Bacon's Rebellion

The Gipper came to us with his sunny, phony, Hollywood style, pushing the common man but talking of unleashing the wonderful forces of the free market.

If only we could get the government off our backs, cut taxes and let the Magic of Capitalism roar about unfettered.

And it did. Republicans and Democrats alike joined in. Ronald Regan got rid of Paul Volker, the inflation hawk disciplinarian and picked instead Alan Greenspan, free market maven, utterer of the often incomprehensible statement and one-time devotee of Ayn Rand, the libertarian Big Sister.

Finance had a ball after Bill Clinton helped get rid of the Chinese walls between investment and commercial banking. Greenspan did his part to crank up markets while keeping rules at bay. Offshoring American jobs? Excellent, it’s just the way it goes. All boats rise, ya know. If Americans lose their jobs, it just the way it goes. It’s a New Economy, after all. Investments? Why not go after that alpha with your hedge fund. No, no don’t regulate. The people who created the funds and the derivatives who drive them are rocket scientists. Twenty-something federal regulators can’t even understand what they’re talking about. Securitize bad mrotgages. No problemo!

And, despite what you’ll read on Bacon’s rebellion today (if you can understand MassOverconsumption and all the other cute, but innane definitions), you may forget that a lot of the columnists and readers are right-wing conservatives who partied on, Wayne, right with the Reaganites. If you ever wanted to read a mantra of free market mumbo-jumbo, BR is the place to do it. Instead of little busts of Lenin, these people ought to have little Gippers on their desks.

Now comes Nobel prize-winning economist Joseph Stiglitz on today’s Huffington Post:

“The globalization agenda has been closely linked with the
market fundamentalists — the ideology of free markets and
financial liberalization. In this crisis, we see the most
market-oriented institutions in the most market-oriented
economy failing and running to the government for help.
Everyone in the world will now say this is the end of market
fundamentalism. In this sense, the fall of Wall Street is
for market fundamentalists what the fall of the Berlin Wall
was for communism — it tells the world that this way of
economic organization turns out not to be sustainable. In the
end, everyone says, that model doesn’t work. This moment is a
marker that the claims of financial market liberalization
were bogus.”

Say it ain’t so, Joe.

Peter Galuszka

Looks like AIG, like Freddie and Fannie, should have spent some of the money they wasted on advertising to improve corporate management and risk analysis.

On 8 Sept we posted a note on this Blog titled “HIGH NOON FOR ENTERPRISE SOCIALISM.” Turns out it was only a little past 8 AM. The lesson from AIG is that if you are big enough to hurt a lot of folks and endanger the political party in power, you are big enough for the feds to bail out. So much for a market economy and a “conservative” administration.

Back in March we wrote a column at db4.dev.baconsrebellion.com titled “Good New, Bad Reporting.” The column did more that beat on MainStream Media for putting the wrong spin on the “news” and failing to provide the background citizens must have to understand the need for Fundamental Transformation in not just human settlement patterns but in governance including management of the economy.

Citizens need to move in the direction of a human scale, not just in settlement patterns but in every aspect of economic, social and physical activity. No one in any Agency, Enterprise or Institution is larger than human scale, although there are far too many with appetites, egos, hubris and greed that is Global.

One of the few Institutions in the Commonwealth that is considering the right set of questions is ASAP (www.ASAPnow.org) in Cville. On Monday 20 October they are hosting the president of the Center for the Advancement of the Steady State Economy (CASSE at www.steadystate.org ).

The end of Mass OverConsumption is near. What is the alternative in addition to functional human settlement patterns? Small is Beautiful. A steady state economy is an imperative.

EMR

While the citizens of Richmond battle red tape and political agendas to create a single charter school (See Norm Leahy’s post, “The Patrick Henry Contract“), thousands of others are dropping out of the public education system. They’re called home schoolers, and their numbers are growing at an explosive rate.

At the invitation of Marc Montoni, a past contributor to the Bacon’s Rebellion e-zine, I dropped by a home school expo Sunday held at the Children’s Museum of Richmond to learn more about the movement. No one I talked to had a definitive count of the number of home schoolers in the Richmond region, but estimates ranged from 3,000 to 5,000. There are thousands more across Virginia. Statewide, the movement is growing at roughly 20 percent a year.

