Category: public policy

Framing Politics With a Ruler

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Peggy Noonan’s suggestion to use a 36 inch ruler to gauge right versus left in politics does help to explain the opposing views of tea partiers, Republicans and Democrats.  Noonan describes 0 inches as pure right and 36 inches as pure left (opposite of what you might expect).  She bemoans her perception that modern-day politicians negotiate between the 25 and 30 inch mark on the far left end of the ruler.  She asserts that tea partiers will try to move back to the 5 inch mark.

In politics, he who sets the framework usually wins the game.  Using American history since the agricultural 1770’s, urbanizing 1860’s, industrial 1920’s or depression 1930’s as a base, a case can be made that post-war politics and economics has been debated on the left end of the ruler, with a mixed economy government share of GDP at 20% and government spending/taxing share of GDP at 25-30%.  These shares of the economy double those of laissez-faire capitalism, the roaring twenties or the depression.  Noonan takes this long-run historical view of how the yardstick should be labeled.

Noonan is right in pointing out that politicians of both parties in a democratic system inherently seek to spend more money.  The rise in government spending in the Bush presidency after the unusual decline in government spending in the Clinton presidency (with Republican congress) is a modern reminder.  Tea partiers are right to have gut level concerns that government spending will continue to climb unchecked.  The trend in 2000-2008 was up.  Extraordinary banking and industry bail-out funds were piled on top of the stimulus spending for the Great Recession.  Health care and social security spending increases are expected in the next two decades.  Whether the various spending increases are justified or not, the trend is clearly up, without any clear countervailing force in Washington.

Those on the left might agree with the challenge to be faced, but they use a different scale to gauge left versus right, object to the accusation that they have driven up government spending, hold the Republicans responsible for inciting anger in the tea partiers and offer different long-run solutions.

If the scale is set between 100% individual, 0% government pure libertarianism versus 0% individual, 100% government pure socialism, the Democrats argue that the post-war game has all been played on the right (0-18 inch) side of the ruler.  Government share of GDP is 20%.  Government spending and taxes share of GDP is 30-35%, including all transfers.  This did not increase between 1960 and 2008.  The US tax burden at 27% of GDP is only 75% of the 36% average level for 30 developed countries.  Only Mexico, Turkey, Korea and Japan spend less than the US.  Total government spending in western European democracies is 40-55%.  Government spending did increase with the Vietnam War and Great Society policies, but was reduced by the Reagan revolution.  Government spending fell from 37.2% of GDP in 1992 to 32.6% in 2000. 

Democrats argue that their fiscal discipline was demonstrated in 1992 to 2000 when they balanced the federal budget and reduced the deficit, employing the “pay as you go” policy to force spending cuts to offset spending increases.  They point to Bush led Medicaid and defense spending increases as the cause of increased government by 2008.  They see the Bush tax cuts as redistribution to the wealthy and don’t see the overall tax-cut initiated economic growth claimed to increase net tax revenues.

Democrats argue that they have not purposely increased the long-run share of government in the economy.  They claim that the one-time investments/guarantees for the banking/auto industries were necessary for the whole economy, addressed issues that had grown for decades, will be partially recaptured and do not require continued funding.  Similarly, they pursued a moderate one-time Keynesian fiscal stimulus in response to a deep recession, just as was done by other governments of all parties in all countries for the last 60 years.  The stimulus spending lies between the 4.7% of GDP boost in 1982 and the 2.3% growth in 1992. Democrats argue that these actions are necessary and moderate and would have been undertaken by a responsible Republican successor to the Bush administration.

Democrats argue they are unfairly characterized as “big spenders” by the Republicans.  This simple accusation has stirred a populist response from “regular Americans”.  While Democrats have historically focused populist rage on big business and big banking, the Republicans and tea partiers have effectively used big government, Washington, elites, foreign countries and religions as targets, tying them to the Democratic Party.  Democrats argue that the monetarist, supply side, tax cut economic policies of the Republican Party since Reagan have been adopted for their populist simplicity and political effectiveness alone, further polarizing economic policy making.

Finally, Democrats have adopted part of the Republican play book in fundamentally looking to the private sector to drive the future economic growth required to support even the historic level of government spending.  The stimulus spending was partially focused on future industrial growth and infrastructure.  The banks and auto firms are returning to pure private ownership.  Small business lending and investment tax credits have become a focus.  Health care reform maintained private providers and insurers as the core of the system.  The costs of the war in Iran have been reduced.  A bipartisan group has been appointed to work on the Medicare/social security future.  Steps are being taken to promote exports.  A reduced public sector role for the mortgage industry has been proposed.  Obama and many Democrats have continued the pro-business approach used by Clinton.

