Glaeser reminds us that cities are “density, proximity, closeness. . . . [T]heir success depends on the demand for physical closeness.” He asserts that electronic communication is not a substitute for face-to-face contact (a proposition anyone who has endured a few conference calls will accept). Even sophisticated “virtual meeting” suites fall short. (Maybe it looks like Nathan is in the same room, but you can’t go out for a beer after the meeting.)

Taking one step further, Glaeser argues that the declining cost of communication, by creating access to vast new stores of knowledge, increases the demand for “face time,” as we work together to make something of all of this information. Face time and electronic communication are complementary—each enhances the value of the other.

Some cities succeed while others fail. The economic base of the community is a key factor: Sectors based on innovation—say software (Bangalore or San Francisco) or financial services (New York, London or Charlotte)—rely on urban “people density.” The value of density outweighs the additional cost of an urban location—in term of real estate, salaries, taxes, etc. Sectors that are less knowledge intensive may find that the benefits don’t outweigh the costs and will locate outside cities.

This explains why technology leadership emerges from cities. New York, the San Francisco Bay area, Boston, Singapore, Shanghai and other tech leaders bring smart people together and spawn competitive companies with innovative cultures.

Is there a lesson here for Rochester? If proximity feeds innovation, let’s explore ways to bring our smart people closer together. Unlike many college towns, our community is separated from our marquee academic institutions, the University of Rochester and the Rochester Institute of Technology.

UR’s campus is a place of splendid isolation—the main site is virtually walled off from the city to the north and west by the Genesee River, to the east by Mt. Hope Cemetery and to the south by Genesee Valley Park and I-390.

RIT’s antecedents, the Rochester Atheneum and the Mechanic’s Institute, were established in Rochester’s downtown. The first building of the combined institution was on Plymouth Avenue next to the Erie Canal. Although the relocation to Henrietta has served the university well (and has enabled the creation of a fabulous 5.6 million square-foot facility), the campus is distinctly suburban and remote from the rest of the city.

It is UR’s “splendid isolation” that prompted the notion of a new I390 interchange. Recently endorsed by Governor Cuomo, the Kendrick Road exit will address problems of congestion and poor design in the E/W Henrietta exit and will dramatically expand access to underutilized real estate south of the UR campus. If you trace the map southwest, you run right into RIT.

Might this be the Rochester economy’s new “center of gravity?” Our “idea factories”—UR and RIT—anchor the north and south. Monroe Community College, a critical partner for tech-based manufacturing, marks the site’s eastern boundary. Ready highway access is assured by I390 and the NYS Thruway.  Adjacent to this site, the airport is also a considerable asset, given the size of the metro area: Rochester International hosts eight major carriers serving 14 nonstop destinations; ticket prices are already below average for the nation and may fall further after Southwest absorbs Airtran.  And just to the west is the Genesee Valley Park, one of our Frederick Law Olmstead-designed public parks.

How does the new interchange promote economic development? It improves traffic circulation, certainly. Better access to UR, less congestion on E/W Henrietta roads, and fewer accidents are good things but the interchange only improves the economy directly through UR. Extending south of Kendrick Road, however, is a former railroad right-of-way, now converted to a bicycle/walking trail. Jim Yarrington, who leads design and construction for RIT, points out that this right-of-way almost directly connects UR, RIT and downtown.  He muses that this could be an Upstate version of the Boston area’s Massachusetts Avenue, which connects the universities and center city. Just as Research Triangle Park in North Carolina spurred economic expansion through proximity to Duke, UNC-Chapel Hill and NC State University, the largely undeveloped real estate between our great universities—UR and RIT—is fertile ground for idea creation and knowledge-intensive business development.

This brings us back to Ed Glaeser: For all of our sophisticated “virtual” connections, physical proximity still matters. Yes, let’s add an interchange on 390. But let’s also explore how that investment can catalyze development of a high tech corridor that creates opportunities for our children and enhances the region’s economic vitality.

