Creative Class

Kathleen Pender asks: “Are you an idiot to keep paying your mortgage?” in light of the new homeowner bailout plan which offers to refinance loans that are at least 90 days delinquent. She quotes financial planner, Peter Schiff who:

predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.  “This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.” … Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.”

Felix Salnon adds:

if you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months, that’s a deal which makes a certain amount of sense. It’s a pretty perverse incentive for the government to give you, but that’s the hand that millions of Americans are now being dealt. And it’s entirely the fault of the people who dreamed this scheme up.

Add to this the additional perverse incentives of an auto bailout and the opportunity costs of more (very limited) resources wasted.

The way out of the crisis is to: a) reduce the price of over-priced assets, b) weed out inefficiency in existing sectors and eventually upgrade them via creative destruction, c) invest in new infrastructure that can stimulate the rise rise of new industries. What we’re doing now is worse than forestalling the inevitable and even of pouring good money after bad – we are throwing away precious capital that is key to building a viable future.

While I know that Richard is the official ”Global Trends” guy around here, I hope that he won’t mind my pointing one out; if not a trend, a global synchronicity at least. In two of the world’s great cities – Toronto and Rome – disagreements in educational policy have led to strike situations.

In Toronto, from the Globe and Mail:

The campus was a ghost town yesterday, the first day of the strike by contract faculty, teaching assistants and graduate students, with classes for more than 50,000 students cancelled and pickets letting cars onto university grounds only every few minutes.

There are no plans to resume negotiations.

Christina Rousseau, chair of the Canadian Union of Public Employees Local 3903, said the striking workers are waiting for a signal from university administrators that they are ready to return to talks.

“Right now the ball is in their court,” she said. “We feel it is their turn to make a move.”

The university has offered a 9.25-per-cent wage increase over three years. A university spokesman said the administration is willing to go to binding arbitration.

The workers have asked for a two-year contract with a wage increase of 11 per cent over that period. The demand for a two-year deal is part of a broader strategy by CUPE Ontario to co-ordinate bargaining on all Ontario campuses in order to gain leverage at the negotiating table.

And in Rome from the BBC:

Sleeping bags in lecture theatres, lessons in parks, people wearing plasters on their faces. They are just some of the ingredients in Italy’s hugely divisive row over education.  The sleeping bags are being used by students, who have taken over a number of buildings. Lessons in some places are being held in parks, as classrooms are occupied, and the plasters are the symbolic sign of the “cuts” the students and staff are protesting against.

But these are not just isolated protests by a few disgruntled hardliners.  A number of recent marches in Rome have attracted up to half a million demonstrators.  Seasoned Italian commentators say they are the biggest in 15 years.

The protests are not just for university students. Secondary school teachers and pupils are also on the streets, as their slice of the education budget comes under threat as well.  The government is pushing its reforms because it believes universities and schools are inefficient and producing lacklustre results.

I also did a little bit of Facebook reconnaissance and found popular groups for and against the strike in Toronto, while Italy Education Minister Mariastella Gelmini’s page has been flooded with comments from young people on the situation.

While both are complex and ultimately different situations, one of the few comparables is popular support: In Rome it is overwhelming, while in Toronto it’s very divided. With starkly different political climates, I can’t speak on how well this bodes for either side, but it will be interesting to see how both situations are resolved. They each represent what the prospective futures of significant numbers of young people within their respective regions will be like. In turn, this will ultimately affect the overall prosperity of the regions.

And now, as always, some music.

Scientific American says the quant revolution in finance bears part of the blame for the crisis and it’s time for new and better models of the way the world really works (via Mark Thoma).

These lapsed physicists and mathematical virtuosos were the ones who both invented these oblique securities and created software models that supposedly measured the risk a firm would incur by holding them… Without the formal requirement to maintain debt ceilings and capital reserves, the commission had freed these firms to police themselves using risk tools crafted by cadres of quants … For its part, the quant community needs to undertake a search for better models—perhaps seeking help from behavioral economics, which studies irrationality of investors’ decision making… These number wizards and their superiors need to study lessons that were never learned during previous market smashups involving intricate financial engineering…

Maybe. Adding behavioral assumptions is a nice tweak, but it won’t remedy the fundamental flaw of this kind of approach. The number wizards need to do much more than read and quantify history. The problem is that that quants and much of modern economics for that matter have neglected the systematic study of economic transformation. What’s needed goes far beyond more historical and behavioral data points. Concretely this would mean building on the fundamental insights of Darwin, Marx, Schumpeter, and Jacobs to create a real scientific understanding of how economies grow, evolve, generate crises, and restore themselves. There are very, very few economists or social scientists that are willing to take on these big questions. And to build these models will not only take big thinkers, but reasonably large and stable teams of theorists, economic and financial historians, computer scientists, data-base experts, and others. It’s what we’re trying to do here at the Prosperity Institute, and I’d encourage others to join in.