Let me be clear: I have no desire to home school my 10-year-old, who attends a private school. But I find much to admire in home schooling. Home-schooled children out-perform their peers in standardized tests and college admissions — and parents lay out only a tiny fraction of the cash that conventional public and private schools require.

I discovered Sunday that “home” schooling is something of a misnomer. The phrase conveys an image of children cooped up at home, books stuck in noses under the watchful eye of their teacher-mom. But if the exhibition booths were any indication, home schoolers get out and about more than most kids. Represented there were children’s gymnasiums, a rock climbing program, fitness centers, a martial arts studio, music studios, and a children’s theater — not to mention the Virginia Museum of Fine Arts, the Virginia Science Museum, and the Children’s Museum. The private and not-for-profit sector is most happy to provide a wide array of services traditionally associated with schools.

Far from being solitary types, home schoolers are immensely sociable. Home school parents connect with one another through the Web and e-mail, often forming “co-ops” in which parents share teaching responsibilities, specializing in the fields they know best. At least one co-op in Richmond leases classroom space. Virginia home schoolers have their own magazine that shares news, resources and best practices. Publishers of textbooks, CD-ROMs and computer-assisted learning cater to the home-school market as well.

The structure of the home-school movement, which is roughly 25 years old in Virginia, is very free-form and egalitarian. I sense that the vast majority of participants are middle class: not wealthy enough to pay hefty private school tuitions, but well off enough that mom can stay at home to shepherd the kids. The people I saw were overwhelmingly white, although they defied ideological categorization. Home schoolers include evangelical Christians, libertarians and hippies.

I didn’t linger at the exhibition long enough to collect anything more than the most cursory of impressions, but I left with the notion that home schooling is the future of education in Virginia. While public schools are hamstrung by bureaucracy, home schoolers are experimenting and innovating like mad. Home schoolers are devising new curricula and new pedagogies. They’re embracing new technologies. They’re developing new models for sharing knowledge. And they’re availing themselves of community resources rather than recreating everything from libraries to sports facilities. Home schoolers have no need to invest in bricks and mortar. The community is their classroom.

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The Bacon’s Rebellion theory of economic development (“Economy 4.0”) is about to undergo an important real-world test in New York.

The theory says that financial capital and human capital gravitates to where it generates the highest return on investment. All other things being equal, states and regions with lower taxes, fewer regulations and a less heavy-handed government will enjoy superior economic performance over the long run. Things aren’t always equal, of course. One of the major countervailing forces is the existence of world-class industry clusters where a critical mass of human capital can generate enough innovation and productivity to offset the disadvantages of obtrusive government. Silicon Valley is such a place. Hollywood is such a place. Manhattan was such a place, defying economic gravity for years. But it may be no longer.

Wall Street stood at the center of one of the greatest wealth-producing machines in American history. For decades, the phenomenal profits of the investment bankers, mortgage bankers and hedge fund managers fueled economic prosperity in New York City (and environs, particularly the Connecticut suburbs where the hedge fund managers dwell) despite an otherwise inhospitable business climate. Through their ability to borrow extraordinary amounts of money, leverage their capital and seemingly dish off risk through opaque and often incomprehensible derivatives, Wall Street financiers generated unconscionable salaries, bonuses and corporate profits.

Kenneth Rogoff, former chief economist with the International Monetary Fund, says that profitability will never return. As quoted by Spiegel Online, he said:

The US financial system was bloated and overgrown and reckless to some extent. Now it is being reigned in. … In 2006, the financial sector accounted for a third of corporate profits in the US, although it only represents 2 or 3 percent of total gross domestic product. Goldman Sachs alone distributed $16.5 billion in bonuses to its 26,000 employees. I’m sorry, I think it’s unbelievable. You can’t just make money out of thin air like this, and underlaying this there were enormous risks being taken.

