Creative Class

In a recent issue of the American Interest related to The Ends of Growth, we argue that, “Our focus on economic growth is misplaced and our leaders’ conception of the U.S. economy is misplaced. No wonder were in such a mess.” Defining Prosperity suggests that both republicans and democrats have an outdated understanding of our political system. The republicans have an absence of principle and the democrats have an obsolescence of purpose.

The next America needs to have an understanding of what America is. Economic growth, or its absence, is merely an indicator on the dashboard of our ongoing national journey. The engine that propels American capitalism forward is entrepreneurship; the fuel is opportunity; the work of foundations recycles the energy of society, making progress and widespread prosperity sustainable.

This century – the global century – will rest on sustainable development in global cities driven by entrepreneurs and fueled by venture capital. However, what will make this happen is the reconstitution of wealth on a global scale the likes of which has never been seen.

Wealthy individuals from around the world will have to learn from the American model that entrepreneurship leads to wealth, wealth needs to be given back to create opportunity for the next generation. The entrepreneurship-philanthropy-opportunity cycle is the inner dynamic of American capitalism and the source of its prosperity. The strengthening of it in the global economy is our most important job today.

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.

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.