Subscribe/Feeds

• Subscribe by Email
• Subscribe in a Reader
• Subscribe to Comments
• Become a Facebook Fan
• Follow on Twitter
• View Photos
• Watch Videos

Search

Friday, December 4th, 2009

The Mayor as CEO

As always, I’ll offer more commentary here. So many people on the right seem to believe that all you need to succeed as a jurisdiction is low costs/taxes. Cost efficiency is of course important in business and in government. But how many businesses have a strategy that is simply “low costs”? Usually they have some ideas about a target market, brand position, and value proposition they are delivering. Unless you are the low cost producer in a commodity market, low cost is generally not a sufficient strategy. And alas, our core cities are structurally high cost producers (usually higher taxes, more crime, worse schools, and older infrastructure) that cannot compete for jobs with their suburban regions purely on price.

On the other hand, too many on the left lack concern about costs and taxes. There are lots of ideas about what can and should be implemented, but too-seldom and appreciation for the negative impact high taxes, costs, and regulations have on the attractiveness of a place to prospective residents and investors.

In the ideal world, cities would combine the best of these approaches, keeping a keen eye on the bottom line and cost competitiveness while making targeted investments aligned with a focused strategy for success. Too often, however, we get the worst of both worlds in the form of highly subsidized boondoggles.

To illustrate the dilemma facing the central city mayor and how that is so different from other governance challenges, let’s compare the case of Indiana and Gov. Mitch Daniels with Indianapolis and Mayor Greg Ballard. Gov. Daniels is one of America’s premier fiscal conservative leaders. His belief is that Indiana’s attractiveness to business needs to be rooted in low costs, low taxes, and lean government. Now, when you are in his office and survey the world, you see your state surrounded by the likes of Illinois, Ohio, and Michigan. It is easy to see how you can envision yourself having a price advantage over those states. Indeed, while Indiana can never beat the China’s of this world on cost, it is very feasible for Indiana to be one of the lowest cost states in America and probably the lowest cost state in its region. This makes a cost-led strategy appropriate and doable for Indiana. (I should note that Daniels is also investing in infrastructure and elsewhere, but clearly his primary focus is the fiscal realm. If you want to know more about his philosophy of governance, the Indy Star just did a 15-minute video interview with him. I would have embedded it, but the video unfortunately auto-plays).

Mayor Ballard takes a look out his window and sees a very different world. Thanks to the state’s low costs and other factors, his region is very attractive to business. But instead of being surrounded by a collection of high cost states, his city is surrounded by very low cost suburban counties. These greenfield locations have brand new everything, great schools, extremely low crime, and lower taxes. No matter what Ballard does he’s not going to be able to change this. So how does he attract people and business to his part of the region? That’s a very different challenge from the one facing the state or one of those suburban counties. What’s more, many of the people and businesses he might target are those that are also being aggressively targeted by many cities around the country. Simply adding things like bike lanes, trails, and stadiums aren’t likely to produce a particularly compelling offering on a national basis. How do you make yourself stand out in the crowd? It is one of the toughest leadership challenges out there.

So many central cities, particularly those in the Midwest are struggling today. They need to reinvent themselves to recreate relevance for themselves in the 21st century. As the quote at the top says, cost and efficiency are a necessary, but not a sufficient condition to make that happen.

Here is some further reading on this topic:

What Is a Strategy?
The New Discipline of True Urban Design
The Talent Equation
Creative Destruction is Real

Wednesday, December 2nd, 2009

Columbus: Fantasy Transit Maps

There’s a sort of genre of urbanist creativity out there of fantasy transit maps. These are maps of transit systems that don’t exist and usually aren’t even proposed yet, but rather just express some dream of the creator, often quite epic in scope.

What I find interesting is how much better these often are than actual transit maps or proposals. I noted before how the Cincinnati streetcar people basically don’t even have a decent map of the line. Contrast that with this example that Columbus Underground points us at. If you click the image, you’ll get a high resolution PDF.

Now that’s a pretty slick map. It is, for locals at least, recognizably Columbus. The crisp, modern design, 45 degree angles, and relatively equidistant stations recall the famous London map and others from cities around the world. The idea being to show how Columbus could position itself among these global cities by creating a transit system. You can even buy it as a poster! A nice possible marketing tool.

This map was created by designer Michael Tyznik and is part of his online design portfolio and is reproduced with permission.

People who are pushing actual transit system improvements could learn a lot from these fantasy maps. Coming up with high quality collateral that demonstrates what the end state looks like is important. And if you can make short term progress and update the map to show reality being made, even better. Transit advocates should take note.

Update: Here is a collection of Columbus fantasy transit maps.

Additional fantasy maps some people linked to. Indianapolis:

New Orleans:

Cincinnati (printed on a T-shirt):

St. Louis:

Tuesday, December 1st, 2009

Role Reversal

Gay Talese releaesd his masterwork on the history, culture, and inner workings of the New York Times, The Kingdom and the Power, in 1969. It’s the story of a bygone era in journalism, but also more than that. I found this passage particularly curious.

And so what worked in Mississippi worked as well in Manhattan, although the reverse was not so true. The impersonal pushing of the North was out of step with the South; Southerners could not easily accept it: the South was deep-rooted and fixed in its way, as Federal lawmakers would later learn. The South set its own pace and style and stamped its people for a lifetime, and when Northerners went South to live, it stamped them, too. Northerners who settled in the South adopted the regional accent; Southerners who settled in the North did not. [emphasis added]

I found this an interesting observation because it is so contrary to what I see in the present day. It strikes me that people – or at least young people – who move north today do everything in their power to lose their southern accent as quickly as possible. My wife is from Alabama (where Talese attended college, incidentally). Having just returned from a visit there, I can tell you southern accents are alive and well in the South. I great up in rural Southern Indiana with an accent myself. Today, neither of us sounds at all like people with southern roots. I’ve seen this story many times.

And also, when people from the north move south, I see a major effort undertaken to preserve a flat accent in the children. Indeed, we are seeing in places like Atlanta, Charlotte, and Nashville significant upscale districts where large numbers of people have no southern accent. An intern at work a year or so ago was born and raised in Brentwood, Tennessee outside of Nashville, and didn’t have a trace of a southern accent.

We’ve certainly seen since the 1960’s a massive change in the fortunes of the South. The civil rights struggles were still ongoing when Talese wrote his book. Today the South, or at least parts of it, are re-energized and feel confident meeting and competing with the rest of America on its terms.

But perhaps we shouldn’t read too much into the south. It seems to me that there has been a significant decline in regional accents and dialects generally in the United States. Perhaps some of this is due to the interstate highway system, which enabled significant mobility around the country and homogenized things a bit. I don’t know. But even within the last 15 years I’ve noticed, for example, a significant decline in the number of people with Hoosier accents on the north side of Indianapolis, especially among younger people.

It is interesting to see the changes in American culture in even a relatively short term. Of course, some things haven’t changed. The Southern style can still be very effective in the north. Let me just say this, do not underestimate someone just because they talk like a good ol’ boy. You might well end up regretting it.

On another topic completely, a lot of what Talese wrote about journalism in the 1960’s as a period of transition is completely relevant today. I will share a few excerpts to demonstrate. The challenges facing the newspaper business are actually longstanding, and clearly the major media companies failed to meet them. Perhaps that bygone era isn’t so bygone at all.

