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.”

Economic factors did not drive state-wide races for Senate or governor either. Democrats, for instance, held onto governorships in the blue states of New York, Massachusetts, and Maryland, and they won a victory in California even though it has taken a tremendous economic hit. Despite the massive Republican pickup in the House and smaller gains in the Senate and governors races, the American electoral map continues to reflect its long-held red versus blue shading.

Columbia University’s Andrew Gelman’s influential book Red State, Blue State, Rich State, Poor State sheds light on this conundrum. Rich voters trend Republican, Gelman and his colleagues found, while rich states trend Democratic. My own earlier analysis of polling data suggested that short-term economic factors like the unemployment rate or changes in housing values provided little explanation of state favorites for Senate or governor, while more deep-seated structural factors like income, social class, attitudes toward religion, and openness toward immigrants as well as gays and lesbians were more likely to hold sway.

With the help of my colleague Charlotta Mellander, I took a close look at factors associated with the recession’s impact – like the change in unemployment and in housing prices since the onset of the crisis — that might have influenced voters. We also looked at income and several other structural variables. In The Emerging Democratic Majority, John Judis and Ruy Teixeira argued that Democrats have gained an advantage by adding the wealthier knowledge workers who cluster in urban centers to their historic base among poorer populations and minority groups. On the red side of the divide, blue-collar working class voters have been shifting into the Republican column. Taking this into account, we examined the relations of work and class and partisan choice. Following Ronald Inglehart’s lead, we also looked at the relations between religious values, tolerance, and political preferences. Confining our analysis to state-wide Senate and gubernatorial races, we conducted a basic correlation analysis and compared the results for the current midterm. We also compared the midterm pattern to the state-by-state vote for Obama and McCain in the 2008 presidential race.  As always, we caution readers not to make too much of these findings. The size of the sample is small, and our analysis can only identify relationships among variables, and in no way implies causation. Still, a number of very interesting patterns emerge.

Despite all the hubbub about the economy, we found no evidence at all that short-term economic factors – unemployment and housing prices – significantly shaped state-wide voting patterns for either party. This is not to say that short-term economic factors did not matter at the margin: Clearly, election returns and exit polls showed that many individuals shifted their 2008 Democratic vote to a Republican one in the midterms. But, at the state level, deeper-seated factors remained by far the dominant factor.

Income and class remain important, but less so than in the ‘08 presidential race. Higher-income states went for Obama, while lower-income states went for McCain. This trend continued to hold for Senate races, with higher-income states voting Democrat and lower-incomes states trending Republican, but not for gubernatorial races.

Class also continues to play a role, though its relation was less evident than it was in ‘08.  Obama took states where knowledge workers and the creative class – which makes up roughly  a third of the workforce and includes workers in science and technology; business and management; law; arts, culture, media, and entertainment; health care and education – comprise a larger share of the workforce, while McCain took blue-collar working class states. The creative class was more split in the midterms, and significant segments of it shifted from Obama and the Democrats to the Republicans. While a considerable change from ‘08, it is not surprising, as many creative class voters tend to be independent and more candidate-centered. While the correlation between creative class states and Democrats remained positive, it was not statistically significant. Blue-collar working class states were positively associated with Republican Senate votes and negatively associated with votes for Senate Democrats.

Religious orientation remains a key pivot point in America’s cultural and political divide.  In 2008, more religious states went for McCain and less religious states went for Obama. This pattern continues to hold for the Senate, though not for governors’ races. Religion is positively associated with both Republican votes for Senate and negatively associated with Democrat votes for Senate. (Our religion variable is from Gallup polls that ask individuals if religion is an important part of their everyday life.)

From Tom Tancredo in Colorado to Carl Paladino in New York, we’re constantly reminded that immigration and gay rights remain significant wedge issues in American politics. (We used the percentage of immigrants and gays and lesbians in states as proxy measures for openness). Salient in 2008, openness toward gays and lesbians and toward immigrants were again among the most important factors in state partisan patterns. States with higher percentages of gays and lesbians and higher percentages of immigrants went for Obama in 2008 while those with lower percentages went for McCain, and these trends also continue to hold. Immigrants appear to have a more substantial relation with votes in Democratic states, while gay and lesbians have a more noticeable association with Republican states. States with larger percentages of immigrants were more likely to vote Democratic in both Senate and governor races. The percentage of immigrants was negatively associated with Republican votes for Senate but not significantly associated with Republican votes for governor.  The percentage of gay and lesbian residents in a state was negatively associated with Republican votes for both Senate and governor, and it was positively associated with the Democratic votes for Senate but not significantly associated with Democratic votes for governor

But, the strongest factor of all in our analysis was the red-blue pattern itself. States that voted for Obama in ‘08 tended to elect Democrats to Senate and governor, while those that went for McCain again went for Republicans. The correlations were significant for both Senate and governor races across both parties, though they were about twice as powerful for Senate races.

