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Sunday, February 16th, 2014

What Entrepreneurs Want

A new study from Endeavor Insight called “What Do the Best Entrepreneurs Want In a City?” has been making the rounds. They interviewed 150 founders of fast growing companies in America to determine what those founders valued in a place to start a company.

Their conclusions are probably not news to most. Most people started companies where they already live (i.e., they didn’t move somewhere to start one), the most important thing they wanted in the city was access to talent, and the second thing was access to customers and suppliers. The report highlights that taxes and regulations were not major considerations. Quality of life items were mentioned by many. The “vast majority” of founders were in metro areas of over one million people and they were described as “highly mobile as young adults.” Their very direct conclusion stated up front is: “We believe that the magic formula for attracting and retaining the best entrepreneurs is this: a great place to live plus a talented pool of potential employees, and excellent access to customers and suppliers.”

This got a lot of press because it supports the standard urbanist narrative. And while I think there’s significant value and truth here, it’s important to drill down to understand the limits. Since many others have already touted the headline findings, I’ll take care of the caveats.

First, the reason people gave for picking a city to live was most frequently having “personal connections” or “specific quality of life factors.” The report doesn’t break down who said what, so we don’t know the ratio of these or their overlap. It shouldn’t be any surprise that personal connections such as being born in a place, family, etc. play a dominant role in people’s decisions on where to live. As for quality of life, I’ve yet to visit a place where people don’t boast of it. Think about it, how many people live in a place they think sucks, even if they do have a connection there? Some, surely (say a child moving to a place he doesn’t want to live to care for an aging parent), but I suspect not many. I think it’s natural for people to brag about the quality of life in places where they live, so I wouldn’t read too much into this. Based on what the report actually says, personal history or connections could overwhelmingly account for location decisions, with quality of life mostly an overlapping secondary indicator.

The companies whose founders were interviewed weren’t specified. It was only said that they were on the Inc. 500, had an average of 100 employees and $20 million in revenue, and had revenue growth of 600%. In other words, these are predominantly early to mezzanine stage companies. Unsurprisingly, a big concern of new and smaller companies is finding customers and suppliers, as well as employees. Often these firms are not even profitable, so things like taxes are irrelevant. But no customer means no company. And small, rapidly growing firms can’t afford to carry a lot of deadweight employees. Traditional business climate items generally loom larger as companies mature and already have an established customer, supplier, and employee base.

It may be that these companies tended to stay located where they were founded when they reach maturity, but that doesn’t mean they grew their operations in that place. That’s why Silicon Valley has fewer jobs than it did back in 2000 even though its companies have thrived. Many of them have grown their jobs base in places like Salt Lake City and Austin.

Additionally, the survey says the companies represent dozens of sectors, but doesn’t give a lot of detail. However, “media” and “software” were mentioned. Also, the among those founders citing talent as a key location factor, “technical” talent was the most commonly mentioned.

This implies to me that tech/media startups loom large in this survey. If true, this would also explain the lack of concern around business climate items. These industries are among the most lightly regulated out there. There have even been specific legislative exemptions to keep the internet space clear of regulation and taxes (such as on internet retail). Most communities think tech startups are key to their future, so bend over backwards to cater to them. You don’t need complex permits to start a tech company.

This means the business climate for technology firms and startups can be very different from what is experienced by other businesses. For example, a recent Rhode Island PBS roundtable featured executives from Hasbro and Banneker industries lamenting the state’s attitude towards business while Allan Tear of tech accelerator Betaspring took a much more positive view. They are all probably right. Life’s probably great if you’re Betaspring, but not quite so good if your company’s name includes “Industries” in it. In short, the experience of tech/media startups is relevant mostly only to other such startups.

Blogger Alon Levy once made a provocative observation that one reason India specialized in software and BPO industries was because those were the only ones that are viable in a country without much infrastructure. The China manufacturing strategy would be a non-starter there. You actually don’t need to invest much in real quality of life items like even universal sanitation or paved roads to have a tech cluster, as many cities in India prove. As long as you have an internet connection to other places you can sell your services to, you’re in business. (Did I mention that Indian outsourcing firms had a massive tax holiday on export revenues for an extended period of time?)

So media/tech are the companies naturally less likely to talk about old school type business climate items, especially when younger. But it’s worth pointing out what mature hypergrowth tech companies have tended to do at some point, namely put their European headquarters on the Emerald Isle where they can take advantage of the “Double Irish” and similar such techniques to all but zero out their tax bill.

I mention this because that the end of the report the authors cite a couple case studies to try to demonstrate the irrelevancy of taxes. Yet this study was in part funded by the Omidyar Network, the philanthropy of eBay founder Pierre Omidyar. Where is eBay’s European Headquarters? Dublin, Ireland. Think that’s because the CEO likes to drink Guinness?

I don’t want to suggest that talent is irrelevant or that taxes mean everything. I’ve clearly pounded the table on the opposite. But just because this survey flatters our conceits in such matters doesn’t mean we should take it to the bank. I see it useful information, but limited in scope to only a narrow segment of firms. I just don’t think this study justified the forcefully stated conclusion

Also, regarding the mobility of youth, this was defined from a Kauffman Foundation study that noted 75% of entrepreneurs started their company in a different city from where they received their final university degree. This is unsurprising and irrelevant. Colleges can be understood as “education factories” whose nature is to produce graduates. Much as actual factories export their widgets, colleges export graduates. This is especially true since many great schools are in proverbial “college towns.” I went to school at Indiana University which is in Bloomington. Bloomington is an awesome town, but how many of the 30,000+ students at IU can a town that’s otherwise only about 50,000 people absorb? This is a not very useful statistic of mobility in my view.

Lastly, the notion that regions of one million people or more are economically advantaged seems very right to me. In this regard, their survey foots to everything I’ve seen and written about. These cities have thicker labor markets, more talent, unique infrastructure (e.g., major airports), bigger local markets, more specialized suppliers, and more entrepreneurial ferment. I’ve long said that there’s a “minimum viable scale” of around 1-1.5 million people in a region you need to have to really succeed in the modern economy. Smaller places generally only have thrived to the extent that they’ve got a unique amenity like Bloomington’s Big Ten university. Since I took a critical eye towards this survey’s actual support for its findings, I thought I’d end on one where I think they hit it.

Sunday, January 12th, 2014

Why State Economic Development Strategies Should Be Metro-Centric

Globalization, technology, productivity improvements, and the resulting restructuring of the world economy have led to fundamental changes that have destroyed the old paradigms of doing business. Whether these changes are on the whole good or bad, or who or what is responsible for bringing them into being, they simply are. Most cities, regions, and US states have extremely limited leverage in this marketplace and thus to a great extent are market takers more than market makers. They have to adapt to new realities, but a lack of willingness to face up to the truth, combined with geo-political conditions, mean this has seldom been done.

Three of those new realities are:

1. The primacy of metropolitan regions as economic units, and the associated requirement of minimum competitive scale. It is mostly major metropolitan areas, those with 1-1.5 million or more people, that have best adapted to the new economy. Outside of the sparsely populated Great Plains, smaller areas have tended to struggle unless they have a unique asset such as a major state university. Even the worst performing large metros like Detroit and Cleveland have a lot of economic strength and assets behind them (e.g., the Cleveland Clinic) while smaller places like Youngstown and Flint have also gotten pounded yet have far fewer reasons for optimism. Many new economy industries require more skills than the old. People with these skills are most attracted to bigger cities where there are dense labor markets and enough scale to support items ranging from a major airport to amenities that are needed to compete.

2. States are not singular economic units. This follows straightforwardly from the first point. As a mix of various sized urban and rural areas, regions of states have widely varying degrees of economic success and potential for the future. Their policy needs are radically different so the one size fit all nature of government rules make state policy a difficult instrument to get right. Additionally, many major metropolitan areas that are economic units cross state borders.

3. Many communities may never come back, and many laid-off workers may never be employed again. Realistically, many smaller post-industrial cities are unlikely to ever again by economically dynamic no matter what we do. And lost in the debate over the n-th extension of emergency unemployment benefits is the painful reality that for some workers, especially older workers laid off from manufacturing jobs, there’s no realistic prospect of employment at more than near minimum wage if that. As Richard Longworth put it in Caught in the Middle, “The dirty little secret of Midwest manufacturing is that many workers are high school dropouts, uneducated, some virtually illiterate. They could build refrigerators, sure. But they are totally unqualified for any job other than the ones they just lost.” This doesn’t even get to the big drug problems in many of these places. This isn’t everybody, but there are too many people who fall into that bucket.

I want to explore these truths and potential state policy responses using the case study of Indiana. An article in last week’s Indianapolis Business Journal sets the stage. Called “State lags city with science, tech jobs” it notes how metropolitan Indianapolis has been booming when it comes to so-called STEM jobs (Science, Technology, Engineering, Math). Its growth rate ranked 9th in the country in study of large metro areas. However, the rest of Indiana has lagged badly:

Indiana for more than a decade has blown away the national average when it comes to adding high-tech jobs. But outside the Indianapolis metro area, there isn’t much cause for celebration.

Careers in science, technology, engineering and math—typically referred to as STEM fields—have surged in growth compared to other careers in Marion and Hamilton counties. It’s a boon for economic development, considering the workers earn average wages almost twice as high as all others, and employers sorely need the skills. Dozens of initiatives focus on building STEM jobs in the state.

A recent report ranked the Indianapolis-Carmel metro area ninth in the country in STEM jobs growth since the tech bubble burst in 2001. But while the metro area has grown, the rest of Indiana has barely budged from the early 2000s, an IBJ analysis of U.S. Bureau of Labor Statistics found.

Indianapolis grew its STEM job base by 39% since 2001 while the rest of the state grew by only 10% (only 6% if you exclude healthcare jobs). Much of the state actually lost STEM jobs.

This divergence between metropolitan Indianapolis (along with those smaller regions blessed with a unique asset like Bloomington (Indiana University), Lafayette (Purdue University) and Columbus (Cummins Engine)) and the rest of the state is a well-worn story by now. Here are a few baseline statistics that tell the tale.


Item Metro Indianapolis Rest of Indiana
Population Growth (2000-2012) 15.9% 4.1%
Job Growth (2000-2012) 5.9% -7.2%
GDP Per Capita (2012) $50,981 $34,076
College Degree Attainment (2012) 32.1% 20.1%

Additionally, there does appear to be something of a brain drain phenomenon, only it’s not brains leaving the state, it’s people with degrees moving from outstate Indiana to Indianapolis. From 2000-2010 a net of about 51,000 moved from elsewhere in Indiana to metro Indianapolis. As Mark Schill put it in the IBJ:

“Indianapolis is somewhat of a sponge city for the whole region,” said Mark Schill, vice president of research at Praxis Strategy Group, an economic development consultant in North Dakota.

