroom flats, however, has mushroomed over the same period. This trend is set to continue: of the 570,000 to 710,000 additional households that London will have by 2026, three quarters will be single person households.

    Initial evidence that sub-prime mortgages were defaulting in greater and greater numbers in the United States in February’07 did not seem to have an impact on the UK housing market up until November of that year. The following months witnessed the crash of house prices, which continued their free fall into the final quarter of 2008. According to the Department of Communities and Local Government, properties in the UK lost a record 11.5% of their value over the year ending January’09, although the rate of house price deflation eased slightly in the last quarter. In London, house prices fell by 16% over the same period (the average house price in Greater London is 53% above the UK average).

    Prior to that, the United Kingdom enjoyed a major house price boom for a decade. Growth was fueled primarily by low interest rates, which kept the costs of mortgage finance low, and by shortages in the property market. Financial deregulation and the entry of banks into the mortgage market in the 1980s and 90s meant increased competition and easy availability of mortgage finance. Add to this stable and growing employment in the city, rising incomes and expectations that interest rates would remain low, and the house price boom was hardly surprising. The boom meant that housing became increasingly unaffordable for Londoners.

    But even the recent recession-related fall in house prices and the slump in sales have not necessarily translated into better opportunities to get a foot on to the housing ladder. On the contrary, the current credit crunch is compounding the problem. Falls in house prices in recent months have been accompanied by tightening of mortgage access criteria. Even if a mortgage can be obtained, average deposits and payments remain much higher than average incomes. The average first-time buyer needed to borrow 3.27 times their average income (joint or individual) in 2008, as compared to an income multiplier of 2.42 in 2000, or 2.31 in 1990. Research also shows that Londoners are increasingly dependent on help from family, since deposits can be prohibitive.

    Recent analysis by the Royal Institute of Chartered Surveyors concludes that despite falling prices, London has seen the largest deterioration in housing market accessibility of any region, as would-be-buyers struggle to find deposits or secure affordable mortgages. Indeed, the volume of first-time buyers was 55% lower in August’08 as compared to a year ago, and it seems that in recent months they have been shut out of the housing market in growing numbers. A quarter fewer first time buyers are accessing the market now than at the bottom of the housing market crisis in the early 1990s, and levels are at their lowest for 30 years.

    Although 80% of the housing in the UK is sold on the private market, the government plays an important role by intervening in the market through the provision of social housing, provided through housing associations or registered social landlords. There has been a dramatic surge in the demand for social housing as the recession has started to bite: the housing waiting lists have grown. According to the National Housing Federation, an additional 80,000 are expected to lack a home owing to recession-related repossessions and unemployment.

    However, there are a few encouraging signs. According to government figures published in December’08, the number of new homes being constructed in London did not fall as much as one might have expected as a result of the credit crunch. This is heartening, seeing that house builders have been hit by lower prices, restricted demand, severe problems accessing credit and rising construction costs.

    And surprisingly, according to primelocation.com, house prices in four of the five prime areas in London actually rose in February’09. Central London (3.24%) and West/South-West London (2.84%) saw the highest increase, although prices for property outside of London continued to free fall. The reasons for the rise could be a recent jump in sales. The investor interest pick up might be the result of yields on property rental looking attractive compared to record-low interest rates.

    Rising rents, falling house prices and a potential glut of unsold new market homes can also provide an improved investment opportunity to larger institutions. In his Economic Recovery Plan, announced in December’08, the Mayor of London, Boris Johnson, put aside GBP 5 billion to be channeled into increasing the stock of affordable housing. The funds are also targeted at Londoners who are threatened with repossession, and to help would-be first-time buyers become home owners.

    For the time being, the private rental sector has absorbed the re-directed demand from the housing market, as more people delay buying a home in the current climate of uncertainty. Rents in London have been strong, in some cases even rising over the last few months, especially in the face of diminishing supply of buy-to-let housing. And although the change in average price from Feb-March’09 for central boroughs in London was positive, some of the outlying London boroughs continued to experience falling house prices. Since movements in house prices in London tend to anticipate those across the United Kingdom, these changes provide an indication of what the rest of the country may expect very soon.

    Megha Mukim is currently reading for a PhD at the London School of Economics. Prior to this she was a visiting fellow at the MacMillan Center for International and Area Studies at Yale University.

  • Burnin’ Down the House! Part Two: Wall Street has a Weenie Roast With Your 401k

    Last week I wrote about the first part of my talk to the Bellevue Kiwanis Club on why our economy is in the position it is today. It is a story about good intentioned policies – like modifying credit scoring for Americans working in a cash-economy – that were bastardized in the execution – like some Americans using modified credit scoring to lie about their income. Just like there were superstar firms among the original “junk bond” companies, there were also firms like Enron and WorldCom.

    In the first part of my story: banks wrote mortgages, their broker-arms sold them to the public in the form of bonds, they paid fees to Standard & Poor’s and Moody’s to get triple-A credit ratings, and they devised crazy default protection schemes which they also sold in the public capital markets. On top of all that, they screwed up the paper work so there was no relationship between houses and the ultimate financial paper that could be used to cover potential losses.

