NewGeography.com blogs

I studied with the Austrian economists at New York University. The Austrian school of economics (as contrasted to Keynesians or Chicago school economists) work with a theory about business cycles that essentially starts from the understanding that what appear to be almost mechanical, regular ups and downs in the economy are actually caused by the periodic disappointment of the expectations of entrepreneurs. The alternative is to suggest that business owners periodically and collective wake up stupid one morning and start making a lot of bad decisions. A connection to the routine horizons of fiscal policy – for example, the 5-year funding cycle for federal highways – is a more likely cause of what appear to be “cycles”.

A current example of how government spending policy can make a disaster of the economy by confounding decision making is the changes/not-changes in US tax policy. What if you are a business owner who has a fiscal year that runs from July 1 to June 30? All of your plans for the first half of 2011 would have been based on the tax cuts expiring (which is the reasonable thing to do – don't change your plans until the law is changed). If the tax cuts are extended, then the last half of your budget is completely changed. In this case, there will be more net income. Being unable to plan for this, according to economic principal-agent theory, will put a lot of cash in the hands of managers who may not spend it in the best interests of the shareholders. The failure of managers to invest wisely when government stimulates business through unexpected and excessive free cash flow is well-documented.

Now imagine you are a state whose tax policy mirrors the federal policy. Tax cuts to businesses and individuals translate into revenue cuts for states, counties and cities. Any state that opts out of mirroring whatever Washington D.C. passes risks being cut-out of certain federal funding programs in the future. Nebraska, for example, passes a biannual budget. The last one covered the fiscal-years 2009-2011, which was based on the tax cuts expiring at the end of 2010. The difference if the tax cuts are extended will be a $200 million shortfall. Nebraska is a relatively small state, so consider what this will do to the budgets of all the states, plus counties and cities in the U.S. This could be the event that brings the global financial crisis in public debt home, especially to states like California which are already in trouble.

Note: A good source for more on Austrian economic theory is the Mises Institute at Auburn University. Click this for a brief on "The Austrian Theory of the Business Cycle" from Roger Garrison – who is an expert on the subject.

Chicago Magazine has an interesting article on the sore subject of Illinois corruption. The article was written by Shane Tritsch who interviews several experts on Illinois political history. There’s no “good old days” of clean government in the Land of Lincoln. Tritsch explains a major reason for Illinois’ historical graft:

Owing to historical factors, Illinois developed a labyrinthine governmental structure that offered fertile ground in which corruption could sprout. The Illinois constitution of 1870, in effect until 1970, limited the amount of debt counties and municipalities could carry and taxes they could levy. When cities needed to fund improvements, they got around those constraints by creating new units of government with the capacity to borrow—a library district, for example, would be created to build and administer a new library. “The 1870 constitution almost forced you into multiple units of government if you were going to deliver services beyond your municipality or modernize your municipality,” says Redfield. Today the state contains almost 7,000 separate governmental fiefs—far more than any other state—ranging from counties, towns, and school and fire districts to water reclamation and mosquito abatement districts. Most have budgets to protect and authority to wield. “It’s very hard to stay on top of it all, and it creates many more opportunities for patronage,” says Cindi Canary. “It creates ways for small islands of graft and corruption to stay hidden.”

It appears that Illinois’ luck is running out. According to Forbes, Illinois is number two on the list of states Americans are fleeing behind New York:

at No. 2. Illinois is expected to lose 27,000 people this year, consistent with its average annual loss over the last five years. The losses are likely linked to the state's economy and tax structure. Job losses in manufacturing and industrial machinery are likely pushing people out of the state

The bond market has taken notice of Illinois’ debt problem. While Illinois can’t go legally bankrupt, creditors can refuse to extend credit. Illinois faces massive public pension crisis in the coming years. Unfunded liabilities will make Illinois a less desirable place to invest.

The Illinois economic situation was born in Illinois’ history of corruption. Shane Tritsch’s article is a decent history on Barack Obama’s home state. The Chicago segment of Illinois corruption is certainly unique. Below is an excellent segment from a National Geographic TV special on how Chicago was taken over by the Mob.

Portland is known primarily as a cool city, where people spend their 20s happily working in the service sector, drinking craft beer, eating organic food, and exploring a variety of unconventional lifestyle options. In short, Portland is weird. That’s not just an observation: it’s the city’s marketing strategy. Keep Portland Weird is a pretty common bumper sticker in the city (believe it or not, there are cars in Portland). Yet despite the non-conformist attitude of Portlanders, the municipal government seems bent on destroying everything fun about the city.

The first attack, which I documented in Reason Magazine, is on craft beer, the city’s primary cultural export. The city attempted to increase the tax on beer producers several fold, though the motion was soundly defeated. It was the only time I’ve ever seen hippies handing out anti-tax fliers in bars on Friday nights. This was followed up by an EPA mandated tampering of the water supply, which may or may not reduce the quality of the world beer capital’s unparalleled beer.