The situation in Indiana, Schill said, is common throughout the United States: States with one large city typically see their engineers, scientists and other high-tech workers flock to the urban areas from smaller towns.

Even I find it very surprising that of my high school classmates with college degrees, half of them live in Indianapolis – this from a tiny rural school along the Ohio River in far Southern Indiana near Louisville, KY.

What has Indiana’s policy response been to this to date? I would suggest that the response has been to a) adjust statewide policy levers to do everything possible to reflate the economy of the “rest of Indiana” while b) making subtle tweaks attempt to rebalance economic growth away from Indianapolis.

On the statewide policy levers, the state government has moved to imposed a one size fits all, least common denominator approach to services. The state centralized many functions in a recent tax reform. It also has aggressively downsized government, which now has the fewest employees since the 1970s. Tax caps, a comparative lack of home rule powers, and an aggressive state Department of Local Government Finance have combined to severely curtail local spending as well. Gov. Pence took office seeking to cut the state’s income tax rate by 10% (he got 5%), and now wants to eliminate the personal property tax on business. Indiana also passed right to work legislation.

I call this “the best house on a bad block strategy.” I think Mitch Daniels looked around at Illinois, Ohio, and Michigan and said, “I know how to beat these guys.” Indiana is not as business friendly as places like Texas or Tennessee, but the idea was to position itself to capture a disproportionate share of inbound Midwest investment by being the cheapest. (I’ll get to Pence later).

The subtle tweaks have been income redistribution from metro Indianapolis (documented by the Indiana Fiscal Policy Institute) and using the above techniques and others to apply the brakes to efforts by metro Indy to further improve its quality of life advantage over many other parts of the state (see my column in Governing magazine for more). One obvious example is a recent move by the Indiana University School of Medicine to build full four year regional medical school campuses and residency programs around the state with the explicit aim of keeping students local instead of having them come to Indianapolis for medical training.

What there’s been next to nothing of is any sense of metropolitan level or even regional thinking. The state does administer programs on a regional level, but the strategy is not regionally oriented and the administrative borders don’t even line up. Here are the boundaries of the various workforce development boards:

There’s a semi-metropolitan overlay, but as I’ve long noted places like Region 6 are economic decline regions, not economic growth regions. Here’s how the Indiana Economic Development Corp. sees the world:

These are not just agglomerations of the workforce districts, there are numerous differences between them. The point is that clearly the organization is driven by administrative convenience and the political need for field offices, not a metro-centric view of the world or strategy.

Add it all up and it appears that Indiana has decided to fight against all three new realities above rather than adapting to them. It rejects metro-centricity, imposes a uniform policy set, and is oriented towards trying to reflate the most struggling communities. I don’t think this was necessarily a conscious decision, but ultimately that’s what it amounts to.

When you fight the tape, you shouldn’t expect great results and clearly they haven’t been stellar. Since 2000, Indiana comfortably outperformed perennial losers Michigan and Ohio on job growth (well, less job declines), but trailed Kentucky, Wisconsin, Minnesota, Iowa, and Missouri. But notably, Indiana only outpaced Illinois by a couple percentage points. That’s a state with higher income taxes (and that actually raised them) that’s nearly bankrupt and where the previous two governors ended up in prison. Yet Indiana’s job performance is very similar. What’s more, Hoosier per capita incomes have been in free fall versus the national average, likely because it has only become more attractive to low wage employers.

Fiscal discipline, low taxes, and business friendly regulations are important. But they aren’t the only pages in the book. Workforce quality counts for a lot, and this has been Indiana’s Achilles heel. (My dad, who used to run an Indiana stone quarry, had trouble finding workers with a high school diploma who could pass a drug test and would show up on time every day – hardly tough requirements one would think). Also aligning with, not against market forces is key.

I will sketch out a somewhat different approach. Firstly, regarding the chronically unemployed, clearly they cannot be written off or ignored. However, I see this as largely a federal issue. We need to come to terms with the reality that America now has a population of some million who will have extreme difficulty finding employment in the new economy (see: latest jobs report). We’ve shifted about two million into disability rolls, but clearly we’ve to date mostly been pretending that things are going to re-normalize.

For Indiana, the temptation can be to reorient the entire economy to attract ultra low-wage employers, then cut benefits so that people are forced to take the jobs. I’ve personally heard Indiana businessmen bemoaning the state’s unemployment benefits that mean workers won’t take the jobs their company has open – jobs paying $9/hr. Possibly the 250,000 or so chronically unemployed Hoosiers may be technically put back to work through such a scheme – eventually. But it would come at the cost of impoverishing the entire state. Creating a state of $9/hr jobs is not making a home for human flourishing, it’s building a plantation.

Instead of creating a subsistence economy, the focus should instead be on creating the best wage economy possible, one that offers upward mobility, for the most people possible, and using redistribution for the chronically unemployed. You may say this is welfare – and you’re right. But I would submit to you that the state is already in effect a gigantic welfare engine. In addition to direct benefits, the taxation and education systems are redistributionist, and the state’s entire economic policy, transport policy, etc. are targeted at left-behind areas (i.e., welfare). Even corrections is in a sense warehousing the mostly poor at ruinous expense. So Indiana is already a massive welfare state; we are just arguing about what the best form is. I think sending checks is much better than distorting the entire economy in order to employ a small minority at $9/hr jobs – but that’s just me. Again, we are in uncharted territory as a country and this is ultimately going to require a national response, even if it’s just swelling the disability rolls even more. I do believe people deserve the dignity of a job, but we have to deal with the unfortunate realities of our new world order.

With that in mind, the right strategy would be metro-centric, focusing on building on the competitively advantaged areas of the state – what Drew Klacik has called place-based cluster – and competitively advantaged middle class or better paying industries.

Contrary to some of the stats above, this is not purely an Indianapolis story. Indiana has a number of areas that are well-positioned to compete. Here’s a map with key metro regions highlighted:

This may look superficially like the maps above, but it is explicitly oriented around metro-centric thinking. Metro Indy has been doing reasonably well as noted. But Bloomington, Lafayette, and Columbus (sort of small satellite metros to Indy) have also done very well. In fact, all three actually outperformed Indy on STEM job growth.

Additionally, three other large, competitively advantaged metro areas take in Indiana territory: Chicago, Cincinnati, and Louisville. These are all, like Indy, places with the scale and talent concentrations to win. True, none of the Indiana counties that are part of those metros is in the favored quarter. But they still have plenty of opportunities. I’ve written about Northwest Indiana before, for example, which should do well if it gets its act together.

This covers a broad swath of the state from the Northwest to the Southeast. It comes as no surprise to me that Honda chose to locate its plant half way between Indianapolis and Cincinnati, for example.

The state should align its resources, policies, and investments to enable these metro regions to thrive. This doesn’t mean jacking up tax rates. Indiana should retain its competitively advantaged tax structure. But it should mean no further erosion in Indiana’s already parsimonious services. The state is already well-positioned fiscally, and in a situation with diminishing marginal returns to further contraction.

Next, empower localities and regions to better themselves in accordance with their own strategies. This means an end to one size fits all, least common denominator thinking. These regions need to be let out from under the thumb of the General Assembly. That means more, not less flexibility for localities. Places like Indianapolis, Bloomington, and Lafayette would dearly love to undertake further self-improvement initiatives, but the state thinks that’s a bad idea. (I believe this is part of the subtle re-balancing attempt I mentioned).

It also means using the state’s power to encourage metro and extended region thinking. For example, last year within a few months of each other the mayors of Indianapolis, Anderson, and Muncie all made overseas trade trips – separately and to different places. That’s nuts. The state should be encouraging them to do more joint development.

This also means recognizing the symbiotic relationship that exists between the core and periphery in the extended Central Indiana region, clearly the state’s most important. The outlying smaller cities, towns, and rural areas watch Indianapolis TV stations, largely cheer for its sports teams, get taken to its hospitals for trauma or specialist care, fly out of its airport, etc. Metro Indianapolis and its leadership have also basically created and funded much of the state’s economic development efforts (e.g., Biocrossroads) and many community development initiatives (the Lilly Endowment). Many statewide organizations are in effect Indianapolis ones that do double duty in serving the state. For example, the Indiana Historical Society. (There is no Indianapolis Historical Society).

On the other side of the equation, Indianapolis would not have the Colts and a lot of other things without the heft added from the outer rings out counties that are customers for these amenities. It benefits massively from that, particularly since it’s a marginal scale city. One of the biggest differences between Indy and Louisville is that Indy was fortunate enough to have a highly populated ring of counties within an hour’s drive.

So in addition to aligning economic development strategies around metros, and freeing localities to pursue differentiated strategies, the state should encourage the next ring or two of counties that are in the sphere of influence of major metros to align with their nearest larger neighbor.

Contrary to popular belief, this is a win-win. When I was in Warsaw, Indiana, people were concerned that many highly paid employees of the local orthopedics companies lived in Ft. Wayne. From a local perspective, that’s understandable and obviously they want to be competitive for that talent and should be all means go for it. On the other hand, what if Ft. Wayne wasn’t there for those people to live in? Would those orthopedics companies be able to recruit the talent they need to stay located in small town Indiana?

It’s similar for other places. Michael Hicks, and economist at Ball State in Muncie, said, “Almost all our local economic policies target business investment and masquerade as job creation efforts. We abate taxes, apply TIFs and woo businesses all over the state, but then the employees who receive middle-class wages (say $18 an hour or more) choose the nicest place to live within a 40-mile radius. So, we bring a nice factory to Muncie, and the employees all commute from Noblesville.” Maybe Muncie isn’t completely happy about this, understandably. But would they have been able to recruit those plants at all (and the associated taxes they pay and the jobs for anybody who does stay local) if higher paid workers didn’t have the option to live in suburban Noblesville? Would the labor force be there?

I saw a similar dynamic in Columbus. Younger workers recruited by Cummins Engine chose to live in Greenwood (near south suburban Indy). Columbus wants to keep upgrading itself to be more attractive – a good idea. But the ability to reverse commute from Indy is an advantage for them.

Louisville, Kentucky has one of the highest rates of exurban commuting the country because so many Hoosiers in rural communities drive in for good paying work.

This is the sort of thinking and planning that needs to be going on. Realistically, most of these small industrial cities and rural areas are not positioned to go it alone and they shouldn’t be supported by the state in attempting to do so. They need to a align with a winning team.

