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Friday
Nov052010

Friday News Digest

Election day is always a little crazy around our house. My wife is a reporter and so her day extends well beyond the typical deadlines. I am involved directly in dozens of cities and so my own "War Room" has multiple computer screens and TV's tracking everything from local to national races. And now the kids are 6 and 3 years old instead of 4 and 1 the last time, so I had to get them involved in the fun too. We had a "Princess Party" to celebrate. Touchingly, my oldest girl was sad to find out that the candidate I had volunteered for - and which she had helped me drop off signs for - did not win. Some good questions and tough lessons for a budding young mind.

Enjoy the week's news:

  • The Federal Reserve this week officially announced their plan to actively devalue the United States currency (a policy known as Quantitative Easing). In the short run, this will push interest rates down so that businesses, individuals and governments can all borrow at low rates. For businesses unsure of the future and individuals saddled with immense levels of debt, the ability to borrow more - even at low rates - is rather meaningless. For the Federal government, which is borrowing heavily, it is quite beneficial. In the short-term, that is. Advocates for printing more money to prop up the Old Economy not only prevent a necessary economic transformation but will hurt most Americans (especially the poor and vulnerable), punish people that have saved prudently and ultimately flirt with disaster.

Most Americans have absolutely no idea how fragile the world financial system is right now. Once the rest of the world loses faith in the U.S. dollar and in U.S. Treasuries this entire thing could completely unravel very quickly.

The Federal Reserve is playing a very dangerous game. They are openly threatening the delicate balance of the world financial system.

  • How will Quantitative Easing - the printing money out of thin air to buy the debt of the Federal government - hurt most Americans, especially the poor and vulnerable? For starters, in an economy that runs on cheap oil, devaluing the dollar is going to make filling up your tank more expensive.

"The Fed announced yesterday evening that it would be buying up more US treasuries. The much weaker US dollar as a result is now giving impetus to commodity prices," said Commerzbank analyst Carsten Fritsch.

A weak greenback makes dollar-priced crude cheaper for buyings using stronger currencies. In turn, that tends to stimulate oil demand and prices.

Crude futures had already surged in New York on Wednesday after the Fed unveiled the plans that have been dubbed QE2 by traders.

"The additional liquidity could also flow into commodity markets and lead to excessive oil prices on a more permanent basis," Fritsch added.

  • Oh, and I believe most people eat food. QE will drive up the prices for commodities like corn and wheat as well as the petroleum products used in fertilizers. Devaluing the currency is about the most regressive way there is of taxing Americans to cover our debts.

For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean — most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn't you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would!

But what about people on fixed incomes? They have always been the true victims of inflation. 

  • As a final thought on Quantitative Easing, keep Jim Kunstler's constant admonition that we can't get "something for nothing" in mind as you read Bernanke's words explaining why printing more money is a great approach for the U.S. economy. All gain and no pain.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

  • MinnPost.com's Jay Weiner has a series running where he looks at the governments of small towns transitioning to the New Economy. His first article focused on the extreme vulnerability of many of these places to cuts in local government aid, which is a key conclusion of our report Minnesota's Vulnerable Cities. The second article looks more closely at government redesign, particularly consolidation of services. There is no question that the future of our small towns and rural areas is going to be much different than its recent past.

Meanwhile, buzzwords such as "redesign" or "live within your means" might not be enough, or even apply, to places where, on a recent night, City Council members debated whether to waive a $500 fee for a homeowner seeking to demolish her property. At issue, among others, was the prospect of losing that sort of chump change, which goes straight to a small city's bottom line. 

  • A few weeks ago I wrote about my experience in dropping off my new kindergartener and how the city and school had gone to such great lengths to accommodate auto traffic, yet the space was absolutely inhospitable to any kids that might walk. With some federal funding, the local school district, cities and county are starting an initiative to examine this problem at each of the local schools. This conversation is a great first step to looking at a deeply systematic problem. I hope the conversation goes beyond the items listed in the paper (engineers building more stuff) and looks at the critical connection to local land use policy.

The federally funded planning study will identify physical improvements such as sidewalks, crosswalks, traffic control and other strategies to improve school routes. The study will also review driver behavior and law enforcement strategies in school areas and will develop educational materials for parents, students and the driving public.

