Grid Pro Quo

Grid Pro Quo

The EPA wants to restructure Virginia’s electric grid. Skeptics argue that slashing CO2 emissions will drive electric bills higher. Environmentalists disagree. Who’s right?

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Does Dominion Win or Lose from the New Law?

Does Dominion Win or Lose from the New Law?

Virginia's biggest power company could benefit from the freeze in electric rates but it also could take a big hit to earnings from power-plant shutdowns.

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Was Bob McDonnell Convicted with Tainted Testimony?

Was Bob McDonnell Convicted with Tainted Testimony?

Jonnie Williams' trial testimony about a critical meeting with the former governor was contradictory, implausible and sometimes incoherent. But the jury bought it anyway

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Building Connectivity in Suburbia

Building Connectivity in Suburbia

Sunnyvale, Calif., wants to reinvent a 60's-era industrial office park as an innovation district. It's making progress but suburban sprawl is not an easy habit to break.

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The Great U.S. 460 Swamp

The Great U.S. 460 Swamp

VDOT had loads of warning that wetlands could kill the U.S. 460 project but the state charged ahead with a design-build contract that everyone knew could explode.

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Will the “Ferguson Effect” Kill Urban Renewal?

by James A. Bacon

Baltimore is the East Coast’s answer to Detroit, a once-prosperous city hollowing out from decades of mismanagement under the Blue State governance model. By the time the Washington Village Development Association (WVDA) filmed its documentary, “Fleeing Baltimore,” in 2013, 31,500 residents had abandoned Maryland’s largest city over the previous decade. Sixteen thousand buildings stood vacant. The documentary described how heroic efforts of middle-class Baltimoreans, both black and white, to clean up trash, combat crime and provide positive experiences for inner city youth were overwhelmed by the ineffectiveness of the city’s criminal justice system.

If conditions were hostile to the middle class two years ago, imagine what it is like now. Last month, a 25-year-old black man, Freddie Gray, died under mysterious circumstances in police custody, raising concerns about police abuse and laying bare a history of strained relations between police and the city’s poor black population. Riots ensued, and now gun violence is up 60% compared to the same time last year. Thirty-two shootings took place over Memorial Day weekend.

Similar explosions in violence are occurring in cities across the United States as as police and inner-city populations react to a series of incidents in which unarmed black men died at the hands of white police. In what what urbanist Heather Mac Donald calls the “Ferguson effect,” police are disengaging from discretionary enforcement activity, the criminal element is feeling empowered and a wave of violence has reversed much of twenty years’ decline in crime rates.

If the surge in murder and violence is foreshadowing of things to come, it will have a tremendous impact on the livability of major urban areas. Two outcomes can be predicted. First, middle-class households with the means to do so will flee the urban core. Second, law-abiding African-Americans living in high-crime neighborhoods but lacking the means to flee will suffer the most.

I’m not disputing the ugly reality that police abuses occur in poor African-American communities. I’m not disputing the fact that police sometimes commit violent crimes themselves, or that African-Americans have a basis for mistrusting the police in some cities. These are real problems that our society must grapple with. But I’m also arguing that the over-reaction to these problems threatens to un-do much of the progress we’ve made in the past twenty years in fighting the scourge of crime and revitalizing our central cities.

Police officers increasingly second-guess themselves in the use of force, writes Mac Donald, writing in the Wall Street Journal. “Any cop who uses his gun now has to worry about being indicted and losing his job and family,” one policeman told her. If police are more timid in applying force, the bad guys will be emboldened in their criminality. She continues:

Even if officer morale were to miraculously rebound, policies are being put into place that will make it harder to keep crime down in the future. Those initiatives reflect the belief that any criminal-justice action that has a disparate impact on blacks is racially motivated.

In New York, pedestrian stops — when the police question and sometimes frisk individuals engaged in suspicious behavior — have dropped nearly 95% from their 2011 high. … Politicians and activists in New York and other cities have now taken aim at “broken windows” policing.

Meanwhile, the move to end “mass incarceration” is gaining momentum across the country. Across the board, Americans are second-guessing the strategies that largely won the “war on crime.” The results will look a lot like Baltimore as productive, law-abiding citizens flee jurisdictions where anarchy and disorder prevail for the safety of suburban jurisdictions.

