Sunday, December 14th, 2014

The Inevitability of Tradeoffs, or Understanding New England’s Sky High Energy Costs

People advance two main sorts of arguments in favor of things for which they advocate: the moral argument (it’s the right thing to do) and the utilitarian one (it will make us better off). As it happens, in practice most people tend to implicitly suggest there’s a 100% overlap between the two categories. That is, if we do what’s right, it will always make us better off too with no down sides at all.

But is that true?

For most of us, our life experience suggests that there are always tradeoffs and there’s no such thing as a free lunch. Urbanists tend to argue in way that suggests this isn’t the case. The types of policies advocated by urbanists tend to be presented not only as right in a certain moral sense, but also ones that make society better off in every way. When things go awry in some respect, as they always seem to do, this is always seen as an avoidable defect in policy implementation, not as a problem inherent to the policy itself. Urbanists aren’t alone in this of course. It affects most of the world. But since I cover the urban beat, I’ll focus on us for a minute.

Today the New York Times opens a window into the type of trade-offs that are studiously avoided in most writings on the subject of climate change. Called “Even Before Long Winter Begins, Energy Bills Send Shivers in New England,” it talks about how a lack of natural gas pipeline capacity is sending electricity and gas costs through the roof as the temperature turns cold.

John York, who owns a small printing business here, nearly fell out of his chair the other day when he opened his electric bill. For October, he had paid $376. For November, with virtually no change in his volume of work and without having turned up the thermostat in his two-room shop, his bill came to $788, a staggering increase of 110 percent. “This is insane,” he said, shaking his head. “We can’t go on like this.”

For months, utility companies across New England have been warning customers to expect sharp price increases, for which the companies blame the continuing shortage of pipeline capacity to bring natural gas to the region. Now that the higher bills are starting to arrive, many stunned customers are finding the sticker shock much worse than they imagined.

I’ve written about this before re:Rhode Island, which is among the most expensive states in America for electricity (most of which is generated by gas). But all of New England is high, with Connecticut ranked as having the country’s most expensive electricity. Gas prices spike every winter to levels far above the rest of the country, as the graph below that I found via City Lab shows:

This would appear to be a simple problem to solve: just build more pipelines. I included on my list of starter ideas for improving economic competitiveness in the state.

Unfortunately, planned pipelines haven’t been built due to environmental opposition:

The region has five pipeline systems now. Seven new projects have been proposed. But several of them — including a major gas pipeline through western Massachusetts and southern New Hampshire, and a transmission line in New Hampshire carrying hydropower from Quebec — have stalled because of ferocious opposition.

The concerns go beyond fears about blighting the countryside and losing property to eminent domain. Environmentalists say it makes no sense to perpetuate the region’s dependence on fossil fuels while it is trying to mitigate the effects of climate change, and many do not want to support the gas-extraction process known as hydraulic fracturing, or fracking, that has made the cheap gas from Pennsylvania available.
….
A year ago, the governors of the six New England states agreed to pursue a coordinated regional strategy, including more pipelines and at least one major transmission line for hydropower. The plan called for electricity customers in all six states to subsidize the projects, on the theory that they would make up that money in lower utility bills.

But in August, the Massachusetts Legislature rejected the plan, saying in part that cheap energy would flood the market and thwart attempts to advance wind and solar projects. That halted the whole effort.

Here we see the clear tradeoff in action. Reducing carbon emissions has a clear human and economic cost. High electricity costs wallop household budgets in a region with many communities that are struggling or even outright impoverished (as recently as last year, for example, a third of the residents of Woonsocket, RI were on food stamps). This particularly harms poor and minority residents. What’s more, it helps contribute to the region’s low ranking as a place to do business and its anemic job creation.

Given that gas itself is dirt cheap and will be for the foreseeable future thanks to fracking, hurting residents through high electricity prices designed to drive energy transition is clearly a deliberate policy choice.

Fair enough if you believe reducing carbon requires subordinating other public goals like more money in poor people’s pockets. But how often is this forthrightly stated by advocates? Almost never.

Instead we’re treated to article after article in various urbanist publications talking about some awesome green project that’s being implemented somewhere, and how other places ought to do the same thing. There’s lots of doom and gloom about the increased potential for future disasters if the policies aren’t followed. But there’s seldom much about the immediate negative consequences that almost certainly will follow if they are.

I like energy efficiency. I’m glad we have more fuel efficient cars. I’m very glad I don’t own a car anymore. I’m not so excited about light bulb mandates and other “feel bad” policies that don’t materially affect emissions. But there’s definitely a lot we can do on the energy front.

But I also care about things like poor people’s electricity bills and economic growth. And I’m not willing to make unlimited sacrifices (including imposing sacrifices on other people) in the name of conservation. I can appreciate that others might make different tradeoffs and want more conservation than I do. But at least they ought to be honest about the costs and harm they are imposing on people in the name of their preferred policy matrix.

Instead there’s disingenuous talk about the “green economy” powering local economies when there’s no such thing as green industry. Or claiming, as many did in response to my article earlier this year, that Rhode Island’s government is actually conservative, so its problems can’t be laid at the foot of excessively progressive policies imported from places with vastly more economic leverage than most of New England. I guess I did not know that killing gas pipelines in the name of promoting renewable energy via high prices was a Tea Party idea.

Actually, not even the places that do have huge economic leverage are behaving like this. New York City has more economic leverage than just about anybody. But it also, as the chart above shows, has cheaper gas. One reason is that, as City Lab reported, NYC recently just opened a new gas pipeline into the city:

A really important thing happened last month to New York City and the rest of the mid-Atlantic. This event will change the daily lives of millions of people, especially during the coldest months of winter. And, despite some protesters, it all went down with less fanfare than Jay Z and Beyonce going vegan for a month.

An $856-million pipeline expansion began ramping up service, allowing more natural gas to get to New York City consumers. The New York-New Jersey expansion project moves more gas the last few miles from Jersey, which is the terminus for much of the Marcellus Shale gas flowing out of Pennsylvania, into Manhattan. The Energy Information Administration called it “one of the biggest… expansions in the Northeast during the past two decades.” It will bring an additional 800 billion British thermal units (BTU) of gas to the area per day.

Maybe New England wants to out do New York City when it comes to driving a green energy transition. (NYC seems to be focusing more on climate change adaptation, aka “resiliency,” these days). That’s a valid policy choice to make. But it’s one with consequences.

Unfortunately, the consequences of these policy choices are seldom presented by their advocates. People only discover them when the costs show up in a way that can be tangible traced back to those policies. Maybe in the case of New England and energy costs, people are starting to wake up to the matter, possibly in a way similar to how sky high housing costs in so many cities woke people up to the actual trade-offs being made in housing policy.

Advocates are there to advocate of course. So perhaps it’s unrealistic to expect advocates of any stripe to give you the full story. But that’s why we should always pay attention to what the critics of particularly policies have to say. That will give us a more complete picture of the tradeoffs any particular policy set will require.

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Topics: Economic Development, Public Policy
Cities: Providence

Sunday, September 7th, 2014

When the People Are Corrupted

This is another installment in my series on corruption. The New York Times ran an article last week about Buddy Cianci entering the race for mayor of Providence. Cianci is a larger than life figure in Rhode Island. Dubbed the “Prince of Providence,” he served two previous stints as mayor of the city – both times ending up forced from office due to felony convictions.

I don’t know the details of the first case, in which he pleaded no contest to a felony assault charge over attacking someone with “a lit cigarette, ashtray and fireplace log.” There’s got to be more to that story than I know because I can’t imagine a felony charge resulting from something like that, or that he’s plead no contest knowing it would get him removed from office.

The second time was he was convicted of racketeering charges (though actually acquitted of all but one of the things he was charged with) as part of an FBI investigation called “Operation Plunder Dome” that resulted in a number of convictions. He did 4+ years in federal prison as a result.

Now Cianci is back and running for office again. Apparently he remains quite popular and there is so much fear among many that he’ll actually win – he’s running as an independent – that various candidates have dropped out of the race in an effort to avoid splitting the vote and letting Cianci somehow slip in.

The fact that Cianci is considered a viable candidate for mayor despite being notoriously corrupt shows something that tends to happen in communities where corruption is the norm. Namely that the people themselves become corrupted in the process.