The upshot of this could not be clearer. We witnessed no massive realigning of the electoral map; instead, America remains divided along the same political, cultural, and economic axes. Richer states are still more likely to be Democratic and poorer ones Republican. But it’s about more than just money. The creative class might have split its vote to some degree, but working class states continue to trend red, while states with higher percentages of immigrants and especially gays and lesbians continue to tack Democratic.

Of course economic conditions do play a role in elections and this one is no exception. Obama benefited strongly from the support of the creative class in 2008; economic conditions have considerably tempered their enthusiasm this time around. And “throw the bums out” inevitably takes a greater toll on the party in power.

But a discernible political pattern remains, one that is etched in a deep class divide that is rooted in the very structure of our economy. It’s not just that more educated, higher income, knowledge workers prefer to live in denser cities and metro areas on the coasts. The logic of an idea-driven economy generates innovation and productivity by concentrating them there. But just as the economy benefits from the concentration of human capital and the creative class in tighter, spikier geographic locations, our political system penalizes it, as evidenced by the big swaths of red in the less densely populated states and the smaller specks of blue on America’s new electoral map.

And this political reality handicaps the nation’s ability to address the very serious economic problems it faces. In previous periods of economic crisis and transformation, like the Long Depression of the late 19th century and the Great Depression of the 1930s, America benefited from the “critical realignments” that were long ago identified by Walter Dean Burnham, which recast the electorate to create more stable governing and policy coalitions. These political realignments shift the power balance between the parties and, in doing so, provide the political underpinnings for the major changes in public policy that are needed to help the nation adjust to structural economic change.

Though our economy is currently in the midst of a similar great reset today, our politics reflect what Burnham called an “unstable equilibrium.” In fact, the overlay of class and geographic divides, combined with Washington’s inability to get much done, creates an especially volatile backlash-gridlock-backlash partisan cycle. Democratic anger at Bush motivated massive voter enthusiasm in the ‘06 and ‘08 cycles among Democrat-leaning groups. The same kind of mobilization was apparent not just in the Tea Party but in Republican-leaning groups this cycle.  According to a November 2 Gallup poll, 63 percent of Republicans surveyed reported that they were more enthusiastic than usual about voting — an all-time high. Americans are most enthusiastic about voting when they feel the least empowered – it is hardly an inspiring picture.  This backlash cycle is chronically unstable. No sooner is a new administration or a new congressional majority in place than anger begins to mount on the other side and the cycle begins again. To match our unstable economy, we have an unstable political system.

The consequences of this backlash-gridlock cycle extend far beyond politics, paralyzing America’s ability to deal with the deep and fundamental economic issues it faces. Just when the United States needs bold, forward-looking leadership which can develop broad efforts to renew the economy, upgrade jobs, spur innovations, and address mounting inequality, it is stymied by a volatile political system propelled by anger and backlash, leaving it with gridlock and inertia.

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.

I myself am a card-carrying, dyed-in-the-wool urbanist; I’ve lived in inner-cities for most of my adult life. But I believe my urbanist fellow travelers are making a big mistake when they impugn suburbanization wholesale. Suburbs don’t always grow at the expense of cities; suburbanization and urbanization alike are parts of a larger process. Studies reveal that, counterintuitively, suburbs don’t draw most of their populations from the inner city, but grow by attracting people from small towns and rural areas further out, as well as immigrants from foreign countries, more than 50 percent of whom bypass cities and settle directly in the suburbs of larger metro areas, according to research by Brookings’ Audrey Singer.

Great metropolitan areas are like economic suns; their gravitational appeal is irresistible. Suburbs and cities are mutually dependent; they blur into each other at the margins. And the most successful suburbs share many attributes with the best urban neighborhoods: walkability, vibrant street life, density, diversity.

Density, the clustering of people and firms, is a basic engine of economic life—for cities, suburbs, and nations. When interesting people rub against each other, they spark new ideas; the clustering of economic assets and activities accelerates the formation of new entrepreneurial enterprises and dramatically increases overall productivity.