What we’re seeing is a shrinking industry — perhaps by 20 or 25 percent and in some segments perhaps as much as 50 percent. But these finance products based on fancy rocket science and derivatives just aren’t coming back, and that’s very painful. The industry is not going to make the same profits in the future as it did in the past. And this isn’t just about subprime and mortgage losses. Investors are starting to realize that the profit model these investment banks were running on has been trimmed.

Wall Street financiers amassed incredible fortunes (contributing to the much-talked-about disparity in wealth in the United States, incidentally) while shoveling off risks that Rogoff says could explode into $1 trillion in liabilities to U.S. taxpayers. You and I will be paying for New Yorkers’ yachts, estates and country club memberships for a very long time.

But Wall Street’s melt-down will be felt most acutely in New York itself. Nationally, financial services accounted for 8.3 percent of the U.S. economy, the highest level in its history. That industry is super-concentrated in the New York New Urban Region (extending into New Jersey and Connecticut). According to the Wall Street Journal, about five percent of New York City’s jobs are in financial services, but they account for a quarter of the city’s wages, or about $60 billion in 2006. That’s about to change. Even before the disastrous events of the past few days, New York had shed 11,000 jobs. Wall Street has been through downturns before, but this one is different. As the financial industry de-leverages, profit margins, stock prices, bonuses and employment will shrink permanently. And that shrinkage will run the economic gears in reverse. As the Journal notes, each financial services job generates three positions in other sectors. “The financial services industry won’t be the same economic engine it has been in recent years.”

Now New York will have to come to grips with the fact that, outside of a handful of industries, such as media, advertising, fashion and tourism, high taxes and a high cost of business make the region hideously uncompetitive. The question is, can New York reinvent itself?

Bacon’s Rebellion’s “Economy 4.0” theory suggests an answer: not bloody likely. Carrying the weight of high taxes, regulations, labor unions and other high business costs, new industries will find it difficult to take root, much less to grow enough to offset the shrinkage of the financial sector.

I do confess to experiencing schadenfreude in seeing the Wall Street “masters of the universe” knocked down a few pegs. I have no respect for people whose greed created immense wealth for themselves and destroyed it for others. But Gotham is a magnificent city, and it is populated by many people who never benefited from the excesses of the money mavens. I pity them for what awaits the city when its employment base and tax base shrivels. I will take little pleasure in having my hypothesis confirmed. But, for now, I am very glad I make my living in Virginia.

Household incomes stagnated in Virginia while the number of uninsured increased during the past economic cycle, contends the Commonwealth Institute for Fiscal Analysis in a recent report, “Feeling the Pinch: The State of Working Virginia.” (I came across the report after reading about it in today’s Washington Post.)

“Despite seeing incomes rise this year, more Virginians are falling into poverty and fewer are able to afford health insurance,” said Michael Cassidy, executive director of the Commonwealth Institute, in an earlier press release based on the latest Census data. “This demonstrates how the bottom has fallen out for low income workers in the state’s economy — their wages have tanked in recent years — and the benefits like life insurance coverage that go along with most jobs have vanished.”

Cassidy doesn’t touch upon it, but there is a direct connection between stagnant wages and the rising rate of uninsurance. It’s the soaring cost of providing medical insurance coverage. Spending more on medical insurance leaves less for employers to pay in higher wages. The common thread: out-of-control costs in the health care sector.

Cassidy brushes up against the problem, but never quite grasps it. Health care coverage is declining mainly in the private sector, he writes. “According to Census data, 69.4 percent of Virginians received coverage from any private insurance plan in 2007. … Since 2000, the private insurance rate has fallen 6.2 percent.” Of those workers who do have insurance, Cassidy notes, they pay the highest share in the country: about 24 percent of the cost, compared to 19 percent nationally.

Cassidy emphasizes the role of public programs in offsetting the decline of private insurance. But a fundamental question needs to be asked: Why is health care insurance in Virginia so darned unaffordable? There are many reasons, but the most important the success of medical interest groups — primarily hospitals and professional societies — in lobbying the General Assembly to protect their interests at the expense of the general public. Examples include:

Mandated insurance benefits. Virginia has among the highest number of insurance mandates of any state in the country. For businesses too small to self-insure, the only option is to buy a plan subject to mandated benefits. These mandates prohibit insurers from offering less expensive, “bare bones” policies that small employers can afford. The all-too-frequent result: No health insurance at all.