This actually happened long ago in Rhode Island, which seems to have been crooked about as long as it’s been around. One of the most famous pieces of writing about the state is Lincoln Steffens 1905 McClure’s Magazine screed called “Rhode Island: A State of Sale.” Here’s what he had to say about the matter:

And Rhode Island throws light on another national question, a question that is far more important: Aren’t the people themselves dishonest? The “grafters” who batten on us say so. Politicians have excused their own corruption to me time and again by declaring that “we’re all corrupt,” and promoters and swindlers alike describe their victims as “smart folk who think to beat us at our own game.” Without going into the cynic’s sweeping summary that “man always was and always will be corrupt” it is but fair while we are following the trail of the grafters to consider their plea that the corrupt political System they are upbuilding is founded on the dishonesty of the American people. Is it?

It is in Rhode Island. The System of Rhode Island which has produced the man who is at the head of the political System of the United States is grounded on the lowest layer of corruption that I have found thus far — the bribery of voters with cash at the polls. Other States know the practice. In Wisconsin, Missouri, Illinois, and Pennsylvania “workers ” are paid “to get out the vote,” but this is only preliminary; the direct and decisive purchase of power comes later, in conventions and legislatures. In these States the corruptionists buy the people’s representatives. In Rhode Island they buy the people themselves.

Rather than just businessmen buying politicians, the politicians bought voters, and virtually ever voter in the state was on the take, and in fact became quite peeved if their vote wasn’t purchased:

Nine of the towns are absolutely purchasable; that is to say, they “go the way the money goes.” Eleven more can be influenced by the use of money. Many of their voters won’t go to the polls at all unless “there is something in it.” But there need not be much in it. Governor Garvin quoted a political leader in one town who declared that if neither party had money, but one had a box of cigars, “my town would go for that party — if the workers would give up the cigars.” In another town one party had but one man in it who did not take money, and he never voted. A campaign marching club organized for a presidential campaign paraded every night with enthusiasm so great that the leaders thought it would be unnecessary to pay for votes in this town; few of the members voted. Another time, when no money turned up at a State election, one town, by way of rebuke to the regular party managers, elected a Prohibition candidate to the Assembly.

In this environment, the public is mostly indifferent to corruption and can even embrace it as part of the civic identity. Hence the viability of a known crook as a mayoral candidate.

It’s the same in Illinois. Even many of my highly educated professional friends there actually take pride in the state’s corruption, cracking boastful jokes about how it only proves Chicago is the best or something.

As Scott Reeder put it in an article earlier this year:

Well, another state legislator is heading to prison. You won’t hear much outrage in Springfield. Or dismay for that matter. In the grand scheme of things, the conviction of state Rep. Derrick Smith, D-Chicago, on bribery charges is picayune. You’ll hear it whispered around the statehouse: “He ‘only’ took $7,000.”

llinoisans have become jaded to criminality among those we elect. A few years back, some Springfield wag printed up bumper stickers that said, “My Governor is a Bigger Crook than Your Governor.” This kind of cynicism has metastases through the electorate leaving political tumors of apathy, inevitability and suspicion.

Derrick Smith, the representative of $7000 bribe fame, was expelled from the House back in 2012 after being indicted, but actually won re-election with 63% of the vote.

And this bit in an article about corruption in Springfield:

Larry Sabato, a nationally recognized political analyst from University of Virginia, adds insight while talking about Illinois in an article written by Dave McKinney for Illinois Issues: “The central and most vital point about corruption is it flourishes where people permit it to, in part because they expect it in the normal course of events. A classic case comes from your state with Otto Kerner being caught solely because the people extending the bribes to him actually deducted it from their taxes as a necessary and ordinary business expense,” he says. “Their argument was, ‘This is how business is done in Illinois.’ That’s what has to change. It’s always up to the people. It’s a democracy. They have to go beyond the images.”

It’s one of the challenges that makes cleaning up corruption so hard. Once it has dug roots deep into the civic soil, the public becomes co-dependent and so there is no constituency for change.

Wednesday, September 3rd, 2014

Chicago Riverwalk Construction

The Architect’s Newspaper recently put up a post with a video from Sasaki Associates showing construction progress on the Chicago Riverwalk. It’s mostly construction shots, but if you want to see more design renderings, check out this HuffPo piece. If the video doesn’t display, click over to Vimeo.

It’s debatable whether spending $100 million on a downtown riverwalk really ought to be a top priority given Chicago’s problems. But spending on major civic statement projects in defiance of circumstances has a long and storied tradition in the urban world, and may in fact be a necessary part of what it means to be a city (or a human being for that matter). Getting it right is a tough challenge with no easy answer, as today’s article in New Geography about Chicago by Roger Weber makes clear.

Turning Around Rhode Island

Channel 10 in Providence recently did a town hall style meeting with various civic leaders from around the state, looking for ideas to reverse the state’s economic malaise. It’s long and probably of specialized interest, but I wanted to include for those following the Ocean State’s travails. If the video doesn’t display, click over to channel 10. h/t Andy Cutler

Sunday, July 13th, 2014

Starter Ideas For Improving Rhode Island’s Economic Competitiveness

This is the third and last part in my series on Rhode Island. You can go back and read part one and part two if you missed them.

Justin Katz, writing at a web site called the Ocean State Current that appears to be published by a libertarian think tank in the state, is unhappy with my proposals. In fact, he’s giving a point by point rebuttal to my six part toolkit, which you can read here, here, here, here, here and here. I think it’s fair to say he thinks Rhode Island needs much more radical change than I prescribe, and can’t rely on a gradual approach among many other complaints.

Right or wrong, here is my thesis. A free market agenda along the lines of a Tennessee or Texas is dead on a arrival in Rhode Island. It’s simply not possible to pass. Among other reasons, this is because the people of Rhode Island by and large have some degree of progressive orientation. That’s very different from say Indiana, where every other person you meet on the street has Tea Party sympathies, and it takes a lot of police possibilities off the table. I also believe that most progressives in Rhode Island genuinely want to see a better economy in the state. Hence my pitch is aimed at providing analysis and policy recommendations that might have a chance at appealing to the Rhode Island electorate, and thus have some hope of getting implemented or affecting how people think about the issues. If Katz & Co. prefer a different approach, I’m all in favor of the marketplace of ideas.

By the way, even if you go on Atkins or some other rapid change program of weight loss and are successful, the weight seldom stays off as we know. Slow and steady changes in lifestyle are the best way for sustainable change.

Today I want to give a starter set of policy ideas for changing the trajectory in Rhode Island. I won’t claim these are a panacea or represent a comprehensive to do list, but you have to start somewhere. This is an expanded list from my City Journal piece.

Taxes and Fees

1. Seek a “grand bargain” on revenue neutral tax reform. Here the idea is not necessarily to reduce tax revenue overall, but to adjust the levers to make the system less onerous on entrepreneurship and small business. One conceptual idea – and I stress this is a hypothetical – might be to raise the income tax on top earners making over say $500K/yr (a shibboleth of the left) to eliminate the 7% sales tax businesses pay on utility bills. I’ll be returning to the matter of utilities again as it’s an important issue.

2. Repeal the $500 minimum corporation tax. Rhode Island shouldn’t add insult to injury by making a business that loses money pay a tax on top of it just for the privilege of existing. I know at least one person who killed off a side business just for this reason. To be sure it was a hobby, but hobbies sometimes germinate into actual full time businesses.

3. Waive permit and other fees for the first year for new businesses. So many startup businesses don’t even last a year. Why not wait until we see until there’s at least baseline viability before socking them with a bunch of fees? You could easily implement this by charging in arrears. Obviously you’d have to be careful to avoid burdening the system with people getting “just in case” permits such as creating tons of shell companies, but I think this can be managed.

4. Reform unemployment insurance. Benefits are too high and ideally Rhode Island should be closer to the national median. But this would be hard to achieve and a start at reform can be achieved without it. The focus here would be eliminating market-distorting cross-subsidies that favor frequent users of the system, and revisiting business successor rules that punish people for buying and saving failing or bankrupt businesses.

Regulations and Mandates

5. Reform temporary disability insurance (TDI). This is one that wasn’t on my radar until I heard Republican gubernatorial candidate Ken Block call for reform. But when I looked into it this appears to be an even bigger problem than he suggests. Rhode Island is one of only five states with mandatory TDI. The others are California, New York, New Jersey, and Hawaii, all states with fortress industries and such that make them most definitely not Rhode Island’s peer group. It has the second highest benefit levels. It has a state run monopoly system. It allows employees to double dip. And I believe Rhode Island’s program is one of only two along with California that has a temporary caregiver leave component. I’d completely repeal mandatory TDI. But again, reform of some sort should be possible without triggering political nuclear war. Eliminate the state run system and tell businesses to buy coverage from the marketplace. Eliminate double-dipping. Make temporary caregiver leave a one time only or one per decade type benefit instead of annual recurring one. Put a lifetime cap on weeks of benefits and beyond that claimants should utilize long term disability coverage. Again, whatever we think about the idea of this system, Rhode Island is a huge outlier here and has little leverage to lead the way on this.

