Friday News Digest

Last week I enjoyed outdoor baseball in Arlington, Texas as I watched the Yankees beat up on the Rangers. This week I received my login and password for choosing my seats in the new outdoor Twins stadium. Next week I get to enjoy a Rockies game in beautiful outdoor Coors Field.

I have a truly blessed life.

Enjoy this week's news: 

• Barak Obama comes from an urban background, and while I do not think that makes him out of touch with small towns, I do think it highlights the fact that most Americans live in urban areas.In our system of government, that means urban areas have more representation that rural areas. It is not unfair - it is a fact. 

• And there is strong evidence that globalization - which has benefited small towns - has created larger cities overall. 

• Disincorporation. A term we will be hearing more of in the coming years.  

• Which might be okay since many of our cities are doing really stupid things. 

• The lead for this story may signal the sad reality that the next phase of this economic mess has begun (and won't be over for a long time).

Borrowers with good credit now make up the largest share of foreclosures as job losses and pay cuts exact their toll. 

• So it is not surprising to hear that we are looking for ways to make better use of things we previously discarded. 

• Yeah, this intersection is a mess, but I'll note that it is just a couple of blocks west of a "temporary" signal that has been in place since long before I could drive. Wonder where they will find the money for the next temporary fix? 

• It won't be from the Highway Trust Fund. 

• I have an idea: four dollar gas. With this money, I could even afford it for a while. 

• George Will had a great Op-Ed about the evolution of mainstream environmentalism.  

• Looks like the people of Woodbury, MN, read that George Will article. 

• There is one group that, for now, seems to be pro-recession: babies.

The Government Bubble (enough already)

I recently wrote about about a brainstorm I had while on the air on KAXE, that being the concept of a Government Bubble. After all the positive feedback (not), I doubled down on the idea with a second posting. Never one to rest until I've alienated everyone who may be inclined to read my thoughts, here is another take on this theme.

The Wall Street Journal yesterday had a short and interesting piece headlined "States' Budget Woes Are Poised to Get Even Worse". The article can be summarized as (a) things are bad for state governments, (b) the fixes today are mostly short-term, (c) things are not going to improve quickly, and so (d) when the short-term fix is gone, things will be much worse.

We've been saying this for some time. Most state governments today can realistically aspire to economies that stagnate instead of decline. Robust growth in the coming years is likely to be confined to a few states that rely on commodities (hello North Dakota). From the WSJ:

.....in general most forecasters see a very slow recovery, which suggests a commensurately slow upturn in state revenues. Federal Reserve officials, for instance, see unemployment, at 8.9% at last report, averaging between 9% and 9.5% next year and remaining elevated through 2011; some private forecasters are more pessimistic.

Since most states are funded through a combination of sales tax, income tax and corporate tax, continued struggles in employment and business growth is a serious problem. 

The best outcome they can imagine, some state officials say, is that the stimulus funding allows them to make spending cuts gradually: for example, by relying more on attrition and less on layoffs to cut payrolls. (Unlike the federal government, states generally are required to balance their budgets.)

So states are looking to cut back, to take the federal stimulus money as a short-term buffer to allow them to transition to a new reality of smaller (dare I say, post-bubble) government. This makes sense, until you consider the following:

At the same time, states face growing health-care costs and the need to replenish pension programs funded by decimated investments. And some of the stimulus funds expand programs that will require state money to sustain them after the federal largesse runs out.

The federal money actually expands programs that will need to be funded by more state and local money once the federal money goes away. Government inducing more government - the bubble.

Let me throw out a couple of other dots to be connected, based on some current news. 

• The Star Tribune reports this week that the Highway Trust Fund is going to go broke by August. (Read our post on The Cost of Development for some of the ramifications). 

• The Detroit Free Press is reporting on plans to devolve urban Detroit into a collection of rural villages surrounded by farms, fields and meadows. 