The cartelization of the health care industry. Quasi monopolies under the guise of “health care systems” — Carilion in western Virginia, Inova in Northern Virginia, and Sentara in Hampton Roads — dominate Virginia’s health care system. These cartels are protected by the Certificate of Public Need that severely restricts competition from newcomers that would force a much-needed restructuring and re-engineering of the health care industry. (See “Big Questions for Roanoke’s Carilion” and “How Much Profit at Carilion Is Too Much?”)

The craft unionization of the health care workforce. All of the health care professions are certified and licensed. They carve out professional turf and use state law to ensure that other professions cannot infringe upon it. This legally sanctioned craft unionization makes it difficult to re-engineer hospitals to make their processes more efficient.

The employer-based health care insurance system is a mess, as are the government-administered Medicare and Medicaid programs. Private insurance is bloated with layers of unnecessary administrative overhead. Medicare and Medicaid are riddled with fraud. Both need to be fixed. But the root problem is the lack of business innovation in the health care sector, the resulting lag in labor productivity and the difficulty in improving patient outcomes. Until we address these ground-level problems — rooted in a political economy in which health care providers manipulate the political system to their advantage — most debate about health care “reform” in this country is a waste of time.

I’ve touched on only a small piece of what the Commonwealth Institute report covers. As I’ve said about institute’s studies in the past, I often take issue with the findings and implications of the findings. But I do applaud the group for raising important issues of social equity and supporting them with facts, rather than spewing a lot of unsubstantiated rhetoric. The Commonwealth Institute raises the bar of public discourse, and for that it should be commended.

Jim Bacon has been into the numbers again. See “States, Taxes and Laffer Curve” below. (This is a new post since some may not make it past Anon 5:31’s post.)

Good post Jim: Glad you noted the importance of human settlement patterns. That leads to the one concern we have with the post: The problem is not just using “state” data instead of “metropolitan region” data. One has to go much deeper into the data issue before any analysis is of real value.

For example:

Larry G. (is that you Larry Gross?) cites a report by Milken / Greenstreet that makes this case crystal clear.

First on Vocabulary: I am sure everyone who looked up the study noted the authors called this the “best performing ‘CITIES’” but the entries are the top 200 “MSAs” or parts there of (e.g. “MDs”) not a “city” on the list.

If you do not know what you are talking about, you do not know what you are talking about.

Even more important of the top 25 places on the list – what ever you call them – 20 are in New Urban Regions. These are not small, out of the way places, they are parts of New Urban Regions, just as you would expect.

What is more 11 of the top 25 places fall into just 4 New Urban Regions.

In other words there is no reason to spend much time looking at this or other badly aggregated information.

Using “state” data makes any analysis less meaningful than “metropolitian region” data, but not much.

We explore the newly in-vogue term “megaregion” in TRILO-G.

There are problems with going too big as well as too small with data aggregation. Think organic, in the food market and in the data.

charlie: Why “New Urban Region” not “state”? The reason is simple, the New Urban Region is the fundamental building block of contemporary economic, social and physical civilization.

Yes, there are some things that vary by state (or by county or nation-state) but not as many as vary by the organic components of society.

TMT: Think New Urban Region, not “nova,” where ever that may be.

Darrell – Chesapeake: Right on except it is Fundamental Transformation, not fundamental change, that phrase has been hijacked by the Business-As-Usual political spinners.

EMR

Sheila and Kevin Nelson are obviously good at what they do. Since purchasing Groomingdale’s, an established pet grooming business, in November, they’ve boosted sales six percent, as Joan Tupponce tells the story in today’s Richmond Times-Dispatch. I wish the Nelsons all the luck in the world. I like to see small businesses succeed, especially in a heart-tugging instance like this: The flexibility of the business allows the couple to schedule appointments around the needs of their oldest daughter, who has cerebral palsy

But I really do wonder: Was there a public policy justification for the Small Business Administration to finance the Nelsons’ takeover of the business with $175,200 in loans?

As the SBA says on its website, it was formed in 1953 to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.”

