America Can’t Ignore the Economic Threat of a Rising China

In the aftermath of the Communist victory in the late 1940s, the question often asked in Washington was: “Who lost China?” That fueled the McCarthyite inquisition that followed. The question our children might ask is: “Who lost America?”

The long-running side-show around Russian “collusion” focused on the nasty but largely inconsequential ties between some of Donald Trump’s more sleazy aides and their equally disreputable Russian or Ukrainian counterparts. Yet, compared to China, Russia represents at most a pesky but fundamentally second-rate power; Russia’s GDP is smaller than that of South Korea and barely a tenth of China’s.

In the 21st century, how we cope with China will determine the future of American economic and political pre-eminence. Read more

After Amazon: What Happened in New York Isn’t Just About New York

The fiasco surrounding Amazon’s recent escape from New York reflects a broader, potentially devastating trend. By driving the Seattle-based behemoth out of the Big Apple, New York’s increasingly militant progressives have created a political paradigm that could resonate in cities across the country.

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The Once-Lucky Country

Planners and other elites threaten the long-established pleasures of life in Australia.

Few places on earth are better suited for middle-class prosperity than Australia. From early in its history, when it was a refuge for British convicts, the vast, resource-rich country has provided an ideal environment for upward mobility, from the pioneering ranches of the nineteenth century to the middle-class suburbs of the late twentieth. Journalist Donald Horne described Australia in 1964 as “a lucky country run mainly by second-rate people who share its luck.”

Over the last decade, though, Australia’s luck has changed, as the country develops many of the pathologies of crowded, socially divided societies like the United Kingdom or the United States. Read more

Our Suicidal Elites

The French nobility, observed Tocqueville in The Ancien Regime and The Revolution, supported many of the writers whose essays and observations ended up threatening “their own rights and even their existence.” Today we see much the same farce repeated, as the world’s richest people line up behind causes that, in the end, could relieve them of their fortunes, if not their heads. In this sense, they could end up serving, in Lenin’s words, as “useful idiots” in their own destruction.

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The Opium of California

The current frenzy of new IPOs — Uber, Lyft, Slack, Postmates, Pinterest and Airbnb — seems destined to reinforce progressive notions that California represents the future not just for the state, but the nation. It will certainly reinforce California’s fiscal dependency on tech-dominated elites — half of the state’s income taxes come from people making over $500,000 a year — and provide a huge potential multi-billion dollar windfall for the state treasury.

To be sure, the insiders — founders, with nearly half the voting shares in companies such as Lyft, a small “tech mafia” of venture firms, foreign investors such as Japan’s Softbank and Wall Street investors — will have reason to celebrate. But the lavish paydays will do little to relieve, and may even serve to worsen, the state’s gaping inequality and nation-leading poverty rates.

Most damaging of all, the IPO high will encourage supporters of the state’s policy agenda. If new companies crop up, and the handful of politically savvy investors thrive, California’s illuminati can fend off criticism of policies that undermine the middle and working class in everything from energy to housing.

The changing nature of California’s tech economy

“Science,” observed Daniel Coit Gilman, the second president of the University of California, ”is the mother of California.” With few navigable rivers, a persistent shortage of water, far from the then-dominant Eastern seaboard, California’s growth depended on engineering prowess. Not tied to the traditional industries, the state seized on emerging fields such as aviation, space and eventually semiconductors, laying the basis for an expanding middle class

In contrast, little of today’s tech growth produces tangible products, and those that remain, such as Space X, the semiconductor industry and Apple, are placing their production either abroad or in less expensive and less highly regulated states. This allows them to escape California’s high electrical rates, poor roads, collapsing bridges and lagging public education system. The digital future may remain in California but the action in chip-manufacturing, biomedical products or space exploration seems headed elsewhere.

The firms in the new “information peddling economy,” notes the University of Washington at Tacoma’s Ali Modarres, have a very different relationship with their employees than “first wave” companies such as Hewlett Packard and Intel. In the first wave a broad range of employees enjoyed rewards from corporate success and stock gains; drivers for Uber, as one analyst suggests, will get nothing but the privilege of seeing vast flows of cash used to replace them with automated vehicles.