On the other hand, Republicans can fairly point to steps taken by the Democrats that indicate a continued desire to “tax and spend”.  The stimulus bill benefited state government, construction and other Democratic interests disproportionately.  Health care reform achieved growth in government commitments without structural cost solutions.  Labor unions were given special treatment in the auto bail-out.  Fannie Mae and Freddie Mac’s roles were not touched in the banking reform.  The financial consumer protection agency smacks of unlimited and uninformed regulation.  The proposed increase in taxes for high earners is significant and is not coupled with structural spending reforms.  A second mini-stimulus has been approved and unemployment benefits have been extended to record lengths.

The current economic situation has raised the stakes for politics.  We should expect to see ongoing attempts to define the ruler and place the participants at marks that favor one group or another in the public eye.

Time for the Tea Party

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Why It’s Time for the Tea Party (excerpt) – Peggy Noonan – WSJ -9/17/2010

I see two central reasons for the tea party’s rise. The first is the yardstick, and the second is the clock. First, the yardstick. Imagine that over at the 36-inch end you’ve got pure liberal thinking—more and larger government programs, a bigger government that costs more in the many ways that cost can be calculated. Over at the other end you’ve got conservative thinking—a government that is growing smaller and less demanding and is less expensive. You assume that when the two major parties are negotiating bills in Washington, they sort of lay down the yardstick and begin negotiations at the 18-inch line. Each party pulls in the direction it wants, and the dominant party moves the government a few inches in their direction.

But if you look at the past half century or so you have to think: How come even when Republicans are in charge, even when they’re dominant, government has always gotten larger and more expensive? It’s always grown! It’s as if something inexorable in our political reality—with those who think in liberal terms dominating the establishment, the media, the academy—has always tilted the starting point in negotiations away from 18 inches, and always toward liberalism, toward the 36-inch point.

Democrats on the Hill or in the White House try to pull it up to 30, Republicans try to pull it back to 25. A deal is struck at 28. Washington Republicans call it victory: “Hey, it coulda been 29!” But regular conservative-minded or Republican voters see yet another loss. They could live with 18. They’d like eight. Instead it’s 28.

For conservatives on the ground, it has often felt as if Democrats (and moderate Republicans) were always saying, “We should spend a trillion dollars,” and the Republican Party would respond, “No, too costly. How about $700 billion?” Conservatives on the ground are thinking, “How about nothing? How about we don’t spend more money but finally start cutting.”

What they want is representatives who’ll begin the negotiations at 18 inches and tug the final bill toward five inches. And they believe tea party candidates will do that..

Talent Day

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As George Orwell demonstrated in his novels, words and word frameworks have tremendous power.  It’s time to replace Labor Day with Talent Day.

The term Labor Day reinforces several old misconceptions and needless conflicts.   Labor connotes physical labor, which became less important to the economy as energy and innovation moved the economic focus from agriculture to manufacturing to services to information.  Labor echoes the Marxian concept of class solidarity which has limited applicability in a dynamic world.  Labor is conceptually distinct from capital in the economic factors of production model, but the two are blended in many economic forms and their returns can be structured the same way.  Public sector (unionized) labor is contrasted with productive private sector capital in political ads, even though public sector employment is a shrinking share of the economy, supplanted by innovative contracting and outsourcing.  The old “labor” no longer exists.

Instead, firms rely upon a variety of human resource talents to succeed.  Physical labor or energy is the least important talent.  Hours worked or energy expended is a minor source of productivity and economic success.

Professional skills and knowledge have become more important and valued in all functions and industries.  Compare the skill levels of nurses, machinists, warehouse workers, purchasing agents, salesmen, engineers, maintenance technicians, auto mechanics, insurance adjusters, physical therapists, bankers or accountants today with those of 50 years ago.  Entry-level jobs today require professional, IT, process, quality and communications skills beyond those of master professionals in the post-war era.

The oddly named “soft skills” have also been upgraded in the last few decades.  In a world that is no longer static, mechanical and bureaucratic, all employees are required to have the skills required for a dynamic, organic and evolving workplace.  Individual character, responsibility and self-management is required.  Supervisors have been eliminated.  Research, development, innovation and improvement are expected of all employees.  Employees and contractors are expected to have teamwork skills, to understand processes that cut across functions and to manage constant change.

The human resources sector is also being asked to assume the risk management function once largely absorbed by capital.  With less labor intensive organizations, the role of financial capital is lowered.  With less employee loyalty, staff are asked to assume greater business risk of unemployment.  With greater outsourcing, contracting and narrow functional specialization in evolving technical fields, individuals are investing in skills with less assurance of ongoing usage.

