Had a great chat with BusinessWeek’s Mike Mandel this morning on the crisis, its geography, and what to do about it. Then I came across this post by Nouriel Roubini (via Naked Capitalism).
With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise… To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar.
He notes that the crisis will be longer and deeper than virtually anyone thinks. But why?
The reason is becoming clearer and clearer every day. The crisis is at bottom the crisis of Fordism. It emerged around housing – the single family home, the pivot point of Fordist consumption. It’s not that the technology and idea-driven creative economy is not productive, it’s that our complex financial system in effect over-allocated the fruits of that productivity into the old cornerstone of the Fordist economy. Instead of creating new demand for technology or better health care or new energy or flowing into savings, that productivity translated into increased demand for housing.
So the current bailouts are fundamentally flawed. Propping up the housing-auto nexus of Fordism will only forestall the inevitable. Bailing out homeowners will only essentially handcuff them to their homes, leaving them paying out huge shares of income on housing and housing-related goods and making it impossible to achieve the mobility so many will need to locate economic opportunity. On a social level, it will keep pouring good money after bad, leaving us wrapped up in the old Fordist economy, unable to generate the demand for or the savings needed to generate the new system architecture and infrastructure required to reset the economy on a new and hopefully more sustainable growth trajectory.
The only way out of the crisis is to simultaneously create demand for and investment in these new areas, in part by massively reducing the amount of consumer spending on the old house-auto nexus.
So any government investment should do the reverse of the current bailouts. Instead of propping up these older sectors artificially it should aggressively seek downward adjustment in their costs, perhaps by investing in efforts to increase the efficiency and management of housing and reduce the costs of cars, energy, and mobility. Fiscal stimulus should also focus on the growth sectors of the future. In my mind, this turns on five interrelated factors:
1) Revolutionize the housing delivery system – More rental less ownership; better construction and management, creation of new housing delivery and management systems which allow for flexibility required to shrink the journey to work and allow people to move more freely as their job, career, and lifestyle prospects change.
2) Transform transportation – Everything from more energy-efficient cars, market pricing of roads and highways, to mass transit, high speed rail, and increased reliance of bikes and walking (especially as the journey to work can be shrunk via more flexible housing tenure).
3) Alternative energy – Moving out of the carbon-based economy, shrinking energy costs, and creating new areas for investment.
4) Revolutionize the human capital system – Economists agree this is the key to long-run growth. Currently we waste more of it than virtually any other resource. We need to massively invest in human talent and creativity on a mass scale. This requires an individually oriented, creativity enhancing (as opposed to creativity-squelching). This means moving well beyond schools to flexible, tailored approaches to creative development, including a massive commitment to early childhood and fundamental from-the-ground-up remake of our educational system.
5) Any solution has to do three interrelated things – It must encourage new investment, the creation of new technologies and enterprise, and accelerate creative destruction. To do so, it must shrink the overall costs of the housing-auto nexus, freeing up capital and demand that can flow into new areas as well as increased savings. It must increase investment in and demand not just for technology but for human development, health (holistic and other), and for experiences more broadly.
Problem is: We’re doubly handicapped in getting from here to there. For one, we remain locked in Fordist mindset which sees the problem as how to reset the old housing-auto nexus. It is too early in the transformative process to perceive the full contours of the new, emergent system and to identify the core investments with real precision. Compounding this is the limits of extant theory. Economics in its current guise overvalues simple micro-models based on the efficient allocation of market systems. Of course some economists have junked this, most notably the new empiricists who believe the answer is to be found in improved models and better data. The real issue is that we lacked theoretical understanding of the dynamics of capitalist economic crises and transformation – modern-day, scientific frameworks and dynamic models based on the broad kinds of understanding advanced by say Schumpeter and Marx. This is not just an academic point; it is a terrible handicap in understanding and dealing with the current crisis and and evaluating alternative paths out of it.
The sooner we dump the talk of the bailout and get on with understanding and building the sustainable economy of the future, the better.
November 17th, 2008 at 12:01 pm
Richard,
Assuming you’re right (and I think you are), do you think that politically Obama or any US government could “sell” a stimulus package based on shifting away from what, for the majority of people, represents “the American Way of Life” — house in the suburbs, big cars, cheap gas, etc.?