Watch the WVDA documentary, and you’ll wonder how the city of Baltimore can ever reverse its decline. One of the most basic human needs is a desire to feel safe from physical harm. If the rebound in crime is more than a passing blip — if peoples’ perceptions of crime in American cities undergoes a major change — the human cost will prove devastating and urban jurisdictions once again will slip into the corrosive spiral of rising crime, middle-class flight, shrinking tax base and busted budgets from which we hoped they had escaped.

Virginia: a Great State for Minority Opportunity

best_metros

by James A. Bacon

The Center for Opportunity Urbanism has developed another set of metrics to suggest that Virginia, like much of the South, is a place where minorities enjoy superior economic opportunity. Bacon’s Rebellion has written in the past how African-Americans, in a reversal of the Great Migration a century ago, are moving back to the South. This new report, “Best Cities for Minorities,” indicates that Hispanics and Asians are prospering here, too.

The study ranks opportunity by four metrics: housing affordability, median household income, self-employment rate, and population growth. By these measures, Virginia’s three largest metropolitan regions — Washington, Hampton Roads and Richmond — consistently score among the most favorable of the nation’s 52 largest metropolitan regions.

“Overall, the analysis shows that ethnic minorities in metropolitan regions with significant economic growth and affordable housing tend to do better than in other locations irrespective of the dominant political culture,” write authors Joel Kotkin and Wendell Cox.

Urban geographers Kotkin and Cox have positioned themselves as defenders of suburban growth and opponents of “smart growth” policies that restrict new residential construction and drive up housing prices. While I would classify myself as primarily in the “smart growth” camp, arguing for the advantages of compact, walkable development, I agree that such policies, as implemented in California and other parts of the country, are prone to creating housing crises and displacing less affluent, minority populations.

Bacon’s bottom line: Virginia’s political class needs to take a close look at these numbers.  The politics of racial grievance is not as likely to play well here as in other metros where economic opportunities for minorities, especially blacks, are more limited. Given the rapid growth of minority populations, due largely to the decisions of thousands of households to move here from somewhere else, the politics of shared opportunity will likely strike a more responsive chord.

Let all those who have ears listen…

(Hat tip: Tim Wise.)

New Film Documents Horrors of Coal Mining

blood on the moutain posterBy Peter Galuszka

Several years in the making, “Blood on the Mountain” has finally premiered in New York City. The documentary examines the cycle of exploitation of people and environment by West Virginia’s coal industry highlighting Massey Energy, a coal firm that was based in Richmond.

The final cut of the film was released publicly May 26 at Anthology Film Archives as part of the “Workers Unite! Film Festival” funded in part by the Fund for Creative Communities, the Manhattan Community Arts Fund and the New York State Council of the Arts.

Directed by Mari-Lynn Evans and Jordan Freeman, the film shows that how for more than a century, coal companies and politicians kept coal workers laboring in unsafe conditions that killed thousands while ravaging the state’s mountain environment.

As Bruce Stanley, a lawyer from Mingo County, W.Va. who is interviewed in the film and has fought Donald L. Blankenship, the notorious former head of Massey Energy, says, there isn’t a “War on Coal,” it is a “war waged by coal on West Virginia.”

When hundreds of striking workers protested onerous and deadly working conditions in the early 1920s, they were met with machine guns and combat aircraft in a war that West Virginia officials kept out of history books. They didn’t teach it when I was in grade school there in the 1960s. I learned about the war in the 1990s.

The cycle of coal mine deaths,environmental disaster and regional poverty continues to this day. In 2010, safety cutbacks at a Massey Energy mine led to the deaths of 29 miners in the worst such disaster in 40 years. Mountains in Central Appalachia, including southwest Virginia, continue to be ravaged by extreme strip mining.

As Jeff Biggers said in a review of the movie in the Huffington Post:

“Thanks to its historical perspective, Blood on the Mountains keeps hope alive in the coalfields — and in the more defining mountains, the mountain state vs. the “extraction state” — and reminds viewers of the inspiring continuum of the extraordinary Blair Mountain miners’ uprising in 1921, the victory of Miners for Democracy leader Arnold Miller as the UMWA president in the 1970s, and today’s fearless campaigns against mountaintop-removal mining.”

