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Musings Report 2019-15 4-13-19 What Would It Take to Spark a Rural/Small-Town Revival?
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
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What Would It Take to Spark a Rural/Small-Town Revival?
The decline of rural regions and small towns is a global phenomenon, and the causes are many but boil down to two primary dynamics:
1. Cities and megalopolises (aggregations of cities, suburbs and exurbs) attract capital, infrastructure, markets and talent, and these are the engines of job creation. People move to cities to find opportunities and jobs.
As long-time readers know, I live part-time in Hawaii and part-time in the San Francisco Bay Area megalopolis of roughly 7.6 million people in 9 counties and 101 cities. The region added over 400,000 new jobs since the 2008-09 Global Financial Crisis and over 1 million residents since the early 2000s.
In effect, the region absorbed an entire new city with 400,000 jobs and 1 million residents in a relatively short period of time. Roads and public transport did not expand capacity, and housing constriction lagged. As a result, traffic is horrific, homelessness endemic and housing costs are unaffordable to all but the favored few.
Rural / small town regions cannot match these employment opportunities and so people move, reluctantly or enthusiastically, to overcrowded, horrendously costly urban zones to find jobs.
2. Globalization has lowered the cost of agricultural commodities by exposing every locality to globally set prices (supply and demand).
The relatively low cost of fuels has enabled foreign-grown produce from thousands of miles away to be shipped to supermarkets virtually everywhere.
These mega-trends have slashed farming incomes while costs have risen across the board. This squeeze as revenues decline and costs increase has driven even the most diligent and devoted small farmers out of business.
What would it take to reverse these trends?
1. The price of agricultural commodities and products would have to triple or quadruple, so that farming would become lucrative and attract capital and talent.
Imagine an economy where ambitious people wanted to get into agriculture rather than investment banking. It's a stretch to even imagine this, but if energy suddenly became much more expensive and crop failures globally became the norm due to fungi, plant viruses and pests that can no longer be controlled and adverse weather patterns, this could very rapidly change the price of ag products to the benefit of local producers.
Another potential dynamic is the decline of global trade due to geopolitical issues and domestic politics, i.e. the desire to reshore "strategic industries" such as food production regardless of the higher costs such a trend might cause.
The repudiation of finance as the engine of economic "growth" (or pillage, if we remove the niceties) and the prioritization of real-world production are also trends that could arise as the financial bubbles pop and cannot be reinflated with the usual trickery.
2. Wealthy owners of capital tire of cities and move to small towns, bringing their capital and entrepreneurial drive with them.
There are many historical models in which the spending/investing of wealthy families drives the expansion of local economies. Colonial America and the Roman Empire's countryside are two examples of this dynamic.
When capital flows to small towns, jobs are created as the wealthy hire people to serve their needs. These new jobs create new markets for small businesses, and these new opportunities attract new capital.
Some owners of capital are passive owners, collecting rents from afar and spending this income in the local small-town economy. Others are restless entrepreneurial types who will fund new local businesses as a challenge or as an opportunity that's been ignored in the mad rush to sprawling cities.
Both kinds of owners bring new spending and investment.
Wealth enables this class to bring its luxuries and desires with it, and so cultural activities favored by the wealthy get funding they never had before.
Wealthy types follow leaders just like everyone else, and once they hear of wealthy people extolling "the good life" in a small town, they investigate this option in a way they would never have done before.
Thus capital attracts capital, opens market opportunities, increases employment and starts attracting talent which is frustrated by the high costs and competition of the megalopolises.
Why would owners of capital move from places like Los Angeles, San Francisco and New York City to small towns?
Any urban dweller in an overcrowded megalopolis can give you the answer: the traffic is unbearable, homeless is expanding, costs are skyrocketing and so on. The cultural benefits the city offers are increasingly outweighed by the friction, even for the wealthy.
What would cause the trickle of wealthy people leaving cities to swell into a mini-flood? A recession that guts tax revenues would cause cities and counties to raise taxes and fees, many aimed specifically at the rich, while limiting spending on the intractable problems of traffic, homelessness, public education, etc.
Most city dwellers cannot leave for lower cost climes because they need the higher income of city employment and they have a stake in the real estate market via a home and mortgage.
The wealthy, whose income is derived from capital rather than solely from labor, have the financial freedom to leave the city but retain much of their income.
If both of these trends manifest, we might see those with the freedom to do so abandoning increasingly unlivable cities for lower cost, safer and more livable small towns.
Highlights of the Blog This Past Week
Assange and the Unforgivable Sin of Disemboweling Official Narratives 4/12/19
Blind Faith vs. the Bottom Line 4/11/19
Beneath the Surface of Brexit 4/10/19
Here We Go Again: Tech Bubble 2.0 but "This Time It's Different" 4/9/19
Trade Deal Follies: The U.S. Has Embraced the World's Worst Negotiating Tactics 4/8/19
Best Thing That Happened To Me This Week
Installed a basketball backboard and hoop on the carport so I can shoot baskets and improve my fitness.