November 17th, 2008 at 12:05 pm
Wow.
So assume all of these are the wave of the future, and I’d say they are. What do we do with the existing houses and cars? How do we value and use those exurban McMansions, those paid for SUVs, those deteriorating interstate highways? Building new affordable rentals close in is great, but the suburbs are already there and aren’t going to move into the city. And how do we make the transformation without badly damaging the middle class by devaluing their principal assets? I’d guess some sort of rescue/bailout is going to be both politically and economically necessary. Granted that it’s been mismanaged so far, how to do it for the largest benefit for the people as well as the new economy?
As various writers have pointed out, it’s often more environmentally friendly to keep your current car in good shape and drive it another 100,000 miles than to dump it for a new Prius. One approach to housing, started in the ’70’s then abandoned under Reagan, is to insulate those houses and make them more energy efficient — which is long term and reduces the need for new energy sources. I expect there are several low and mid-tech solutions that a good stimulus plan could achieve.
November 17th, 2008 at 12:48 pm
Point of fact: it wasn’t “the financial system” that pushed “Fordism”. It was the government. Freddie Mac and Fannie Mae are government created organisms. How about the tax advantaged status of home ownership? If you REALLY want to end “Fordism”, end that!
Now, if the government f-ed up the “home owner-industrial complex” so badly, what makes you think that they’re competant to figure out the next big thing?
You really think the government can pick a replacement for fossil fuels? A new transportation system?
Richard’s post has a lot of cool buzzwords (”a individually-oriented, creativity enhancing (as opposed to creativity-squelching)”. I just think that it ignores a lot of human nature.
I too want to know what’s going to happen to all those “little McMansions on the prarie”. They could be as completely abandoned as those Buffalo neighborhoods that Richard is so fond of.
November 17th, 2008 at 1:46 pm
Amen brother Richard!
November 17th, 2008 at 4:26 pm
Lots here. I’ll have to read again, but for now…
I think it is a mistake to link housing to fordism. RE ownership has alway been a corner stone of economic systems for ages (from Church control, to feudal systems, to modern capitalism/marxism). It is not something that came up with Fordism
Moreover, while presumably everyone on this site loves/encourages change, people making long-term commitments to neighborhoods, cities, regions is crucial to the economic development of those units.
Also, many people prefer to be stable. As we know, a small % of the pop moves every year and most of these moves are local moves. (Kevin has data on this I believe)…
So while all of us at the tip of the creative class spear may call for close in, affordable rentals/walking/etc, there are many who don’t want those things. And the thing about those folks is that they put their capital down, pay taxes, and protect/strengthen communities. We should be thankful for those people. (Many of whom are creative class members).
I think one of the most exciting elements of Richard’s post is the concept of education. This ‘fordist’ system is perhaps another that is undergoing massive strains and competition right now. The shift is already underway in many cases — from private for profit vocational schools to certificate and executive programing to online degree granting universities. Check out the ACTON MBA — a one year program/fellowship in Austin that is built for entrepreneurs. It is a fascinating model and seems to be doing well. Nice post richard.
November 17th, 2008 at 4:50 pm
I smile and laugh at people who, with a romantic notion of what the government can and can’t do, dream of it saving us. Meanwhile, Adam Smith’s Invisible Hand (not the government) comes along and slaps financial institutions who were stupid enough to leverage themselves 30-to-1 to go out of business or be acquired. The free market will figure it out, and if this rent-is-better lifestyle works, then it will prevail – no government assistance needed.
November 17th, 2008 at 6:25 pm
Interesting commentary. For those that disdain government “interference”, do you really think private corporations will get us out of this? The market and corporations exist solely to make a profit. And that’s fine. But they are not altruistic organizations (and neither is the government). The government being ALWAYS the answer is not a coherent argument. Likewise the free enterprise sector ALWAYS being the solution is also not a coherent argument.
I’d like us to move beyond ideological dogma.
Great, great article, by the way.
Wendy’s probably right, though. The idea that More Is Better has become so ingrained in current thought that I can’t see anyone selling this concept, however correct I personally think it is.