As a participant in the Rochester Downtown Rotary’s annual economic forecast luncheon, I was pleasantly surprised by the generally upbeat expectations of my fellow panelists. Moderated by Sandy Parker, head of the Rochester Business Alliance, it included Steve Babbitt, chairman of the board of the Greater Rochester Association of Realtors; Brad McAreavy, president of the Rochester Auto Dealers’ Association; and Clayton Millard, first vice president of wealth management at Merrill Lynch.

While realtors are congenitally optimistic, Steve Babbitt’s positive outlook for the housing market is supported by two recent national releases. Homes.org, an online source of listed homes nationwide, identified promising markets using affordability, appreciation potential, price stability, area unemployment/job potential, and median price. Rochester was one of its top nine metros, along with Washington, DC, Santa Fe, NM, Bremerton, WA, Orlando, FL, Austin, TX, Houston, TX, Cambridge, MA, and Chicago (see http://t.co/NOzNINNA).

Jed Kolko, Chief Economist at Trulia, another website devoted to real estate issues, posted his “top cities” in a Huffington Post column. He also included Rochester, along with Austin, Houston and Cambridge. He added San Jose, CA to homes.org’s list. As it happens, Kolko hails from Brighton, a Rochester suburb. He had to assure his readers that he’d not “put his thumb on the scale” and was frankly surprised that Rochester scored so well, given Kodak’s well-publicized troubles (see http://t.co/fCd5qjx6).

I find the breadth of recent employment growth encouraging. We’re accustomed to seeing education and health care driving most of the region’s growth. Yet in 2011, this sector actually shrank. And manufacturing, long the source of job losses, added an estimated 1,400 positions. Growth spread across the economy is more likely to persist.

As the Wall Street Journal highlighted on Dec. 24, the recent economic downturn gave rise to a partial rebirth of Rochester’s entrepreneurial past: “Many of the people laid off by the large companies in Rochester are highly trained engineers who have started their own companies and live in the upscale neighborhoods of Pittsford, Penfield and Brighton,” the piece explained. “Some have left the engineering world behind as they made the transition from company man to entrepreneur.”

While the panelists are all feeling good about the future, we also agree that the downside risk is greater than the upside risk. Clayton put it best: A continued lackluster recovery is the most likely good outcome. At the other extreme, a collapse of the Euro is not beyond the realm of possibility. And that would be very disruptive to the world economy.

I’m not optimistic that the Europeans will do better than muddle through the ongoing Euro crisis. In aggregate, the Europeans will be looking to refinance about $200 billion in debt during the first quarter, one third of that by Italy. As Italian debt yielded 7% at the end of the year, refinancing will be an expensive proposition and will make the country’s fiscal challenge that much greater.

Domestically, the national election will encourage Congress and the President to delay bold action, as each side seems to fear handing a “win” to the other, even if that success can be shared. Deals like the unsatisfactory compromise on the payroll tax extension may be all we can expect.

The collective positive tone on the panel follows cautious optimism expressed by economists at the national level heading into 2012. Some of the factors behind Rochester’s success story – job creation, investment by businesses small and large, and a healthy housing market – may help to drive such comebacks in other metros.

See below for updated charts on Rochester’s comparative performance, discussed in Policy Wonk on November 14 (see http://bit.ly/zVMTSF).

We want answers. We blame globalization or automation or the school system. Or we blame government or regulation or some shadowy conspiracy. And we blame each other. The Occupy Wall Street movement blames the greed of the rich and powerful and their agents in government. The Tea Party movement blames the power of Big Labor—and their agents in government.

What we want changed depends on who we think is guilty. The Tea Party wants less government. The Occupy movement wants more.

The more radical Occupiers question the fundamentals of our economic system. I was asked to speak to a group at Rochester’s Third Presbyterian Church on this topic—“How does a Christian think about capitalism?” Putting the question in a faith context changes how we value the results of our economic system. A parable of Jesus speaks of a sorting of the worthy and the unworthy—and that worthiness is defined by actions taken for the “least of my brothers,” e.g. the hungry, the stranger, the unclothed, and the prisoner.