    That’s when Wall Street staged a weenie-roast over the blazing fire of your 401k plan. They were making so much money in fees and trading profits that they decided to extend the scheme to car loans, credit card debt, and anything else they could package and sell off in capital markets around the world. When new money stopped flowing in and when the value of the underlying assets began the decline, the whole mess came falling down over their – and our – heads.

    In case after case, there are more derivatives than their underlying assets. Here’s an example of just how absurd this is: The market value of Bank of America (BofA) is $32 billion; the contracts that payoff if BofA fails are worth $119 billion. This isn’t rocket science math. It’s worth a lot more to someone to see BofA fail than it is to see them succeed. Here’s a table of some of financial companies and home builders, alongside some countries, to give you an idea of what the potential cost would be of letting them collapse – because the derivatives would have to be paid off if they collapsed. Where the market value of a company’s publicly-traded shares (or the outstanding public debt of a nation) is greater than the derivatives outstanding (a negative number in the difference column), the “market” is probably betting in favor of the company.

    Entity

    Derivatives outstanding

    Market Value or Public debt

    Difference

    BANK OF AMERICA CORPORATION

    118,689,745,334

    31,558,840,000

    87,130,905,334

    GMAC LLC

    83,556,419,908

    4,690,000

    83,551,729,908

    MORGAN STANLEY

    84,271,180,804

    24,186,940,000

    60,084,240,804

    DEUTSCHE BANK AKTIENGESELLSCHAFT

    71,011,177,628

    18,510,000,000

    52,501,177,628

    CITIGROUP INC.

    61,875,137,002

    12,760,000,000

    49,115,137,002

    AMERICAN INTERNATIONAL GROUP (AIG)

    47,393,950,401

    2,230,000,000

    45,163,950,401

    GENERAL MOTORS CORPORATION

    43,373,996,836

    1,540,000,000

    41,833,996,836

    CENTEX CORPORATION

    41,027,349,092

    856,760,000

    40,170,589,092

    LENNAR CORPORATION

    40,426,782,677

    1,260,000,000

    39,166,782,677

    AMBAC ASSURANCE CORPORATION

    36,835,358,941

    189,580,000

    36,645,778,941

    PULTE HOMES, INC.

    38,364,111,999

    2,460,000,000

    35,904,111,999

    FORD MOTOR COMPANY

    39,618,004,718

    5,030,000,000

    34,588,004,718

    THE GOLDMAN SACHS GROUP, INC.

    80,849,691,288

    46,624,340,000

    34,225,351,288

    BARCLAYS BANK PLC

    44,579,007,183

    11,160,000,000

    33,419,007,183

    WHIRLPOOL CORPORATION

    32,665,900,751

    1,850,000,000

    30,815,900,751

    CBS CORPORATION

    32,484,932,800

    2,600,000,000

    29,884,932,800

    SOUTHWEST AIRLINES CO.

    33,766,673,423

    4,090,000,000

    29,676,673,423

    TOLL BROTHERS, INC.

    27,532,256,817

    2,590,000,000

    24,942,256,817

    SPRINT NEXTEL CORPORATION

    33,852,494,934

    10,230,000,000

    23,622,494,934

    AUTOZONE, INC.

    31,489,303,582

    8,700,000,000

    22,789,303,582

    D.R. HORTON, INC.

    19,889,587,401

    2,540,000,000

    17,349,587,401

    ALCOA INC.

    20,554,123,223

    4,620,000,000

    15,934,123,223

    AMERICAN EXPRESS COMPANY

    28,098,626,953

    13,970,000,000

    14,128,626,953

    K. HOVNANIAN ENTERPRISES, INC.

    9,458,710,459

    70,220,000

    9,388,490,459

    AETNA INC.

    15,056,041,259

    9,720,000,000

    5,336,041,259

    TIME WARNER INC.

    33,530,285,093

    29,240,000,000

    4,290,285,093

    WELLS FARGO & COMPANY

    47,902,948,043

    58,060,000,000

    -10,157,051,957

    JPMORGAN CHASE &CO.

    61,250,536,812

    86,770,000,000

    -25,519,463,188

    RUSSIAN FEDERATION

    102,631,256,656

    151,000,000,000

    -48,368,743,344

    ABBOTT LABORATORIES

    5,273,779,532

    68,720,000,000

    -63,446,220,468

    REPUBLIC OF TURKEY

    169,668,377,905

    243,747,000,000

    -74,078,622,095

    REPUBLIC OF ITALY

    157,609,796,730

    248,773,000,000

    -91,163,203,270

    BERKSHIRE HATHAWAY INC.

    18,409,990,929

    126,860,000,000

    -108,450,009,071

    UNITED MEXICAN STATES

    76,677,172,011

    320,334,000,000

    -243,656,827,989

    FEDERATIVE REPUBLIC OF BRAZIL

    113,249,393,554

    814,000,000,000

    -700,750,606,446

    Derivatives outstanding is data made available by the Depository Trust and Clearing Corporation for publicly traded credit default contracts. Market value is for public companies generally in early March 2009; public debt is for countries generally from year-end 2008. Difference is author’s calculation. The average derivatives outstanding for entities with positive differences are 22 times the value of the entity (excluding GMAC as an outlier with a multiplier of 17,816).

