Thursday, March 19th, 2015

Can Hipsters Save Providence?

Kate Nagle has a piece in GoLocalProv called “Can Hipsters Save Providence?” in which I am extensively quoted. To summarize my basic take on hipster driven revitalization:

  • It’s great that people are choosing these cities and urban neighborhoods. Who doesn’t want to see growth, better food and coffee, and more cultural offerings?
  • Channeling William Frey, there aren’t enough hipsters to go around to revitalize America’s cities. Having said that, some level of hipster neighborhood now exists almost everywhere.
  • Outside of a handful of locales like Brooklyn, the scale of hipsterdom is relatively small. Even Portland’s impressive central area is only a minority of what’s going on in that region.
  • Hipsters haven’t yet created much follow-on opportunities for the working class.
  • Portland’s culture of small makes it a great place to run an artisanal business. New England’s anti-business culture raises more barriers. If you want more hipster stuff, make it easier.
  • I think most hipsters in Providence specifically want to be there, so they aren’t that likely to flee to Detroit or some other hot spot. They have a passion and commitment to that place.

Tuesday, March 17th, 2015

More on Minneapolis-St. Paul and the North

Following up on last week’s post from Alex Schieferdecker about Minneapolis-St. Paul as the “Capital of the North” – an attempt to rebrand it to be in a region separate from the Midwest – I put together a few thoughts of my own that are posted over at New Geography. Here’s an excerpt:

There are two basic approaches cities are pursuing today. One is the regional capital approach of a Barcelona. (It would perhaps like to see itself as a national capital). The other is the global city approach of Chicago in which the city seeks to brand itself as a stand alone entity directly in the marketplace while actively divorcing itself from the region. The global city model seems more popular at present….If the Twin Cities are functionally a capital, this regional relationship will assert itself organically, however it seeks to brand itself.

Where the branding idea falls flat is in two areas….

Click through to read the whole thing.

Monday, March 9th, 2015

Where’s America’s Entrepreneurial Economy?

Go to almost any city and you’ll hear them brag about their startup scene. But the reality of entrepreneurship in America is very different, as my latest column in the March issue of Governing discusses. Here’s an excerpt:

Yet despite our perceptions, entrepreneurship has trended downward in recent decades. The Brookings Institution found that so-called “firm entry rates” have declined since the 1970s and that they suffered a steep fall post-2005. And though millennials are often seen as an entrepreneurial generation, The Wall Street Journal reports that business ownership among those under the age of 30 recently hit a 24-year low. Self-employment has seen a similar downward trend. A study by Economic Modeling Specialists International found that both the total number of self-employed and their share of jobs have fallen since 2006.

So with conditions seemingly so ripe for an economy fueled by entrepreneurs and freelancers, why are we not seeing its emergence on any large scale? And what can be done about that?

Click through to read the whole thing.

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Topics: Economic Development, Public Policy

Thursday, February 26th, 2015

Rahm’s Runoff

Rahm Emanuel is heading to a runoff in his bid for re-election as Chicago mayor. I discuss the matter in my latest piece over at City Journal. In short, while Emanuel has done himself no favor with his “Rahmses” style and unapologetic catering to the upscale Chicago, much of the dissatisfaction with him comes from a denial that the bill for past decisions is finally coming due.

Here’s an excerpt:

The dynamic Emanuel seemed just what the flagging city needed. His dead-fish-mailing, F-bomb-dropping style seemed perfectly in tune with hardboiled Chicago sensibilities. He started fast, unleashing a blizzard of initiatives and announcements that boosted the morale of the city’s establishment. And four years on, Chicago has hit its stride in many ways. In November, Crain’s Chicago Business reported that jobs in the greater downtown area had reached an all-time high. The city has enjoyed a tourist boom, drawing over 50 million visitors last year, and several new hotels are expected to open. Chicago’s downtown tech scene has seen strong growth. Thousands of new apartments are going up in downtown every year.