On this Labor Day, let’s celebrate the value of talent in the new economy and the end of “labor” as a misused word and concept.

Book Reviews

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I’m very busy in my new role with Tripp-Lite in Chicago.  I have published many book reviews on Amazon.com in the last 2 months, including:

Pontoon, Garrison Keillor

Pere Goriot, Balzac

The Limits to Power, Bacevich

The City, Kotkin

Hitchhikers Guide to Universe, Adams

Ragtime, Doctorow

Siddhartha, Hesse

What’s the Matter with Kansas?, Frank

The American, James

No Ordinary Time, Goodwin

Prize Winner of Defiance, Ohio, Ryan

Enjoy!

High ROI Suburbs

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Many of America’s highest income, politically conservative suburbs have successful pursued high amenity public service strategies.  How is this high spending approach economically and politically justified?

http://en.wikipedia.org/wiki/Tiebout_model

In 1956, economist Charles Tiebout developed a model of competing suburban governments providing different levels and combinations of services to match the varied preferences of groups.  Subsequent research on suburbs and private real estate communities has confirmed that individuals prefer to choose amenity/payment bundles which match their values.

http://www.springerlink.com/content/r1v378785j2588j8/

Why would members of this usually tax and government-averse high income group willingly choose to live in a high amenity suburb?

The sociological observation that individuals prefer to belong to groups of like individuals is a partial explanation.  Exclusive communities are more homogeneous.

Brand name communities also provide some luxury goods type value from their exclusive status as high income, wealth and service communities.

High income, wealth, tax and service communities screen out criminal elements and benefit from low service costs to security services, delivering a safe environment.

High service communities provide signaling benefits in a world of imperfect information.  Transferred corporate executives rely upon education and amenity cues in choosing a residence.  Universities rely upon the reputation of school districts in selecting among applicants. 

Most importantly, a high service strategy delivers a great financial return on investment – especially for the initial group of residents.  High service communities proactively pursue strategies to minimize the cost to existing residents.

They invest in all service dimensions to ensure that the community is recognized as “a” or “the” leader in the metropolitan area and region.  Schools, roads, utilities, zoning, parks, transportation, libraries and cultural institutions achieve recognition.

They increase the tax base through annexation, selective density increases and attracting commercial firms.

They pursue “good government” initiatives, outsourcing services, consolidating services, utilizing volunteers and boards, leveraging regional, state and federal funds, employing specialized consulting firms and retaining highly qualified staff that benefit from the community’s growth and financial stability.

They invest in economic development, using Tax Increment Financing districts, user fees, economic development incentives, balanced zoning and negotiation to take advantage of the economic value of their attractive locations.  Retail, office, distribution, services, logistics and light manufacturing firms are welcome in the right zoned areas.

High service communities make capital investments to provide future economic returns.  Schools, parks, roads, libraries, utilities, cultural services, transportation and recreation assets are created through donations, local and regional government actions.

Suburbs compete with other metropolitan suburbs for residents and with other regional centers for commercial investments.  The right investments provide an atmosphere with low taxes, high services and a high quality of life. 

A Midwestern suburb of 75,000 has invested almost $1 billion in the last 20 years in its schools, roads, utilities, library, parks, infrastructure, cultural institutions and economic development incentives.  In essence, each of the existing 25,000 households has made a $40,000 bet on the future.  There has been some political and journalistic opposition.  A typical residence is valued at $250,000.  There are another 3,000 commercial firms with $250,000 property investments, making the total property value $7 billion. 

The community has annexed the unincorporated areas, increased density, attracted new businesses and continued its build-out towards a 120,000 population.  The number and value of commercial enterprises is expected to grow from .75B to $4B in 20 years.  Through zoning measures, growth and increased demand for a singular resource, the average residence will be valued at $400,000, with the existing residences appreciating from $250,000 to $325,000.  The built out residential market value will be $16B, for a total property value of $20B.

The original 25,000 households will gain a real $75,000 on their housing values.  Because of the community’s economic and population growth, their capital investment will be reduced to less than $20,000.  The early residents will clearly benefit from this high service and investment strategy.  The new residents will benefit from the investments and have the opportunity to “vote with their feet” in determining if the services delivered are worth the property values and taxes required.

High income families demand high quality services and are willing to pay for them.  They also require their municipal governments to take all possible steps to increase the cost effectiveness of these services.