The idea that such clustering only happens in Manhattan-style urban centers is shortsighted and parochial—it’s characteristic of Silicon Valley too, and Nashville, whose cluster of musicians, composers, studios, publishers, and record companies has made it the most concentrated center of commercial music-making in the world. But we need more of it and too many of our suburbs and exurbs don’t have much of it at all. The key to our suburbs’ renewal is not beautification but densification. As our suburbs become more clustered, they’ll become more economically energetic—with benefits for us all.

Renewing our suburbs is part and parcel of broader economic recovery. The very act of restoring them—of retrofitting them for the new ways of living and working that our emerging new economic order requires–will help bring back prosperity overall.

Sources: Map by Zara Matheson of the Martin Prosperity Institute. Data from Christopher Leinberger.

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Though some of our most stressed suburbs might have passed the tipping point— like those brand new unsaleable houses on the far-out fringes of L.A. that were bulldozed to the ground not too long ago, double-paned windows, granite countertops, whirlpool baths, and all—most of them aren’t going to fade away. Just over half of Americans live in the suburbs, and the great majority of them are content to stay. More than two-thirds (68 percent) of suburbanites are “satisfied” or “very satisfied” with where they live; 57 percent rated their communities as the “best” or “near-best,” according to a survey I conducted with the Gallup Organization and report in my book Who’s Your City? A separate Pew survey identified the group of Americans that is most satisfied with their living choices as college-educated suburbanites–62 percent of whom said there was no better place for them to live.

Even before the recession, our changing demography had begun to alter the texture of suburban life in favor of denser, more walkable, mixed-use communities. Ozzie and Harriet stereotypes notwithstanding, the average age of marriage has been rising, households have gotten smaller, and single people now outnumber marrieds. Only about one in five American households consists of two parents with children living at home, according to data from the U.S. Census Bureau. Many baby boomers who are in their empty-nester phase are looking to downsize, and younger Americans faced with a stagnant economy are putting off having families a little longer and are staying put in their apartments or moving home with mom and dad.

The recession accelerated this process of change. Much has been made of the shift to a so-called “new normal” where consumers scale back on debt, purchase less material things, spend more time with family and friends, and seek greater meaning in their lives. It may sound like the wishful thinking of crunchy granola, ivory tower pundits —only it really is happening. Even builders and realtors have taken notice. According to an eye-opening 2009 survey commissioned by Builder magazine, home buyers are no longer willing to drive to the furthest edges of developments to buy the biggest house they can afford. In fact those are precisely the kinds of homes that are not selling.  Real estate development expert Arthur C. Nelson predicts that we will have a surplus of as many as 22 million large-lot homes by the year 2025.

Today’s buyers—surprising numbers of them single women— are looking for smaller houses closer-in, with access to parks and cultural amenities. There is a rapidly growing market for super-energy efficient homes under 1,300 square feet – quite a departure from the 5,000-6,000 square foot McMansions of just a few years past. “We are entering a new era of home building, where buyers look for spiritual satisfaction rather than material gain,” the Builder study concludes. Not the kind of language we’re used to hearing from the construction industry.

While most suburbanites are happy with where they live, growing numbers are increasingly unhappy with how much time they’ve been spending in their cars. More than half of Americans would prefer to walk more and drive less, a 2003 national survey reported, and more than a third would prefer to live in walkable communities, according to research by Jonathan Levine of the University of Michigan and his collaborators. Commuting by car is not only time-consuming and expensive, according to research by the Nobel prize winning economist Daniel Kahneman, it is also one of life’s least enjoyable activities. Most suburbanites don’t want to move to the city; they’d like the best aspects of city life—its liveliness, its amenities, its walkability—to come to them.

Sources: Analysis by Patrick Adler; graphics by Michelle Hopgood of the Martin Prosperity Institute. List of walkable suburbs from Christopher Leinberger. Human capital refers to adults with a bachelor’s degree or more; travel time to work is one-way travel from work to home. Human capital, income, and travel time to work data from the U.S. Census Bureau.

