Creative Class

Here’s the longer, unedited version of my column published in today’s The Daily Beast – It Wasn’t About the Economy, Stupid.

The conventional wisdom among pundits, pollsters, and political analysts is that the Republican victory in the midterms represents a referendum on – and a stunning of repudiation of – the Obama administration’s stewardship of the economy. “U.S. registered voters choose economic conditions by nearly a 2-to-1 margin over any of four other key election issues as the most important to their vote for Congress,” according to a Gallup organization analysis, a result that held “across all partisan groups.”

But the geographic patterns of Tuesday’s historic election results reveal a curious paradox. While the economy was clearly the voters’ number one concern, economic conditions alone cannot explain why they cast their ballots as they did. A Wall Street Journal analysis of House races found that Democrats held onto their seats in congressional districts that were feeling the recession the worst. “Of the 25 congressional districts hit hardest by the recession—measured by joblessness, poverty rates, and housing prices—16 are currently represented by Democrats. Fourteen of them won re-election despite the Republican tide.”

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This is the longer, unedited version of my column in today’s Wall Street Journal.

Remaking our sprawling suburbs, with their enormous footprints, shoddy construction, hastily put up infrastructure, and dying malls, is shaping up to be the biggest urban revitalization challenge of modern times—far larger in scale, scope and cost than the revitalization of our inner cities.

What a dramatic shift. Just a couple of decades ago, the suburbs were the locus of the American Dream. More than their sprawling, large-lot homes and big wide lawns, their shopping malls, industrial parks, and office campuses accounted for a growing percentage of the nation’s economic output.  A good many of them formed into Edge Cities—satellite centers where people could live, work, and shop without ever having to set foot in the center city.

With millions of homes underwater or in foreclosure, our suburbs and exurbs have taken some of the most visible hits from the great recession. In a stunning reversal, big cities like New York, Boston, Washington, D.C., Chicago, San Francisco, and Seattle have become talent magnets at the same time, drawing ambitious people, empty-nesters, young-families, and even a growing number of offices back to their downtown cores. As inner city neighborhoods are being gentrified, blight and intransigent poverty are moving out to the suburbs, where one third of the nation’s poor now reside—1.5 million more than in cities, according to a Brookings study. And suburban poverty populations are growing at five times the rate of those in cities.

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I had a great chat with Dan Gross, one of my favorite economics correspondents, last week about resets and American adaptive capabilities. Dan wrote a terrific Newsweek story and we got to team up for a nice segment on Newsweek Radio 9.

“We are the most adaptive, inventive nation, and have proven quite resilient,” says Richard Florida, sociologist and author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. If these impulses are embraced more systematically and wholeheartedly, the U.S. can remain an economic superpower well into the current century.

One thing that struck me was how my working-class father instinctively understood the power of America’s capacity to rebound and reset its economy and society. Here is how I described his words in my book Flight of the Creative Class:

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I was talking to a 60-year-old, retired entrepreneur at a party the other night. Successful guy, very sharp. I asked him what he thinks is next for Florida and he said he did not have much hope for Florida, mostly due to lack of visionary leadership. Then he said something that really struck me. He suggested that Florida is on a course to reset to its old state of being “cheap, sunny, and dumb.”

That really struck me because while we are all talking about the great reset that is going on, I had not thought to ask the question, “What does Florida reset to?” And he may very well be right. At the state level, we are relaxing the rules for developers  to encourage even more sprawl to try to kick-start our construction industry again. We are actually lowering impact fees in places. We are lowering protections on the environment. This seems like a reset towards “cheap, sunny, and dumb.” There are powerful forces and attitudes that could very well push Florida back into this reset mode. And that is pretty scary.

While we all generally agree that this reset is needed and welcomed in some cases, we should be careful that we don’t reset back to a point so far back that we actually lose too much of our hard won progress. We all have to ask ourselves and our leadership what the plan and vision is for this reset. Each community is facing this and we act as if the reset is just something that will happen. That is not the case, yet I hear far too little  debate as to how we actively shape the reset.

The Obama administration announced its upcoming summit on jobs yesterday.  The economic crisis has eliminated seven million jobs in the U.S. and 400,000 in Canada. ”This is the only recession since the Great Depression to wipe out all job growth from the previous business cycle,” writes Mort Zuckerman, editor-in-chief of U.S. News and World Report, in an op-ed ominously titled: “The Free Market Is Not Up to the Job of Creating Work.”