Now the newspaper industry had a serious new threat, television, and [Managing Editor] Catledge knew that the formula that had worked so well [in the past] would require some adjusting. A newspaper could not compete with the speed of television in covering spot news, nor could it match televisions dramatic presentation of a single news spectacle…but [he] was confident that newspapers could bring readers more details and could explain the significance of these details more effectively than could television…Newspaper reporters would now have to dig more deeply into more areas and to inform the public more thoroughly; they could no longer merely report the facts, but they would often have to interpret the meaning behind these facts. The trick was to do this without editorializing.

…

The [NYT] could no longer financially afford to print lengthy stories about relatively minor news events….The paper was now actually printing fewer columns of news than it had been in the 1920’s and 30’s. And since the end of WWII it had also greatly increased the volume of advertising to a point where it regularly carried more lines of advertising than news….The only what the The Times could both cover the news and pay its bills was to get its reporters to say more in less space, as the tabloid men from the New York Daily News had been doing so well for years

…

It had become one of the corporate jokes within The Times that most of the money earned did not come from publishing the greatest newspaper in the world but from the 42 percent interest that Ochs had bought in 1926 in a paper-making mill in Canada – The Times made more money producing paper without words than paper with words.

…

Only The Times and two tabloids, the morning News and the evening Post, would remain in a city than in 1900 had sixteen dailies, and than in 1930 had a dozen…Of the New York dailies, only The Times and the News [had been] consistent money makers; the others survived on subsidies from newspaper chains or from individual owners whose wealth was derived from outside sources.

…

The Times would have to accept the computer. The computer was still a relatively controversial subject at The Times, but now in Sulzberger’s first year as publisher he began to prepare the institution for its introduction. Timesmen would have to overcome their aversions and romantic notions about the newspaper business.

Plus ça change….

Sunday, November 29th, 2009

Midwest Miscellany

I have received some reports of badly distorted fonts with Firefox on Windows XP. If the font on this site is rendering horribly for you, I’d appreciate you sending me a screen shot, along with your browser and OS version. I’m investigating. In the meantime, you can see a cleaner version by either using Internet Explorer or using the alternate URL www [dot] arenn [dot] com. Please do not share any links using that URL, however, as I don’t want to confuse Google.

Neighbors for Neighbors

Joseph Porcelli, a friend of mine, has a very interesting project going on in Boston that I wanted to highlight. It is called Neighbors for Neighbors, a social networking platform that includes social networks for every neighborhood in Boston. This came out of his experience with his Jamaica Plain neighborhood, which was experiencing a crime wave and needed a way to organize. Fast forward, and N4N has launched, in official partnership with the city of Boston, with hyper-local based social networks that bring people together and span both the online and offline world. This is a model I think is worth checking out.

China’s Empty City

Here’s a fascinating video I found via the NYT Economix blog about an empty city in China from the Al Jazeera English language service. We keep hearing about China’s inexorable rise. Yet clearly there are massive speculative excesses built up in the Chinese economy. We just watched Dubai, another seemingly unstoppable juggernaut, suffer a debt crisis. China is obviously a much strong country, but stories like this make you wonder. (If the video does not display, click here).

Dangerous by Design

Transportation for America released a major study on preventable pedestrian deaths called Dangerous by Design. In the last 15 years, over 76,000 pedestrians have been killed in America. Here is where our 12 Midwest metros stacked up among regions of over one million people. The ranking is by most dangerous, so the top of the list is more dangerous than the bottom:

• #7 – Louisville
• #14 – Detroit
• #20 – Kansas City
• #21 – St. Louis
• #31 – Indianapolis
• #35 – Columbus
• #37 – Milwaukee
• #41 – Chicago
• #43 – Cleveland
• #46 – Cincinnati
• #49 – Pittsburgh
• #52 – Minneapolis-St. Paul (America’s safest major city)

Full data tables are available here.

Oxford Circus Pedestrian Improvements

For those of you who’ve been to London, you know pedestrians overwhelm the too-narrow sidewalks. The city has been looking at various ways to improve this, and one of the more interesting projects is one at Oxford Circus. Broken Sidewalk points us at this video (click here if video does not display).

Here’s the “Before” view:

Here’s the “After” view:

Best Performing Cities

The Milken Institute released their rankings of the best performing cities of 2009. Their index “ranks U.S. metropolitan areas by how well they are creating and sustaining jobs and economic growth. The components include job, wage and salary and technology growth.”

Austin, Texas was #1 in America. Here is how the large Midwest metros stacked up. On this one, a higher rank is better, like a normal league table. The ranking is out of the 200 largest metro areas. You know your region is struggling when it can’t crack the top 50. (In fairness, Peoria, a city I generally don’t cover, was #33)

• #52 – Kansas City
• #108 – Columbus
• #109 – Pittsburgh
• #123 – Minneapolis-St. Paul
• #125 – Indianapolis
• #128 – St. Louis
• #138 – Cincinnati
• #148 – Chicago
• #151 – Milwaukee
• #153 – Louisville
• #186 – Cleveland
• #199 – Detroit

No two ways about it, that’s a pathetic showing.

Detroit Roundup

The Wall Street Journal wrote up an interesting incident here a group of people found an old dump truck on the fourth floor of an abandoned factory and pushed it out of a window. Below is the video. If it does not display, click here. h/t Rust Wire.

Also:

An American Catastrophe (Bob Herbert @ NYT)
David Bing’s last second shot (WSJ)
Michigan’s roads are in a fix. The Detroit News reports that 1/3 of the states total road miles are in poor condition.

8664: River Fields Exposed

LEO Newsweekly, Louisville’s alt-weekly paper, had a great piece recently called Burned Bridge that talks about how River Fields, once a bona-fide conservation group, has become nothing but a front for East End NIMBY’ism. They are a group opposed to the East End bridge at all costs. They so hated this article, that apparently they might have pulled issues from racks to keep people from reading.

Everyone knows the River Fields agenda in Louisville. However, the National Trust for Historic Preservation allowed their name to be attached to the River Fields agenda in filing a lawsuit against the bridges project. Personally, I wouldn’t be sad to see the Record of Decision re-opened, since that is necessary for the 8664 option. But the National Trust may yet find that their own reputation ends up tarnished by linking themselves with an organization that is actually in favor of demolishing historic properties in downtown Louisville to build a bridge there. The River Fields agenda is antithetical to bona fide historic preservation. I actually asked the National Trust what their rationale was for joining the lawsuit, but wasn’t able to get much from them beyond the press release which said it was not about just the East End bridge, and the list of potentially impacted properties taken directly from the EIS. I think they ought to re-evaluate who they are getting into bed with, however.

National and International Roundup

Carol Coletta: Regionalism as identity theft for cities.

Brain Drain Report: Berlin Wall Edition (Burgh Diaspora)

Three simple rules for getting out of poverty – but how easy are they to follow? (One Story Up). Also from One Story Up, Don’t fall in the poverty trap – you night never get out. This is a great public housing oriented blog by Megan Cottrell. Worth checking out.

Housing bust halts growing suburbs (USA Today)

Paris debates plan for new subway (Yahoo News). Proposed 80 new miles of subways for inner ring suburbs at a cost of $31.4 billion.