    In other words, you could buy all the shares of Lennar for $1.2 billion. However, if they go bankrupt, the payoff will be $40 billion for the holders of the derivative contracts. And at this point, we – the US taxpayers – are in the position of paying off on these contracts if the banks and other “too big” companies fail. This table also tells you that the “markets” think that Bank of America is significantly more likely to fail than, say, Brazil – which is probably true, if for no other reason than the fact that Brazil has an army and Bank of America doesn’t!

    The bottom line is that the government has to continue to bailout these banks and large companies because many of them, including AIG which is now owned about 80% by us, are the same entities that will have to pay off the bets if the other companies fail. There’s really no way out of it now. I remain opposed to the bailouts – they create “moral hazard,” the scenario whereby it is more profitable to fail than to succeed. But: I understand why they are being done and why we have to keep doing it.

    The reason is: it matters to our 401k plans, the pension plans of teachers and firefighters, the retirement benefits of loyal, hard-working Americans. You see, the debt of insurance companies and other triple-A rated credits (AIG had a good credit rating less than 12 months ago) are required investments for money market funds, pension plans, etc. Take a look at the prospectus for any of these investments if you have them and you’ll see what I mean. It is necessary for such funds to make triple-A investments because the funds need to be able to make payments and honor withdrawals, sometimes on short notice. That means they have to hold some very safe, very easily sold investments. Investments like those issued by AIG.

    If the mutual funds holding your 401k and the pension fund supporting the school teachers and all that go broke – well, no one wants to imagine what that America would look like. Despite all the bad economic news, few Americans have run out in the streets in protest and even those who did didn’t vandalize any property, public or private. Nor did we take our CEOs hostage. In fact, I think a little civil unrest may be called for: print this story, wrap it around a hotdog, mail it to the New York Stock Exchange and tell them to enjoy their weenie-roast!

    Here’s why: the time is coming very soon when Wall Street will need us again. Uncle Sam is doling out the bailout money to the financial institutions, but even now they are devising ways to get ordinary investors to come back to the markets – and to use our own money to do it.

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

  • While Fixing Housing, Fix the Regulations

    Everyone knows that subprime mortgages lie at the root of our current financial crisis. Lenders originated too many of them, they were securitized amidst an increasingly complex credit market, and the bubble popped. The rest is painful history.

    Most commentators have explained the source of the problem by pointing either to faulty federal housing policies – such as Fannie Mae’s affordable housing goals, the Fed’s easy money practices, and the Community Reinvestment Act – or to the imprudent zest for gain among investors who miscalculated risk and kept up the demand for bad mortgages. Both views are correct to varying degrees. These perceptions will shape the ongoing policy debate about needed reforms.

    But as this debate advances, we should not lose sight of another consequential, yet mundane, factor in the crisis: the way that regulations raised house prices and created conditions ripe for subprime loans. Regulations may be one of the least debated contributors to the current crisis, and yet their effect on the middle class’s ability to buy homes may arguably have been a key reason why subprime loans flourished in the first place.

    In the heated housing market before 2007, a median income family in the U.S. could only afford 40 percent of homes for sale across the country, compared to more than two-thirds of homes in 1997. Banks got creative and helped ordinary families buy overly expensive homes with risky mortgages. In a hot market, the risks seemed low. People never should have purchased homes they could not afford, but at the same time, rising prices were putting homeownership out of the reach of ordinary families such that unconventional loans seemed a convenient solution.

    Why were housing prices rising so rapidly? Observers have traditionally held that land scarcity drives up prices by preventing supply from meeting demand. But the more likely answer is that regulations on housing overly constricted supply in many parts of the U.S. Through the groundbreaking work of Wendell Cox at Demographia and scholars such as Ed Glaeser at Harvard and Joe Gyourko at the University of Pennsylvania, we have come to see that rules and regulations drive up housing prices much more than we had originally thought. Blaming supply problems on land scarcity has been a convenient excuse for too long for those who see hyper-regulation of housing as a good thing.

    Regulations often limit the number of housing units that can be built on a given lot, or they restrict the number of new home permits that can be issued in a given municipality, making supply a function of rules, not land scarcity. Restrictions to the property itself, such as environmental or design requirements, also raise the cost of construction (see Andres Duany’s thoughtful article on this issue here.).

    Increased regulation on housing has been a quiet, but disquieting, trend. For example, Glaeser has shown that only 50 percent of communities in greater Boston had restrictions on subdivisions in 1975, compared to nearly 100 percent today. Housing prices in the Boston area would have been between 23 and 36 percent lower on the eve of the crisis were it not for burdensome restrictions on housing. While the Boston area’s regulatory impulse may be excessive, it is nonetheless emblematic of a national trend. A recent U.S. Department of Housing and Urban Development has found that more than 90 percent of the subdivisions in a recent national study now have excessive restrictions.

    According to Harvard’s housing research center, the growing cost of regulations has edged smaller builders out of the construction market and increased the market share of the nation’s ten largest builders from 10 to 25 percent since the early 1990s. This doesn’t mean that the larger builders are happy about restrictions. Bob Toll, president of one of the nation’s largest builders, has said that his company quit building “starter homes” for young families years ago because the margins on small homes grew too narrow due to excessive regulations.