November 17th, 2008 at 6:52 pm
I think Michael’s on the right track – “So assume all of these are the wave of the future, and I’d say they are. What do we do with the existing houses and cars? …the suburbs are already there and aren’t going to move into the city.”
My answer is, move the cities to the suburbs.
What’s old is new again.
The suburbs (and even neighborhoods of larger metros) swallowed and absorbed small towns that once were complete communities, with all the amenities needed for daily living. The small businesses located there withered away as residents chose to drive 15-20 minutes to the nearest mall with its big-box stores.
Encourage these small business districts to be reborn. And bring the employers to where their employees live, through satellite offices in conjunction with telecommuting.
Instead of a homogeneous sprawl of suburban homes, there will nodes of higher-density population with the small town supplying most of needs of the residents within a walk, bike-ride, or a few-minute drive. The nearby larger metro city-center will provide recreation, arts and culture, and more specialized health care and shopping than would be available locally.
Best, Bert
November 17th, 2008 at 8:57 pm
Shifting the auto industry is going to be hell. If anyone needed particular reasons not to bail them out, see this article, Nov.10: “Falling Gas Prices Jump-Start GM SUV Sales
Automaker Puts Texas Plant On Overtime Amid Other Closures” ( http://tinyurl.com/5hml7b ). That just really makes me despair, and the idea of bailing them out just galls me. From the article:
QUOTE
Although sales of the vehicles are still down overall, they have rebounded in recent weeks as gas prices have fallen and cash-strapped automakers have slashed prices. The vehicles have proven to be a solid source of revenue for GM.
“We’re still on overtime,” plant spokeswoman Wendi Sabo told The Dallas Morning News. “Nothing has changed.”
GM is also placing a high-stakes bet on its SUV line overseas, opening a new $300 million plant Friday near St. Petersburg, Russia.
UNQUOTE
Meanwhile, I’m tearing my hair out…
November 17th, 2008 at 9:08 pm
Okay, that’s really disheartening.
November 17th, 2008 at 9:11 pm
If we want to encourage rental over home ownership for the sake of economic mobility, how can we encourage renters to care for property that does not belong to them? It’s clear that security deposits do an inadequate job, given the amount of gratuitous or neglectful damage done every year.
November 17th, 2008 at 10:54 pm
What metrics are the ‘new empiricists’ using?
November 17th, 2008 at 11:33 pm
The private market will go into hibernation and await the next cycle. Only government has the incentive to ensure widespread economic incline, all other players are motivated solely by self-interest. We’ll be re-defining capitalism over the next few years and creating a federalism functions effectively and efficiently as the wind behind the sails of business. This will not be socialism, marxism or pure capitalism; or any political theory; but upon sensible pragmatism uniquely tailored to the issues of contemporary capitalism in a digital information-streaming globally inter-connected world economy. The best of all theories from the past will by synthesized and new approaches distilled therefrom. The focus will be on TALENT and DIVERSITY so that we assemble of the most talented people and blend perspectives to achieve common goals. Significantly, we will see the government because to direct lend to entrepreneurs who show promise based upon talent and quality business plans and models. There will be lots of rotation in and outside of government, people like Hank Paulson who leave high level private positions to assume government posts in the short-term before returning to the private sector.
As for the housing and car axis, the condo boom is a testament to the reality that people want mobility and easy urban living. Renting is dangerous however because rental costs escalate while housing costs remain static over time or diminish, creating equity in the process. Housing will not disappear; however, it will change dramatically and look for more time-share models as well as the continued growth of condo communities and possibly primary time-share residences; especially for mobile creative class workers who spend time in multiple places as their projects shift from city to city. The auto industry will not die but it will change dramatically. More smart cars and single one-way rentals should emerge.
In any event, this will be exciting to watch unfold!
November 18th, 2008 at 12:35 am
Interesting stuff, Mr. Fisher. Way to go.
November 18th, 2008 at 12:36 am
I’m not being “ideological”. Point of fact, the current crisis began in the subprime loan space, which grew to be 20% of all loans originated in 2006. Freddie and Fannie were being pushed by their Democrat overlords to buy these loans, which they then securitized, spreading the contageon around the world.