Chicago is also uniquely burdened among major American cities by its twin deficits. Both the state of Illinois and the city of Chicago are in dire financial condition. Illinois’s unfunded pension liability stands at $111 billion. It owes another $56 billion in unfunded retiree health-care obligations. Chicago itself faces $35 billion in unfunded pension liabilities. The total liability for all local government obligations adds up to as much as $83,000 per household. This flow of red ink can’t be staunched with simple “belt tightening.” One wonders if Emanuel understood the full extent of the financial hole when he sought the mayor’s office.

It’s tempting to pin the blame for Emanuel’s travails on hubris, and he has committed his share of unforced errors. He manages the local media with Washington-style spin control. He’s also shown a lack of regard for the optics of leadership. Daley projected a South Side “neighborhood guy” persona even while cozying up to the Loop business class. By contrast, Emanuel seems unconcerned about coming across as an elitist. His schedule is full of meetings with wealthy donors. Over half of his top donors benefit in some way from city largesse. Emanuel built a fancy selective-admission school named after President Obama on the white and wealthy North Side while closing 50 public schools in the city’s lower-income neighborhoods.

Click through for the whole thing.

Thursday, February 19th, 2015

The New Aspirational Suburb


Interior of the Palladium concert hall in Carmel, Indiana. Photo by Zach Dobson

My latest post is online at New Geography and is called “The Emerging New Aspirational Suburb” and is about how upscale business suburbs are reinventing themselves as sub-regional centers in their own right, including more urban nodes and amenities like arts facilities and events. In part this is exploiting their strong market position, but it’s also a response to the now evident challenges that face many suburbs as they reach maturity. The piece focuses on Carmel, Indiana, which as more of the pieces put together than anyplace else I know of currently, but the same approach is being pursued elsewhere.

It’s a longform piece, but here are some excerpts:

Beyond the historic downtown, Carmel has also implemented multiple New Urbanist style zoning overlays, including on Old Meridian St. and Range Line Rd. (the city’s original suburban commercial strip). These promote mixed use development, buildings that front the street, and multi-story structures. Infrastructure improvements and TIF have been used in these areas as well. There’s also a major New Urbanist type subdivision in western Carmel called the Village of West Clay.

[Mayor Jim Brainard] also keenly aware of global economic competition and the fact that Indiana lacks the type of geographic and weather amenities of other places. He frequently uses slides to illustrate this point. In one talk he said, “Now this picture, guess what, that’s not Carmel; but this picture is the picture of some of our competition. Mountains – that’s San Diego of course, mountains, beautiful weather, you know I think they have sunshine what, 362 days out of the 365…. What we’ve tried to do is to design a city that can compete with the most beautiful places on earth. We’ve tried to do it through the built environment because we don’t have the natural amenities.” While the claims to want to equal the most beautiful places in the world may be grandiose, the key is that mayor believes Carmel’s undistinguished natural setting and climate requires a focus on creating aesthetics through the built environment.

The city’s demographics have also expanded to become much more diverse. The minority population grew 295% between 2000 and 2010, adding 9,630 people and growing minority population share from 8.7% to 16.3%. 12% of the city’s households speak a language other than English at home. Many of these are highly skilled Chinese and Indian immigrants working for companies like pharmaceutical giant Lilly. Even black professionals are increasingly moving to Carmel, with the black population growing 324% in the 2000s and black population share doubling to 3%. Carmel is not a polyglot city today, but it’s far more diverse than in the past.

Critics also pointed to state figures showing Carmel with nearly $900 million in total debt. While it is a wealthy community that can afford the payments, in a conservative state like Indiana, a suburb accumulating nearly a billion dollars in debt raises eyebrows.

Click through to read the whole thing.

I should note that the mayor of Carmel disputes media accounts about cost overruns on various projects that I cite in the piece. He attributes these to other explanations, such as deliberate decisions to increase scope.

Monday, February 9th, 2015

Why (Some) Downtowns Are Back by Mario Polèse

[ I’m going to be giving a keynote at Governing Magazine’s Summit on Performance and Innovation in Louisville this Wed. The entire conference is live streaming at Governing’s web site. My session is Wed at 1:30pm, but looks like a lot of great stuff you won’t want to miss, such as the mayor’s roundtable immediately following me.

