Creative Class

One consequence of the economic crisis is that the rate of home ownership has been slipping, as the chart below shows (via Calculated Risk).

A growing number of economists and urbanists question whether the United States has put too much emphasis on homeownership and over-invested in housing. Ever since the Great Depression, America has generously subsidized homeownership through the tax code and by other means. Housing does take up  a significant share of U.S. investment comparatively speaking; and, in some regions, real estate, housing, and construction made up a huge share of the local economy, as high as 25 to 30 percent at the height of the bubble, bigger than education, health-care, government, or manufacturing. I’ve argued elsewhere that the two American dreams - of homeownership and of unfettered economic mobility - may be in conflict, as homeownership, especially in downturns like today, impedes mobility and makes it harder for individuals to move to work and the labor market on the whole to adjust.

The benefits versus costs of homeownership is an important debate. On the pro-side, Joel Kotkin makes the case for homeownership in his recent Forbes column. Stephen Slivinski provides a thorough review (via Tyler Cowen) of the downsides of what he calls America’s homeownership bias.

Simply put, Americans may have overinvested in housing. This has been a worry of economists for a while. It’s a concern based on what they see when they compare the rates of return - profit per dollar invested - for a variety of capital types …  “When you observe that the measurable rates of return are different across the sectors,” said the Dallas Fed study author, Lori Taylor of Texas A&M University, “you either have to conclude that there are substantial unmeasured returns across the sectors or you have to conclude that society would be better off with a reallocation of resources.” These unmeasured benefits would have to be very large - at least $3,600 per homeowner in America - for the investment imbalance to be explained …

Robert Shiller, an economist at Yale University and an expert on national housing markets, has estimated that “from 1890 through 1990, the return on residential real estate was just about zero after inflation.” Throw in the costs of maintenance of the property and it’s easy to see how renting could certainly be cheaper than owning, even if you include the tax advantages. Yet the opportunity cost of those home investments - the foregone investment opportunities elsewhere - go largely unseen …

Being tied down to a house tends to make people less likely to leave an area in which employment prospects are deteriorating …A seminal study by British economist Andrew Oswald of the University of Warwick traced the link between unemployment and homeownership. Oswald looked at the United States, the United Kingdom, France, Italy, and Sweden between 1960 and 1996 and discovered that, on average, a 10 percentage point increase in homeownership tended to correlate with a 2 percentage point increase in the unemployment rate.

Recent studies of European data discover that you don’t see these sorts of correlations in areas with higher concentrations of renters. Renters are simply more able and willing to move away when their community hits the economic skids. In addition, workers who aren’t likely to move from a specific location might create frictions in the markets for labor skills. It’s a cost to the economy when people live in an area in which their skills are no longer valued. But there is a potential personal cost too: The overall welfare of that worker may suffer. Homeownership also tends to contribute to adverse political incentives. Incumbent homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations. These restrictions limit the number of houses that can be built in any geographic area and, consequently, keep housing inventory low and property values artificially inflated.

It appears that the crisis is causing a shift from homeownership to rental, as the graph below (also from Calculated Risk) shows. This trend may end up being a good thing for certain homeowners and for the flexibility of the U.S. economy as a whole.

One thing we know about crises is they frequently bring about significant changes in the system of housing tenure. The Great Depression and New Deal innovations in housing finance and housing policy, plus the post-war boom and infrastructure building, brought a massive shift toward single family homeownership. My hunch is it’s time for new hybrid forms of housing tenure which mix the benefits of ownership with the flexibility of renting.

Were you - like me - ever amazed at how so many people could afford bigger and bigger homes, New England beach houses and Florida condos, expensive cars? The answer, according to a terrific article by Ben Funnell in the Financial Times, is simple: cheap, available credit.

Debt, he says, is “capitalism’s dirty little secret.” Cheap mortgages, cheap car leases, and the use of home as veritable ATM’s created fictitious living standards for the middle class and the bulk of the population at a time of low productivity and paltry growth in incomes, and where the bulk of the gains in wealth were scooped up by the top fraction of households.

The economic crisis appears to be causing a slight but noticeable shift from the suburbs to the cities, according to an analysis of recent Census data by Brookings demographer William Frey, reported in the Wall Street Journal.