The neo-feudal city

The new wave of IPOs will expand the ranks of what The New York Times aptly describes as “the elite caste who can afford to live comfortably in the Bay Area.” Tech senior managers will enjoy huge capital gains, greatly reducing their federal tax liability. In contrast, less well-placed working schmucks will pay upward of half their income in taxes while those who clean their offices will face potential new fees on everything from tires and soda to water.

Even in the Bay Area, home to four of California’s wealthiest ZIP codes, middle-wage jobs are disappearing and most new growth is tilted toward low-wage service work. Nearly half of all millennials are planning to leave and analysts suggest the area may face a severe shortage of skilled workers. Overall, notes a new Joint Venture Silicon Valley report, homelessness and inequality has expanded in the region, while the quality of life is perceived by most to be deteriorating.

One can appreciate the economic benefits that Uber, Lyft, Salesforce and others have brought to San Francisco, but there’s also a neo-Dickensian reality: sky-high housing prices, widespread homelessness, displaced minorities, few children and a rapidly shrinking middle class. There are now more drug addicts in the city of San Francisco than high school students and so much feces on the street that one website has created a “poop map.” More than half of the Bay Area’s lower-income communities, notes a recent UC Berkeley study, are in danger of mass displacement.

As for the rest of California

In previous tech-led economic booms — as recently as the last decade — growth extended to the rest of the state, particularly the more affordable interior. Tech firms expanded eastward, to Sacramento, south toward Salinas and throughout Southern California. The new tech economy, in contrast, has no real need for a periphery. It expands almost anywhere, whether to media-centric New York, less expensive places including suburban Austin, Nashville or Dallas or to China, India or the Philippines.

This has left much of Southern and interior California an economic dependency, hosting largely on low-wage jobs and increasingly dependent on an expansive welfare state. Worse yet, the tech boom serves as a narcotic, anesthetizing our political leaders from confronting the economic realities outside the venture capital-funded Bay Area bubble.

What is needed now is a focus on the middle- and working-class Californians, the vast majority of whom live far from the Bay Area.

California’s policy makers need to start by rolling back many of the regulations on energy and housing that are reducing opportunity by driving up costs and driving middle-class jobs out of the state. We also need to focus more on developing employment centers outside the ultra-expensive coastal areas, something that would allow people to live closer to where they work. This suggests a policy that focus on such things as good roads, decent schools and a variety of upwardly mobile jobs — things that may not matter much to oligarchs or the youthful staffs, but make all the difference to middle- and working-class families.

To be truly a sustainable society, California needs opportunities for carpenters, machinists, middle managers, not just for the current structure that relies on superstar coders and produces large numbers of low-paid service workers. We need a California boom that lifts most of our citizens and does not drive them toward a permanent semi-feudal state, servants and supplicants of a small, fantastically wealthy and preening technological elite.

This piece originally appeared in The Orange County Register.

Joel Kotkin is the Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University and executive director of the Houston-based Center for Opportunity Urbanism. He authored The Human City: Urbanism for the rest of us, published in 2016 by Agate. He is also author of The New Class Conflict, The City: A Global History, and The Next Hundred Million: America in 2050. He is executive director of NewGeography.com and lives in Orange County, CA.

Photo Credit: Daniel L. Lu (user:dllu) [CC BY-SA 4.0], via Wikimedia Commons

A New Good Neighbor Policy

Whatever one thinks of Donald Trump’s proposal to build a “beautiful wall,” it is unlikely to resolve the crisis sending ever more people—largely from Central America—to America’s borders. The problems that drive large numbers to leave their homes and trust their families to criminal gangs will not be solved by bigger fences but better thinking. Fundamentally, the United States should regard Mexico and Central America not as adversaries but as economic partners in a world increasingly defined by competition between the U.S. and an ever-more aggressive China determined to establish global hegemony—even in our hemisphere. In this context, a strong policy of investment and aid to our southern neighbors makes both economic and political sense.