Now, there is more going on here than just subprime. I think Chinese manipulation of markets has a lot to do with the crisis. It isn’t a coincidence that this all came crumbling down soon after the Olympics ended.
But those who don’t learn from history are doomed to repeat it… or something. Guys like Richard or Hayden Fischer are way more eloquent than me, but after you strip away the verbosity, is there any understanding of what really just happaned there?
What is a more realistic path forward? Bankruptcy for the automakers, bankruptcy for Freddie, Fannie, and a lot of other banks, an end to securitization of loans of all types, and a lot slower, more organic growth that is not based on manipulation of markets by the government.
Austerity. A return to old values of work and saving.
But nobody is recommending that course of action.
November 18th, 2008 at 12:52 am
Housing construction is one of the most inefficent and wastefull processes in our economy today, resulting in tons of waste from every house contruction project.
Contour crafting ( a more advanced cousin of radid prototypeing) is a 3-D robot printing technology that sprays layer by layer quick drying cement to form the shell of a house structure in one day with no human labour and no material waste. Now that’s disruptive technology. But unfortunately we are likely to see it in Africa first before we see it in North America (outdated building codes)
see Smart 3D supersized printer that prints your house
http://smarteconomy.typepad.com/smart_economy/2006/02/contour_craftin.html
see related stories
Smart Ecocities, Sustainable living, Migration and localized climate change?
http://smarteconomy.typepad.com/smart_economy/2006/06/smart_ecocities.html
November 18th, 2008 at 9:11 am
Wow – What an incredible array of comments! I’m blown away. Quickly. Buzzcut – you’re right about the “Buzz words” – I wrote that post quickly just to get it up and … well … our of my brain after talking with Mike Mandel. I felt intuitively that I was struggling to explain myself and fell victim to buzz word short cuts. I’ll improve the prose in the next round, in large measure due to these comments. Thanks for calling me on it.
I am not calling for government to take the lead here. I recognize that they, along with the private sector, is complicit in thsi situation. Yes, Fannie and Freddie and the tax incentives and the rampant and mindless infrastructure underwriting. And I realize that what we’re likely to see is more of the same.
What I’ve been trying to sort out in a forward looking way, and why all of these comments are so valueable, is that if massive government stimulus is coming (there seems to be consensus that it is) what form should it take. I’m simply trying to identify what kinds of investments (as inefficient as they will be) would be most likely to reset the conditions for renewed and sustainable economic growth. These cannot continue to prop up the current system (many of these assets must be allowed to fall in price particularly those bound up with the housing-auto complext) and must create new avenues for investment, consumption and demand. The system must become cheaper, more efficient and more rationalized before a new cycle can be set in motion.
No one (no government, no single private sector body, no one) can know this in advance. It will evolve out of many experiments, in fits and starts. But sooner or later, some place or places will begin to find itself doing the next-best things …
November 18th, 2008 at 11:27 am
The government must direct lend to entrepreneurs or start-up companies that possess the talent and business models to succeed in industries that will be relevant to the future. Government should be silent partners in these new entities and, therefore, able not only to recoup their loan principals plus reasonable interest bus also dividends to replenish the public purse. How do we know which those will be? The short answer: we’ll know them when we see them. I’ll save the longer answer for another day but if you hang the meat out there, the achievers will come running for it. Most importantly, we must move away from asset-based only lending practices that, as we’ve seen, are not the “secure transactions” we’ve been taught to believe they are; and moved towards lending based upon the value of the ideas, details of the business models and quality of those behind both, ie, the intellectual property and human talent. In short, government should become a kindler and gentler venture capitalist looking not to sustain but create. The federal student loan program is a good model to explore for starters. The government doesn’t do the admitting, the schools do that; government merely provides the means for those who have demonstrated their qualifications for enrollment to do so even if they lack the means to pay the tuition or balance sheets to receive traditional loans.
November 18th, 2008 at 12:39 pm
Hayden wrote, “…the condo boom is a testament to the reality that people want mobility and easy urban living.”
Au contraire (as they say in Canada.)
The condo boom was a response to unaffordably-high home prices, often the result of unrealistically high prices. Or condos and apartments are the outgrowth of inner-city living where single-family housing is unavailable.