“The central-city population in U.S. metropolitan areas with more than one million people (excluding New Orleans …) grew at an annual rate of 0.97% between July 2007 and July 2008 …That compared with a growth rate of 0.90% in 2006-2007, and growth rates around 0.5% in the years between 2002 and 2005, when the robust real-estate market led to new jobs and new housing developments outside the cities, where open land is more plentiful … Population growth in the cities has translated to slower growth in the suburbs. U.S. suburbs in metro areas greater than 1 million people grew at a 1.11% annual rate in 2007-2008, the same as a year earlier and down from growth rates between 1.29% and 1.48% between 2002 and 2005.”

The combined effects of the recession, job loss, and the housing crisis have made it more difficult for many to sell their houses, in effect locking them in place and slowing rates of residential and geographic mobility. Frey points out that:

“This shows cities were reviving at the end of this decade, and they are also surviving a recession that has been a lot harsher for other parts of our landscape …Cities are big enough and diverse enough that they are able to survive these ups and downs in the economy a lot better.”

And this is especially true of the biggest and most diverse cities, like New York and Chicago, which are hubs of large mega-regions, as well as magnets like greater D.C. and Silicon Valley which continue to draw in highly skilled and ambitious people from the U.S. and the world. Large Rustbelt cities, like Detroit, continue to lose people, and rates of growth in housing-driven Sunbelt cities have slowed considerably.

The June unemployment numbers do not look very pretty for the United States. After four months of improvements in the number of jobs lost, the numbers again increased to 467,000 up from 322,000 in May. The unemployment rate, now at 9.5 percent, is the highest in 26 years. The recession is entering its 20th month and will soon reach two years with little end in sight.

While the great recession of the 21st century grinds on, explanations for it continue to elude us. Some think that it is a depression and they may be right. I suggest that we have at least four issues on our plate that have emerged as a perfect story. The solutions to all are institutional. First, let’s start with the financial crisis. This financial crisis resulted from market failure. The lack of rules or what some like to call regulatory arbitrage, that is, working the rules led to the financial meltdown. We are still not out of the woods on this one because the rules have not been fixed. Without rules markets cannot work.

Second, we now have a global recession with falling demand and rising unemployment. A classic case of underused resources. The recession was in part caused by the financial crisis, but only in part. It is clear now that at least two interpretations are in order. First, it was a classic case of over-investment in housing. We have about two to three million too many houses. It will take about six years to work this off through population growth and attrition. This “inventory recession,” to use an old phrase, is nothing new, only the sector is - housing. The other interpretation is that it was caused by imbalances in the global economy between rich and poor countries. In either case, as Richard Florida pointed out with housing, or Business Week with global imbalances, new rules are needed.

Third, we have finally realized that we do indeed have a sustainability issue in the environment. It is both about the carbon footprint and about the type and amount of energy used. This is not a cause of our current financial and economic problems but it impacts it directly since it is about investment, and with a huge amount of uncertainty where to invest it is also putting a drag on the economy. Rules would help.

Finally, we are just realizing that globalization that started a few decades ago might be a dead end. It is a dead end not because the world does not want to globalize (most do) but because markets cannot work without rules. And in a global economy we need global rules. Here is the rub. All of the above problems in some way suffer from having a global economy without a set of global rules. When the last era of globalization ended at the dawn of the first world war, the rules that governed up to then also evaporated and it took decades to put them back in place after the second world war.

We are now into the second decade of the second globalization of the world economy. Until we are able to put the “rules of the game” in place markets, I am afraid the economy, and the financial sector, cannot be expected to lead to growth. The environmental rules are even more onerous. We just might need to start working on the rules of the game sooner rather than later. This seems like a task for the creative class. What is needed is talent and honesty in order to put a global structure in place where all can prosper. This is no small task.

Writing in The Atlantic, I argued that the economic crisis was reshaping America’s economic geography, with big city centers and mega-region hubs like New York City, talent-rich regions like greater D.C., and college towns weathering the storm relatively well, while Rustbelt cities and shallow-rooted Sunbelt economies being much harder hit.

Take a look at the graph below from the newly released SP/Case-Shiller Home Price Index for April.

Phoenix and Las Vegas have taken the biggest hits: Housing prices there have declined more than 50 percent in the past year. Miami is next, then Detroit where housing prices have sunk to mid-90s levels. San Francisco is the only significant talent region to be pummeled. Part of this is to be expected given the tremendous run-up in housing prices there, but still prices remain higher than 2000 levels. San Diego, L.A., and Tampa have all seen declines in excess of 40 percent.