  • It may be of interest to our readers here in our home state of Minnesota that James Kunstler spent half of his podcast this week talking about Minneapolis. He is right, of course, but don't listen if you get defensive easily.
  • Eric Jaffe at The Infrastructurist blogged about the report this week that our water supply systems are basically crumbling before our eyes. What was most interesting to me is the disconnect Jaffe again points out between the size of the problem and our willingness to pay for a solution.

The American Society of Civil Engineers recently gave America’s drinking-water systems a grade of D-minus. Roughly 10 billion gallons of sewage seep into these crumbling pipes each year. The Obama administration has secured $6 billion for improvements, but the Environmental Protection Agency puts the true cost of fixing water infrastructure at roughly$335 billion.

...

While 69 percent of survey respondents agreed that they take their access to clean water for granted, about two-thirds said they would be willing to pay $6.20 more per month to improve their water systems. If applied to all households across the country, such an increase comes to $5.4 billion, ITT notes.

  • In a diversion from our standard fare....Imagine if you lived on the top of a skyscraper and never left the roof. You looked down on the street far below and saw these little things (cars) that moved around, but you had no idea why or how. So you develop a way to control these little things from your perch. You line up two going in opposite directions as fast as possible and then you smash them together. The hope is that the stuff inside will fly all over and, from watching that stuff, you will be able to figure out the answers to your questions. Substitute protons for cars and now you know have a rough sense of what the physicists are doing at the Large Hadron Collider in Geneva. We live in amazing times. I know I should be embarrassed to to pass this video on except you'll note that is has been viewed over 6 million times. That's a lot of geeks.

 

The Strong Towns blog is like reading James Kunstler, only you can share it with your mom. You can leave a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

Wednesday
Nov032010

Costs and Benefits, Part 1

Many people assume that, when we invest in infrastructure, "the government" gets back - by whatever means and at whatever level - cumulatively more money than it puts into a project. There are others who know that this is not remotely true, but believe that the money invested in infrastructure is going to a good cause that pays in other ways (job creation, quality of life, etc...). There are a growing number of people that believe that infrastructure spending, in its current form, is a financial sink hole fueled by political patronage and special interest agendas.

Regardless of which belief is correct, the cost benefit analysis is the mechanism whereby we justify the spending. Today we are going to have a theoretical discussion on how a cost benefit analysis should be done.

For a business in the private sector - let's assume it is a heartless corporation with profit as the sole motive for its existence - a cost/benefit analysis is simple. How much does an undertaking cost and what financial return does that yield? When the financial return exceeds the cost, this is an undertaking worth considering. Of course, a business will look at the amount of risk and volatility as well, but the basic return-on-investment calculation is the first step.

Private sector ROI: financial benefit > financial cost

The analysis gets a little more complicated for a non-profit endeavor like a charity hospital or a private school. For such an endeavor there is also a social motive beyond pure profit that comes into play. We'll call this "social value". While a charity hospital cannot ignore ROI - it must, after all, generate sufficient return to stay in operation - ROI is not always the overriding criteria for decisions.

For example, a charity hospital may increase ROI by having a cigarette vending machine in the emphysema ward, but this would seem rather counterproductive to the overall mission. Unless that cigarette vending machine provided the hospital with the revenue it needed to save the lives of premature babies born to impoverished mothers. Then maybe it is not such a black and white discussion.

In the end, though, a charity hospital would balance the relative costs and benefits associated with different actions and come up with an approach that allowed it to do the most good while still staying financially solvent.

Non-profit ROI: financial benefit + social benefit > financial cost + social cost

In concept, it is easy to see how governments would operate much like the non-profit charity hospital. When we collectively gather together for a common purpose for which we tax ourselves, the costs and the benefits are not simply financial. The questions this collective action raises are complex and largely unanswerable, at least in an absolute sense.

  • What is the best way to raise revenue?
  • Who should contribute to the costs and in what amount?
  • Should there be a means test where the better off pay more and the less fortunate pay less?
  • What is the best way to spend revenue?
  • How do we determine which projects have the greatest benefit?
  • Is there a minimum threshold of government service that everyone is entitled to?
  • How should all of this best be determined?

Certainly government can do bad while trying to do good. The classic utilitarian quandary of the "inhospitable hospital", where one patient is sacrificed and carved up so that their parts can be used to save many others, may be an action that would provide great benefit to a great many people. but it is done at a cost that we are not willing to pay. We collectively place some values - in that example it is the life and autonomy of an individual - above all others.