Musings on the Economy: How Financial Crises Arise and How They Are Resolved
Correspondent David E. sent me this outline of how the Texas Savings & Loan financial crisis arose and was slowly and painfully resolved in the 1980s.
Financial crises may differ in particulars, but I think they share many traits: perverse incentives are institutionalized, greed erodes oversight mechanisms, the perverse incentives reward figuring out how to evade oversight, and so on.
The resolution has to 1) eliminate the perverse incentives that launched and fed the crisis; 2) institutionalize oversight that actually functions to limit dangerous excesses and 3) all the malinvestment / bad debts must be liquidated and the losses taken / distributed.
Here is David's commentary:
"The S&L crisis provides an excellent example of both how to make a problem worse and how to resolve it in the end. (note: I watched this play out in Texas; some of your readers may have a different perspective).
1. Prior to the mid-1970s, S&Ls lived by the 3-6-3 rule – pay depositors 3%; make home loans at 6%; and be on the golf course at 3 o’clock. This cozy little world had been in place since the 1950s.
2. Inflation in the 70s wrecked this calculation. The loans (long term home mortgages) still paid 6%, but the S&L’s were having to pay the depositors more – often more than the 6% they were making on the loans. Bankruptcy loomed.
3. The S&L owners were some of the more prominent local business people, especially in smaller towns scattered across the US – and more importantly, in Congressional districts scattered across the US.
4. They went to Congress and said, "we’re in trouble, but if we could only invest in commercial real estate, we could grow our way out of this mess, and it won’t cost the taxpayer a dime."
5. Congress, faced with a $50 billion problem as well as the prospect of alienating multitudes of prominent local citizens, agreed, and thus kicked the can down the road.
6. At least in Texas, this is when the “cowboys” moved in. The smarter S&L owners saw what was happening and realized the game was up. They sold their institutions to the cowboys (and the smart ones took the highest cash offer, ignoring any stock or profit-sharing).
7. The predictable and well documented abuses took off (“fiduciary pornography” in the words of one regulator afterward).
8. Things went on for a few years but were beginning to unravel even before the Saudis flooded the oil market in early 1986 and drove the price of crude down to $9.
9. Now for what was done right – if only by accident. Texas was the first to tumble, and people in other states remembered our oil boom bumper stickers. “Drive 90 and freeze a Yankee” among others. As a result, there was ZERO sympathy for Texas’ economic problems.
10. Federal regulators thus had a free hand to clean house. Even large banks were declared insolvent. Shareholders lost everything. Over 1000 bank executives went to prison. I personally know at least two who slithered free in the end, but many did not. A lawyer friend spent a couple of years in the late 1980s doing little other than foreclosing houses in Highland Park (old money Dallas).
11. It was a rough 3-4 years in Texas, but two decades of accumulated rot had been burned away, setting the stage for the economic boom that followed.
The other big factor was the tax reform of 1986. People today need to be more cognizant of what really happens when marginal rates go up to 70%. Do the rich pay more tax? NO. Instead the world becomes infested with tax shelters and other avoidance schemes, which produce tremendous waste.
In late 70s/early 80s Texas, a lot of this tax shelter money intersected with the S&L pirates in the form of commercial real estate, especially apartment complexes, in an orgy of malinvestment. I still remember the TV ads in Houston marketing yuppie-villes: gorgeous women in bikinis by the pool, and one unending party. After the bust, these complexes turned into Section 8 housing almost overnight and many remained blighted for a couple of decades before they were finally torn down.
If the next bust starts out affecting only one region, there may be a chance to do the right thing (basically, let her rip and things will settle out on their own). But that didn’t happen in 2008, and probably won’t happen next time."
Thank you, David, for a very insightful summary of how financial crises arise and are resolved, or left to fester into even bigger future financial crises.
From Left Field
Why Japan Still Matters-- writer ignores the social decay in favor of the "Japan is still wealthy" narrative...
The era of ‘price-insensitive buying’ has led to this troubling chart (MarketWatch)
Macroeconomics vs Modern Money Theory: Some Unpleasant Keynesian Arithmetic
Nothing Fails Like Success: Internet investors don’t want a modest return on their investment. They want an obscene profit right away, or a brutal loss, which they can write off their taxes.
Everything Was Forever, Until It Was No More: The Last Soviet Generation. (book)
HyperNormalisation by Adam Curtis (2 hour video)
The County With the Least Expensive Housing Market in Every State.
Andy Grove and the Value of Facing Reality
How Rupert Murdoch’s Empire of Influence Remade the World
In San Francisco, Making a Living From Your Billionaire Neighbor’s Trash
A Mysterious Infection, Spanning the Globe in a Climate of Secrecy: The rise of Candida auris embodies a serious and growing public health threat: drug-resistant germs.
How China Turned a City Into a Prison (via Maoxian) -- don't read this if you believe China will rule the world....
"People who have no emotional stake in a decision can see what needs to be done sooner." Andy Grove
Thanks for reading--
charles |
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