The movie (here is the trailer) is a personal mission for me. In 2013, after my book “Thunder on the Mountain, Death at Massey and the Dirty Secrets Behind Big Coal,” was published by St. Martin’s Press, Mari-Lynn Evans called me and said she liked the book and wanted me to work with her on the movie project. She is from a small town in West Virginia a little south of where I spent several years as a child and thought some of my observations in the book rang true.

I drove out to Beckley, W.Va. for several hours of on-camera interviews. Over the next two years, I watched early versions, gave my criticisms and ideas and acted as a kind of consultant. Mari-Lynn’s production company is in Akron and I visited other production facilities in New York near the Brooklyn Navy Yard.

Interesting work if you can get it. My only forays into film making before had been with my high school film club where he videographed a coffin being lowered into a grave (in West Virginia no less). I was greatly impressed when I saw the movie at its New York premiere.

Mari-Lynn and Jordan have been filming in the region for years. They collaborated on “The Appalachians,” an award-winning three-part documentary that was aired on PBS a few years ago and on “Coal Country” which dealt with mountaintop removal strip mining.

They and writer Phyllis Geller spent months detailing how coal companies bought up land on the cheap from unwitting residents, hired miners and other workers while intimidating them and abusing them, divided communities and plundered some very beautiful mountains.

Upper Big Branch is just a continuation of the mine disasters that have killed thousands. The worst was Monongah in 1907 with a death toll of at least 362; Eccles in 1914 with 183 dead; and Farmington in 1968 with 78 dead (just a county over from where I used to live).

By 2008 while Blankenship was CEO of Massey, some 52 miners were killed. Then came Upper Big Branch with 29 dead in 2010.

At least 700 were killed by silicosis in the 1930s after Union Carbine dug a tunnel at Hawks Nest. Many were buried in unmarked graves.

While state regulation has been lame, scores West Virginia politicians have been found guilty of taking bribes, including ex-Gov. Arch Moore.

The movie is strong stuff. I’ll let you know where it will be available. A new and expanded paperback version of my book is available from West Virginia University Press.

Blankenship is scheduled to go on trial on federal charges related to Upper Big Branch on July 13.

Layne’s Law

Map credit: VDOT

Proposed Interstate 66 improvements. Map credit: VDOT

by James A. Bacon

After spending a year and a half cleaning up the mess left by the previous administration — the Charlottesville Bypass, Norfolk’s Midtown-Downtown Tunnel, the U.S. 460 Connector in Tidewater — Transportation Secretary Aubrey Layne now has the opportunity to show whether or not he has the chops to handle a complex, politically charged transportation mega-project — the $2.1 billion in proposed improvements to Interstate 66 west of the Capital Beltway.

The Virginia Department of Transportation is focusing on two key dimensions to the mega-project, which is intended to address one of the most congested traffic corridors in Northern Virginia. The first is engineering. VDOT engineers have conceptualized a plan to build a corridor that will include three free lanes running both directions, two express lanes in each direction and high-frequency bus service  linking commuters with major activity centers. That plan will be subject to extensive environmental review and public input.

The second key question is how the state will finance and manage the project. Should VDOT use the controversial public-private partnership (P3) legal/financial structure to build and operate the project, much as it did with the Interstate 495 and Interstate 95 Express Lanes projects? Should VDOT undertake the project entirely on its own? Or should it create a hybrid approach? The question assumes tremendous urgency given the problems created by the P3 approach with the Norfolk-Portsmouth tunnels and the U.S.460 Connector.

Parenthetically, I would add that there is a critical third dimension to the project which appears to be getting less attention: What will be the impact of the project on Northern Virginia land use patterns? Will the project subsidize suburban sprawl (scattered, disconnected, low-density land use patterns) in the far western reaches of the Washington metropolitan area, which in turn will generate more demand — and more congestion — in the years ahead? In other words, will the state spend more than $2 billion to “fix” a problem that will re-emerge a decade or two after the project is completed?

In an interview yesterday, I sat down with Layne to discuss the financial dimension of the project. The transportation secretary has given enormous thought on how best to structure highway mega-projects, balancing the twin imperatives of controlling costs and limiting risk.

