David Friedman

Rebuilding the Middle Class

Cecille Isidro — Mon, 04 Dec 2006 00:33:00 -0500

Over the last 20 years, the United States has regressed into what one economist calls a "plutonomy" -- a society in which the largest economic gains flow to an ever smaller portion of the population. According to recent economic statistics, from 1999 to 2004, the inflation-adjusted income of the bottom 90% of all U.S. households grew by 2%, compared with a 57% jump for the richest 10%. Incomes rose by more than 87% for households annually making $1 million and more than doubled for those that take home about $20 million a year.

Most disturbingly, workers losing the most economic ground are not the uneducated and unskilled but those with high school, community college and even four-year degrees. Overall, the middle class, in relative if not absolute terms, has lost purchasing power, especially in big coastal cities where the highest earners and the super-rich have driven up prices for housing and the cost of living. Globalization and automation have not only hurt manufacturing workers but also mid-level managers, engineers and software programmers. Despite enormous media and stock market hype, for instance, the U.S. has lost more than 700,000 information industry jobs since early 2001.

Is there any way to restore the prospects of middle- and working-class Americans? A comprehensive program to rebuild the nation’s highways and bridges, upgrade its ports, construct and expand its energy lifelines and enlarge its public transportation systems could generate hundreds of thousands of good-paying jobs. Admittedly, this back-to-basics strategy is not glamorous. But it has helped narrow economic inequality in the past by producing more balanced economic growth.

During the 1930s, for instance, the government sought to narrow the enormous wealth disparities caused by the Depression by putting people to work on an unprecedented number of infrastructure improvements. About 3 million workers, many of them unemployed, were organized to build roads, bridges and dams. They planted millions of trees in middle America to prevent soil erosion. They built transportation networks that helped cities increase their industrial productivity. Rural electrification programs lifted sections of the Midwest and South out of darkness.

In the 1950s, under the Eisenhower administration, construction began on an interstate highway system that, when completed, reduced travel times and made the economy more efficient. By promoting suburban development, the new roads also sparked an unprecedented growth in homeownership for working- and middle-class families.

The result was one of the most balanced periods of prosperity in U.S. history. As ordinary Americans prospered, the share of the nation’s wealth controlled by the top 10% of the population fell from nearly 50% in the 1930s to about 30% in the 1960s. Yes, the super-rich did quite well. But coupled with such government programs as the GI Bill and housing for veterans, the infrastructure projects helped give more Americans access to higher education and homeownership.

Both Democrats and Republicans have largely abandoned policies that led to balanced economic expansion. Liberals tend to favor social programs that redistribute income to the less privileged, while conservatives resist nonmilitary spending. As a result, since the mid-1960s, spending on public infrastructure has fallen from more than 3% of gross domestic product to about 2.5%. As the quality of roads, bridges, schools, sanitation and healthcare fell, wealth shifted away from the middle and working classes. Measures of income inequality skyrocketed from relatively low levels in the 1950-1970 period to postwar highs in the late 1990s.

Of course, lack of infrastructure spending was not the only culprit. But minimal investment in public projects that boost the economy’s productivity certainly has not helped. By contrast, countries such as China, Japan, Singapore, South Korea and Taiwan have poured billions of dollars into upgrading airports, transit systems, schools and roads, and their economies have benefited.

The scale of today’s economic inequality in the U.S. can be eye-popping. Since 1980, for instance, Manhattan’s inequality rate has risen from 17th to first among all U.S. counties. The richest 20% in the borough now earns 52 times what the lowest fifth does, disparity roughly comparable with Namibia. Last month, just as Wall Street hailed record bonuses of more than $25 billion, thousands of New Yorkers lined up for 185 jobs -- 65 of them full time -- at the M&M’s World theme store in Times Square. The starting salary was $10.75 an hour, though the benefits package was generous by comparison with most entry-level jobs.

Similar wealth concentration is occurring throughout the country. California is home to one of the world’s highest number of billionaires and multimillionaires, but one in five children live in poverty here. A 2000 study by the California legislative analyst’s office showed that 20% of San Francisco’s population took home more than 60% of the Bay Area’s income, the worst inequality in the state. In Los Angeles County, 20% of the population pocketed about 55% of the region’s income.

The current favored policy proposals will do little to change economic disparity. The Republican package of high-end tax cuts, pork-barrel spending projects such as the bridge to nowhere in Alaska and near-total neglect of the country’s industrial base by generally ignoring unfair trade practices constitutes a veritable formula for continued inequality. That’s one reason why the party lost power in the November midterm elections despite overall solid economic growth and a record-breaking stock market.

Democrats also have few answers. Many focus on increasing the U.S. minimum wage or expanding the "living wage" movement that has taken hold in Los Angeles and San Francisco. But the chief beneficiaries of these policies are younger part-time workers, not primary household wage-earners. One study by the Public Policy Institute of California shows that such measures, while boosting the wages of those affected by them, also reduce overall regional employment by as much as 6% to 8% among lower-skilled workers.

Others push for higher taxes on the "rich," a strategy that would have little effect on multimillionaires and billionaires, who can afford legal and financial advisors who protect their wealth. Most Democrats don’t want to restrict wealthy people’s use of private environmental trusts or activist foundations to dodge taxes because many of these entities are among their most fervent supporters. Instead, it’s those in the $100,000-to-$300,000-a-year range who would feel the pinch of higher taxes, many of whom are small-business owners and professionals who create jobs in costly urban areas.

Indeed, the net result of decades of liberal urban policy -- mixed-price residential developments, high taxes on professionals and small businesses, environmental and business regulation and mandated wage rates -- has been to drive more and more middle-class workers out of urban areas. A recent Brookings Institution report showed that heavily Democratic regions such as Boston, Los Angeles, New York and San Francisco are precisely the places where middle-class neighborhoods are most endangered.

The best way to reverse these trends is to return to those policies that produced a vibrant, economically well-balanced society: creating jobs by investing in infrastructure and promoting people’s technical skills. According to the American Society of Civil Engineers, $1.6 trillion worth of infrastructure projects are required but yet to be started.

Thousands of production jobs go begging in this nation not because of foreign competition but because of a lack of skilled workers willing or able to obtain basic machinery training. As one Houston factory manager, echoing findings across the country, remarked recently, it is easier to find an engineer than an experienced machinist or welder.

