Creative Class

In the New York Times, Alex Kotlowitz visits my home town of Cleveland, Ohio to find that it is all boarded up. I grew up in Cleveland right in the middle of it just a few miles from the famous Cuyahoga River. Cleveland was a modest town with lots of blue collar workers in scores of industries. The city had a very large and very substantial housing stock. Over the years, as industry declines, the creative class fled, and as technology evolved the city declines. When a city like Cleveland declines it leaves behind something, and that something is an abandoned housing stock. Cleveland now has between 10,000 and 15,000 abandoned and boarded up houses. Of course this is not new. When I was growing up in Cleveland, the whole east side of the city was abandoned, houses were torn down, and the Cleveland Clinic expanded in much of the space, the rest was left abandoned like my old neighborhood.

This is in part a legacy of industrial restructuring, the sub prime mortgage problem, and the long term subsidy to housing dating back to the great depression. Whatever the cause it seems to be well picked up by Richard in his article in the Atlantic. Cities come and go. In an article by Phil McCann and I we show that this has been the case for over 1,000 years and is nothing new. Baghdad 1,000 years ago was the most important city in the world.

The question is how do we deal with the housing abandonment in this country. For a large part of the problem is that we have an overstock of housing that no one will ever use. Should we start the write off of the trillions of dollars worth of old abandoned, or nearly abandoned housing, wipe the slate clean and just move on? Perhaps as Richard suggests we should just abandon the support for home ownership, eliminate the tax subsidy, and use the savings to clean up and abandoned housing mess.

In a recent article in the Washington Post, Reid Hoffman has suggested that the way out of this crisis is not with a stimulus to the “same old same old” but a return to the 1990s when small firms and entrepreneurship led the way to technological change through innovation from start-up firms. In fact, that trend started in 1982 and lasted for over 20 years as year after year new start-ups brought us the wonders of inventions that changed our lives for the better. Can this work again this time in green energy, sustainable development, and plug-and-play cars?

This is a good question but during the last quarter of the 20th century the economy was growing, we had a robust financial system, and technological innovation. Today, we have a mini-depression that may turn into a major one. The stimulus package and the financial bailout were needed to stabilize the economy and the financial system and it’s nowhere near finished.

I support policies to promote entrepreneurship but this is a long-term strategy. Do we really believe that immigrants are the way to solve our economic problems? Will they return again? We should start to lay the groundwork for entrepreneurship but it is not a short-term solution to our financial problems but a solution to our long-term challenges.

The National Journal asks:

If the economic crisis deepens, which areas of the world are most vulnerable to political turmoil and instability, and what form might that take? Is there any danger that the current economic crisis could unleash additional forces of violent extremism and upheaval above what we already face, and perhaps on a par with those spawned by the economic turmoil of the 1920s and 1930s?

Money quote: The United States is now the great creator of failed states.

And this:

Our global system is really a network. We like to champion Net-strengths: how networks degrade gracefully, node by node; how a network can lose many nodes and still function. But networks can also be surprisingly vulnerable: threats race from periphery to center, and can spread quickly to everywhere.

But there is another network fragility. Our civilization of modernity is dependent on a surprisingly small constellation of “creative cities” (Richard Florida), just as was the world of late antiquity (Peter Brown). A global system that depends on the economic and creative exchange between just 40 nodes, or city clusters worldwide, represents a fragile network — especially in the face of what lies ahead.

A mature global system already under stress and visibly ineffective on defense thus can be overstressed by exogenous shock. Shocks lead to both deglobalization and decompression.

Deglobalization means the system cores pull away from each other, look inward, and hunker down. Decompression follows as trade declines and networked relationships attenuate. As deglobalization and decompression gain momentum and become self-reinforcing, there will be more and more abandoned places. It is there — as it is now — that new identities and ideas spread and root.

Read more here.

For the first time in over a decade, the DOW closed below 7,000. For a little history, the DOW was around 1,000 in 1982 and then steadily rose to 14,000 over the course of 25 years. We have now returned 50 percent of that and the future does not look very good for getting it back anytime soon. The Nikai in Japan fell from 30,000 in 1989 to just around 7,500, losing more than 75 percent of its value in 20 years.

What is happening is that we are at the end of an era. It is the end of highways, sprawl, cheap everything, and we are also at a the end of globalization as we knew it.