Layne sees transportation projects as forming a continuum between a model in which VDOT does everything, and a privatization model in which all functions are delegated to a private-sector concessionaire through an asset sale or a long-term lease. Any project is comprised of several parts:

Design
Construction
Financing
Operation
Maintenance

Any one of these pieces can be performed by the state or out-sourced to the private sector. In Layne’s view, because no two projects are identical, there is no standard configuration. He tends to think that the private sector does a better job of designing and managing construction than VDOT, but not by such a wide margin that jobs should automatically default to private players. In other areas, VDOT has a clear advantage. The fact that VDOT can tap tax-free bonds, which sell at lower interest rates, and requires no private equity financing often means that the state can finance a project at less expense than a private entity.

But there is more to managing a project than driving for the lowest cost or, as the previous administration tended to do, the lowest up-front public subsidy. Costs should be viewed over the lifetime of the project, which runs 50 years or longer, after adjusted for risk. One risk is the potential for cost overruns. In the past, VDOT used to eat construction cost overruns, which meant that the taxpayer paid. But that risk, says Layne, usually should be transferred to the private contractor. Another risk is that toll revenues might not materialize as forecast. Private entities pay especially close attention to that risk, and they try to negotiate all manner of protections into a P3 project to offset it.

Express lane projects get tricky because a private entity is motivated to maximize toll-paying traffic through its tolled lanes in order to maximize revenue, while the state’s goal is to maximize the throughput of riders, which means encouraging High Occupancy Vehicles and buses. In its negotiations over Interstate 95, the original plan called for Transurban to make a $250 million up-front investment to provide a robust mass-transit component. But as the negotiations proceeded, the mass-transit piece got whittled down drastically. If High Occupancy Vehicles exceed 24% of total traffic on I-495 (35% on I-95), the state is obligated to pay 70% of Transurban’s lost revenue. Meanwhile, the state pays for mass transit on I-95 out of its own funds — an expense that was not included in the announced project cost.

Layne’s Law is to start by first defining what the state wants in a project, and only ascertaining which mix of functions it should outsource to the private sector. “I’d love to have a private-sector partner,” Layne says, “but only if the risk transfer makes sense.” In the case of I-66, bargaining away a robust mass-transit capability to protect a private entity’s revenue stream probably would not make sense. Continue reading

Coping with Risk in Highway Megaprojects

Aubrey Layne explains the concept of fiduciary risk.

Aubrey Layne explains the concept of fiduciary risk.

by James A. Bacon

As Transportation Secretary Aubrey Layne has had more time to dig into his job, he has developed an ever more nuanced appreciation of how things went wrong with the U.S. 460 Connector. There was more to the fiasco, which could cost the Commonwealth up to $300 million, than a simple failure to acquire necessary wetlands permits before opening the spending spigots and then discovering that the permits were not forthcoming. The McDonnell administration, he says, negotiated a public-private partnership deal without sufficient appreciation of risks entailed with the project.

“I can’t tell you if they didn’t know they weren’t transferring the risk [to the private-sector partner] and got out-foxed, or whether they didn’t give a damn,” Layne told Bacon’s Rebellion in an interview today. Either way, the Commonwealth was left holding the bag when plans for the 55-mile Interstate-quality highway linking Petersburg and Suffolk had to be redrawn to do less environmental damage. He still hopes to recover some of the $250 million paid to U.S. 460 Mobility Partners (over and above $50 million in sunk design and engineering costs) for pre-construction work, but that outcome is uncertain.

Layne is optimistic that public-private partnership (P3) reforms enacted with bipartisan cooperation this year will prevent recurrences of the U.S. 460 debacle and help the state negotiate better terms in future deals than it got with the Interstate 495 and Interstate 95 express lanes projects in Northern Virginia, which effectively capped bus transit on the highways for the next half century. The McAuliffe administration’s big test will be to do a better job structuring the financing and risk of $2 billion in proposed improvements to Interstate 66 in Northern Virginia.