Things Fall Apart

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California voters in every county except far left San Francisco County and far right Orange County approved Proposition 14 which changes the state constitution to require the primary election to select the two highest vote recipients, without respect to their political party.

http://en.wikipedia.org/wiki/California_Proposition_14_(2010)

California may once again be on the leading edge of American history.  This change seems to be a rejection of the current primary system where candidates in both parties are required to pander to the extremists and activists before tacking back to the center to win in general elections.  Ironically, the Tea Party movement seems to be tapping some of this frustration by the average centrist voter, while at the same time pulling the Republican Party even further to the right.

In the shadow of “The Great War”, William Butler Yeats wrote:

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

http://www.online-literature.com/donne/780/

http://en.wikipedia.org/wiki/The_Second_Coming_(poem)

The optimistic progressive consensus of 1880-1910 among the leading classes had been severely weakened by the war.  World War II shattered the last idealistic sentiments in Europe, leading to the post-war time of European community, skepticism and limited idealism.  The United States picked up the progressive banner with the New Deal, WWII, post-war global organizations and economic recovery, the cold war, New Frontier and Great Society.  Temporarily derailed by the Vietnam War, Energy Crisis and Japanese competition, the U.S. once again embraced the optimistic progressive spirit in the 1980’s, but with a distinctively right-wing flavor following the Reagan revolution.  Twenty years of economic and geopolitical progress delivered a new sense of American exceptionalism, leading to the Bush administration’s overreach in Iraq in response to the perceived terrorist threats after 9/11.   Most commentators agree that we now face a more uncertain multi-polar future (see 2/1/2010).

How did the American public reach this point where most voters clearly see that the political system does not work (see 1/26/2010)? 

Congressional and state legislator gerrymandering has played a major role.  The average voter can see that many legislators are simply incompetent party hacks with extremist, populist rhetoric, but no sense of responsibility for governing on behalf of the citizens.  The advantages of incumbents have lead to their re-election and increased voter cynicism (see 12/12/2009).    This year, unprepared voters elected Alvin Greene as the Democratic SC senate candidate and nominal Democrat, 29 year-old Tim Crawford to oppose Dan Burton.

http://en.wikipedia.org/wiki/Gerrymandering

As the financial and volunteer resources required for election have grown, the power of extremist/activist groups in both political parties has grown significantly.   As the country’s population and standard of living have grown, narrow economically rational voters have reduced their participation, thereby increasing the power of those with strong ideological views.

Citizens of all political views have become more independent, decreasing the role of many individual and institutional influencers who once promoted the center (think US News & World Report in the 1960’s).   Politicians and political parties have become far more sophisticated in identifying and capturing the resources of those with the strongest beliefs.

After the break-up of the Democratic Party’s “solid south” position following passage of the 1960’s civil rights legislation, the Republican Party developed a more philosophically consistent right wing position on all economic, military and cultural issues.  The Democrats have tried to move towards the center, but the left-right and Democratic-Republican dimensions of American politics have become synonymous for almost 40 years.  The Republicans have effectively attracted millions of Catholic, Baptist, working and middle class voters from Democratic strongholds, while the Democrats have rode demographic trends and recaptured some socially moderate and upper middle class voters on the coasts.

The modern media has returned to its 19th century roots, adopting explicit political and populist positions in order to sell advertising.  This promotes partisan posturing and coverage.

Politics no longer attracts citizen legislators with moderate views.  Political positions have very low compensation compared with other options for highly competent citizens.  The price of entering a campaign is so high that only individuals with hopes for a 20 year political career, radical idealists or the very wealthy rationally pursue elected office.

Non-party primaries, campaign finance reform, independent districting commissions and grass-roots political participation can all help to return our political system to the center, where reasonable compromises can be found for the benefit of all.  Without some structural changes, we run the risk of having the divisive and unproductive political results seen in Italy, Greece, Mexico, Venezuela, Japan and Germany.  A solid majority of the American people desire centrist solutions to our challenges.  Structural changes can help to ensure that we have a self-improving system, or at least that we do not see “things fall apart”.

2010 Graduates: Live a Great Life

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Graduates, I encourage each of you to “Live a Great Life”.  This is your right, your choice and your destiny. 

We each live in three worlds: the world of commerce, the world of choice and the world of community.  I believe that “a great life” comes from balancing these three worlds.  In eighth grade, our industrial arts teacher, Mr. Laurie, told us that our first project would be a foot stool and that it would have three legs.  One student spoke up, “Mr. Laurie, I think it would be better with 4 legs”.  Mr. Laurie calmly responded, “Tom, I have found that 3 legs provide the proper balance for a successful footstool.  If you tried 4 legs, it would take you the whole semester to make them the same length and the final stool would be 3 inches tall”.  As I learned in this school, balancing the three legs of commerce, choice and community is essential to “living a great life”.