Housing prices have declined less significantly in greater D.C., Chicago (hub of the great Chi-Pitts mega-region and a magnet for regional talent), Seattle (a high-tech, high human capital center), Atlanta (a talent hub for the southeast), New York, Portland, Boston, Denver - (talent hub for the Rockies), Dallas (a mega-region hub), and Charlotte (which along with Atlanta hubs the great Char-lanta mega-region). Cleveland breaks the pattern, but like Detroit its absolute housing values have fallen. Prices in greater D.C., along with Denver, Dallas, and Cleveland, were actually up in April.

The Index also tracks prices in terms of their 2000 baseline. Nationally, it’s at 140, meaning housing prices remain 40 percent higher than in 2000, more or less in line with 2003 prices. Looked at it this way, the geographic pattern could not be more striking.

Rustbelt cities have seen, by far, the biggest declines relative to 2000 prices. Detroit and Cleveland are the only two cities where housing values have slipped below 2000 values - Detroit at 69 percent and Cleveland at 98 percent.

Prices have just about fallen back to 2000 levels in Sunbelt cities like Phoenix (105), Atlanta (105), Las Vegas (112), Dallas (115) and Charlotte (118). Miami (145) and Tampa (140) break the pattern; their prices remain significantly above 2000 levels. My guess is that prices will continue to fall and sharply in these two markets in the coming months.

But prices in prices in Boston (146), L.A. (149), greater D.C. (167), and New York (170) remain significantly above - 50 to 70 percent above - 2000 levels. While these prices may dip some, my hunch is these markets will not be devastated and will remain substantially above 2000 levels.

The SP/Case-Shiller Index suggests that housing prices are still falling and have another 30 or more to go before they hit bottom. One thing you can be sure of, it will continue to be felt unequally across regions.

Two of my favorite management thinkers, John Hagel and John Seely Brown, have just released an important new study, The Big Shift. I’ve read the research, which expands on some of my own constructs, and had a chance to talk with Hagel about it at length last week. One of the most important findings is that return on assets for American companies has been declining for decades. Here’s a short-form version that appeared over at Harvard Business Review online.

The 2009 Shift Index reveals a disquieting performance paradox in the US corporate sector. On the one hand, labor productivity has nearly doubled since 1965. During those same years, however, US companies’ Return on Assets (ROA) progressively dropped 75 percent from their 1965 level.

How can firms be getting lower returns even as they’re becoming more efficient? The answer resides in the heightened competition among firms. Competitive intensity nearly doubled between 1965 and 2008, forcing firms to compete away the benefits of productivity gains, which were instead captured by creative talent in the form of higher compensation and numbers of consumers through increasing performance/price ratios and wider choice.

It’s little surprise to find also that the highest-performing companies are struggling to maintain their ROA rates and are increasingly losing market leadership positions. Taken as a whole, the findings portray a U.S. corporate sector in which long-term forces of change are undercutting normal sources of economic value. “Normal” may in fact be a thing of the past: even after the economy resumes growing, companies’ returns will remain under pressure.

To respond to this performance challenge, U.S. companies will need to let go of industrial- era organizational structures (and the reporting relationships, incentive systems, and managerial processes that go with them) and operational practices in favor of the new institutional architectures and business practices needed to create and capture economic value in the era of the Big Shift.

Companies must move beyond their fixation on getting bigger and more cost-effective to make the institutional innovations necessary to accelerate performance improvement as they add participants to their ecosystems, expanding learning and innovation in collaboration curves and creation spaces. Companies must move, in other words, from scalable efficiency to scalable learning and performance. Only then will they make the most of our new era’s fast-moving digital infrastructure.

The full report is here. The section on creative cities begins on p. 60. It shows strong relationships between cities with high scores on the Creativity Index and economic output (measured as GDP), returns to talent and economic freedom, as well as a large performance gap between high and low scoring cities on that index.

While most of the focus in the national healthcare debate is over whether to have a public insurance system, the real action is in a couple of other areas. One involves how the local medical community is organized and decides on treatment. The other is whether decisions on treatment will be based on science or on “local practices” and what’s most profitable for the doctors. Both of these will have far more impact on the cost of healthcare than who pays for it.

The social sciences and mental health or addiction treatment are moving to Evidence Based Practices, where a practice is independently evaluated to see whether it has positive outcomes. But doctors and medicine still make decisions on what they learned in school, maybe decades ago, and on what the local practices are when they talk shop at the country club. As a result, people are often overtreated using less effective models.