Gov. Arnold Schwarzenegger’s rebuilding project for California, an estimated $43-billion effort that could generate more than 700,000 jobs, is a step in the right direction. There also are alternatives to public debt. Today, many needed public investments can be -- and in some places are -- privately financed. By steering capital -- through tax breaks and incentives -- now flowing to speculative Internet stocks and luxury condominiums toward roads, bridges and electricity lines that can carry surplus power from the heartland to urban consumers, productivity can be enhanced and large numbers of blue- and white-collar jobs created.

To be sure, a back-to-basics economic growth strategy would conflict with certain deeply held but flawed political nostrums. Most Republicans would resist any notion that government should have larger role in promoting the aspirations of Americans, although precisely this belief animated the Eisenhower administration’s interstate highway system. Many upscale liberals probably would be hesitant to embrace a full-blown program to rebuild the infrastructure because of its possibly harmful effects on the environment. Others claim that training for "knowledge" jobs should take precedence over that for manufacturing or trade occupations.

All of the essentials -- capital, a willingness to work and undeniable need to rebuild our infrastructure and expand worker skills -- for a program that would directly address our steadily worsening class divide are already in place. All we lack now is the political willingness to embrace this opportunity.

David Friedman

Operations — Tue, 18 Apr 2006 23:55:00 -0400

Former Senior Fellow

David Friedman was a New America Senior Fellow from March 2000 through March 2007.Friedman is an attorney, political scientist, economic development specialist, author, and columnist. In addition to his law degree, he holds a Ph.D. from MIT in international politics, where he won an award for the “Best… more

A Prescription for the Blue-Collar Blues

Cecille Isidro — Sat, 11 Jun 2005 00:00:00 -0400

Expanding the number of quality blue collar jobs in Los Angeles will be Mayor-elect Antonio Villaraigosa's most difficult economic challenge. Since 2001, our region's manufacturing employment has declined by nearly 20%, mirroring the loss of 2.6 million goods-producing positions in the nation as a whole. That's very bad news for cities like L.A. that are home to enormous numbers of working and middle class families.

As Villaraigosa prepares to take charge of a city about the size of Singapore or Ireland, what can he do to reverse the manufacturing sector's decline? Despite years of debate, our national leaders can't decide if the huge trade imbalances that are wiping out America's industrial base merit serious concern, let alone repair. It's highly unlikely that Washington can suddenly be induced to act in ways that would foster local production jobs anytime soon.

What L.A. needs is a new, locally led approach. I think our best bet may be to stimulate new companies that provide specialized products for the millions of goods that are shipped through our region's ports, airports, railyards and warehouses each year.

Los Angeles may never again have an automobile factory. But there's no reason why local firms can't supply sophisticated, add-on products for the imported cars offloaded in Los Angeles on their way to the rest of the continent. If our region can stimulate value-added manufacturing for even a fraction of the trans-shipments through our region, it may be possible to stem the blue collar economy's decline.

Value-added manufacturing plays a key role in many industrial nations' success. Places like China or Japan often require that U.S. or other foreign, big-ticket producers procure important components from domestic firms. That's why Japanese aerospace companies grew so rapidly in the 1990s while U.S. suppliers went bankrupt, and why China recently announced that it will build the rudder, doors and fairing panels for Boeing's new 787 "dreamliner."

Our country's trade laws don't allow Americans to demand reciprocal investment and employment offsets from overseas competitors. Nevertheless, there are several possible approaches that Los Angeles can utilize to help build a local, value-added production network.

First, Villaraigosa and other city leaders should greatly expand existing free-trade zone and similar state and national programs that provide customs and tax breaks for companies that invest in trade-related activities. Value-added production zones should be identified and promoted around each of the region's major trade distribution hubs. Each should be qualified to provide all of the incentives that current law allows.

Next, potential traffic, noise and related concerns must be proactively addressed. During the 1990s, blue collar parcel-delivery job growth around Los Angeles International airport was stymied by local, anti-growth moratoria. To reduce the risk of crippling delays and legal uncertainty, Los Angeles should immediately complete all environmental and planning steps required to fully entitle future production zone construction, manufacturing and transportation activities.

Finally, an offset strategy can be pursued by linking value-added job creation with the fulfillment of environmental and other stringent regulatory requirements. After years of neglect, for example, port area ships and trucks are the worst air polluters in Southern California. Port operators, shippers and trucking firms will spend hundreds of millions of dollars to comply with new standards.

Rather than retrofit engines or redesign transshipment technology solely to meet local environmental needs, however, international companies may prefer to invest in regional value-added manufacturing that enhances the value of the products they handle. Job growth around distribution hubs, in fact, reduces air pollution by bringing goods, workers and suppliers together in a single location. If ports and shippers can offset some of their environmental requirements by investing in value-added employment, the region's manufacturing base can be strengthened at the same time that our air quality is protected.

Even modest industrial growth would generate surprisingly large economic benefits. Just 5,000 new value-added production jobs, for instance, would create at least 15,000 related positions throughout the economy. The new business activity would likely boost additional demand for building and infrastructure improvements. Overall, a significant chunk of the 100,000 manufacturing jobs our region has lost over the past four years alone could well be recaptured by a successful value-added production development strategy.

That would be a remarkable achievement. None of America's major cities has figured out how to revive manufacturing in the face of overwhelmingly adverse global economic conditions. If the new Villaraigosa administration can identify options that help reverse our urban blue-collar blues, it will not only have served Los Angeles, but the nation as a whole.

How Can Villaraigosa Succeed?

Cecille Isidro — Mon, 30 May 2005 00:00:00 -0400

Immediately after his landslide victory, more than a few editorials wondered if Los Angeles Mayor-elect Antonio Villaraigosa would inevitably govern in accordance with the new, Chablis-liberal ideology that has infected so many of our nation's cities. Antonio Villaraigosa is garnering attention across the nation. But he'll find that Los Angeles' problems are unique.