6. Perform a post-Obamamcare health insurance mandate review. Rhode Island has more items of mandated insurance coverage than any other state. Coming from Illinois – a blue state mind you – I was stunned at how much individual health insurance costs in Rhode Island. Obamacare seems to have largely standardized coverage and I would suggest defaulting to its coverage guidelines. If Rhode Island has items that go beyond this, it should eliminate any where at least ten other states (including at least MA and CT) don’t already mandate it.

7. Pass a clean semi-monthly payroll act. Until last year, Rhode Island was the only state in America that required companies to pay their employees weekly. That was changed to enable bi-weekly/semi-monthly payroll, but only for businesses whose average pay is twice the minimum wage and can post a surety bond, get the written permission of any unions affected, and recertify with the state every four years. You know what I call that? Progress. That’s good news. But in keeping with the continuous improvement theme, the legislature should follow-up with a clean semi-monthly payroll bill.

8. Create a “most favored nation” regulatory policy with regards to Massachusetts and Connecticut. It’s hard to argue that neighboring states have different core values. So their regulatory systems should be considered prima facie adequate for Rhode Island. Unlike California, a big and rich state, businesses are not going to jump through hoops for the privilege of serving small and economically challenged Rhode Island. So to make it easy, I suggest harmonizing regulations with Massachusetts (and if possible Connecticut) to create a mini type of EU style common market effect. This could be implemented via a most favored nation policy saying that “If it’s legal in MA or CT, it’s legal in Rhode Island. If you’re licensed to do it in MA or CT, you’re licensed to do it in Rhode Island.” Rhode Island is really subscale to be running its own regulatory system anyway, so outsource it.

This doesn’t even scratch the surface of what’s needed on the regulatory front. Many of you probably saw the recent Thumbtack survey that ranked Rhode Island the worst state in the country for its small business climate, as rated by small businesses themselves. Metro Providence was ranked the second worst metro. Fixing this is actually much more critical than taxes in my view, but also harder as many of the worst regulations around land use and such are at the local level. So this is where local reformers should focus.

Utilities

When I spoke to the Rhode Island House of Representative earlier this year, the other speaker was a representative from CVS sharing his perspectives on what that company looks for in places to invest. One item he mentioned as important is utility costs. Hence my thought about utility taxes above. But beyond that, Rhode Island’s electric bills are among the highest in the country and gas prices are high too. There needs to be a focus on bringing those down. Lowering electric rates doesn’t deprive the treasury of much and actually saves money on government electricity purchases. Unfortunately, as someone pointed out to me, in Rhode Island it works just the opposite; because it doesn’t appear to be a tax, the legislature feels free to pass laws that send rates through the roof.

9. Kill Deepwater Wind by any means necessary. Deepwater Wind is a crony capitalism fiasco of epic proportions involving an offshore wind farm. Billed by some as the “next 38 Studios”, it’s actually even worse as the price tag will be hundreds of millions of dollars. IIRC, the increased cost to governments alone from purchasing inflated electricity will be $1.5 million a year. The environmentalists I know don’t even like the project. The only plus side to anybody other than cronies appears to be reduced electric rates on Block Island. Well, I may have cheaper electricity, but I don’t get to live on an amazing island. Nevertheless, if it’s important to bring those rates down, then direct subsidies would be cheaper.

10. Partner with other New England states on increasing gas pipeline capacity into New England. A while back City Lab ran a story talking about a new gas pipeline under the Hudson River into New York City. As you probably know, gas is dirt cheap right now because of plentiful supplies from fracking in places like Pennsylvania. But that doesn’t help if the gas can’t get there. The Northeast has been under-pipelined. But as you can see, New York City is seeing the infrastructure investment to bring this online. New England isn’t. Here’s the money chart showing the price spikes this produces:

I’m not sure why no new pipelines have come into New England, but I’d certainly make it my business to find out. By the way, some residents do heat their homes with natural gas. I did when I lived in the state. So beyond industrial customers, think about what that chart means to struggling Rhode Islanders’ winter heating bills.

Sadly, the state seems to be moving in the opposite direction as the legislature passed more laws this year that will at first glance raise rates still higher.

Infrastructure

11. Cut to Invest With a Major Infrastructure Bond. Bruce Katz at the Brookings Institution likes to talk about a principle called “cut to invest.” That means making cuts in current spending in order to invest in critical items like infrastructure. Rhode Island’s infrastructure is in rough shape so that approach is needed here. Interest rates are rock bottom right now so there’s no better time to borrow. As the Fed dials back on quantitative easing, the window may start closing on this. Rhode Island needs to identify cuts in ongoing spending sufficient to finance payment on a major infrastructure bond targeting roads, bridges, and schools. I’m not talking about adding any new road capacity here, just doing things like rehabbing or replacing the existing crumbling bridges and obsolete school buildings.

As the Sakonnet River Bridge debacle shows, this money is going to be spent one way or another. Better to do it now on the state’s terms instead of later when it will cost a whole lot more to, for example, fully replace decayed structures that could have been saved if they’d only been properly maintained.

Under no circumstances should Rhode Island issue a bond without the full necessary funding stream for repayment allocated up front.

12. Investigate shared startup/co-working facilities. Instead of paying companies to set up shop in Rhode Island, invest the sales effort into luring operators like TechShop to create locations in Rhode Island. These types of co-working facilities can reduce the cost of capital and risk of entrepreneurship. I’m not a big fan of government building these directly, but they are a key part of the startup infrastructure of a community these days.

Miscellaneous

13. Build more Quonsets. NYU economist Paul Romer has advocated for a “charter city” concept in developing countries along the lines of a charter school as a way to bypass dysfunction. Rhode Island already basically applied that concept at the former Quonset naval base. Quonset is everything Rhode Island is not. They’ve invested in first class infrastructure. They have a single zoning classification, business friendly performance-based development standards, pre-permitted sites, a single point of contact for approvals, and a 90 days to groundbreaking pledge. Port users even have a tax advantage in that they are exempt from the Army Corps of Engineers import duty because the state instead of the feds paid for the port improvements. The result: 9,000 jobs, including 3,500 created in just the last few years.

Why not replace this model elsewhere by partnering with towns to create more Quonsets? When I pitched this idea at a RIPEC event, an economist with Beacon Hill Institute in Boston wasn’t a big fan. He critiqued it on two basic points. One is that the businesses who located there probably would have been elsewhere in Rhode Island. The other was that the $10,000 a job in infrastructure investment was too high.

I think the first criticism is fair and must be true to some extent. Additionally, some of the jobs are directly port related and there isn’t another deepwater port handy that I’m aware of. However, there’s no hard data on this and my assumption would be that at least some of the non-port jobs must represent a net gain to the state. In any case, Quonset is the best thing going in the state right now, so why not give the model another chance? Also, keep in mind that a state like Tennessee paid $250,000+ per job for a VW plant. $10K/job – not in subsidies, but infrastructure – is small potatoes as these things go, particularly in state where the infrastructure is decrepit. I’m pretty sure if I told the legislature they could create middle class jobs at $10K a pop in infrastructure, they’d sign checks all day long.

At Quonset, the state is the developer. For new sites, I’d look to partner with a private developer, with a state authority as infrastructure partner and approval provider a la Quonset.

I won’t suggest this list is anywhere near where the state needs to be. It doesn’t address key issues as the local level like regulations that hobble building, or the corruption/cronyism issues. But hopefully this provides at least some tangible first steps that could get the state pointing in the direction it needs to go.

As with my guiding principles list, some of these items were originally suggested by other people.

Thursday, July 10th, 2014

A Toolkit for Rhode Island Policy Analysis

Sunday I described how Rhode Island’s fundamental economic problem is that it has been acting like it’s selling a premium product from a structurally advantaged position when in reality it’s selling a commodity product into a highly competitive global marketplace. Unsurprisingly, it hasn’t gotten a lot of takers.

Before giving my starter set of action items, I want to provide a brief decision toolkit in the form of a set of guiding principles or questions to help people evaluate any proposed solutions. I won’t pretend this is a totally comprehensive list, but clearly these ought to be front and center.