Popularized by Karl Marx, the slogan, “From each according to his ability, to each according to his needs” seems more consistent with Jesus’ parable than what our system achieves. However, the problem with utopian socialism isn’t its objectives, but its results. Socialism works for saints—the gifted give without thought of repayment; the needy accept without exploiting the giver. For sinners, we need capitalism.

Adam Smith, the patron saint of market capitalism, noted that markets aren’t driven by love: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Self-interest—greed, if you like—is the engine of capitalism. Critics claim that economists, like Michael Douglas’ Wall Street character Gordon Gekko, think “greed is good.” I disagree: to be reflexively self-interested is the human condition, “original sin” in theological terms. Economists think about greed the way engineers think about gravity—it isn’t good or bad, it just is.

To be productive, the economic system must permit reward, thus harnessing self-interest to the task of meeting society’s material needs. To be fair, the economic system must also limit the power that can be amassed from market success, thus restraining the capacity for exploitation. Adam Smith’s proposition was that greed can be both harnessed and limited by promoting a distribution of market power.

“Unbridled” capitalism often leads to concentration of power and from there to exploitation. It was that same Adam Smith who said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Thus, the bridle is a critical piece of equipment. There are two approaches to manage, or bridle, concentrations of market power in capitalist systems. One solution is more regulation, effectively creating countervailing power in an agency charged to act on behalf of the public. The other solution is to create a more competitive private market.

The performance of the regulators in the financial crisis was dismal. Pick a reason:

a) The regulations were too weak.

b) The regulators had been captured by the regulated.

c) The regulators were simply outgunned, as outsized Wall Street salaries attracted the best and brightest.

I’ll take “all of the above.” Which is why I’m unimpressed with the response of the nation’s leadership, having left the structure of the financial sector untouched, and choosing instead to put our faith in more regulation and better regulators.

One unintended consequence of efforts to shore up the banking system in 2008 was an increase in the concentration of our banking sector. The top three banks—JP Morgan Chase, Bank of America and Citibank—are still the top three and their combined assets in 2011 rose 23% from 2007. The assets of the largest five banks grew 28%. #5 Wells Fargo absorbed #4 Wachovia. Bank of America acquired Merrill Lynch. JP Morgan Chase purchased Bear Stearns. And so on.

For capitalism to work, we must balance self-interest against self-interest by splitting up these enormous companies, companies that are, indeed, “too big to fail.” Markets work best when you pit wolves against wolves. So far, our strategy has been to hire more sheep dogs.

As states grapple with rising costs and tighter budgets, states at the top of the list may see the rankings as evidence that rising employee costs are crippling. On the other hand, states at the bottom of the list may feel defensive about the comparison. More than 230 news outlets in 42 states ran pieces on the rankings. And some found the report troubling. In an article in the Plains Daily, Ken Purdy, Classification and Compensation Manager with the State of North Dakota’s Human Resources Management Services—the state with the lowest average state payroll—said:

“An overall comparison of average salary is pretty baseless. It’s not very valid. It depends on the makeup of the workforce, and the employees at various levels. Throwing out a blanket number like that, in a business sense, isn’t very helpful. The true measure in trying to price your employees is a more direct job-to-job comparison of salaries to competing employees.”

The question for us at CGR is this: Should we be issuing straight rankings from our Govistics database without applying an additional analytical “screen”? Or are we contributing to a “dumbing down” of complex statistics, stats that should only be explored in the context of careful review and discussion?

Many take offense at rankings. US News and World Report has turned the ratings game into a business model. There isn’t a college president in the country that doesn’t roll his or her eyes at the latest release of USN&WR’s “top colleges” issue, even schools that score well. While they accept parts of the approach, they also know that much of what makes a college or university desirable and effective can’t be easily reduced to a numbered list.