High hopes and higher standards for Bloomberg 3.0 (Streetsblog)

LA Mayor seeks creative funding to prevent 7 MPH gridlock (Bloomberg)

Smart City Memphis offers Lessons from Great Mayors.

Grand Plans for Rail in Denver Hit a Wall of Fiscal Realities (NYT)

Salt Lake City passes gay rights ordinance with Mormon backing (USA Today)

California exploring detailed strategy for growth (SF Chronicle via @gosner)

Miami ponders whether the good outweighs the bad (NYT)

More Midwest

Chicago
Leaseback deals could come back to bite CTA unless Congress acts (CTA Tattler)
Company piles up profits from parking meter deal (NYT) – Related: Chicago’s parking meter deal a massive rip-off (Streetsblog)
What Oprah’s departure means for the Windy City (Julia Vitullo-Martin @ WSJ)
Review of Aqua (Blair Kamin @ Tribune)
5 year tollway project under budget and ahead of schedule (Tribune)

Columbus
Residents look for trees in I-70/I-71 plan (Dispatch)

Cleveland
An open letter to Cleveland (Cleveland Love via Brewed Fresh Daily)

Detroit
Detroit voters approve $500 million school bond (Detroit News)

Indianapolis
Indianapolis lands 100 more life sciences jobs (Indy Star)
Suburban counties slowly building loop roads to avoid Indianapolis (IBJ) – By the way, Urbanophile readers got the story here first – back in 2007.
Allen Plaza developer bullish on downtown (IBJ)

Kansas City
Mayor-manager system makes problems for Kansas City (KC Star)

Louisville
Would UAW wage concessions have been good for Louisville? (TNR)
Baxter Avenue elevated train station (Louisville Art Deco)

Milwaukee
A void paved over with concrete (Richard L. Birch @ J-S)
City may use water to lure business (J-S)
Republic Airways to add up to 800 jobs.

Pittsburgh
Ravenstahl at crossroads in defining his legacy (Tribune-Review)
How Pittsburgh is managing population loss (Newsweek)

St. Louis
St. Louis second worst city for crime, report says

Wednesday, November 25th, 2009

Thanksgiving Open Thread: Your Civic Ambition

I’ve long said that people with big dream and ambitions for themselves want to live in a city where the civic aspiration matches their personal aspiration. Of course, this isn’t always true. Many of us have a reservoir of affection for our home towns, our alma mater, etc. that transcends this. And it generally takes something to dislodge someone from where they are.

So as we in America celebrate Thanksgiving, I thought I’d throw it out there to everyone to chip in with what you would like the civic ambition of your city to be.

I will lead off with three cities I have a personal connection to.

For Louisville, I’ll share something tactical. It’s my hope that it will make 8664 happen. This plan to tear down an elevated waterfront freeway would save a huge amount of money and turn Louisville into a true river city once again.

For Indianapolis, it is to find a high aspiration consistent with its character. The city is outperforming most of the rest of the Midwest and is well positioned to be an even greater success story. Yet it seems content to think of itself as the “Diamond of the Rust Belt”, notwithstanding that that’s like being happy to win the loser’s bracket in the JV playoffs again this year.

For Chicago, perhaps again a tactical example, but it is to create a transit system worthy of a great city.

Have a Happy Thanksgiving everyone and I’ll see you next week.

Tuesday, November 24th, 2009

Back From Barcelona

We just got back from spending a week in Barcelona. It’s a great city, the weather was perfect, and the crowds weren’t too bad. A very enjoyable trip all around. As usual, I have a few observations that struck me while there.

Urban Culture

I used to have a team I supervised in Madrid, so I had been to that city many times, but never made it to Barcelona apart from one brief in and out trip. I was eager to compare and contrast the two.

One thing that struck me was an analogy to the Midwest. Spain was once a mighty empire, but became a sort of backwater for quite a while. Madrid was always a sort of provincial capital not as important in world affairs as say London, New York, or Paris. And within Spain, Barcelona is a regional capital, one looking to assert its own cultural identity, such as by emphasizing the Catalan language. Some even want Catalonia to be independent from Spain. I definitely noticed that the Catalonian flag is ubiquitous while you need to look closely to see Spain’s national flag.

This is somewhat similar to the Midwest. Chicago is the provincial capital, and other cities in the region want to assert themselves on the national stage. Of course, we’ve got to be careful about analogies, particularly with foreign countries. No city in the Midwest is a rival to Chicago in the way Barcelona fancies itself a rival to Madrid. And Chicago itself is in some ways a second city like Barcelona. But I’ll try to tease out some provocations anyway.

The thing I found most interesting was actually a lack of distinct regional culture in Barcelona vs. Madrid. To me, Barcelona just seemed generically “European”. Sure, you knew where you were, but it was a similar experience to many other European cities. But when you go to Madrid, it is very clear you are in Spain, in a Spanish city. There’s the weight of all the history, the culture, and above all a notable lack of English speakers. Barcelona is much more cosmopolitan. In pretty much every establishment I visited, someone spoke good English, which is definitely not the case in Madrid.

Possibly the language matter is due to Barcelona’s embrace of Catalan. I don’t think it is unreasonable to expect that any Westerner should know at least a few words in Spanish and French, but clearly almost nobody is going to learn Catalan. Hence, if you want to embrace that language, you must be willing to engage in English with foreigners.

Consider also the artists. The artists that are the backbone of the Prado collection – Goya, Velazquez, El Greco – are ones that immediately conjure up Spain in the mind. But Barcelona’s native sons Picasso and Miró were modern artists whose names bring to mind place like Paris and MoMA above all. So too with architecture, as Barcelona has clearly more embraced the modern than Madrid. There are even more modern furniture outlets there.

If I were to draw a surmise from this, it would be that: when a regional provincial capital tries to assert its identity, the result is a sort of generic cosmopolitanism.

If you look at the Midwest, you see this in action. It is Chicago (like Madrid), not the other regional cities, that has the most unique identity. And most of the efforts smaller cities are putting into asserting themselves is through self-consciously embracing a sort of generic cosmopolitan style, by implementing standard urban items like sports stadiums, starchitect buildings, and transit systems that are as much about signaling as they are about actual results.

Beyond this, it seemed to me that Madrid was much more a business center. Barcelona didn’t give off that vibe at all. I’m not even sure what its main industries are. Also, Madrid seemed to have much more recent construction than Barcelona. Tons of new apartment blocks and office towers had sprung up there. And there was an orgy of freeway construction (including several underground tunnels) and transit system expansions, including many new tram lines that reach even suburban office parks. I didn’t notice nearly as much of that in Barcelona.

Density and Transportation

As with Madrid, Barcelona is an exceptionally dense city by the standards of the west. The core is about 40-50,000 per square mile, greater than any US core other than Manhattan. But as is often the case in Europe, this is in the form of 6-8 story buildings, not skyscrapers, refuting the notion that height equates to density. There are almost no vacant lots or surface parking anywhere in the city, though the interior of blocks often features courtyards or lower rise structures that make them look hollow. Here’s a view of the city taken from one of the bell towers of Sagrada Familia:

Naturally this enables a robust transit system, and Barcelona has an excellent, high frequency subway network that, as with many European cities but unlike in the US, is a mesh-like structure that serves most of the city, enabling you to get almost anywhere with a simple transfer. It is not a core-centric radial system. Headways are excellent. I never waited even one minute for a train and something like eight times in a row the train pulled into the station just as we arrived at the platform. There is also an extensive and well-patronized bus system with a modern rolling stock.