How did financing the Nelsons’ business “maintain and strengthen the overall economy of the nation”? Groomingdale’s had been in business since 1992. In other words, the SBA-guaranteed loans helped finance the purchase of an existing pet grooming business by a new owner. Are the owners creating new jobs or expand the tax base? Does the business serve new markets? Does it stimulate exports? Is it advancing a new technology? Does the enterprise complement, and help grow, a strategically important business cluster?

With Wall Street firms collapsing, with the federal government committing itself to gazillion-dollar bailouts of mortgage-securitization giants Freddie Mac and Fannie Mae, with the U.S. financial system imploding, foreign investors withdrawing their capital and lenders trimming their sales, is a pet-grooming service the kind of business into which the United States should be funneling scarce investment capital? Nothing personal against the Nelsons, whom I’m sure are wonderful people, but I reaaalllly don’t think so.

(This blog entry was adapted from a post on R’Biz.)

Arthur Laffer, known for the “Laffer Curve,” and Stephen Moore, a Cato Institute scholar, published a study last year, “Rich States, Poor States,” that asks exactly the kinds of questions we explore here on the Bacon’s Rebellion blog. What are the public policy variables that affect states’ long-term economic growth — and how does Virginia fare?

I have only now come across this study. Although its data is a year older than we’d like, “Rich States, Poor States,” covers a recent 10-year period (1997 to 2006), so its conclusions are still informative for purposes of long-term analysis.

Laffer and Moore pick three criteria for tracking a state’s economic performance: per capita income, net in-migration, and job creation. We have oft-touted the virtues of “per capita income” as a metric for economic well-being. The usefulness of “job creation” as a measure of economic vitality needs no elaboration.

I find the net in-migration number the most interesting because the data is less widely reported and it’s a forward-looking indicator. Domestic migration is the best single indicator there is of the flow of human capital. For the most part, domestic migrants are better educated and earn more money than those who stay behind. They enrich the human capital of the regions and states where they end up. If you’re trying to build up your creative class, domestic in-migration is a good measure of how you’re doing.

Anyway, according to Laffer and Moore, between the 1Q of 1997 and the 1Q of 2006, Virginia recorded:

• per capita income growth of 56.4 percent (7th best in the country)
• job growth of 18.8 percent (12th best in the country), and
• net domestic in-migration of 162,653 (12th best in the country)

Add it all up, and Virginia had the 4th strongest economic performance nationally over that period. (Arizona was 3rd, Florida was 2nd, and Texas was 1st.)

What contributed to that strong performance? Laffer and Moore focus mainly on state tax and regulatory policies. They don’t provide a composite score for each state, but here’s how Virginia ranks for individual variables (with state rank in parenthesis):

Top marginal personal income tax rate: 5.75%…. (23)

Top marginal income tax rate: 6.0%…. (15)

Personal income tax progressivity (change in tax liability per $1,000 in income): $6.42…. (22)

Property tax burden (per $1,000 of personal income): $29.85…. (20)

Sales tax burden (per $1,000 of personal income): $15.00…. (9)

Remaining tax burden (per $1,000 of personal income): $21.35…. (33)

Estate/inheritance tax: No…. (1, tie)

Recent legislated tax changes (2005 and 2006, per $1,000 of personal income): -0.37…. (14)

Debt service as % of total tax revenue: 7.8%…. (17)

Public employees per 10,000 population (FTE): 563.4… (28)

State liability system survey (tort litigation treatment, judicial impartiality): 66.9…. (12)

State minimum wage (federal floor is $5.85): $5.85…. (1, tie)

Average workers comp costs (per $100 of payrol): $1.52…. (3)

Right to work state? Yes…. (1, tied)

Number of tax expenditure limits: least/worst…. (23, tied)

Education freedom index score (vouchers, ease of private/home schooling): 1.47…. (42)

My main quibble with the Laffer/Moore analysis is that it chooses states as the unit of analysis rather than metropolitan regions. Breaking down the performance data by region would permit a finer-grained analysis. Here in Virginia, there is enormous variability between the performance of Charlottesville or Northern Virginia and, say, Danville.