The American relationship with Mexico and Central America is implicitly complementary. The U.S. and Mexico not only exchange products and services; they also produce them jointly. American manufacturing or value-added inputs represent 40 percent of every dollar Mexico exports to the United States. Chinese exports to the U.S. represent only one-tenth as much.

Mexico complements the U.S. in ways that promote regional competitiveness. Capital abundance and high-skilled labor in the U.S. are complemented by low-skilled labor abundance and capital scarcity in Mexico, factors that are, if anything, even more evident in Central America. The region’s weak human-capital accumulation has hobbled its integration with advanced trading partners like the United States. In Central America, more than half of youths between 15 and 24 are out of the educational system, and most work at poorly paid jobs. Only 38 percent of Central American youths aged 27 to 29 hold a high school degree, compared with 61 percent in the rest of Latin America.

The 1994 passage of NAFTA led to a period of unprecedented growth and optimism. Mexico enjoyed macroeconomic stability, during which inflation, exchange-rate volatility, and short-term interest rates converged with those of the U.S. Economic cycles in industrial production also converged in both countries. This emergence was derailed, first by China’s 2001 entry into the World Trade Organization and then by the Great Recession.

The recession is now a bad memory, but China’s influence has only grown. By 2003, China had surpassed Mexico as the second-leading importer to the United States, behind Canada. By granting WTO membership and most-favored nation status to China, the U.S. opened the door for an expansion of Chinese-manufactured exports, to the detriment of traditional sources such as Mexico, which lost around 650,000 manufacturing jobs from 1995 to 2016. A big overlap exists in the kinds of products—clothing, automotive, and consumer electronics—in which both Mexico and China excelled; the two countries’ export mixes to the U.S. became similar just when China increased its manufacturing export capacity. Mexico specialized in industries and activities in which, in some cases, China would eventually develop a comparative advantage. In 2006, Mexico’s maquiladoras—mostly lower-tech factories requiring semi-skilled labor to do assembly and finishing work—generated more than $25 billion in foreign exchange and accounted for 44 percent of total Mexican manufacturing exports; 94 percent of maquiladora exports went to the U.S. As China’s access to U.S. markets grew, the maquiladora industry lost jobs, largely to China’s benefit.

The increase in Chinese exports to the U.S. hurt Mexican labor markets, which faced a negative demand shock after 2001. These shocks may have been disproportionately large in the case of manufacturing establishments that use unskilled labor, especially for maquiladoras in the border region. These factories’ production structures resembled those of Chinese firms, and they were thus more vulnerable to China’s enhanced presence in the U.S. import market.

The displacement of Mexican manufacturing products in the U.S. market led to a decrease in Mexican wages, and the negative effects spilled over to wages paid in non-manufacturing industries. The decline of manufacturing in Mexico has had a devastating impact on the country. As China’s dominance as a U.S. trading partner has grown, Mexico has seen a rapid rise of crime and corruption. The once-bright hope seen for the country, largely as a result of close cooperation with the United States, has faded, and led, most recently, to the election of its most aggressively left-wing president in 50 years—Andrés Manuel López Obrador.

The results south of Mexico were even worse. In the pre-China era, Mexican manufacturers would move some their more labor-intensive operations to Central America, where costs were lower. But as the Mexican economy has failed to expand, such movement has decreased. Instead of new production, many of these countries simply import manufactured goods from China, rather than building industries for “liftoff” while they export commodities to Beijing. Chinese merchandise imports by Central American countries (Costa Rica, Dominican Republic, El Salvador, Guatemala, and Honduras) rose from $4.7 billion in 2011 to $8.5 billion in 2017, according to United Nations statistics.

What we now see at the border—the desperate movement of families—reflects this sad reality. As in Mexico, the nations of Central America are afflicted by high unemployment, slowing growth, and rising criminality. If prosperity never fully arrived in Mexico, it was only scarcely glimpsed farther south.