I prefer to think that he will use his mandate to accomplish something that none of the overhyped "models" of urban revival have been able to achieve. Unlike the mayors of supposedly hip, high-tech Boston, San Francisco, or even Pittsburgh, Villaraigosa cannot hope to lead Los Angeles forward unless he builds a city that works as well for the working and middle classes as it does for cocktail-party progressives.

Villaraigosa takes charge at a particularly bizarre moment in U.S. urban history. Despite their overwhelmingly blue-state politics, many cities have openly abandoned any interest in retaining or growing "old economy" industrial and middle income jobs. Beguiled by the promise of attracting the next Bill Gates -- and windfall tax revenues - they focus almost exclusively on appeasing affluent, educated classes by building fashionable arts and chi-chi retail complexes, retro-chic sports facilities, and subsidized, manicured research parks. In the process, factories and small businesses that are already reeling from intense global competition have been regulated and priced into oblivion.

There are several reasons why this odd form of trickle-down economics has captivated American mayors. Industrial and middle class pursuits are messy and aesthetically unappealing. Replacing them with top-drawer concert halls or pricey ballparks is something any politician can support. The beneficiaries of the new "creative class" urban development, including computer and entertainment executives, lavish money and positive press on those who cater to their interests. And many cities happily discovered that abandoning broad-based growth policies tended to restrict development and boost property values. Buildings and houses seemed to ooze new wealth as if by magic.

Given these trends, it's no wonder that today's urban leaders yearn for the adoring treatment afforded San Francisco's Gavin Newsom, Pittsburgh's Tom Murphy or Boston's Thomas Menino. None has successfully diversified his city's employment base, created a single net new job since taking office, or tangibly upgraded urban schools. But by embracing such elite progressive concerns as costly historic district renovations or gay marriage, they have been hailed as the very epitome of an enlightened 21st century mayor.

The problem, however, is that Chablis-liberalism can flourish only in special areas with unique demographics. The dirty secret of America's most ballyhooed cities is that they can afford to ignore the working and middle class because they increasingly resemble exclusive Malibu more than America's diverse, hardscrabble towns like McAllen, Texas.

Few realize, for example, that Boston and Pittsburgh are among the most socially monotonic, affluent areas of the country. Their metropolitan populations are an astonishing 83% to 90% white, compared with just 31% of greater Los Angeles. Three-quarters of San Francisco is either white or Asian, the highest income groups in the country, and more than 40% of Bay Area households earn at least $75,000 per year, double the national average. In contrast, 60% of the Los Angeles metropolitan area is Latino and black, the nation's least wealthy demographic groups. Over 30% of L.A.'s residents aged 25 or older have less than high school educations, one of the highest proportions in the nation and twice the rate in places like San Francisco.

It would be great news indeed if San Francisco, Boston or Pittsburgh demographics reflected widespread upward mobility. But their affluence clearly results more from working- and middle-class attrition than expanded opportunity. Each city lost population during 2001-2003 while the average U.S. urban community grew by over 2%, and Los Angeles expanded by 3.4%, adding more than 125,000 residents. Since 2001, San Francisco, Boston and Pittsburgh have lost nearly 300,000 jobs and still have the weakest economies in the country. Even during the 1990-2000 boom, San Francisco's black population fell by nearly 25%, one of the largest declines in America, and its Latino population growth was just half the average rate for California.

In short, America's celebrated, boutique cities depopulated and disenfranchised themselves into an illusion of urban success, much like what would happen if L.A. suddenly rid itself of everything but Brentwood and Hancock Park. Given these realities, why would Villaraigosa want to emulate urban policies that could only dispossess his core political constituencies and alienate much of the region's younger, aspiring work force?

I think he won't. Yet, defining an urban growth strategy in today's economy is hardly a simple task. Although regulations and taxes unquestionably hurt L.A.'s manufacturing employment, for example, Chinese competition is probably a bigger problem than the City Council. What exactly can Villaraigosa do to foster working and middle class prosperity?

The answer, I believe, is to leverage the city's existing assets, such as its mammoth sea and air ports and unique resource protection programs, to stimulate new industries and local investment. Urban renaissance projects can also be redirected to better unite generally isolated communities, such as East Los Angeles and the commuter-dominated Downtown Los Angeles, and generate economic opportunities. We'll explore these strategies in detail over the next few weeks.

Top 25 Cities For Doing Business in America

Cecille Isidro — Mon, 01 Mar 2004 00:00:00 -0500

Frank Sinatra never wrote a song about Newark or Green Bay, nor has Madonna ever bought a house in either city. But these are among the unexpected places where businesses are adding jobs most rapidly and many people are moving in search of new lives, creating tremendous opportunities for entrepreneurs.

The Top Cities in America for doing business are not at all where most people think, and there's good data to back that up. This year Inc. publishes an exclusive Top Cities list, using a brand-new methodology that we believe to be the most objective, reliable system used anywhere for ranking fertile ground for companies.

For the most part, the top cities aren't found on the fashionable coasts, nor in the biggest, most famous metro areas, but in more prosaic places, including many in the Midwest, that found a way to grow in a tough economy and now seem poised for rapid expansion as the recovery comes in. Especially notable are cities -- large, medium, and small -- spread throughout the still booming Southeast, including No. 1 ranked Atlanta and a score of Florida cities of various sizes.

"Atlanta is amazing," notes Ray Wallace, president of W. Ray Wallace & Associates, an Inc. 500 firm that does financial consulting from suburban Alpharetta, Ga "The opportunities are here and small businesses are here. People from all over the South come to Atlanta like to Mecca."

If the late 1990s were all about a gold rush -- quick success, stock market fire-works, sex and the city -- the prevailing trends almost midway through the more somber 2000s suggest a whole other dimension to what makes the entrepreneurial economy hum in such under-hyped business havens as No. 5 (small city) Sioux Falls, S.D., No. 4 (medium) Fresno, Calif., and No. 11 (small) Bismarck, N.D. (For a complete ranking of 277 large, medium, and small cities, and a separate ranking of the top cities by major industries, see Inc.com.)

Of course, there are some high-tech, high-priced holdovers relatively high on the list, including No. 15 (large) San Diego, No. 19 (large) Austin, and No. 13 (large) greater Washington, D.C., but those places have been high up on the growth curve for more than a decade. Perhaps most revealing are those denizens, including No. 9 worst Boston, No. 8 worst Portland, Oreg., No. 7 worst San Francisco, and No. 6 worst New York City. Dead last (the No. 1 worst large metro area) is San Jose, home of Silicon Valley, the megawatt center of late '90s business hype. In the bygone era, these were the cities that had the sizzle. No more.