While tax/regulatory policy clearly is a major determinant, it is not the only one. Human capital — and the capacity for upgrading human capital, i.e. education and training — is another one. The existence of strong industry clusters is another. Human settlement patterns are yet another. Still, while the Laffer/Moore analysis doesn’t explain everything, it explains a lot.

Virginia Republicans may be losing their grip on power, but they can console themselves that they’re still perceived as “pro business.” That gives them a significant advantage in fund raising. I’m yet to be convinced, however, that the pro-business epithet is terribly beneficial for the rest of us.

According to the 2008 report card issued by the Virginia Foundation for Research and Economic Education (Virginia FREE), the top pro-business legislators in the General Assembly are all Republican. As listed by the Associated Press, they include:

1. Sen. Walter Scotch, R
(tie) Sen. John Watkins, R
3. Sen. Kenneth Stolle, R
(tie) Sen. Thomas Norment, R
5. Sen. William Wampler, R
6. Sen. Frank Wagner, R
(tie) Del. Thomas Rust, R
8. Sen. Harry Blevins, R
9. Sen. Robert Hurt, R
(tie) Sen. Stephen Newman, R

Once upon a time, I would have said it was a good thing to be pro-business. America is, after all, a capitalist society. A healthy economy requires healthy, profitable businesses. But I’m not so sure I believe that anymore. Increasingly, businesses view government and politics not as a thing apart from the private sector but as an extension of marketplace, an arena where they can manipulate the rules and the power of patronage for their own benefit. Increasingly, the “business” lobby has evolved into an aggregation of special interests that look out for themselves, not the general welfare.

Clayton Roberts, president of Virginia FREE, doesn’t see it that way. In a column published widely around the state this morning, he regards the interests of business, the citizenry and good government as largely synonomous:

Virginia businesses do not see public safety, education, health care, transportation, and energy as partisan issues. They are Virginia issues. They are pressing business issues.

Roberts, a delightful guy whom I regard as a friend, blames elected officials and partisan stand-offs for Virginia’s failure to devise legislative fixes. I wouldn’t disagree. Mindless partisanship does not lend itself to solving problems.

But the biggest obstacle in Virginia is something else entirely: the widespread belief that complex problems have easy answers — usually entailing the expenditure of larger amounts of money. The answer, we hear repeatedly, is mo’ money. We don’t hear a cry for Fundamental Change.

John McCain may be trying to seize the mantle of change in the presidential elections, but I see little evidence that Virginia Republicans — or businesses — have been caught up in the same spirit.

Inc. Magazine is known mainly for its prestigious “Inc. 500” list of fastest-growing private companies in the United States. As I reported for R’Biz last month, the Richmond region contributed only one company – Logical Innovations, a software development firm — to that list. But it turns out that Inc. compiles an even bigger list, an “Inc. 5000,” that dips even deeper into the entrepreneurial economy.

Ah, hah, I thought. Perhaps the Richmond area’s successful companies were buried a layer or two under the elite strata of the top 500. If only I searched the larger database, I reasoned, the region’s rising stars would be unveiled. Alas, searching the Inc. 5000 list proved to be even more demoralizing. Out of the 5,000 fastest-growing private companies in the United States, 244 companies are from Virginia — nearly one out of 20. But the vast majority are from Northern Virginia; only 12 are located in Richmond.

In a metropolitan area of about one million people and a country of 300 million people, the odds are that at least one company out of 300 would be found here. In actuality, the ratio is less than one out of 400. If the Inc. 5000 list can be trusted as an accurate reflection of economic reality, the Richmond region is entrepreneur poor. We have a severe shortage of the fast-growth companies that drive regional economic development through job and wealth creation.

While Richmond has been successful at recruiting corporate headquarters and professional firms, we’re doing a lousy job of creating the next generation of businesses, jobs and technologies. No wonder the Milken Institute ranked the region 102 out of the 200 largest Metropolitan Statistical Areas for the growth of its technology sector. (See “Richmond Falling Short in Tech Cred.”)