As you know, I recently joined the Manhattan Institute and its quarterly magazine City Journal. So obviously I’m interested in promoting our work. I think it’s fair to say that for those of you with a strong left orientation, you’re not going to agree with some of what’s published in City Journal. On the other hand, I think that regardless of what your political philosophy is, you’ll find some things that you do resonate with – but more importantly things to engage you. I want to share a couple of pieces from the magazine to give you a sample of what you might find. Here’s one by Mario Polèse from the Winter 2014 issue talking about how (some) downtowns have come back – Aaron. ]

Not so long ago, most urbanists were predicting the demise of downtowns. The data, after all, pointed unambiguously to declining central-city populations and expanding suburban ones in nearly every American metropolitan area between 1950 and 1980. Manhattan lost a quarter of its residents, for example, and Boston nearly a third. The exodus wasn’t confined to the United States. The population of inner London fell by more than a million residents during the same period, and my hometown, Montreal, watched the central borough of Ville-Marie hemorrhage half its population between 1966 and 1991. Businesses were fleeing, the urbanists noted. Central business districts were becoming vestigial organs, legacies of a bygone era before the automobile and the truck liberated us from the tyranny of proximity and brought us the suburban shopping mall.

But downtowns didn’t go the way of the dinosaur. In fact, most of them have begun to grow again. Of the 50 largest central cities in America, all but five saw their populations grow between the 2000 and 2010 censuses, and only two exhibited declines after 2010. For some, the turnaround came in the 1980s; for others, in the 1990s; and for still others, more recently. The title of Alan Ehrenhalt’s recent book, The Great Inversion and the Future of the American City, reflects the nature of this shift—which, again, isn’t limited to the United States. But why are downtowns coming back? And how can we account for the holdouts?

The modern history of the central city is a story of three consecutive waves. The first began during the decades following World War II, though its full impact on urban economies became apparent only later. It involved a structural change sometimes called “deindustrialization” or “tertiarization”: a massive shift from manufacturing to services. The principal beneficiary of this shift was the “business services” sector, which includes finance, insurance, real estate, engineering, management consulting, advertising, publishing, and legal services.

All these business services sought out locations offering a high potential for personal interaction. The objects of exchange weren’t goods but information; human relations were the glue that held the sector together. Unlike manufacturing, business services required little floor space to generate income. Office towers allowed numerous firms to inhabit small spaces, producing correspondingly high property values. In the downtowns of large cities, such industries as manufacturing and warehousing, which demanded a lot of space, were unable to afford the rising cost. They began to decamp for less expensive locales. Meantime, the development of standardized containerization meant that trucks could now carry cargo from ships directly to factories and warehouses. Manufacturers and wholesalers no longer needed to be adjacent to ports and railheads in cities like New York and Montreal, giving these businesses more flexibility in choosing their locations.

So over time, business services replaced manufacturing as the principal economic base of large cities. You might define the tipping point as the moment when combined employment in the three main industry classes that constituted business services—finance, insurance, and real estate; professional, scientific, and technical services; and administrative support services—surpassed employment in manufacturing. In New York, that moment arrived in 1980. Manufacturing still accounted for a quarter of the city’s employment in 1970; today, it has fallen to well below 10 percent. The tipping point came in 1988 in Toronto, Canada’s largest metropolis, and some 15 years later in runner-up Montreal.

Until the late 1980s (or later, depending on the city), business services hadn’t grown enough to undo employment and land-use patterns that downtowns had inherited from the industrial era. Heavily polluted brownfields were left vacant, as were unused docks, empty warehouses, and factory shells. But many of these industrial sites have since been transformed. In Montreal’s old port, for instance, one abandoned dock now houses a science museum; a second has become a popular entertainment venue.

The growth of business services irreversibly altered not only the appearance of most big-city central neighborhoods but also their employment profile. This brings me to the second wave, which we might think of as the residential counterpart of the first. It was a turnaround in the population decline of central neighborhoods.