    How big is the problem? Most observers have typically agreed that housing regulations account for 15 to 35 percent of a median-priced home in the U.S. These percentages come from a 1991 federal housing commission, and they are likely to have increased considerably since then. If we conservatively use them to calculate the scope of regulations by the time the housing crisis began in earnest in 2007, they suggest that regulations accounted for between $35,850 and $83,650 of a median-priced home. Using the National Association of Homebuilders’ methodology for determining the impact of price increases on home affordability, we can say that regulatory restrictions priced at least 7 million – and as many as 18 million – families out of their local housing markets in 2007. As we have learned, families priced out of their markets still purchased homes – usually with unconventional, risky mortgages.

    Of course, not all housing regulations are bad, and zero regulation would introduce unnecessary risks to homeowners. But the increasing rate of regulation in the U.S. represents one of the nation’s larger assaults on the middle class that defenders of “working families” rarely talk about. Conservatives avoid the issue for federalism reasons, since any effective restraint on land-use planners will likely require the federal government’s involvement. And liberals hide from an honest debate about the effects of regulations for fear that it will derail their environmental agenda that relies up on regulations to limit the kind of housing most people want – such as single family homes.

    Now that there is an over-supply of housing in the U.S., the problem of housing regulations may seem moot. But if we do nothing about this issue, it will trip us up again in the future. While I served in the George W. Bush White House between 2005 and 2007, economists inside and outside the administration offered mixed – and sometimes completely contradictory – assessments of what was happening in the housing sector. We continued to work on our proposed reforms of Fannie and Freddie and the Federal Housing Administration in an effort to reduce the “systemic risk” but approached it more as a theoretical matter than as a perceived, impending crisis. We even had a HUD-based initiative on reducing regulatory barriers that quietly lumbered along but which we never elevated as a major policy issue. We now know that what we were grossly underestimating the scope of a potential crisis. We should have made housing sector reform a front burner issue.

    That is all behind us now, and we can see much more clearly what led to the crisis. We need to look at how rule-makers have for too long been making housing unnecessarily expensive for ordinary families. There is a limit to what the federal government can and should do about local housing regulations, but options exist for President Obama and Congress to consider.

    First of all, just as federal agencies are legally required to analyze the environmental impact of new regulations, Congress could require federal agencies to demonstrate the impact of new federal regulations on the cost of home construction. Federal agencies already have the personnel required for the task, and such a requirement would cost the taxpayer nothing extra. Second, Congress should consider new incentives in existing federal law, from highway construction to affordable housing, that would prompt states and municipalities to reduce burdensome regulations in exchange for federal resources. Third, President Obama could issue an executive order requiring federal agencies to amend regulations that have a negative effect on home construction costs. He could also use the same order to establish a task force whose job would be to identify the chief price-increasing regulations in use around the country to inform the legislative process.

    If we ignore the problem, as the housing market recovers, regulations will once again make housing more expensive than it should be. Unconventional mortgages will no longer be available due to the current crisis, and we will be back in a familiar debate about “affordable housing” in which the federal government is called upon to subsidize housing that others have made too expensive. In other words we return to the status quo in which we once again increase the role of a government that – under both Republican and Democratic administrations – has gotten ever bigger, more expensive and increasingly intrusive.

    Ryan Streeter is Senior Fellow at the London-based Legatum Institute and former special assistant to President George W. Bush for domestic policy.

  • Anger Could Make Us Stronger

    The notion of a populist outburst raises an archaic vision of soot-covered industrial workers waving placards. Yet populism is far from dead, and represents a force that could shape our political future in unpredictable ways.

    People have reasons to be mad, from declining real incomes to mythic levels of greed and excess among the financial elite. Confidence in political and economic institutions remains at low levels, as does belief in the future.

    The critical issue facing the new administration is finding useful ways to channel this disenchantment. We know popular anger can also be channeled in unproductive ways. It can serve to further a narrow political agenda – for example, Karl Rove’s cynical exploitation of the “culture wars” – or stir up a witch hunt against both real and perceived “threats,” as occurred during the McCarthy era. If this were Russia, there would be show trials and executions. We do not and should not do that – but we can still use populist anger to reshape our nation and make it stronger.

    In this respect, the Obama administration, criticized justifiably as too radical on some issues, has been far too timid. It has squandered much of the stimulus effort on maintaining fundamentally corrupt, even sociopathic, institutions like AIG or Citigroup. By taking direction from establishmentarians like Treasury Secretary Timothy Geithner, one of the original architects of the Bush financial bailouts, the current administration has seemed as complicit in condoning and even rewarding Wall Street’s transgressions as the last one.

    Populist rage creates the political support for taking far bolder steps against Wall Street. A good first step would be to allow the TARP-backed giant banks to come under some sort of federal control, or bankruptcy process, effectively wiping out the holdings of the financial malefactors and decimating any hopes for future bonuses. The public could then sell the remaining assets to the many well-run community and regional banks that invest in local businesses as opposed to the arcane paper favored by the Masters of the Universe.