The Rankings

How did Inc. arrive at these conclusions? Not by subjective criteria, such as proximity to research universities or a hospitable climate. The central premise behind the Top Cities rankings is that current and historical job growth is the most objective indicator of a region's economic vitality for entrepreneurs. More than three-quarters of all new jobs are created by small business, according to the Small Business Administration, so a region showing strong job growth is in all likelihood a hotbed of entrepreneurship. The impact on business of a city's educational and training systems, housing and living costs, taxes, regulatory burdens, and quality of life -- factors commonly measured by other "hot lists" to identify strong economies -- are all ultimately reflected by job growth.

A strong history of creating new jobs means that regional businesses have expanded, created new demand, and pushed up areawide disposable incomes. In contrast, companies don't form or hire new workers when a region's regulatory climate, costs, or work force capabilities aren't conducive to expansion.

Regions that consistently generate jobs in a broad range of industries rank at the top of the list. Those with poor and worsening job growth and increasingly undiversified economies do less well in the rankings. As the recent technology bust and manufacturing cutbacks indicate, overreliance on a single sector risks painful, long-term setbacks. Unbalanced growth can also indicate whether even once prospering areas are developing anti-industrial land use or other slow- or no-growth regulatory policies.

Inc. measured current-year employment growth in more than 250 regions (as defined by the Bureau of Labor Statistics) as well as current trends in the annual average growth over the past three years, and compared employment expansion in the first half versus the second half of the last decade. Job growth factors account for approximately two-thirds of the final score for each city and the balance among industries accounts for approximately one-third of the final score.

So what kind of places are working best in George Bush's America? They are predominantly suburban and, perhaps most importantly, relatively affordable, particularly in terms of housing prices, cost of living, and business costs. These are places, notes Brookings Institution demographer William Frey, where younger families, including many well-educated people as well as upwardly mobile immigrants and even singles, are now migrating in large numbers.

Perhaps the most predictable bottom line in this current economic expansion is, well, the bottom line. Places kindest to business costs, whether in terms of office rents, taxes, or regulatory environments, seem to be doing best. "When people depend on debt to finance operations, they look at things differently than when it's equity," suggests Andrew Segal, of Boxer Property, a Houston-based real estate investment firm with holdings in several "second tier" cities. "Business now has to look for a more reasonable place. The ugly ducklings are beginning to look better." Few people in the growth areas, of course, would consider themselves "ugly ducklings," but they certainly tend to have economies that are grayer and less specialized than the '90s hotshots. Total dependence on high tech, once considered a boon, has turned out to be a disaster.

In the mid to late '90s, suggests Leslie Parks, former economic development director for San Jose, inflated stock prices created a false economy that drove up real estate prices and the cost of managerial and technical talent while driving out more middle-class, blue-collar activities from the region. "Economic diversity is a constant challenge here," Parks adds. "A lot of people did not want basic industries. They thought high tech could solve everything."

Atlanta: Leading the Pack

The leading large city on the list, Atlanta, epitomizes the characteristics of economic diversity and affordability. Spread out over 28 counties in north-central Georgia, Atlanta's region includes over 4.5 million people, only 420,000 of whom live in the city itself. It combines the advantages seen in smaller communities with an array of assets -- such as top-flight universities, major corporate headquarters, and a world-class airport -- usually only found in leading global cities.

This vast archipelago of largely suburban communities also houses a relatively diverse economic structure. Atlanta is not wedded to technology like San Jose, or financial services like New York City and Boston. While the recession pummeled some of Atlanta's key industries -- including information technology and construction -- the area's well-rounded economy has allowed it to take full advantage of the current, broad-based recovery.

"Atlanta has one of the most diversified economies in the country," points out Mark Vitner, a senior economist who studies the Southeast for Charlotte-based Wachovia. "Whatever the new thing turns out to be, Atlanta will be in the forefront. They are very adaptable."

Affordability, Vitner notes, has been the other pillar of the region's success. Although not cheap by southern standards, Atlanta's cost of living, particularly housing, is much lower than that in places like Boston, New York City, Seattle, or San Francisco. This has made Atlanta an excellent spot to start a business, allowing lower costs and salaries for start-ups.

Atlanta turned out to be a far better choice than San Francisco for the head-quarters of the fast-growing, 250-employee Cendian Inc., which opted for the Georgia metropolis over a series of other cities, including the fabled city by the bay." Affordability killed us with the BayArea," says CEO Mark Kaiser. "San Francisco is a delightful place to live, but way too expensive."

Atlanta may lack some of the Bay Area's edginess and physical beauty, Kaiser adds, but in addition to reasonable housing prices, it also presents many lifestyle options, including an increasingly lively central city and diverse suburban areas, which allows the firm to compete for talent across a broad spectrum of skills, from top management to technicians. At the same time, Atlanta's airport and long history as an area of logistics expertise, best epitomized by UPS, help the firm in its primary business of providing logistical support for the chemical industry worldwide.

"Atlanta," Kaiser sums up, "gives you a lot for the buck."

Affordability

The theme of affordability was repeated often by many firms located in the cities that ranked high on the list. It helps explain the remarkable performance of places like No. 4 (large) San Antonio and No. 26 (medium) McAllen, Texas, all of central Florida, and much of inland California. "San Antonio is a very good sell for families," says Keith Frederick, founder of SecureInfo, a San Antonio computer security firm with 145 employees. "You can get a new three-bedroom starter house here with a two-car garage for $60,000. And it's actually a super environment for operational experience. This is one of the few places I can get the kind of talent I need."

Indeed, Inc.'s data shows many fast-growing cities, such as No. 5 (small) Sioux Falls, S.D., No. 15 (small) Fargo, N.D., and No.8 (large) Jacksonville, Fla., also saw rapid expansion of financial and business-professional service industries, which require a work force with a high level of education. In contrast, many of the traditional hotbeds for these professional industries (e.g., Boston, New York City, San Jose) have suffered either negative or slow growth during the past few years.

