Bacon's Rebellion

Memo to: James Atticus Bowden
From: Peter Galuszka

Re: Reading Assignment

Okay, I got my copy of Thomas Sowell’s “Basic Economics,” have skimmed through it and am ready to make some points. I know your views are generally the polar opposite of mine, but I think I deserve at least a Gentleman’s C” for my efforts.

Sowell has written a very good, clear primer on economics. I wish I had this book when I took Economics 101 back in 1971. Those were the days when every college intro econ. course had you get the umpteenth printing of Paul Samuelson’s classic textbook. I went to a liberal, northeastern school for which I make no apologies, but I will admit that the mindset was very Keynesian and all the teaching assistants who drilled us on Samuelson really liked government spending. It didn’t matter if the government didn’t have the money, we were told.

Milton Friedman and the Chicago School existed but hadn’t penetrated the Northeastern elites yet. Free market principles, such as those of the Chicago School or at the Hoover Institution which is Sowell’s home, wouldn’t become really fashionable until Margaret Thatcher took power, and of course, Ronald Reagan gained the White House even though he turned out to be the biggest Keynesian of all.

Sowell’s approach favors a free market view, which does have its merits. He is right about issues such as productivity, letting the market make choices and limiting government regulation and interference. Sowell gives the standard Ricardo line that “all boats rise” with free trade and that we are a lot better off with deals like NAFTA than not. Rule of law is critical for unleashing the laws of economics. Communism doesn’t work (like Duh) and he even quotes some Soviet economists and critics such as Nikolai Smelev whom I interviewed as a Business Week correspondent in Moscow back in the late 1980s. Good choice on Sowell’s part.

My criticisms of Sowell’s work are ones of ideology and omissions.

On ideology, he’s very anti-labor and though he’s right that unions are greatly diminished and now represent mostly government workers. However, they still play a needed role especially since corporate loyalty is a thing of the past and management is becoming more bloodless and ruthless. A counterweight is needed and unions can help provide it.

Sowell’s arguments against “rent control” are over the top. He says that rent control in New York and San Francisco has kept apartment prices artificially high. I know about San Francisco but I have lived in New York City and rent controlled-apartments started to become rare about 20 years ago. The reason rents are high is that real estate in specific areas is very desirable and lots of rich executives and creative elites compete for it. This really doesn’t have much to do with rent control.

Sowell doesn’t really tell us much about how executive compensation got way out of whack over the past 15 years or so and has led to plenty of CEO arrogance, hubris, stupidity and criminality. The pay given to CEOs if many times greater than it is for average workers than it was before. Are the today’s CEOs suddenly worth that much more than yesterday’s?

Sowell skimps on the impacts of free trade. Sure it tends to be an overall win-win but try telling that the textile workers in Danville or in Kannapolis, N.C. where 6,000 lost their jobs in one afternoon.

Sowell doesn’t even the topic of dysfunctional living patterns or mass overconsumption that are dear to the hearts of some Baconauts.

On foreign ownership and investment, Sowell rightly points out that this is nothing new. Foreigners held significant shares in U.S. railroads at the end if the 1800s, for example. But what you are seeing is the emergence of “stateless” corporations that are new-fangled entities answerable to no specific country. Major U.S. construction firms linked to the Bush Administration end up headquartered in Dubai. How can you hold these firms accountable to shareholders, the true owners? Global securities regulation is only starting to take hold. Sowell doesn’t talk much about it. Yet decisions made by these companies can kill or create thousands of jobs overnight in Virginia or elsewhere.

I really don’t see any specific application to Virginia any more than to anywhere else. Still, a good book.

The disconnect between the general public and the special interests pressing for taxes for transportation (the Axis of Taxes) seems to widen with each passing day. As the General Assembly gears up for a special session to address transportation funding, according to the latest Commonwealth Poll, transportation ranks only fourth among the topics that the state should make “a top priority.”

