Wednesday, November 28th, 2012
Here’s a gorgeous time lapse of San Francisco. The only thing I would have changed is the music, since they used the same track as the incredibly awesome Le Flâneur (Intro by The XX). In any event, definitely full screen for this one. If the video doesn’t display for you, click here.
If you still want more, here’s a San Francisco installment from the “Empty America” series. If the video doesn’t display, click here.
Tuesday, July 31st, 2012
[ Mark Suster is a former Accenture guy like me who left to become a serial entrepreneur and is now a partner in a Los Angeles based venture capital firm. He writes an excellent blog on the tech industry called Both Sides of the Table that draws on both his entrepreneurial and VC experience. I consider it a must-read for those interested in tech. A recent story of Mark's caught my eye as it's relevant to cities and comes from a bona fide investor, not urban booster, perspective. He graciously gave me permission to repost it here - Aaron. ]
Like many I read the headlines about Pinterest moving from Palo Alto to San Francisco and thought about the trend it portends. For those not familiar with the local geography, Palo Alto is the north end of what most consider “Silicon Valley” although nobody local calls it that. Palo Also is about 35 miles south of San Francisco.
Palo Alto is home to Stanford. It is the birthplace of Hewlett Packard. And Facebook. It is adjacent to Mountain View, home to Google. Further to the south are the legendary companies of Cisco, Apple, Intel, eBay, Yahoo!, Juniper and countless others.
Back in 2006/07 when I sold my company and then worked at Salesforce.com there were very few options in SF for technology folk to build their careers at big, growing companies.
Today there’s many. In addition to Salesforce.com (the 800 pound gorilla) there is also Twitter, Zynga and Square – just to name a few. And now Pinterest.
So why all the movements towards cities? It’s clearly more expensive for office space and living. In addition to higher rents many cities impose city taxes on local businesses. It’s clearly a complex topic without black-and-white answers.
Fred Wilson ponders this in his post “Cause and Effect”
Technology innovation doesn’t occur in a vacuum. It happens in a dialog with society. And sci-fi writers are but one example of the way society impacts technology.
I think that’s one of the reasons that many of the most interesting Bay Area startups are choosing to locate themselves in the city. And it is one of the reasons that NYC is developing a vibrant technology community.
Society is at its most dense in rich urban environments where society and technology can inspire each other on a daily basis.”
I’m sure there’s a lot of truth to that. I see it first hand in Los Angeles where given the growth of YouTube networks the worlds of art & technology are colliding. It’s becoming harder to distinguish tech companies from media companies.
Many “tech companies” now have green screens. And make-up artists. And costume & set designers. And sound engineers. And post production. And writers! And even … yes … actors.
I can’t say for sure, but it feels to me like the re-urbanization of technology companies is driven by a broader trend of the tech industry overall – cloud computing. In driving down the costs of building businesses it’s driving down the age of startup founders and thus they’re starting companies where young people want to live – in urban environments.
I’ve been meeting with LPs (those who invest in VC funds) over the past year and discussing trends I see in the market and where I think we need to be as a firm to be near to and meet the needs of our customers.
One of the major trends I’ve outlined is this movement of entrepreneurs (and as a lagging indicator venture funds) to more urban environments.
And it’s not just the movement from Palo Alto to San Francisco.
The same phenomenon is happening in many places.
- In Massachusetts companies (and VCs) have migrated from out by Waltham to Back Bay (Boston) or Cambridge.
- In LA companies used to be concentrated near Pasadena or in the San Fernando Valley. These days it’s Santa Monica and Venice. Not exactly “urban” in the way you think of SF or NY but certainly relative to the suburban communities of LA and at a minimum it’s where young people want to live / hang out
- In England they were all in The Thames Valley (45 minutes west of London) and these days they’re all near Shoreditch east of London
- I think NY has always – by definition – been urban. But there does seem to be huge startup energy around the Flatiron District / Union Square.
For those that aren’t aware of the broader technology shifts of cloud computing, the trend is described in a post I did about changes in the software industry.
The costs of building a company have gone down dramatically, from $5 million to get to launch in the late 90’s to $500,000 (or even lower) today for web companies.
As a result younger people are creating startups because they can. It’s far easier as an inexperienced 23-year-old to get $200,000 from somebody than $2 million or $5 million.
So we’ve seen an explosion in the number of startup companies and subsequently a huge burst in the number of incubators.
I think the urban tech renewal is happening for the same reason.
It’s not that young people wanted to live in Mountain View in the past. In fact, so many DID NOT that companies like Google & Yahoo! had free buses with wifi from San Francisco to their Palo Alto and Sunnyvale headquarters.
Young people want to live where the action is. They want to live amongst other young people. They want nightly restaurants, bars, dance clubs, karaoke, or whatever other late night activities are available to those with fewer encumbrances.
You know the story. You get older. You get married. You have a kid. Then another. Suddenly you feel the pull for a backyard and nearby parks. And a bigger house wouldn’t hurt so that when your mother-in-law is in town for 3 weeks it doesn’t feel like you see her quite so much.
So you move outside the city – even though you feel a strong pull to stay. It’s why many of the older executives at San Francisco startups live in Marin County and commute in. Or they do so from Burlingame, San Ramon or even Palo Alto.
I suspect the shift from the burbs to urban environments – or more specifically to places where young, single, technical startup people WANT to live – will continue into the future and will not decline.
And with startups so go VCs. Spark Capital, Flybridge, Founder Collective, NextView Ventures … all in Boston or Cambridge not west of the city.
In San Fran you find more recently established VCs like True Ventures, First Round Capital, Freestyle, Kii Capital and others.
And there has been a similar move from Sand Hill Road to Palo Alto itself with firms like SoftTech VC, Felicis Ventures, K9, Accel, True Ventures (other office) and Floodgate.
In NY you find the broader Flatiron / Union Square are home to USV (obviously), IA Ventures, First Round Capital, FF Ventures and the incubators General Assembly and TechStars.
I’m sure I’ve forgotten many who have moved or set up anew since I wrote the list in one sitting and with no research.
In LA the VC shift is clearly to Santa Monica / Venice, home of Rustic Canyon, Greycroft, Anthem and just about every incubator (Amplify, Launchpad, Mucker, Science).
GRP’s offices are near Beverly Hills. Our lease runs out in 2013. No prizes for guessing where our new offices will be located
This post originally appeared in Both Sides of the Table on July 10, 2012.
Wednesday, May 9th, 2012
For my email subscribers who missed this update, the OECD report on Chicago actually now is available online. Thanks to Jim Russell for pointing this out.
Researchers at Carnegie Mellon University have developed a new way of looking at neighborhood definitions they call livehoods that determines de facto neighborhoods using an algorithm that looks at Foursquare checkins. It’s pretty cool, especially as the maps they generate are interactive. Here’s a static shot of San Francisco though to show you want they look like:
I found this via the excellent Flowing Data blog that I’d encourage any data visualization geeks to check out.
Think, Act, Impact Indianapolis
Another interesting infographic comes to us from the folks at People for Urban Progress. They put together an infographic showing how things get done in Indianapolis city government. If the zoomable image embedded below doesn’t display, click here to check it out on PUP’s site.