There are two groups of places that require special attention. One is the mid-sized metro regions of Ft. Wayne, Evansville, and South Bend-Elkhart. These places are too far from larger metros and aren’t large enough themselves to have fully competitive economies. No surprise two of the three lost STEM jobs. Evansville has done better recently on the backs of Toyota, but has a vast rural hinterland it cannot carry with its small size. The region has done ok of late, but it has also received gigantic subsidies in the form of multiple massive highway investments, and now a massive coal gasification plant subsidy. I don’t believe this is sustainable. These places need special assistance from the state to devise and implement strategies.

The other grouping consists of rural and small industrial areas that are too far outside the orbit of a major metro to effectively align with it. This would includes places like Richmond or Blackford County. They might get lucky and land a major plant, but realistically they are going to require state aid for some time to maintain critical services.

For the last two groups especially, there also needs to be a commitment by the state’s top brain hubs – Indy and the two university towns – to applying their intellectual and other resources to the difficult problem at hand. Part of that involves helping them be the best place of their genre that they can. While cities are competitively advantaged today, not everybody wants to live in one. So there is still an addressable market, if not as large, for other places.

Put it together and here’s the map that needs to be changed. It’s percentage change in jobs, 2000-2012:

Pretty depressing. Urban core counties had some losses, but suburban Indy, Chicago, and Cincy did decently (Louisville’s less well), plus Bloomington area, Lafayette, and Columbus. You see also the strong performance of Southwest Indiana which is fantastic, but the sustainability of which I think is in question. Wages are higher in metro areas too, by the way. Here’s the average weekly wage in 2012, which shows most of the state’s metros doing comparatively well:

In short, I suggest:

- Retain lean fiscal structure but limit further contractions
- Goal is to build middle class or better economy, not bottom feeding
- Align economic development efforts to metro areas, particularly larger, competitively advantages locations. Align capital investment in this direction as well.
- Greater local autonomy to pursue differentiated strategies for the variegated areas of the state
- Special attention/help to strategically disadvantaged communities, but not entire state policy directed to servicing their needs.
- Utilization of transfers for the chronically unemployed pending a federal answer, but again, not redirection of state policy to attract $9/hr jobs.

This requires a lot of fleshing out to be sure, but I think is broadly the direction.

Back to Gov. Mike Pence, would he be on board with this? He’s Tea Party friendly to be sure and interested in fiscal contraction. But he’s not a one-trick pony. He’s actually taken some interesting steps in this regard. He is subsidizing non-stop flights from Indianapolis to San Francisco for the benefit of the local tech community. He also wants to establish another life sciences research institute in Indy. And he’s talked about more regionally focused economic development efforts. It’s a welcome start. I think he groks the situation more than people might credit him for. Keep in mind that he did not establish the state’s current approach, which arguably even pre-dated Mitch Daniels, and he has to deal with political realities. And if as they say only Nixon could go to China, then although a reorienting of strategy is not about writing big checks, still perhaps only someone with conservative bona fides like Pence can push the state towards a metro-centric rethink.

Tuesday, December 10th, 2013

Southern California’s Road Back by Joel Kotkin

[ Believe it or not, metro LA has fewer jobs today than it did in 1990, making it the only metro in America's top ten that can make that "boast." Today Joel Kotkin shares some of his thoughts on rebuilding - Aaron. ]

If the prospects for the United States remain relatively bright – despite two failed administrations – how about Southern California? Once a region that epitomized our country’s promise, the area still maintains enormous competitive advantages, if it ever gathers the wits to take advantage of them.

We are going to have to play catch-up. I have been doing regional rankings on such things as jobs, opportunities and family-friendliness for publications such as Forbes and the Daily Beast. In most of the surveys, Los Angeles-Orange County does very poorly, often even worse than much-maligned Riverside and San Bernardino. For example, in a list looking at “aspirational cities” – that is places to move to for better opportunities – L.A.-Orange County ranked dead last, scoring well below average in everything from unemployment to job creation, congestion and housing costs relative to incomes.

Yet, Southern California possesses unique advantages that include, but don’t end at, our still-formidable climatic and scenic advantages. The region is home to the country’s strongest ethnic economy, a still-potent industrial-technological complex and the largest culture industry in North America, if not the world.

In identifying these assets, we have to understand what we are not: Silicon Valley-San Francisco, or New York, where a relative cadre of the ultrarich, fueled by tech IPOs or Wall Street can sustain the local economy. Unlike the Bay Area, in particular, our economy must accommodate a much larger proportion of poorly educated people – almost a quarter of our adult population lacks a high school degree. This means our economy has to provide opportunities for a broader range of skills.

Nor are we a corporate center such as New York, Houston, Dallas or Chicago. We remain fundamentally a hub for small and ethnic businesses, home to a vast cadre of independent craftspeople and skilled workers, many of whom work for themselves. In fact, our region – L.A.-Orange and Riverside-San Bernardino – boasts the highest percentage of self-employed people of any major metropolitan area in the country, well ahead of the Bay Area, New York and Chicago.

Policy from Washington has not been favorable to this grass-roots economy. The “free money for the rich” policy of the Bernanke Federal Reserve has proven a huge boom to stock-jobbers and venture firms but has not done much to increase capital for small-scale firms. Yet it is to these small firms – dispersed, highly diverse and stubbornly individualistic – that remain our key long-term asset, and they need to become the primary focus on regional policy-makers.

Ethnic Networks

Immigration has slowed in recent years but the decades-long surge of migration, largely from Asia and Mexico, has transformed the area into one of the most diverse in the world. More to the point, Southern California has what one can call diversity in depth, that is, huge concentrations of key immigrant populations – Korean, Chinese, Mexican, Salvadoran, Filipino, Israeli, Russian – that are as large or larger than anywhere outside the respective homelands. Foreigners also account for many of our richest people, with five of 11 of L.A.’s wealthiest being born abroad.

These networks are critical in a place lacking a strong corporate presence. Our international connections come largely as the result of both the ethnic communities as well as our status as the largest port center in North America, which creates a market for everything from assembly of foreign-made parts to trade finance and real estate investment. Southern California may be a bit of a desert when it comes to big money-center banks, but it’s home to scores of ethnic banks, mainly Korean and Chinese, but also those serving Israeli, Armenian and other groups.

For the immigrants, what appeals about Southern California is that we offer a diverse, and dispersed, array of single-family neighborhoods. Both national and local data finds immigrants increasingly flocking to suburbs. Places like the San Gabriel Valley’s 626 area, Cerritos, Westminster, Garden Grove, Fullerton and, more recently, Irvine, have expanded the region’s geography of ethnic enclaves.

These enclaves drive whole economies, such as Mexicans in the wholesale produce industry or the development of electronics assembly and other trade-related industry by migrants largely from Taiwan. Global ties are critical here. Korean-Americans started largely in ethnic middleman businesses, but have been moving upscale, as their children acquire education. They, in turn, have helped attract investment from South Korea’s rising global corporations, including a new $200 million headquarters for Hyundai in Fountain Valley, as well as a $1 billion, 73-story new tower being built by Korean Air in downtown Los Angeles.

Tech Industrial Base

During the Cold War, Southern California sported one of the largest concentrations of scientists and engineers in the world. The end of the Cold War, at the beginning of the 1990s, severely reduced the region’s technical workforce, a process further accelerated by the movement out of the region of such large aerospace firms as Lockheed and Northrop. The region has roughly 300,000 fewer manufacturing jobs than it had a decade ago, largely due to losses in aerospace as well as in the garment industry.

Yet, despite the decades-long erosion, Southern California still enjoys the largest engineering workforce – some 70,000 people – in the country. It also graduates the most new engineers, although the vast majority of them appear to leave for greener pastures. One looming problem: a paucity of venture capital, where the region lags behind not just the Bay Area, but also San Diego and New York. This can be seen in the relative dearth of high-profile start-ups, particularly in fields like social media, now dominated by the Bay Area.

But the process of recovery in Southern California does not require imitating Silicon Valley. Instead we need to leverage our existing talent base – and recent graduates – and focus on the region’s traditional strength in the application of technology. A recent analysis of manufacturing by the economic modeling firm EMSI found strong growth in some very promising sectors, including the manufacturing of surgical and medical equipment, space vehicles and a wide array of food processing, an industry tied closely to the immigrant networks.

Cultural Complex

For most Americans, and even more so among foreigners, the image of Southern California is shaped by its cultural exports, not only in film and television but in fashion and design. This third sector epitomizes the uniqueness of the region, and provides an economic allure that can withstand both the generally poor business climate and the incentives offered by other regions.

After a period of some stagnation, Hollywood again is increasing employment. Roughly 130,000 people work in film-related industries in Los Angeles, which is now headed back to levels last seen a decade earlier but still well below the 146,000 jobs that existed in 1999.

At the same time, the sportswear and jeans business in Los Angeles, and the surfwear industry in Orange County, remain national leaders. Overall, the area’s fashion industry has retained a skilled production base – over twice that of rival New York’s – and has been aided, in part, by access to Hollywood, lower rents and labor costs than in New York.

Taken together, these sectors – ethnic business, sophisticated manufacturing and culture – could provide the basis for a renaissance in the local economy. The smaller firms in these fields, in particular, need a friendlier business climate, a more evolved skills-training program from local schools and a better-maintained infrastructure. More than anything, though, they require an understanding on the part of both government and business that their success remains the best means to reverse decades of relative decline.

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

This piece originally appeared at The Orange County Register.

Sunday, September 29th, 2013

Industrial Policy Reconsidered

[ I've always been a skeptic of industrial policy, and the travails of the various federal green programs and such make me feel justified my thinking in that regard. Yet, for struggling communities, clearly something needs to be done, even if not trying to pick specific winners and losers. In 1983 Rhode Island had an opportunity to have implemented an economic turnaround plan dismissed by critics as industrial policy, but voted it down. I recently took a look back and that, and the results of that decision that I think are relevant to other places trying to figure out what to do or not do. ]

I’m a relative newcomer to Rhode Island, but you don’t to be here long to hear about the infamous “Greenhouse Compact,” a state economic development strategy developed at the end of the Volcker recession in 1983 and voted down by the public in 1984.  It is certainly one of the most remarkable economic development analyses ever performed. I have not seen a full copy, but the internet tells me it exists in at least two volumes with a length of at least 976 pages.  There was a 47-page executive summary – not much shorter than many full reports these days – that I did manage to get ahold of and read, however. If the full report is as robust as that suggests, then I’ve never seen anything that appears to be so thorough and in-depth.