The streets themselves are largely a grid outside of the gothic-era core. Avinguda Diagonal cuts through the grid at an angle like Market St. in San Francisco. Many of the streets are very wide. I often hear people in places like Indianapolis bemoan their wide streets. I take exactly the opposite view. In most cases, the street ROW is actually too narrow. There are many Barcelona streets wider than the right of way of Washington St., Indy’s widest. The big difference is that in the US we give most of the ROW to cars, with only tiny sidewalks. In Barcelona and throughout Europe they accommodate plenty of cars, but give large amounts of the street to general sidewalks, wide medians, landscaping, and such, creating a much better pedestrian experience. Barcelona also has a plethora of one way streets, which seems not to have hurt it.

Speaking of pedestrians, there is a high density of them throughout the city. I did see some bike lanes, but most of these appeared to be carved out of previously pedestrian space, not auto traffic. There is also a bike share program, which accounted for about 80% of all the bikes I actually saw on the street. Barcelona’s biking culture far lags that of many US cities. The preferred mode of transit is instead the scooter, which is ubiquitous. It appears to be legal to park them on the sidewalk.

Unlike in the US, all of the sidewalks I saw were either flagstones or modular pavers. It also appears that they run most of their utilities under the sidewalk, not under the street pavement. I saw very few projects tearing up streets, but several on the sidewalk, though generally not disruptive. It’s a great solution. To access utilities, you simply pull up the pavers, shovel away the sand, and get at it. Replace the sand and pavers when you are done. Looks better than concrete and functions better than cobblestones. Also, they use granite curbs and wheelchair ramps. Very nice.

Architecture

Barcelona is known for its architecture, particular that of the so-called modernista movement (related to Art Nouveau). The best known exponent of this, and certainly the most original, was Antoni Gaudí. His works are heavily influenced by nature and come across as sort of a fairy tale setting.

His most famous work is the Sagrada Familia church.

Here’s a closer look at the bell towers. These are actually mosaics.

This project was started in the 19th century and is still under construction. It is estimated to be completed in 2030, making it like a modern day equivalent of the gothic cathedral projects.

Another well known Gaudí building is Casa Milà, also known as La Pedrera.

Facade detail showing the intricate ironwork railings:

Chimneys (aka Imperial stormtroopers) on the roof:

One last example is Park Güell:

Gaudí was fortunate to work at a time when he had access to modern construction techniques such as steel frame construction, but also to craftsman who could create his unique works.

When you think of all this old architecture that even today enchants visitors, it makes you think. There was a great era of architecture from say 1850-1914 in Europe and from 1875 to the end of the art deco era in the early 1930’s in the United States. It was actually a great era in many other ways. The French called it the Belle Époque. And it wasn’t just the modernista and Art Nouveau in Europe. Most of the core civic structures of the Midwest were built in this era as well. Virtually none were built after them.

I think of Indianapolis, where the Indiana State House, the Soldiers and Sailors Monument, Union Station, the movie palaces, and the Indiana World War Memorial (started 1926) all date to this era. Has there been a truly great building constructed in Indianapolis since the Scottish Rite Cathedral in 1929? A similar story could be told in most places. For much of the US, this is the era that defined the architecture that creates the civic sacred space. Europe obviously has a longer architectural history, but this era saw most of the last of the entries. If many of these were simply vernacular pieces, at least they were good ones, especially compared to what came later.

The mid-century period and beyond produced plenty of architecture that is critically acclaimed, but for the public at large even the best of these buildings inspire more respect than affection. And unlike previous eras, the vast bulk of the copies of the masterworks were severely lacking. Many of them blight our cities to this very day.

What went wrong? In the Great War and the Great Depression something in the human spirit was grievously wounded.

But today we see signs of recovery. While I have my quibbles with starchitecture, there’s little doubt many of these structures are beloved by the public in the way a Miesian monolith never will be. These architects remembered that aesthetics is the answer to the great question of “What is Beauty?”, a question too seldom asked in the modern world. While it is too early to judge, perhaps we are the start of another age of good design. I don’t think it is any accident that like the previous one, today’s design age takes place against a backdrop of economic revolution and all that comes with it. Will the Great Recession kill the baby in its crib? We’ll see.

Here are a few more shots from Barcelona. First, Casa Batlló by Gaudí

The Mercat de Santa Caterina

The Museu Nacional d’Art de Catalunya

The Palau de Musica Catalana

Dining and Entertainment

I won’t say much on this, other than that Barcelona is a famously hard partying town. Alas, I’m past the age for such things, but I did notice quite a crowd of people still carousing on the streets at 6:30am as we were in the cab on the way to the airport to leave. Reputedly there are over 20,000 bars in Barcelona.

The food is also quite good. I didn’t go hungry, that’s for sure. Very heavy on seafood, as one might expect being so close to the coast.

I’ll leave you with one of those strangely named restaurants that always gives one pause in a foreign country.

Monday, November 23rd, 2009

Migration: Geographies in Conflict

My latest post is up over at New Geography. It is called “Geographies in Conflict“. I examine the curious case of why there is so much net domestic out-migration from supposedly booming “world cities”. Some attribute this to high taxes driving people out. I have a different take. Yes, taxes are higher there, but generally higher costs and the public policy choices they make result from macroeconomic changes. Notably, bifurcation of the city into two economic geographies and labor markets and the resulting two-tier wage structures. Cost structures and public policy clearly follow the more economically high value group, resulting in an outflow of those losing out in this new world. There’s a lot more to it than this simplified summary, so please check it out.

I am increasingly taking a much more negative view of the rising income gap in America. I think the focus on the “top 1%” is a red herring. We’ve long had a handful of plutocrats in almost any city. What we see now is what we might think of as the development of an “overclass”. I’m not sure how big it is. Maybe 5-10% of the people, perhaps more in elite core cities. There are so many of these people that their mere purchasing power drives up real estate and other costs significantly, displacing others – not just new immigrants, but also the traditional middle class – from large areas of cities.

Thinking about this in terms of the Midwest, clearly we see that Chicago is experiencing this effect and other places aren’t. When I started work at my first job out of university at Andersen Consulting in Chicago in 1992, I made less than the median income. Today, brand new employees at Accenture (the Firm’s current name), make more than the median income. I noted before the widening gap between new law firm associate salaries in Chicago and Indianapolis. Once the gap was 30%. Now a partner at a top tier Indianapolis firm tells me it is 100%. When I previously gave that stat, someone else said it was really closer to 60%, but that is still a doubling of the gap in recent years. That shows the salary inflation that has taken place in Chicago.

Think about this in terms of housing costs. A $100,000 annual salary is not uncommon for Chicago professionals. Couple with another $100K professional and you’ve got a $200,000 annual household income. Using a rule of being able to buy a house 3x your gross annual income, that means this couple can buy a $600,000 home without any gimmicks at all. And there are thousands and thousands of people with approximately that purchasing power. Unlike in places like California, the run-up in home prices in Chicago, at least in upscale urban neighborhoods, is fully supportable by incomes. This is why housing is unaffordable there for so many and will remain so.