To see why it happened, we need to understand the forces that had previously been driving households away from the center: rising incomes, growing ownership of cars, the postwar baby boom, and high crime. A general rule of housing economics is that as incomes rise, households demand more floor space per person. As they prospered during the postwar years, families aspired to better, bigger homes, perhaps with a garden and even a pool. They found the space they sought in the suburbs, where land was cheap and plentiful. Automobile ownership also rises systematically with incomes, and it enabled numerous households to move to those spacious suburbs. And the baby boom, of course, meant more households with children, which demand more space than childless households do. Over the four decades following World War II, these trends produced ideal conditions for urban flight and suburban growth, especially when combined with the growing urban crime and disorder that marked the era.

But eventually, the lure of the suburban dream began to diminish. Starting in the 1990s, incomes rose less rapidly than in the past, slowing the demand for housing space. Automobile ownership stopped rising, stabilizing at about 800 cars per 1,000 people, according to the World Bank. Single-person and childless households accounted for an increasing share of the American population. The suburbs kept growing, but the great era of rapid suburban expansion seemed to have ended.

It can be argued, too, that tastes and preferences changed. The car is no longer the status symbol that it once was, having been replaced, among today’s youth, by concert tickets or the latest smartphone. As America’s infatuation with the car wanes, owning a two-garage split-level house becomes less glamorous. In an article published in Urban Studies in 2006, City Journal contributing editor Edward Glaeser and Joshua Gottlieb convincingly demonstrated Americans’ change in preferences toward urban living. Before 1990, the larger the city, the higher the average wages paid there, even after accounting for cost of living. After 1990, that relationship reversed itself, meaning that workers now accept lower wages for the privilege of living in big cities. They must be receiving something in return, the authors argue—specifically, access to the amenities and pleasures that central big-city living offers, from restaurants and museums to concerts and learning institutions. I’m inclined to agree with Glaeser and Gottlieb that the fall in urban crime rates since the 1980s explains only part of the new taste for urban living, but it, too, was important.

But the most powerful reason for the second wave was the first wave, which produced well-paying jobs downtown. That is, the main reason households began to return to the center was that the best jobs were there. New Yorkers have long since grown familiar with gentrification, the replacement of poorer, generally blue-collar, populations by wealthier, professional ones. But the phenomenon took place in downtowns all over North America.

The two waves that I’ve just described reshaped central neighborhoods, making them magnets for rising cohorts of entrepreneurs in digital firms. This is the third wave, currently in full motion: high-tech start-ups seeking out central neighborhoods. Downtowns are the new battlegrounds of the digital economy.

True, Silicon Valley remains the top player in that economy, whether you’re measuring the number of high-tech start-ups per year or the amount of venture capital invested. That isn’t about to change; few places can match the Valley’s buzz, its location near two top engineering schools, its superb scenery, and its local supply of risk-tolerant venture capitalists—not to mention the entrepreneurial spirit that California, despite its dysfunction, seems to bring out in people. Nevertheless, smaller clusters of high-tech start-ups are springing up in many central cities. New York’s cluster has (predictably) been dubbed Silicon Alley (see “Net Gains,”); London’s, Silicon Roundabout. San Francisco’s South of Market area, or SOMA, is an emerging hub of high-tech activity. Following a multibillion-dollar cleanup, the South Boston waterfront area, a short walk from the financial district, is also becoming a high-tech hub, attracting firms from nearby Route 128 and Cambridge.

To understand what’s happening, take a closer look at the neighborhoods being colonized. New York’s tech cluster is located chiefly in lower Manhattan—specifically, the Flatiron district, Tribeca, Chelsea, and nearby neighborhoods that have completed the transition from warehousing and manufacturing to residential and nonmanufacturing commercial uses. In London, the heart of the cluster is Shoreditch, an old blue-collar neighborhood to the northeast of the financial district. South Boston is also an old warehousing district with recycled rail yards and docks. These areas’ distinguishing feature is that each is within walking distance of the central business district. If the second wave took place because of housing, the primary factor here is proximity to other firms.

And not just other digital firms: as the tech industry moves away from simply making hardware and software and begins producing computer-accessible content—from music and video games to news and broadcasts—it finds value in being located near the entertainment, publishing, and broadcasting industries, traditional foundations of large-city downtown economies. Proximity to financial institutions, another traditional downtown pillar, is also helpful: meeting a rich banker or an eager venture capitalist is easier in lower Manhattan than in the New Jersey suburbs.