As the Richmond region has experienced repeatedly, large corporations come — and they go. It’s great when we recruit a new manufacturer or, even better, a corporate headquarters. But there is no assurance that they will stay. In the past year alone, Albemarle Corp., a specialty chemicals manufacturer, has relocated its corporate headquarters to Baton Rouge, La. Far more damaging to the local economy, Wachovia Securities moved to St. Louis, taking hundreds of highly compensated employees with it.

As Robert Reich argued in his book, “Supercapitalism,” corporations today have no regional loyalties. They invest their capital wherever they can maximize their profits, whether that’s in Virginia, or Louisiana… or China. Maximizing profit for shareholders is the reason why corporations exist. If senior executives don’t maximize profit, they will either be relieved of their command or investors will shun their stock.

By contrast, citizens are invested in their communities, and they want to see their communities prosper. The citizens of Richmond need to create the social and economic conditions – a deep pool of human capital, and institutions supportive of entrepreneurs — that encourage the formation of innovative, fast-growth companies. Even successful fast-growth companies can grow up to become Fortune 500 companies and move out of town. But in the two or three decades it takes to reach that stage, the fast-growth companies are creating jobs, wealth for investors, opportunities for vendors and partners, and economic prosperity generally.

Our business, political and civic leaders appear to be very engaged in community issues. But, whatever priorities they may have, supporting entrepreneurial growthis not one they take terribly seriously. Perhaps more depressing evidence like that of the Inc. 5000 will induce the big shots to change. Instead of jetting off to places like Jacksonville, Fla., for inspiration, maybe they should take a bus up to Northern Virginia to see where that region’s entrepreneurs come from.

(This post was adapted from an article first published in R’Biz.)

Washington, D.C., has the greatest extremes of wealth and poverty of almost any place in the United States. Yet, ironically, both extremes — the rich and the poor — vote overwhelmingly for Democrats, observes David Frum, former speechwriter for President George W. Bush and now a resident fellow at the American Enterprise Institute.

The same pattern applies across the country: Places with greater income inequality vote for the Dems, places with more egalitarian incomes prefer Republicans. The danger for the GOP is that the nation is becoming more unequal, Frum argues in “The Vanishing Republican Voter,” an article published Sunday in the New York Times Magazine.” As America becomes more unequal, it also becomes less Republican,”

To advance his argument, Frum hones in on Fairfax County, a once solidly Republican stronghold that now leans Democratic, and Prince William County, where the GOP lock is loosening.

The million residents of Fairfax County have an economy larger than Vietnam’s. Incomes average more than $100,000. But that high average conceals wide variations between those with great educations and high incomes, and the arrivals “speaking 40 different tongues.” Inequality has created new social problems, contends Frum: “The schools are stressed. The roads are choked. Land use is more contentious.” And the county is shifting steadily into the Democratic column.

Why? Frum doesn’t really explain why. He just notes that super-affluent Americans generally trend Democratic. Says Frum: “Al Gore beat George Bush 56-39, among the 4 percent of voters who identified themselves as ‘upper class.’ America’s wealthiest ZIP codes are a roll call of Democratic strongholds.” It goes without saying that poor people prefer Democrats, who look more favorably upon the redistribution of wealth.

Moving on to Prince William County, Frum says, “There are no more egalitarian and no more Republican places in the United States than these exurbs. The rich shun them, and the poor can find no easy foothold.” But even here, the Republican dominance is slipping. Democrats Gov. Tim Kaine and Sen. Jim Webb both won majorities here.

Frum argues that Republican policies under the Bush administration have yielded few benefits to middle-income Americans. He then focuses on Prince William as “ground zero” for the illegal immigration debate. Illegal immigration is bad for the poor because it drives down wages, and it helps the rich because it lowers the price of personal services like landscaping and restraurant meals. In other words, it fosters inequality. Making matters worse, middle-class communities like Prince William are paying the cost of maintaining social services for the illegals.

Frum points to one other crisis: the rising cost of health care. What the middle class needs even more than tax breaks, he suggests, is for someone to tame the soaring inflation in health care that has bitten deeply into wages and salaries. “If health-insurance costs had risen 50 percent rather than 100 percent over the Bush years,” he writes, “middle-income voters would have enjoyed a pay raise instead of enduring wage stagnation.”

