Creative Class

Few things are more important in capitalism, or any society for that matter, as the incentive structure. If the incentive structure is right, people will move into productive activities. If it is not they might become unproductive or, even worse, destructive. During 1980, the business community engaged in unproductive, or what we call rent-seeking activities. These take from Peter and give to Paul. During the 1990s, the U.S. was involved in one of the most productive periods in its history with large numbers of people engaged in productive activites (ICT revolution) that created new wealth. During the 2000s, a set of unfortunate events created an incentive structure that destroyed instead of creating wealth. This destructive entrepreneurship was caused by ideology, changes in the tax laws, and lax regulation. The outcome - trillions of dollars in wealth lost. This form of destructive entrepreneurship is the legacy of the past decade when investment did not flow into productive activities. In fact, it was destructive. How to change the incentive structure to get us back to a productive form of enterpreneurship is a million dollar question for which there are no easy answers.

How many of you are startled and even a bit frightened at the lack of attention the rapidly worsening global warming crisis is receiving in the U.S. in particular? Yes, there is vague talk from the incoming U.S. President about global warming, but, in fact, the U.S. government is trying everything in its power to boost consumption and raise housing prices in an effort to reignite the housing bubble. Obama is talking about massive infrastructure programs and yet, when you examine the plans, it is largely about building highways with some money for energy conservation in government building retrofits. All of this will be done on a wave of deficit spending that is likely to pauperize the remaining U.S. middle class.

Highway building and energy conservation measures will fail to rein in global warming because hydrocarbon energy is too inexpensive in the U.S. Odd isn’t it, only six months ago, because of the price increases, the U.S. was treating energy conservation as a serious topic. Miles driven were dropping, people were demanding better mass transit, and the move back to the city was being celebrated. The price mechanism was addressing the global warming problem, though it did affect the poor disproportionately. Today, with gasoline prices down, miles driven are increasing, and once again traffic jams and the behemoth SUVs are back.

There is an obvious measure that can address our fiscal deficit and global warming - raise gas taxes, say $0.50 immediately, then after three months another $0.25, and again another $0.25 in another three months (the more one increases, the stronger the signal to consumers is). The phasing in of the increases would provide warnings to auto buyers to choose more fuel-efficient vehicles. This would be a serious response to global warming and the fiscal deficit, but there are no voices demanding such an obvious policy.

You don’t need to be a member of the Creative Class to see how disconnected from reality the policy discussions in Washington, D.C. are. No discussions of raising taxes to address an enormous and spiraling deficit. No discussions of serious policies to discourage the consumption of fossil fuels. The U.S. is today operating on what I term “crackpot optimism,” which I will discuss further in future posts.

From Newsweek (via Planetizen):

Moribund malls have not gone unnoticed amongst industry analysts and Web sites like Deadmalls.com that feature photos of hundreds of now-abandoned sites. But what were once just worrying signs appear to have finally flat-lined. Last year was the first in half a century that a new indoor mall didn’t open somewhere in the country—a precipitous decline since the mid-1990s when they rose at a rate of 140 a year…

CMU urban designer guru David Lewis long ago predicted that finding ways to reuse and revitalize these dead malls would make inner-city redevelopment look like a walk in the park.

In a little more than a few months the world has changed more than one can remember: A financial collapse with a slice of Wall Street gone. Impossible. A governmetn bailout of - would you believe- Wall Street. Paulson arguing that regulation is needed to stabilize the financial system. The global economy in recession, and it seems like it’s not the garden variety. It could be a depression. The election of the first African-American as President of the United States and an eoch changing shift in the electorate. The auto industry on the brink of bankrupcy. Birmingham, Alabama bankrupt. One does not know if we should buy on a rumor, sell on a hunch, or hunker down and hold. The markets are always looking forward and what they seem to be indicating is that we are now in for and have been in a bear market for most of the past decade. On average, these last 15 years or so we have a new administration that is likely to reside over a depression, bear market, major industrial bankrupcies. Welcome to the Global Economy.

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.

Martin Kenney introduced the concept of the “new frugality” here first. Grant McCracken says in downturns consumption shifts to “dwelling” from “surging.”

Roughly speaking, consumers have two modalities: surging and dwelling. In the surging modality, consumers have momentum. We have a vivid sense of forward motion. Life is getting better. Each purchase is an improvement on the last one. Clothes change with fashion. The material world teems with new features, new things, new opportunities, new excitement. We look ahead constantly, keeping one foot in the present, putting one in the future. The good life in America is always a better life. That’s the fundamental promise of the consumer society. In the dwelling modality, the consumer is not forward looking, but concentrated on the here and now. Now most of life’s pleasure comes from counting one’s blessings. This is a dwelling modality, because the individual is no longer in transit, racing toward a better tomorrow. Now the consumer is focused on what is good about what one has. The consumer stops anticipating and starts savoring.

We have to move from a surging modality to a dwelling modality when the economy suddenly “softens” and “goes south.” And there is no gear box. There is no single or simple way of gearing down from “in motion” to “in place.” It’s one of those deals where the consumer must perform his own “interrupt” (to steal a term from Information Processing), see that the world has changed, see that something new is called, identify what is called for, embrace it fast, and hold it tight.

It’s weird that in our economy/culture we go through the surging-modality transition something like once a decade …

This graphic from Michael Mandel’s BusinessWeek essay tells a most interesting story. U.S. economic growth over the past decade has been premised not on underlying productivity growth but on consumption, much of it fueled by the hyped-up real estate sector and construction and reliant on debt. While official numbers peg U.S. growth over the past decade at roughly a 2.7 percent annual clip, factoring some $3 trillion in excess borrowing and consumption into the picture, Mandel calculates, reduces that to a more anemic 1.3 percent rate.

Some time ago, savvy urbanists like Paul Gottlieb argued that a growing number of U.S. regions had created a fiction of growth by building new homes, malls, and industrial parks in their sprawling suburbs, even when they were not creating jobs or adding people.

Two sides of the very same coin - don’t you think?

It’s the cover of the new issue of Business Week. Martin Kenney wrote about it here more than a month ago.

This graphic is from a must-read paper (via Naked Capitalism) by economists Ken Rogoff and Carmen Reinhart that examines international financial crises through history. The upshot: housing prices will have a long way to fall; stocks still have a long way to fall; the deficit is a big problem; and we are in for a long and deep recession. What is propping us up? Infusions of foreign capital. And underneath it all is a basic problem as Naked Capitalism writes:

The sorry fact is the US has consumed at an unsustainable level. We need to reduce consumption and increase savings (and reducing debt is a form of savings). Reduced consumption means a fall in GDP … Why are we unwilling to accept the inevitable?

This is a watershed of sorts as Calculated Risk points out:

The current National debt is $9.727 trillion (see TreasuryDirect) as of Sept 19, 2008. …
Add in the Paulson plan, and it’s not even going to be close.

Question: geographically speaking, which places in the United States will bear the brunt of this cost?