Here are six questions that should be asked in evaluating policy:

1. What does this proposed policy mean to us, considering our competitive context?. This is where Rhode Island has to swallow hard and recognize that it is not a premium location for business and has start behaving like and making decisions like it’s in a competitive market. That’s gonna be tough, but it’s imperative.

Another way to think of this is my question about how to best embody the values of Rhode Islanders into a contextually appropriate policy set. It may be that in some cases, economic development takes a back seat. For example, Rhode Island is a “must shelter” state for homeless families. That is, families have to be given a place to stay, even a hotel room, if they are homeless. I’m sure this costs a lot of money, but I don’t care. I’d personally be willing to sacrifice some economic growth for this purpose (assuming someone made the case that eliminating this mandate would affect that). On the other hand, is it really necessary for people on temporary disability to be able to double-dip from both their employer and the state administered benefits fund? I don’t think so.

Rhode Island has to ask what the results of a policy will be in the Ocean State, not just how well it worked out in New York, San Francisco, or Seattle. Again, like it or not, the state border is never more than a few miles away, and in today’s globalized economy, localities are at the mercy of the market. As progressive commentator Ramsin Canon put it regarding Chicago:

What we’re feeling viscerally, but seeing from too close to appreciate, is the logical end of decades of neoliberalization of government, which has transformed a managerial state into an entrepreneurial one. Our Mayors are now “entrepreneurs-in-chief,” and the result is that governance has been transformed from a participatory process of pooling resources and regulating behavior for the public good into one of government by private negotiation and enticement of capital through competition between states, cities, and even neighborhoods.
….
Why not raise property or luxury taxes, or institute a city income tax, to make up the deficit? Why not divert money from the TIF districts? See above; Chicago is no longer a political community, it is an economic entity that is in competition with other cities in the region, in the state, across the world. In that mental framework, tax is cost, or price. You raise prices, you drive away your clients.

Read the full piece for his prescription for change – again from a staunch progressive. Regardless of what we think of current conditions, anyone left or right has to start with an acknowledgement of reality.

In my view this means that in most cases Rhode Island needs to be a bandwagon jumper, not a bleeding edge innovator, on things like green energy and social service levels. Let California experiment with cap and trade or other things, succeed or fail as the case may be, and once there’s a proven model that’s economically efficient, jump on board. It’s like how flat panel TVs were originally the province of the rich, but eventually got perfected and prices collapsed down to where they became the norm. Similarly, when it comes to mandated benefits, if there’s one the state wants, rather than being one of the top five early adopters, wait till a tipping point gets hit (say 25 states) and join in then. Or think of it as a “pick your battles carefully” approach. But always be aware of the competitive context.

2. Is Rhode Island continuously improving at a rate faster than its competitors on a long term, sustainable basis? A second factor to consider is that it took a long time to get into this situation, and it will take a long time to get out. It’s just like losing weight. There is no silver bullet. There is no quick fix. There is no magic pill. We need to make lifestyle changes over the long term to get us where we want and need to be. As local consultant Kevin Hively once put it, “Rhode Island needs to change its diet, not take a shot of 5hr Energy.” And that’s dead on.

The guiding principle here should be: “Continuously improve at a rate faster than your competitors are improving over the long term.” And that’s the second way to evaluate policy proposals. Are they part of a sustainable program of change? Or are they just a flash the pan? Are they a gimmick? And are they improvements that are outpacing the improvements we know every other state is striving to make? Just because it’s better than the state’s past doesn’t mean it isn’t still falling further behind. Rhode Island needs to keep a finger on the pulse of the competition and what it’s doing. But it’s a journey and it’s lifestyle change.

And it needs to be maintained for the long term. Short term upticks can lull us into complacency. For example, as the national jobs picture improves, Rhode Island’s unemployment rate has fallen. But we’ve seen this movie before. Back in 1984 when the Greenhouse Compact failed, its opponent did a jig on its grave when Rhode Island’s economy had a moment in the sun. But it quickly faded and look where the state came to decades later. Rhode Island has to see evidence of improving strength across business cycles, not just following along in the footsteps of the national economy.

3. Is Rhode Island addressing the areas where it is worst in class or otherwise particularly disadvantaged? Since it is a long journey, Rhode Island has to know where to start and where to go next. The state should start where it’s worst in class or where it has things that are particularly causing competitive problems, the things that are directly a burden on job creation and economic growth.

For example, I hear about people wanting to eliminate the estate tax. I’m not a big fan estate taxes, and there were some particular problems with the so-called “cliff” that the legislature did something about this year. But is the estate tax the biggest thing discouraging people from starting a business in Rhode Island? I don’t think so. You have to have earn your estate first before you worry about paying taxes on it.

Similarly, the Republicans have really focused on the sales tax. Rhode Island’s sales tax isn’t low, but it’s not nearly the highest in the country either, especially when local taxes in other states are factored in. It’s almost 10% in Chicago, for example. In response to my City Journal piece, one local free market type said that his reason for advocating a sales tax cut was border arbitrage. But “beggar thy neighbor” policies and border wars are seldom positives over the longer term and generally indicative of “5Hr Energy” thinking. That’s doubly true in this case when Massachusetts has way more ammunition to fight with. The sales tax needs to be looked at competitively, but in a broader context and at a the right time.

On the other hand, Rhode Island has the worst rated unemployment insurance system in the country. That’s a direct burden on business. Places like that are where to start.

4. Is Rhode Island moving toward or away from the right balance between consumption vs. investment spending? Rhode Island government as a whole only spends 4.8% more per capita than the national average. But Rhode Island is well above average in spending on consumption items like social services and very below average in spending on investment items like infrastructure and higher education. Rhode Island spends 52% more per capita on human services than the national average. But it’s 47th in per capita higher education spending and has the 4th worst rated bridges in the nation.

I believe the state has to rebalance away from consumption towards investment. I’m not suggesting that Rhode Island gut its safety net. I’ve personally received government benefits and can attest to their importance. I won’t even say Rhode Island needs to have below average social services. But on a whole range of items it’s in the top five states in America. That’s simply not realistic given the competitive context, financial condition of the state, and the dire need for longer term investment.

But whatever your take, you should come up with a point of view on the right balance, and evaluate policies based on how they adjust the dials towards or away from that target balance.

5. Is Rhode Island promoting and de-risking entrepreneurship and the scaling of local businesses inside the state (vs. targeting large corporations and luring businesses from elsewhere)? Rhode Island needs to remember how it made its money in the first place. It did it through mostly through home grown businesses. It’s the same with other places. The Big Three were founded in Michigan. Most firms in the Bay Area started there – Google, Intel, Cisco, etc. Facebook may have moved, but it was tiny at the time.

So the state needs to adopt that mindset again. It’s going to have to grow its own success stories, and focus on creating an environment that’s conducive to that, not convincing fickle firms from elsewhere to pick it in a site selection. Post 38 Studios, I think that should almost go without saying. And again, the state doesn’t have enough financial ammo to get in bidding wars for business in any case.

CVS is an interesting case study here. It does get subsidies from the state, but fundamentally why is CVS in Rhode Island? Because, although it was originally started in Mass, the founders were from Woonsocket. So they grew it there and now the company has a huge headquarters in the state. Rhode Island needs to build more home grown success stories like that over the longer term.

6. Is Rhode Island setting policies and making investments like an integrated urban region (a city state)? Rhode Island is the city-state. People there say it a lot, but don’t act like it. Instead, all of its 39 cities and towns are treated similarly, and as completely autonomous independent entities, not part of overall urban or metropolitan region.

In the 21st century economy, it’s metropolitan areas, and particularly metropolitan areas of greater than a million people, that are the hubs of economic activity. That’s Rhode Island (aka Metropolitan Providence). That’s good news. That is a structural advantage, but the state isn’t taking advantage of it because it doesn’t make policies like it’s an urban region. Its policies today seem more like it thinks it’s collections of villages in the English countryside.

For example, when the state extends the T to Wickford Jct. and proposes to extend it all way the Westerly, that’s not investing like an urban region. When I hear people pounding the table for why agriculture is so key to the state’s future, that’s not thinking like an urban region. Clearly the tradition of New England towns isn’t going away and that limits what can be accomplished, but it’s important to ask what can be done to move the needle in the right direction.

So those are six questions to ask when assessing policy. In my final installment, I’ll give some specific suggestions for how to get started moving forward.

Full disclosure: I took a couple of these ideas from someone else who I’ll leave anonymous so he or she doesn’t end up guilty by association with me.