Wednesday, January 18th, 2012
I have a few miscellaneous items for you today. First I’ll highlight this brief piece from Chicago reporter Tracy Swartz, who rode all 139 Chicago bus routes end to end.
Next, an interactive infographic on Silicon Valley (California) vs. Silicon Alley (New York). I clipped it slightly to fit my blog template, so to get a full sized version, or if it doesn’t display for you, click on over to the University of North Carolina site where it came from.
Economic Security Report Card
The Urban Institute also put out an interactive map that let’s you explore economic security in US metros. They’ve got various factors that go into this, and while you can’t add your own, you can adjust the weightings on theirs to create your own overall score. This one won’t fit on my page, so you’ll have to click on over to check it out. Here’s a static screen shot for you, however.
Via RecreActiva – Guadalajara’s Ciclovia
Streetfilms did a nice short piece on the the Ciclovia program in Guadalajara, Mexico’s second city. (If the video doesn’t display, click here).
Thursday, November 10th, 2011
Update: The NYT just ran an interesting story called “In Shift, More People Move In to New York Than Out” that provides further info on this trend using recent Census data.
My latest post is online over at New Geography. It is called “Back to the City?” and examines the question of whether in fact there has been a movement back to the city. Census figures suggest that while many downtowns flourished, albeit often showing large percentage gains on a small base, cities generally underperformed in the 2000s vs. the 1990s.
In this piece I look at intra-metro migration to measure people moving from the city to the suburbs and vice versa. Because data is only available at the county level, I selected four cities where counties offered a good proxy for the urban core: New York, Philadelphia, San Francisco, and Washington, DC.
As you can see from the chart above, there has been a shift in trends in the 2000s, with out-migration falling off late in the decade, while in-migration remained steady or even increased. The most striking trend was in Philadelphia, as shown above. That chart shows the migration values plotted as a index to render them in the same scale. There is still a net out-migration to the suburbs, but the gap has narrowed in these places. Here we see that on the chart with raw numbers:
Obviously with the late decade featuring a steep recession and housing bust, migration has been affected. It remains to be seen what will happen in the future. But these numbers do clearly show improvements for core cities in the underlying migration trends.
Wednesday, September 28th, 2011
I can’t resist yet another great urban time lapse, this one of San Francisco. If the video doesn’t display for you, click here.
Friday, January 28th, 2011
[ As a follow-up to my Cost of Clout piece I am re-running this 2008 post demonstrating the important of social structures and culture to urban success. ]
There seems to be a popular belief that what it takes to create an industry cluster in bioscience or whatever is to pair research with commerce. That is, to find an academic institution doing cutting edge research, and connect it with venture capital and entrepreneurs to start companies to commercialize it. Soon enough, you have a “cluster” of businesses that takes off like a rocket. This is the perceived Silicon Valley model, and no company epitomizes it more than Google, which was started by two Stanford students to commercialize their graduate research.
But is this true? There are many top flight research universities in this country, but few major startup clusters. When major research institutions fail to generate commercial spinoffs, this is often blamed on a lack of venture capital. But is that really the case, or is something else at work?
Anyone interested in this matter simply must read AnnaLee Saxenian’s seminal book, “Regional Advantage: Culture and Competition in Silicon Valley and Route 128“. A social scientist at UC Berkeley, Saxenian lived and worked in both Silicon Valley and Boston’s Route 128 technology corridor. She wondered why Route 128, which started out with far more of a technology business and economic base than Silicon Valley, eventually lost ground to become a clear number two. She sees this resulting from the different social structures that exist in the various areas.
According to Saxenian, Route 128 suffered from a culture that was oriented towards a traditional maturing industry, not a rapidly changing one like technology. This included more deliberative decision making; vertical integration and self-sufficiency; hierarchical, centralized command structures; focus on economies of scale; a high friction job market; geographically dispersed locations; and low levels of cooperation and sparse networks between firms in the region. In other words, all the standard traits of a typical large corporation. While she doesn’t dwell on this point, it also comes across that Boston, probably due to its New England locale with all the history there, was a much more closed society. The social network and hierarchy was more fixed (the phrase never appeared in the book, but I couldn’t help but think Boston Brahmin) and the process of establishing trust and credibility much slower than California. While famous as one of the bluest states, Massachusetts is socially conservative in many ways, and highly risk averse. This is the land of the suit and tie, and the difference between that environment and California casual was more than just a surface thing.
Silicon Valley, of course, was just the opposite. It adopted social structures that were very focused around innovation and time to market. It was open, with rapid, decentralized decision making. Firms quickly specialized, focusing on their core competency, and established close links with suppliers to fill in the rest of the value chain. These links were often such that it was not clear where one company ended and the other began. The clearly functioned on high degrees of trust. Even direct competitors often talk to exchange ideas and help each other solve problems. Here’s a quote:
Competitors consulted one another with a frequency unheard of in other areas of the country. According to one executive: ‘I have people call me quite frequently and say, “Hey, have you ever run into this one?” and you say “Yeah, about seven or eight years ago. Why don’t you try this, that or the other thing.” We all get calls like that.’ (33)
Clearly this is quite unique. I’m not even sure if it’s all legal, but hey, it works for them.
The job market in Silicon Valley is extremely fluid, with people constantly changing jobs, starting companies, etc. It is expected that you won’t stay that long with any given employer. Route 128 operated on the “company man” model and to leave was to show disloyalty, often resulting in ostracism. Since Silicon Valley was a new country with almost all immigrants of one type or another, family history and credentials meant little. What mattered was whether you could perform.
Now of course it was almost entirely men, originally white men, who set this up. The tech industry is famous for being one of the most gender imbalanced. What I found particularly interesting was that many of the founders had Midwestern roots. Again quoting:
This collective identity was strengthened by the homogeneity of Silicon Valley’s founders. Virtually all were white men; most were in their early 20’s. Many had studied engineering at Stanford or MIT, and most had no industrial experience. None had roots in the region; a surprising number of the community’s major figures had grown up in small towns in the Midwest and shared a distrust for established East Coast institutions and attitudes. They repeatedly expressed their opposition to ‘established’ or ‘old-line’ industry, and the ‘Eastern establishment.’ (30, emphasis added)
The many examples of engineers with humble origins who became millionaires by starting successful companies had no parallel in the more stable social structures of the East. Jerry Sanders, founder of Advanced Micros Devices … grew up in south Chicago, the son of a traffic light repairman. (38, emphasis added)
To digress for a moment, remember how I said the contrarian, ornery Hoosier/Midwestern attitude is, in the right context, a huge strength, not a weakness. This shows that in action. These guys didn’t toe the conventional wisdom line. Instead they created a whole new business model. I’ve got to believe the Midwest mindset played a huge role in making this possible. The unfortunate thing is that they had to leave the Midwest to do it. Imagine if they’d stayed home and made it happen around one of the great engineering schools there? Alas, to this day Midwesterners often have to leave to turn things into reality. Famously, Marc Andreessen had to leave Illinois to start Netscape, and in fact had U of I actively hampering him all the way. If the Midwest cracks the code on this piece alone, it would be a huge step in the right direction.