Before 1995, the Virginia Department of Transportation (VDOT) had one way of building roads. It designed them, put construction out for competitive bids, arranged its own financing, operated them, maintained them and absorbed the risk of anything going wrong. The system got the job done but it had drawbacks. It overlooked potentially creative solutions to engineering and design problems, and it was prone to cost overruns. Then the General Assembly passed legislation enabling public-private partnerships, which provided the Commonwealth a whole new range of options for financing big projects and shifting selected risks to the private sector.

Facing a severe transportation budget crunch, the McDonnell administration made the strategic decision early on to use P3s to leverage scarce public dollars with private capital. From a high-level perspective, this made sense because the Commonwealth had limited capacity to issue road-building bonds without jeopardizing its AAA bond rating and then-Governor Bob McDonnell had not yet pushed through tax increases to bolster transportation funding. Moreover, the administration wanted to take advantage of historically low interest rates on long-term bonds.

But politics and ideology were pushing P3s as well, says Layne. There was a bias that something is always better if the private sector does it. Sometimes the private sector can do things better than VDOT, he says, and sometimes the private sector is better suited to take on certain risks than the state. But not always. The McAuliffe administration’s goal is to find the best fit — the best balance of cost and allocation of risk — on a case by case basis.

The devil is in the details. Layne, a Republican and a McDonnell supporter at the time, backed the governor’s mega-project funding priorities and voted to approve them while serving on the Commonwealth Transportation Board. Indeed, he chaired an independent bonding authority that issued bonds for the U.S. 460 project.  But now that he’s transportation secretary, he realizes the issues were far more complex than presented to him and the CTB board.

The McDonnell administration first proposed a public-private partnership for the U.S. 460 project with the hope that outsiders could devise a more creative way of building and financing the highway than VDOT could come up with. Three consortia took a look and came up with similar conclusions — there would be insufficient toll revenue to finance more than a fraction of the construction cost with bonds. The McDonnell administration then switched gears, deciding to pay for most of the project with state funds but retaining the P3 structure in order to outsource the design and construction of the project to a private-sector partner, which turned out to be U.S. 460 Mobility Partners. The state should have gone back to square one and started over, says Layne, re-defining the project and putting it up for bids instead of using the P3 structure. Instead of getting multiple bidders to compete, the state wound up negotiating with a single player, U.S. 460 Mobility Partners. Even worse, Governor McDonnell had signaled that U.S. 460 was his highest priority, and there was no back-up plan — the administration had to reach a deal with U.S. 460 Mobility Partners or the project would never get built during McDonnell’s term. U.S. 460 Mobility Partners had all the bargaining leverge.

Negotiations took place within the P3 structure, which meant that the deliberations were secret and the contract not released to the public. VDOT briefed the CTB, the state’s transportation oversight board, but failed to disclose the information that critical wetlands permits had not been obtained and might not be obtainable.

The final contract for the U.S. 460 deal was more than 700 pages long. Layne says he can’t imagine than anyone in state government read the whole thing. “I’m confident that no one person understood it all. No one person could tell you what the deal was, what risk was transferred, and what risk the state was taking. And that’s a recipe for disaster” when negotiating with sophisticated business people on the other side of the table.

The dynamic would have played out very differently, says Layne, if the McDonnell administration had set up U.S. 460 as a design-build project.  First, VDOT would have opened up the proposal to competitive bids, very likely getting a lower price even while the private contractor took on the risk of delivering the project on budget and on time. Second, VDOT guidelines would have ensured that all necessary permits were granted before the project commenced and the state started shelling out money.

Layne doesn’t blame U.S. 460 Mobility Partners for negotiating the best deal for itself that it could. It’s not a charity. The company’s managers had a fiduciary responsibility to get the best deal for its shareholders that they could. But elected officials have a fiduciary responsibility to the public. The challenge for the Commonwealth is to bring to bear an equally acute understanding of risks and rewards and to cut the best deal possible for the taxpayers. That’s where the state failed utterly with U.S. 460. If he’d had negotiated such a disastrous real estate sector when he worked in the real estate business, he says, he would have been fired.

Now it’s Layne’s turn. He has to structure a mega-project deal for I-66. Tomorrow, I’ll describe how he is approaching that task.