World of Commerce

The world of commerce is important as we emerge from the Great Recession.  Completing high school is a great accomplishment.  But it’s not the end of learning.  You will continue to build your problem solving and communications skills and you’ll pursue new degrees and certifications.  Lifelong learning is now required for everyone.

Our guidance counselor, Mr. McGinnis, urged us to be serious about our careers.  He said “choose something which interests you, build skills in that field and focus on one industry”.  In spite of the many options and uncertainties in life, pick that one path and treat it like it’s the only one. 

Securing employment is difficult today.  You can improve your odds by thinking about jobs from the employer’s point of view.  Employers want clear “yes” answers to three simple questions: “Can you do the job?  Are you self-motivated?  Are you manageable?”  Focus on these and you will always be an attractive job candidate.

Be confident about your economic future.  Don’t listen to the nightly news.  The sky is not falling.  The U.S. economy grows by 3% per year on average.  That doesn’t sound like much, but since the Diamond Alkali factory in Fairport closed 30 years ago, the US economy has grown by 160%, from $5 trillion to $13 trillion dollars.  There will be recessions, but you will succeed.

Education, career skills and positive attitudes will make you succeed in the world of commerce.  Always invest in yourself first.  Save the first 10% of every paycheck.  Invest it for your retirement.  When you are 53, you will thank me.

World of Choice

We also live in a “world of choice”.  In 1974, we were emerging from a “world of tradition” and sought a “world of choice” where we could “express ourselves”.  Our parents cautioned us to “be careful what you wish for”.  The number of choices and options today can be overwhelming.  You now have great responsibility for your own future. 

First, you must accept and love yourself as you are.   Believe that you were created just as you are for a purpose.  My classmate, Jim Kulma, shared a book with us in 1972. It was titled “I’m OK, You’re OK”.  It sold 15 million copies because its advice was very sound.

This is not an invitation to be self-centered.  We all need to become more self-aware.  Discover your talents and your non-talents.  Listen to others.  Seek feedback and advice. 

Because we have so many choices, engagement in life is critical.  Many adults, in their roles as workers, family and friends, choose to not fully engage in life.  They try to avoid responsibility for themselves and their choices because they are afraid of making mistakes.  Unfortunately, “there is no place to hide”.  Others will hold you accountable anyway.  Embrace responsibility and make it a habit. 

Engage in life; explore and experiment.  When you are older, you will not regret these adventures, but you might regret the things you missed.  Have the confidence to “take the road less traveled”.  As we learned playing “Milk League” baseball, “you can’t get a hit, if you don’t step up to the plate.”

View life as an exciting journey.  Don’t make it a death march in pursuit of a single goal, like career success.  Don’t think “If I only had a better job, a winning team, a better spouse, a bigger house or a full head of hair, things would be different”.  Joy comes from living life, not from dreaming about or even from reaching goals.

Accept that “life is not easy”.  Life remains a challenge.  Use the “in spite of” strategy.  In spite of the challenges, risks, hurts and pains, I will choose to do X.  If the challenges become too great, get help.  Family, friends and counselors are ready to help.  They all want you to succeed.

World of Community

We all need to earn a living and make wise choices.  But, to be happy, we must also live in the world of community.  We live in a world that glorifies material success and the individual.  However, history, science and common sense tell us that happiness does NOT come from wealth and introspection.  Happiness comes from relationships.  Every wisdom tradition, including psychology, has found that people are truly happy ONLY when they live for something outside of themselves.

In our everyday lives, family matters most.  Family life is difficult.  But, we were created to live with others.  We give and we get even more in return.  On my wife’s nightstand, there is a picture of two identical dogs sitting on a beach, much like the Fairport beach, at twilight, with the quote: “Love does not consist in gazing at each other, but in looking outward in the same direction”.  Invest in a high quality family life.  It will provide the greatest rewards.

Fun social groups matter.  Make time for bowling leagues, youth sports, church groups, boy scouts, girl scouts and playing cards with friends.  These low-cost activities create a high quality life.

Your local community matters.  There is great value in the familiarity, pride, loyalty and common interests of the local community.  Village residents already know this.  Your big city neighbors yearn to find this sense of place, security and belonging. 

Our national community and government also matter.  In a society with 300 million members, it is tempting to be a “free rider”.   We have found that democracy is the best form of government.  It allows the hopes and values of the people to be translated into laws to guide society.  Society needs your active involvement in the political process.  Our future depends upon it.