These trends were particularly notable in Florida, the state that more than any other dominates our list. A remarkable six of the top 25 cities on the large list, including No. 5 West Palm Beach, No. 7 Fort Lauderdale, No. 8 Jacksonville, No. 11 Orlando, No. 14 Tampa

2004: An Economic Odyssey

Cecille Isidro — Mon, 05 Jan 2004 00:00:00 -0500

Most telescope enthusiasts know the difference between a clear sky and good seeing. After rain or wind, for instance, the air looks crystalline and the stars as bright as can be. Yet, it's often at just those moments that the atmosphere is secretly bubbling with turbulence, smearing what should be magnificent images of Saturn or Jupiter into an eyepiece of flickering, ghastly mush.

It seems uncommonly hard to decide this year whether our vision of the economy is blessed with confident clarity or distorted by quiet illusion. To be sure, most observers think it a safe bet that the future is bright. Combine a president determined to avoid his father's economic mistakes, an election year, rising military expenditures, a recovering stockmarket, record low interest rates, low inflation and remarkable levels of public spending and it's a sure thing the economy will be roaring throughout 2004. Even the risk of a new terrorist attack or a setback in Iraq hardly dampens such enthusiasm.

Maybe we are poised on the cusp of yet another period of effortless affluence. Then again, the same experts that are so confident now were equally certain just a few years back that the last, late boom would extend forever. Could today's apparent clarity be less than it appears?

Over the past few quarters, for example, we've been bombarded with truly amazing economic output and productivity reports suggesting American growth is reaching unbelievably high levels. Yet, one reason for these results may be that U.S. government statisticians gross up whatever sales are reported for "high tech products, like computers, by a quality factor that supposedly identifies their "true" value.

Computer sales might actually total around $900 million, as they did in the second quarter of 2003. By assuming that the quality of the computers -- their speed or memory for instance -- is much greater than in previous years, the official data expanded the quarter's results to nearly $16 billion. Worse still, the imported parts that are used to make the computers aren't grossed up by a quality factor, an oversight that can further distort the accounting of what's actually made in our country, and what's produced somewhere else.

Needless to say, this sort of statistical wizardry can greatly exaggerate real output and productivity. It also helps explain how the U.S. can be enjoying such an apparently extraordinary expansion yet generate so few new jobs. But far too few observers seem willing to seriously discuss such questions.

Indeed, the obvious is being ignored on many fronts. It is unlikely that the United States has ever enjoyed a time of more sustained stimulus. Combined state, federal and foreign trade deficits are pumping a trillion dollars per year into the economy that would otherwise be unavailable if we were living within our means. The cost of money may be at a 200-year peacetime low.

Problem is, there's scant evidence that this largess is being used to foster the creativity and innovation we normally associate with long-term prosperity. America has imported astounding amounts of goods and decimated its domestic manufacturing sector. Trillions of dollars have been recycled by refinancing tax-advantaged home loans over and over again. The U.S. buys the largest, least efficient cars in the world and burns more fuel than anywhere else. And everyone throws money at stocks. Typical of the trend, automotive giant General Motors recently floated a $17 billion bond not to pay for new factories or novel designs, but rather to buy other firms' stocks and speculate on the market.

Bad as it proved to be, at least the "new economy" offered a plausible myth in the way that the Internet was supposed to revolutionize everything. In contrast, today's supposedly red-hot growth seems to fueled by nothing more than naked subsidies and the consumption windfall they've provoked. By some measures, in fact, the majority of the recent expansion is simply government spending recounted as "growth."

Reputable economists, of course, have answers for all of these concerns. Most remain decidedly upbeat. And perhaps we should take comfort in the consensus position, even if its track record of late is hardly inspiring.

This summer, America's ambitious Cassini spacecraft will finally arrive at Saturn. Current plans call for flying the tiny probe through the outer portion of the planet's spectacular rings. "Ring modelers tell us this should be safe," explains a mission specialist in this month's Astronomy magazine. "We hope they're right."

As America embarks on one of the most curious, conflicted recoveries in memory, we can also extend such sentiments to those who would pilot our economy and nation to renewed prosperity.

Stop Politicking, Fix Trade Policy

Cecille Isidro — Sun, 07 Dec 2003 00:00:00 -0500

Early on, the Bush administration seemed willing to break with years of indifference and think seriously about America's hugely unbalanced, unfair trade relationships. Instead, it played electoral politics. As a result, U.S. trade policy critics were handed all the ammunition they needed to compel President Bush last week to rescind the steel tariffs he imposed in 2002. The tariffs, scheduled to be in effect for three years, were designed to protect the ailing U.S. steel industry from cheap imports while it regained its economic strength. The whole sorry episode is a model of political miscalculation.

A reassessment of U.S. trade relations is long overdue. Over the last 10 years, the annual U.S. merchandise trade deficit ballooned to half a trillion dollars, a debt that imperils the dollar and may yet short-circuit the current economic recovery. During this time, manufactured imports rose from 20% of the U.S. domestic market to well above 50%. One result has been the loss of 3 million blue-collar jobs and the decimation of such sectors as plastics and metalworking. Hundreds of billions of dollars and some of the most advanced technologies in the world were transferred wholesale to nondemocratic countries often hostile to U.S. interests.

These trends attracted little attention throughout the 1990s in part because paper assets like stocks or dot-com companies were thought to more than offset any loss of "hard" industries. Rising manufacturing productivity was supposed to reduce factory jobs, much as farm labor was cut back after the Industrial Revolution. If overseas producers didn't mind dumping their wares at bargain prices, which accelerated these trends, so much the better.

The end of the bubble economy showed that digital-related jobs were no more immune from recession than old-fashioned assembly-line employment, a realization that served to spotlight America's disproportionate loss of manufacturing jobs; factory employment grew in Mexico, Canada and most of Asia.

For a while, the administration's "safeguard" steel tariffs appeared to work. The staunchly free-trade Economist magazine called the result a "miracle at Bethlehem," in reference to the Pennsylvania home of bankrupt behemoth Bethlehem Steel. Yet, the politics behind the protection doomed the whole enterprise. The tariffs were selectively imposed to benefit firms in electoral swing states. Politically favored steel exporters -- Canada, Mexico, Israel and Jordan -- were exempted from the measures. Other economic sectors equally deserving of protection -- aircraft, plastics, film production -- were ignored. Such a haphazard, self-interested approach to trade made it impossible to build widespread support for the tariffs, at home and abroad.