This situation, and mass migration, can be addressed only through a strategic repositioning by the region’s dominant economic power. This would include more incentives for American businesses that have already decided to move operations out of the country and shift them to Mexico—where they would at least benefit both countries—instead of to China. For President Trump, whose comments about Latin America are often both ill-conceived and poorly received, this initiative would deprive China of markets and allow our closest neighbors to share in a new North American prosperity. It’s an idea that has gained some support within the administration, and from both Republicans, such as Marco Rubio, and Democrats, like prospective presidential candidates Julian Castro and Joe Biden.

A bold program that steers American investment, and that of allies, to Mexico and Central America could be critical to bolstering our trade position and creating newly receptive customers. And it could reshape the immigration debate by slowing migration—a win both for America and those countries desperately in need of creating opportunity for their citizens.

It also would serve to address the historic gap between our neighbors and ourselves. There’s an old saying in Mexico, ascribed to the nineteenth-century dictator Porfirio Díaz : Pobre Me’xico, tan lejos de Dios y tan cerca de los Estados Unidos, which means, “Poor Mexico, so far from God and so close to the U.S.” A reimagined American-Mexican alliance would make both sides happy to be neighbors again.

This piece originally appeared on City Journal.

Photo Credit: Martin D, via Flickr, using CC License.

Joel Kotkin is the Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University and executive director of the Houston-based Center for Opportunity Urbanism. He authored The Human City: Urbanism for the rest of us, published in 2016 by Agate. He is also author of The New Class Conflict, The City: A Global History, and The Next Hundred Million: America in 2050. He is executive director of NewGeography.com and lives in Orange County, CA.

California’s Message: You Built That, Now Get Out!

The people who build our homes increasingly can no longer afford them. As the state elite and their academic cheering crew celebrate our progressive boom, even the most skilled, unionized construction workers, notes an upcoming study, cannot afford to live anywhere close to the state’s major job centers.

In fact, notes the study, soon to be published by Chapman University, not a single unionized construction worker can afford a median-priced house in any of the major coastal counties, including Orange, Los Angeles, San Mateo, San Francisco, Santa Clara, San Diego, Alameda, Sonoma and Napa. Even with incomes averaging over $73,000 annually, notes author and economist Dr. John Husing, most can afford median-priced homes only in the further reaches of the Central Valley or the Inland Empire, requiring huge commutes.

This gap between blue collar and professional and entrepreneurial wages is even greater among the majority of construction workers who are not unionized. Husing suggests that most of these workers could only afford the cheapest starter house in the furthest reaches of exurbia and beyond.

California’s growth model

For many progressives and futurists, California’s growth model represents a beacon to a prosperous future. It’s repeatedly pointed out that California is now the world’s fifth-largest economy, largely the product of massive wealth concentrated in the Silicon Valley giants, as well as a much stronger dollar versus the pound and Euro, and sub-par growth throughout Europe.

To be sure, California came out of the recession with a robust recovery, paced by increased property values, a soaring stock market and, critically, huge growth in the Bay Area, which represents roughly 17 percent of the state’s population. Yet overall, California’s post-recession growth, according to the BLS, is now only marginally above the national average, and in many regions, notably Southern California, somewhat below. The contrast is greatest with our strongest rivals: California is now growing jobs at a rate 50 percent or more below the rate of Texas, Arizona and Nevada.

Even in the Bay Area, growth is slowing, particularly in the San Francisco-Oakland area where job growth has plummeted from nearly 5 percent in 2015 to less than 2 percent last year. The bulk of the job growth there now is at the low and high ends, leaving little in the middle. Nearly half of millennials in the Bay Area, according to a recent survey, plan to leave; since 2012 millennial outmigration from Los Angeles, as a new Brookings study reveals, lags only metro New York in exporting its youthful workers.

Future threats to the working class

The California economic model is based largely on income and capital gains accruing to a relatively small part of the population, one reason the state ranks second in inequality to New York, and is becoming ever more unequal. To be sure, the new wealth has driven housing demand, largely for expensive new homes and apartments, but overall construction employment remains considerably below its 2007 levels. Growth in the sector has actually fallen from 2013, and now lags well behind the rate enjoyed in Nevada, Arizona, Florida and Texas.