The constitution assumes that government (which, at its essence, is We the People), unless it is constrained, will overreach and that this act of overreaching, however good in its intention, will have impacts that are destructive. We can argue all day whether or not government has overreached and whether or not it is destructive. I don't think that gets us anywhere. What is critical to understanding how the government should conduct an ROI analysis is to understand that the social benefits and social costs are "constrained" by the rules we have established to govern ourselves.

As an example, the constitution gives everyone a right to legal representation. This is critical to our thinking that the state should not be able to deprive someone of their liberty without a fair process and a vigorous defense. So we have set a constraint and obligated ourselves to pay for the defense of the accused, if they cannot afford a defense. We have also continued to cut funding for public defenders, which in a practical sense constrains the vigor in which we defend the accused. These are difficult realities that go to the core of who we are.

From a practical standpoint, today we live under a number of constraints when it comes to funding infrastructure improvements.

Constraint #1: We have limited revenue for infrastructure spending. (Note: We acknowledge that one can argue that we can simply increase taxes or fees to add revenue, but the public has consistently shown that, where they support new revenue, it should go to priorities other than infrastructure spending.)

Constraint #2: We have massive, unfunded liabilities for maintaining existing infrastructure systems.

Constraint #3: We are highly indebted, both in the public sector and the private sector.

Constraint #4: We have huge obligations and priorities in other parts of our economy that will limit the amount that we can devote to infrastructure.

In the end, the government ROI analysis is very similar to the non-profit ROI analysis except that our social benefits and costs are constrained by the community rules and accepted practices we have established.

Government ROI: financial benefit + (constrained) social benefit > financial cost + (constrained) social cost

It is important to note here that financial benefit in the government analysis is actually tax revenue. It is not "jobs", which is a social benefit. I can hear the immediate argument that "jobs create government revenue", but in reality less than 2% of income tax revenue goes to infrastructure spending. In other words, "jobs" does not equate to revenue for paying back infrastructure investments. If our spending on infrastructure is actually designed to create jobs, then we should really be asking the question, "How do we create the most jobs at the least cost?" That is a completely different discussion that rarely finds its way into the public debate.

At this point I would like readers to briefly imagine a world where our collective government action did not take into account social costs and benefits but instead focused on strict financial ROI. In this imaginary world, when a road was built, it would need to generate enough tax revenue to ultimately pay for itself. When the government builds an overpass at $9.5 million, it would need to see tax revenue increase by $9.5 million, plus financing costs, to cover that expense.

In the real world, nothing close to this ever happens. For the most part we completely ignore an analysis of the real financial return. Our projects are largely done for social reasons, with tremendous spatial disconnect between the costs and the benefits.

Let me elaborate on that briefly. We pay gas tax and registration fees. These fees are collected centrally and then the money is distributed out for road projects. We don't look at a road project and say, "this project will create X amount of new gas tax revenue or registration fees". We just do the project and then lament that there is not enough money to do more. Everyone feels entitled to their project because everyone pays gas tax and registration. The only problem is that, collectively, we are not paying anything near the cumulative cost of our spending.

The establishment systems tend to look at every project exclusively for its social benefits. People can get to work more quickly. Public safety response is enhanced. More private land is not accessible for development. Etc, etc, etc... In a practical sense, our approach overlooks the financial return almost completely.

Government ROI: financial benefit + (constrained) social benefit > financial cost + (constrained) social cost

What this means is that, if we were honest with ourselves, we would be asking whether or not a given project produced enough social gain to justify the cost. This would open infrastructure projects up to comparisons with other social endeavors, such as education and medical research, and that is exactly what the general population is doing (to the bewilderment of the pro-infrastructure spending establishment).

Coming up, we will look at the analysis that Staples submitted for its TIGER II grant and show how the analysis for projects like this one are essentially rigged to convert social benefits to financial benefits, thus claiming tremendous financial gain when none actually exists.

 

We've been told that the Strong Towns blog is like reading James Kunstler, only you can share it with your mom. You can leave a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

Tuesday
Nov022010

VOTE

If you have not voted yet, please don't spend time here but instead go and cast your ballot. If you have already voted, give us all a shout out in the comments section or on Facebook and let everyone know how it went.