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Walkable suburbs are some of America’s best places to live; they provide a model for renewal for their sprawling, spread-out siblings. Relatively dense commercial districts, with shops, restaurants, and movie theaters, as well as a wide variety of housing types, have always been a feature of the older suburbs that grew up along the streetcar lines of big metro areas. A 2007 study by suburban redevelopment expert Christopher Leinberger found more than 150 walkable places in America’s 30 largest metro regions–places like Hoboken, Montclair, Maplewood, and Princeton in New Jersey; Stamford and Greenwich, Connecticut; Brookline, Massachusetts; Bryn Mawr, Pennsylvania; and Royal Oak and Birmingham, Michigan, outside Detroit. Newer versions of walkable suburbs can be found in regions that developed later, like Palo Alto in the heart of Silicon Valley; Santa Monica; Boulder, Colorado; Coral Gables, Florida; Decatur outside Atlanta; and Clayton near St. Louis.

These are the places where Americans are clamoring to live, where housing prices have held up even in the face of one of the greatest real estate collapses in modern memory, as Leinberger documents in his book, The Option of Urbanism. The desire for walkability can be measured in dollars and cents. Houses in walkable neighborhoods command higher prices than houses in more distant, less dense locations. A recent study by urbanist Joe Cortright for CEOs for Cities analyzed the sales of 90,000 homes in 15 major metros. In 12 out of 15 of them, walkability commanded a premium—sometimes of hundreds of thousands of dollars in places like the D.C. suburbs.

With help from my colleague Charlotta Mellander, I examined the economic relations of walkability (as ranked in Leinberger’s research and by the walkscore index) across 40 or so other U.S. metropolitan regions. We found that metros with walkable suburbs had greater economic output, higher incomes, and higher housing prices; higher levels of human capital, higher membership in the creative class; higher levels of patented innovations and of high-tech industries and employees; not to mention higher levels of happiness.

It goes both ways. On the one hand, skilled, affluent people prefer walkable neighborhoods, especially when they have young families. Many move from denser city neighborhoods, like Georgetown or Adams Morgan or Capitol Hill, to places like Bethesda, or from Manhattan or Brooklyn to Montclair or Westport or Greenwich, because they can gain security and access to good schools without having to give up amenities they left behind in the city. Whether they move to these suburbs specifically because of their walkability, their urban virtues of mixed use and generally medium-scale density ensure that the innovation and productivity-enhancing effects of clustering continue to be available to them. Just as they did in the city, people bump into each other in coffee shops and other such Third Places; they discuss projects and make deals. This sort of thing is legendary, from Silicon Valley to Nashville’s Music Row.

If America’s oldest suburbs have been its most resilient, they are not its most typical. Many of the inner-ring suburbs that boomed after World War II started out with more modest endowments of human and physical capital; some of them have since lapsed into significant disrepair. But as the metro areas continued to expand, many of these places have seen their land values rebound because they’re closer in. Ferndale, Michigan, just outside of Detroit, has gone far to revitalize itself by promoting its art scene, building affordable housing, and by marketing itself as gay friendly. Arlington, Virginia, has added density by building mixed-use high-rise complexes at its 11 Metrorail stations while encouraging the development of independent businesses in its older neighborhoods. It is a place of exhilarating contrasts, with funky coffee shops, vintage clothing stores, and places to hear indie bands close upon gleaming office towers and chain restaurants. Bellevue, Washington, just across from Seattle which has been retrofitting  and adding density and mixed-land use to its downtown for some time, recently launched a major core-building initiative, the “Bel-Red Area Transformation,” a 900-acre urban infill project that will bring mixed-use development, light rail, new streets, parks, and open spaces to a disused stretch of highway.

But not all of America’s suburbs have the option of developing compact cores along streetcar lines or transit; not all are filled with old, wonderful housing stock that is ripe for gentrification, not all of them are filled with the kinds of mega-talented techies and visionaries who are flocking to Silicon Valley. Many are sprawling, relatively characterless places, with spread out  populations living in cookie-cutter houses on large lots, who commute long distances to work. These suburbs have to rebuild from the bottom up.

In Phoenix, Arizona, three abandoned strip malls, clustered at the corner of 40th and Campbell Streets, have been converted into a restaurant, an upscale grocery, a chic bakery, and a cocktail bar. It’s called Le Grande Orange and it has become a huge attraction, both for customers and local home buyers, who want to live within walking distance of it.

National Harbor, a mix of hotels, residential units, marinas, parks, stores, and indoor and outdoor entertainment venues, is being built on the footings of two previous failed projects in Prince George’s County, Maryland. When completed, it will extend along a mile and a quarter of the Potomac.