(By the way, for a wonderful look at how these Midwesterners invented Silicon Valley and the “elder days” of semiconductor business, see Tom Wolfe’s 1983 Esquire essay, “The Tinkerings of Robert Noyce“.)
These extremely fluid job markets, open social institutions, high trust customer and supplier interactions, and competitor information exchange create an environment of so-called “dense networks”. In a period of rapid change and innovation, these networks, by efficiently distributing information and dispersing risk, create an environment with very rapid speed to market and high levels of adaptability. A traditional Route 128 do it all yourself model simply can’t keep up with the power of this vast network.
It was this network, more than anything, that created the Silicon Valley we know today. The “cluster” we see in Silicon Valley is not an artifact of spatial co-location. It comes from the network. According to Saxenian:
Spatial clustering alone does not create mutually beneficial interdependencies. An industrial system many be geographically agglomerated and yet have limited capacity for adaptation. This is overwhelmingly a function of organizational structure, not of technology or firm size … The current difficulties of Route 128 are to a great extent a product of its history. The region’s technology firms inherited a business model and social and institutional setting from an earlier industrial area. (161-162).
Sound familiar? It describes the Midwest perfectly. What I find interesting is how Saxenian illustrates her thesis not using a struggling Midwestern burg as a case study, but rather Boston’s Route 128, the second largest technology hub in America, home to possibly the greatest collection of universities in the country, with massive access to capital, etc. If this town had its problems, how much more so places without those advantages? It certainly shows the scale of the challenge in building industry clusters.
Obviously, changing the social structure, culture, and institutions of a region is difficult to do. Even positive articles highlight the scale of the challenge. I’ll refer a recent article on Milwaukee startups that I linked that quotes a local businessman saying, with some pride I gather, “Milwaukee is a one-strike-you’re-out town.” That’s not a good thing. Silicon Valley shows that failure and risk taking are good. The way to innovate is to figure out how to try lots of things and to fail quickly and cheaply. If you are overly concerned that you’ll be permanently ruined if your business goes bankrupt, you’re not that likely to take a chance.
It reminds me of a discussion I once had with a friend from Germany. He told me, “We’re the children of the people who stayed” and bemoaned the highly conservative outlook of his countrymen. He noted the extreme reluctance to take risks because in Germany, if you go bankrupt, you’re stigmatized for life. Obvious some of that carried over to heavily German Milwaukee.
I should note that one should not over-internalize Saxenian’s case studies into some sort of cookbook solution. Every city and region needs to find its own unique path to success based on its own culture, institutions, history, etc.
I would be remiss I did not point out a few areas where I was skeptical of the Silicon Valley model. One intriguing factoid from the book was that in 1962 federal government purchases, principally defense related, accounted for over half of Route 128’s sales. Indeed, the area got its start in technology through defense related research during World War II. Could it be that dependency on government contracts is really what caused the dysfunctional culture there? Government largesse encourages rent seeking behavior at the expense of building a competitive business.
Also, Saxenian highlights how the non-business social networks in Boston substitute for the type of technology networks in Silicon Valley. But is this a bad thing? The books paints a portrait of Silicon Valley as a bunch of geeky guys who toil away long hours on tech projects and even talk about technology at the bar when they do go out. It’s like a community of idiot savants. Some might say “get a life!”
What’s more, there is some research that suggests dense networks themselves aren’t a recipe for success. In an thought provoking paper called “Why the Garden Club Couldn’t Save Youngstown” Sean Safford contrasts the experiences of Youngstown and Allentown, both small steelmaking cities. Despite similar dense networks, Youngstown failed while Allentown fared much better. His conclusion that was the dense networks in Youngstown only reinforced an already closed leadership circle who were economically aligned, while Allentown’s served to bridge otherwise non-overlapping groups.
Perhaps to a great extent, the key attribute is less the networks themselves, than the ability of outsiders and new thinking to penetrate them. Silicon Valley’s social structure was open, Route 128’s wasn’t exactly closed, but there were barriers to entry. In a globalized world of ever faster change, the ability to respond and adapt, to process new ideas and react to rapidly shifting global forces, is critical. This puts a bit premium on dense social networks that are also open and flexible.
This is somewhat the thesis also of Richard Florida. He has a somewhat different spin, saying that the economy is now powered by the creative class, and they want to live in places that are open, tolerant, etc. This is his “three T’s” model: talent, technology, and tolerance. The last appears not to be so much valuable in its own right, but for what it says about the openness of social networks. Thus a large number of gays in a community isn’t what drives economic growth per se. Rather, a thriving gay community is a signaling mechanism that lets people know that diverse ideas and people are welcome.
I think we all know places where the social network is impenetrable. This isn’t necessarily a function of size, prosperity level, etc. I mentioned the Boston old money, social register concept. In any number of southern cities, who your daddy is, or what sorority you went to in college is a huge determinant of your place in a social hierarchy. If you don’t come from the right family, the right schools, etc., you can forget it.
Perhaps this explains my Cincinnati conundrum. Here’s a city with better assets than almost any in America, but it is one of the all time relative decline stories in US history and to this day is on a moderately stagnant, slow growth path. Why is that? There was an intriguing study I saw recently called Who Rules Cincinnati? [dead link] This is by an independent researcher named Dan La Botz, who I get the impression is some sort of hard core left activist, so keep that in mind. Nevertheless, he uses a similar approach to the Garden Club study to track social networks in the city, coming to the conclusion that officers of seven major corporations basically run Cincinnati, mostly to that city’s detriment. Another person I know offered the interesting insight that when he meets someone in a bar in Cincinnati, the first question they ask him is where he went to high school. This both indicates a highly inbred culture as evidenced by the assumption one must have gone to high school in Cincinnati, and shows that the school you attended is an important social marker. (It perhaps also shows a lack of regard for higher education).
It could be that the Midwestern cities that have the best potential for future growth are those with the most open social networks, as well as exhibiting other of the characteristics Saxenian cites. I think this would be fertile ground for social science research. It also makes me wonder if perhaps that goes part of the way to explaining the relative success of the Midwest’s larger state capitals. State capitals constantly have people traveling and doing business there from all corners of the state. This flow in and out might potentially prevent a social structure from completely congealing into a small, impenetrable elite. I sense another potential dissertation topic here.
The key takeaway is not to focus on purely the institutional infrastructure (universities, venture capital funds, labor force, etc.) when trying to set out an economic strategy. The local culture, norms, and social practices, and in particular the density and openness of the social networks is critical. Clearly, as anyone who has found themselves mired in a corporate or governmental bureaucratic organization, changing a culture is an extremely difficult thing to do. But it is something that clearly warrants an examination.
This post originally ran on July 13, 2008.
Thursday, December 16th, 2010
Lots of cities are trying to build up high tech/internet industry clusters. I think there’s room for a lot of places to significantly boost their employment and business formation here, particularly in focused areas, but the top hubs like Silicon Valley have huge advantages that mean they’ll likely stay on top of the heap for quite some time.