Sunday, July 6th, 2014

Ruining Rhode Island – Missing the Context

My latest article is online over at City Journal, and shows how Rhode Island has become an economic and demographic basket case, one not making headlines largely because the state is small enough to fly under the radar. I’ll give you a trigger warning on this one. While making clear that the Republicans of Rhode Island have hardly crowned themselves in glory, I focus on the follies of the Democrats who have had overwhelming control in the state since 1935. If you don’t want to read this one, try one my previous posts about the Tea Party instead. You can also read a response from the left at RI Future.

In my article, titled “The Bluest State,” I attribute the state’s failure to poor governance and corruption (bi-partisan), a complacent populace, and far left policies that have imposed top 5 or top 10 levels of high taxation, high service/low investment spending priorities, stifling regulations, and very powerful public sector unions on a state radically unsuited to them.

The response by some in Rhode Island was to say that while the legislature is controlled by Democrats, they are conservatives, not progressives. Or pointing out Republican failures like Gov. Don Carcieri. I have a very simple reply to that. If the policies of Rhode Island are indeed conservative, then progressives should have no problem rolling back the taxes and regulation, rebalancing spending, and curtailing union abuses there. Welcome aboard.

In any case, the macro problem is that this collection of policies was implemented in a place completely unsuited for them. The ideas were imported from elsewhere and implemented in a way that ignores the context. I plan to explore that in a three part series starting today. This post will be about the competitive context of Rhode Island. Thursday I’ll lay out a “decision toolkit” of questions that can be used to evaluate any proposed policies there. And next week I’ll give some very specific recommendations in the form of an expanded and more detailed list from my article.

Let’s start with the context. That’s something that’s really been missing from the Rhode Island discussion and is absolutely critical – because without the context, you can’t really property evaluate any proposed solutions to the economy.

I want to start by going back to the Slater Mill in Pawtucket 1793. Why did America’s industrial revolution begin in Rhode Island? There are a lot of reasons. We were a coastal country, and Rhode Island was on the coast. Rhode Island was right in the middle of that Northeast Corridor from Philadelphia to Boston that was far more dominant then than it is now. So Rhode Island was in the middle of the action – it was centrally located. It was an era of water transport and power, and Rhode Island had the seaport access, and numerous small rivers it could dam for power. It was in the intellectual center of America, and had a freethinking culture that was open to the new and the different. And once the first mill was built, Rhode Island had first mover advantage in the marketplace.

So in a sense where else in America other than New England could this have happened? Not too many places. You couldn’t have done textiles in North Carolina back then because their entire economy and culture was a slave based agricultural economy, for example. It would have been a non-starter.

So what we see is that Rhode Island and New England had major structural competitive advantages that let them initiate and then dominate the early stages of the industrial economy in America. It was like Detroit in cars, or Silicon Valley in tech today.

Fast forward a hundred years to the 1890s, and that’s when Rhode Island’s textile base began to erode. What happened in that hundred years that caused this change? Well America was a very different place in the 1893 than 1793. Instead of a coastal nation we were a continental nation. Rhode Island was no longer centrally located, it was on the periphery. The primary transport mechanism was no longer ship, it was rail. Power was no longer water, it was coal, steam, and electricity. Slavery was abolished in the South, and they had to find something else to do. Religious freedom and free thinking ways were no longer the exclusive possession of Rhode Island. And as a consequence of these changes, Rhode Island no longer had a structural competitive advantage or fortress position in the industrial marketplace. Instead, it was subject to something it didn’t have originally, and that was competition. This newly competitive environment posed – and still poses – particular challenges for Rhode Island because it is so geographically small and thus border arbitrage is easy.

What Rhode Island needed to do was to recognize that its circumstances had changed, and that it need to start acting like it was in a very competitive market instead of one in which it held all the cards. That would have been difficult in the best of circumstances candidly. But it didn’t do that. And I’d argue that’s true up to the present day. And it’s easy to understand why. Rhode Island had a 100 year run in a market dominant position. Keep in mind, Detroit only had 60 years of success and dominance in autos, max. Rhode Island had a hundred years of industrial dominance, and successful merchant trading and such industries before that. So clearly that stamps the thinking of a people. It has to. But nevertheless, the situation has changed.

And that, fundamentally, is the most important thing to understand about Rhode Island’s condition. It’s been acting like it’s still selling a premium product from a structurally advantaged position like it was at the beginning, when it’s actually selling a commodity product into a highly competitive global marketplace. It’s been trying to sell a commodity product at a premium price point in terms of costs, taxes, regulation, etc. and unsurprisingly hasn’t gotten a lot of takers. The stone cold reality is that with limited exceptions, Rhode Island has no marketplace leverage. One might blame this on federal level neoliberal policies, but that doesn’t make reality any less real for the Ocean State.

The state hasn’t recognized its problem of trying to sell a commodity at a premium price point. That’s for several reasons. First is that the policies that are intended to embody Rhode Island’s values were imported from other places that have radically different conditions. Rhode Island is a state with progressive values. There’s nothing wrong with those values and in fact I share many of them. But where do the policy ideas that instantiate progressive values come from?

To just pick an area that’s been a debate in the gubernatorial race, every Democratic candidate has pledged to raise the state minimum wage to $10.10/hr, which would be the highest statewide level in the country. Where did that idea come from? Did it originate in Rhode Island? I don’t think so. So the question we need to ask is where did it originate, and what are the conditions like there?

I’d argue most progressive policy ideas come from three primary places: San Francisco, New York, and Washington, DC. And if you look at those cities, or other progressive capitals like Boston, what you see is that they are like Rhode Island was back in 1793. They have a structural competitive advantage in the marketplace because they have captive, high value industries that are bound to the geography where they are located, operate at global scale, and spin off huge amounts of cash. Wall Street prints money and it isn’t going anywhere. Silicon Valley isn’t going anywhere. Speaking of printing money, the federal government literally prints it and is not pulling out of DC. Harvard and MIT aren’t moving out of Greater Boston. These places have cash registers that never stop ringing. So those cities can get away with doing things Rhode Island can’t because it no longer has those fortress industries like they still do today. So the state has been importing policy ideas from places that are nothing like Rhode Island.

That includes the rest of New England. If you pan back the lens, what you see is that there are really only two poles of wealth in New England. One radiating out of Boston. The other out of New York City into Connecticut. To the extent that you’re able to tap into Boston or New York money, you’re doing pretty well. To the extent that you’re not, you’re likely as bad off as Rhode Island. Most of Massachusetts, its so-called Gateway Cities and all that, are exactly like Rhode Island. Connecticut is chock full of struggling industrial cities like New Haven and Bridgeport. Even their white collar economy is in trouble.

The states of Massachusetts and Connecticut only are able to do what they do because of the high value they capture in Boston and places like Greenwich and Stamford. Even New Hampshire similarly is almost entirely dependent on access to Boston money. Rhode Island simply looks worse, because it has less access to New York and Boston money than those other states.

That’s where I’ll actually defend Rhode Island’s leadership. In a previous article, I argued that Rhode Island’s problem isn’t poor leadership. I’d like to qualify that. Rhode Island has indeed been poorly governed, and that’s a problem. But it hasn’t had uniquely bad leadership. Some people like to say that the problem is Rhode Island’s leaders are stupid whereas those in other states are smarter or less venal. I don’t think that’s the case. Three House speakers in a row got indicted in Massachusetts. But you can get away with things in Massachusetts that you can’t in Rhode Island because of the Boston area economy. It’s like Warren Buffett said: when the tide goes out we get to see who’s been swimming naked. The tide went out on Rhode Island a long time ago whereas some other places have been luckier in that regard.

This is a painful reality for the state because Rhode Island takes its cues from its neighbors. But they’re richer. It’s like three brothers, one’s a doctor, one’s a lawyer, and one’s a teacher. The teacher isn’t going to be able to live in as a nice a house as his brothers. That’s just financial reality. And that’s the situation Rhode Island is in. Because neighboring states have access to money from fortress industries. Rhode Island doesn’t. They’re market makers; Rhode Island is a market taker.

Another aspect of missed context is that Rhode Island has over-estimated its quality of life advantage. It really struck me when I was living there that the idea that Rhode Island has a markedly superior quality of life to other places is just sort of taken for granted. It’s a bedrock axiom. I think the quality of life is good in Rhode Island. I’m not going to criticize it. And I think that the assumption of superiority actually was true not that long ago.

