Crisis as Opportunity

Richard Florida, an urban theorist, has an interesting piece in this month's Atlantic entitled "How the Crash Will Reshape America." He talks about how America has rebounded from past crises with innovation, expansion, and prosperity, sustaining declines in regional economies while fostering growth elsewhere. He predicts a few things about a changing regional economic landscape in America as well as a shifting global economy. He makes the case that a few "mega-regions" will come to dominate innovation and progress in the future, driven by the snowball effect of accelerated "urban metabolism":

[A Santa Fe Institute research team] found that successful cities, unlike biological organisms, actually get faster as they grow. In order to grow bigger and overcome diseconomies of scale like congestion and rising housing and business costs, cities must become more efficient, innovative, and productive. The researchers dubbed the extraordinarily rapid metabolic rate that successful cities are able to achieve “super-linear” scaling. “By almost any measure,” they wrote, “the larger a city’s population, the greater the innovation and wealth creation per person.” Places like New York with finance and media, Los Angeles with film and music, and Silicon Valley with hightech are all examples of high-metabolism places.

He talks about the specifics of our current crisis, including the cataclysm in the housing markets in areas like Phoenix and Las Vegas. His plan to deal with the meteoric rise in the foreclosure rate was one I hadn't heard yet:

The foreclosure crisis creates a real opportunity here. Instead of resisting foreclosures, the government should seek to facilitate them in ways that can minimize pain and disruption. Banks that take back homes, for instance, could be required to offer to rent each home to the previous homeowner, at market rates—which are typically lower than mortgage payments—for some number of years. (At the end of that period, the former homeowner could be given the option to repurchase the home at the prevailing market price.) A bigger, healthier rental market, with more choices, would make renting a more attractive option for many people; it would also make the economy as a whole more flexible and responsive.

Contrast this with Obama's announced plan to avoid foreclosures. On the one hand Florida's idea seems like a great way to help keep people in their homes by renting at a lower price. This might help some overcome the inability to make mortgage payments due to job loss. On the other, allowing these foreclosures will cause continuing declines in home prices. Obama's plan seeks to avoid this for a certain demographic segment of homeowners. It will probably be better to hit the market bottom sooner rather than later, however, if such a thing can be effected by public policy. Just as with the stock market, we cannot have a true recovery until a bottom is reached.

Florida is anti-homeowner in the sense that he feels government policies gave the housing bubble the potential to get as big and unstable as it did. He makes a pretty convincing case, and predicts that in the future we will see a lower homeownership rate among a more mobile populace of renters.

Florida talks about how geography impacts economy, and while suburbanization was the perfect answer in postwar America, its continued sprawl without adjustment is likely an unhealthy situation for society. We need an entirely new way of thinking about and approaching a host of problems, none of which can be permanently fixed by ad hoc, stop-gap measures:

But different eras favor different places, along with the industries and lifestyles those places embody. Band-Aids and bailouts cannot change that. Neither auto-company rescue packages nor policies designed to artificially prop up housing prices will position the country for renewed growth, at least not of the sustainable variety. We need to let demand for the key products and lifestyles of the old order fall, and begin building a new economy, based on a new geography.

Then of course there's this:

On one level, the crisis has demonstrated what everyone has known for a long time: Americans have been living beyond their means, using illusory housing wealth and huge slugs of foreign capital to consume far more than we’ve produced. The crash surely signals the end to that; the adjustment, while painful, is necessary.

But even though it is painful, we might just come out the better for it in the end - whenever that may be. As Florida concludes:

At critical moments, Americans have always looked forward, not back, and surprised the world with our resilience. Can we do it again?