Finally, spiritual belief matters.  We all have a deep need to matter and to be significant.  This is fulfilled by connecting to something larger than ourselves.  We all ask the same questions: “what is the meaning of life?”, “where did the world come from?”, “why was I created?”, and “what happens in the long-run?”  These religious questions are part of our deepest nature.  Finding your relationship with eternity, mankind, truth and god is a vital part of your journey.

We live in these three worlds of commerce, choice and community.  Your generation inherits a world that is more complex, fast-paced and demanding than those of the past.  Some scholars wonder if we are “in over our heads”, with the demands of life exceeding our capabilities.  I believe that we are blessed to be able to lead even richer lives today.  I agree with the author Harold Kushner who says that God always provides each of us with the strength and capacity to make our journeys with confidence. 

On behalf of the “class of 1974” and the Fairport community, I wish each of you success on your journey.  I am confident that you are very well-prepared for the exciting worlds which lie ahead.

Indiana 2050

tomkapostasy4 Comments

It will take some time for the official 2010 Indiana census to be complete.  The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.

Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050.  The population will increase from 5.2 to 6.4 to 8.0 million residents.

In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000.  These four counties contained 1.9M people, or 36% of the 1970 population.  They grew to 2.0M in 2009 and an estimated 2.2M in 2050. 

By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list.  By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.

Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%.  Ten of the 92 counties will experience two-thirds of the growth across the next four decades.  Based on recent trends, Hamilton County will add 300,000 residents.  Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%).  Marion and Allen counties will add 80,000 residents at 10-20% growth.  Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.

Five Indianapolis area counties will experience 70% or higher growth.  Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind.  The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M.  This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050.  The Indianapolis area will grow from 28% to 33% of the total state population.

Eleven counties will change population ranks by three or more places.  Boone and Hancock Counties will climb 9-10 places.  Shelby, Clark and Hendricks Counties will rise 3-4 places.  Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places.  Howard County may drop 7 places.

Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050.  Growth will be highly concentrated in a small number of urban counties.  The top ten counties, each with 200,000 or more people, will account for 50% of the state population.  The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population.  These 21 counties will capture 80% of all growth,

averaging increases of 60,000 people.  The remaining 71 counties will experience growth of 4,000 people each on average.

       Pop   Pop   Est   2009-50     2009   2050   Chg 
SMSA County City  1970   2009   2050   Growth  Pct  Rank   Rank   Rank 
                     
Vincennes Knox Vincennes       42       38         38           –   0%       37 37       –  
Terre Haute Vigo Terre Haute      115     106       106           –   0%       17 19       (2)
South Bend Elkhart Goshen      127     201       273           72 36%        6 6       –  
South Bend Kosciusko Kosciusko       48       76       104           28 37%       19 20       (1)
South Bend LaPorte LaPorte      105     111       120             9 8%       15 16       (1)
South Bend Marshall Plymouth       35       47         59           12 26%       31 31       –  
South Bend St. Joseph South Bend      245     268       289           21 8%        5 5       –  
Richmond Henry Newcastle       53       48         48           –   0%       30 34       (4)
Richmond Wayne Richmond       79       68         68           –   0%       25 29       (4)
Muncie Delaware Muncie      129     115       115           –   0%       14 17       (3)
Louisville Clark Jeffersonville       76     108       148           40 37%       16 13        3
Louisville Floyd New Albany       56       74         94           20 27%       21 23       (2)
Lafayette Tippecanoe Lafayette      109     168       248           80 48%        8 8       –  
Kokomo Cass Logansport       40       39         39           –   0%       36 36       –  
Kokomo Grant Marion       84       69         69           –   0%       23 27       (4)
Kokomo Howard Kokomo       83       83         83           –   0%       18 25       (7)
Indianapolis Boone Lebanon       31       56       114           58 104%       27 18        9
Indianapolis Hamilton Noblesville       55     279       579         300 108%        4 2        2
Indianapolis Hancock Greenfield       35       68       144           76 112%       24 14      10
Indianapolis Hendricks Danville       54     141       261         120 85%       11 7        4
Indianapolis Johnson Franklin       61     142       242         100 70%       10 9        1
Indianapolis Madison Anderson      139     131       141           10 8%       13 15       (2)
Indianapolis Marion Indianapolis      794     891       971           80 9%        1 1       –  
Indianapolis Morgan Martinsville       44       71       101           30 42%       22 21        1
Indianapolis Shelby Shelbyville       38       45         61           16 36%       33 30        3
Ft. Wayne Allen Ft Wayne      280     354       434           80 23%        3 4       (1)
Ft. Wayne De Kalb Auburn       31       42         54           12 29%       34 32        2
Ft. Wayne Noble Albion       31       48         68           20 42%       29 28        1
Evansville Vanderburgh Evansville      169     175       189           14 8%        7 11       (4)
Evansville Warrick Booneville       28       59         84           25 42%       26 24        2
Columbus Bartholomew Columbus       57       76         96           20 26%       20 22       (2)
Columbus Jackson Brownstown       33       42         45             3 8%       35 35       –  
Cincinnati Dearborn Lawrenceburg       29       51         71           20 39%       28 26        2
Chicago Lake Gary      546     494       534           40 8%        2 3       (1)
Chicago Porter Valparaiso       87     164       232           68 41%        9 10       (1)
Bloomington Lawrence Bedford       38       46         50             4 8%       32 33       (1)
Bloomington Monroe Bloomington       85     131       171           40 31%       12 12       –  
  Subtotal 37 counties   4,091  5,125    6,543      1,418 12%      
                     