The European Union and other steel exporters challenged the legality of the tariffs before the World Trade Organization. In theory, the WTO is supposed to function as an international court over world trade. Countries aggrieved by another's trade policies can seek review of the questionable practices and be granted relief, if warranted.

In practice, countries must build support for their positions to prevail in the organization. Much of the WTO's analysis of trade disputes reduces to arcane squabbles over the "true" meaning of vaguely drafted trade agreements. A party to a dispute that lacks widespread support has little chance of surviving the review. The Bush administration had already lost 14 of 19 actions brought against U.S. policies in the WTO.

Unsurprisingly, the WTO reviewing panel repudiated the U.S. position on virtually every front. It found that the steel safeguards lacked a "proper" justification. Here is a passage from the WTO's Nov. 10 ruling rejecting the U.S. interpretation of the word "reasoned" in safeguard agreements. It makes President Clinton's tortuous definition of "is" during his Monica S. Lewinsky troubles read like Shakespeare.

"[T]he word 'reasoned' which the United States defines in terms of the verb 'to reason,' is, in fact, used in Article 3.1 [of the Agreement on Safeguards] as an adjective to qualify the term 'conclusion.' The relevant definition of the intransitive verb 'to reason' is 'to think in a connected or logical manner; use one's reason in forming conclusions.' The definition of the transitive verb 'to reason' is 'to arrange the thought of in a logical manner, embody reason in; express in a logical form.' ... Thus, the competent authorities are required ... to 'give an account of' a 'judgment or statement which is reached in a connected or logical manner or expressed in a logical form,"distinctly, or in detail'" (citations omitted).

The Bush administration's attempt to negotiate a compromise to extend the tariffs went nowhere with the Europeans, who threatened to aim $2.2 billion in retaliatory tariffs at products from states dear to the president's political base. The administration had little choice but to rescind the tariffs or face a trade war.

There's no evidence that the administration has learned the main lesson of this sad episode -- that halfhearted trade measures do more harm than good. Its recently announced quotas on some Chinese textile and duties on color TV imports, said to reflect U.S. displeasure with Chinese currency policies, will affect only a fraction of the trade between the two countries and do nothing to reverse a trade imbalance that will probably approach $130 billion in China's favor by year's end. The move has further tarnished U.S. trade motives, making future initiatives, no matter how justified, easy targets for global skeptics.

The serious reappraisal of our growing reliance on imports and imported capital that once seemed forthcoming from the administration is now, after the steel-tariff fiasco, all the more urgent. Among the issues it should address:

At what point, if any, should U.S. companies and workers be protected from price competition based solely on the unwillingness (or inability) of a trading partner to assure its citizens a reasonable wage, protect its environment, abide by global currency rules or allow reciprocal access to its market?
To what extent is our current economic recovery fueled by capital borrowed from abroad in the form of our half-trillion-dollar -- and rising -- annual trade deficit? What happens if the rest of the world tires of funding U.S. consumption or, as seems to be happening with Europe and the rising euro, demands a bigger return on its money? Worse, what if perceptions the U.S. is enjoying an undeserved consumer windfall provoke a political backlash, particularly in countries where authoritarian governments have artificially reduced domestic demand for strategic reasons?
How much of America's apparently booming productivity is a byproduct of an unprecedented flood of cheap imports, especially in manufacturing sectors, repackaged as "U.S. made" though little real value is actually added to the finished goods? What's the long-term consequence if much of the productivity gain turns out to be another example of accounting fool's gold?
Historically, the transfer abroad of manufacturing technologies and industries seems linked with a nation's loss of influence and power. Has the world changed so dramatically that this relationship is no longer a concern?
Does the remarkably diverse U.S. workforce require a broad-spectrum economy to generate the best jobs for the greatest number of people? Or can America afford to restructure toward the deindustrialized model of, say, Belgium or New York City?

Regrettably, the Bush administration seems in no hurry to undertake such a far-reaching assessment of U.S. trade policy. Instead, it has traded away important opportunities to pursue national commercial priorities in a politically expedient, but ultimately counterproductive, fashion.

San Fran Becomes Playground for Elites

Cecille Isidro — Mon, 29 Sep 2003 00:00:00 -0400

A sportswriter shocked by the recent shooting of a Giants fan in the parking lot outside Dodger Stadium inadvertently touched on one of California's most important, yet underreported demographic trends.

"It used to be the fans in San Francisco who were fools," wrote the L.A. Times' Bill Plaschke. "The battery throwers? The Tom Lasorda haters?... And while construction of a pricey new San Francisco ballpark eliminated some of those Candlestick cretins, the Dodger Stadium crowd has simply grown angrier and more frustrated."

In one respect, his lament is unquestionably true. In the late 1990s, when the Giants still played in decrepit Candlestick, the cold malevolence could be terrifying. I once sat through a painful late season Dodger loss in almost complete silence, fearful of what the tattooed, boozy crowd around me might do to a traitor in their midst.

Recently I chanced on some corporate tickets to perennially sold-out PacBell Park, the Giants' sparkling new home on the south side of the city. I went to the game thinking I'd see a West Coast version of venerable Fenway Park in Boston, or Baltimore's cozy Camden Yards.

To be sure, the architecture was impressive. And there was no Candlestick-like undercurrent of hostility. But the stadium was chock full of cell phones, seven-dollar hot dogs, and well-off baby-boomers with well-toned girlfriends. The stands were eerily devoid of kids happily savoring their favorite players, or a bag of peanuts.

Far from a classic baseball shrine, the ballpark had the ambience of a pleated chino.

The Bay Area's striking baseball transformation helps explain one of California's most puzzling mysteries. Since the fake "new economy" collapsed of its own absurdity in late 2000, greater San Francisco suffered far steeper job losses than did Los Angeles in the early 1990s. However, San Francisco seems disinterested in changing the trend.