Here’s how the issues compared:

Public schools (67 percent of respondents listed as “a top priority”)
Job situation (54 percent)
Environment (49 percent)
Transportation (46 percent)
Illegal immigration (45 percent)
Mental health services (37 percent)

The breakdown did vary by geography. Fifty-nine percent of Northern Virginians rated transportation a top priority, but the figure in Hampton Roads — where the Axis of Taxes is determined to raise billions in regional revenues for regional bridge and highway projects — rated only 43 percent.

I hate to say I told you so, but… I told you so. Back in February, I took note of major shifts in global trading patterns resulting from the declining value of the U.S. dollar. In “The Inscrutable Meaning of the Shrinking Trade Deficit,” I noted that a weaker dollar would translate into greater U.S. exports and lower imports. That’s Economics 101 — not exactly a leap of genius. But I went a step further, writing:

[Virginia] lawmakers are being urged to make massive infrastructure investments based on those global trading patterns. Hampton Roads is undergoing a massive expansion of port capacity predicated on the view that the volume of imported containers, mostly from China, will continue basically forever.

Rising imports implies the need for more trucks — and highway capacity. But a leveling off of imports suggests that the anticipated surge in truck traffic may not materialize. What worries me is that the business-political establishment of Hampton Roads will plunge ahead blindly with its monumental road improvement projects, saddling the region with a massive extra tax burden in order to handle an increase in imports that never materializes.

Now comes this news from the Daily Press:

For the first time since before 2003, annual revenue for the authority’s terminals is projected to fall by nearly 7 percent in 2009, a decline officials attributed to a continuing economic downturn and the specter of losing two major customers to Portsmouth competitor APM Terminals Inc.” …

“If you look at the trend in the last few months, I think our volumes have been down three of the four months,” said Joseph A. Dorto, president and chief executive of VIT. “We look out there, read the newspaper and see what the economy looks like, and we think the rising cost of fuel, energy and food are going to cause people to cut back and not spend as much and buy as much.”

In other words, the shift in global trading patterns is now being felt in Hampton Roads. What’s not clear from the Daily Press story is how much of the anticipated 7 percent decline in container traffic represents a loss of state port business to private terminals in Portsmouth, and how much will manifest itself in a smaller number of trucks running up and down Interstate 64 and U.S. 460. Clearly, though, truck traffic, whether it originates from Norfolk or Portsmouth, is expected to decline.

Combine the port trend with yesterday’s post, “Vehicle Miles Traveled – Down 4.3 Percent.” Folks, we are experiencing a significant shift in the demand curve for transportation capacity. That’s a fancy way of saying that we won’t need as much new transportation infrastructure as we thought we did. Whether any of this will penetrate the consciousness of lawmakers before they convene this June to address transportation funding, however, remains to be seen.

As the General Assembly gears up for a special session to hammer out a transportation-funding “solution,” you’ll hear a lot about the catastrophic decline in gasoline tax revenues. Because maintenance projects get first crack at all state gas-tax dollars, the plunge in revenues translates into a dollar-for-dollar reduction in construction spending. You’ll hear a lot of panicky talk about the cancellation of all sorts of highway projects, and dire predictions of how Virginians will be consigned to traffic-congestion hell.

But there’s a flip to the declining gasoline consumption and gas-tax revenues: People are driving less. Fewer people driving translates into less traffic congestion. In an economically rational world, a decline in traffic congestion would be reflected in scaled-back construction plans. This is not an economically rational world, of course. It’s a world in which a massive share of the economy is directed not by market forces but political forces. And it’s not in the interest of those who benefit from massive construction programs to tell the whole story. So, there’s a good chance you won’t see this information anywhere else.

Estimated vehicle miles traveled (VMT) on all U.S. public roads for March 2008 fell 4.3 percent compared to March 2007, according to a Federal Highway Administration press release. The decline of 11 billion miles traveled that month was the sharpest year-to-year drop since the FHWA started tracking the numbers in 1942.

As a side benefit, fewer VMT means less air pollution. “Fewer cars on the road has translated into a 9 million metric ton decline in greenhouse emissions for the first quarter of 2008 alone,” writes Acting FHW administrator Jim Ray in the Department of Transportation’s Fast Lane blog.