A brief story about a company called Formspring illustrates this. Formspring is a spin-off of an Indianapolis online form vendor called Formstack. (Actually, Formstack was originally called Formspring, but the spinoff business became so big they changed their name). Formspring was one of those crazy social media growth juggernauts that signed up something like 15 million users in only eight months.
Of course, they needed money to keep up with this, and so went looking for investors. In the interview below from July with Formspring CEO Ade Olonoh, the interviewer described this as an “iconic super-angel funding round where every bold faced Silicon Valley name put money into you guys.”
The entire process end to end lasted 12 days. Somehow they got a conversation with Steve Anderson of Baseline Ventures. After a few phone calls over the first week, the Formspring team flew out to Silicon Valley where Steve arranged about 10 meetings over two days with a who’s who of investors, people Olonoh admitted he couldn’t have even listed on a whiteboard before the process started. Shortly thereafter the funding round was closed and Formspring relocated to Silicon Valley. Here is the entire interview, if you are interested. (If the video doesn’t display, click here).
In Silicon Valley they just plain move faster than everywhere else. That’s a huge advantage. And they have a huge reservoir of strategic investors who bring not only dollars to the table, but significant experience and expertise in growing businesses.
Another advantage is talent. In staffing up the business, Formspring was able to hire a couple people who worked on Second Life. Though the competition for developers in Silicon Valley is intense right now, the talent pool is still the world’s most robust for this type of business.
Similarly, talent and access to capital led a couple of University of Chicago entrepreneurs to relocate their enterprise to Silicon Valley. As WBEZ reports in “The One That Got Away.”
They didn’t go with the intention of staying. After all, Lieb and Mintz still had another year of B-School ahead of them. But like lots of good tech companies, the train barreled down the tracks at breakneck speed.
They took part in a summer business incubator program run by Y Combinator. By the end, they got a big, fat $3 million check from the venture-capital firm Sequoia Capital and some Valley angel investors.
But just because they got the money there didn’t mean they had to stay. They could have come back to Chicago. But they didn’t. They opened their headquarters in Mountain View, California, and now have 15 employees there and are “aggressively hiring.”
Lieb says the main reason was because Huibers lived in California already. But there was another reason that speaks to Silicon Valley’s dominance.
“We knew we needed to hire a bunch of people, and being here in the Valley is really where all that technical talent is,” Lieb said in an interview.
And even though they did talk with venture capitalists in Chicago, there aren’t as many of them and they’re more cautious, Lieb says.
Now all is not doom and gloom here. I don’t think a place like Indianapolis was a great fit for Formspring. It’s a perfect fit for B2B businesses like Exact Target, but a mass-consumer social networking site is not the city’s sweet spot. So I wouldn’t feel too bad about losing the business. Similarly, WBEZ also reported how Groupon has ignited a startup boom in Chicago.
But I think this story shows some important differences in the capabilities and ways of doing business between the Midwest generally and Silicon Valley. (For example, there appears to have been a media blackout in Indy regarding the relocation. I read about it in the New York Times). It shows why the Valley has had such staying power, and why it is so hard to build and sustain an innovative tech cluster like this over time.
Friday, October 15th, 2010
California has a case of the same disease that felled the Rust Belt. Will the patient survive?
The troubles of California, and their causes, are a widely discussed topic these days. America’s most populated state by far, its successes and failures always loom large in the national consciousness. In the last year we’ve seen the state face a massive $42 billion budget deficit and the humiliation of having to issue IOU’s as payments. Its pensions are radically underfunded and there are other long term structural budgetary problems. Parts of the state were ground zero for the housing collapse and among the highest foreclosure zones in the country. Unemployment, high everywhere, is particularly so in parts of California. California, the place people once moved to, is now the place the move from, as the state is experiencing net domestic out-migration, leading to the prospect of losing a representative in Congress for the first time in its history. A complicated political system has led to decision making paralysis. Even disasters like wildfires have been played up.
There are no end to explanations for this which, unsurprisingly, tend to follow people’s political beliefs. To those on the right, California is the ultimate blue state, with high taxes, an anti-business mindset, and environmental and other regulations designed to send people and businesses fleeing for the exits. To those on the left, California’s problems are the comeuppance for decades of unchecked sprawl, the ultimate car culture, and runaway exploitation of resources. Whatever your particular policy pet peeve, California must be it.
But is this really the case?
The real problem could be much more simple and yet much more terrifying in its implications. California has simply now outgrown its youth and is now well into its middle age. Like the Rust Belt before it, California is now old. As with people as they age, “chronic lifestyle diseases” hit places too. These are: unfunded liabilities, the end of growth economics, and institutional rigidity, each of which builds on the one before it.
I’ve long noted that places have an incredible tendency to accumulate unfunded liabilities, most of them of the “off balance sheet” variety. The temptation to defer problems into the future is simply too great for most governments to resist, hence structural imbalances build up over time. The sources of these liabilities are many, but here are some key ones:
- Deferred Infrastructure Investment. As populations and development grow, infrastructure is built with a lag and generally there is a lack of funds for completion. As a result, cities and states end up with deficient infrastructure for their size, leading to all sorts of problems such as traffic and transit congestion. Clearly, California is suffering here.
- Infrastructure Maintenance. Similarly, cities build some infrastructure, then “sweat the assets” as long as possible. Infrastructure is often not well-maintained, and the periodic capital refresh unbudgeted. Condo associations do reserve studies and set aside funds to meet future capital needs such as roof replacements to avoid painfully huge special assessments, but government do not. I have yet to see any city or state that even has a schedule of major assets and infrastructure with needed maintenance and replacement timeframes, much less funding for any it. California’s Golden Age infrastructure is now aging, and it is facing repair bills merely to maintain what it has.
- Underfunded Pensions. Politicians love to sweeten public sector pensions. This buys both labor peace and a powerful political constituency. These are seldom funded at adequate levels – and with the rapid growth in life extending technology, it’s questionable whether any level of funding is sufficient – leading to major problems downstream. California’s pensions are unfunded by upwards of $300 billion.
- Other Redevelopment Costs. When ever homes and buildings are shiny and new, things are great. But what happens when your building stock gets old like in Rust Belt inner cities, and often no longer meet the functional and technical demands of the modern day, such as sizes, layouts, energy efficiency, etc.?
Add this all up, and it’s a huge bill that eventually comes due. The most important thing to understand about this is that the bill attaches to the territory, not to the people. So residents and businesses can avoid paying up simply by leaving for another jurisdiction. It’s like being able to run up a huge credit card bill in someone else’s name, then skip town.
This ability to run up massive deferred and unfunded liabilities, then leave, sticking other people with the bill, is one of the most powerful forces driving greenfield development. Even if there weren’t a drop of subsidies to, say, suburban expansion, the financial incentive to escape the huge liabilities of central cities and older suburbs is a key incentive on its own.
This why I’ve said it is critical to find ways to prevent governments from accumulating these liabilities in the first place.