They dynamic unleashed by this large upper-middle overclass creates a two-tier economy and unbalances public policy in its favor, leading to the exodus of the traditional middle class from the city and region. That doesn’t mean top talent can’t still be coming in. There’s just fewer of them. This dynamic features a positive feedback loop whereby more top talent raises overclass wages even higher, more squeeze on the middle class, more migration, etc.

Still, Chicago remains among the cheapest if not as the cheapest Tier One type city in America. I attribute this to the fact that, while a powerful business services center and secondary financial hub, it is not the epicenter of any major 21st century macro-industry the way Silicon Valley is for technology, LA for entertainment, NYC for finance and media, DC for government, Miami as a Latin American gateway, or even Boston with its educational complex. And I’d argue that partially a result, Chicago is notably more pro-growth and pro-business than many other Tier One cities. I will have more to say on this topic at a future date. For now, let us just note that while the problem of a two-tier economy are present in Chicago, a lot of the symptoms of unaffordability are moderated in comparison with say NYC or California. Can Chicago figure out have the best of both worlds?

As for other Midwest cities, rather than moaning about not being Chicago, they should look on the plus side and take comfort that they don’t share this problem of a two-tier economy and major wage gap between an overclass and everyone else. Of course, the downside is that most of them also don’t have as much economic dynamism as they want. The challenge is to ramp up the economic engine without leaving a good chunk of the region behind. Since their economies are much more dependent on industries and competitive positions that aren’t subject to clustering economics, these places do need to keep an eye on the bottom line as they look to upgrade themselves.

That’s the challenge for them. How can they become more attractive to talent needed to power 21st century cities while not undermining their broad based economic attractiveness to the middle class? It’s not an easy path to walk. Again, more on that in a future post.

Thursday, November 19th, 2009

Ryan Avent: Disruptive Technologies

[ For those who don't already read him, Ryan Avent is an editor at The Economist magazine who also writes for Streetsblog Capitol Hill and at his own blog The Bellows. Ryan is also an honest to goodness real economist too. He's great for getting a more progressivist take on urban issues from the perspective of an economist, and you'll often find him jousting with the likes of Ed Glaeser. I've been reading Ryan a while and he's great. It was also great to get to meet him and person and be part of a panel with him at Rail~Volution 2009. I recommend checking his blog out.

This post ran on his blog back in August. Though I subscribe, I somehow missed it until reminded of it by Jim Russell. I thought you all would find it interesting so I am reprinting it here with permission. ]

Disruptive Technologies by Ryan Avent

I’ve been enjoying Tim Lee’s posts discussing the introduction and impact of a disruptive technology. Let me quote some (a lot) of what he’s been writing:

The key characteristic of a disruptive technology is that at its introduction, it is markedly inferior to the then-dominant technology, as judged by the existing base of customers. A classic example is the microcomputer. When the first microcomputers were released in the late 1970s by Apple, Commodore, and others, they were inferior in almost every respect to the minicomputers and mainframes that then dominated the computer market. People bought microcomputers for one of two reasons: they couldn’t afford a minicomputer, or they had an application where the microcomputer’s unique advantages (i.e. smaller size) were a particular advantage.

It’s important to understand that the innovator’s dilemma is not that disruptive technologies are “so innovative” that incumbent firms can’t keep up with them. To the contrary, disruptive technologies are often relatively pedestrian from an engineering point of view. Minicomputer manufacturers would have had no difficulty entering the microcomputer market if they’d wanted to. Rather, the innovator’s dilemma is that incumbents find it extremely difficult to make disruptive technologies profitably.

He quotes Clayton Christensen:

A characteristic of each value network is a particular cost structure that firms within it must create if they are to provide the products and services in the priority their customers demand. Thus, as the disk drive makers became large and successful within their “home” value network, they developed a very specific economic character: tuning their levels of effort and expenses in research, development, sales, marketing, and administration to the needs of their customers and the challenges of their competitors. Gross margins tended to evolve in each value network to levels that enabled better disk drive makers to make money, given these costs of doing business.

In turn, this gave these companies a very specific model for improving profitability. Generally, they found it difficult to improve profitability by hacking out cost while steadfastly standing in their mainstream market: The research, development, marketing, and administrative costs they were incurring were critical to remaining competitive in their mainstream business. Moving upmarket toward higher-performance products that promised higher gross margins was usually a more straightforward path to profit improvement. Moving downmarket was anathema to that objective…

Four times between 1983 and 1995, DEC introduced lines of personal computers targeted at consumers, products that were technologically much simpler than DEC’s minicomputers. But four times it failed to build businesses in this value network that were perceived within the company as profitable. Four times it withdrew from the personal computer market. Why? DEC launched all four forays from within the mainstream company. For all the reasons so far recounted, even though executive-level decisions lay behind the move into the PC business, those who made the day-to-day resource allocation decisions in the company never saw the sense in investing the necessary money, time, and energy in low-margin products that their customers didn’t want. Higher-performance initiatives that promised upscale margins, such as DEC’s super-fast Alpha microprocessor and its adventure into mainframe computers, captured the resources instead.

Now, here’s Lee again:

But companies aren’t big people, and it’s a mistake to think of them that way. In 1983, any given engineer at DEC could have easily quit his job making minicomputers and taken a job at Apple or IBM making microcomputers. But it would have been much harder for DEC as an institution to make that same transition. Turning DEC into a microcomputer company would have required a wrenching, years-long struggle to essentially build a new company from the ground up. Indeed, as Christensen documents, the few firms that have successfully pulled off such a transition have done it by essentially growing a new company inside the existing one: senior management would start a subsidiary devoted to the disruptive technology and keep it insulated from the parent company’s managerial structure. The hope was that by the time the parent company fell on hard times, the subsidiary would hopefully have grown enough to sustain the overal company’s profitability. There are a few examples of this strategy working, but it’s an extremely risky and difficult process.

Me being me, I read this and instantly began thinking about cities. One of the things I’ve been puzzling over recently is the implosion of formerly successful metropolitan areas. In theory, there’s no reason why the decline of one of a city’s principle industries should lead to the decline of the city itself; cities have useful infrastructure, institutions, and human capital, and the decline of one industry should free up space that can be utilized by a new, growing industry.

In practice, things tend not to work out this way. Cities that face the loss of one of their main industries tend to suffer through a long period of decline before recovering, if in fact they manage to recover at all. Why is this? Why should all of the many things that go into the making of city come undone in one place just because one particular business failed, while all of the things that go into the making of a city are rebuilt from nothing elsewhere in the country? It makes no sense.

I have tended to focus on negative feedback loops as a primary explanation for this dynamic, and I feel certain they play an important role. Loss of part of a city’s tax base will lead to reductions in the quality of services and increasing tax rates, which will lead richer households to leave, further shrinking the tax base. Declining services lead to failing schools and high crime rates which accelerate depopulation and so on. A city’s most talented workers will have the most opportunity available elsewhere, and so they’ll be the first to leave, sharply reducing an area’s competitive attraction, thereby encouraging further talent to leave, and so on.