  All Others 55 counties   1,104  1,298    1,459         161 12%      
  (Pct of State)   21.3% 20.2% 18.2% 10.2%        
                     
  Indiana     5,195  6,423    8,002      1,579 25%      
        24% 25%          
                     
Indianapolis       1,251  1,824    2,614         790 43%      
(Pct of State)     24.1% 28.4% 32.7% 50.0%        

The Knee Bone’s Connected to the Shin Bone

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In simplest terms, the mortgage lending industry collects deposits to make loans possible.  As mortgage lending has grown increasingly complex, the checks and balances of a simpler time have been lost.  Like the proverbial frog boiled as the water temperature rose, bankers did not perceive the changes in systemic risks.  Like the subjects in Hofstadter’s “Escher, Gödel and Bach”, a strange loop has been formed that could not be predicted from its components.

http://en.wikipedia.org/wiki/G%C3%B6del,_Escher,_Bach

In place of the original triplet of depositor, banker and borrower, today we have no less than 14 actors to consider: borrower, mortgage broker, mortgage product, mortgage broker firm, mortgage lender, guarantor, consolidator, mortgage-backed security, securitized asset, credit default swap, credit rating agency, investment banker, investors, regulators and auditors.

In 1776, Adam Smith provided scientific, philosophical, ethical and political support for free markets of independent buyers and sellers. Academic economists from Alfred Marshall through the Chicago School provided sophisticated theoretical, historical and statistical support for free markets.  Ronald Reagan and Margaret Thatcher consolidated political support for free markets.  NONE of them had a 14 step conga line in mind.

http://www.youtube.com/watch?v=RKtPrOiMj3o

At every step, we have the risks of self-interest creating failure rather than an efficient market with optimal social welfare.

Borrowers have an incentive to lie to mortgage brokers about their income.

Mortgage brokers have an incentive to process as many successful mortgages as possible, coaching borrowers and appraisers.

Mortgage lenders and firms have an incentive to devise mortgage products that are most attractive to borrowers, including no money down, variable interest rates and negative amortization beauties. 

Mortgage broker firms have an incentive to generate volume, without regard to the risks that will be born by the lenders or investors.

Mortgage lenders have an incentive to book as much volume as possible; locking in profit spreads for 30 years.

Fannie Mae and Freddie Mac serve a pivotal role, consolidating and guaranteeing individual loans and collections of loans in support of the American ideal of home ownership.  As quasi-government agencies, they have an incentive to capture congressional support through campaign contributions.

http://www.diffen.com/difference/Fannie_Mae_vs_Freddie_Mac

Mortgage backed securities provide the key gap in the chain of responsibilities.  They allow the mortgage brokers and lenders to transfer liability for mortgage defaults to investors.  Theoretically, these financial instruments greatly increase the sources of funds and through the portfolio effect reduce risks for everyone.

http://en.wikipedia.org/wiki/Mortgage-backed_security

The most sophisticated financial engineering is used to transform a portfolio of mortgages into a new set of securities that separate risks into layers, theoretically allowing some investors to have low risks and returns while others assume moderate and higher risks and returns.  This financial alchemy also increases the pool of potential investors and fine-tunes the risks assumed.

http://en.wikipedia.org/wiki/Securitization

Investors in mortgaged backed securities and their derivatives are not fools.  They understand that risks accompay these innovative instruments and that there are inherent underlying risks.  As sophisticated investors, familiar with derivatives of all flavors, they seek ways to limit their risks.  Credit default swaps were created to provide them with additional security about the risks involved in investing in securitized mortgage based securities.

http://en.wikipedia.org/wiki/Credit_default_swap

Credit default swaps and mortgage-backed securities are evaluated by credit rating agencies.  The growing complexity of financial instruments greatly increased their business volume and relations with investment banks.  They provided overly positive ratings historically.  They were paid by the firms that created the securities.  No one should be surprised by the results.

http://en.wikipedia.org/wiki/Credit_rating_agency

Investment bankers have played a key role in the growth of the securitized mortgage industry. They collect fees as advisors in the creation of products and as advisors to mortgage brokers, mortgage lenders,  guarantors,  consolidators and investors.In their banking role, they have invested directly in these securities, provided funds for others to invest and developed derivatives to allow bets against the securities.  Investment bankers have supported both political parties.