But I visit a lot of places, and I can tell you, America has really raised its game in the last two decades. I live Indianapolis now, and when I first started spending time there back in the early 90s, to be honest, it was like Siberia. You wouldn’t want to live there unless you were from there. Today, it’s completely different. Indianapolis has more and better microbreweries than Rhode Island, better coffee, pretty good restaurants – not as good as Rhode Island’s but definitely serviceable – a big farm to table movement, their own local fashion magazine – I mean like a real print magazine – and a lot more. It’s night and day.

Rhode Island hasn’t fully woken up to how much better life has gotten in a lot of places you never would have considered living before. There’s a new level of competition out there that was never there before.

Add it up and Rhode Island needs to have a big mindset shift. My observation is that candidly, it’s had an entitlement mentality. I attribute that to three sources I talked about above:

One is Rhode Island’s rich historic legacy which is a justifiably proud history. Part of that legacy is its history as a highly competitively advantaged economy in the past. But that history can blind the state to the reality of today, which is very different.

Two is that Rhode Island feels entitled to live like its neighbors, its brothers if you will, in New England, when they’ve got better jobs.

Three is that Rhode Island hasn’t recognized the extent to which other places have improved their quality of life such that its advantage is much slimmer than it realizes.

Rhode Island has to realize that it is not entitled to live like it used to or like California lives today. And that’s tough to accept. In America especially, with this deep seated narrative of economic progress, regression is a bitter pill to swallow. We’ve seen the results of that in post-industrial America across the board.

That doesn’t mean rejecting every progressive idea. It does mean assessing what makes sense for the state in light of its weak marketplace position. The values of Rhode Islanders have to be embodied in a policy set that makes sense with its own economic competitive context, not somebody else’s.

The problem here is that there’s hasn’t been indigenous R&D to create locally appropriate policies. That’s actually one reason I started my site so many years ago when it was focused on smaller Midwest cities. Those cities were – and sadly still are for the most part – passive importers of ideas about what cities should be. I wanted to start a conversation about Midwest cities on their own terms. I’m all in favor of stealing good ideas from anybody, even NYC. But you have to ask whether it makes sense locally and how to do it. And also be developing your own “in-house” ideas as well. That’s what I set out to do with this site.

So if Rhode Island wants to perform differently, it needs to create an indigenous R&D capability, especially as most national progressive ideas emanate from elite citadels, which Rhode Island is not. This will be hard because to many of Rhode Island’s intellectual elite came from places like New York and Boston, and thus are steeped in that way of thinking.

But I have an idea. There are a lot of people in Rhode Island who are heavily involved in boosting the fortunes of developing counties. Would they go into a developing country and say that the leaders there should adopt California style taxes, services, and regulations? No way. They’d realize that these places need to start with where they are at. The immediate needs in many places are better governance (esp. less corruption), basic services like clean water and sanitation, education, upgrading infrastructure, and facilitating economic development. Rhode Island isn’t a developing country by any means, but it’s not California or New York either. No matter how much people in Rhode Island might be in agreement with the values or policies of those places, the state is simply in a completely different situation. It needs to focus on the basics. So maybe those Rhode Islanders who are involved in developing country work can try to think about Rhode Island through that lens to see what ideas can be generated. Again, Rhode Island is NOT a developing country, but there may be things that can be learned.

The good news is that change is possible. Though Rhode Island has huge problems and a long road back to recovery, I believe there’s certainly a lot of room to believe that it can be a lot more successful than it is. I’ll delve into the specifics of a starter program in the next two installments.

Monday, May 19th, 2014

Know Your Marketplace Leverage

I’ve noticed so often that urbanist policy suggestions or case studies are treated as universals. That is, with a presumption that a good idea or policy can be replicated pretty much anywhere. Clearly, there are a number of items like bike lanes and trails that would appear to be widely applicable, and for which the best practice standards would appear to work without much modification in most places. On the other hand, this isn’t true of everything.

Where do most urban progressive policy ideas come from? From what I’ve seen, these tend to get wide currency when the come from one of the major urbanist citadels like London, New York, Washington, San Francisco, or Portland. This doesn’t always mean that was the place that came up with the idea, but it often is. But these cities are very different from your average, workaday type place.

One problem with our analysis of these things is that they seldom take into account the amount of marketplace leverage a particular place has. Let’s take New York, for example. That’s a city with immense marketplace leverage, meaning that people and businesses are willing to put up with enormous cost and hassles to live, work, and do business there. In particular, the finance industry, which remains heavily centralized in New York as one of the two top global finance centers, generates tons and tons of cash. Most places don’t have that. It’s similar for tech in the Bay Area, government in Washington, DC, etc. These places have high value industries that are bound to the geography they are located and generate immense wealth and tax revenue. That means these places can get away with a lot of things other cities can’t. They’ve got a cash register that never stops ringing.

One current case study is Seattle’s raising of the minimum wage to $15. First the small city of SeaTac raised its minimum wage to that level. SeaTac has 27,000 residents, but also includes SeaTac airport as the name implies. Airports employ a large service class who can benefit from a minimum wage increase. And most airport service businesses don’t have the luxury of moving off airport. That gave SeaTac marketplace leverage to raise the minimum wage significantly without huge risk to its employment base. SeaTac airport isn’t going anywhere.

The city of Seattle itself has followed suit with a graduated increase to $15/hr. Again, Seattle is, like San Francisco, a city of the elite or on its way. The cost of doing business there is such that most businesses that are cost sensitive are already gone or on their way out the door. The coffee shops and other establishments with lower paid workforces mostly can’t move without losing their customer base. So in my view Seattle also has more leverage than your average city in setting this policy.

It would be tempting to look at the Seattle case and say that other cities should raise their minimum wage. But for places without the concomitant marketplace leverage, it could prove to be economically disastrous.

So understanding that degree of marketplace leverage you have is critical to evaluating local policies where the result could affect competitive positioning. Cities with greater marketplace leverage will have more flexibility to have local specific policies that might otherwise disadvantage them by raising costs, regulatory hurdles, etc. They can afford to be in the vanguard of policy experimentation.

Places that fail to take stock of this do so at their peril. One place that has clearly done that is Rhode Island. It has basically acted like it’s entitled to put into place the same sorts of policies as next door Massachusetts and Connecticut, but without the captive high value industries to finance it. Massachusetts has the global power of greater Boston with its unmatched universities, tech, and biotech clusters. Connecticut has access to New York money. Rhode Island doesn’t have anything like this.

Unfortunately for the Ocean State, it doesn’t seem to get it. I think in part that’s because the state’s intellectual elite – its cultural 1%, so to speak – live in a different reality. Many of them have lived and worked elsewhere like Manhattan and chose to move to Providence for lifestyle. Or they are affiliated with Brown or RISD, two atolls of actual competitive advantage in the state. They look around and see that they are in Rhode Island and they can compete at the global level, so they push for the same sorts of ideas that they used to have back when they actually did live in Manhattan or wherever, without realizing that the other 99% of Rhode Island can’t compete at that level.

Back in early 2013, I summed it up like this:

The basic problem of Providence (and by extension the rest of Rhode Island) becomes obvious: it is a small city, without an above average talent pool or assets, but with high costs and business-unfriendly regulation. Thus Providence will neither be competitive with elite talent centers like Boston, nor with smaller city peers like Nashville that are low cost and nearly “anything goes” from a regulatory perspective.

One reason it’s unlikely they’ll escape from this dilemma is that in my view they aren’t ready to face up to the reality of where they stand in the market competitively.

Acting like you have leverage when you don’t can be a serious problem, but you can also “leave money on the table” when you do have leverage and fail to take advantage of it. Just as one example, Indianapolis has a “beggar’s mentality” when it comes to development. It just so happens that because of the tourism/sports business and the locals penchant for chain dining that upscale national chains have some of their best locations anywhere in downtown Indianapolis. It’s literally one of the most profitable places in the country for that kind of business – not that you’d know it from the way the city treats them.

As one example, a BW-3 was built on Washington St. downtown a couple years back. As it turned out, they built something contrary to their approved plans and which violated numerous design guidelines of the city. Did the city make them fix it? Nope. So BW-3’s insult to streetscape humanity was allowed to stand. The city had a lot of marketplace leverage in this case, but didn’t recognize it or wasn’t willing to use it.

The lesson here is that you need to take stock of the amount of marketplace leverage you have, and tailor your approach accordingly. This is part of coming up with an urban solution set that is right for a specific place and not just a bunch of imported ideas from elsewhere pursued without thought.

Also, cities should also be asking what they can do to add to their marketplace leverage. Hopefully over time as they continuously improve, their intrinsic attractiveness will go up, which will accrue leverage benefits right there.