There are cultural reasons for the third wave as well. Asked on TV why his large computer-animation firm, Ubisoft, decided to locate in downtown Montreal, a founding shareholder pointed out that the company’s employees worked at all hours. They wanted to be able to walk across the street for coffee or a sandwich at midnight—or, alternately, to visit a bar at noon. Few wanted to commute, he added, and of those who did, many biked. Is it any surprise that such firms want to be in 24-hour cities, rather than in suburban districts that empty out after 5 PM? And that such employees are choosing to repopulate center-city neighborhoods, rather than drive in from afar? The symbiosis of workplace and residence is further strengthened by a growing construction trend in which condos occupy upper floors, offices occupy lower ones, and retail stores occupy the ground floor, creating a new generation of mixed-used neighborhoods.

It’s also the case that high-tech companies, like the business services of the postwar years, require relatively little floor space. Many need nothing more than a few laptops and desks and can consequently pay those downtown rents. And in some downtowns, third-wave firms can recruit graduates of nearby engineering or tech schools, such as Montreal’s McGill University and École de Technologie Supérieure. New York mayor Michael Bloomberg was hoping to accelerate just this kind of symbiosis when he announced plans for an ultramodern technological campus on Roosevelt Island, across from Manhattan, to be run by Cornell University and the Technion–Israel Institute of Technology.

In several big American cities, though, the downtown resurgence hasn’t taken place; the areas continue to struggle and deteriorate. In most cities, the average office rent per square foot is higher downtown than in the suburbs—in New York, downtown rents are twice as high. But in Cleveland, according to data from the major real-estate firm Cushman & Wakefield, office space is no more expensive downtown than in the suburbs, and in St. Louis, it’s actually cheaper. Office-based firms in those cities don’t see downtown as a valued location and aren’t willing to pay more to locate there. Data for downtown Detroit are unavailable from Cushman, probably because demand from prospective clients is so tiny that there aren’t enough properties on the market for information to be produced.

An economic geographer would call this phenomenon a loss of “centrality,” which refers to the geographic point with the highest market potential for firms. It’s highly unusual for a big city to lose centrality. Even during the height of the population exodus—the 1960s and 1970s—the central business districts of New York, Boston, San Francisco, and most other cities never lost it. Why have Detroit, Cleveland, and St. Louis?

No simple answer exists to that question, though part of the explanation involves successive badly run city administrations, white middle-class flight, and a shrinking tax base, things that create a downward spiral of deteriorating services and rising taxes. And just as the reasons that some big-city downtowns have failed to revive are various, so are the solutions. No magic pill—be it a sports stadium, a convention center, or a shopping mall—can single-handedly bring back a moribund big-city downtown (see “Urban-Development Legends,” Autumn 2011).

Still, these troubled areas could learn a few lessons from the success of many of their peers across the nation. For one thing, the key to downtown resurgence is jobs—chiefly, jobs in business services. If finance firms, consultancies, head offices, advertising companies, and so on flee to the suburbs, the task of reviving a downtown will prove far more difficult.

Also, successful downtowns are mixed-use centers that are busy around the clock, not just from nine to five. A 24-hour downtown isn’t built overnight, so to speak. But it’s true that teaching institutions can sometimes bring in clienteles with a taste for 24-hour living. It wasn’t a coincidence that New York’s first gentrified neighborhood—long before the word “gentrification” came into fashion—was Greenwich Village, near New York University.

Another lesson is that you can’t separate the health of a downtown from that of the wider metropolitan area. Cities with resurgent central neighborhoods also have strong metropolitan economies. This means, for one thing, that strong national or regional corporate centers will find it easier to maintain strong downtowns; by contrast, smaller cities whose downtowns are largely dependent on retail have a harder row to hoe. It also means that revitalization initiatives can’t be limited to the central city. Some level of cooperation between city and metropolitan area is necessary—if only to ensure that they effectively share the cost of metro-wide infrastructure, such as public transit.