Ed Glaeser has argued that it’s very difficult to recover from depopulation because of the durability of the housing stock. Falling population alongside steady housing supply leads to falling home prices. This, in turn, attracts those who require cheap housing — the poor — which will further degrade housing values and attract more poverty. An increasing population of poor residents will also tax city services which will further imperil budgets, and so on.

That certainly seems like enough to destroy a city, but it isn’t. In real life, cities experience negative shocks all the time, but they don’t always enter into a major downward spiral. And some cities which do face a downward spiral manage to pull themselves out of it and enjoy an economic renaissance. Why?

I think Lee’s disruptive technology post offers us a glimpse at an explanation. When a metropolitan area has an old, successful, established industry as its economic driver, that area builds its infrastructure and institutions around that industry. These institutions are likely to be unwilling and unable to accomodate and support growth industries. We can think about legislators in a Rust Belt state who fight to protect old industries even when the protections they seek would undermine growth industries. Or banks in old manufacturing centers that are reluctant to invest in start-ups with sharply different practices from the old giants.

If you have a daring new idea, you don’t take it to someone who’s living fat off something which has worked for decades. You take it to someone who is hungry. Many of the Sunbelt boom towns which have sprung up over the past half century grew at the start by accepting what investment they could. I’m reminded of my hometown, where leaders were anxious to attract high-tech investments to their new Research Triangle Park. It was lack of better options that gave them the idea in the first place — something which might not have occured to leaders in a city where hundreds of thousands of people earned good union wages in manufacturing plants. And while leaders definitely wanted to craft a research environment, they took the investments they could get. Not having recently been on top of the world, they had the benefit of not suffering from wounded pride when less-than-glamorous operations came to invest.

And I think there’s something to the idea that new growth cities aren’t inherently superior to older, richer metropolitan areas. Rather, their advantages are fairly mundane — they’re cheap, accommodating, and ready to please. On the other hand, older, richer cities don’t realize that they have a problem until it’s clear their bread and butter industry won’t ever be the same, at which point they’re faced with serious problems and have few resources to attract new industries. At that point, there are few routes to recovery. A city might get lucky (by, say, enjoying proximity to another metropolitan area which enjoys a booming economy). It might manage to retain enough in the way of resources from niche industries, like tourism, to maintain a framework capable to supporting a new growth industry. Or it might find that one of its older and smaller industries is capable of growing large enough to fill in the missing economic strength.

There are tricky implications to this. It suggests, for instance, that the availability of new metropolitan areas is crucial in maintaining a flexible, growing economy. That creative destruction doesn’t just mean the scrapping of once-proud firms but of whole cities. It also suggests that my previous prescription for fighting urban decline — a program of temporary fiscal support — could be counterproductive. It might delay inevitable economic adjustments.

I don’t know that I accept that it’s necessary to destroy old cities and create new ones to keep an economy fresh. Revolutionary geography could be interchangeable with institutional or political revolution. That is, places that are less flexible geographically might instead face increased pressure to change institutions or otherwise accommodate disruptive economic change. Still, this seems to be an important part of the story of urban decline.

Related on The Urbanophile

Creative Destruction is Real
On Innovation
Resolving the Paradox of Success

Tuesday, November 17th, 2009

Replay: Mega-Skepticism

[ This post inaugurates a three part series on "megaregions" and the applicability of this concept to the Midwest. It is a repeat of something I wrote on the subject a bit over a year ago. That should lay the ground work. Part two of the series will be a review of the book "Megaregions", edited by Catherine L. Ross. The third part will be some thinking on ways the Midwest might be able to apply megaregional thinking to its problems. As you will see, I come to this subject as a skeptic.

This post originally ran on July 11, 2008]

There seems to be a lot of talk lately about an expanded concept of regionalism. Perhaps the best known exponent of this view is creative class guru Richard Florida, who published his thesis in a paper called “The Rise of the Mega-Region“. In Florida’s view, the mega-region is the logical unit of economic activity, superseding nation-states, US states, or metro areas. He defines mega-regions as basically a conglomeration of metros and their surroundings with more or less continuous development as indicated by light emitted and tracked from space. In this logic, much of the Midwest is in what he dubs the “Chi-Pitts” mega region, a collection of 46 million people creating $1.6 trillion in economic output (GDP equivalent) per year. This rates that mega-region third in world based on economic output. His map incapsulates the northern arc of the Midwest around the Great Lakes, extending from Minneapolis to Pittsburgh. Florida believes that thinking mega-regional is one way for struggling cities to boost their fortunes.

Author Richard Longworth has a similar view. He sees Midwest state boundaries as historical anachronisms unsuited to the modern economy. His travels while researching his book brought to light that few people in Midwest even know what’s going on in the next state, much less around the world. In his view the Midwest has great assets, but significant challenges, and the best way to deal with the latter is through a self-consciously Midwestern strategy developed through new regional institutions.

Academic institutions appear to be getting in on the game as well. The Committee on Institutional Cooperation (CIC), an organization of Big Ten universities plus the University of Chicago, recently held a summit on the regional future of the Midwest in Minneapolis, co-sponsored by the Federal Reserve.

It is easy to see the surface logic and appeal of this. The Midwest is collectively struggling, so it makes intuitive sense to pool resources and tackle the problems together. Who could be against regional cooperation?

What I can’t help noticing, however, is how few concrete proposals are out there that would appear to show any material uptick from regional cooperation. Other than holding conferences, what is it that cites and states in the Midwest are actually supposed to do to implement this strategy? What does a mega-regional solution allow a city to do that it couldn’t do on its own?

I have struggled to think of operationalizable actions, but can’t come up with many. In fact, most of benefits of thinking bigger appear to be elusive. Let’s think about why size and scale works in a business environment. There are a few reasons.

One is economies of scale. Typical scale economics comes from capital efficiency. That is, a large producer can substitute fixed costs for variable costs, and with large volumes produce a unit cost that can’t be beat by smaller producers that can’t absorb the fixed costs.

Two is purchasing power. This exploits economic inefficiency from being a dominant purchaser of inputs or producer of outputs such that a company can trade on favorable terms. We see just such a battle playing out for iron ore, featuring a large customer (China) haggling back and forth between a handful of large producers (Vale, Rio Tinto, etc).

Three is additional specialization and the division of labor. With more people, you can have greater specialization. This enables ever more division of labor which creates a more efficient production environment a la Adam Smith’s pin factory.

Four is diversification. This is the logic of the conglomerate like General Electric. Being in diverse businesses, it is better able to weather the storms that hit any particular one of its units. It should be noted that conglomerate thinking is definitely out of favor.

Do any of these apply in the case of the Midwest? It is hard for me to identify specific scenarios. To give a real example, I think of the triangle of cities formed by Cincinnati, Indianapolis, and Louisville. These are all smallish major metros separated by about 100 miles. While none would be mistaken for Sunbelt boomtowns, none of them are Cleveland or Detroit either. They are also a good example since they are in different states. How might these cities cooperate to take advantage of mega-regional thinking?

I can already name some small scale things that have been done. One is mutual aid. The electric utilities in the three cities have long sent crews to help out the others after major storm related outages. And the cities formalized a disaster assistance pact. This is sort of the diversification argument and seems to create something tangible.