Two professors of urban design and architecture, Ellen Dunham-Jones of Georgia Tech and June Williamson of City College of New York, have literally written the book on the challenges and opportunities that our failing suburbs present—Retrofitting Suburbia: Urban Design Solutions for Redesigning Suburbs. Documenting strategies of redevelopment, re-inhabitation, and re-greening, they focus on what to do with superannuated or abandoned malls and suburban office and industrial parks.

As Americans take their business to larger and larger “mega-malls,” the smaller, older ones are left to languish. A 2001 PricewaterhouseCoopers study found that one in five malls were dead or dying – 7 percent were effectively dead and another 12 percent were vulnerable and likely to fail in the near future. But these troubled malls have become the sites of a wave of renewal. Outside of St. Paul, the parking lot that surrounded a dead shopping center built on land fill was turned back into wetlands—which in turn attracted new “lakefront” townhome development. In Lakewood, a suburb of Denver, Colorado, a dead mall on a single 103-acre superblock is being transformed into Belmar—22 urban blocks with parks, bus lines, restaurants, stores, and 1,300 new households—the downtown that Lakewood never had. Eight of the 13 regional malls in the Denver area are now planning or have completed makeovers.

But perhaps the biggest retrofit of all is happening in Tysons Corner, Virginia, the virtual archetype of an auto-dependent, sprawling edge city. Located near the junctions of three major highways, it boasts 25 million square feet of office space and four million square feet of retail space (including one of the largest malls on the East Coast). Though only 18,500 people live there, its population swells to 120,000 every day. Decades ago, developers hailed it as the wave of the future—one of hundreds of new stretched out, auto-dependent satellite centers that would render our old downtown commercial centers obsolete.  But for all the jobs it supports, stores it houses, and tax revenue it generates, Tysons Corner has been losing out of late. Its perpetual traffic gridlock and its lack of human energy have caused homebuyers to choose other places; some of the companies that were headquartered there have even moved back into the District of Columbia.

But now a major retrofit is in motion, led by its major developers and land-owners who seek to make it more walkeable, denser with a more integrated mix of uses, and more connected to the city via transit. When the D.C. Metro announced plans to build an extension to Dulles Airport that would pass through Tysons Corner, the biggest debate was not about whether or not it was needed, but whether or not to bury it underground – an expensive proposition, but one that would free up land for even more integrated mixed-use development. On June 22, 2010, the Fairfax County Board of Supervisors adopted a comprehensive plan that would transform the town from “a sprawling suburban office park” to a “24-hour urban center where people live, work, and play.” There is a certain irony in this. America’s archetypal Edge City is seeking to reinvent itself as a place whose hallmarks will be walkability, green construction, access to public transportation, and abundant public amenities, like parks and bicycle trails—something that sounds very much like a real city. And, what’s also pretty astonishing is it has competition. Nearby edge cities in Crystal City and White Flint have proposed similar transit-based retrofits of hundreds of acres. It is something that needs to happen—and that is starting to happen—across more and more of our suburbs.

There are countless other opportunities for reclamation, all across America. Disused golf courses can be transformed into parks and nature sanctuaries; abandoned car dealerships can be landscaped and developed as new, mixed-use neighborhoods. Whole commercial corridors, as Dunham-Jones and Williamson put it, “are being retrofitted in ways that integrate rather than isolate uses and regenerate underperforming asphalt into urban neighborhoods.” Developers are decking over the parking lots at commuter rail stations and building high- and mid-rise office/commercial/residential complexes atop them; they are cutting streets through formerly walled-off corporate campuses and adding restaurants, stores, and public spaces. While the recession has slowed down most of the suburban renewal projects, it’s provided further impetus for community service and regreening efforts. Abandoned big-box stores are being made over into senior centers and schools and libraries—amenities that are just as essential for neighborhoods as eateries and boutiques. Most of these retrofits, of course, are a far cry from the organic authenticity of “real cities,” Dunham-Jones and Williamson note, but they build community and lay the groundwork for still further redevelopment. Writ large and multiplied across hundreds of other metros, they are remaking the way Americans live and laying the groundwork for future economic prosperity. This type of strip commercial redevelopment will be the major development feature of the next generation.

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The drive to renew our far-flung suburbs may seem like a tall order for a recession-weary nation, but it’s a lot less farfetched than someone in 1950 saying that those old decrepit urban warehouse and factory districts would turn into some of America’s most vibrant and expensive neighborhoods someday. Not to mention that remaking the suburbs, where so many Americans live, is far, far more important to our overall economic recovery and broader quality of life.