A StrikeForce about as Effective as the Iraqi Army

conservative_strikeforceIn 2013 former Attorney General Ken Cuccinelli lost to Terry McAuliffe by 56,000 votes in a gubernatorial race in which he was outspent by two to one. Would $85,000 more in his campaign war chest have made a difference in the election?

Probably not — the number was a small fraction of the $21 million Cuccinelli spent — but it’s a point worth pondering, given news that the Conservative StrikeForce PAC has agreed to pay $85,000 and hand over fund-raising contact lists to Cuccinelli, according to the Washington Post.

In a lawsuit, Cuccinelli had accused the PAC of raising funds that were never delivered to his campaign. Estimating that the group raised about $435,000 from emails using his name, he alleged that he’d received only $10,000.

Between January 2013 and June 2014, according to Federal Election Commission records, Conservative StrikeForce raised more than $2.8 million overall, of which it paid only $82,000 toward candidates or campaign committees.

“It’s just a thunderous precedent . . . to make it harder and more expensive to be deceitful and misleading with people in the political arena as far as donations go,” Cuccinelli said. “In an already sour environment, people who think they’re supporting something they believe in are defrauded.”

The Washington Post article provides no response from Arlington-based Conservative StrikeForce, its chairman, Dennis Whitfield, or its independent treasurer and outside consultant, Scott MacKenzie. But an outside observer must wonder if this s a case of an opportunist mimicking the police and veteran fund-raising scams in a political context. In a similar case, the Post notes, a committee to recruit conservative physician Ben Carson to run in the 2016 presidential race spent $2.44 million to raise $2.4 million.

Bacon’s bottom line: Maybe this was a case in which Conservative StrikeForce just wasn’t very effective at its job, which it defined on its website as raising small contributions for conservative candidates through mail, direct mail and telephone solicitations. Or maybe it was a cynical ploy for the organizers to pay themselves handsome salaries and perks. We don’t know. But, sad to say, in the wild, wild world of political financing, we’ll probably be reading about a lot more cases like this one.

– JAB

Federal Bailouts and the Buildup of Risk

bailout_barometer

Graphic credit: Federal Reserve Bank of Richmond

by James A. Bacon

The federal government plays a much bigger role in shaping the United States economy than is evident in its taxing and spending policies. Uncle Sam funnels credit to favored constituencies through subsidized credit programs like TIFIA transportation loans and the Import-Export bank as well as by protecting lenders from losses due to a borrower’s default. Members of Congress are exercised, as well they ought to be, by the dispensing of subsidized credits to corporate interests. But loan guarantees have a far bigger impact — and expose the federal government, and the U.S. economy — to far greater risk.

Sixty percent of the U.S. financial system’s loans are explicitly or implicitly backed by the federal government, the Federal Reserve Board of Richmond has found in its updated Bailout Barometer. That’s up from roughly 45% as recently as 1999.

The capitalist financial system is inherently prone to booms and busts. Busts lead to corporate failures, and big corporate failures can trigger panics, in which even financially sound firms get caught in the undertow. The U.S. has sought to alleviate this pain by providing loan guarantees. Some guarantees are self-financing, such as federal insurance on bank deposits. Other guarantees are policed by regulators, and yet others are implied but ambiguous and not spelled out in advance. But the end result is that actors in the financial system adjust their behavior — taking on more risk than they would otherwise — in ways that could create new, bigger problems in the future. As the Richmond Fed explains:

Implicit guarantees effectively subsidize risk. Investors in implicitly protected markets feel little need to demand higher yields to compensate for the risk of loss. Implicitly protected funding sources are therefore cheaper, causing market participants to rely more heavily on them. At the same time, risk is more likely to accumulate in protected areas since market participants are less likely to prepare for the possibility of distress — for example, by holding adequate capital to cushion against losses, or by building safeguarding features into contracts — and creditors are less likely to monitor their activities. This is the so-called “moral hazard” problem of the financial safety net: The expectation of government support weakens the private sector’s ability and willingness to limit risk, resulting in excessive risk-taking. …

The Richmond Fed’s view is that the moral hazard from the [Too Big To Fail] problem is pervasive in our financial system. The U.S. government’s history of market interventions — from the bailout of Continental Illinois National Bank and Trust Company in 1984 to the public concerns raised during the Long-Term Capital Management crisis in 1998 — shaped market participants’ expectations of official support leading up to the events of 2007-08. According to Richmond Fed estimates, the proportion of total U.S. financial firms’ liabilities covered by the federal financial safety net has increased by one-third since our first estimate in 1999. The safety net covered 60 percent of financial sector liabilities as of 2013. More than 40 percent of that support is implicit and ambiguous.