The End of Growth Economics
Look at companies and industries. There is a standard growth curve to them. They start out in incubation and infancy, then, if successful, on to growth, then finally to maturity and decline. Why would we think that what is true for firms would be different for places? Why would we think that cities or states are immune from the forces of creative destruction? The answer is, they aren’t.
Having done consulting in the retail industry for some years, I often observed the growth curves played out in companies. Category killers came along and grew and grew and grew, seemingly as unstoppable juggernauts. But eventually, they hit the end of their growth phase, and had to endure a period of wandering in the wilderness. The reasons for this are varied – market saturation and consequent over expansion, changes in the marketplace, insufficient infrastructure and operational disciplines, more nimble competitors – but we’ve seen it played out before our eyes in America. Think McDonald’s, Home Depot, and the Gap.
The logic and economics of high growth are fundamentally different from that of operating a more or less steady state or low growth business. In the growth phase, everything is oriented towards expansion, mostly building more infrastructure to keep up with it. Also, scale economics are in your favor. With more people, for example, you are spreading fixed costs across more bodies and more buildings, so you can spend more money and tax less per capita all the same time. Your brand value is expanding with size, etc. That’s all great if you can pull it off.
But when something causes growth to take a hit – maybe accumulated liabilities, resource exhaustion, jurisdictional limits, etc – the equation changes radically. You can no longer rely on growth to provide unit cost efficiency. You have to start thinking like an operator. That is an extremely difficult mindset shift and requires a totally different set of skills. From what I’ve seen, companies have an extremely difficult time doing this. They generally have to struggle for some time, usually bring in new leadership, and undergo painful structuring. Many of them never really recover. But some do. I think of McDonald’s, which stopped relying on store growth to fuel its engine, but now relies on product innovation (Angus burgers, coffee, salads, etc) and operational effectiveness.
California, for whatever reason, stopped growing. The trends in domestic out migration make this very clear. The fact that total population has not declined doesn’t matter. Most Rust Belt states never actually physically lost population. Their growth simply slowed to a crawl. And it was the most entrepreneurial and high skill classes that fled. In California that his been somewhat masked by outsized productivity in the technology sector and international immigration, but the overall trend is clear. California now has to think like an operator. Welcome to the world of legacy. California is now a gigantic “brownfield”.
As California struggles with this transition, the scale economics start to go in reverse. As people and businesses leave, the unit cost of all those unfunded liabilities looms large. Just as growth begets growth, decline begets decline. If you are young and ambitious, why stay in California and pay off all those pensions? All things being equal, it is much better to leave for a more greenfield location, where you can benefit from running up the credit card, not paying off someone else’s bill. If not arrested, decline eventually reaches a tipping point, as we’ve seen in so many Rust Belt cities.
The third symptom of civic aging is a creeping institutional rigidity that makes change difficult. In established, mature places, there many, many powerful institutions and interest groups. These can often be forces for good, but too often become barriers to change or getting things done. What’s more, these institutions were typically created in the past to meet the perceived challenges of that time and age, but survive today in a world that is very different. As most institutions are never sunset, and new ones form over time, there is a gradual accumulation of friction over time. Eventually, the gears and seize up.
These institutions can take many forms. Constitutions and political structures, non-profits, clubs and social networks, various trade-offs and political accommodations and deals from over the years, power structures, corruption, local business practices, unions, recipients of government funding, taxpayer or other advocacy groups, political party organizations, business groups, etc. Much is made of California’s many times amended constitution as a barrier to change, but that is only the tip of the iceberg.
As decline sets in, a toxic dynamic takes hold. In a growth mode, it is very easy for everyone to hold hands and sing kum-bah-ya. It’s comparatively easy to cut deals to divide the fruits of prosperity. In decline, those deals come back to haunt. The status quo is failing, but people are still profiting from it. Even in Detroit, America’s ultimate failed city, so many people and groups benefit from the current system that there is complete paralysis. No one wants to give up an inch of hard won gains, especially since in a dismal region there’s little hope of replicating that privileged position or income. Hard times promote solidarity, some say. But the reality is that hard times also often produce selfishness and civic dysfunction as well as people cling desperately to what they have instead of looking boldly forward to the future.
I’ve seen this shift happen in a few cities. Where once civic boosters dreamed of glory and invested their own money into the city, now they focus on what they can get out of it. So too in California. Everyone knows the Titanic has hit the iceberg, but they are determined to loot as many state rooms as they can before shoving the women and children out of the way and commandeering the life boats.
This institutional rigidity is another force driving people to greenfield locations. It’s a global phenomenon. Consider this Newsweek coverage of a study of Chinese industry that notes much lower levels of corruption and better governance in new cities than old.
An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou–all were industrial backwaters in 1978, and responded to China’s opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.
Jim Russell hypothesizes that this effect of frontier geography explains a lot of the success of the Sunbelt, which industrialized late.
Cities such as Austin, TX and Charlotte, NC have offered a frontier opportunity akin to the one observed in the boomtowns of China. On the other hand, Pittsburgh stagnates. Governmental reform is key for attracting investment and stimulating growth. This is unlikely to happen in Western Pennsylvania, leaving this region at the rear of economic globalization.
For Pittsburgh, substitute California and you’ve got a pretty good picture.
Writers like Joel Kotkin like to reminisce about the Golden Age of California, and the leadership of that age from enlightened members of both parties like Pat Brown and Ronald Reagan. But you can never go home again. That letter jacket from your high school glory days might still fit, but you’re never going back to the state finals. Brown and Reagan were products of their era – an era that no longer exists. While they might be better executives than Gray Davis and Arnold Schwarzenegger, even if you assume they could get elected today – unlikely – I doubt they’d prove much more effective.
It’s been said that China will get old before it gets rich. Well, California got rich first – but it still got old. Not old demographically, but old civically. The polity of California is now well into middle age. As with people, places that reach that point experience a mid-life crisis as they look back longingly at the optimism, energy, flexibility, dynamism, and endless capacity for reinvention of youth. That’s often a bitter pill to swallow.
Can California Recover?
Can California pull out of this? It’s hard to point to a lot of examples that offer hope. But California has a lot going for it. It’s got the stunning climate and physical geography. Cities like San Francisco and Los Angeles remain powerful. In addition to the technology and film industries, California also has a robust agricultural sector, an entrepreneurial immigrant base, as well as an American hub for contemporary art and other creative fields besides the movie business. So there’s a lot of assets to build on.
The challenge is that these existing strengths are part of the institutional rigidity. Another way to say “build on assets” is “defend the past”. Other than the its physical setting, the assets of California only exist because previous generations didn’t build on assets. If they did, Silicon Valley would still be orchards, not the powerhouse of the global technology industry. If a city or state is failing to create new industries, it has economically stagnated, no matter how prosperous it might be or appear for a time.
Looking at the Rust Belt, we do see that tier one global cities have managed to renew their cores. Chicago, New York, and Boston have glittering city centers and a migration back to the city of upscale residents. This is a far cry from the sour days of the 70’s. But if you look beyond those zones, you see places with surprisingly unimpressive metro area statistics in many regards. And the states they are in look at lot like, well, California. A handful of metro thriving cores can’t energize an entire state or even metro area. Places like New York and Illinois have major structural challenges of their own. And California has already followed this program, with booming regions that are among globalization’s winners, with many larger areas of losers. Of course the alternative is worse – look at Michigan, with the same failures and no global city to even partially make up for it.