In his blog post, Ray focuses on the fiscal downside. “The less revenue in the Highway Trust Fund, the less funding is available for states to keep roads healthy and efficient – resulting in more traffic tie-ups, more inefficiency, reduced driving and even less funding,” he writes. “This latest trend is yet another reason that we need to overhaul the highway financing system.”

We do need to overhaul the highway financing system to replace the gasoline tax, which will become increasingly obsolete over time. But here in Virginia we also need to re-examine assumptions on how much travel, and traffic congestion, are forecast to increase, and how much money we need to spend to address our need for mobility and access.

It would be farcical to pass a tax increase to compensate for declining Vehicle Miles Traveled and ensuing gas tax receipts without simultaneously taking a fresh look at the lower Vehicle-Miles-Traveled assumptions upon which Virginia’s highway-spending wish lists are based. But don’t expect it to happen. Politics is nothing if it is not a farce.

Update: What’s happening nationally may not be happening in Virginia. In the comments section of a previous post, “Bob” the blogger points to the March 2008 Commonwealth Transportation Fund Revenue Report , which indicates that the Motor Fuels tax in Virginia increased 4.4 percent in March. Something seems out of sync. Perhaps the difference between U.S. and Virginia trends can be attributed to differences in what is being counted or in methodology.

One of the key concepts in Richard Florida’s new book, “Who’s Your City?” is that of the “clustering force,” a knowledge-economy phenomenon that reward people for congregating in places where they can network and collaborate with one another. (See “The Clustering Force Be With You.”) The need to cluster is impelling smart, creative people to migrate to a handful of “superstar” cities where they can maximize the economic rewards of their talents and skills by pursuing innovative ideas with others like themselves. (See “Mass Migration and Superstar Cities.“)

The clustering force is one of the fundamental economic drivers at work in regional economies today. Because it is so ill appreciated, Florida devotes considerable ink to probing and dissecting it. And, because it is so fundamental to understanding the dynamics of regional economies, I devote yet another blog post to the topic.

As Florida observes, productivity and innovation come from face-to-face communication, information-sharing and teaming. Technology, as marvelous as it is, cannot yet substitute for intensive personal interaction.

Social capital is created, writes Florida, when people institutionalize these personal relationships through “bonding” and “bridging.” Bonding, he suggests, represents the close ties between extended families and ethnic communities of the type that Harvard political scientist Robert Putnam described and lamented the demise of in his book, “Bowling Alone.” Bonding is important for personal satisfaction and happiness, but not necessarily for innovation. Bridging, suggests Florida, is a pattern of interpersonal ties that extends across, and connects, different groups. For clustering and creativity, bridging is what counts.

I’ve quoted before the insights of Frans Johansson, whose book “The Medici Effect” describes how innovation takes place at the intersection of cultures, disciplines and worldviews. Extrapolating from Johansson, bridging allows people of varied backgrounds to make connections that enable novel combinations of concepts and thoughts. Florida quotes Andrew Hargadon, of the University of California-Davis, as making a similar point.

[Bridging] changes the way people look at not just those different ideas they find in other worlds, it also changes the way they look at thoughts and actions that dominate their own. Bridging activities provide the conditions for creativity, for the Eureka moment when new possibilities suddenly become apparent.

Stanford University sociologist Mark Granovetter writes about “the strength of weak ties.” Numerous weak ties do more to foster innovation than fewer, more intimate ties. “The beauty of weak ties is that they bring us new information,” explains Florida. Numerous weak ties, if I might elaborate, exposes you to a wider variety of people and ideas. If you limit yourself to talking to the same people, who simply confirm what you already think, you’re far less likely to come up with breakthrough ideas.

Florida, ever the coiner of new terms, calls this creative interaction “making the scene.” For investment bankers, the “scene” is power lunches or company retreats in the Hamptons. For tech gurus, it’s breakfast meetings, beer bashes or bicycle rides. Hollywood has a scene. Nashville has a scene.