The Greenhouse Compact vs. Laissez-Faire

The Greenhouse Compact was the brainchild of Ira Magaziner, who went on to design Hillarycare, apparently not learning his lessons as that plan was developed and failed in a similar fashion. Though perhaps not the reason the Greenhouse Compact was voted down, it was roundly criticized by economists like Brown’s Allan Feldman, who strongly attacked it as industrial policy.

Magaziner and Feldman lay out starkly contrasting views of the matter. The Greenhouse Compact says:

Today, Rhode Island is in an economic crisis….When an economy has a vibrant private sector which can clearly provide the growth opportunities in investment that the economy needs to employ its people fully and raise its living standards then one can speak of a laissez-faire attitude as being appropriate. Rhode Island is currently far from that. It has many industries which are becoming subject to low wage competition; it has many others which are mature low wage rate industries with very little growth prospect but a need to modernize and develop new products; it has very few companies that have the prospect for significant growth and these are often being wooed by other states with particularly attractive incentive packages; and it has only a smattering of activities in new technology areas. Under these circumstances, a concerted economic development effort is the only way to create the momentum to build economic prosperity.

In the run-up to the vote, Feldman told the New York Times:

“I think this is not an appropriate thing for government to do, but that’s not my basis for opposition,” said Allan Feldman, an economics professor at Brown who is co-chairman of a group, Common Sense, formed to oppose the Greenhouse Compact. ”Beyond the ideological question, I think the economic analysis is terrible and the plan won’t work. It favors bankers, venture capitalists and high technology, and while it might be great for Terry Murray’s bank, it won’t help the average Rhode Islander.”

After it was voted down, he said in the Christian Science Monitor, “It was not economically sound, and would ‘offer very little to taxpayers.’”  He also wrote an article in which he gloated that “industrial policy is dead.”

A bit later, as Rhode Island’s economy was looking up, Feldman appeared vindicated, telling the Washington Post in an article titled “Rhode Island: Rags to Riches”, “Governors delude themselves. They like to think they’re responsible for everything.” In the same piece Magaziner stuck to his guns, saying, “We should be fixing the roof when the sun is shining. We really should have invested more than we have.”

The Greenhouse Compact Vindicated

Fast forward 30 years and what has history shown? The predictions of the Greenhouse Compact have been entirely vindicated and the approach of Feldman and company has perpetuated the economic ruination of the state. Rhode Island’s post-recession bump wasn’t a real recovery; it was a dead cat bounce.

The Greenhouse Compact had said, “Overall, prospects are bleak. Industries which are likely to lose employment or at best stay stable far outweigh those with growth prospects. Those companies with growth prospects often plan to expand out of state….Given the current structure of Rhode Island’s economy, these jobs are unlikely to emerge.” This report included a sector by sector analysis in which it concluded that with the exception of eds and meds, the future didn’t look bright. And while it may have been off in some details, clearly history has borne out the Compact’s central claims.

It certainly possible that the Greenhouse Compact’s recommendations would have failed to stem the tide. But it’s hard to see how they could have made things much worse, thus pursuing the strategy likely made sense on option value alone.

What Feldman and the ultra-purists on the right fail to fully recognize is that creative destruction is real. Just as in the commercial marketplace where almost all firms ultimately fail, the vast majority of places will end up failing as well. Once they reach the top of their maturity curve, they’re done, and unless they reinvent themselves and begin a new growth curve again, they sicken and enjoy a long stagnating decline. Rhode Island reinvented itself three times from agriculture to seaborne merchant trading to industry, but failed to pull-off a fourth reinvention. Any CEO of a company facing a similar need to reinvent itself certainly would not take the attitude that he should let the market sort it out and do nothing but manage costs. But that’s the prescription too many give to public sector leaders.

From ‘Industrial Policy’ to ‘Conventional Wisdom’

Not all of the Greenhouse Compact’s recommendations make sense. The $138 million (a lot more than that now when you factor in inflation) in incentives to existing industries seems more like a fillip to interest groups to secure their buy in than a real strategy, for example. But a lot of it, including the eponymous “greenhouse” component, were ahead of their time and indeed have become almost conventional wisdom.

The Greenhouse idea was to basically have some public sector support to nurture emerging industries that were research and technology related in areas where Rhode Island was perceived to have some potential to play. These would include a marketing and civic booster program, as well as a venture capital fund, including some unique components such as allowing the state’s pension fund to invest in startups.

Pretty much every state has adopted a similar model in the last decade. Even Tea Party friendly politicians like Indiana Governors Mitch Daniels and Mike Pence invested heavily in Biocrossroads, which is the umbrella organization for that state’s “greenhouse” in life sciences, for example. They may be fiscal conservatives, but they’re not dumb. Pretty much every single city and state has variations on these. Another example: one of the plan’s suggestions was to create a Rhode Island Academy of Science and Engineering to boost the supply of talent into those industries. This idea was recently implemented – by New York Mayor Michael Bloomberg, who is opening a new technical and engineering college on Roosevelt Island in conjunction with Cornell and Israel’s Technion backed up by significant public investment. Look at any city or state, and you’ll see them trying some variation on the greenhouse theme, though with different terminology. Many of these programs are ‘me too’ initiatives that aren’t likely to be effective. But where the approach is applied to areas where a state or metro area has a potential advantage, it makes a lot of sense.

It’s interesting that the Greenhouse Compact even specifically warned against 38 Studios style cross-border raiding, saying, “To some states, economic development has meant trying to convince industries in other states to close down and move. This will not be Rhode Island’s approach. We are not interested in ‘stealing’ another state’s companies.”

Now plans aren’t implementation, and obviously the reality would have involved a lot of politicization. I’m not so naïve to believe that poaching attempts would have been eliminated just because this report said so. But the bottom line is that Rhode Island had an opportunity to be 20 years ahead of its time, and took a pass.  Free market types might argue that their preferred policies were never implemented either, but that’s the right-wing equivalent of “true communism’s never been tried.”  The results are in and the Rhode Island experience makes it very clear that while some of these approaches that might have had aspects of industrial policy (though certainly nothing like the botched federal green subsidies and such that rightly give industrial policy a black eye) may not have been the right idea, doing nothing certainly didn’t work.

In a lesson to Tea Partiers everywhere, the Greenhouse Report summed it up, “If Rhode Island is to undergo an economic renaissance, investors must have significant positive reasons for investing in this state rather than any other. The absence of negatives will not be enough.”  A Tea Party style focus on nothing other than taxes and costs – removing the negatives – is insufficient and history has borne that out (just as is now being repeated in many Midwestern states that are becoming Rhode Islands despite their nominally attractive business climates).  Want to oppose plans like the Greenhouse Compact? Fine, but show us your plan and give us a reason to actually believe it will work.

Based on what I read in the executive summary, though there area a number of anachronisms and areas I didn’t agree with, the Greenhouse Compact actually stands up quite well today. If it were simply implemented as is, it would still probably be an improvement over the status quo, but now that everybody and their brother has piled on, the big returns have, sadly, already been harvested elsewhere.

This article originally appeared in GoLocalProv on September 23, 2013.

Tuesday, July 9th, 2013

Is Detroit the Next Berlin? by Justin Fox

[ Given the emergence of an artist movement in Detroit, the comparisons to Berlin are obvious. However, in this piece that ran over in Techonomy last year, Justin Fox argues the comparison is invalid. I'm glad to be able to repost it. And I'd also suggest that you might want to check out more of the material from Techonomy Detroit - Aaron. ]

After the fall of the Wall in 1989, Berlin had very cheap housing and industrial space, some in spectacularly grand old buildings. Years of division—with repressive communist rule on one side of town and isolation and economic stagnation on the other—had left the city depressed and underpopulated. Reunification initially only made things worse, as uncompetitive Eastern-side state-owned factories closed en masse.

This translated into, among other things, apartment rents much lower than in any other major Western European city. The low rents and post-industrial landscape drew artists and other bohemian sorts. Then low rents plus a burgeoning cultural scene drew young college grads who couldn’t find good jobs anywhere (German unemployment was high in the 1990s). They could get by in groovy, low-cost Berlin. This influx eventually translated into economic revival. Now Berlin is a boomtown, and everybody’s complaining about the skyrocketing rents.

Detroit’s roughly the same size as Berlin (measured by metro area population). It’s got a lot of cheap real estate, some of it spectacularly grand. It’s got abandoned factories. It’s got great cultural history (mainly on the music front). So … let the young bohemians come and the boom begin, right?

Uh … no. I’m moderating a panel at the Techonomy Detroit conference titled “Is Detroit the Next Berlin?” but I just don’t buy it. Sure, I’m rooting for Detroit’s revival. And the revival seems real, although still in its early stages. Studying and learning from the struggles and successes of other cities (as WDET did with its series on the Detroit-Berlin Connection) is never a bad idea. But the notion that Berlin could be a model for Detroit strikes this outsider as wrongheaded and a bit dangerous. It is an aspiration bound to be thwarted. Here’s what makes Berlin so different from Detroit (and vice versa):

1) Berlin is a political and cultural capital. The economic impact of becoming the capital of a reunited Germany in 1990 was actually a disappointment for Berlin at first, as some government agencies stayed away, and corporations did, too. But the reality of becoming the capital city of a major economic power, and the construction boom that went with that, eventually had a big impact. Berlin also was quickly able to regain its pre-World-War II status as the country’s artistic and cultural capital—thanks in part to massive federal subsidies. So it became Germany’s New York (minus finance and media) plus its Washington, D.C. (minus the huge defense and homeland-security industry). With super-cheap rents. That’s a lot of magnetic power, and by the late 1990s Berlin had become the default destination for creative, ambitious, educated young Germans. Detroit has none of these dynamics going for it except the real estate. Bringing in a few curious artists is great, but expecting a mass inflow of hipsters from all over America is crazy. It would already be a huge victory if lots of creative, ambitious, educated young Michiganders began moving to the city.

2) Berlin reunified. Detroit never had a Wall, but it’s been riven by its own division over the past half century, a stark racial and political separation between the city and the rest of the metropolitan area. There’s clearly been progress made in recent years, with new stadiums and other development downtown, and an apparent shift—born of shared economic desperation—toward more of a we’re-all-in-this-together regional attitude. But the divide is undeniably still there, and it means that even a successful revitalization will of necessity have to take a much different, less-centralized shape than in Berlin. Three quarters of metro Berlin’s 4.4 million people live within the city limits. In Detroit it’s the other way around; more than 80% of the 4.3 million inhabitants of the metro area live outside Detroit proper. Finding ways to tie city and suburbs together remains one of the area’s biggest challenges.