As discussed below, people are often overtreated and evidence-based practices would provide a mechanism for changing how medicine is practiced, producing better health outcomes and lowering costs. Buzzcut (a frequent commenter on this forum) calls reducing overtreatment “rationing” and argues that it would prevent medical mishaps. Whatever you call it, it’s going to be vital to both controlling medical costs and raising the quality of healthcare in the United States to the level of other industrialized countries.

There are several examples in America of low-cost, high-quality institutions - the Cleveland Clinic, the Mayo Clinic, Kaiser in the Bay Area and Portland, Geisinger in Pennsylvania, Intermountain in Utah. These institutions are organized for efficiency and effectiveness, using different models and serving different populations, but they universally provide excellent care without generating excessive costs. There are also some local communities where doctors and hospitals have organized themselves without an institution - The New Yorker article below talks about Grand Junction, Colorado.

I’ve been a Kaiser member for years and while you do need to learn to work with the bureaucracy, it’s less hassle then coping with Blue Cross. Aside from a co-pay, I never have additional charges nor receive bills or paperwork. All my health records are kept electronically - if during an appointment my doctor orders lab tests, prescribes from the pharmacy, and refers to a specialist, the information is in their records before I leave the exam room (and without the notorious doctor’s handwriting problem.)

The stimulus package dedicated $19 billion to starting to create a national electronic medical records (EMR) system. In the digital age it’s obscene that people get poor treatment because their records are scattered among file cabinets. I recently worked on a collaborative project between a large mental health/substance abuse provider and a FQHC “safety net” primary care clinic. They both have EMR systems, but the softwares aren’t compatible, so they can’t easily share patient information.

This is from the current issue of Time Magazine:

Americans tend to assume that more is better, especially when it comes to the heroic brand of try-everything medicine we’ve watched on ER and House M.D. But overtreatment is a national scandal. It’s bad for our health: with medical errors now estimated to be our eighth leading cause of death, drugs, procedures and hospital stays can be risky (as well as painful, time-consuming and wallet-straining) even when they’re necessary. It’s also bad for the economy: health costs are bankrupting small businesses and even conglomerates like General Motors as well as millions of families. And it’s awful for the country: Medicare is on track to go broke by 2017, and our long-term budget problems are primarily health-cost problems.

They’ve already stuffed $1.1 billion into the stimulus bill to jump-start “comparative effectiveness research” into which treatments work best in which situations. Now they’re pushing to overhaul the entire health-care sector by year’s end, and they’re determined to replace ignorance with evidence, to create a data-driven system, to shift one-sixth of the economy from “that’s what we do here” to “that’s what works.”

And an article in The New Yorker is what started me thinking about this issue. Here are some quotes:

McAllen, Texas is one of the most expensive health-care markets in the country. In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.

El Paso County, eight hundred miles up the border, has essentially the same demographics. Both counties have a population of roughly seven hundred thousand, similar public-health statistics, and similar percentages of non-English speakers, illegal immigrants, and the unemployed. Yet in 2006 Medicare expenditures (our best approximation of over-all spending patterns) in El Paso were $7,504 per enrollee-half as much as in McAllen.

The annual reports that hospitals file with Medicare show that those in McAllen and El Paso offer comparable technologies-neonatal intensive-care units, advanced cardiac services, PET scans, and so on. Public statistics show no difference in the supply of doctors. Hidalgo County (McAllen) actually has fewer specialists than the national average. Nor does the care given in McAllen stand out for its quality. Medicare ranks hospitals on twenty-five metrics of care. On all but two of these, McAllen’s five largest hospitals performed worse, on average, than El Paso’s. McAllen costs Medicare seven thousand dollars more per person each year than does the average city in America. But not, so far as one can tell, because it’s delivering better health care.

As America struggles to extend health-care coverage while curbing health-care costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions. If we don’t, McAllen won’t be an outlier. It will be our future.

CCG recently finished up a Creative Community Leadership Project in Noosa, Australia. The program was a true success with the original group of catalysts championing several successful initiatives. 

As the program moves forward into the second year, it will operate under a broader umbrella - the Sunshine Coast Regional Alliance. The program’s goal will be to build off of Noosa’s success and extend the Creative Community project to the entire Sunshine Coast.