Bacon’s bottom line: While the current financial regime did alleviate the pain of the 2007 market collapse, the system could be allowing even bigger risks to build up. Like generals fighting the last war, regulators are fighting the last panic. The new risks will not be the same as the old ones, and we won’t know what they are until they explode in the next financial debacle. But spurred by the Fed’s near-zero interest rate policies, investors are chasing higher returns by taking greater risks, and financial markets are concocting elaborate new financial instruments to circumvent the regulators.

The global derivatives market was calculated in 2013 to be roughly $1.2 quadrillion in notional value, or about 20 times the global economy. Admittedly, most of that is tied to interest rates, currency values and stock indexes, not the economic sectors guaranteed by the federal government. But it illustrates how arcane financial instruments can magnify or hedge risks in ways we mere mortals — and government bureaucrats earning low, six-figure salaries — can barely comprehend.

I don’t know what will trigger the next financial crisis. Most likely, it will come from a quarter that most people would never expect. I don’t know when it will come. But the history of capitalism since the South Sea Bubble of 1720 suggests that one will come along eventually. If a bunch of multibillionaire hedge fund managers lose multibillion dollar bets and wind up selling apples on the street, I will lose no sleep. But if those hedge fund multibillionaires’ losses are back-stopped by federal loan guarantees, effectively socializing their losses, I will have a deep and abiding rage.

Fixing Food Deserts Won’t Fix Food Insecurity

by James A. Bacon

Speaking of food…food_desert there’s new research out on the differences in diet and nutrition between different socioeconomic groups. The conventional wisdom is that a major factor explaining the gap in nutritional quality between affluent and poor Americans is the difficulty poor people have in accessing fresher, healthier food — the food desert phenomenon.

Using new data sets unavailable to previous researchers, Jessie Handbury, Molly Schnell and Ilya Rahkovsky were able to hone in food-buying practices of poor and affluent shoppers in the same grocery store. They found that the same patterns prevailed  — affluent people buy healthier, more nutritious food than poor people do.

“Our results indicate that improving access to healthy foods alone will do little to close the gap in the nutritional quality of grocery purchases across different socioeconomic groups,” they write in “What Drives Nutritional Disparities? Retail Access and Food Purchases across the Socioeconomic Spectrum,” published by the National Bureau of Economic Research. “Improving the concentration and nutritional quality of stores in the average low-income and low-education neighborhood to match those of the average high-income and high-education neighborhood would only close the gap in nutritional consumption across these groups by 1-3%.”

The authors suggest that two other variables are at play: the price of food and consumer preferences for certain kinds of food over others. Their research did not indicate the relative importance of those factors played in influencing food purchases.

Bacon’s bottom line: Once food preferences are established, it is very difficult to change them. That’s not to say it can’t be done — If I learned to like brocolli and brussel sprouts, for cryin’ out loud, anybody can change their food preferences — but it is a long, slow process. The problem is compounded by the fact that the food preferred by the poor — loaded with salt, fat and sugar — is engineered to taste better than healthy foods. And it’s compounded yet again by the fact is that many Americans across the income spectrum have lost the cultural knowledge of how to cook healthy foods. Educated Americans acquire that knowledge by watching cooking channels, buying cook books, and exposing themselves to new foods at finer restaurants. Those options are less available to the poor.

Spending money to induce grocery stores to locate in food deserts and stock their shelves with nutritious food is a fool’s errand. Grocers won’t stock shelf space with food that no one buys. Conversely, if poor people (a) showed a strong preference for nutritious food and (b) could afford to buy it, grocers would need no prodding — they would supply what the customer demanded.

The lousy nutrition of America’s poor is a demand-side problem, not a supply-side problem. To change how America eats, the first order of business is to change what Americans want to eat and can afford to eat.