A related lesson: strong downtowns and suburbanization are not mutually exclusive, as anyone who has driven through the sprawling suburbs of Washington, D.C., or New York can testify. An exodus from the center can occur for two diametrically opposed reasons. Suburban office parks can spring up because a downtown is too strong (and therefore expensive) or because it’s too weak. Firms leaving Manhattan for cheaper office rents in New Jersey are the sign of a growing downtown; firms leaving central Detroit for the safer, cleaner suburbs are the sign of a dying one.

Finally, the many current policies that restrict real-estate supply downtown—rent control, restrictions on building heights, and so forth—are a luxury that only cities with solid, growing downtowns can afford because they drive up prices in the center and discourage people and businesses from settling there. How far we’ve come since the 1970s, when downtowns seemed doomed and governments were concerned with revitalizing them! Today, those governments are doing the opposite, restricting growth in downtown areas and, in too many cases, turning them into coveted prizes occupied by a lucky few. Abandoning these misguided policies would reinforce the gratifying shift that cities all over the country and the world are witnessing: a return to the center.

This article originally appeared in the Winter 2014 edition of City Journal.

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Topics: Economic Development, Globalization
Cities: Montreal, New York

Friday, January 30th, 2015

Is Detroit Open For Business?

My latest piece is online in the latest issue of City Journal. It’s about the blowback people and firms ranging from Shinola to Hantz Farms have gotten when trying to bring what Detroit desperately needs to rebuild, namely investment. Here’s an excerpt:

Consider Shinola, a luxury-goods start-up that employs more than 250 people in Detroit, many engaged in the manufacturing of bicycles, leather goods, and watches. The firm has opened boutiques in New York and London and is running multipage ads in upscale magazines, boasting of its Detroit connection. But not everybody sees Shinola as a Detroit success story. “Shinola is using my city as its shill, pushing a manufactured, outdated and unrealistic ideal of America,” wrote Detroit native John Moy on Four Pins, a fashion website. He complains about Shinola’s out-of-town financial backers and its use of parts made elsewhere. When Shinola installed four outdoor city clocks, someone tagged them with graffiti.

What these and other incidents reveal is an “it’s our city” mind-set among locals deeply hostile to and suspicious of outsiders—and of outside investment. “Detroit is the only town in America where misery hates company, or at least distrusts it,” wrote Detroit Free Press columnist Brian Dickerson about the Shinola controversy. Detroiters, he notes, view enterprising newcomers as “mere poseurs, parasites feeding off a hardscrabble heritage to which they lack any legitimate claim.”

I note that some of this is understandable emotionally, but the reality is that if Detroit wants to improve, that means more people and investment from the outside, and those people are going to demand a seat at the table too. Click through to read the whole thing.

Friday, December 19th, 2014

Why the Rent Is Too High, Reason #239

It’s no secret housing costs are high and going higher in major US cities like NYC, San Francisco, etc. I was just tweeting with someone this week who moved back from Park Slope, Brooklyn to Indianapolis because her rent was being raised by over 50% (possibly that’s a cumulative increase over time – not sure).

Most of the urbanist discussion tends to focus around zoning as the reason prices are high. That’s certainly an important factor. But there are also other things driving up costs and rents. The NYT highlighted one of them last Sunday, namely the permit expediter tax:

When Mark Brotter dies, the inscription on his tombstone will read simply: “Thank God — no more plumbing Schedule B.”

Mr. Brotter, 55, is an expediter, an imprecise term that is used to describe the men and women whose workdays are spent queuing up at the Manhattan branch of the New York City Department of Buildings to file the documents and pull the permits that allow construction projects — your kitchen renovation and the high-rise next door — to go forward. “I’m basically a middleman,” he said. For its part, the Buildings Department insists on the title “filing representative.”

Others are employed by large firms that do nothing but expediting, or are on the staffs of architectural or engineering firms. In the early 1990s, expediters numbered 300 to 400; today there are more than 8,300. (Filing representatives must register with the Buildings Department and pay a $50 annual fee for the right to stand on lines at department offices.)