How to move forward is the $64,000 question. What is clear is that we are just thrashing around, like a whale beached on the shore. There is no one around to put us back in the water. Perhaps the best solution would be for someone to slay the whale. In the Farrow Islands, when a whale beaches they come out with knives, jump on its back, and hack it to death. They have a big dinner of whale meat. In California, they call out a team of doctors to examine it and then it dies anyway. No dinner!

The problem is that everyone (read: economists) studied the 1930s and how to get out of the depression. People forgot that what got us into the 1930s depression was the 1920s! What got us into this depression is the 2000s (leverage, borrowing, housing investment, deregulation) – they were just like the 1920s. One thing is clear, the best way to heal this event is perhaps just to wait it out and not spend trillions and trillions to try and save it. We will heal in due time.

Measurement abounds! Stocks are down around the world over 50 percent from a year ago, GNP growth is down a little, unemployment has doubled but from a very low base, bank stocks are in the toilet. But how can we get a handle on what is actually happening around the world that represents a real number and not just financial.?

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. The index provides “an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron, ore, and grain.”

The index is a good measure of future manufacturing output since many of the inputs that go into manufacturing are dry goods. Over the past year the index has fallen from 10,000 to just over 1,500! This sudden collapse in shipping prices and increase in capacity is one indicator of the depth of this crisis. It more than other indicators suggests that the economic recession is far from over and will most likely deepen.

What to do about this is clearly expressed in the major concerns today about trade protraction and bigger than thy neighbour policies that bought on the Great Depression of the 1930s.  We world needs to keep trade routes open and avoid protectionism as much as possible. For if we are not able to keep trade going the world will no longer be flat, or spiky. It will be chopped up.

It has been over six weeks since my last post to the Creative Class site. I have moved to London and from my new vantage point the world seems a little distant. However, I also now see the world a little more clearly, and what I see is not pretty.  We have had war, elections, financial meltdown, recession etc. What is now clear to me is that whatever your historical perspective, the present situation is different from anything we have lived through. So we are looking at either a 60 or a 100 year event. Take your pick.

That is a long time, even for an economist, who is used to thinking in the long run. What is clear and becoming clearer every day, is that yes growth will return, but it will not happen for a long time. How long? I do not know, but it can be years and years. What is clear to me at this point is that the problem is about the very fabric of society in the U.S. and the U.K. and its global connections. This is not just a housing problem or just a credit problem or just a “Detroit” problem. This is a problem that was years in the making and will take years to unravel. However, how to unravel it is not clear to anyone that i can find.

A few things I know. First, the problem is not a lack of growth. Stimulating the economy to have more growth that we cannot pay for is not the solution. It will just create more problems down the road. Second, the banks are bankrupt. At three percent, capitalization losses are greater than the available capital. How to fix this without giving away the house will take creative energy. Third, the problem is global, and it stems from global flows of technology, goods, and capital of the past decade. The world was flat. This may be the hardest to correct.

How to think about solving the problem is the interesting question. It must start with an examination of the whole question of growth. “Has growth come to an end?” is the wrong question. The right question is “What is the end of growth?” The lack of growth is a mere indicator of what is wrong. The engine that propels America forward is entrepreneurship; entrepreneurship creates wealth; the wealth it creates becomes the fuel to create opportunity. As President Obama stated in his inaugural address: “The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart – not out of charity, but because it is the surest route to our common good.”

The present economic crisis is widely understood to have revealed a dangerous imbalance in the relationship between business and government that further fueled the lack of opportunity for most. Without opportunity stability itself disappears. This will take the creative talent of the international community to solve.

Getting it right will not be easy.

A new study written by Richard Florida and Roger Martin, released by the Martin Prosperity Institute today, makes recommendations for how Ontario can become a world leader in the creative age.

Roger Martin and Richard Florida call on Ontarians to embrace the promise of the global economic transformation underway and to harness its potential for building shared prosperity for Ontarians. Despite the current economic environment, Ontario is well positioned to compete and prosper in the ongoing global economic transformation. While the economic environment has worsened in the past year, the current upheaval only accelerates the longer-term trends – especially the shift from more routine-oriented to creativity-oriented jobs. Yet Ontario can do more to ensure it is a globally competitive jurisdiction. That is the key conclusion from the report released today, Ontario in the Creative Age.

The full report and press release can be found here and, to read more, see the related articles in The Globe and Mail and the Toronto Star.

Your thoughts?