The Agribusiness Opportunity

Source: New Geography

Source: New Geography

by James A. Bacon

If prostitution is the “oldest profession,” farming is likely the second oldest. Humans have been farming for thousands of years and, if they want to continue to eat, they’ll be farming for thousands of years more. Young people don’t see much future in farming (unless it’s locally grown organic food), and small towns and rural areas in the United States continue to bleed population. But there’s an argument to be made that farming has a great future.

Agriculture is already one of the United States’ biggest export sectors, and overseas markets are likely to continue to grow as developing the world population increases and rising incomes increase food consumption. Those mega-trends portend a favorable environment for large-scale agribusiness capable of moving large volumes of food commodities. Meanwhile, the rise of the locally grown food movement will create opportunities for community gardens and artisinal producers serving local markets.

That future of agriculture may not look like today’s massively mechanized, resource-intensive farming industry. It will be more knowledge-intensive, utilizing insights from biology and ecology to grow crops with fewer herbicides, pesticides and fertilizers. It will be less labor intensive, as leaf and berry pickers replace unskilled migrant workers. As the nature of the business changes, farming could well rebound as a career path for the young. As Joel Kotkin and Mark Schill write in New Geography, “The farms of the future are increasingly high-tech and run by highly skilled professionals and technicians.”

As we think about how to revitalize the economy of rural/small town Virginia, we don’t give much thought to stimulating agricultural production. Perhaps we should.

On the surface, the data compiled by Kotkin and Schill seems none too encouraging for Virginia. They honed in on metropolitan regions with at least 5,000 total jobs falling into one of 68 ag- and food production-related industries, including crop and animal production. Only four Virginia metros made it onto the list (as seen above), and they ranked in the bottom half of the 124 regions listed.  But that’s OK. I see farming and agribusiness as relatively untapped opportunity — fields of opportunities ripe for entrepreneurial innovation.

I’m Feeling Paranoid about Cyber-Terrorism at the Moment, and Keith Alexander Didn’t Help One Bit

cabin_in_the_woods

The only refuge?

by James A. Bacon

My sentiments regarding the Middle East periodically vacillate between “they’re crazy, leave ‘em alone and let ‘em all kill each other” to “the world’s too small, we can’t run away from the problem.” Last night I swung hard toward the latter perspective.

Keith B. Alexander, former director of the National Security Agency, and Robert S. Mueller III, former FBI director, spoke at the Richmond Forum last night on the topic of cyber security. And let’s just say, I’m not feeling very secure.

A major topic of the dialogue was the threat posed by ISIS. Right now, ISIS is on a roll. After suffering a setbacks in Kobani and Tikrit, the self-styled Caliphate has rebounded by capturing Ramadi and Palymyra. Tactical successes feed their propaganda and recruiting, many of those recruits are coming from Europe and North America, and some of those recruits have backgrounds in information technology.

At present, ISIS’ IT prowess has been limited mainly to sophisticated use of the Internet to recruit more jihadis. But a glimmer of their future intentions, said Alexander, can be seen in a recent cyber-attack that succeeded in shutting down a French television station. Admittedly, the station had left itself stupendously open to cyber-attack, so it didn’t require a great deal of savvy to break into its IT system. But it would be a mistake to think that ISIS capabilities won’t grow over time and that they won’t aim for more ambitious targets.

Think about it from ISIS’ point of view. If you wanted to do serious damage to America or Europe, you could invest your resources in bombing plots or shooting sprees — pinpricks — or you could do some serious, lasting damage by shutting down an electric grid. These people are not going to stop. They are at war with us not only because we have a (much diminished) presence in the Middle East but because they see Western Civilization as an enemy. It seems beyond ISIS’s capabilities to acquire a nuclear weapon, but all it takes is a few really smart guys with computers and an Internet connection to wage cyber war. And as long as they have a sanctuary like the Caliphate, they’re practically impossible to take out.

Americans are war-weary, and that certainly includes me, but it doesn’t take a whole lot of IQ points to imagine what would happen if ISIS expanded its zone of control, acquired some more oil fields, and could afford to hire some of the cyber-criminal geniuses operating out of Russia or Eastern Europe. I tell you, it’s almost enough to make me buy a cabin in the woods and stock up on canned food and ammo.