Tuesday, February 25th, 2014

Supersize Your Development by James Kennedy

[ Last week Jef Nickerson told us about a proposed strip mall development in inner city Providence. This week James Kennedy of the blog Transport Providence pans back the lens to look at the bigger picture around this kind of development – Aaron. ]

The McDonaldization of Society

McDonald’s is no stranger to the love and hatred of people all over the world. It’s most vocal opponents have faulted it for being the robotic extension of a hyper-efficient assembly line. An important urban planning model is getting more and more attention across the country, and its models show not that auto-centric businesses like McDonalds are hyper-efficient, but the opposite. Even successful sprawl is a sinkhole for huge government subsidies, and results are that municipalities seeking new tax revenue from them may be shooting themselves in the foot.

One of the most prominent critique of McDonald’s is George Ritzer’s “The McDonaldization of Society.” Ritzer’s central thesis is that McDonald’s has perfected what Max Weber called “bureaucratic rationalism” in the use of its resources to such an extreme as to have dehumanized the process of eating.

I talked to Ritzer on the phone and by email, finding some of what he has to say about McDonalds interesting. Overall, though, I am a critic of his perspective. A lot of his examples of creeping McDonaldization don’t seem all that troubling to me. Quoting from his book:

  • “The department store obviously is a more efficient place in which to shop than a series of specialty shops dispersed through the city or suburbs. In addition, the shopping mall increases efficiency by bringing a wide range of department stores under one roof.” Certainly the disappearance of Main Street stores from many small towns and cities is something to be concerned about, and especially in its suburban form the shopping mall has meant lots of low-wage, high-turnover jobs that require huge amounts of wasteful driving and land use to produce endless streams of unremarkable places to shop. But what has to be understood is that Ritzer means to go beyond the big box store as an example of one-stop-shopping and criticize the idea of mixing different types of buying at all. In Providence, where we recently struggled over the addition of a new sprawled-out McDonalds and Family Dollar in Olneyville Square, Ritzer’s critique could not only apply to suburban places, but also to the newly-refurbished Arcade in Downtown, or even to the Winter Farmers’ Market in Pawtucket.
  • “Supermarkets have sought to make shopping more efficient by institutionalizing ten-item limit, no-checks-accepted lines for consumers who might otherwise frequent the convenience stores.” To have a more humanized society, shoppers expecting to pick up just a few items should apparently wait in line with people buying hundreds of dollars of items. As someone who values transit and biking, this example particularly irks me, because the ten-items-or-less line is a good demonstration of exactly the advantages brought with transit or bike lanes. I see this example as a huge stretch.
  • “Shopping also offers many examples of imposing work on the customer. The old-time grocery store, where the clerk retrieved the needed items, has been replaced by the supermarket, where a shopper may put in several hours a week ‘working’ as a grocery clerk, seeking out wanted (and unwanted) items during lengthy treks down seemingly interminable aisles. Having obtained the groceries, the shopper then unloads the food at the checkout counter, and in some cases, even bags the groceries.” Ritzer described the problem with imposing work on the customer as its effect on job creation. I personally can’t wrap my mind around why it would be bad for customers to be able to decide they want to order in a line or collect their own napkins and condiments in return for a lower price.

Certainly there are problems with fast food businesses, but I find Ritzer’s explanation of what those problems are to be lacking. I’m actually a very economically liberal person in many ways, but I also value consumer choice, and I feel like the McDonaldization thesis actually is a perfect combination of nanny-state patronization without any deeper analysis of how working class neighborhoods and businesses are fleeced by welfare-queen corporations.


Urban3 believe cities can increase their economic stability and community benefit by analyzing how architecture, planning and policy impact a community’s revenue base. (Image Credit: Urban3)

It’s Not About Fast Food

There’s another way of looking at McDonalds that sheds more light on its problems. The urban design and economics firm Urban3 in Asheville, N.C., uses math that’s receiving a lot of attention from national media. Urban3 asks, should cities be after any kind of economic growth or should they focus instead on how much growth they can squeeze out of an acre of land? The group produces some astounding visual models of what economic output per acre looks like, and its work has helped cities such as Memphis, Tenn., visualize what the balance between land use and economic growth actually looks like.

The firm first noticed the relationship between land use and real value in North Carolina, when staff worked to restore a JC Penney store that had been vacant in Asheville’s downtown for four decades. Made usable again, the property went from being worth $300,000 in 1991 to $11 million in 2012, according to a story about the firm’s work to restore the building, which takes up about a fifth of an acre.

The real insight of Urban3’s logic comes when one contrasts the value of the Walmart just outside of town, valued at almost twice the JC Penney building’s assessment. Emily Badger writes in The Atlantic article:

“Asheville has a Super Walmart about two-and-a-half miles east of downtown. Its tax value is a whopping $20 million. But it sits on 34 acres of land. This means that the Super Walmart yields about $6,500 an acre in property taxes, while that remodeled JCPenney downtown is worth $634,000 in tax revenue per acre. (Add sales tax revenue, and the downtown property is still worth more than six times as much as the Walmart per acre.)”

Urban3 contends that although businesses such as Walmart, which operate in similarly car-centric way to a McDonald’s with a drive-thru, appear to bring far more revenue than other businesses, that when looked at in a broader context are actually very inefficient at producing wealth.

I set out to apply his model to Providence, and found some interesting results.

For example, 235 Thayer St., home to a Chipoltle on the ground floor, carries exactly the kind of fast-food fare that Ritzer derides. Sitting on less than a tenth of an acre, the building is worth $636,100, according to the most recent tax assessment. The Whole Foods Market down the street at 261 Waterman has a small parking lot out front, and is valued at $2,222,300. But taken at a per-acre value, the Chipoltle wins hands down — $7 million an acre to the grocery store’s $1.5 million.

The lesson to draw from this isn’t that grocery stores are a bad investment. Though located in a less-valued neighborhood and worth just a bit more than $400,000, God Is Able African Market, in three-story building at 743 Cranston St., is worth $2 million an acre — half a million more than the Whole Foods. Fertile Underground, at 1577 Westminster St. on the West Side, came in at about $3 million per acre, trouncing a 6-acre Super Stop & Shop on Manton Street, worth more than $6 million, but only $1.1 million per acre.

In Olneyville Square itself, Recycle-A-Bike occupies the bottom floor of a building worth $200,500, but with a land footprint of just one-tenth of an acre, the building is worth 10 times that much on a per-acre basis compared to some other businesses in the area. The nearby Olneyville New York System has a parking lot in back that increases its footprint to a fifth of an acre, making the $272,600 building worth only $1.3 million an acre. The United Way at 50 Valley St. is assessed at nearly $600,000, but with a land footprint of 1.4 acres comes in at $423,000 value per acre.

I asked the city to provide tax information for a number of other businesses, many of which the city was surprisingly unable to locate in its tax records. These included a number of McDonalds restaurants built in suburban styles, a Home Depot which I had intended to contrast with a small neighborhood hardware store, several suburban and urban-style buildings that had Dunkin Donuts—which I figured is the ultimate in low-cost fast food—and a larger Whole Foods grocery store with even more parking which I was interested in contrasting with the smaller footprint one on Waterman Street. There were also several businesses in Olneyville that weren’t located.

Minicozzi emphasizes that it’s not just about how much value is created by an acre of land, but all the many extra costs that low-density development has.

“I think you have to ask yourself, what is the lifecycle cost of the road out front of the business? How much did it take to run sewer service across several acres of land for just one business, instead of connecting it ten feet from the next building over?” he asks. “If you’re in a nice three-story Victorian and someone just plops a gray box next to it, it’s not only about whether you dislike that box. Does that box pay its bills? I think the answer is no.”

Taxes in Providence are based on property values rather than land use, so some of the very small but very efficient businesses we studied pay very high taxes in relationship to the amount of infrastructure they consume.

I spoke with Nina Maxwell and Mike Giroux of Fertile Underground to get a sense of what one high-value-per-acre business pays in taxes. Fertile Underground pays $500 a month in taxes. But the costs to this small business go much further. “We pretty much have a permit for everything. I mean everything. There’s one for selling ice cream, and one for having chairs inside, and yet another for having chairs outside,” Maxwell says. “We had to pay the state a couple thousand dollars to put in bike racks on the sidewalk.”