I can recall how a major San Francisco developer, a Democrat party heavy contributor that had been invited to a conference in Washington, D.C., summed up his view of the state at that time: "Northern California is great, central California is fine, but there's just nothing we can do about the south."

Now his beloved Bay Area is in an economic sinkhole far deeper than the setbacks Southern California endured in the wake of the federal defense cutbacks. Yet, there's no despair among the region's elites, no sense of crisis or bold new responses. San Francisco politicians, led by state senator John Burton, remain committed to one of the most anti-business legislative agendas ever mounted in California. And, amidst all this, it's standing room only at PacBell Park.

What's happened is that the Bay Area rediscovered its historic propensity to ensure the comfort and perquisites of the privileged by driving up costs and driving out those of lesser means. Oakland was essentially created decades ago by the purging of minorities from San Francisco. Today, perpetual housing shortages and staggeringly capricious rules and regulations accomplish much the same result.

San Francisco now has one of the fastest outmigrations in the country, including the largest loss of African American residents among all of America's urban areas since 1990. More striking still, it is increasingly childless. Fewer than 15% of greater San Francisco residents are 18-years old or younger, half the national average. Most of the region's households are comprised of adults that spend their pooled incomes on themselves. Those who would raise and invest in successor generations have been all but totally priced out of the market.

So the Bay Area recession turns out to be a blessing for aging baby boomers. It has ruthlessly weeded out the pesky working and middle classes and often annoying, demanding families with children. It left behind a less crowded metropolis, bristling with elegant playgrounds like PacBell Park, exclusively dedicated to their needs and whims.

Is this sort of clean, sharply exclusive Disneyland really the preferred model for our state? Confronted with the seemingly volatile cultural and economic mix that abounds in most of the rest of California, including Dodger Stadium, many may yearn for its apparent safety. Part of the recall is about choosing among these different visions of our future.

I later learned that, at the very same game I attended, a Giants fan had dropped his sunglasses over PacBell Park's right field wall. Determined to retrieve his shades, and possibly fueled by the ballpark's designer beer, he tried to jump to a nearby light post. He missed, and fell, dying at the base of the wall even as thousands of Giants fans were cheering their team's new divisional championship.

It's tempting to think that life's uncertainties can be whittled down to a safe, predictable core. Yet, sometimes even the most comfortable surroundings just can't save people from themselves.

Note to the Candidates: Sky May Not Be Falling

Cecille Isidro — Sun, 28 Sep 2003 00:00:00 -0400

At no time in the last several years have California's jobs data, the key to measuring the state's economic health, been less reliable. Statistical inaccuracies inevitably crop up during volatile periods, such as a recession or a recovery, because the numbers are based on surveys that frequently lag behind realities on the shop floor. But these inaccuracies have been magnified by new, untested survey methodologies whose latent errors have not been fully identified, let alone corrected.

This is no esoteric matter. The target of the recall and the replacement candidates have been making strong statements about the condition of the state economy. Gov. Gray Davis has touted evidence that California is doing better than the rest of the country. At last week's debate, the five leading candidates to replace the governor overflowed with conflicting economic data. Problem is, the underlying data aren't reliable enough to support assertions about current economic conditions.

There's another problem. The aspiring candidates offer up economic prescriptions for ailments that may have no factual underpinnings next spring, when the data will be corrected. As a result, those who purport to be "saving" California from a job-loss calamity may be seriously misjudging the political consequences of their message.

Most of the debate about California's economic health depends on information contained in the monthly employment reports released by the state Employment Development Department. Unfortunately, the underlying data used to produce the reports are due for a major revision that won't be completed until well after the Oct. 7 election.

California's employment statistics are derived from a survey of a relatively small number of firms. Results are then used to extrapolate employment for the state and various counties and regions. The accuracy of these estimates depends on how closely the assumptions used to infer the broad numbers actually reflect real-world trends.

The process is most reliable when the economy is stable. When recessions or growth spurts depart from previous trends, however, state employment estimates can go astray. To correct for this problem, the data are "benchmarked," or tested against actual payrolls and tax receipts. The underlying assumptions in the employment model are accordingly modified.

Since late 2000, several factors have unsettled California's reported employment data. First, the recession bit so deeply and so fast, especially in the once highflying Bay Area, that company survey reports could not keep pace with actual job cutbacks and business failures. Once the lag was identified, statewide employment estimates had to be revised downward by nearly 100,000 jobs in 2000, and by an additional 175,000 jobs in 2001. Official reports thus didn't fully reflect the depth of the recession until well after the fact. It's likely that current job data will also have to be adjusted at the next benchmarking, in March.

Confounding matters further, California's employment survey methodology was significantly revamped in 2002. It now uses a new, randomized system designed and implemented by the federal Bureau of Labor Statistics. This approach may prove much more accurate than previous techniques. As with anything brand new, however, it's virtually certain that it will need to be fine-tuned before its accuracy can be assured.

What this means is that since early 2002 -- when the new survey method was fully introduced, and after the last benchmark was completed -- state employment statistics have become increasingly uncertain. From August 2002 to August 2003, for example, the three-month rolling average of reported employment results indicated that California lost about 44,000 jobs, a 0.3% decline. If true, that's less severe than the pace of job losses reported for the nation as a whole. Yet, over the same period, reported regional employment suggests that the state instead lost a net 93,000 jobs, a 0.7% setback that would be roughly twice as bad as the rest of the country.

Many experts believe that jobs will be added to the regional numbers in part because the statewide figures are thought to be based on more complete samples of company surveys. Consistent with this view, the latest California Department of Finance bulletin indicates that state tax receipts for the current fiscal year are up about 10% compared with 2002. That seems to indicate a stabilizing economy.

But reported job losses for the largest, best-surveyed counties in the state, including Los Angeles and those in the Bay Area, are still quite high, totaling nearly 100,000 in the last year alone. It's possible that these estimates may be substantially adjusted for the better. But it's troubling that California's best analyzed, major employment centers don't seem to be tracking reported statewide trends. In addition, no one knows for sure if the state's apparently higher tax receipts were generated by sustainable job-market improvements. A few large, one-time bonus payments to a handful of highly paid professionals in such hot sectors as stocks and real estate could be skewing the numbers.