The second attack is on street vendors. Portland has some of the most liberal rules regarding street vendors. You can find anything from Mexican to Thai food in the nearly 600 Portland street carts. This is one of the things that make the city charming. Street vendors add to the street life of the city. Yet this summer, a story about a little girl having her unlicensed lemonade stand shut down drew international attention. Now City Commissioner Randy Leonard is openly discussing a city wide crackdown on food vendors. The complaint? Many of them are guilty of attaching unlicensed appendages such as awnings and decks.

Where are the complaints originating from? You guessed it: local restaurants. They claim that street vendors are providing unfair competition, since they don’t have to provide restrooms, be wheelchair accessible, and so forth. This has so alarmed the Commissioner that he’s instructed building inspectors to assign top priority to inspecting street vendors. Ironically, this debate completely ignores the most legitimate question: are street vendors actually hurting anyone? Is their safety record worse than local restaurants? Are they blocking off public sidewalks? The answer to the first question isn’t clear, since the inspection reports aren’t reported in the same way they are for restaurants. Having said that, the health inspectors would shut them down if there were egregious violations. The second question is easier. They aren’t unduly encroaching on sidewalks. If anything, they’re providing sidewalk dwellers shelter from the rain with their unlicensed awnings.

Quirky things like world class craft beer and street vendors are what make Portland interesting. If the city is going to market itself as a destination for the creative class, it is going to have to stop cracking down on the very things that attract these people in the first place. After all, they sure aren’t moving to Portland because of the local economy.

When looking for a place to settle down, one might consider cities with active cultural scenes or intellectual communities. However, young people today are looking beyond those factors and moving to where the jobs are. Portland, for example, has a thriving social scene and is one of the nation’s leaders in attracting college graduates, but it ranks 40 as the best place for young adults. A high cost of living, stagnant job growth, and a 9.6 percent jobless rate among 18 to 34 year-olds have tarnished Portland’s reputation as the dream city for life after graduation.

You can see the economic shift in this country by looking at the best cities for young people. The Southwest is now the haven for those in their 20s and 30s looking to establish their lives and careers. Austin, which ranks number one on the list, has the highest annual employment-growth rate in America at 2.8 percent. This has increased the concentration of 18 to 34 year-olds in its metro area to 28 percent, the most of all cities in the study and well above the average of 23.1 percent. Washington, D.C., Raleigh, Boston, Houston, Oklahoma City, Dallas-Fort Worth and Tulsa round out the top eight.

However, economics do not dictate everything. North Dakota, which has one of the lowest unemployment rates in the country, is still not a major draw for those right out of college. The cities that have attracted young people in droves not only offer employment and lower costs of living, but also provide some sort of cultural scene. However, if the recession continues to limit job growth on the coasts, North Dakota may build its metro areas to cater to younger crowds, and thus provide them with more than just a steady, good-paying job. Fargo has seen positive net migration every year since 2003, and the state of North Dakota was positive for the first time this decade in 2009. The middle of the country is slowly becoming hot place to be.

It’s hard to believe that it’s been nearly two years since we first wrote about the game of “hide the ball” that Junkmeister Ben Bernanke is playing. Finally, Congress is getting some admissions out of the Federal Reserve about the gusher of cash that was opened up when the insides fell out of Wall Street’s Ponzi scheme. Remember, you read it here first! Trillions of dollars were funneled to private, non-regulated companies. According to the New York Times article, the release of documents on 21,000 transactions came about as a result of a provision inserted by Senator Bernard Sanders (I-VT) into the Restoring American Financial Stability Act of 2010. I covered the hearing in March 2009 when Bernanke told Senator Sanders he would not reveal who got the money – but I wrote three months earlier about the deal brokered between the Treasury and the Federal Reserve to circumvent a Congressional prohibition on lending to non-regulated companies. Sanders called it a Jaw Dropper by the time he saw the actual documents.

Lest you think that all is hunky-dory because the money is being paid back, don’t forget the old adage: “It takes money to make money.” Everyone that borrowed had the opportunity to make money on the money they got at (virtually) no cost. In the interim, small businesses, homeowners, student borrowers, etc. are paying enormously high interest rates for the little credit they can get. The profits go to Brother Banker.

The Federal Reserve released papers on $12 trillion, about half of the $23 trillion distribution estimated by Special Inspector General Neil Barofsky. Despite admitting to pumping an amount equal to about the entire annual national output into the economy in the form of cash – belying the real decline in the output of goods and services – Ben Bernanke told 60 Minutes recently that he was “100% certain” that inflation is not going to be a problem. Makes you wonder what else they’re hiding.

Inform Yourself:
Click here for the Federal Reserve Press release.

Click here for Regulatory Reform Transaction Data from the Federal Reserve website.

Click here for an internet article with additional links to original sources and media coverage (thanks to Dennis Smith for providing the original article).