Here’s the takeaway for Virginia regions trying to build their human capital: Scenes require social and economic infrastructure. Unfortunately, Florida drops that thought and doesn’t tell us what the infrastructure is. Picking up on the theme, I would suggest that the “infrastructure” for “scenes” is the existence of networking groups that allow a wide range of people to plug in and connect with one another. Those networking groups may be chambers of commerce or technology councils. They may be clubs like the Tower Club in Fairfax County, or the Bull & Bear Club in Richmond. They may be venture forums, or women’s business associations, or young professional organizations, or metro leadership conferences, or tipster clubs.

I would submit a hypothesis: The capacity of a region for innovation can be measured by the number of formal and informal networking organizations that create “bridging” opportunities across the broadest possible spectrum of society. The richer and denser the skein of bridging networks, the more easily ideas can be communicated through a region, the more spontaneously creative ideas will erupt, and the more speedily people can convert novel notions into business opportunities.

Economy 4.0: If Virginia regions want to build human capital, one place they can start is by encouraging the proliferation of networking groups of all shapes, kinds and colors, through which people — especially those outside the traditional elites — can share ideas and help make things happen. Openness and tolerance are virtues highly correlated with economic dynamism, as Florida often preaches. Those traits extend bridging networks and exchange of ideas to the broadest possible number of people.

Today Becky Dale compiled her last daily digest of Virginia transportation/land use clips, a resource that I have leaned upon to keep track of developments across the state. I have owed much of my ability to keep tabs on obscure controversies and trends around Virginia to stories I have picked up from the email that arrives in my in-box every day.

Alas, Becky has decided that she has better things to do for the first hour or two (or more) of her mornings than scour the Internet — unpaid — on the behalf of others. (She also compiled a daily list of “open government” articles.) I admire her tenacity in sticking to the anonymous endeavor as long as she did. I owe her a great debt, and she has my everlasting gratitude. Whatever the Bacon’s Rebellion blog has achieved over the years is due in considerable part to her efforts.

Thanks, Becky. I don’t know what you’re going to do with all your free time now, but I hope you enjoy it!

I completed my reading assignment from Jim Bacon and wrote my response for a Virginia perspective as installments.

So, here is a reading assignment – an economics book without math. Piece of cake.

“Basic Economics, A Citizen’s Guide to the Economy”, Thomas Sowell, published in 2000.

Consider to what degree Virginia’s public policy issues are based on economics and what that suggests for solutions that work.

The United States has seen at least two great migrations in its history: the great trek of settlers to America’s seemingly endless frontier through the end of the 19th century, and then the migration of farmers to towns and cities in the 20th century. The late 20th century has experienced a significant movement of “snowbirds” to the “sunbelt,” which continues to a degree, but that arguably pales in significance to the migration of the creative class to what regional economist Richard Florida calls “superstar cities.”

In his latest book, “Who’s Your City,” Florida describes a “mass relocation of highly skilled, highly educated and highly paid people to a relatively small number of metropolitan regions, and a corresponding exodus of traditional lower and middle classes from those same places.”

The means migration can be seen in the increasing concentration of college graduates. In 1970, human capital was distributed fairly evenly across the country, with half of all regions clustering within a narrow range of 9 percent and 13 percent of over-25 adults possessing college degrees. Over the past three decades, the percentage of Americans with college degrees has doubled, but the gains have gone overwhelmingly to regions like Washington, D.C., and San Francisco while largely bypassing regions like Detroit and Cleveland.

What’s driving the migration? Florida argues that the most talented and ambitious people need to live in the anointed regions in order to maximize their full economic potential. And in a virtuous cycle, the influx of talented and ambitious people spurs the productivity and innovation at the heart of wealth creation. The superstar cities surge ahead economically and cities like Motown figuratively spin their wheels.

While people can live anywhere they want to and plug in electronically in the Internet Age, they cannot plug into the networks that really count: the people networks. To participate in the great waves of wealth creation, people still have to live and work where the wealth is being created. Writes Florida:

When large numbers of entrepreneurs, financiers, engineers, designers, and other smart, creative people are constantly bumping into one another inside and outside of work, business ideas are formed, sharpened and executed, and — if successful — expanded. The more smart people, and the denser the connections among them, the faster it all goes. It is the multiplier effect of the clustering force at work.