Gambling that an apocalyptic view of the California economy will bring out recall voters thus seems a risky bet for a candidate to make. To date, there's little systematic evidence that businesses are shifting large numbers of jobs to neighboring states, as was repeatedly claimed during last week's debate in Sacramento. Nor is it yet clear that the public sector's undeniable budgetary mismanagement has significantly harmed California.

Since December 2000, for example, when the new-economy bubble burst, states often touted as having relatively good business climates -- Oregon, Missouri, Colorado, Indiana and Ohio -- have suffered more severe job losses than California. The Golden State also significantly outperformed other large-scale economies, including Michigan's, Illinois', New York's and Massachusetts'.

It's possible that the newly passed legislation mandating that most companies provide health insurance for their employees -- if signed by Davis -- would inhibit job growth, as business leaders widely predict. But there's a big difference between seeking office to fix a continuing catastrophe and trying to avoid one in the future.

California's geographic disparities further undercut political appeals that trade in doomsday economics. Parts of the state that have the poorest-performing economies -- Greater San Francisco, San Jose and Los Angeles -- are also the most ambivalent about spurring growth. Since late 2000, Bay Area employment has plummeted by as much as 18%, a near-Depression rate of decline. Yet, the region is remarkably devoid of pro-growth sentiment. Few of its elected officials display even a passing interest in job creation.

It seems that as long as home values stay high and high-end employment in such fields as filmmaking, professional services and investment banking are unaffected by blue-collar and working-class job losses, California's worst-performing regions will be deaf to pro-business political appeals. In 2000, when the last boom was in full swing, these regions voted 68% for Democratic presidential candidate Al Gore. Last November, long after the bubble burst and their economies went into steep decline, they voted for Davis by virtually the same margin. If pro-growth appeals didn't resonate in poorly performing areas when times were truly bad, they are unlikely to work when the economy is thought to be stabilizing.

Meanwhile, the rest of the state has been doing markedly better. Employment in places like Riverside, San Bernardino, Sacramento and San Diego counties and the Vallejo-Fairfield region expanded during the recession. In many instances, growth rates in these areas surpassed most other parts of the country. Voters in these better-performing regions haven't experienced the kind of economic retrenchment that some candidates contend is taking place. They seem more concerned about sprawl, traffic and other unwanted byproducts of rapid development.

Recent electoral history has been unkind to candidates running against the California economy. Voters seem to intuitively grasp that when politicians implicitly run down their livelihoods to seek public office, the state's reputation in world financial circles can be tarnished for years to come. That's a legacy no honorable candidate should ever aspire to build.

California Caprice

Cecille Isidro — Sat, 20 Sep 2003 00:00:00 -0400

We had just finished a ride down the South Bay beach bike path, huffing and puffing through the route's uniquely California mosaic. Behind us were the USC frat-like boys and girls of Playa del Rey, the inner-city flavor of Dockweiler State Beach, the always-puzzling encampment of Winnebagos at the very foot of the massive Hyperion sewage plant, and the body-wrapped opulence of Manhattan Beach.

My friend, a prominent Los Angeles lawyer and cast-iron liberal, was talking about the recall election. He wanted to vote for Cruz Bustamante. But he worried that a last-ditch appeal to a famously activist Ninth Circuit appeals court panel could moot his opportunity.

"Do you really think they have such hubris?" he asked. Few people I know have more familiarity with the judiciary. Yet, he was plainly discomfited by the thought that three men could turn aside months of preparation and choose to derail the pending Oct. 7 election.

Yes, I replied. I think they do.

I have long believed that the greatest threat to California's long-term prosperity is not so much the letter of the state's much-maligned regulations, but rather the lawless way they are increasingly applied. Most of the state's economy, after all, has flourished despite Sacramento's increasingly ill-conceived legislation. Businesses will always complain, often with justification, about higher costs and picayune, intrusive environmental, health, workers' compensation, accounting and similar rules. Yet, they have shown they can do well, provided that these laws are relatively certain and predictable.

But it's the loss of that confidence that puts so much of the state's future at risk. In my experience, there is nothing more maddening for a business owner or an investor than complying in good faith with phone-book sized lists of requirements, only to have utterly unforeseen lawsuits surface that demand even more. Lawsuit-induced uncertainty has become a sub-industry in slower-growth, urban California. The economic consequences of this trend are frighteningly clear.

In areas where legal caprice is especially high, such as Los Angeles and the Bay Area, big, well-funded entities supported by a phalanx of lawyers and consultants tend to be the only long-term private sector players that can survive. Needless to say, since their costs are incredibly high, they focus almost exclusively on relatively narrow high-end housing, office and similar big-ticket projects. Over time, an unbalanced, slow-growth economy inevitably results.

Mindful of slow-growth region legal risks, smaller, more dynamic companies, and motivated middle and working classes, shift their activities to the less ideologically volatile parts of the state. In most of these areas, the applicable rules and laws are more predictably interpreted and enforced. Faster-growing communities, often rivaling the most economically successful parts of the country, quickly emerge. That's one reason why the exact same formal laws have led to such dramatically different economies in slow- and fast-growth parts of California.

Indeed, the economic costs may prove to be the ultimate irony of the Ninth Circuit's decision. In deciding that they knew best for the state's 36 million residents, the three appellate judges determined that the dangers of using punchcards to vote vastly outweighed the benefits from complying with the plain language of the state constitution. Delaying the recall vote by what they airily dismissed as just "a few months," they reasoned, could hardly match the horror of having to poke holes in a ballot, or a hanging chad.

That's where the panel's balancing act went askew. California, in fact, has everything at stake in demonstrating to an increasingly skeptical world that it is not an arbitrary society where no rational, long-term calculation can be made. Granted, concern about the state's voting equipment might have merit. The consequences of capriciously subverting at the 11th hour a high-profile election previously reviewed at length and blessed by numerous state and federal judges should have been given incalculably greater weight.

But it wasn't. Reflecting all too well the damaging intellectual calculus that has crippled slow-growth California, the Ninth Circuit Court's three-person committee elected to exercise its power when taking a pass was plainly in the state's best interest.

I helped my friend finish putting his bike back up on the car. We turned to say goodbye.

"You know," he mused, "On second thought, I guess I think they really are that arrogant." He shook his head.

"That's too bad," he said.