There’s a great post by Edward Glaeser (in the Economix blog of the New York Times), titled “New York, New York: America’s Resilient City.”

In it, he describes how New York has managed to avoid the decay that has afflicted many large older cities, and, after a brief downturn in the 1970’s, came roaring back as arguably the most influential single city in the world.

His explanation? In a word – “smart people.”

“New York still has an amazing concentration of talent. That talent is more effective because all those smart people are connected because of the city’s extreme population density levels. Historically, human capital — the education and skills of a work force — predicts which cities are able to reinvent themselves and which ones are not. Those people who are continuing to pay high prices for Manhattan real estate are implicitly betting that New York’s human capital will continue to come up with new ways of reinventing the city. “

Glaeser continues, describing why dense cities succeed…

“They thrive by enabling us to connect with each other, which then promotes learning and innovation. The current downturn will only increase the returns to being smart, and you get smart by hanging around smart people. As long as New York continues to attract and connect those people, the city will continue to thrive.”

Now here’s what every city planner wants to know. Is this replicable? Can this success be engineered or encouraged, and are the effects measurable in 10 years, 20 years, a lifetime?

Does anyone have successful examples of campaigns and projects to replicate this resilient infrastructure? Or perhaps, examples of some cautionary unsuccessful attempts?

Best wishes to everyone for a creative and fruitful New Year!

My Globe and Mail column is out.

SOCIAL SCIENCE: THE POST-SUPERPOWER WORLD

Russia’s youth ready to embrace the dawn of a new era

Hard to believe, as we enter a thoroughly globalized world in 2009, that as an elementary-school student, I crouched under my desk every time an air-raid siren pierced the unsteady calm. I was born in 1957, the year of Sputnik, and my first political memory is of John F. Kennedy announcing that he would “stand up” to Russia during the Cuban missile crisis. Back then, in the United States, we grew up believing that we were engaged in a titanic struggle against a mortal enemy whose very existence threatened our creed of individualism, freedom and liberty.

But when I visited Russia this month, I was struck at how similar it has become to the United States. Certainly, the country is pushing to develop more of a market-based economy, having abandoned its state-run economy to the historical dustbin. But it’s more than that.

In Russia, as in the U.S., everything is big. People are loud and aggressive. Many are overweight. The roads are clogged with gas-guzzling SUVs. Billboards advertising luxury products dot the sky, and women walk around covered in designer labels – most of which, as in the U.S., are knock-offs. In a Moscow airport café, two young women are transfixed by the Russian version of InStyle magazine, poring over pictures of Sarah Jessica Parker, Paris Hilton and Scarlett Johansson.

And, just like the U.S. then and now, Russia is security-crazed – from the contortions required to obtain visas to airport checkpoints, from the suspicion of anyone taking a photo in a restaurant or hotel to the metal detectors at the entrances of official buildings, even the security gate at my hotel’s front door. Police sirens blare into the night, reminding me of city life in the U.S.

But it’s among the youth that the similarities between Russia and the U.S. become eye-popping.

While older Russians still appear to smoke and drink too much – evoking a U.S. culture more typical of the 1950s Mad Men era than the present – young Russians, with their jeans, T-shirts, BlackBerrys and iPhones, are virtually indistinguishable from their Western counterparts.

I had been invited to Moscow along with Megatrends visionary John Naisbett, Garage Technology Ventures start-up guru Guy Kawasaki and billionaire entrepreneur Richard Branson to take part in a conference on innovation and entrepreneurship, meant to encourage a new generation of techies to launch start-up companies in Russia.

Even as someone who has written about the growth of a new global creative class worldwide, I was struck by how much entrepreneurial zeal there was among Russia’s young generation.

I asked our interpreter and guide – a twentysomething foreign affairs staffer – what could account for it. Three things, he said.

One is globalization. Young Russians are well aware that they are part of a global economy, a global lifestyle and growing global class.

The second cause is communication. With international distribution of television and movies (including the Russian version of the recent Hollyood comedy Baby Mama), the boom in Internet and social media, the country’s young people are participating in cutting-edge trends.

The third is language. Young Russians (of whom he is a perfect example, he said) are speaking more and better English. When I addressed a class in Siberia last year, many of the students (a self-selected group for sure) engaged me in perfect English, asking questions that mixed academic insights with of-the-moment slang. I couldn’t help but feel that these young Russians had developed capacities that even exceeded so many of their North American peers. They seemed perfectly poised to navigate our global economic terrain.