An enormous potential source of jobs is right in front of our noses – the service sector. Service jobs employ 56 million people, 45 percent of workforce in the United States and seven million workers, 46 percent of  Canada’s workforce. Millions more will be added as we move from crisis to recovery.

However, low-paying service class jobs seem to be a poor substitute for the long-run, stable, high-wage jobs that are being lost in manufacturing. But service jobs offer lots of potential for innovation, entrepreneurship, and the upgrading of employment opportunities.  The Strength in Services Summit will explore what is and can be done to transform service jobs into more innovative, higher-paying, and better work.  Click here for more. And contribute to the ongoing dialogue on this critical issue.

Interesting article in the latest Milken Institute Review which argues that the fiscal policies of the New Deal lengthened the Great Depression. It seems like a thoughtful critique without the right wing polemic that flavors so many of these discussions.

The current economic crisis has made some nostalgic for Franklin D. Roosevelt’s New Deal, an era that we are now inclined to remember as a grand – and successful – struggle to bring the economy back from the brink of chaos. After all, Roosevelt’s social insurance programs, including Social Security, unemployment compensation and the WPA did aid millions of Americans.

But despite the benefits of the New Deal safety net, and despite the success of Roosevelt’s financial reforms – notably, the creation of the Federal Deposit Insurance Corporation and the Securities and Exchange Commission – this nostalgia is misplaced. The central component of the New Deal – the programs aimed at restoring private-sector jobs – was highly problematic, and largely accounts for why the Depression ground on through the 1930s.

I’m not convinced, but I’m not an economist either. Today, as then, we’re in uncharted waters. You can download the article as a PDF here.

Green chutes optimism is misplaced. The economic crisis continues to deepen at a pace that is on par with or worse than that of the Great Depression, according to an updated analysis by economists Barry Eichengreen and Kevin O’Rourke. They conclude that even though “trade and stock markets have shown some improvement without reversing the overall conclusion – today’s crisis is at least as bad as the Great Depression” (pointer via Mark Thoma).

Their first graph (below) tracks world industrial output leading them to conclude that: “World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots.”‘ They add that: “North Americans (U.S. & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.”

Felix Salmon points to Julia Ioffe’s TNR story on Nouriel Roubini, zeroing in on the long journey back to recovery.

Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he had told me earlier. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change. The transition is painful, but the result may be good.”

Salmon’s comment is spot on.

[O]ver the long term, I’m optimistic that the redeployment of US human resources away from finance and into the real economy is bound to be a good thing. But in the medium term, the process of “scaling back and turning inwards” around the globe is going to be extremely painful – and is far from over. Or, to put it a more familiar way, things are going to get worse before they get worse. Only very slowly and very painfully might they start to get better — and it’s not going to happen any time soon.

The thing that strikes me most is how very long it takes for economies to reset themselves during crises. Recovery from both the Long Depression of the 1870s and the Great Depression of the 1930s took the better part of two or three decades. Both required not just a new wave of technological innovation, the creative destruction of various industries, and new modes of government economic intervention, but were premised upon a whole new “spatial fix” – the rise of the “modern” industrial city after the Long Depression and suburbia’s rise after the Great Depression – to set in motion broad new patterns of consumer spending and demand which could power longer-run growth. My own father was just eight in 1929, my mother three, when the stock market crashed. They left Newark for a close-in working class New Jersey suburb in 1960 – three full decades after the onset of the crash.

Governments and central banks certainly have better monetary and fiscal policy tools at their disposal now and are more adept at managing economic downturns. Still, I fear it will be a much longer road to full recovery and a new normal than most people expect.

The Pew Research Center recently asked a sample of Americans what they consider to be life’s necessities. Here’s a chart summarizing the key results.

Felix Salmon reacts:

I’m quite surprised that the landline phone is still considered more of a necessity than a cellphone — I can’t imagine that’s going to continue to be the case for long. I am interested in the huge drop in the perceived necessity of the microwave, however. Yes, there’s something about microwaves which just feels old-fashioned and unnecessary — but the microwave hasn’t really been replaced by anything … I’m also surprised that 52% of people consider a TV set to be a necessity, while only 23% of people consider cable or satellite TV to be a necessity: subtract the second number from the first, and you get a good indication of the sheer power of network TV. I’m sure that, too, will erode quickly.

The huge drop in the perceived necessity of clothes dryers, home air conditioning, and dishwashers is I think partly a response to the economic crisis, but more a response to the bursting of the housing bubble: people don’t define themselves by their appliances in the way that they did during the housing boom.