I can’t think of one place where condos were developed and sold, where sufficient reasonably-priced land was available for single-family homes.
And I predict mobility will decrease, not increase, in the coming winter of higher fuel prices.
Bottom line – if you want to predict the future, look to the past. Boring and frustrating, but true.
But things will change over the long term, and in ways that we probably cannot logically foresee. Here’s something to remember – we tend to overestimate the extent of change in the short term, and underestimate the change in the distant future.
Still waiting for my jet pack,
Bert
November 18th, 2008 at 1:47 pm
Bert, actually there were lots of vacant buildings and warehouses that developers converted into condos, ranging from churches and schools to meatpacking warehouses. The sad reality is that we paved natural environments into suburbia and strung public infrastructure out to it (additional liabilities) when we already had lots of vacant urban buildings and land where houses, apartments and condos could have been built within existing grids of development in mixed-use communities.
November 18th, 2008 at 10:38 pm
> we already had lots of vacant urban buildings and land where houses, apartments and condos could have been built within existing grids of development in mixed-use communities.
True. But that’s not what people want, at least at this point. Like we say here in Oregon, it’s like teaching a pig to sing; it just doesn’t work, and it only annoys the pig.
(actually, we don’t say that in Oregon, at least not in Portland. But I’m amused at the notion that we’re a bunch of hillbillies in fleece overalls.)
Best, Bert
November 19th, 2008 at 12:54 pm
Bert,
I respect your insights, so I’m wondering what I’m missing when you say “I can’t think of one place where condos were developed and sold, where sufficient reasonably-priced land was available for single-family homes.”
What about Portland’s famous Pearl District, where I personally know at least four people who have sold houses to move to condos? Or South Waterfront where a newly together couple I know are selling two houses to buy a condo? Granted my friends tend to be middle aged, but I suspect the 30-somethings who bought in the Pearl could have gotten houses for the same money.
November 19th, 2008 at 2:45 pm
The government must direct lend to entrepreneurs or start-up companies that possess the talent and business models to succeed in industries that will be relevant to the future.
I’m sorry, but this is absolute crap.
There is no one in “the government” that is competant to do this.
Government is not a big venture capitalist with a no-limit credit card. It’s a bunch of bureacrats with access to information no better than that available to you or me. Sounds like a recipe for disaster.
Remember, what you are talking about is nothing more than industrial policy. It’s is done everyday around the world, most famously in Japan in the 1980s. There is no evidence that it works any better than the free market, and a lot of evidence that, in the case of Japan, it didn’t work at all.
November 19th, 2008 at 2:47 pm
Richard, admiting that you have a problem is the first step in getting help.
November 21st, 2008 at 4:23 am
Michael – you’ve very kind to posit that you’re missing something… I’m probably just plain wrong.
But I’m referring to locations that have land available for single-family homes, not in the middle of a inner city. The folks that are moving to an inner-city location, are moving for that urban experience, not because they like condo living.
I was responding to Hayden’s theory that “the condo boom is a testament to the reality that people want mobility and easy urban living.” This may be true for a small number of people but overall, people want a) a single-family home, b) as large as they can afford, and c) as much land as they can afford.
An increasing number of people seek the vibrancy of inner-city urban living, and I find it attractive too. But I’m not likely to find a single-family home downtown, hence the condo or apartment route. Similarly, you don’t find many condos surrounded by cornfields.
And during the recent housing boom, condos become the only way for many people to afford their own shelter, and the rapid price increases only encouraged them to buy. Now in some cities, condos are offered at huge discounts yet they still remain unsold. The reason is that, for better or worse, the American public still wants their home as a stand-alone castle.
Best, Bert
June 17th, 2009 at 11:27 am
Richard -
As we discussed at the Texas Lyceum, the big trick is to invert our thinking away from institutions and back to individuals. The aggregation of individuals can be more dramatic than the siphoning of energy from government.
I point folks back to your blog post in November 2006, where we discussed the article I had published at the Lyceum conference:
http://www.creativeclass.com/creative_class/2006/11/14/beyond-schools/
With the leadership of the Creative Class, we can create 21st Century models for solving problems.
Gary Thompson
Austin, Texas