As I sat in the fashionable Pushkin Café near the Kremlin and Red Square one evening, musing that the bustling nightlife around me could just as easily been that of Toronto, New York or London, it occurred me: I was witnessing the dawn of a new era. The age of the great superpower conflict – of a generation and a world defined by the Cold War – is over. While both countries remain powerful in their own ways, they are now subsumed in a global economy that is bigger than either of them.

At the conference, John Naisbett spoke of the rise of Asia, and especially of China as not just the world’s factory but as a growing centre of research and innovation. He described new universities, new research institutions (including one that he runs), high-speed trains and the striking, architecturally significant new airport terminals being built there. The contrast between an emergent society in the throes of rapid expansion and older societies that are living off the past and failing in many ways to embrace the 21st century could not have been clearer.

While Fareed Zakaria, editor of Newsweek International, describes a post-American world defined by the rise of the rest, I now think of our era as that of a post-superpower world. The energy has shifted, and been unleashed, and it’s not just a wide range of countries that matter, but mega-regions such as the Beijing-Shanghai corridor, the Mumbai-Bangalore axis, greater Toronto and its environs, Cascadia in the Pacific Northwest, and all throughout Asia, Europe and across the world – everywhere the Internet and global airwaves now reach.

Language, communication and openness to new ideas – these are now the drivers, whether you find yourself in New York or Toronto, Amsterdam or Moscow.

It will be interesting to see how the first post-superpower generation in the U.S. and Russia handles the looming economic crisis. Judging from the ubiquitous Louis Vuitton purses and InStyle readers in the Moscow airport, populations in both countries appear to be in denial about the prospect of a full-fledged depression. Americans still pacing the malls fervently wish that some combination of government bailouts, Federal Reserve action and the incoming Obama administration will save them. Russians cannot bear to think back to the late 1990s, when they last faced an economic fallout, and have stockpiled savings and foreign reserves in the hopes of avoiding it, even in the event of a stock-market collapse.

But it’s also clear that we share more connective tissue. A truly global creative class has emerged and is growing. We are all much more connected and similar than ever before – much more so than when we cowered under our desks at the threat of mutually assured destruction when I was in grade school.

Call me an optimist, but that fact bodes well for our shared future.

As a graduate of the U of Michigan, I can only try to forget what an awful football season we have just endured. However, a recent WSJ article reminded me that the Big 10 football conference and all major conferences are being outperformed by the teams of the Southeastern Conference (SEC).

The WSJ asks “What the rise of Southern Football Says About America,” in an interesting piece by Darren Everson. And while there is no overt mention of Detroit’s Auto Industry and the South’s Auto Industry in the article, the ongoing bailout saga kept popping into my head as I read the article. A snippet:

In recent years, the South has undergone rapid growth. Twenty-seven of the 50 fastest-growing metropolitan regions in the country in 2007 were in the South, while personal-income growth in the region outpaced the national average over the past decade. These changes have added muscle to the South’s historic passion for college football. While they rank low in many measures like per-capita income and educational achievement, states like Alabama and Mississippi rank close to the top in the percentage of high-school students who play football. And among states that have more than 10 native sons playing in the National Football League, the top six producers by percentage of population are Louisiana, Mississippi, South Carolina, Alabama, Florida and Georgia.

I began to wonder, is there some connection between the success of SEC football teams and the rise of the Southern Auto Industry?

Are Big 10 teams stuck with ‘Fordist’ football models while SEC coaches and administrators make use of ‘continuous improvement’ and other concepts in order to strengthen their programs? Are SEC leaders better at innovating with recruiting, play calling, and conditioning? (Remember, Gatorade was created at the U of Florida.)

The article points out a few potential theories for why the SEC has grown into such a football powerhouse, including pride of place that Southerners exhibit in their states, tight relations between SEC schools and Southern politicians, and academic standards in the SEC that differ from other conferences such as the Big 10 and PAC 10.

While there is likely no connection between successful SEC football and the successful Southern auto industry, it highlights the spiky nature of the creative economy – from auto production and college football administration to content creation and biotech. I believe that is what the rise of Southern football tells us about America.

BTW, I will remind all SEC fans that Michigan (and its old school coach Lloyd Carr) did beat Florida (and new school coach Urban Meyers) handily during last January’s Capital One Bowl Game.