3) Berlin has good public transit. Yeah, its air connections have long been something of a joke, but that should improve dramatically with the opening next year of a new airport. The city is also linked by high-speed rail to the rest of the country’s major cities. Detroit’s got a great airport, but beyond that it’s built quite literally around the automobile. The millennials who would have to begin flocking to Detroit to make a Berlin scenario real don’t seem to like cars much. There’s no easy way around this: Detroit simply can’t afford to build a mass-transit infrastructure right now, and a Berlin-style, youth-oriented metropolis is almost inconceivable without such an infrastructure.

4) Detroit knows business. Yes, the city’s main business has been through a really tough time lately, but metro Detroit is full of private sector expertise—not just in automobiles—and seems to be growing a new entrepreneurial class. Berlin has a startup scene now, but that’s been driven mostly by newcomers. When its long, slow return to prosperity began it was a city of bureaucrats, former communists, and the long-term unemployed. Detroit has a huge advantage over Berlin here, an advantage that should be exploited and emphasized.

5) Detroit has better immigrants. Sure, now Berlin is attracting jet-setters from all over—and has attracted hard-working immigrants from Turkey and Eastern Europe for years. But Detroit, and U.S. cities in general, have two big advantages over their continental European counterparts in attracting ambitious, entrepreneurial newcomers from other countries: (1) we speak the global language, English, and (2) despite occasional problems we have a deserved reputation as a nation where newcomers can thrive. The Detroit area has of course already benefited from its status as destination No. 1 in the U.S. for immigrants from Arab countries, and any realistic comeback scenario for the area and the city proper has to include a big role for overseas immigrants.

There’s an echo here of the competing visions of urbanists Richard Florida and Joel Kotkin. Florida is of course the progenitor of the idea that a new, urban “creative class” is the key economic driver of our time—and that cities (like Berlin) that can attract young creatives will thrive. Kotkin argues that this simply won’t work for most American cities, and that messy, immigrant-filled, strip-mall sprawl is an equally vibrant and more realistic model. Florida, who married a Detroiter, has been talking up the creative-class link to the city’s revival. Kotkin, in a recent newspaper profile of Florida, scoffed that “There’s not enough yuppies on the planet to save Detroit.”

In the case of the Detroit area, they’re both right. Locavore restaurants and design studios aren’t going to bring back the regional economy. That’s going to require other, more mass-scale kinds of business success, and possibly some big-time government investment. At the same time, returning the city of Detroit to its rightful position as economic and cultural heart of the region—which seems like an essential prerequisite to any truly sustainable revival of metro Detroit—will take exactly the kind of building-by-building, restaurants-and-galleries-and-cool-little-creative-businesses entrepreneurship that Florida loves so much. Detroit is not the next Berlin. But it may still get a little bit of that Berlin spirit.

Justin Fox appeared at Techonomy Detroit in a session entitled ”Is Detroit the Next Berlin?” For complete coverage of the September 12, 2012, conference, click here.

This post originally appeared in Techonomy on September 11, 2012.

Tuesday, July 2nd, 2013

Strangling Innovation: Tesla vs. Rent Seekers

[ If you're at all involved with tech, then you probably know Steve Blank, who pioneered the customer development concept, is a must read on lean startups, and much more. I'd encourage you to check out his blog. If you're thinking about starting a tech company, his book "The Four Steps to the Epiphany" is a must read - though I should warn you there's a heckuva lot more than four steps in there! Steve recently weighed in on rent seeking after reports that car dealers are ganging up on Tesla to try to make direct Tesla sales illegal (which is probably already the case in most states). Urbanists frequently see the absurdity of rent seeking regulations when it comes to cool stuff we like like Teslas, Uber, or AirBnB. The challenge is to maintain that same anti-rent seeking ardor in more prosaic examples. Thanks to Steve for letting me repost this - Aaron. ]

The greatest number of jobs is created when startups create a new market – one where the product or service never existed before or is radically more convenient. Yet this is where startups will run into anti-innovation opponents they may not expect. These opponents have their own name – “rent seekers” – the landlords of the status-quo.

Smart startups prepare to face off against rent seekers and map out creative strategies for doing so…. First, however, they need to understand what a rent seeker is and how they operate…

———-

Recently, the New York and North Carolina legislatures considered a new law written by Auto Dealer lobbyists that would make it illegal for Tesla to sell cars directly to consumers. This got me thinking about the legal obstacles that face innovators with new business models.

Examples of startups challenging the status quo include: Lyft, Square, Uber, Airbnb, SpaceX, Zillow, Bitcoin, LegalZoom, food trucks, charter schools, and massively open online courses. Past examples of startups that succeeded in redefining current industries include Craigslist, Netflix, Amazon, Ebay and Paypal.

While Tesla, Lyft, Uber, Airbnb, et al are in very different industries, they have two things in common: 1) they’re disruptive business models creating new markets and upsetting the status quo and 2) the legal obstacles confronting them weren’t from direct competitors, but from groups commonly referred to as “rent seekers.”

Rent Seekers

Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.

These barriers to new innovative entrants are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.

No Regulation?

Not all government regulation is rent or rent seeking. Not all economic rents are bad. Patents for example, provide protection for a limited time only, to allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a products’ release. But patent trolls emerged as rent seekers by using patents as legalized extortion of companies.

How Do Rent Seekers Win?

Instead of offering better products or better service at lower prices, rent seekers hire lawyers and lobbyists to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is rent-seeking.

Rent seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks or future jobs in the regulated industry. They also use the courts to tie up and exhaust a startup’s limited financial resources.

Lobbyists also work through regulatory bodies like FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc. Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.

PayPal – Dodging Bullets

PayPal consistently walked a fine line with regulators. Early on the company shutdown their commercial banking operation to avoid being labeled as a commercial bank and burdened by banks’ federal regulations. PayPal worried that complying with state-by-state laws for money transmission would also be too burdensome for a startup so they first tried to be classified as a chartered trust company to provide a benign regulatory cover, but failed. As the company grew larger, incumbent banks forced PayPal to register in each state. The banks lobbied regulators in Louisiana, New York, California, and Idaho and soon they were issuing injunctions forcing PayPal to delay their IPO. Ironically, once PayPal complied with state regulations by registering as a “money transmitter” on a state-by-state basis, it created a barrier to entry for future new entrants.

U.S. Auto Makers – Death by Rent Seeking

The U.S. auto industry is a textbook case of rent seeking behavior. In 1981 unable to compete with the quality and price of Japanese cars, the domestic car companies convinced the U.S. government to restrict the import of “foreign” cars. The result? Americans paid an extra $5 billion for cars. Japan overcame these barriers by using their import quotas to ship high-end, high-margin luxury cars, establishing manufacturing plants in the U.S. for high-volume lower cost cars and by continuing to innovate. In contrast, U.S. car manufacturers raised prices, pocketed the profits, bought off the unions with unsustainable contracts, ran inefficient factories and stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75% in 1981 to 45% in 2012.

unplug tesla

Innovation in the Auto Industry

According to the Gallup Poll American consumers view car salesmen as dead last in honesty and ethics. Yet when Tesla provided consumers with a direct sales alternative, the rent seekers – the National Auto Dealers Association turned its lobbyists loose on State Legislatures robbing consumers in North Carolina, New York and Texas of choice in the marketplace.

In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.

Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.

Rent seeking is bad for the economy

Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.

Schumpeter’s theory of creative destruction – that entry by entrepreneurs was the disruptive force that sustained economic growth even as it destroyed the value of established companies – didn’t take into account that countries with lots of rent-seeking activity (pick your favorite nation where bribes and corruption are the cost of doing business) or dominated by organized interest groups tend to be the economic losers. As rent-seeking becomes more attractive than innovation, the economy falls into decline.

Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.

What Does This Mean For Startups?

In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market – one where either the product or service never existed before or the new option is radically more convenient for customers – the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well organized incumbents will fight if they perceive a threat to the status quo.

As a result disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.

impossibleIf you’re a startup with a disruptive business model here’s what you need to do:

Map the order of battle

  • Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.
  • Understand who has political and regulator influence and where they operate
  • Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back

Pick early markets where the rent seekers are weakest and scale

  • For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
  • Go after rapid scale of passionate consumers who value the disruption i.e. Uber and Airbnb, Tesla
  • Ally with some larger partners who see you as a way to break the incumbents lock on the market. i.e. Palantir and the intelligence agencies versus the Army and IBM’s i2, / Textron Systems Overwatch

For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability. AirBNB’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.” This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.

When you get customer scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include:

  • Hire your own lobbyists
  • Begin to build your own influence and political action groups
  • Publicly shame the incumbents as rent seekers
  • Use competition among governments to your advantage, eg, if New York or North Carolina doesn’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue
  • Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.
  • Buy them out i.e. guaranteed lifetime employment

Lessons Learned

  • Rent seekers are organizations that have lost the ability to innovate
  • They look to the government to provide their defense against innovation
  • Map the order of battle
  • Pick early markets and scale
  • With cash, take the battle to the incumbent

This post originally appeared in Steve Blank’s blog on June 24, 2013.

Sunday, June 2nd, 2013

Viva Las Vegas! Part 2 – Will the Downtown Project Succeed?

This is the second installment in my look at the Las Vegas Downtown Project. In part one I gave an overview of the project and some of the positives and success indicators. On Thursday I looked at some of the commonalities between Vegas and other small cities as a bridge to this installment. And finally today I want to look at some of the challenges I see with the Downtown Project and ask, will it succeed?

As for the answer to that question, some of it is a matter of how you define success. At a base level, there’s already been success. Downtown Las Vegas is now on the mental map and the discussion agenda for urbanists around the country. The product offering is already better. Also, the original concept of building an extended urban campus for Zappos seems likely to succeed. Downtown will certainly be light-years ahead of where it started as a live/work/play environment.

Other goals are more speculative. Can Zappos avoid the sub-linear scaling curse? We shall see, but given that the same leadership is running both the company and the Downtown Project, this is a good laboratory and case study for business schools to look at.

The big, aspirational goals around making Vegas the most community focused city in the world, and the co-working and co-learning capital of the world seem much more challenging. My previous post around common traits of small cities shows why there’s lot of competition in the community department. Also, with NYC having an estimated 50 co-working facilities already, it seems unlikely Vegas is ever going to win in co-working on volume of activity.

Still, better to aim high than low I always say. But looking forward to how Downtown Project plays out, I see three major areas of concern: the conventionality of the program, the fact that it goes against the DNA of Las Vegas, and challenge of curating a city versus running a company.