What went up in perceived necessity? Nothing, really — nothing more than the margin of error of 3.6 percentage points, anyway. Although it would have been interesting to see the results if intangibles had been included in the survey.

I mainly agree with Salmon. The results show the fragility of the old suburban, fordist, “keeping up with the Jones’” lifestyle. Looks to me though that the old order has declined, but we’re still awaiting something to replace it.

But this begs a bigger question: When might we see a tipping point toward something new – a new normal, so to speak.

The numbers for high-speed internet and iPod are not so encouraging in terms of potentially signaling the rise of a new higher-tech consumption bundle. But there are many things that are not probed, as Salmon notes. I wonder what the results would be, not just for intangibles but for experiential goods and for things like personal development (education, learning), higher-quality food, exercise, health-care, and a cleaner, greener environment.

It’s important to begin to understand what this new consumption bundle and new lifestyle might be for a simple reason. It’s not government spending that ultimately will set the stage for long-run recovery, but a shift in private consumption that provides the broad pattern of consumer demand that fuels innovation and new patterns of production. As I’ve noted before, it was the rise of suburbanism that powered post-war recovery and expansion.

We’re in the earliest phases of the current reset so it is still hard to tell what the core components of that new consumption bundle might be. The Great Depression began in 1929, for example, and it was not until the 1950s and 1960s that the new suburban lifestyle burst onto the scene fully formed. My dad was an eight-year-old boy in 1929 living with his nine family members in a tiny Newark apartment without a refrigerator or full plumbing. Like so many others of his generation, he bought his first suburban home in the late 1950s. He could not even imagine the total transformation of his lifestyle 20 or 30 years earlier, buying his own home on what was then a farm, filling it with all manner of modern conveniences, and driving his Chevy Impala car to work.

It may not be apparent yet, but a new consumption bundle and a new way of life will have to emerge sooner or later. It will have to be less oriented around the auto-housing industrial complex: We’ll all have to spend less on these things, so we can create demand for the stuff that will power and build our future.

If we look closely we can already notice some of the emergent strands or threads of this new normal – in the shift away from big cars and big houses, away from conspicuous consumption and toward not just organic and energy-efficient, green products, but from material goods to experiences, health, and personal development.

But, it’s still very early in the resetting process. Transformations on this scale take time.

Still, I can’t help but wonder what the shape of the new consumption and new lifestyle might be, and would very much welcome your thoughts.

My very favorite casualty of the reset – conspicuous consumption. The New York Times reports:

In just the seven months since the stock market began to plummet, the recession has aimed its death ray not just at the credit market, the Dow and Detroit, but at the very ethos of conspicuous consumption. Even those with a regular income are reassessing their spending habits, perhaps for the long term. They are shopping their closets, downscaling their vacations and holding off on trading in their cars. If the race to have the latest fashions and gadgets was like an endless, ever-faster video game, then someone has pushed the reset button…

Still, economists point out that the Great Depression created a generation of cautious savers. The longer the downturn this time, they say, the more likely it is to change financial habits permanently.

“Though the recession was always talked about in economic terms, we felt really strongly that, in fact, it was a crisis of culture,” said Tracy Johnson, research director for the Context-Based Research Group, a market research firm in Baltimore that views the recession as a rite-of-passage that will reorder consumer priorities. Ms. Johnson has advised clients to focus on quality rather than quantity. Malls redecorated in screaming red “sale” signs are not the way to go, she said, because “if you just give people the opportunity to buy more, you’re not matching up to where their minds are…”

Carol Morgan, who teaches law at the University of Georgia and whose husband has a private law practice, said she felt a responsibility to cut needless spending. “That is probably something that is a prudent thing to do in any event, but particularly now I see it as the right thing, as the moral thing to do,” she said, adding that she also hoped to increase her charitable giving. “Before, extravagance and opulence was the aspiration, and if we can replace that with a desire to live more simply…”

Any sharp decline in consumer spending will feed on itself, said Juliet B. Schor, an economist at Boston College and the author of “The Overspent American: Upscaling, Downshifting and the New Consumer” (Basic Books, 1998). Typically, people spend when those around them are spending, but in a downturn, the need to compete evaporates. “You can stay right where you are without falling behind,” Ms. Schor said.  Consumers’ focus may have shifted, she said, from striving to catch up to those above them to contemplating the fates of those below them.