A simple ranking is a crude indicator—in the case of public sector payrolls, for example, a robust study of variable pay would include more than just gross per person. Certainly cost of living is a factor—a dollar goes much further in Fargo than it does in Manhattan. Non-cash compensation also makes a difference. Pensions vary dramatically from state to state—how many years are required before the benefits are assured, even if the individual leaves public employment (called “vesting”)? What share of final salary is assured after, say, 20 years of service?  “Other than pension employment benefits” (referred to as “OPEB”), particularly health insurance, also influences total compensation. And consider job security—states with strong unions like New York or California have achieved much greater job security than in states with less influential public employee unions. Dollar for dollar, a safer job is worth more than a job that is more subject to the state’s fiscal condition or changing priorities of the state’s leaders.

But you have to start somewhere. State workers in North Dakota (again, the last ranked state) earned $34,000 on average—about 60% of earnings in New Jersey, the first ranked state. If the difference can be explained by differences in labor markets and cost of living—then let’s have that discussion. What is it about New Jersey and New York that have driven up average salaries? Why is it more expensive to live in New York than North Dakota? High salaries for public sector workers don’t emerge from a vacuum. While high average salaries for the public sector drives up cost to taxpayers—a bad thing—high average salaries in the private sector probably reflects an economic base in high value-added industries—a good thing.

So CGR’s simple Govistics rankings—just like the college rankings—can only be a starting point for deeper study and further discussion. A small difference in rank—consider Arizona and Alabama—is certainly meaningless. Big differences between similar states are another matter. But we are reminded that the lion’s share of cost for state government is salaries. We intend to continue to explore the information on the public sector contained in CGR’s Govistics database and to add to it additional information that can inform and empower taxpayers and community leaders.

And when the Rochester economy outperforms the state consistently over a three-year period, we suspect either mischief or incompetence: Someone at the Department of Labor made a mistake that will soon be discovered. Yet while the rest of the state has been shedding jobs since September 2008, we’ve pretty much held our own here in Rochester. We lost less than 1% of jobs while others did much worse. Long Island and Albany, for example, dropped nearly 4%. And for the year just passed, we’re 10^th in the nation (out of 372 metro areas).

Rochester isn’t being propelled by a single firm or a single cluster or a single sector. Of 11 major sectors, 8 grew over the year. And in 8 major sectors (not exactly the same ones), Rochester’s outperformed NYS.

I attended the Rochester Top 100 event last week and was tremendously encouraged by the winners. First, there are 42 on the list with 100 employees or more. These companies are driving enough revenue growth to secure a place on the Top 100 and are managing a substantial workforce. Many are poised to continue growing, particularly as the global economy recovers.

Second, many of these firms are selling outside the region. Easily half are in the “traded sector,” the part of our economy that earns revenue from the state, nation and world. Local service providers are important to our daily lives—but only by trading outside the region can we increase total jobs and income.

Third, many of Top 100 firms sell products and services that are—hmm, can I say this?—rather boring. It is fun to boast about firms that are doing things most of us don’t understand—Sydor Optics or iCardiac. And we’ve lots of great companies like these. But most products and services in our economy aren’t new. The general mercantile store has been with us as long as trade has existed. Wegmans succeeds by making a pedestrian business exciting—that’s why the opening of their new store in Worcester, Massachusetts was a newsworthy event. A local news blog titled its story, “Wegmans Aftershock” and told of 25,000 first day shoppers. It wasn’t that someone had opened a supermarket—no, they’d opened a Wegmans.

Four firms in the Top 100—employing more than 1,500—are in the packaging business. Empty boxes just aren’t that exciting. Lewis Tree Service reports 3,555 employees. Yes, they cut trees—throughout the Eastern & Southern States. Lapp Insulators employs 1,146 making—you guessed it!—insulators for power lines. Companies that succeed when they aren’t protected by patents are just outperforming the competition. Hear, hear!