    Radical financial reforms represent only part of the opportunity. China is using its stimulus to increase its competitiveness globally. So far, the Obama administration’s economic strategy, if it has one, has been selling the public on the chimera that highly subsidized “green jobs” and good intentions will save the economy. It has also rewarded what my old teacher Michael Harrington called “the social-industrial complex,” the massively growing education, health and social-service bureaucracy. President Obama needs to spend less time in photo ops at “green” factories and figure out how to drive the transformation of whole industries, like autos, steel, electronics and aerospace.

    In this sense, of course, the New Deal – particularly the Works Progress Administration and the Civilian Conservation Corps – provides some models. These programs used the unemployed to create new dams, electrical-transmission systems and bridges that boosted the nation’s productive power. Critically, such a program would target blue-collar workers – mostly male and heavily minority – hardest hit in the recession. As conservatives rightly note, the New Deal construction projects did not end the Depression, but they did give people purpose and skills as well as hope, while leaving us with a remarkable legacy of productive structures that inspire us with their affirmation of our national destiny.

    Sadly, the political operatives running the White House today may prefer to use the popular mood primarily to service their key political constituencies and boost their poll ratings. If they do so, they will have squandered a unique opportunity to implement changes that would benefit both the country and the middle class for decades to come. Public outrage is a terrible thing to waste.

    This article originally appeared at Newsweek.

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

  • Restoring the Real New Orleans

    Like so many others, I have long been a visitor to New Orleans. In my case, the first visit was 1979, when we studied the city to influence the design of the new town of Seaside. I have been back often – for New Orleans is one of the best places to learn architecture and urbanism in the United States. My emphasis on design might seem unusual, but it shouldn’t be, for the design of New Orleans possesses a unique quality and character comparable to the music and the cuisine that receives most of the attention.

    During those visits, sadly, I did not get to know the people – not really. The New Orleanians I met were doing their jobs but not necessarily being themselves. Such is the experience of the tourist.

    This all changed when Katrina brought me back in the role of planner. Engaging the planning process brought me face to face with the reality.

    Apart from the misconceptions of the tourist, I had also been predisposed by the media to think of New Orleans in a certain way: as a charming, but lackadaisical and fundamentally misgoverned place long subjected to unwarranted devastation, with a great deal of anger and resentment as a result. That is indeed what I found at first; but as I engaged in the planning process I came to realize that this anger was relative. It was much less, for example, than the bitterness that one encounters in the typical California city with nothing more than traffic gripes. The people of New Orleans have an underlying sweetness, a sense of humor, and irony, and graciousness that is never far below the surface. These were not hard people.

    Pondering this one day, I had an additional insight. I remember specifically when on a street in the Marigny I came upon a colorful little house framed by banana trees. I thought, “This is Cuba,” (I am Cuban). I realized in that instant that New Orleans is not really an American city, but rather a Caribbean one.

    Looking through the lens of the Caribbean, New Orleans is not among the most haphazard, poorest or misgoverned American cities, but rather the most organized, wealthiest, cleanest, and competently governed of the Caribbean cities. This insight was fundamental because from that moment I understood New Orleans and began to truly sympathize. Like everyone, I found government in this city to be a bit random; but if New Orleans were to be governed as efficiently as, say, Minneapolis, it would be a different place – and not one that I could care for. Let me work with the government the way it is.

    It is the human flaw that makes New Orleans the most humane of American cities. (New Orleans came to feel so much like Cuba that I was driven to buy a house in the Marigny as a surrogate for my inaccessible Santiago de Cuba.)

    When understood as Caribbean, New Orleans’ culture seems ever more precious – and more vulnerable to the effects of Katrina. Anxiety about cultural loss is not new. There has been a great deal of anguish regarding the diminishment of the black population, and how without it New Orleans could not regain itself.

    But I fear that the city’s situation is far more dire and less controllable. Even if the majority of the population does return to reinhabit its neighborhoods, it will not mean that New Orleans – or at least the culture of New Orleans – will be back. The reason is not political, but technical. You see, the lost housing of New Orleans is quite special. Entering the damaged and abandoned houses you can still see what they were like before the hurricane. These houses were exceedingly inexpensive to live in. They were houses that were hand built by people’s parents and grandparents, or by small builders paid in cash or by barter.

    Most of these simple, and surprisingly pleasant, houses were paid off. They had to be, because they do not meet any sort of code, and are therefore not mortgageable by current standards.

    I think that it was possible to sustain the culture unique to New Orleans because housing costs were minimal. These houses liberated people from debt. One did not have to work a great deal to get by. There was the possibility of leisure.

    There was time to create the fabulously complex Creole dishes that simmer forever; there was time to rehearse music, to play it live rather than from recordings, and time to listen to it. There was time to make costumes and to parade; there was time to party and to tell stories; there was time to spend all day marking the passing of friends. One way to leisure time lies in a light financial burden. With a little work, a little help from the government, and a little help from family and friends – life could be good! This is a typically Caribbean social contract: not one to be dismissed as laziness or poverty, but as a way of life.

    This ease, so misunderstood in the national scrutiny following the hurricane, is the Caribbean way. It is a lifestyle choice and there is nothing intrinsically wrong with it. In fact, it is the envy of some of us who work all our lives to attain the condition of leisure only after retirement.