The global city phenomenon perhaps illustrates the way. Cities that have experienced that boom like to pat themselves on the back. Indeed, there has been some good leadership along the way. But when something happens in most similarly situated cities, you have to look first to a common force acting on them. Chicago, New York, London, etc. all had their own Rust Belt eras and suffered in the 70’s and 80’s. Starting in the 90’s a large number of what we now call global cities had urban core booms. As Saskia Sassen noted, the new networked global economy requires new financial and producer services, that tend to be concentrated in global cities. In effect, the global city is an emergent property of the globalized economy, just like the company town was in a previous era. I noted previously with regards to Chicago that it was the artifact, not the architect.
To me that shows that a state like California needs to look at and understand the macrotrends affecting it and the world, and figure out how to position itself to profit from them. One area it is trying to do so is in the “green economy”. I’ve got a few problems with “green jobs”. The first is that the entire concept of a green economy is a transitory one. Likely in a decade or so it will be gone. There will no longer be green industry, but only industry – it will all be green. This immediately prompts the question of whether, since we’re not going a very good job of competing in traditional industry, we’ll do any better in green industry. Indeed, China and others are already making a move here.
The other aspect of this is the huge gamble California is placing on the environmental trend. That is, it has imposed the strictest environmental controls in the world. There is no doubt this is one factor causing a lot of short term pain. But the state hopes that in the long term this will attract talent and, what’s more, position it for future success because other states will be forced into the same painful restructuring for environmental issues in the future and California will be ahead of the game. California’s ultimate goal here is clearly to push to federalize its policies to prevent any other states from not following its lead and producing a differentiated product. Because international migration is so much more difficult than domestic, this would, in theory, eventually help staunch the flow of people out of the state. Other states no doubt realize this and will resist the push at the federal level. It remains to be seen how this turns out on many fronts.
Other than that, it is difficult to identify a strategy California has other than more of the same. While the green realm might be a good place for California to put some chips, I don’t think piling everything on one square is a good idea, so new ideas are clearly needed.
And these economic strategies will only be ultimately a success to the extent that they enable California to reach an equilibrium and either successfully make the transition to an operator, or somehow reignite growth.
I would suggest that California and other maturing jurisdictions should look to partner with academics in our economics departments, and especially our schools of business, who have studied industry growth and maturity curves, and how to manage that transition over time, strategically and operationally.
Has the United States Reached Maturity?
Given the problems of California and the current Great Recession and associated talk of American decline, it’s worth asking the question: has the United States matured? That is, are the life cycle forces that are hurting California now affecting America as a whole?
Let’s consider our three harbingers: unfunded liabilities, the end of growth, and institutional rigidity. Clearly, we’ve racked up huge unfunded liabilities, just like every industrialized nation. I believe we are projecting a deficit of $1.8 trillion this year alone and that doesn’t even count off balance sheet problems like social security and medicare. So a definite check mark in that box.
As far as institutional rigidity, clearly we observe some. There is no doubt that it has gotten harder to do things in America and that one of the key advantages of China is its greenfield location and lack of this cruft, not just its low labor costs. Regulatory arbitrage, for example, can be a powerful motivator. Still, I haven’t observed a ridiculous amount of change here in my lifetime. At the federal level, it has always been hard to do things in America, by design. I do argue that in some areas we’ve turned the dial too far. In a country that desperately needs to make transportation investments, it shouldn’t take a decade to get approval to build a new transit line, for example. But on the whole the United States still feels like a fairly dynamic society to me.
Which brings us to growth. Clearly we have been in a major recession. The question is whether our best days are behind us. I say clearly No here. America is demographically healthy. Compared to Europe we have comparatively high birth rates, more or less replacement rate, in our native born population. This shows a society with confidence in the future. Also, people from around the world are still voting with their feet to come here. And I believe we’ll get back on economic track eventually.
But this is where the warnings signs should be looked for. If growth dries up, I believe the institutional rigidity will enter that toxic cycle and we could be in trouble. Keep an eye on immigration. When people stop wanting to come here – because they don’t want to pay taxes merely to pay off yesterday’s unfunded liabilities, because they think there are better opportunities elsewhere, or whatever – and especially if Americans start leaving in any material numbers, we’ll know we have a major problem on our hands.
Obviously no one can predict the future, but I remain bullish on America.
This post originally ran on October 8, 2009.
Sunday, August 22nd, 2010
Last week I taped a segment for a film project on privatization. For some reason, people keep seeking me out to be the guy that will take an anti-privatization point of view. That always puzzles me because I’m generally favorable to it. I’m a big fan of the Chicago Skyway and Indiana Toll Road leases, which were clearly grand slam home runs. Chicago pocketed over $100 million from a privatization of Midway that didn’t even go through because the winning bidder couldn’t line up financing and had to forfeit their deposit. $100 million just for running an auction has to be the all time greatest ROI in the history of privatization. The recent Indianapolis water company “privatize to yourself” transaction was a pretty good deal I thought.
The fact that I cite all these long term infrastructure lease deals as examples of privatization, and that this is what everyone typically thinks of regarding it these days, shows how much things have changed in this field in just the last couple decades. Think back about 15-20 years ago and the types of deals privatization pioneers like Stephen Goldsmith did. He’s now a deputy mayor of New York City and formerly a Harvard professor, but then he was mayor of Indianapolis. Goldsmith undertook 80+ privatization deals. His approach was rooted in a conservative vision of good government where he believed that by subjecting what was formerly a government monopoly service provider to competition from the marketplace, he could reduce costs and improve quality of service. While as a moderate Republican he had free market sympathies, he wasn’t acting out of some innate hostility to government. In fact, he allowed the government employees who were already providing the services to bid on them, letting them up to propose how they would go about doing it if freed from the previous rules that tied them down. And those employees actually won some of the deals.
In retrospect, I think you’d have to classify this as a success. Some of these deals were criticized, and anytime you do 80 of anything you’re probably going to run into problems. But because these deals were periodically rebid, vendors had to stay on their toes and if they screwed up they could be sacked or replaced at the next tender, which happened on a regular basis. The risk was manageable, the benefits clear.
This is a very different type of privatization than the infrastructure leases above. Those deals aren’t about bringing competition to bear on service provision at all. They’re about jackpots. They are about substituting one monopoly service provider for another, and splitting the resulting monopoly rents between the government and the private sector. Rather than being rooted in a vision of how to improve government services, these deals are about how to generate cash from under-performing assets. It’s an investment banker mindset, not an operator mindset.
That’s not to say they are bad, as the examples above show. But they are very different. One of the biggest differences is that unlike Goldsmith’s deals, these are extremely long term contracts, often 50-75 years. This makes them very risky undertakings. If you sign a bad deal, the consequences are much more severe. Also, these deals generate large up front payments. Because of that, particularly in an era of financial crisis for our cities, there is an enormous structural incentive for mayors who operate on a four year election cycle to grab that pot of money, even if it means signing a bad deal.