Bacon’s bottom line: Frum’s article is a good read, and parts of it are quite perceptive. But he fails to close the loops of logic in a number of his arguments. For instance, I agree with Frum’s economic analysis about the disparate impact of illegal immigration, but he never explains how that issue would induce the stressed-out middle-class residents of Prince William County to vote for Tim Kaine or Jim Webb, neither of whom have championed the anti-illegal immigration cause.

On health care, Frum may be on firmer ground. If middle-class Americans are worried about the impact of health care costs, they may be drawn to the Democratic pitch for a national health care system. Even then, though, he doesn’t take his argument quite that far.

Finally, Frum omits what may be the most crucial cluster of issues of all: those relating to transportation, land use, energy and the environment. Middle-class NoVa residents fall into the demographic that Ed Risse refers to as the “Running As Hard As They Cans” (RHTCs) whose lives are impacted by dysfunctional land use patterns — unaffordable and inaccessible housing, traffic congestion, fiscal stress at the municipal level, rising energy costs — in ways they do not fully understand. It’s possible that they’re losing faith in the old Republican mantra: Just keep keep taxes low.

Without question, taxes matter to the middle class, but so do wage levels, and health care costs, and mortgage costs, and housing values, and gasoline/energy costs, and traffic congestion, and the quality of the schools… What those problems have to do with income inequality, I’m still not certain. I would think they would matter to everyone. If Republicans want to hold on to middle class voters, they’d better find a bigger bag of tricks — regardless of what happens to income inequality.

Funny how old associations come up. About two weeks ago, I was up near Tysons Corner for an appointment. I was early so I dropped by the Borders across the street. As I was waiting for the cashier with my CD of bluesman John Lee Hooker, I noticed one of those stand-up photo advertisements. The face looked awfully familiar.

It was. It was Steve Baker, a BusinessWeek senior writer with whom I have worked off and on for 20 years. He was in Mexico City when I was in Moscow and later he was in Pittsburgh while I was in Cleveland. The latter association brought on occasional barroom discussions of rust belt economics and the many sins of our New York editors.

Steve’s done very well. The ad was for an excellent book he’s just published about “The Numerati,” a class of math experts who quietly orchestrate the massaging of the zillions of bits of data about us. We generate the stuff every time we use our cell phones or search Google, use a grocery loyalty card or whisk through a toll booth using a Smarttag.

Steve, who has specialized in technology reporting for more than a decade, draws intriguing portraits of the numbers class, many of whom are non-Americans from Syria, Pakistan, or France. How they use the tremendous cache of data about us will make a huge difference in our future lives.

Even in Virginia. In his section on politics, Steve zeroes in on how pollsters and campaign officials used and massaged data in the state gubernatorial race in 2005 to get money or reach out to undecided and critically important voters. How such data will be gathered and analyzed will be extremely important in the tight presidential race this year between Barack Obama and John McCain, especially in the Old Dominion, which is a swing state. Data management will probably be less important in the Mark Warner versus Jim Gilmore senatorial contest, as an outcome favorable to the Democrat seems preordained.

For more, please check out https://www.baconsrebellion.com/Issues08/09-08/Galuszka.php

Peter Galuszka

Bacon’s Rebellion has been a huge part of my life for the past six years. But it’s time for a break, as I explain in “Passing the Baton.” While I will continue to participate in Virginia’s public policy dialog in the blog, I just don’t have the energy right now to keep up the time-consuming commitment of publishing the e-zine every other week. I have more important obligations, foremost among them my wife, my children and my elderly parents.

That doesn’t mean the e-zine is necessarily dead, or even dormant. It may be taking a breather. A number of long-time friends of the e-zine have approached me with ideas for keeping it going. I am most gratified by their response, and I’m open to their thoughts. I expect those conversations to unfold over the next two or three weeks. If there are any breakthroughs, I will keep you posted.

Meanwhile, if anyone has any suggestions on how to keep the e-zine going, or knows of any potential benefactors — life was sweet when the Piedmont Environmental Council supported us, I didn’t have to make a “real” living — please feel free to e-mail me at [email protected].