Historically, America’s economic growth has hinged on its ability to create new development patterns, new economic landscapes that simultaneously expand space and intensify our use of it. Our rebound after the panic and long depression of 1873 was forged by our transition from an agricultural economy to an urban-industrial one organized around great cities and their early streetcar suburbs. Our recovery from the Great Depression saw the rise of massive metropolitan complexes of cities and suburbs. The drive to remake our suburbs today, to turn them into more vibrant, livable, people-friendly communities—and, most important, to create the strategically located pockets of density required for innovation and productivity growth—may provide our own troubled era with the fix that it so desperately needs.

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:

As a young teenager he went to work to help his family during the Great Depression, an infantry solider who enlisted in the Army the day after Pearl Harbor, landed on Normandy, and fought in all the major battles of World War II, and a man who spent his life in manufacturing, he would always say: “Richard, no one should ever – never, never – count this country out.  When I enlisted in the Army, we had nothing. They gave us doughboy hats and old uniforms, our boots often did not fit. There weren’t enough guns to go around in training, so we used wooden facsimiles.  But, boy, did we gear up.  I saw it as soon as I got over there.”  My father who was always afraid of the water would often interject his own personal D-Day story. “Richard,” he would say, “the Germans didn’t scare me, the water did, so I made the ship-to-shore boat driver pull up right on the beach to let me out.”

He would continue, the pride of a D-Day veteran in his eyes: “We all had heard about the technological prowess of the Germans. Their guns were incredible – the Lugers, the machine guns, their fighter planes and tanks – works of technology and of art.”  But, he continued, “You should have seen how we mobilized. Our guns might not have been so state-of-the-art and fancy, a little bit clunky. But they worked and there were lots of them.  Whoever we could get to take over the factories – old people, women, whoever – we kept churning out what was necessary. Guns, ammunition, planes, tanks, support trucks – we never ran out of anything. We turned this country on a dime and built an incredible production machine. That’s why we won.” And he would end, “I think when the Germans—their soldiers and the officers—saw this stuff coming and coming and coming, on and on, without end, they just got demoralized.”

I recalled his words often in the late 1980s, when, as a young professor, I would visit Japan to discuss the manufacturing competition then bracing the world economy.  At the time, I was the studying the increasing prowess of the Japanese manufacturing system and its apparent ability to be transplanted in the United States and around the world – the gleaming new automotive assembly plants and steel rolling mils that were revitalizing our American Midwest. My Japanese hosts, ever polite, would always interject at the end of my remarks.

“Professor Florida,” they would say, “isn’t it so sad what has happened to your country? You were once the envy of the manufacturing world, with your great automotive assembly in Detroit and the towering steel mills of Pittsburgh. We made pilgrimages there to study and learn from you. We studied at the feet of your quality guru, Edward Deming, and others.  But now your factories are falling apart—the technology is low, their productivity poor, and quality truly suffers. We want to help you now. We are building new plants and restoring old ones in your country, to give back to you, the country that taught us so much.”

I would recall my father’s pride and struggle to hold back my own emotion, retorting as politely as possible: “I think it would be a mistake to write the United States off.  We’ve had some tough times, yes.  Your manufacturing system and great factories are now the envy of the world.  But my father, a veteran and a manufacturing expert, always reminded me of America’s skill at bouncing back – it’s amazing ability to transform itself and to turn on a dime. Remember how we rebuilt our economy after the Great Depression. Remember how quickly we mobilized for war.  Never, ever count this country out.  It’s most impressive and constant trait is its willingness to remake itself for new times.”  Sure enough, the 1990s witnessed the high-tech boom and the amazing recovery of the U.S. economy; even as this happened, the Japanese economy mired in recession.

Can we do it again? I agree with Dan that this kind of adapabiity and resilience is a fundamental American advantage. But the time scale is longer than most of us would like to think. Looking back at the previous two economic crises – the Long Depression of the late 19th century and the Great Depression of the 1930s in The Great Reset - I note that the time scale for this kind of resetting process is roughly two to three decades… the better part of a generation. We certainly have better technologies and tools of economic management today, so perhaps we can reduce the adjustment period to a decade or so. Still this strikes me as longer than most people think. Resets don’t happen all at once. They are the products of thousands upon thousands of individual adjustments by firms, governments, and individuals.

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.