• The Wall Street Journal is reporting on cities that are turning to "disincorporation", some as part of a bankruptcy process.  

The way we have been developing - the very pattern of that development - is not economically viable, especially in small towns where there is a heavy reliance on direct and indirect government subsidy. What is the future of America's small towns in this new reality, where a deflating government bubble removes some or all of that subsidy? 

When our highway building days are over, Detroit is morphing into a series of "small towns" and some cities are just giving up, a wake up call should be sounding across the county. 

The game is different today. Those towns that realize it now, use this time and their shrinking resources to transition to the post-government-bubble world, will be the Strong Towns in the coming years.

The Poison Gift

A few years ago I worked on a permit for a new golf course. During the process, I became aware that the company building the course was negotiating to purchase properties neighboring the course. One, in particular, was a story worth noting.

It was a middle-aged woman, single, with a couple of kids. She owned a few acres of land and upon it was a house that, in an urban area or an area with higher construction standards, could potentially have been condemned. Tarpaper shack would be an apt description. The house was actually a liability to the property because anyone purchasing it would have had to also spend the money tearing that structure down.

I was reliably told that she was offered double what the property was assessed at, yet refused to sell. I found it amazing that she would not take the money until I heard her reasoning. She indicated that the price offered, while generous, was not even half of what would be needed for her to go and buy a new house. If she did that, she would need to take a different job working more hours (the tarpaper shack was paid for) and that would mean less time with her kids which, as the only caregiver, was near impossible.

What appeared to me to be an opportunity of a lifetime would have been a golden noose around her neck. In exchange for a nice, modern home she didn't really need (or value), she would have to give up time raising her kids, something she did need (and value). The house still stands, now with my admiration.

Imagine you were a family struggling to make ends meet, perhaps with some moderate envy of "the Jones". Now imagine that the government came to you and made you this deal: At the same mortgage you have now, you would be given a 10,000 square-foot mansion complete with multiple swimming pools, a kitchen for each day of the week, a theatre and all the amenities you dreamed about while watching "cribs". Your ultimate fantasy home, and all with the same mortgage. The government would pay the difference.

The only catch is that you have to maintain the mansion. 

It is a no-brainer until you get to that "minor" catch. Just the property tax alone is double what your current mortgage is. Even if you didn't hire someone to clean all 27 bathrooms and instead did it yourself, let alone the lawn maintenance, pool maintenance, etc...there is no way you could afford this.

Now you could take the deal, move in, enjoy the pools and the immaculate landscaping for a while until it all started to deteriorate. You could pick the part of the estate that you liked the most and maintain that section only, letter the others decline faster. You could get two or three jobs, although that would not give you much time to enjoy your new digs. Or you could even get into the rental business, renting out parts of the home that you aren't using (not the business you planned to be in, but you need the money).

You get the point: the poison gift would destroy you, enslave you, change you into something you never wanted to be, or all three. The woman on the golf course looks all the wiser.

Unfortunately, hundreds (or perhaps thousands, if you count state subsidies) of small towns all across the country receive the poison gift each year. In just one example, the Department of Agriculture subsidizes water and sanitary sewer infrastructure for small towns, sometimes paying up to 95% of the cost. The primary criteria for judging the project is not efficiency or even need, it is income level. 

All the town has to do is maintain that pipe once it is in. 

When "maintaining" includes day-to-day operations, it can be a huge challenge for a small town. When "maintaining" includes repair and ultimately replacement, it is an impossibility. The town is (a) forced to seek government subsidy to repair and maintain the system (see entry on Government Bubble or Government Bubble, Continued), (b) forced into the Small Town Ponzi Scheme, (c) forced to allow the system to deteriorate or (d) forced into a combination of all of these.

It is nearly impossible for a small town to say no to the poison gift. Those that understand who they are and confidently seek to be Strong Towns can either find a way to decline or find a way to use the gift to move the town closer to long-term financial solvency.