Other key blue collar sectors such as manufacturing have also under-performed national average. The sector is now growing at one quarter the national rate, a shortfall exacerbated by state climate policies that have increased both energy costs and imposed ever more rigid regulatory burdens that encourage producers to move to other locales.

How sustainable is the “California Model”?

If the rest of the country wants to adopt the “California model,” it should be aware of what this means for the middle and working classes. The likely further acceleration of our state’s tougher climate regulation polices, as well as the prospect of more taxes on things like soda, guns and tires may please our green gentry and the oligarchs, but inevitably will hurt job prospects and raise the cost of living for most California workers.

Pushing our construction workers to the far fringes, particularly as state policy seeks to concentrate employment in expensive core cities, makes it less likely that new workers will enter the labor pool necessary to address our housing shortage. With residential sales dropping across the state, and California’s rate of new housing permits per new resident roughly half the national average, the prospects facing construction workers may be dimmer than necessary.

State measures to encourage the creation of subsidized housing could help some, but in reality would make only a tiny dent in the problem. Increasingly the political class focuses not on expanding the land for development, or bringing jobs to the more affordable interior, but on mandating subsidies, set-asides and rent control. Some, including certain oligarchs, suggest offering regular cash outlays so working people can subsist but never enter the property-owning classes.

Having sought accommodation with the green, anti-suburban regulators, both developers and labor need to recognize that it’s time to challenge a policy agenda harmful to the prospects both of business and most working Californians. Rather than doubling down on policies that reinforce our state’s descent into feudalism, we need to forge a new agenda that encourages instead broad economic growth and greater opportunity.

This article first appeared on The Orange County Register.

Joel Kotkin is the Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University and executive director of the Houston-based Center for Opportunity Urbanism. He authored The Human City: Urbanism for the rest of us, published in 2016 by Agate. He is also author of The New Class Conflict, The City: A Global History, and The Next Hundred Million: America in 2050. He is executive director of NewGeography.com and lives in Orange County, CA.

Homepage photo credit: Rishichhibber via Wikimedia under CC 3.0 license

Where Millennials Really Go For Jobs

This article first appeared on City Journal.

Contrary to media hype, tech firms and young workers aren’t flocking to “superstar” cities.

When Amazon decided to locate its second headquarters in New York, it cited the supposed advantages of the city’s talent base. Now that progressive politicians have chased Amazon out of town, the tech booster chorus has been working overtime to prove that Gotham, and other big, dense, expensive cities, are destined to become “tech towns” anyway, because of their young, motivated labor pools. That argument may sound great to New York Times readers or on local talk shows, but it is increasingly untrue. Read more

America’s Oligarchs Face Left-Wing, Right-Wing Backlash

When the late Steve Jobs died in 2011, even protesters from the left-wing Occupy Wall Street movement mourned his passing. Today, it is unlikely that the passing of tech giant would elicit much in the way of sympathy from progressives or, for that matter, almost anyone else.

As Amazon’s expulsion from New York suggests, the tech oligarchs are gradually morphing from great saviors to widely perceived threats to the republic. Rather than gutsy entrepreneurs, they are seen increasingly as greedy oligopolists whose goal is to place society firmly under their digital control. A majority, notes the Pew Research Center, already feel they need to be more tightly regulated.

The oligarchs have managed to unite both the progressive left and the conservative right against them. The left objects that the tech industry remains almost totally un-unionized and seems to seek to eliminate gainful work for all but a handful. The right sees a threat to their political expression as they strengthen their hold on the means of communications, generally wiping non-progressive views from the screens of their customers.

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Twilight of the Oligarchs?

Amazon’s decision to abandon New York City—leaving a $3 billion goodie bag of incentives on the table—represents a break in the progressive alliance between an increasingly radicalized Left and the new technocratic elite. Read more