Read more about the coverage here:

Noosa Journal - Now it’s over to you…

Noosa News - Change of name is a Sunshine Coast merger

Sunshine Coast Daily - Handover stretches benefits of alliance

I’ve been thinking about social support networks lately and so pieces in recent books have stood out. Humans are social animals who are able to organize ourselves or act individually, but the family and small group networking connections are still more important than generally acknowledged. The implications for a creative economy is that how companies and cities are organized can be as important as what they do or make in their success.

These examples are mostly medical, partly because that’s where a lot of research goes on, but the implications for society are universal.

• The first chapter of Malcolm Gladwell’s Outliers talks about the town of Roseto, PA which was founded by Italians from Roseto, Italy in the 1890s. Doctors noticed that the residents were unusually healthy. But investigations showed little difference in diet, personal habits, the natural environment, etc. What they did find was that the social and friendship networks were unusually strong. This mutual support resulted in less heart disease and other maladies.

• This reminded me of Dr. Dean Ornish’s work with treating heart disease with diet, exercise, meditation, yoga, and social/family support. When his success in not only stopping but reversing heart disease was reported, the medical establishment said, “Yes, we know that if our patients shifted to a low-fat diet, exercised, and reduced stress it would reduce heart attacks. But people won’t follow our orders so we just schedule bypasses.” The difference was the social and family involvement, which got people to change their behaviors.

• In The Age of the Unthinkable, Ramos tells about AIDS patients in Tugela Ferry, South Africa who had extraordinary levels of medication compliance because rather than doctors just saying “take these pills” they explained the science and involved family members. People stuck to the regimen despite the extreme side effects, while groups who were just told to follow doctors orders would stop medication when they felt better.

• A growing evidence-based practice in residential drug treatment is the “Therapeutic Community,” where peers are involved in each others’ recovery. It has better results than just staff-led treatment.

• Then this article in the Portland Tribune tells about a program to have severely mentally ill people work real jobs rather than “sheltered workshops.” The job stress that was assumed to be too much for them to handle turns out to actually help them get better.

From quality circles to army platoons to extended families, people working together are healthier, more productive and more creative. How can this knowledge be used to build the creative economy?

Last summer, I blogged about Under Pressure in Montreal, one of Canada’s premier graffiti conventions. While out last night checking out a show, DJ Static [of the internationally acclaimed WEFUNK radio show and regular DJ @ Under Pressure] mentioned to me that the festival has recently encountered some economic peril with many of its funders backing out. It is not the only one though as the Under Pressure blog indicates:

After 13 years of dedication and hard work, the organizers of Scribble Jam had to regretfully announce that due to lack of funding and the current economic climate, they do not have the resources to continue with the festival this year.

Read more HERE.

Events such as Toronto’s Style In Progress have already succombed to the same fate and this serves as a reminder more than ever that Under Pressure 2009 needs YOUR support this year…

Meanwhile, festivals that are a bit smaller like Ottawa’s House of PainT, which are primarily DIY with a bit of local community support, continue to roll on. I’ve always understood Hiphop culture to be grounded in “get-it-how-you-live” economics. In other words, it emerged out of an endogomous low-budget environment where the idea of sponsorship or support from external agents was far-fetched at best. To borrow a concept form Karl Polanyi, the economy was very embedded in the society. To extend that idea a bit further, when economy is embedded in society that way, value becomes determined by metrics that are responsive to that society. That is to say the distance between expense and expectation is shorter in these kinds of societies. Particularly with respect to cultural products - currency expectations (read: cost) are set based on the value of that product, which is determined by those society specific metrics.

Haute Finance and global economics have disembedded economy from society such that the value of a product, cultural or otherwise, is set externally and determined by metrics that are often quite apart from the society that produces them. The idea was that the ability of federal governments to communicate, exchange currency and goods, and participate in this international system would set up a more even-handed trickle-down system for the citizens who produce those goods/services. 150 years later, we see how that’s worked out.

What’s going on with these festivals is a good example of all of that. As this culture globalized and patched itself into a bigger economic system, it’s on the ground value - the endogamous value - became supported by off the ground finance, and things got disembedded such that culturally important gatherings find it difficult to support themselves on their own steam.

Might we see more regional and embedded expressions of culture in the future, based on real value to that region like the House of Paint model? What other feasible models might emerge? How will cultural investment strategies be affected by/reposition on account of the economic climate?

Before I go, I’ve gotta give a big Rest In Peace shout to IZ the WIZ, one of the very few Kings graffiti, setting the standard in New York and all over the world. He passed away on Friday. Do the knowledge here.