The expediter’s fee varies depending on the outlay of time and the complexity of a job. The charge for securing a permit for a contractor ranges from $200 to $400; for filing a project, $1,500 to $3,500. Plans that must go before the Landmarks Commission are a more costly proposition, as are projects that involve the conversion of a commercial space to a residence.

Now these prices aren’t ridiculous in the grand scheme of things for New York City real estate. But the idea that there are 8,300 people making a living standing in line to file permits for people points to the entire structure of how development gets done in big cities (NYC is hardly alone in this particular industry) in ways that continually raise costs. This is beyond the cost of delays that a baroque permitting process introduces.

Particularly when you are trying to build lower rent buildings, all of the fixed costs you have to incur to built anything (land, permits, expediters, etc.) have to be recovered and amortized across the units. When you have a hyper-complex development environment, these fixed costs raise the minimum viable rent threshold and thus push the cost of construction towards the higher end of the market that is already being served.

To bring the cost of housing down, cities should be working on all fronts, not just zoning to make it happen.

This particular case is instructive regarding barriers to reform, however. If the city made it easy enough to file plans and get permits in ways that didn’t require an expediter industry, 8,300 people would be out of work. Presumably they would squawk about it. I’m sure I would if I were in their shoes As with many regulatory reforms, the benefits are diffuse and hard to see, whereas the costs are concentrated and obvious.

Also, just one reform in and of itself is unlikely to produce immediate substantive change. Broad based reform in many areas is needed, then there will be a lag as investors adjust to and take advantage of the new environment. This may involve shorter term pain for longer term gain, much like disruptive technical innovation.

That’s not a formula politicians like. It’s one reason Japanese Prime Minister Abe’s “third arrow” of structural reform remains mostly in its quiver. Too many interest groups face immediate pain from reform, but the payoff is raising the economic potential of Japan and creating conditions in which future growth can occur, the exact nature of which can’t be predicted. That’s a hard sell to make, which is one reason politicians tend to focus on things that have immediate benefits to at least some people, such as tax cuts or spending programs.

Regardless, beyond just changes in zoning or this or that process or regulation, there needs to be a mindset shift in how these cities approach development to bring about a broad based change in housing affordability.

Tuesday, December 16th, 2014

The Silent Killer – The Company Your Community Never Created by Mark Suster

[ My fellow Accenture alum Mark Suster is a former startup founder and now a VC based out of Los Angeles. Hence he writes the fantastic tech startup blog Both Sides of the Table that’s a must read if you’re into tech startups. This recent piece particularly caught my eye as it’s relevant to so many cities’ startup scenes. Mark graciously gave me permission to repost it here – Aaron. ]

I was at a dinner recently in Chicago and the table discussion was about building great companies outside of Silicon Valley. Of course this can be done and of course I am a big proponent of the rise of startup centers across the country as the Internet has moved from the “infrastructure phase” to the “application phase” dominated by the three C’s: content, communications and commerce. But the dinner discussion included too much denial for my liking.

I think startup communities being simple cheerleaders doesn’t help anyone. Those of us outside Silicon Valley need to make an effort to effect change not just wish for it.

At the dinner some of those arguing that Chicago has everything it needs now that it has built: Groupon, Braintree, GrubHub and others and that it has “come along way” and “will never get the full respect it deserves just because it’s not Silicon Valley.” But I think this misses the point. I’m a very big fan of Chicago. I started my career at Andersen Consulting (now Accenture) so I went to Chicago many times a year for nearly 9 years. I then got my MBA at University of Chicago so I secretly pull for local entrepreneurs as long as they don’t make me visit in the Winter any more.

But no community can become complacent with the wins that it has. It’s not the great companies you build, it’s the silent killer of those that should have been build locally and weren’t. It’s the thousands of jobs that weren’t created but you don’t even know it.

Think about Facebook had it stayed in Boston. Could it have become the behemoth that it is today? Who knows. But I’ll bet the Boston community would take 50% of the success of Facebook built locally. And the truth is that successful startups beget more successful local startups, wealthy VPs who go on to build their next startups, etc. Even Mark has acknowledged moving wasn’t the be all, end all in this famous interview:

“If I were starting now, I would have stayed in Boston. [Silicon Valley] is a little short-term focused and that bothers me.”