Had a great chat with BusinessWeek’s Mike Mandel this morning on the crisis, its geography, and what to do about it. Then I came across this post by Nouriel Roubini (via Naked Capitalism).

With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise… To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar.

He notes that the crisis will be longer and deeper than virtually anyone thinks. But why?

The reason is becoming clearer and clearer every day. The crisis is at bottom the crisis of Fordism. It emerged around housing – the single family home, the pivot point of Fordist consumption. It’s not that the technology and idea-driven creative economy is not productive, it’s that our complex financial system in effect over-allocated the fruits of that productivity into the old cornerstone of the Fordist economy. Instead of creating new demand for technology or better health care or new energy or flowing into savings, that productivity translated into increased demand for housing.

So the current bailouts are fundamentally flawed. Propping up the housing-auto nexus of Fordism will only forestall the inevitable. Bailing out homeowners will only essentially handcuff them to their homes, leaving them paying out huge shares of income on housing and housing-related goods and making it impossible to achieve the mobility so many will need to locate economic opportunity. On a social level, it will keep pouring good money after bad, leaving us wrapped up in the old Fordist economy, unable to generate the demand for or the savings needed to generate the new system architecture and infrastructure required to reset the economy on a new and hopefully more sustainable growth trajectory.

The only way out of the crisis is to simultaneously create demand for and investment in these new areas, in part by massively reducing the amount of consumer spending on the old house-auto nexus.

So any government investment should do the reverse of the current bailouts. Instead of propping up these older sectors artificially it should aggressively seek downward adjustment in their costs, perhaps by investing in efforts to increase the efficiency and management of housing and reduce the costs of cars, energy, and mobility. Fiscal stimulus should also focus on the growth sectors of the future. In my mind, this turns on five interrelated factors:

1) Revolutionize the housing delivery system – More rental less ownership; better construction and management, creation of new housing delivery and management systems which allow for flexibility required to shrink the journey to work and allow people to move more freely as their job, career, and lifestyle prospects change.

2) Transform transportation – Everything from more energy-efficient cars, market pricing of roads and highways, to mass transit, high speed rail, and increased reliance of bikes and walking (especially as the journey to work can be shrunk via more flexible housing tenure).

3) Alternative energy – Moving out of the carbon-based economy, shrinking energy costs, and creating new areas for investment.

4) Revolutionize the human capital system – Economists agree this is the key to long-run growth. Currently we waste more of it than virtually any other resource. We need to massively invest in human talent and creativity on a mass scale. This requires an individually oriented, creativity enhancing (as opposed to creativity-squelching). This means moving well beyond schools to flexible, tailored approaches to creative development, including a massive commitment to early childhood and fundamental from-the-ground-up remake of our educational system.

5) Any solution has to do three interrelated things – It must encourage new investment, the creation of new technologies and enterprise, and accelerate creative destruction. To do so, it must shrink the overall costs of the housing-auto nexus, freeing up capital and demand that can flow into new areas as well as increased savings. It must increase investment in and demand not just for technology but for human development, health (holistic and other), and for experiences more broadly.

Problem is: We’re doubly handicapped in getting from here to there. For one, we remain locked in Fordist mindset which sees the problem as how to reset the old housing-auto nexus. It is too early in the transformative process to perceive the full contours of the new, emergent system and to identify the core investments with real precision. Compounding this is the limits of extant theory. Economics in its current guise overvalues simple micro-models based on the efficient allocation of market systems. Of course some economists have junked this, most notably the new empiricists who believe the answer is to be found in improved models and better data. The real issue is that we lacked theoretical understanding of the dynamics of capitalist economic crises and transformation – modern-day, scientific frameworks and dynamic models based on the broad kinds of understanding advanced by say Schumpeter and Marx. This is not just an academic point; it is a terrible handicap in understanding and dealing with the current crisis and and evaluating alternative paths out of it.

The sooner we dump the talk of the bailout and get on with understanding and building the sustainable economy of the future, the better.

A turbulent economy can generate some “creative destruction” in your career path. The best thing that ever happened to me was the dot-com I worked for going bust in 2001 and that sector staying weak for long enough that I moved on and considered all possible industries. Where I am now turned out to be a much better fit.

