Las Vegas takes top spot, followed by Detroit. Atlanta, Greensboro, and Dayton round out the top five. Phoenix comes in sixth. No surprises there. But, I was surprised frankly to see Chicago make the list. Here’s the full list, from Forbes.com, based on fourth-quarter rental and homeowner vacancy rates for the 75 largest metropolitan statistical areas in the country. Curiously, there is considerable overlap with this Forbes list of the places where home sales are rising fastest.
Arnold Kling challenges me to a $50 dollar bet.
For me, this is more of an emotional bet than an economic one. Florida and I both share the premise that Wall Street will not come back. Florida’s economic case is that the New York economy may actually be less dependent on financial services than Columbus, Ohio or Hartford, Connecticut…
I hate the Mets. I find the heavy-handed sensory overload of New York tiring and ultimately unpleasant, in the same way that I find Las Vegas or Disney World unpleasant. Although I can actually enjoy New York in short stretches, and I cannot say the same for Vegas or Disney…
I don’t think that the arts are all that important. To me, creative innovation that matters is somebody in a lab at MIT coming up with a more efficient battery or solar cell. It is somebody at Stanford coming up with a way to make computers smarter or cancer more preventable. I just can’t get excited about some frou-frou fashion designers and the magazines that feature their creations.
Ryan Avent responds:
Kling seems to want us to live in some bleak, technophilic dystopia, where we work to enable ourselves to work. But that would be a poor society indeed. Cultural goods aren’t just a nice by-product of a modern economy. They’re the very justification for it.
I’m not a betting man. But because I think very highly of Kling… and, well, because I’m pretty confident on this one – I’ll take it.
A quick disclaimer: As a boy growing up in New Jersey I was a huge fan of the 1960s Mets – Tom Seaver, Jerry Koozman, Nolan Ryan, Tug McGraw, Tommy Agee, Cleon Jones, Ron Swoboda – I can name more players from that team than the current one. I was also a huge fan of the NY Jets – Namath, Snell, Boozer, and company…
My point is that New York is a diverse open economy with a fast metabolism which will keep it attracting people and generating new businesses, industries, and modes of consumption – that will likely range from management and technology to arts, culture, entertainment, and media, and, yes, even finance – and in many cases capitalizing on the intersection and convergence of these. Can you say Bloomberg?
And while we’re at it: D.C.’s success (which I’d also bet on) is based not just on the fact that it’s a government town with highly educated people and a growing tech sector, it’s in effect become a suburb of New York, as the whole Bos-Wash corridor has become a more integrated economic unit – which can be seen most visibly in the relocation of major chunks of broadcast and print media – due to greater D.C.’s proximity, affordability, and quality of life.
I’ll also take San Francisco (from Napa to the Silicon Valley), Seattle, all of Cascadia, Chicago (which has roiled up many of the management functions of the old Midwest), and my very own Toronto – which to my mind may well have the biggest upside of any city in North America. I could go on…
So, how do you wager?
Emma Rothschild in the New York Review of Books (h/t: Brian Knudsen):
An enduring bailout, or a new deal for Detroit, would be different. It would be an investment in ending the auto-industrial society of the late twentieth century. This would involve innovation in public transportation, and in the infrastructure that would enable people to work at home or close to home. It would engage the information industries in making public transport more convenient, more enticing, and more secure. It would be open to the sorts of improvements that have been suggested in the expansion of rail and bus transportation in China, Japan, and France, for example, and in India by the information technology services companies.[18] It would be an investment, even, in the old promise of “automotive” freedom, of owning a car but not having to use it, and of being able to go anywhere at any time, in Asia as in America. The improved public transport would be used for routine travel, such as the “work, school, and medical/dental trips” on which public transit use is already concentrated, according to the National Household Travel Survey. The new hybrid vehicles, in a post-auto-industrial society, would be available for the other trips that the survey describes as “family, personal,” or “social, recreation, eat meal.”[19]
Hot on the heels of his Talk of the Nation interview this past Tuesday, Richard Florida will appear on the NPR Weekend Edition with Scott Simon.
Tune in at 1pm EST, Saturday, February 21! Listen to the broadcast here.
Guess what country has just said a big, fat resounding “no” to industry bailouts? Sweden, that’s right, Sweden. The land of the big state, socialism, and social democracy. My colleague Charlotta Mellander writes:
It’s interesting how differently the financial crisis is being met by governmental authorities in North America and Scandinavia. With Saab on the brink of bankruptcy, GM – which owns Saab – turns to the Swedish state asking for support, approximately in the same manner in the US. And the Swedish government says – NO. No tax money will be spend on saving the car industry. The message is that if a company can’t make it on its own then tax money shouldn’t be to bail it out. I must say I’m kind of surprised – but in a positive way. I didn’t think they’d have the courage to say no to such an “institution.”