The Conventionality of Downtown Project

One thing that struck me when I saw Tony’s original talk at BIF-8 is the conventionality of much of what is being done. The project has a reputation for being very innovative, but most of the components of it are conventional wisdom. Or “best practices” if you will.

Car share, collisions, fashion, tech startups, co-working, art, music, coffeeshops, restaurants, etc. Everything is exceptionally buzzword compliant, right down the PBR on tap in the local establishments. All of the boxes are checked perfectly – too perfectly.

I described the project as Ed Glaeser meets Richard Florida which highlights how this happened. They consulted with all the gurus, from Elon Musk to Burning Man. And all the leading edge thinking was incorporated into the program.

But think about Zappos for a minute. If you ever take the tour, it’s obvious that this is a very unique and different company. Here’s a snap:


The scene at Zappos

The Zappos culture and service mentality did not come from taking the best of Seth Godin, Jim Collns, etc. and creating a company culture from them. I’m sure that their HR policies, finance, tech, etc use many methods and tools common to all companies. But the company is not an amalgamation of best practices. Nor is the unique company culture and zaniness just frosting applied to a cake that’s similar to any other. It cuts through everything they do.

By contrast, I just don’t get the same sense of uniqueness in downtown Vegas. What makes downtown Vegas unique is unrelated to Downtown Project (e.g., casinos). There are definitely things I think they’ve innovated on. The Telsa car share and modal integration take that to a new level. The crash pads and sales mentality create a “WOW” experience that’s clearly unique – and probably explain why the project has gotten so much positive press. But those things don’t change the fact that they are basically trying to do what Ed Glaeser and Richard Florida told every city to do.

This I think limits what can be accomplished. Every city has coffee shops, a budding startup community, bars and restaurants, etc. They are all adding livable streets infrastructure and such. They’ve all got a lot of exciting stuff happening. The challenge is how to create the Zappos of cities. That is, a place when you go there you’re blown away by how unique it is and how cool is. And which has a certain polarizing effect, much like Zappos itself, which is not for everybody. Definitely the “WOW” thing they’ve got going with rolling out the red carpet is a great start. A willingness to stay a bit niche and not actually scale so they can preserve the uniqueness might be part of it too (more on this later).

To be fair, given how bleak downtown Vegas is, they pretty much have no choice but to build the basics, which every city needs. Almost by definition, the basics are conventional. So I should probably give them more time to see how this evolves.

Challenging the Vegas DNA

Another challenge is that they are directly going against the brand and cultural DNA of Las Vegas. Vegas is about gambling, etc. While there are definitely regular things in Vegas, including nice boring suburbs, the core of it seems to be in everything centered around casinos.

Downtown Project not only isn’t trying to roll with this but is actively cutting against the grain. The tech fund isn’t investing in gaming technology companies, for example, which is the obvious logical niche. Rather than trying to do cool-urban casinos or some such, they actually bought a casino (the Gold Spike) and ripped out the gambling.

I understand this perfectly because it is exactly what most smaller, unhip cities try to do. You want to join the club, so you think you have to fit in. I have noted how the one thing everyone in the world thinks of when they think of Indianapolis, the 500-Mile Race, is something that’s never talked about by the local urban crowd. To them auto racing is declasse and an emblem of the past city they’d like to think they’ve transcended. Indy is way more than auto-racing today, goes the logic. Almost every city goes through this phase.

One of the things I’ve been most passionate about and that I feel most strongly about generally is the idea that cities need to be themselves. They need to understand who they are and build the future around that, not around junking the past. Yes, change to be sure. But remember who you are. My post “The Brand Promise of Indianapolis” gives the overview of my thinking on that. Cities simply cannot sever their roots and expect to thrive in most cases.

Going against the DNA of your city mean’s you are swimming upstream. As Paul Graham noted in “Cities and Ambition“:

How much does it matter what message a city sends? Empirically, the answer seems to be: a lot. You might think that if you had enough strength of mind to do great things, you’d be able to transcend your environment. Where you live should make at most a couple percent difference. But if you look at the historical evidence, it seems to matter more than that.
….

A city speaks to you mostly by accident—in things you see through windows, in conversations you overhear. It’s not something you have to seek out, but something you can’t turn off. One of the occupational hazards of living in Cambridge is overhearing the conversations of people who use interrogative intonation in declarative sentences. But on average I’ll take Cambridge conversations over New York or Silicon Valley ones.

It’s very tough to overcome the message that a city repeats in your ear over and over again. And for Vegas trying to reinvent itself around creative collisions, it’s doubly hard as Richard Florida put it in last place for creative class share among large cities. Trying to go from worst to first is a tough challenge indeed.

I come from a consulting background and so am obsessed with strategery. So my own biases are showing. But what do companies obsess about? Their unique customer segments and their value propositions to it, along with the financial model for realizing value. In short, it’s about the brand DNA. It amazes me to no end that while most companies try to convince you how unique and different they are from every other company in their market (Zappos being a great example), virtually every city is trying to convince you that they’re just like every other cool city (tech hub, creative, etc).

What’s the first thing a new creative director does when trying to revive a fashion house that’s fallen on hard times? Pay a visit to the archives. What is this company all about? It’s the same with cities. What is this city all about? And with most cities that question was asked and answered a long before we got there or were even born. The founding ethos of a city is almost impossible to displace. (The best documentation of this is E. Digby Baltzell’s “Puritan Boston and Quaker Philadelphia” which showed how the founding ethos of the Puritans and the Quakers permeated every aspect of those cities’ cultures up until the present day). So to understand this you have to dig below the surface (which in the case of Vegas would be gambling I guess) and become a sort of anthropologist. I’m sure my surface analysis of Vegas as about casinos is off and that deeper digging needs to be done. But it doesn’t appear to be a creative capital type of place, etc.

So in thinking about how to transcend conventionality, I think aligning with not against the civic DNA is important. In fact, the Downtown Project already has one area where they have done this and it is by far the most compelling thing I’ve seen them do. This is a hybrid of what they call “Subscribe to Las Vegas” and “Las Vegas Makes You Smarter.”

The idea behind subscribing to Las Vegas is that not everyone can or wants to move there. But that doesn’t mean you can’t be a part of the community. Some people are choosing to live or work there part time – say one week a month. The notion is that one purposeful visitor or part timer who is fully engaged in the community and “collisionable” is as good or better than a full time resident that is sitting home watching TV or at work in the burbs.

“Las Vegas makes you smarter” I believe came out of all the people Tony was bringing in to check out Downtown Project. He started asking them to give a presentation while they were in town. Most people said Yes. Hence the downtown speaker series and the notion of Vegas as a place you can get exposed to great minds and knowledge.

These are very in line with the Vegas DNA. First, most people don’t want to move to Vegas. But almost everyone would love to visit. So the idea of becoming a regular visitor to the city is an easy sell to a lot of people. It’s directly in line with the tourism focus of the city. Plus the air connections are superb to it’s easy to get into and out of. The speaker series also goes along with this. On any given day there are already tons of A-list people in Vegas. All you’ve got to do is convince a handful of them to make a community contribution.

So I think finding things like these are critical to building the “Only in Las Vegas” downtown experience that would be best. That’s not to say even this is without challenge. Downtown Vegas does not appear to be an intellectual center. While technology has certainly made it harder to tell, I didn’t see a single person reading a newspaper or book while I was there. There aren’t even that many boxes selling the local newspaper downtown, or a bookstore that I found. The book selection at the Beat Coffeehouse didn’t wow me either. However, I’m told the Inspire Theater that’s being built to house the speakers series will also have Vegas’ largest newsstand and that a bookstore is being looked at.

Can You Curate a Community and a City?

Zappos is known as a company that is very intentional about its culture. The know what they are trying to build, the invest in it, and they take great pains to protect it. But can you apply the same sort of intentionality to the city?

Real cities aren’t just about collisions, they are about conflict. “Iron sharpens iron, so one man sharpens another” says the proverb. This is different from “Hey, you’re cool. I’m cool. Let’s be cool together and collaborate.” It’s about people with very different agendas and ideas competing for the same space (in every sense of the word “space”). As Sam Jacob of FAT put it, “Cities are not about the perfect vision; they are not about a singular idea. They are about a collision of all kinds of incompatible demands.”

This is where the blank slate of downtown Vegas is a weakness. Because there’s nothing around but casinos and government, there’s really no vision I see apart from Downtown Project. And Downtown Project is investing in people and projects that are compatible with their vision. In effect, they are self-selecting for a monoculture, or for diversity within a particular worldview or paradigm. People who move to downtown Vegas personally or move their business there are likely going to do it because they are bought into the Downtown Project vision. It’s not exactly central economic planning, but there may actually be too much shared vision. I didn’t run into anybody who didn’t think the current approach was right on.

What’s more, because Downtown Project has been so successful in garnering mindshare and national press, it may have sucked all the oxygen out of the room. Unless a local casino billionaire or something gets attracted, anyone who wants to play in downtown Vegas is probably going to find it hard to gain mindshare unless they sign onto the Tony Show as it were. Another city with more of a plurality of players might actually be a better platform for getting noticed if you want to do your own thing.

This is where I think a city functions differently than a company. Downtown Las Vegas is not Zappos at a larger scale. It’s a fundamentally different kind of organism.

I’m not convinced it’s even possible to curate a community at more than a small scale anyway. Once more and more people come, you won’t have the same level of community because it will just plain be bigger and more anonymous. And what happens when people start showing up who don’t share the ethos, but are just there to consume? The magic starts to fade. This is exactly what Tony himself went through with the post-peak decline of rave culture and the erosion of PLUR.

Perhaps that magic fading ought to be the big goal after all, to create something that Downtown Project ultimately loses control of because it is so successful that others come in and build something on top of their platform that they never imagined. Maybe it won’t be the co-working capital of the world. But maybe it will be just as cool – or even cooler. Many of the best things turn out to be something their founders never could have imagined. It may be that the best tribute possible to Tony would be if his project became something radically different than what he ever thought it could be.

Concluding Thoughts

Though I obviously have my differences with some of the Downtown Project vision, you have to admire the chutzpah it takes to bring that much ambition to such as bleak place. What they’ve accomplished in such a short time with so little money and with so meager a starting platform in the city is very impressive, especially in contrast to the taxpayer money pits that exist in all too many places. And a number of the things they’ve done are particularly great, especially the subscriber model and their focus on selling downtown Las Vegas (which is truly the best I’ve every seen anywhere – definitely “WOW”). Clearly it’s a place everyone ought to visit to see for themselves – and to find out if Tony can talk you into moving there and starting your own business…

Monday, May 27th, 2013

Viva Las Vegas! Part 1 – Tony Hsieh and the Downtown Project

The Downtown Project in Las Vegas, an attempt to completely reinvent downtown Las Vegas spearheaded by Zappos CEO Tony Hsieh, is one of the better known downtown revitalization initiatives in America. I’ve been planning to write on it since I saw Tony speak about it in Providence last fall. I was kicked in the pants to finally do so by a trip I took to Vegas last week to check the Downtown Project out.