The Chicago Parking Meter Lease
Which brings us, of course, to perhaps the most controversial privatization deal of recent years, the Chicago parking meter lease, which continues to generate negative press for the city. A recent provocatively titled Bloomberg piece, “Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry,” had this to say:
Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue. Standard Parking Corp., which runs 30,000 spaces at the city’s O’Hare and Midway airports, earned 4.84 cents on that basis last year, data compiled by Bloomberg show. The deal illustrates how Wall Street banks, recipients of more than $300 billion in taxpayer bailouts in the worst credit collapse since the Great Depression, are profiting from helping states and cities close record recession-induced deficits by selling bonds and leasing public properties.
Oddly for a financial publication, this piece ignores the time value of money. But I think it’s fair to say that it’s likely Morgan Stanley got a very good deal on these meters. They closed this deal about the same time the Midway one fell apart. The fact that financing was readily available in tight market for the parking meters while it was impossible for Midway tells you everything you need to know about the relative merits of those deals financially.
But even if Chicago didn’t extract the last penny of value out of the parking meters, so what? It’s highly unlikely you are going to win huge in every deal. In fact, the more of them you do – and Chicago has done several – the more likely you’ll encounter a loser. Chicago got massively overpaid for the Skyway and Midway, and on a portfolio basis I feel confident the city is still a net winner from privatization on a cash basis even if it theoretically could have gotten more for the meters.
The Real Problem: Policy Risk
The problem with deals like the parking meter lease is that they aren’t like buying a stock, which is an entity with a purely financial purpose, and where if you screw up the worst thing that happens is that you lose money. They’re a lot more getting married. And if you marry the wrong gal – particularly with no option of divorce for 75 years – the consequences are a lot worse than a bad stock pick.
I’ve long said that most of the critiques of the Chicago parking meter lease are overblown. They’re good fodder for gotcha journalism, but not much more. But even so, this deal, and any deal like it, contains serious fatal flaws.
The main problem with the parking meter lease is that it locks the city into a particular policy structure on parking for the next 75 years. In order to get someone to pay $1 billion up front, you have to give them certainty as to the quantity, location, hours, and rates of the meters. All of these matters are thus written into the contract. In effect, Chicago has irrevocably set public policy with regards to parking for the next 75 years.
This might not matter for something like a toll road. Firstly, unlike with parking, there’s a track record here of successful deals. Second, tolls roads by design are built to stand apart from the territory through which they pass. They are purposefully isolated. This is one reason so many urbanists hate freeways. If you get something wrong on a freeway, you affect it but not necessarily everything else to a great degree.
But with on street parking it is very, very different. Parking spots are the curb lane of your streets. Your streets are the primary public space in your city. They are intimately connected with everything that happens in the city, which is one reason parking policy is so politically controversial. On street parking – in contrast to garages, which are very different – is a fundamental and integral element of urban planning policy. In effect, these deals aren’t about just parking spots, they are assigning a property right interest in the biggest component of public space in the city to a private monopoly that doesn’t have the public’s best interests at heart. The city of Chicago has ceded a portion of its urban planning powers to a private company.
I’ll show some of the consequences of this momentarily. But first I’ll address the response that the city hasn’t given up the right to anything, but still retains all of its powers it always had. That might be legally true, but de facto these powers can’t easily be exercised. I noted earlier how all of the parameters of parking policy are specified in the contract. They can’t be changed without paying the vendor to hold it harmless. According to published reports in the Reader and elsewhere, this isn’t even based on actual loses, but on a penalty schedule in the contract that assumes nearly 24 hour meter occupancy. This means if the city wants to change policy, it has to pay dearly for the privilege. Being broke, it can’t afford to. Alderman have already been told they can’t exercise their previous prerogative power to change parking hours in their wards because of this.
The essence of a monopoly is collecting rents. Everyone thinks of the public’s quarters here when it comes to leases. But part of the monopoly is on policy, meaning that the vendor is now in a position to extract even further rents from the city to change policy. I believe this is one reason these vendors desire such long term deals. They believe there is even more future value to be extracted through penalties and inevitable re-negotiations.
I actually cited that as a benefit of the toll road leases. The city in effect bought a hedge against changes in future conditions as part of the deal. For a relatively standalone asset like a toll road, that’s a good thing. For an integral part of the city’s public space, it’s catastrophically bad. This is because management of public space is, along with public safety, schools, and taxation, one of the single most important factors contributing to the attractiveness of a city as a place to live and do business. In an innovation era, in an era of ever more rapid change, locking yourself into a fixed policy for public space for decades is a terrible mistake.
Imagine the world 75 years ago (1935) or 50 years ago (1960). Those people could never have foreseen what our cities would be like, what the challenges and opportunities of our urban spaces would be today, what the technology would be today, etc. How likely it is we’ll know what we need even 10 years from now?
Unfortunately, one doesn’t even need to hypothesize about the negative fallout from this. It’s already visible.
New York’s Pop-Up Sidewalk Cafes
It’s no secret that New York is today’s leader in urban transportation design. Under Transportation Commissioner Sadik-Khan, they’ve launched a revolution in public space management, and have brought huge innovation and positive change to New York’s streets.
Here’s a small but great example. Some of New York’s sidewalks are too narrow to permit sidewalk cafes. So what do you do? Well, the Architect’s Newspaper reports on an experimental solution using pop-up sidewalk cafes. I believe this idea may have actually been borrowed from San Francisco, but it involves re-purposing some parking spots on a seasonable basis for a temporary sidewalk cafe installation. Here’s a picture:
It’s a nice solution, and an attractive design I might add. NYC went from concept to implementation in just one month. Now, maybe they are possibly losing some meter money from space removal. But at least it is only actual loses, not Chicago’s fantasyland liquidated damages. And with tomorrow’s dynamic pricing systems (see below) it might not lose anything. Also, while tampering with parking is always a sensitive matter, they were able to move quickly because, among other things, they don’t need to coordinate with a leaseholder on the spots. Everyone knows time is the enemy of the deal, and so many innovative ideas never happen because they hit resistance and end up in the too-hard pile. New York hasn’t created a barrier to continued innovation and improvement in its streets. As Transportation Commissioner Sadik-Khan put it, “Inventions like this help make our streets into destinations and improve the quality of life for the thousands of people who live, work, and play in Lower Manhattan.”
It’s not going to be impossible for Chicago to do this, but it is going to be harder. Maybe pop-up cafes are doable. But what about large scale BRT deployment? Or the bicycle boulevard I’ve proposed on Monroe St. as a way to safely link the west side to the lakefront through the high traffic barrier of the Loop? It isn’t hard to see how the meter deal puts a major obstacle in the way of all these things, financially if nothing else.