Finally, the Top 100 companies are fabulously diverse. Yes, we’ve a number of optics/photonics firms and we’re proud of them. But not all of our growth comes from a narrow base. We have successful firms in a wide range of sectors. Our diverse economic “portfolio” insulates us from a downturn or technological change in one industry or another.

I’m going out on a limb and making a prediction: Rochester is getting back into the growth habit. I doubt that we’ll be at the head of the pack when the national economy really gets heated up. But we’ve the makings of steady, broad-based growth that will bring us long-term prosperity.

ORIGINALLY published in Rochester Business Journal 11/11/11

While we hope to be one of the winning regions—earning a promised $40 million in state support—the process itself has already been valuable. In my 20 years here, I cannot recall a time when leaders of business and government from the Finger Lakes’ nine counties have gathered to talk about what makes our economy successful and what might make it better. The process would have been even more valuable had it been less of a fire drill—a February deadline would have been better, although still ambitious—but we can be proud of the diligent efforts of the Council members and participants in eleven workgroups. The plans they have developed are a testimony to the vitality of particular economic clusters and the many vital economic institutions in the region.

Thirty years ago a few big manufacturers—Kodak, of course, plus Xerox, Bausch + Lomb, and General Motors—dominated the regional economy. Most of the rest of the economy revolved around these firms, like the earth about the sun. No longer. Now the distinctive character of the Finger Lakes economy is our diversity. We no longer have a core “cluster” of firms or industries that define us. And it is the breadth and diversity of the region’s economic base that provides its stability.

One cluster plays a unique role in our diversified economy, however: Higher education. Despite the fact that the four firms mentioned above shed 65,000 jobs since 1980 (both for competitive reasons and from productivity improvements), the community added population each decade since. Total employment rose steadily until 2000 and has only dipped slightly since.

I have speculated that two factors are responsible for the economy’s ability to absorb shrinkage in manufacturing: First, the firms involved were responsible corporate citizens, providing exiting workers with the financial resources to “retool,” including funds they could apply to education. Second, our community is blessed with an unusual concentration of colleges and universities. Workers looking for a new career could find nearly every need covered—from certificate programs at our community colleges to an array of doctoral programs at UR and RIT.

In support of the planning effort, CGR compiled federal statistics on academic degrees conferred by colleges and universities in metro areas across the nation. The Rochester Metropolitan Statistical Area (RMSA) is the 51^st largest in the nation. When compared to the other 50 largest MSAs, our community is at or near the top of the list in a number of fields that are critical to a technology-led economy: We confer the most degrees per capita in Mathematics, and in Physical Sciences; we hold second place in Biological and Life Sciences, third in Engineering, and fifth in Computer & Information Sciences. And the RMSA is third overall after Boston and, surprisingly, Buffalo. Minneapolis and Austin round out the top five.

Finger Lakes colleges and universities enroll 114,000 students—75,000 when the figure is presented as “full time equivalent” enrollment. Austin and Boston are widely recognized as “college towns”—Rochester deserves a similar reputation.

One other ranking stands out: In both visual and performing arts and a subset, music, Rochester is No. 1. The music statistic is particularly striking: Rochester institutions, led by the Eastman School of Music, conferred 30 music degrees per 100,000 residents in 2009-10. Boston was No. 2 at 26 degrees per 100,000 residents. Then the concentration falls off rapidly: Hartford, Austin, Cleveland and Nashville conferred 15 to 17 music degrees per 100,000.

And academic strength is only the tip of Rochester’s musical iceberg: Whether you’re a music consumer—holder of a Rochester Philharmonic season ticket, a Jazz Festival Club Pass or a subscription to the Eastman School’s Eastman-Ranlet Series—or an active participant in one of the many ensembles—perhaps the Eastman Rochester Chorus, the Genesee Symphony or the New Horizons Band—you know that music is part of Rochester’s cultural core.