The securitization of mortgages has allowed a wide variety of individuals and firms to invest in these assets, including banks and investment banks as part of their overall portfolios.

Regulators have tried to keep pace with these innovations, but failed.

Auditors have invested their resources complying with the details of the Sarbanes-Oxley legislation, but missed the change in risks in this complex system.

The mortgage world has become very complex in the last 30 years.  The proponents of “financial reform” in both parties need to closely review the reality of a 14 actor system.  There is a trade-off between the benefits of financial innovation and the regulatory costs of financial complexity.  We have clearly crossed the line where the costs of complexity (regulatory and risk) have exceeded the benefits of innovations (funding and reduced risks).

Banking in Bedford Falls

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As the Great Recession moves along into its third calendar year, the focus in Washington is on “Financial Reform”.   The backlash at Democrats and Republicans alike over the “bank bailout” continues to grow.  The politicians are posturing to allocate credit for the so-called reforms, but seem destined to “give the people what they want”.  It might help the politicians and the people if there was a shared understanding of the inherent factors universally at play in the home lending market.

I propose that everyone take an evening off and watch the classic 1946 film “It’s a Wonderful Life”, starring James Stewart as George Bailey, the initially reluctant but eventually heroic, manager of the Bailey Building & Loan Association in Bedford Falls.

http://en.wikipedia.org/wiki/It’s_a_Wonderful_Life

The essentials of banking are exhibited in this film.  Bedford Falls is the whole universe.  All of the actors know one another.  The cast is composed of depositors, owners, board members, bankers, borrowers, regulators and landlords. 

There are inherent conflicts between the roles.  Depositors don’t really trust the bank as shown by the bank run.  Landlords would like to see lending restricted to boost rents.  The owners are motivated by self-interest (enlightened or not) and set policy accordingly.  The board seeks a trustworthy banker to be its agent, and provides incentives to attract and retain him.  The banker has fiduciary and personal motives.  The regulators enforce the laws, unaware of all key facts.  The borrowers want loans, even if they can not afford them, in order to escape the costs of the landlords.  People act out of self-interest.  They respond to incentives.  There are trade-offs to be evaluated and decisions to be made.

A bank fills a valuable social role, attracting deposits in order to lend money.  A bank profits by the spread.  A bank is in business to lend money whenever it sees a profitable opportunity, irrespective of the moral concerns of owners, depositors or borrowers.  Banking is subject to real risks such as bank runs.  Banks are subject to poor decisions by bankers, mistakes by employees and fraud by anyone involved in any transaction. 

Historically, banks have operated by the 4 C’s of credit: capacity/cash flow, capital/collateral, conditions and character.  This is especially effective in a small town such as Bedford Falls.  Although George and the audience might hope that every citizen should qualify for a loan, some may not have the earnings to cover the principle, interest, insurance and maintenance of a home.  Some may not be able to save for a down payment to create adequate collateral.  As business conditions change, the income of the citizens is at risk and the ability of the bank to manage its affairs fluctuates.  A banker with a long-term perspective and proper incentives adjusts lending accordingly.  Finally, character counts.  Past financial and personal performance are good predictors of future performance.  Character is part objective and part subjective.

Even in this simplified setting, risks abound.  Public pressure for universal home ownership can result in too many loans.  Regulators can enforce laws mechanically while missing larger problems.  Institutional knowledge can be lost through staff turnover.  A single fraudulent act can threaten a bank.  Changing external business conditions can disrupt the bank.  Lending policies can be too loose or too tight.  Business judgments can be wrong.

The film delivers an escapist, idealist, overly simplistic view of life.  Mr. Potter is the evil bank owner and plotting, fraudulent landlord.  George Bailey is the selfless hero.  Yet, behind the scenes, we have a social institution performing a social function.  We need banks to provide the social function of collecting deposits, allocating credit and collecting from borrowers.  In spite of the vastly more complex institutional structures today, the role of a “building & loan association” is essentially the same.  As a society, we allow these institutions to connect savers and borrowers across varied time frames because this is a necessary function.  Our laws and regulations should be based on this real-world understanding, not upon the simplistic dualism of “good and evil”.