The other tragedy is that Chicago has locked itself into a parking policy at just the moment that we’re on the cusp of a revolution in on-street parking management. Just as we understand congestion is a result of underpricing, and that we can use dynamic pricing on tollways to optimize the use of that resource, dynamic congestion pricing is coming to parking. Based on the recommendations of professor Donald Shoup, San Francisco is rolling out high tech meters like this one that will enable it to dynamically change pricing in order to maintain 80% parking occupancy at all times:
The beauty of this approach is that it not only ensures that limited parking spots are used in the most economically efficient way possible, it also depoliticizes parking rates. Rather than setting them arbitrarily, or only once and nearly forever through a lease, San Francisco is basically telling the public “you tell us what the rate ought to be.” Like eBay, the value of a spot will depend on actual consumer demand, not government fiat. Who would have thought that the greatest bastion of the free market in parking would end up being San Francisco? This is an example of what modern technology is letting us take out of the ivory tower and into the real world.
There will no doubt be kinks to work out. But that’s why it’s good SF doesn’t have to deal with a private leaseholder. And even further down the road policy might change again. What’s more, none of this actually prevents San Francisco from issuing revenue bonds against its meter proceeds (which it has done in the past), nor does it prevent contracting out management of the system, enforcement, etc.
Again, this isn’t even about money. It’s about being able to better manage one of key assets of the city – its public space on its streets.
The lesson is very clear: maintain policy flexibility, particularly when it comes to these types of services. San Francisco and New York are positioned to step on the gas here, while Chicago is going to have to figure out how to deal with the consequences of its meter lease.
Lemmings Off a Cliff
Given the paucity of successful case studies for meter privatization, and the cautionary tale out of Chicago, one would think that cities would be hesitant to follow the same path. But apparently not. Lots of cities are considering this. Indianapolis just this week signed a 50 year deal for its meters. I’m sure they would say it’s completely different than the Chicago one. And I’m sure they couldn’t have failed to learn something from the Chicago fiasco. But in its essentials, at least based on media reports, this deal has the same basic characteristics as the Chicago one. Indianapolis is selling a 50 year property right interest in its public space, including virtually all of downtown, to a private company. And they’re doing it for a comparative pittance of only a $32 million lump sum. (The revenue share component does not necessitate a 50 year deal). At least Chicago got $1 billion for their trouble. What’s that story again about Esau and a bowl of soup?
I think about Indiana’s failed FSSA privatization. Gov. Daniels took some heat for this deal, obviously. But here’s a guy that has tried to advance the ball. Occasional failure is the price of innovation. If at least a few of Daniels’ ideas didn’t work out, I’d argue he wasn’t doing nearly enough. I don’t blame him at all for trying a new idea an in fact I think he ought to be admired for the political courage he’s exhibited in making the case for the new in a conservative state like Indiana.
But guess what, when the FSSA deal didn’t work, he was able to re-evaluate and cancel it. While some people who receive services from them no doubt experienced the downsides of this, in the long term, Indiana wasn’t harmed. But imagine if the state had signed a 50 year deal in return for a large up front payment. And when the deal went sour it had already spent it all and the state was so broke it couldn’t afford to cancel the deal even if it contractually had a termination clause? Indiana would have been in for a world of pain.
Cities would be wise not to put themselves in the situation to let that happen to them. Daniels understood the difference in risk profile between the FSSA and the Toll Road, and he contracted appropriately. Parking meters are closer in risk profile to the FSSA.
What Would Goldsmith Do?
Some local political bloggers claim a cabal of Goldsmith-era people are running the Indianapolis government behind the scenes. That sort of inside politics stuff is beyond my pay grade. Given that Goldsmith was the last Republican mayor before the current one, it would make sense that Ballard hired a few of those people, just like President Obama hired many folks from the Clinton administration.
But perhaps rather than listening to what old Goldsmith hands have to say, better to just look at what Goldsmith himself does – or, more importantly, what he’s not doing, which is signing a long term lease for Gotham’s parking meters. He runs their Department of Transportation, so this is clearly in his scope of responsibilities.
Yes, I’m aware that Goldsmith defended the Chicago parking meter deal. And I agree with virtually 100% of the article he wrote. The vast majority of the complaints about Chicago’s parking meter lease are much ado about nothing, and he explains why. But he did not address the matter of policy risk that I discuss here.
I’m sure he’ll be looking at parking in New York. There’s no doubt that parking in NYC is, as it was in Chicago, grossly underpriced. Fixed pricing for parking is on the way out. As for parking garages, I’m not sure why government is in that business anyway, since it’s clear that private enterprise will spend their own money to provide that service. I have no principled objection to the involvement of private enterprise in the management of on-street parking, which is clearly long overdue for a shake-up. I think there’s plenty of scope for contracting things out, issuing revenue bonds, etc.
But I’m confident that if he looks in detail at leasing New York City’s meters, the policy risks inherent in it will become very clear. That’s doubly true in New York, where public space innovation has played a key role in moving the city forward in recent years. I’ll be very interested to see how he addresses it. If anybody can figure out a way to structure a good deal around parking, Goldsmith is the guy. If he does a major parking deal in New York, then that’s a structure I’d advise anyone to take a hard look at and consider implementing. Until then, a long term parking meter lease should be a no-go zone for cities.
Who’s Your City?
One of the things about so many of the policy fiascoes of the past is that they tended to get universally applied, thus didn’t generate competitive disadvantage. Most cities had their share of urban renewal boondoggles, for example. But what happens when a bad policy trend hits, but only some cities go for it? We might get an example of it right here.
In the future there might be two kinds of cities: those who who sold off a long term property right interest in their on street parking – which is to say, in the most important component of their city’s public space – and those who didn’t. And make no mistake about it, no matter what anyone might claim about these meter leases, the long term sale of a property right interest is what they represent.
I won’t claim this is going to be the difference between urban success and failure. But it will make things more challenging to innovate, and keep up with best practices, in public space. It’s sort of like running with ankle weights and a 25-pound weight strapped on your back. It doesn’t mean you can’t finish the race, but it does put you at a competitive disadvantage. While a place like Chicago can probably handle it, lots of other cities are still struggling mightily to attract residents and investment to their urban cores. Why create gratuitous problems for yourself? Deals like this are one reason why, despite the fact that I believe Indianapolis has higher potential, I have said that Columbus, Ohio is likely to be the better performer in coming years.
Again, it’s an era of ever more rapid change and ever tougher competition. We have no idea what the world is going to be like 5, 10, 25 years down the road, much less 50 or 75. Anything that locks cities into a particular policy framework for the long term for areas where there isn’t a strong track record of success poses a high risk. I would strongly advocate that cities avoid entering into long term on-street parking leases until successful models have been developed and have proven themselves through shorter term, successful contracts.
I haven’t examined the Chicago meter contract personally in depth and I’m not a lawyer in any case. If you’d like to, however, a copy is online here. My scan of it indicates that the city could change parking policy if it desired (it’s a “reserved power”), such as to implement dynamic pricing or some such, but only if it results in a net financial gain to the vendor. Otherwise, the city has to pay up (it’s a “compensation event”). This is what I mean when I talk about the ability of the vendor to extract even more downstream revenue through its ownership of that property right when the city needs to change policy. It’s amazing what the contract considers an adverse event. It even includes reducing the threshold for booting!