    This is the way of living that may now disappear. Even with the Federal funds for new housing, there is little chance that new or renovated houses will be owned without debt. It is too expensive to build now.

    If nothing else, the higher standards of the new International Building Code are superb, but also very expensive. There must be an alternative or there will be very few “paid off” houses. Everyone will have a mortgage, which will need to be sustained by hard work – and this will undermine the culture of New Orleans.

    What can be done? Somehow the building culture that created the original New Orleans must be reinstated. The hurdle of drawings, permitting, contractors, inspections – the professionalism of it all – eliminates grassroots ‘bottom up’ rebuilding.

    Somehow there must be a process whereupon people can build simple, functional houses for themselves, either by themselves, or by barter with professionals.

    There must be free house designs that can be built in small stages, and that do not require an architect, complicated permits, or inspections. There must be common sense technical standards. Without this, there will be the pall of debt for everyone. And debt in the Caribbean doesn’t mean owing money, it means destroying a culture that arises from lower costs and leisure.

    To start, I would recommend an experimental “opt-out zone.” Create areas where one “contracts out” of the current American system, which consists of the nanny-state raising standards so expensive and complicated that only the nanny-state can provide affordable housing. The state thus creates a problem and then offers the only solution.

    However it may sound, this proposal is not so odd. Until recently, this was the way that built America from the Atlantic to the Pacific.
    For three centuries Americans built for themselves. They built well enough – so long as it was theirs. Individual responsibility could be trusted.

    We must return to this as an option.

    Of course, this is not for everybody. There are plenty of people in New Orleans who work in conventional ways at conventional times. But the culture of this city does not flow from them; they may provide the backbone of New Orleans, but not its heart.

    See the attached file for a polemical draft for legislation that activates the thesis of the above essay.

    Andrés Duany is a principal at Duany Plater-Zyberk & Company (DPZ). DPZ is recognized as a leader of the New Urbanism, a movement that seeks to end suburban sprawl and urban disinvestment. In the years since the firm designed Seaside, Florida, in 1980, DPZ has completed plans for close to 300 new towns, regional plans, codes, and community revitalization projects.

    Duany is the author of The New Civic Art and Suburban Nation. He is a founder of the Congress for the New Urbanism. Established in 1993 with the mission of reforming urban growth patterns, the Congress has been characterized by The New York Times as “the most important collective architectural movement in the United States in the past fifty years.”

  • How Elite Environmentalists Impoverish Blue-Collar Americans

    The great Central Valley of California has never been an easy place. Dry and almost uninhabitable by nature, the state’s engineering marvels brought water down from the north and the high Sierra, turning semi-desert into some of the richest farmland in the world.

    Yet today, amid drought conditions, large parcels of the valley – particularly on its west side – are returning to desert; and in the process, an entire economy based on large-scale, high-tech agriculture is being brought to its knees. You can see this reality in the increasingly impoverished rural towns scattered along this region, places like Mendota and Avenal, Coalinga and Lost Hills.

    In some towns, unemployment is now running close to 40%. Overall, the water-related farming cutbacks could affect up to 300,000 acres and could cost up to 80,000 jobs.

    However, the depression conditions in the great valley reflect more than a mere water shortage. They are the direct result of conscious actions by environmental activists to usher in a new era of scarcity.

    To some extent, such efforts reflect some real limits imposed by the growth of population. Constructive long-term changes in the conservation and utilization of all basic resources – energy, water and land – are not only necessary, but also inevitable.

    Yet the new scarcity does not simply advocate humane ways to deal with shortages, but seeks to exacerbate them intentionally. This reflects a doomsday streak in the contemporary environmental ethos – greatly enhanced by the concern over climate change – that believes greater scarcity of all basic commodities, from land and water to energy, might help reduce the much detested “footprint” of our species.

    One key element of this agenda has to do with reducing access to critical resources like water beyond those required to support existing uses. To be sure, two years of below-average precipitation helped create central California’s current water shortage. Planting crops such as cotton, which needs lots of water, may also have contributed to the problem.

    However, this only explains part of the problem, which increasingly has to do not with vicissitudes of nature but conscious political action. In prior dry periods, the state has managed its water resources to supply farmers and other users as effectively as possible. Today, in response to seemingly endless litigation to protect certain fish in the Delta region west of Sacramento or to “revitalize” valley streams, enormous amounts of water have been allowed to flow untapped into San Francisco Bay.

    This distinction was entirely missing in national coverage of the drought. A recent New York Times article, for example, barely acknowledged the role played by environmentalists whose move to block additional water supplies from the Delta have turned a below-average year – moisture content in the Sierra is about 90% of normal – into something of an epochal agricultural and human disaster.

    “This is still a pretty decent drought but nothing unusual,” suggests Tim Quinn, executive director of the Association of California Water Agencies, which represents both urban and agricultural interests. “We were prepared, as usual, for the drought, but they have taken all the tools away from us.”

    Many environmentalists justify their efforts to curtail water availability for California’s farmers and towns by citing various doomsday global warming projections. Energy Secretary Steven Chu, for example, recently opined that as the state’s climate inevitably shifts to a hot-weather, low-precipitation pattern, water scarcity will create “a scenario where there is no more agriculture in California.” If agriculture is doomed anyway, why not kill the industry now and use the water for fish or other pet “green” projects?