When the zoning board in Providence approved the development of the McDonalds, alongside a Family Dollar of similarly sprawly style, it put forth the argument that while the businesses weren’t ideal, they were a step forward for a neighborhood with high unemployment. But the pattern of taxation and business-unfriendliness for small startups alongside bad land use and high consumption by sprawl businesses asks questions about whether that small-step-forward approach is exactly backwards. This isn’t helped when many of the officials in charge of directing policy admit to having no understanding of how these things work. Jim Bennett of the city’s economic development office testified at the meeting as follows:

You would think I would be supportive of this project because of the jobs, and there are jobs. I’ve checked it out, they’re accurate. The jobs particularly that are attuned to the minority community where we’re getting crushed.· We have probably the highest minority unemployment in the country; this addresses that issue. That’s not why I’m supporting the project.

You would think I’m supporting it because the property taxes are going to be raised between 5 percent and 10 percent. Several hundred thousand dollars, which could be used for infrastructure, schools. That’s a reason to be supportive of these jobs.

I went by and I got a picture of every building in Olneyville, every one. I looked at them and there’s not one business there that wouldn’t benefit by the increase in traffic. So that’s another reason to support it. However, my reason for being here … is that I do support the councilwoman who works with me at Providence Economic Development Partnership, who helped me get our loan program out of trouble with HUD, who I like to kiddingly call my assistant economic development director, who knows her constituency better than anybody. That’s who I support.

And lastly, and this is very important. Bob Azar, for 13 years he’s been involved with every major project in the city of Providence. The reason why this city is a jewel is because, part and parcel, of Bob and his staff. I have to tell you, I’m the director of economic development. I don’t know the first thing about zoning and planning and all this stuff, nor do I want to, but I’m a business person. I rely on the experts, that’s what I do. A lot of the work that Bob has done for 13 years here is seen around the city.

So Bennett’s points seem to be 1. I don’t know anything about this, but listen to me. 2. Things that expensive and harmful, like highway traffic through a low-car-ownership neighborhood, have only an upside without any counterbalance, and 3. I’m supporting this because my buddy in local government does. Very convincing.

Bennett initially agreed to set up an in-person meeting with me on behalf of ecoRI News to discuss the new development, but the morning of the scheduled meeting his secretary wrote to cancel, citing snow. I offered to do an interview by phone, and sent an e-mail with questions pertaining to the lifecycle costs of things such as Routes 6 and 10, the sewage overflow system that was just installed in Olneyville, the underground water pipes to the site and RIPTA efficiency. Bennett didn’t reply to requests for an e-mail or phone exchange.

At least one Rhode Island city has a different approach. Central Falls, located north of Providence, and itself quite a struggling rust-belt town, but the director of economic development for CF, who is also an Olneyville resident, spoke at the zoning meeting to recommend that the businesses themselves be approved, but only with the zoned urbanism intact. He said that Central Falls had been approached by a Family Dollar for its historic Broad Street and had insisted on no set backs from the sidewalk, and that Family Dollar had complied.

The Central Falls example gives one hope. In a state the size of Rhode Island—a state that also has the highest unemployment in the country, a shrinking population, and lots of unmet road infrastructure obligations around its neck—we should be able to get our heads wrapped around the idea that land is limited and has value that should be protected.

A version of this post originally appeared in a ecoRI on February 21, 2014.

Tuesday, February 18th, 2014

Providence: The Suburbanization of Olneyville by Jef Nickerson

[ Providence, Rhode Island was spared some of the worst of the urban renewal disasters and has a lot of intact neighborhoods. But there have still been some not entirely positive changes in the urban fabric in others. One such neighborhood is Olneyville. As you can see in this aerial, there’s an old mostly intact neighborhood commercial center at the core, though with areas of demolition. The area is also cut off by a freeway.

In the piece below Jef Nickerson discusses a proposal for a strip mall in the area that would further degrade the urban fabric. (It’s near the bottom left of the photo above). This is sadly what happens in many struggling areas where a desperate city approves suburban style “redevelopment” that’s actually destructive to the only things giving the neighborhood appeal in the first place.

As an aside, I believe this development is across the street from the legendary Olneyville New York System Wieners. Somewhat oddly, the term “New York System” actually means “Rhode Island style.” Here’s a picture of the classic, complete with cheese fries and coffee milk (like chocolate milk, but made with coffee flavored syrup – another Rhode Island classic).

- Aaron.
]

mcdonalds-rendering
Rendering of proposed McDonald’s and Family Dollar store on Plainfield Street in Olneyville.

After learning of plans for a drive-thru McDonald’s proposed on Plainfield Street in Olneyville, I requested plans for the proposal from the Planning Department.

The developer is seeking master plan approval from the City Plan Commission for the construction of a McDonald’s and Family Dollar store in a separate building on a site which was cleared of existing structures last year.

mcdonalds-plan

Per the CPC agenda, the applicant seeks relief from front yard setbacks (they are requesting to set the building further from the street than allowed) and also for a special use permit for a drive thru for the McDonald’s. The applicant plans for a total of 56 parking spaces on the site (per the plans, 19 parking spaces in two rows between Plainfield Street and the Family Dollar Store). The McDonald’s is situated on a corner lot (Plainfield and Dike) with the drive thru lane wrapping around the building between it and the sidewalk. Pedestrian access to the McDonald’s is proposed to be via two crosswalks across the drive thru lanes and a third crosswalk from the Family Dollar store across the parking lot. Direct off-road pedestrian access to the Family Dollar store is only provided via crosswalks from the McDonald’s or via sidewalks crossing a driveway entrance on the Atwood side of the parcel.

According to ProvPlan, as of the 2000 census (the most recent data available) 59.5% of households in the Olneyville area have automobiles this compares to 52.5% Downcity. With such low car-ownership numbers, the residents of Olneyville are highly dependent on public transit, walking, and bicycles. Buildings separated from these forms of transit by parking lots with drive thru lanes are not the best way to serve this population. Olneyville is a major traffic artery to points west where car ownership rates are much higher (~80% in Hartford and Silver Lake). The residents of Olneyville should not be further burdened with automobile infrastructure catering to people outside their community.

The removal of the buildings at this site has widened a widened a gap in the street-wall along the south-side of Plainfield Street and Olneyville Square which only had small gaps between the Route 6 overpass and the eastern end of the square. For generations Olneyville has fallen victim to the automobile, first the highways, them the retail mindset that set in in the middle of the last century with places like the former Price Rite plaza, the car wash on Westminster, the Burger King with a drive thru and 60 parking spaces, and the gas station across from this site.

The Olneyville community has been working hard to bring street-life back to the square and Olneyville Housing are providing homes for residents who can walk to this area. Allowing auto-centric design at the southwest side of the square will make that area dead to walkability for generations more, just as we’re making progress on reversing prior generations of damage.

This isn’t about the proposed retailers (though I’m sure we could have a long discussion about the food choices we have in lower-income neighborhoods), this is about their physical manifestation in the neighborhood.

This post originally appeared in Greater City Providence on January 15, 2014.

Wednesday, January 29th, 2014

America’s Most “Godless” Cities?

The American Bible Society does an annual survey related to what they call “bible mindedness.” The latest results were just released and I was surprised at the amount of media airplay it got, including sites like Time Magazine and Likecool. But perhaps it should be easy to see as this is the type of analysis that can appeal regardless of where you stand on God.

But I found their results and methodology questionable in terms of supporting the conclusions the media drew from it. Here’s the chart (click to enlarge):

Time called this a list of “the most godless cities in America” but in fact it is nothing of the sort. The survey measures instead “bible mindedness,” which they measure using frequency of reading it and a degree of belief in its accuracy. In order to be considered “bible minded” you have to have read the bible within the last seven days and strongly agree that it’s accurate.

This immediately raised a caution flag to me. Obviously it is Christian oriented (though the question set is designed to capture Jewish scripture reading). But the bible minded definition is clearly Protestant-centric. Perhaps I generalize, but historically even devout Catholics tended not to read the bible regularly. My Italian grandfather may have been the most devout Catholic I ever met. Until his very old age he went to mass every single day, said the rosary three times a day, and other things like that. But I never once saw him read a bible.

So we shouldn’t be surprised that the least bible minded metro in America in this survey is Providence, because Rhode Island is either the first or second most Catholic state in America, depending on the survey you use. Whereas the most bible minded city, Chattanooga, is in the least Catholic state. (See this HuffPo piece for some stats. Pew says Rhode Island is 43% Catholic, though how many are practicing is another question).

Practicing Catholics believe in the bible, but don’t generally interact with the text in the same way Protestants do. As a result, surveys that focus heavily on personal bible reading shouldn’t be used as a proxy for Christian religiosity in general, hence most of the conclusions that have been drawn from it are likely wrong.

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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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.

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