Beyond this, are the cities able to take advantage of scale economics? I don’t see how. I could see some level of capital efficiency that could be achieved if, for example, the three cities shared an airport located somewhere between them. But they seem far enough apart not to be able to do that for anything I could think of.

Is specialization an option. In theory, yes. In practice, I’m dubious. Thinking about how this might work, I use the example that Cincinnati could be the headquarters city, Indianapolis the life sciences city, and Louisville the tourism city. Each city would specialize and the others would agree not to compete but support the chosen city for each individual segment. This would eliminate costly duplication of effort and allow more muscle to be put behind each individual item. But would this happen? Highly unlikely. None of these cities is giving up an inch in fighting for all three items. That’s just not gonna happen.

Now, we do see around the country some degrees of specialization in cities that are nearby such that one could argue they form an extended region. NYC specializes in finance, DC in government, for example, and there is a lot of travel back and forth. In Texas, Dallas, Houston, and Austin seem to have specialized in complementary niches. But I don’t see a great opportunity for this in the Midwest, at least not in a pratical sense.

Ironically, the one area I do it happening in is within those much maligned state boundaries. For example, Indiana University and Purdue University have a great degree of specialization. Purdue has engineering, pharmacy, and agriculture as specialities. Indiana University has law, medicine, etc. They complement each other so well, in fact, that they are able to share major regional campuses in Indianapolis and Ft. Wayne.

What about purchasing power? This is something I do see some logic in. Namely, if the Midwest congressional caucuses pooled their power, they could accomplish something. Again, how likely is this in practice? Most congressman and senators seem primarily concerned with their district, and not that likely to expend clout elsewhere. But if a Midwest caucus were formed in the House and Senate, there could emerge something. Perhaps the forthcoming battle over the Great Lakes Compact would be a good place to start.

There are certainly benefits to an expanded view of the market for state and local level procurement. For example, “home cooking” in terms of favoring in town or in state suppliers probably raises the cost of road construction, etc. Throwing this wide open to Midwestern competition, with common standards would be a financial benefit. But of course, so would opening it up to global competition. And that’s just unlikely to happen due to politics. Not in the Midwest, not anywhere.

Looking again at our three cities, I don’t see them able to reap much advantage from pricing power effects of cooperation. And even if they did, would this really materially change their economic fortunes? Unlikely.

So where are the benefits of mega-regionalism to be found? Jim Russell of Burgh Diaspora views it as less about scale than about critical mass, particularly critical mass of talent. This is a powerful metaphor because it makes us think that once a certain talent level is reached, a chain reaction will set off a powerful economic explosion.

I prefer to think of this as a concept I call “minimum efficient scale”. That is, there is a certain minimum size it takes in order to support certain things or to do them in house. For example, a city needs to be a certain size to support commercial air service, a pro sports team, or a Neiman Marcus. Would cooperation between our three cities enable anything they can’t support today because of inefficient scale?

There is some intriguing evidence here. Cincinnati seems to have benefited from this. They have a Delta air hub, a major league baseball team, a major amusement park, and an IKEA store. I would argue that most of these only make sense for Cincinnati in the context of exploiting the expanded regional population. However, Cincinnati has favorable geography (being also close to Dayton and Columbus and thus serving as a natural focal point) and was traditionally the more prominent and large city of the three. The benefits to Cincinnati are clear, but are there benefits to anyone else? Not anything significant. What’s more, none of these items required any mega-regional cooperation at all. They happened naturally because of the marketplace. What would the cities specifically cooperate on that would give them something they don’t have today?

When it comes to talent, there are certainly benefits to having more of it. But I don’t see any particular benefits to mega-regionalism here. What would they be? Idea exchange? Possibly, but there is no particular geographic advantage to that. I can exchange ideas with anyone. If I were a struggling Midwestern city, I’d probably be more concerned about building connections to successful places and to the overall global economy than I would be to my failing neighbor next door. Believe me, if a good idea comes up, people will find out about it. The Youngstown shrinkage experiment is a good example of that.

Could there be an expanded labor market? I’m having trouble seeing it. In our example, consider a life sciences company in Indianapolis. Would they be more easily be able to tap into labor in Louisville and Cincinnati if there were some cooperation in place? Perhaps if the respective life sciences communities were intertwined, there would be more awareness of job opportunities, but my experience is that people are either going to stay where they are, or follow the money. In the latter, they probably aren’t moving 100 miles for what are probably similar wages. They are going to go to San Diego and make some real bucks. What’s more, the regional cities I know seem to harbor a special contempt for each other, which would seem to make it doubly unlikely someone would move if they bought into that rhetoric.

I also do not buy into the “chain reaction” analogy. I’ve yet to see a successful example of this that spans metro areas.

Geographic proximity alone can offer some benefits. Philadelphia is certainly benefitting from proximity to New York as NYC prices turn it into the sixth borough. Pittsburgh can’t tap into that. But I view this as less of a mega-region, than just the colossus that is New York City expanding its sphere of influence as it becomes an ever more important world city. There is a similar effect going on with Chicago and Milwaukee, but is that replicable elsewhere?

I think again about this, what would proximity alone bring to our three cities? Well, for some it could mean easier access to professional sports. But other than Reds baseball, which has a very broad fan base for historical reasons, I don’t see it. A local Louisville blog recently noted the lack of inroads the Colts have had in building a fan base in that city, for example. And looking to the bigger city example, what benefit could Indianapolis reap from closer engagement with Chicago that say Kansas City, which is outside the Floridian mega-region, could not?

Florida himself probably offers the best potential explanation. He argues that mega-regional integration will lead to emergent properties that can’t be predicted based on the inputs. This is plausible, but not where I’d be hanging my hat if I were trying to figure out where to invest my time. And emergent properties could be good or bad and Florida doesn’t predict what they might be.

Longworth is also big on mega-regional thinking. He does a great job of diagnosing and describing the Midwest’s problems. But I do not see how the specifics of his proposed solutions will dramatically change the Midwest’s course. And he himself recognizes the political difficulty of making them happen. Among his proposals, he wants to see a Midwest regional think tank and newspaper. He’d like to see reciprocal in-state tuition. He’d like to see a higher degree of academic specialization among Big Ten schools with less competition. And he’d like to see states call a cease-fire in the economic incentives game versus each other. All good ideas, and potentially beneficial. But I don’t believe they are game changers, apart potentially from the academic specialization, which seems to be a daunting proposition.

I’m willing to be convinced. I clearly see the benefits of regional cooperation on a metro or economic area basis. Even there, however, we’ve seen significant challenges operationalizing even that idea. To really justify significant time and effort being spent on mega-regionalism beyond the quick and easy idea exchange variety, I think a specific program of recommended actions and the type of results we should expect to see from them needs to be put forward. Otherwise I’m inclined to view mega-regionalism in the Midwest as dinosaurs mating. Rolling up a bunch of weak players won’t make a strong one.

I welcome any thoughts on this subject, of course.

[Update 7/12: For a 1990's take on the concept of a super-region from the perspective of Cincinnati, refer to the Gallis Report (9MB PDF)]

Sunday, November 15th, 2009

Principles of Privatization – Part 4: Guidelines for Action

I’ll conclude my series on privatization with a series of guidelines for action or best practices you should look at to determine if privatization is right. I take a pragmatic view on this. The private sector and government are always going to work together. We just need to make sure we do it right. I had a list of considerations I had developed it, and supplemented it some insights from Indianapolis blogger Paul Ogden. Ogden is a strident populist Republican who used to favor privatization but is now mostly skeptical. Even if you don’t go for his politics, I think he made some good points, so I included them.