Here’s a report from Sweden’s The Local:
The Swedish government said on Wednesday it would not intervene to take over Saab. Enterprise Minister Maud Olofsson slammed Saab’s US owner General Motors for “abandoning” the struggling Swedish car maker. General Motors has warned that the unit would go under without official help. “Voters picked me because they wanted nursery schools, police and nurses, and not to buy loss-making car factories,” Enterprise and Energy Minister Maud Olofsson told Swedish public radio.
Can we get her to be our new Commerce Secretary?
Question: How do you stimulate the housing market, when virtually no one can get a mortgage of greater than $417,000?
That’s the limit on so-called conforming loans in most parts of the country. Bigger loans, called jumbo mortgages, are hard to get and carry significantly higher interest rates and large down payments. The reality for most people is that everything else is cash beyond the $417,000 conforming loan. Try buying a house on that in one of this country’s talent-magnet cities. And what if you have to renovate? From Bloomberg:
“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.” … Habetz said he had a customer with a 740 credit score who had a down payment of $500,000 on a $1 million home in Easton, Connecticut. The borrower had to wait two weeks for approval when in December he would have gotten the mortgage overnight. “Mortgage lending right now is like wading miles and miles in waist-deep mud,” Habetz said. “It’s so difficult. Jumbo borrowers will be tortured and it’s nothing they should take personally because everybody is getting tortured.”
Expect the housing market to continue in its current zombie state for some time.
It drives me crazy when I get the argument, “Well Roger, the reality is…” The instant I hear the expression “the reality is,” anything that follows is just “blah, blah, blah” to me.
Why? Almost everything that we think is real is actually a construction of inferences and interpretations that we misinterpret as reality. And unfortunately, the belief that we are directly observing and understanding ‘reality’ discourages us from trying to change it. Hence our concept of ‘reality’ is the enemy of innovation.
The ‘reality’ assertion happens all the time. I recall a fellow board member, Tony M., arguing with me during a board meeting, “Roger, the reality is that we can’t sell this division right now.” In fact, we could (and did) sell the division, but it didn’t appear that way to Tony because the things to which he paid attention didn’t add up to the possibility of sale.
Tony didn’t see his view as a model of reality, but as reality-direct, pure, and clean. That is why he didn’t say, “I don’t think we can sell it,” but rather “the reality is we can’t.”
When we see ‘reality,’ we act to confirm and reinforce that ‘reality’, whether it is real or not. So if we were to conclude that ‘the reality is’ that consumers won’t pay a premium for quality-for example, they won’t pay more than 99 cents for a four-roll package of toilet paper-then we won’t even try to provide more quality. Instead we will provide a generic product and spend our resources on price promotions that enable retailers to hit the 99-cent price point.
Self-Fulfilling Prophecy
In this context, the consumer will wait to buy his toilet paper until it is on special at 99 cents and thereby exhibit what is logically interpreted as superhigh price sensitivity. In doing so, he reinforces the ‘reality’ that toilet paper consumers won’t pay a premium for quality.
Inadvertently, these prophecy-fulfilling consumers reinforce the belief that we can identify ‘reality’ when we see it, whether it is a ‘reality’ about customers, colleagues, competitors, distributors, suppliers, family, friends, or relatives.
The problem with the rush to define ‘reality’ is that very few people are inclined to try to change reality. Why would you? You can’t change reality. Why would you try to change, for example, the laws of physics? In the late 17th century, Sir Isaac Newton made a number of observations about properties of physical objects and came up with a set of basic laws of physics.
Braving Change
For over two centuries, these laws were considered immutable reality. We know now that Newton’s Laws were nothing more than his interpretation of a set of observable features of moving objects. When Albert Einstein came along, he demonstrated that a different interpretation of the observable world would generate a different ‘reality’ that we now know as the general theory of relativity.
It was no small task for Einstein to take on two centuries of ‘reality’. In fact, it is stunning that he did and that he prevailed. He had a better time of it than Galileo.
The treatment of interpretation as actual reality has a chilling effect on innovation. Reality is there to be accepted, not challenged. It is a bit like the expression “possession is nine-tenths of the law.” Once something gains the stature of ‘reality’ it becomes the law, and any related innovation is suppressed.
Seed of Scientific Thinking
I had long wondered why there is such a predisposition in the modern world to classify things as ‘reality’ and only recently got a compelling answer when I met a clever guy from Australia named Tony Goldsby-Smith, an ex-philosopher who heads a consulting firm called 2nd Road. He traces the problem back to Aristotle or, more specifically, to a tragic partial interpretation of the Greek thinker.
Modern scientific thinking arguably stems from Aristotle, whose classic book Analytics laid out what may have been the first truly comprehensive view of how to reason scientifically from observation to rigorous conclusions. While many other philosophers and scientists have built on and contributed to the practice of analytical reasoning, Aristotle gave us the kernel.
Goldsby-Smith points out that Aristotle made an important distinction that has been almost entirely overlooked in the modern history of analytical thought. He divided the world into parts: the first in which things cannot be other than they are, and another in which things can be other than they are-a simple but powerful distinction.