Before going any further, I should disclose that I stayed there for free in one of the project’s “crash pad” apartments (more on those later). I also previously had a small financial relationship with affiliated entity. And I bought my running shoes on Zappos and might have gotten a free upgrade on shipping. But while this article will be very positive on Downtown Project, please stay tuned for part two before dismissing me as a shill. That’s where I plan to cover the negatives.

What Is the Downtown Project?

There’s nobody better to tell you want the Downtown Project is than Tony Hsieh himself. Here’s the talk he gave on it in Providence at BIF-8, a sort of TED-like conference. If the video doesn’t display for you, click here.

In brief, Downtown Project is seeking to reinvent downtown Las Vegas as a community oriented innovation hub. The genesis was Zappos’ purchase of the old Las Vegas city hall as a headquarters. Rather than a traditional tech campus like you might try to find in the suburbs, Tony wanted to build an urban campus more like NYU where Zappos was integrated into the city.

Here’s a picture of City Hall/Zappos future headquarters:

This was not an entirely altruistic move. Research shows that corporations have sub-linear scaling. That is, they become less productive for innovation as they get bigger. But cities have super-linear scaling as they get larger. That is, cities get more productive for innovation as they grow larger. Part of the idea of Downtown Project is to preserve the innovative and productive capacity of Zappos as it scales by hybridizing the company with the urban environment of downtown Las Vegas.

If you’ve read Tony’s book Delivering Happiness you know that customer service is Zappos differentiator, and its company culture is the foundation of making service and everything else they do happen. So unsurprisingly, culture is a big part of what the Downtown Project is setting out to do. There are three project goals. They want to make downtown Las Vegas:

  1. A true live/work/play environment
  2. The most community-oriented downtown in the world
  3. The co-working and co-learning capital of the world

The strategy to accomplish this is basically Ed Glaeser meets Richard Florida. It’s about density, creative class activities, collisions (aka serendipitous interactions), and openness (aka tolerance). From there, as Tony puts it, “The magic will happen on its own.” Or that’s the theory. The magic is intended to be happiness, luckiness, innovation, and productivity.

To make this happen Tony raised $350 million for the Downtown Project. It’s a separate entity from Zappos though it isn’t clear who the investors behind it actually are. (The information may be out there somewhere. Some have suggested Tony is paying for the entire thing himself. Once before he took every penny he made from selling a startup and rolled it into Zappos, so I guess it’s possible. He certainly has a huge appetite for risk. However, when I’ve heard him describe the project, it has only been as “privately funded” which suggests other investors. Given that this is in effect a Zappos campus buildout project, one would hope the company is actually contributing, especially as Amazon now owns it. Whatever the case, clearly Tony is calling the shots and is personally involved at the most intimate level).

Now that sounds like a lot of money, but you could easily spend way more than that on just one real estate project. So instead of just trying to build a bunch of apartments or something, a good chunk of the money is penciled in for “software” type of activities. The allocation is $200M for real estate, $50M for tech startups, $50M for small businesses, and $50M for education, arts, and culture. The real estate money seems to be going quickly as the Las Vegas Sun has reported that the Downtown Project has already spent at least $93 million just on land acquisition, buying 28 acres, mostly along Fremont between Las Vegas Blvd. and Maryland. Their ability to transform the city through purely building would appear to be limited.

The software consists of two venture capital funds. One is going for traditional tech startups, many of which Tony is personally recruiting to Las Vegas. So far there have been about 30 takers, though these are mostly very small enterprises. The other is for small business infrastructure like boutiques, coffee shops, and restaurants with a focus on owner-operated businesses that are unique or best in class.


Natalie Young, owner and chef at Eat, a Downtown Project funded breakfast/lunch restaurant (and a very good one too!) – Image via Eating Las Vegas


The Beat Coffeehouse. (Not a Downtown Project funded venture AFAIK) – Image via Timothy Dahl

Both of these are bona fide investment funds, but the focus is not necessarily short term profits. Rather, Tony likes to talk about “Return on Community” as their metric. This is really an investment mindset of necessity. Downtown Vegas has a huge chicken and egg problem. It won’t be attractive to business and residents unless there are cool things to do and the services people want. But the service oriented businesses won’t open until there’s demand. The Downtown Project is trying to solve this by in effect being a source of “patient equity” by pre-funding the services until critical mass is achieved. And of course the demand side is in part being addressed both by the Zappos move and the tech startup initiative. The goal is basically acceleration of what might have happened organically, though it’s too early to tell if there will be success.

I’m not sure what all is in the arts and education fund, but there’s plenty going on in those areas, including a downtown speaker series (with a theater to house it), the purchase of public art from the likes of Burning Man, and a major music festival called Life Is Beautiful. This category seems to be a catchall for filling in the gaps between the others. I’m not sure what fund these fall into, but there are also co-working spaces for fashion (Stitch Factory) and tech (Work in Progress) with a Tech Shop like space coming soon.

The project focus seems to be principally business attraction and programming. There’s little purely residential development to speak of, in part because that type of bricks and mortar project is so expensive. I’m sure the hope is that the environment will draw developer interest to provide the housing as demand is stimulated.

To sum up, Downtown Project is Tony Hsieh as real estate developer + venture capitalist + philanthropist. In effect, he is trying to be a curator/impresario for downtown Las Vegas.

Project Success Factors

I think there are two main things that the Downtown Project has going for it: the guy behind it and the city it is in.

The first is the man himself, Tony Hsieh. First, he’s a successful, proven serial entrepreneur. He also clearly isn’t scared off by massive risk. Beyond this, he just has general gettitude on cities, which is something that too few people calling the shots in the redevelopment efforts of similar sized cities can say. Because he runs basically the highest profile non-casino business in down, he’s got the gravitas (and the money) to convince the civic establishment to go along with way he wants. Or at least to get out of his way. In too many cities, the people who know what’s up are marginal and uninfluential versus traditional power players. The knowledge capital is there, but it’s not paired up with clout like it is with Tony. And as a superstar entrepreneur, he can command massive attention outside Las Vegas, as well as be very influential in recruitment of startups, etc. Tony H. is clearly the indispensable man on this project.

But Vegas is also the right city. I come at this as someone who has been a champion for overlooked post-industrial cities in the Heartland. So I’m guessing my reaction when I saw downtown Vegas is pretty similar to what advocates from other similar sized cities would say: This is it!?

Let’s be honest, what’s actually been physically achieved in downtown Las Vegas to date is quite limited. The Downcity Arts District in Providence is better than Fremont East. Over the Rhine and downtown Cincinnati blow Vegas out of the water. Downtown Indy already has more tech employees than Vegas will even after Zappos makes the move. Honestly, it’s a bit infuriating as a guy who lived in Indy, Louisville, and Providence to see a place where so little has happened garner such massive press and accolades when most other regions the size of Vegas have done more while getting far less attention.

However, I think we need to get a sense of perspective. The first thing to understand is that for all intents and purposes there is no such thing as “downtown” Las Vegas. What they call downtown has some older casinos and some government buildings, but that’s it. There’s no traditional employment or commercial core. There’s a grand total of one decent sized office building in the entire place. Here’s a picture:

That’s basically it. Most of downtown is either vacant or has marginal business activities at best. This old boarded up hotel is typical:

The streets of downtown are nearly deserted even in the middle of the day. You could shoot a cannon off and not hit anything.

By the way, that new building is the federal court house. The tall buildings further away are on the Strip. Here’s what you see across the street from Zappos:

Las Vegas has the single most savagely bleak downtown of any major city I’ve ever visited. The Downtown Project is almost literally starting at zero. There are practically no assets. So anything that the Downtown Project accomplishes needs to be seen against that backdrop. Most of these other cities have been at the downtown redevelopment game for 30+ years, have massive architectural and institutional assets, and have already been the recipients of untold billions in investment, much of it public money. There’s next to none of that in Vegas. Frankly when you see what’s already been done and is being done with $350M – and so quickly – it almost makes you weep to think about the billion dollars or so in taxpayer money that has gone into stadiums and arenas alone in so many other smaller cities. Oh, what could have been done with that instead!


Fremont East, an exception to the rule of bleakness. Most of the establishments on this block are not gambling oriented. The core of the Downtown Project is to extend this several blocks to the east. Image via Flickr/davelawrence8

At this point you may be wondering why I say this is a success factor. Simply, because it’s clear the elite of Las Vegas have completely abandoned and turned their backs on downtown. If they had even a smidgen of pride in their city, they would never have let it get like this with no effort to change it. This leaves the institutional playing field clear for people who actually know what they are doing.

I was chatting with one of the Downtown Project employees who is from Rhode Island. He compared the ease of getting things done in Las Vegas with the near impossibility in Rhode Island. In most places, there’s a spider web of competing land interests, power brokers, politicians, etc. all fighting over what happens downtown (especially who gets to receive all the subsidies). This seems to be immeasurably less true in Vegas. All of the action is on the Strip, so the downtown playing field is wide open. This is one place where the term “blank canvas” might really be appropriate. There’s probably an ability to execute in Las Vegas that simply doesn’t exist in other cities because of the lack of competing interests. (This is also a huge problem for Downtown Project, which I’ll cover in the next installment).

Project Highlights

I want to wrap up this part with a look at some of the highlights of what Downtown Project is doing.

Actually, the most compelling thing that they are doing, a combination of what they call “Subscribe to Las Vegas” and “Las Vegas Makes You Smarter,” I’m going to save for part two so I can use them as the exception that proves the rule. However, there are some other very interesting things.

One is that Las Vegas is the only city I’ve ever visited that actually has sales and not just marketing. Let me explain. Every city in America obsesses over talent and spends beaucoup dollars on various talent initiatives, etc. Similarly, we hear about startups and building tech communities. But while everybody says they want this stuff, and while everyone has a web site and well-funded booster clubs, what nobody actually tries to do ever is actually recruit people unless there’s a specific job opening they are trying to fill.

I always like to do my “Urbanophile test” when I go speak somewhere. Obviously if people are willing pay me to come speak to them, they must think there’s at least some value I bring. But how many places I visit will actually attempt to sell me on their community as a place I might want to live? The answer is zero. I’ve talked to more than enough people to know this is a common occurrence. Nobody is actually selling their city.