1. Understand why you want to do the transaction. There are lots of potential motivations and we should understand the ends we are going for. This is often independent of the entity in question. For example, when Indianapolis Mayor Steve Goldsmith privatized the water utility management, the motivation was typical “good government” efficiency and a belief that a private operator would do it better and cheaper. Today, water and other privatizations tend to be more about jackpot payouts.
2. There should be clear, obvious, and compelling value, and transparency how it is being generated. Given the risks inherent in any transaction, it should only be undertaken if the value is clear. Back to my post on value levers, we should understand which ones we are pulling.
3. One time funds should be spent on one time expenses or put in the bank. Any operating tails created should be fully funded.
4. There should be a universe of multiple qualified bidders. If there is one or only a couple firms who can provide the service, this exposes the government to the risk of bad deal with a near monopoly and no alternatives. When looking at contracting out to non-profits, this is also a risk. For example, Community Development Corporations tend to be territorial monopolies. Given the size of most of those contracts, the financial risk is not high, but certainly there is risk from having a single or handful of organizations consistently do everything.
5. The transaction should be as purely financial as possible to maximize bid fairness. Think about highway construction projects. These are subject to a sealed bidding process where every contractor has access to the exact same specs and the lowest qualified bidder is required to be picked for the job by law. The Indiana Toll Road and Chicago Skyway leases were similar. The terms were known and the competitors were merely putting out dollars. Not not every service is this way. Professional services are generally not, because skills are so different, the deliverable often is not sufficiently spec’ed to give a true apples to apples comparison, and relationships are very important. But that does render them more subject to outside influence.
6. Avoid contracts of excessive length. In a large scale private outsourcing, the benefits are usually higher a few years down the road. It takes time to centralize, offshore, etc. In fact, doing that can even cost more money in the short term. So to get the client to buy, the vendor has to generate current year savings for the client by effectively fronting some of the benefits. They hope to recover in this, along with their investments in efficiencies and transition costs, in the later years. That’s one reason why durations can be longer, such as 5-7 years. The vendor needs to have a long enough time span locked in to recover those up front costs. So it can be reasonable to have longer term contracts, but that should be based on things like recovery of investments and pre-funded benefits. We shouldn’t just sign a long term deal just because.

   I always wondered why infrastructure leases are so long. The Skyway and Toll Road leases are 75 years. I’ve never seen an investment made on a 75 year business case. For the IT investments we used to make, we expected maximum three year payback. When you start discounting back the revenue from 75 years in the future, the present value of the money can’t be that high in the out years. I haven’t figured it out completely, but one thought is that vendors want the long term lease so that they can force the government into an advantageous renegotiation at some point.

   Consider the toll road leases. I noted that part of the value of these lease in the hedge created. The lessee is taking on all of the risk about revenues, repair costs, traffic volumes, etc. If something takes a turn for the worse, as with the current recession, the concessionaire is left holding the bag. But conceivably down the road some provision of the lease might trip up the government as well. For example, highway leases often contain non-compete clauses that prevent the government from improving parallel roads. If the government ever wanted to change something, they lessee is now in a strong position. The longer the lease, the more likely something like this will happen. Think of it as a hedge for the hedge.

   Whatever the case, we should understand exactly why the length of the deal is what it is and it should make intuitive sense.

7. Termination for convenience. The government should be able to terminate the deal with some appropriate notice period and the payment of a known in advance and reasonable termination fee. We should not be stuck with an under-performing vendor and the government should have the right to get out of the deal without having to sue for breach of contract. It is clearly reasonable to expect to pay a penalty to do so, but this should be a reasonable penalty, negotiated in advance, and declining over time. Possible there could be a variable element in things like Toll Road leases to protect the vendor from the government canceling the deal just because it would look advantageous to rebid it in the current market.
8. Avoid impairing the right of future governments to change public policy. This can be very subtle. The non-compete clause in a highway lease is a good example. That one is probably ok, as long as it is not overly broad. But vague wording could be disastrous. Outsourcing water utilities shouldn’t do anything to prevent various water usage reduction initiatives the city might want to take on, or cause problems with other regulations related to the use of the systems.
9. The privatized service should be one that is visible to the general public. Someone in a Chicago newspaper said that privatizing sewers would be better than privatizing water because people care about what comes out of their tap but not about what goes out of their toilet. My view is just the opposite. Perhaps sewers are politically easier to privatize it, but we should want to privatize things where the public itself will provide an extra layer of vigilance. Things like roads, parking meters, and water are used by a broad section of the public and it is very visible whether or not they are being managed well or poorly.
10. Do not privatize services consumed by vulnerable populations who cannot effectively protest against poor performance. Ogden criticized the Indiana social services outsourcing contract as an example of how not to do it. However, I think this one actually worked. That is, when it was discovered that the contract was not working, the state backtracked. Those in need of social services are, unfortunately, fairly numerous. Also, there are established advocacy organizations that serve as watchdogs. So while this particular contract didn’t work out, ultimately the public oversight function worked. I would agree with Ogden, however, on privatized corrections. This seems to be a pretty popular function to outsource, and it is easy to see why. People who are incarcerated probably can’t vote, have little ability to influence policy, and are publicly unpopular. I can’t imagine a scenario in which I believe privatizing corrections is a good idea. That’s not to say all vendors and contracts are performing poorly. But there is just no possibility of public oversight.
11. Vendors in privatization contracts should be subject to open records laws related to those contracts as if the government provided the service. Privatization of services should not involve moving government behind closed doors. However, there are probably some viable differences here. For example, with a vendor on a fixed price contract, it probably isn’t necessary to be able to find out what they paid subcontractors for materials and services. That’s legitimately sensitive competitive information. But clearly when operating in the public sphere, businesses need to be accountable to the public. If they don’t want to be, that is there choice. They can simply not bid on the contract.
12. Avoid asset leases or sales in bad markets. Right now would not be an ideal time to try to, for example, lease a toll road. Credit it tight and the economy is tough. Indiana and Chicago leased their toll roads at the peak of the bubble. You can’t always time the market, but anyone can tell that right now is a tough time to get deals done and the terms probably aren’t the best.

More in This Series

• Part 1: Taxonomy of Transactions
• Part 2:Value Levers
• Part 3: Uses of Funds
• Part 4: Guidelines for Action (this post)

« Newer Posts   -   Older Posts »

Telestrian Data Terminal

A production of the Urbanophile, Telestrian is the fastest, easiest, and best way to access public data about cities and regions, with totally unique features like the ability to create thematic maps with no technical knowledge and easy to use place to place migration data. It's a great way to support the Urbanophile, but more importantly it can save you tons of time and deliver huge value and capabilities to you and your organization.

Try It For 30 Days Free!

About the Urbanophile

Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

Full Bio

Contact

• arenn@urbanophile.com
• twitter.com/urbanophile
• linkedin.com/in/aaronmrenn

Please email before connecting with me on LinkedIn if we don't already know each other.