Alternate Reality
The former is typified by the physical world in which a rock is a rock and can’t be anything else. In this world, Aristotle’s Analytics lays out a fabulous toolbox-rigorous, objective, quantitative analysis whose goal is to establish and document the reality of the situation.
The latter, where things can be other than they are, is the world of people, of organizations, of cultures. For example, a badly performing organization can be something else-a great organization-if someone figures out how it to turn it around. For this entire domain, Aristotle explicitly argued that analytics is an inappropriate tool.
Instead, in his book Rhetoric he described the proper thinking tools: conversation, invention, and intention. In Rhetoric, the object of endeavor is not the description of what is real but rather the creation of something that does not currently exist; that must first be imagined.
Full Circle
The great pity for innovation, creativity, and possibility is that the modern world has adopted Analytics as the universal thinking dogma rather than as an approach its inventor saw as being useful in just one specific domain.
Innovation and creativity require a fundamentally different approach. Many believe they require a new way of thinking but, ironically, they require a very old way of thinking, brought to us by the same man who created the analytical model we need to replace: Aristotle.
One could even go so far as to argue that Aristotle was the original Design Thinker. In Rhetoric he argued for the power of collaborative conversation to generate new ideas. He stood for having the intention to invent something new where nothing currently exists. This required the thinker to engage in abductive reasoning in addition to deductive and inductive reasoning, all concepts that modern designers hold near and dear.
Creating the Future
But back to ‘reality’… Analytical reasoning seeks out and reveres reality. As long as we apply analytical thinking to things that can be other than they are, we will convince ourselves that what we have now is ‘reality’ and we will be both blissfully ignorant of the possibilities that could be and comforted that there is nothing to do but accept the situation.
Instead, our core assumption should be that we are not looking at ‘reality’ but rather seeing just another model-one that is likely to be imperfect. If we start with that assumption, we open ourselves to imagining better, different models. With that mindset, we can create the future rather than reinforce the past. With that mindset, we can be Design Thinkers.
Originally published in BusinessWeek.
Tyler Cowen says not so good:
The simple truth is that so far economic policy has fallen short of being good. Some (not all) left-wing bloggers may be reluctant to say this so early in the tenure of such a long-awaited administration, but perhaps a few of them are thinking it. There is the stimulus, the Geithner banking plan, and the housing plan. Of course there are differences of opinion but perhaps it is fair to say he is straining to be one out of three?
The plan does too little to recognize that many homeowners are living in homes that they cannot afford. In one of the government examples, a family earning less than $44,000 a year has a $213,000 mortgage on a $190,000 house. By any reasonable standard, this family cannot afford that house. It would be far wiser for the government to facilitate the family’s move to rental housing than to provide a short-term subsidy aimed at keeping the family in the home. The plan should have been more forthright in acknowledging that America’s housing mess means new mortgage terms for some and new housing for others.
We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income. (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income. The government then steps in to lower payments to 31 percent of income.)
The extreme fiscal largesse bestowed on residential housing, directly and indirectly through mortgage interest deductibility, has led to a massive misallocation of investment in the US. There has been overinvestment in the private residential housing stock and underinvestment in just about every other form of fixed capital: infrastructure, public amenities of all kinds (sports facilities, public recreational facilities, parks etc.), commercial structures, plant and equipment. It is time to correct the distorted incentives that are at the root of this misallocation. The easiest way to do this, in the current tax system, is to end the deductibility of mortgage interest in the personal income tax, close down Fannie and Freddie and end the role of the US government in the provision of residential mortgages.
But this impossible dream of re-inflating the housing bubble and making all the wealth reappear is going to die hard. Clever, but stupid, politicians are going to try to convince people that they have plans to make this happen, and they’ll criticize the Obama administration for not getting the job done. It’s important to understand, however, that we’re not talking about real assets that vanished. The houses are still there, and they’re still as good or bad or useful or non-useful as they ever were. What’s vanished is a speculative mania, and public policy can’t—and shouldn’t—create a new one.
Ryan Avent points to this finding from a 2006 report from the Center for Housing Policy, which documents the share of income people devote to housing and transportation. It’s higher than you might think.
With annual combined housing and transportation costs at 39 percent of the median income of $87,398, Arlington County becomes the most effective when you use this formula. Next in line are Alexandria, with a median income of $80,510, and Fairfax County, with median income of $100,419. Both have combined housing and transportation costs at 41 percent.
These are not disadvantaged places we’re talking about, but some of the most affluent counties on the planet. Avent notes: “For residents of exurban Nova counties, like Prince William and Spotsylvania, total housing and transportation cost can be 50 percent or more of median incomes.”
How can we even imagine building an innovative, creative, and knowledge-based economy when housing and transportation costs eat up so much of household income? It would be like trying to build a modern industrial economy, say in the 1930s or even 1950s, but having food (that is the cost for agricultural products) consume half of all income. When housing and transport eat up this much on average, what’s left over to create effective demand for the industries, technologies, and business models of the future?
Before we can get out of this mess, housing and transport have to become a whole lot cheaper.