Vegas is different. Downtown Project, and Tony personally, are aggressively involved in sales. They leased out 50ish units in a residential high rise called the Ogden (one of only a handful of residential properties downtown). They use these as what they call “crash pads.” They are for people who want to come check out downtown Vegas and the Downtown Project to stay free. They also make sure to showcase what they are doing. And they are going to try to show you how downtown Vegas could be a fit for you or your business. Tony himself is personally involved with this. I was able to take a small group walking tour with him, and part of his agenda was trying to sell a small retailer on setting up shop in a retail development they called Container Park. Here’s this guy who is a multi-mega-millionaire personally recruiting a small business. Hard to imagine there’s a lot of that going on in other places. Think having a tech rock star personally making the ask helps bring small tech outfits to Vegas? You bet it does. Unlike 99% of other cities in America, the downtown Vegas crowd is actually asking for the business.


The Ogden, home of the Downtown Project “crash pads” and what Tony calls the project’s “secret weapon” – Image via Business Insider (lots of good photos of downtown Vegas and the Downtown Project on that page)

Another item, as I highlighted earlier, is capital efficiency. It’s basically the Zappos do more with less ethos. A major retail development will be made out of shipping containers. A new hotel will be Airstream trailers. A casino called the Gold Spike is getting a fairly lo-fi makeover instead of getting scraped and replaced with a Taj Mahal. All of these are stretching $350M at lot further than it would go in most cities. Part of this is obviously of necessity, but is has big benefits. As Jamie Lerner of Curitiba put it, “If you want creativity, cut one zero from your budget. If you want sustainability, cut two zeros. If you want to make it happen, do it fast.”

The car share program they are setting up is also interesting. Firstly, the backbone of the fleet will be 100 Teslas. How cool is that? They are planning to do an entirely electric fleet. Also, the idea is to integrate bike share and every other mode of transport you might need into the same system, and have it accessible from your phone.

Lastly, a couple of the projects – the container space and a school – are oriented towards children. This is very rare to see, as families and children are simply not part of the equation in most cities that are targeting the “young and restless.” While the ubiquity of sexually oriented material in downtown Vegas means this will never be a truly kid-friendly environment, there’s at least an effort being made.

That’s a look at the project and a number of the positives about it. If this seems like too much puffery for a traditional Urbanophile post, stay tuned. Thursday I’ll take a brief look at the nature of community and collisions in small cities. Then I’ll follow-up with part two of this series where I examine my reservations about the project and the challenges it faces. Stay tuned.

Wednesday, January 30th, 2013

Reinventing Metro Providence

I was very pleased this week to be a guest on Ted Nesi’s “Executive Suite” talk show on WPRI-TV in Providence. We spent about half an hour talking about the challenges and opportunities facing the region. Here’s the show, without commercial interruption even. We cover a lot of ground, and I think much of the thinking is relevant to many other cities. If the video doesn’t display for you, click here.

A big point I made was the need to think metro, not Rhode Island. But gosh darnit didn’t I go and talk Rhode Island myself for most of the rest of the piece? I think it just goes to show how difficult it is even for the diligent newcomer to maintain a perspective that’s different from the one that’s basically in the air he breathes.

Tuesday, January 29th, 2013

Chicagoism, Part 3: Reinventing Services, Starting Accountability Reforms by Robert Munson

This photo represents what historians could come to regard as the Chicago Spring. At this moment in May 2011, there were two big breaks with history. First and obvious, the person leading Chicago’s transformation changed from Richard to Rahm. Richie Daley’s two decades made Chicago half-ready as a leader of the Sustainable Century. Making us fully ready depends on fulfilling Rahm’s campaign promise of “fiscal sustainability.” This is his key challenge… and our responsibility, too. This photo also captures the good fortune of Chicagoans to have political genius-follow-genius in the Mayor’s Office.

Seemingly staged to capture a second and larger historical transformation, officials from all levels of government are present: the Vice President (hidden partially by Daley and whom Rahm has just shaken hands with), the Governor and Cook County officials. The photo implies an unspoken acknowledgement that governing cities well requires a Realignment of authorities, one of the 3Rs in the update of Chicagoism.

The second R — Reinventing services — was central to Rahm’s Inaugural. And the third R — Reforming accountability — was symbolized by his first official acts; what I call The Five Ethical Executive Orders, including the Mayor not taking campaign gifts from City contractors.

As a useful way to picture Rahm’s challenges and our transition to a government that can address today’s challenges, let’s quickly introduce how these 3Rs build a framework that generalizes a key problem, suggests how a principle of sustainability can guide solutions (see bubble diagram in Section 2) and summarizes solutions as Sustainability’s 3Rs.

Back to the details of Chicago’s transition under Rahm…. The positives of a new era were apparent quickly. Many Chicagoans also knew we should start girding ourselves to make the tough choices ahead. Details may differ, but many of these decisions are common to America’s cities today. To contrast the difference between talking about Big Changes and actually getting things done, the tale immediately below is instructive.

Compare Occupy Chicago to Chicago Spring

These two simultaneous events tell us a lot about how government will reconnect to its citizens. Occupy Chicago resulted in little more than an inchoate protest. While serving as a resonant response to our deadened federal and state democracy, Occupy Chicago still was three or four stages removed from the practical reforms needed to remake governments so they work again. Some 18 months from starting its talk, the Occupy movement is mostly memory.

While much of the nation was struggling in a democracy-of-irons, Chicago Spring launched our city on a path that can break through democracy’s complications. Chicago Spring accelerated the previous decade’s changes using governing strategies that this series synthesizes as an updated Chicagoism. Consider this practical -ism as a framework to categorize the first two years of changes and, more important, craft the deal needed for sustainable progress.

Rahm’s First 100 Days Opens Horizons to a Deal

During his transition, Emanuel talked straight to the City Council with comments such as “Nothing ahead of us is easy. It’s all hard.” Welcoming frankness and rapid changes, Chicagoans seemed to like what they got. Rahm’s honeymoon was applauded with an astounding approval rate pushing over 80% by Labor Day.

Accompanied by a PR machine producing prodigious press releases announcing an amazing and full range of improvements, here are some samples gleaned from the many 100 Days reviews offered by opinion-makers; most of whom were impressed, but felt it was too early for conclusive results. This condensed list only glimpses at Rahm’s enormously energetic display of remaking municipal government.

* Outlined $75 million in savings in before the Inauguration; realizing $50M before September 2011.

* Expanded the privatization of recycling. Plus, continued re-routing garbage collection.

* Created the city’s first ever interactive budget website at chicagobudget.org.

* Hosted the first Facebook town hall and several other innovative public forums.

* Announced securing 4,000 private sector jobs downtown and some neighborhoods.

On the fraud and abuse front, Rahm even reined in credit card use by City managers.

Further Acts of Accountability

To show his intent to cleanup the bigger money, he also tried to resolve Daley’s primary blemish by creating a task force to recommend reforms to Tax Increment Financing. In an assertive effort to avoid future TIF scandals and to minimize the ever-present appearances of impropriety in the particularly murky world of real estate deals, Rahm had the Task Force deliver proposals quickly by late August.

Accepted by most mainstream observers as a genuine effort at reform, the TIF report and the five Executive Orders served to give many Chicagoans pause to ponder that the “city that works” might actually do so in a reasonably ethical manner.

As a hindsight summary, consider Rahm’s first 100 Days as a political triumph because it made possible the changes that were to follow.

With its honeymoon faded, the Emanuel Administration’s rapid progress slowed as 2011 ended. Running out of low-hanging fruit to harvest, the Administration also had to contend with the dissatisfactions bred by budget cuts.

While big statement changes — such as the Five Ethical Executive Orders — were less frequent and the PR machine made more muted music, Rahm’s Administration still made solid progress during 2012. If you need more convincing, make a quick revisit to “The Urbanophile” September 2012 post, “Fixing Chicago: Rahm’s Work In Progress.”

In part, progress continued when the governed started sensing a new reality: Rahm’s strategy ameliorated small sacrifices by making things better in multiple ways.

How A Multi-Benefit Strategy Works for “The City That Works” and Can Work for Your City, Too

Compare Chicago’s 2012 results to those of Uncle Sam or Illinois. What level of government is creating “the new order of things” and which levels are preventing it?

While every government’s dilemmas are different, Rahm’s strategy produces progress because it markets multiple benefits: one change helps citizens in multiple ways. For example, Rahm tells the administration to publish the City’s data and let the private sector profit by adding value. Characteristic of how sustainable strategies produce multiple benefits, Rahm’s strategy has three wins.

First, sharing data makes possible greater accountability, a break from Daley’s secretive years.

Second, greater information flow can boost Rahm’s present problem: making services more efficient. Emerging when Daley was Mayor, the biggest example is BusTracker because it reduces waiting time and increases ridership and revenue. Other innovations also are creating the incremental use of data that, in total, makes noticeable progress.

Third, this governing strategy also stimulates local startups in the information economy by developing micro-applications. This last area could prime the pump to grow an industry that helps update Chicago’s role as a global center. While industrial Chicago took raw materials and added value to consumer products, an information-based Chicago today can convert more data into sustainable practices.

(If all this multi-benefits stuff sounds familiar, it should. It is a verbal rendition of the same dynamic describing the bubble diagram in Section 2.)

While we have too few results to judge how well Rahm’s overall tech strategy is working, it helped carry him over bumps during 2012. And for a few risks and pitfalls that may become apparent, go to the end of “The Urbanophile” post “Thoughts On Chicago’s Tech Scene.”

Whether or not Rahm’s tech emphasis is a triumph for economic growth, his information strategy helps two of the three “R” principles emerging in the 21st Century Chicagoism: Reinventing services and Reforming accountability. While seeking the Synergy “thing” certainly helps give the impression of progress, we explore two key examples of what we hope is lasting progress in the next installment.

Chicagoism Series Index
Part 1: Lessons from the 20th Century
Part 2: Starting the Transition to Sustainability
Part 3: Reinventing Services, Starting Accountability Reforms (this post)
Part 4: How Chicagoism Works Again
Part 5: Where Do We Go From Here?

Robert Munson sharpened his interest in regional planning while serving on the Citizens Advisory Committee for the metropolitan plan released in 2010. Out of that experience, he started the website CCC or Chicagoland Citizens Central where you can find his profile. Readers can contact him directly at robertmunson@earthlink.net.

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.

Telestrian Data Terminal

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

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About the Urbanophile

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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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