Boston is still a great tech hub. But wouldn’t it want to be great PLUS have Facebook?

We have similar stories in LA and most people don’t know it. For example, Lookout is a mobile security company that was founded by three talented graduates of USC. They started their company in LA but a couple of years after raising capital from Khosla Ventures in the Bay Area they ended up relocating there. A few years later they announced $150 million in a funding round at $1 billion+ valuation and are ramping up jobs to secure their market-leading position. You could say the team would have gone North anyways. Perhaps – who knows? But I know with local funding and local support that’s certainly less likely.

And consider Snapchat – one of our hometown favorites as they’re based in LA (Venice Beach). Luckily for our community the founders decided they wanted to build their company in LA regardless of not having local funding from LA. That’s our great gain as Snapchat has also raised a lot of money at a monster valuation ($10 billion reported) and has been scooping up talented Stanford engineers and relocating them to LA. Locally we call it “the Snapchat effect.” The VPs of SnapChat will be LA’s great founders 5 years from now.

Silicon Valley is littered with startups where the founders were originally in LA. Klout was an LA company – sold for $200 million to Lithium. As was FarmVille (sold to Zynga) and many, many others.

Local capital matters. Local mentors matter.

That was my original idea behind Launchpad LA. I figured if we couldn’t fund every company locally we should at least embrace them as a community and show that we’re willing to mentor them whether they raise their money in town or not.

So what can a community do?

I often point out the story of when we raised our fourth fund a few years ago. I went to see several LP funds in Boston. At least twice I had conversations that went like this, “Yes. It’s true. Your fund performance has been great. But there’s also several great funds in Boston and while our first priority is to returns we have an equal responsibility to local funds and local jobs.”

LA public pension funds and endowments have historically been the opposite. I think government and community members need to understand that capital formation is an incredibly important part of economic revival. People often say, “Great entrepreneurs will build a community and the capital will follow.” I don’t see much evidence of that. I think it’s a combination of the two. It’s clear capital with no talent ends up having to travel to do deals. But talent with no capital is another word for migration.

And then there is public policy. Historically the City of LA has been hostile to startups. I’m reminded of LegalZoom who was founded in LA but moved it’s headquarters to Glendale and much of its operations to Austin, Texas. While LA was trying to impose archaic taxes on the firm and seemed to care less about its existence since it was a “startup” – the first lady of Texas welcomed them to Austin by picking up the CEO at the airport on his first visit there. It’s no wonder hundreds of jobs migrated. Luckily since then we elected Mayor Eric Garcetti who understands the importance of startups and of technology and venture capital on job creation.

But we still need more funds. No – I’m not worried about the competition. We’ll win our fair share of deals. But when you remember the Snapchat effect you see that I gain even from the deals we didn’t get to do. I’m guessing the future leaders of Lookout will build companies in the Bay Area.

Communities can make a difference. I wrote about the awesome efforts of Cincinnati to stimulate its startup community and the role of Paddy Cosgrave in Dublin, Ireland as well the entire Irish business community, the IDA, etc. who woo businesses to put their headquarters there. I also covered the impact of Brad Feld in Boulder or Fred Wilson in NYC as observed from my keynote on a trip to Seattle, which I felt could have a huge boom if its elder statesmen embraced startups a bit more.

Don’t get me wrong. Chicago has made strides. The Pritzker Family has been very active and the opening of 1871 as an entrepreneurial hub is a great example. But my conversations with countless Chicago entrepreneurs suggests it has similar issues to all non-Silicon Valley centers: not enough venture capital, too few tech angel investors, not enough talent for product management or engineering, not enough local tech powerhouses to drive local biz dev / keiretsu. I think this is true of LA, NY and many other tech communities so I’m not singling out Chicago.

My point is this … cheerleading isn’t enough. We need to help create local venture capital funds who may be national in investment strategy (as we are) but who will do more than their fair share of fundings locally (for us that’s 50%). Fund formation + local mentors + local talent = a shot at creating successes that drive the future job growth of our great cities.

This post originally appeared in Both Sides of the Table on November 15, 2014.

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

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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