A number of companies and industries will do some restructuring over the next few months, both shedding some workers but also potentially hiring others as they refocus. In case you end up with the opportunity (whether forced or not) to consider new career and employment possibilities, here are some helpful issues to ponder from a recent CBC website article:

Tips on finding a great place to work

• See which employers have put some effort into building a high-trust culture.
• Assess the space: Get a sense for the company’s physical environment. Do you feel inspired by the space itself, and what would the commute be like for you? How would that affect your work-life balance?
• Talk to people who say the workplace is tops: Do you have a sense that they’re proud of what they do? Is there a feeling of camaraderie that you get when you go into the workplace?
• Ask about the perks: If an employer is describing the perks or benefits that they offer, make sure you ask how many employees actually use those perks and benefits.
• Long-term plan: Ask about the opportunities for career development and progression throughout the organization. What’s the long-term plan for you in this organization?

The article mentions several top Canadian places to work and how they live up to these above standards. For example, at pharmaceutical giant Nycomed’s Canadian operation:

The company’s permanent employees have access to $3,000 a year in post-secondary tuition funding or $5,000 for post-graduate studies. Last year, about 30 percent of the company’s employees took advantage of this perk.

Being encouraged and supported to grow your knowledge and skills is a wonderful workplace benefit that also can provide new options in times like these.

And, in these turbulent times, a great place to work also offers some job security as those companies tend to outperform rivals:

Companies on the Great Place to Work list outperform standard stock market indices by a factor of two to three,” Jen Wetherow, the institute’s director, said. “Their results are above average.”

What will be interesting this economic cycle, and something I’m actively trying to monitor, is which employers stick with plans to create better, more effective workplaces as productivity enhancing tools and means to better attract and retain talent. I’ll also be looking to see if talented people continue to keep criteria like those on the list above in mind. So far, intriguingly enough, I’m hearing affirmative from both camps (particularly in the accounting / finance / consulting sector).

Toronto’s ongoing creative transformation is coming more fully into view. This week saw the opening of Frank Gehry’s newly renovated Art Gallery of Ontario.

(Photo via AGO).

I was there for the opening (full disclosure: I serve on the board) and the building is beyond spectacular in the way it activates the art, stitches together old buildings and reanimates old spaces, and relates to the messy urbanist neighborhood which surrounds. Here’s what the NYT has to say;

Frank Gehry has often said that he likes to forge deep emotional bonds with his architecture projects. But the commission to renovate the Art Gallery of Ontario here must have been especially fraught for him. Mr. Gehry grew up on a windy, tree-lined street in a working-class neighborhood not far from the museum. His grandmother lived around the corner, where she kept live carp handy in the bathtub for making her gefilte fish. Given that this is Mr. Gehry’s first commission in his native city, you might expect the building to be a surreal kind of self-reckoning, a voyage through the architect’s subconscious. So the new Art Gallery of Ontario, which opened to the public on Friday, may catch some fans of the architect off guard.

Rather than a tumultuous creation, this may be one of Mr. Gehry’s most gentle and self-possessed designs. It is not a perfect building, yet its billowing glass facade, which evokes a crystal ship drifting through the city, is a masterly example of how to breathe life into a staid old structure. And its interiors underscore one of the most underrated dimensions of Mr. Gehry’s immense talent: a supple feel for context and an ability to balance exuberance with delicious moments of restraint. Instead of tearing apart the old museum, Mr. Gehry carefully threaded new ramps, walkways and stairs through the original. As you step from one area to the next, it is as if you were engaging in a playful dance between old and new.

But that’s not all. Earlier this month, Toronto’s Artscape unveiled its transformation of Toronto’s old street car repair barns into an urban park plus work-live space for artists and creators.

(Photo via Blog TO)

The project is an amazing example of creative, sustainable, and inclusive adaptive reuse. Rana and I were blown away when we saw the project as host of its opening night. The Globe and Mail reports:

The reinvention of the old Toronto Transit Commission streetcar-maintenance sheds in the St. Clair-Wychwood area of the city will banish forever your spontaneous, ill-considered desire to damn all urbanity … [T]his is a chance to feast on a version of urban heaven, a wondrous, hybridized redevelopment of something that had been left for 30 years to die a slow death. The Artscape Wychwood Barns, which open to the public this week, give us a new kind of temple in which art, community and urban agriculture are allowed to happily conspire … This is not to say that the barns will replace such major destinations as the Art Gallery of Ontario or the Royal Ontario Museum … The compelling city allows for an intermingling of all creative players. And it’s that potent mix which inspires us to stay.

Exactly. Artscape founder Tim Jones likes to say the city’s ongoing transformation involves the simultaneous recognition of the need both to put creativity on display and to more fully engage creativity at work. These two projects are part of that unfolding process to celebrate and harness creativity in a sustainable and inclusive way.