(For a discussion of the “clustering force,” see “The Clustering Force Be With You.”)

What, then, are the implications for the themes discussed on this blog? One is that the wealth creators are driving up the cost of real estate, a phenomenon clearly at work in the Washington metropolitan region and to a lesser degree in the Richmond region. Florida explains: “Because the returns from colocation among the ablest is so high, and because high-end incomes are rising so fast, it makes sense for these workers to bid up the price of real estate and accept other costs that traditional middle-class families cannot afford.” The result: A metropolitan-wide gentrification in which the wealthy displace the less affluent, literally driving them out of the region.

Regions where the greatest wealth creation is taking place tend to be regions marked by the greatest disparities in income and wealth. Florida regards the “means” migration and the growing gap in incomes to as largely inevitable — and most distressing.

He also warns that escalating real estate prices can inhibit innovation. Many forms of creative activity — high-tech start-ups, art galleries, musical groups — require cheap real estate. If every dingy warehouse has been converted into loft condominiums and chi-chi boutiques, there’s nowhere for from-the-ground-up innovation to take place. Extreme real estate prices also hinder the ability of regions to attract new talent.

Says Florida: “When creative, productive regions become the province of affluent people who have already made their money (usually elsewhere), the cycle of local wealth building falls apart.”

Economy 4.0: Once again we see that economic development merges into community development. The challenge for most Virginia communities is to figure out how to jump onto that wealth-creation bandwagon. How do we spark the chain-reaction in which regions attract talent, which generates wealth, which attracts more talent? (It can be done. Florida points to the example of Nashville as a city that vaulted from a second-tier music city focused on the country-and-western genre into the third largest cluster of musicians in the country, after New York and Los Angeles, and has eclipsed those two cities as “the place for music writing, recording and publishing.”)

The Washington region has already catalyzed its human capital/wealth creation chain reaction, and it’s far advanced into the unaffordable housing phase. Washington’s task is to preserve and create livable and sustainable communities in the face of the Great Means Migration.

I’ll have more to say about these themes in later posts.

The movement to privatize large sections of state-owned highways is gaining momentum. Citigroup Inc. and Abertis Infraestructuras SA have won an auction — paying $12.8 billion — to lease the Pennsylvania Turnpike from the state of Pennsylvania for 75 years. Money from a turnpike lease would help the state close a $1.7 billion gap in transportation funding.

Terms of the lease agreement, if it gets final approval, would allow the operator of the turnpike to raise tolls by 25 percent Jan. 1. Tolls then would increase 2.5 percent annually or match the rise in the consumer price index if it is higher, according to Bloomberg.com.

The Bloomberg article makes no mention of improvements to the turnpike or the use of congestion pricing to maximize throughput. Based on the details published in the article — I reserve the right to retract my analysis if the reporting is incomplete — this looks like the wrong way to go about privatizing a state highway. Basically, the privatization here is a back-door way to jack up rates on one set of drivers (those who use the Pennsylvania Turnpike) in order to underwrite transportation improvements to other parts of the state. In this instance, privatization is a tool used to perpetuate Business As Usual transportation policies.

This deal does not take Pennsylvania toward a user-pays system. It looks like an old-fashioned money grab by the political elites in Pennsylvania. There are no discernible signs of added value for turnpike drivers. There are no indications that the tolls would be fine-tuned to encourage drivers to seek transportation alternatives during periods of peak demand. Tolls are hiked willy nilly to meet the needs of investors and the state of Pennsylvania.

By comparison, the deals that the Kaine administration has struck with private sector entities to build HOT lanes on Interstates 495 and 95/395 look vastly superior. In those deals, congestion pricing will maximize throughput and incentivize drivers to find alternatives during periods of peak demand. Money raised from tolls will be plowed back into major upgrades of the Interstates, including Bus Rapid Transit, thus expanding the alternatives to one-man-one-car. People paying the tolls in Virginia will receive tangible benefits for their money. History will show the HOT lane deals to be the signature transportation achievement of the Kaine administration.

(Hat tip to Neil Haner.)