    This represents a remarkable reversal in the spirit that only a few decades ago drove the development of California. Anyone who has lived for any period in the state knows that aridity represents our greatest natural challenge. California seems always either at the edge of drought, coming out of one, or about to enter a dry spell. Since 1920, the state has experienced crippling six-year droughts during 1929 to 1934 and 1987 to 1994, as well as severe shortfalls of a lesser span on several occasions.

    Recognizing the need for a reliable water supply despite the certainty of significant dry years, Californians responded by building one of the most highly advanced water delivery systems in the world. The result was a network of federal and state dams, pumps and aqueducts emblematic of the “can-do” spirit motivating old Progressives, like Edmund Brown in Sacramento and New Dealers in the nation’s capitol.

    The state’s water conveyance facilities opened vast new tracts of land to agriculture. Some of the world’s largest expanses of almonds, pistachios, pomegranates, grapes and cotton covered once-arid land. This expansion created steady demand for advanced farming technologies as well as low-paid labor, much of it undocumented. Reflecting this dichotomy, wealth and poverty grew hand in hand throughout the Central Valley.

    Today, environmentalists cite – as yet another reason to dehydrate California farmlands – the prevalence of immigrant labor in the Central Valley. Lloyd Carter, a major state environmental activist, recently suggested that cutting farm production would actually be beneficial since most farm workers are “not even American citizens for starters” and raise children that “turn to lives of crime,” “go on welfare” and “get into drug trafficking and … join gangs.” These comments cost Carter his association with certain environmental groups, but not his day job – deputy attorney general under former governor and supreme green jihadi Jerry Brown.

    Unfortunately, Carter’s comments reflect what many environmentalists will tell you in private. As a Valley resident himself, Carter may have great empathy for his region’s poor and working class, but it’s hardly a priority among the core of the green movement, which is based in places like San Francisco or Santa Monica. This reflects not so much racism as a disconnect with the productive industries – agriculture, energy and manufacturing – that tend to cluster on the other side of the coastal range.

    The growing economic problems in Central Valley cities like Fresno, where unemployment is near 15%, represents little more than an abstraction to a new cadre of wealthy “progressives” who merely pass through the area on their way to Yosemite and other Sierra resorts.

    “We are getting the sense some people want us to die,” notes native son Tim Stearns, a professor of entrepreneurship at California State University at Fresno. “It’s kind of like they like the status quo and what happens in the Central Valley doesn’t matter. These are just a bunch of crummy towns to them.”

    This split has engendered what is likely a quixotic secession campaign led by farmers in the interior counties, but such drives to divide the Golden State have risen and failed many times before. Yet clearly, there exists a growing divide between producer and consumer economies, and this is coming to the fore not only in California, and on issues well beyond water.

    It is critical to understand that anti-growth politics diverges from the old conservationist ethos in radical ways. No longer is it enough to talk about growing intelligently or using technology to meet long-term problems. Instead, scarcity politics seeks to slow and even reverse material progress through what President Obama’s science adviser, John Holdren, calls “de-development.”

    “De-development” – that is, the retreat from economic growth – includes some sensible notions about conservation but takes them to unreasonable, socially devastating and politically unpalatable extremes. The agenda, for example, includes an opposition to population growth, limits on material consumption and a radical redistribution of wealth both nationally and to the developing world.

    In much the same way as seen in California’s water crisis, many of the administration’s “green” energy policies pose a direct threat to blue-collar workers employed in extracting and processing fossil fuels. The resultant high energy prices caused by the proposed “cap and trade” system – essentially a system for creating scarcity – also will cost middle-class consumers, blue-collar workers, truckers and manufacturers. These constituencies could well face the kind of water policy-related decline that is destroying farming communities throughout central California.

    Yet at the same time, such policies make the well-to-do and trustafarians in San Francisco and Malibu – for whom higher energy prices are barely a concern – feel better about themselves. In what passes for progressive politics today, narcissism usually takes priority over reality.

    In the new scarcity politics, access to land also may be sharply limited. New land regulation, ostensibly for climate-change reasons – already in place in California and being discussed as well in Washington state – could force almost all new development to follow a high-density, multi-family pattern. Over time, single-family homes – the preference of a vast majority of Americans – will become once again, as they were in the past, the privilege only of the upper classes in some metropolitan regions.

    By embracing the politics of scarcity, the Obama administration seems committed to imposing a regime that could slow any sustained recovery from the current recession. Although these ideas might appear plausible at a Harvard Law Review bull session, their real consequences for millions of Americans could prove very ugly indeed.

    This article originally appeared at Forbes.

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

  • Different Shades of Green

    Last month marked the 15th anniversary of the settlement of Plotkin vs. General Electric, the landmark “greenwashing” lawsuit I filed in 1993. At the time, GE was misleading consumers by selling phony lookalike energy efficient light bulbs that were in fact just old fashioned incandescent wolves in green packaging.