Buffalo has lots of them – and great ones at that. Nicolai Ouroussoff in today’s NYT:

Buffalo was founded on a rich tradition of architectural experimentation. The architects who worked here were among the first to break with European traditions to create an aesthetic of their own, rooted in American ideals about individualism, commerce and social mobility. And today its grass-roots preservation movement is driven not by Disney-inspired developers but by a vibrant coalition of part-time preservationists, amateur historians and third-generation residents who have made reclaiming the city’s history a deeply personal mission. At a time when oil prices and oil dependence are forcing us to rethink the wisdom of suburban and exurban living, Buffalo could eventually offer a blueprint for repairing America’s other shrinking postindustrial cities. Touring Buffalo’s monuments is about as close as you can get to experiencing firsthand the earliest struggles to define what an American architecture would look like.

The city’s rise began in 1825 with the opening of the Erie Canal, which opened trade with the heartland. By the end of the 19th century the city’s grain silos and steel mills had become architectural pilgrimage sites for European Modernists like Erich Mendelsohn and Bruno Taut, who saw them as the great cathedrals of Modernity. In their vast scale and technological efficiency, they reflected a triumphant America and sent a warning signal to Europe that it was fast becoming less relevant.

Yet it is the parade of celebrated architects who worked here as much as the city’s industrial achievements that makes Buffalo a living history lesson. Daniel Burnham’s 1896 Ellicott Square Building, with its mighty Italian Renaissance facade, towers over the corner of Main and Church Streets. Just a block away is Louis Sullivan’s 1895 Guarantee Building, a classic of early skyscraper design decorated in intricate floral terra-cotta tiles.  Across town, Henry Hobson Richardson built his largest commission: the 1870 Buffalo State Asylum for the Insane, composed of a pair of soaring Romanesque towers flanked by low brick pavilions. Light and air poured in through tall windows; spacious 18-foot-wide corridors were designed to promote interaction among the inmates, an idea that would be refined by Modernists in their communal housing projects decades later. But it was Wright who made the decisive leap from an architecture that drew mainly on European stylistic precedents to one that was rooted in a growing cultural self-confidence. Wright built two of those great pillars of American architecture here, the 1904 Larkin Building and the 1905 Darwin D. Martin House.

I’ve been a Buffalo fan since I got to experience its great architecture as a young visiting professor in the University of Buffalo’s School of Architecture in the early 1980s. Now combine this gift with the economic heft of the mega-region and there is a great deal of potential. The Bills are already playing some games in Toronto; cross-border trade and commerce is substantial. The economic crisis will likely spur once-in-a-lifetime infrastructure projects to connect the Canadian hubs of the mega-region – imagine a new super-high-speed tail line spanning Windsor, Toronto, and Quebec City. Is there a way to extend that kind of connectivity across the border to Buffalo and other U.S. cities? That could be just the spur that would activate the market for Buffalo’s tremendous history, authenticity, and quality of place.

This one takes the cake:

Even as Detroit’s Big Three teeter on collapse, United Auto Workers President Ron Gettelfinger said Saturday that the problem is not the union’s contract with the automakers and that getting the automakers back on their feet means figuring out a way to turn around the slumping economy.  “The focus has to be on the economy as a whole as opposed to a UAW contract,” Gettelfinger [the UAW President] told reporters on a conference call … Gettelfinger blamed the problems the auto industry is suffering from on things beyond its control — the housing slump, the credit crunch that has made financing a vehicle tough and the 1.2 million jobs that have been lost in the past year. “We’re here not because of what the auto industry has done,” he said. “We’re here because of what has happened to the economy.”

Er… really. So why aren’t VW, BMW, Damlier-Benz, Toyota, or Honda in this kind of mess?

This AP report is just sickening.

Cross burnings. Schoolchildren chanting “Assassinate Obama.” Black figures hung from nooses. Racial epithets scrawled on homes and cars. Incidents around the country referring to President-elect Barack Obama are dampening the postelection glow of racial progress and harmony, highlighting the stubborn racism that remains in America. From California to Maine, police have documented a range of alleged crimes, from vandalism and vague threats to at least one physical attack. Insults and taunts have been delivered by adults, college students and second-graders. There have been “hundreds” of incidents since the election, many more than usual, said Mark Potok, director of the Intelligence Project at the Southern Poverty Law Center, which monitors hate crimes.

The piling-on begins: The AP reports:

Three big city mayors asked the federal government Friday to use a portion of the $700 billion financial bailout to assist struggling cities. They sought help with the pension costs, infrastructure investment and cash-flow problems stemming from the global financial crisis. The mayors  – Michael Nutter of Philadelphia, Shirley Franklin of Atlanta and Phil Gordon of Phoenix  – made their request in a letter to Treasury Secretary Henry Paulson. Nutter said cities are facing an economic crisis not seen since the Depression and need help just like financial institutions. “I want to make sure that cities and metro areas are at the table, that their voices are being heard, that our challenges and problems are well understood, so that we can get relief,” Nutter said.

Who’s next?