    I took no money from the case. But I required G.E. to make labeling changes and to pony up $3.25 million dollars in consumer refunds and donations to environmental and public service groups. The labeling changes made it easier for the manufacturers of real energy efficient light bulbs, which were just then entering the marketplace, to distinguish their products on the shelves. Plotkin vs. GE also more firmly established the ability of environmental activists to turn to the courts when state and federal government agencies fail to punish greenwashing. The settlement we achieved created a powerful deterrent that continues to produce benefits to this day.

    In the meantime, though, greenwashing has become a virtual industry in the political and policy worlds. Take, for example, the growing push for economically regressive and environmentally problematic HOT (high occupancy toll) lanes. HOT lanes are toll lanes on public highways. Prices are set dynamically so that HOT lanes keep moving even if all the other lanes are stuck. Governor Schwarzenegger and many leading Democrats favor the idea and use it to paint themselves green. HOT lanes are also popular with many affluent motorists who love the idea of driving their SUVs in the carpool lane for what amounts to pocket change. It’s an odd alliance.

    Unfortunately, support for HOT lanes is also becoming a litmus test issue for some environmental groups when they evaluate political candidates, apparently without much thought about the economic consequences, particularly for the poor.

    HOT lane backers push their plan by claiming that only a limited number of lanes will be involved, typically just one to start. But in Europe, where many of these experiments began, “congestion management” programs have since morphed into systems that essentially allow rich drivers to hog public roads. Give the upper crust the fast lane and, it turns out, pretty soon they want the whole road.

    HOT lanes are an example of one of the worst forms of regressive taxation imaginable. Like all regressive taxes, they exact a higher percentage of income from the poor. But in this case, they also tax the very mobility of the poor, making it harder for them to commute, including to work and school, which can effectively lock people into low end jobs and poverty that they might otherwise escape.

    What little thought the proponents of HOT lanes have given to their impact on the poor appears to be in the category of “let them eat cake.” One widely-cited report recommending HOT lanes even dismissed concerns they were unfair to the poor by noting that service workers can use the lanes to get to their clients’ houses more quickly:

    “… studies of Orange County’s SR-91 show that the variable-priced toll lanes are not used exclusively by the wealthy. The ability to save time and reduce uncertainty confers substantial benefits to all drivers, including service professionals who can make more service calls…”

    In the San Francisco Bay Area, Caltrans and the Metropolitan Transportation Commission are fast-tracking a HOT lane implementation plan that could be devastating for students at area community colleges. At De Anza College in Cupertino, California, for example, more than 10,000 students commute to school each day. For many, this is the only reasonable path towards upward mobility. I know. Thirty years ago, I was one of those students, only to return more recently to serve on the college district’s board of trustees.

    A proposed fee of $5 a day per trip on Highway 85 during peak rush hour, as envisioned, would boost a typical De Anza College commuter student’s expenses by as much as $100 a month. That burden is sure to grow over time. Escaping poverty is often a game of inches. Our surveys indicate that thousands of our students live at or near the poverty level. Each additional expense imposed by our government makes a high quality college education less accessible.

    HOT lane proponents say that over the long run the impact on the poor will be positive because the tolls will be used to improve public transit, which will benefit less affluent citizens and increase use of public transportation.

    But this is out of touch with the realities of life in places like Silicon Valley, where the automobile is still the most practical way for many people to get to work. What may work for investment bankers taking transit to downtown San Francisco doesn’t work for a student who lives in Mountain View and needs to get to Cupertino and then to a job in Redwood City each day.

    What’s more, the promised transportation improvements may take decades to implement and may never meet the real world transit needs of working students, not to mention those who also have to stop to pick up their children, get groceries or complete errands on the same trip.

    But one thing is for sure. While we wait for those HOT lane financed transit improvements to kick in, a generation, maybe more, will find it harder to attend school or get to their jobs.

    Global warming is a very real problem. But it can and must be addressed in far better and more equitable ways. Those less regressive ideas include higher taxes on gas guzzlers, road electrification, remote sensing (“by wire”) vehicles, increased subsidies and public support infrastructure for carpools, home-based work and or possibly even a boost in industrial levies based on employee commute profiles. All of these advances will require government action and a communal effort. But each of these more significant steps are far less likely to occur if rich divers can easily get wherever they want to go quickly at the expense of everyone else. That’s the road the current elitist HOT lanes proposal takes us down.

    It also raises the question of what comes next. Will this same crowd of economic elitists also want to make public parks and beaches off limits to all but the affluent, too? After all, those are also getting pretty crowded. Or we will defend a more traditional American value: public spaces, including roads, are created, maintained, protected and improved by the public to benefit the public.

    When General Electric put phony energy efficient light bulbs on stores shelves two decades ago, taking the company to court was the smart way to fight back. Unfortunately, there is no court we can petition to ensure that regressive tax policies aren’t greenwashed in ways that trample the rights of the poor, community college students and working people. But there is at least one place we can fight for the smarter, more effective and more equitable environmental policies we need: the state legislature.

    Hal Plotkin is a veteran Silicon Valley journalist and commentator, a founding editor of Marketplace on public radio, and the founder of the Center for Media Change, Inc., a Palo Alto-based 501(c)3 non-profit that enables crowd-funding of high-quality journalism.