So what does all this say about the economy? Our colleges and universities, an economic force in their own right, provide the raw material of invention to our technology-driven economic clusters, train a workforce for the challenges of 21^st century industry, and serve to create a quality of life that attracts and retains creative people. Our diversity is our strength: No longer dependent on a few firms or sectors, Rochester is poised to succeed in the topsy-turvy global economy we now confront. Our colleges and universities are a critical piece of Rochester’s economic puzzle.

Whether or not the Finger Lakes region walks away from this state contest as one of the four winners, it is heartening to recognize the valuable assets that exist here already, independent of a $40 million prize.

As year-to-year variation is less reliable, I compare the 2010 American Community Survey estimates to the 2000 Census—the “long form.”

• Median household income fell about 20% over the decade. Adjusted for inflation, the 2009 figure reported in the 2010 report—about $45,000—is 78% of the nearly $58,000 figure from 1999.
• Per capita income didn’t decline as much—about 9% to about $27,000 (from an inflation-adjusted $29,000).
• The increased incidence of poverty is also troubling:
  • Family poverty rate from 8.2% to 11.1%
  • Poverty rate for families with children under 18 rose from 13.1% to 18.6%
  • Similarly, persons in poverty rose from 11.2% to 15.4% but children in poverty rose even more, from 15.5% to 22.2%

• Clearly the distribution of income became less equal over the decade. Yet the easy “rich got richer & poor got poorer” story isn’t complete.  As has been noted at the national level, incomes fell throughout the income distribution. Census Bureau reports income ranges according to the same scale, despite inflation, so the distribution analysis takes some calculating. Roughly, here are the income “breaks” by population quartiles:

Thus to reach ¼ of the population in 1999 required an income threshold of $30,000, dropping to $25,000 in 2009. 95% of the population was captured with an upper income limit of $175,000. Incomes up to $189,000 were required to capture 95% of households in 1999.

What happened?

Feels like we’ve collectively been hit by a truck, doesn’t it? The obvious explanations are the most likely:

• We’ve still not recovered from the worst recession of the post WWII period. While recent statistics have been flat, not declining, the possibility that the economy will weaken instead of strengthen is real.

• The impact of global competition on labor markets shifted up the skills ladder during this decade. Most of the jobs lost to global competitors were unskilled and semiskilled well into the 1990s. Only during the aughts did we begin to lose white collar jobs to India, China and other nations.

• Finally, the Rochester area saw Kodak’s shrinkage kick into high gear. Film sales continued to increase through the 90s, only beginning a long-anticipated decline in 2000. While Kodak was shrinking through the period, a portion of the jobs eliminated were actually transferred from Kodak to the business services sector through subcontracts. Other manufacturers—historically the region’s highest paying employers—continued to aggressively pursue improved productivity. Final statistic:  Census reports that total manufacturing employment fell by 31,000 over the decade, from 21% of all jobs to about 13%. Much of the “take up” of these jobs—23,000 of them—was in Education, Health Care and Social Assistance.

For more from the Census, see http://factfinder2.census.gov/main.html

Growth in employment—already anemic—ground to a halt in August. GDP growth for the second quarter was first estimated at 1.3%, which was mildly depressing this long into a “recovery.” Then it was revised down to 1.0%. Although few indicators have slipped into reverse, none have shifted out of first gear and many, like employment, are slowing, not accelerating.

I should have warned my father-in-law that I’m a lousy forecaster. And I’m not about to try again. What I do know for sure is that the economy is vulnerable. That was true at Christmas, incidentally. And a vulnerable economy was subjected to a number of shocks, e.g. rotten weather, a rolling fiscal disaster in Europe, Hatfield & McCoy feuding in Congress, etc.

Enter Barack Obama’s American Jobs Act. He’s in a tough spot. Nearly every economist in the world agrees that the fiscal soup that caused the financial crisis had been simmering for years—and that recovery would be a long time coming. While I disagree with a number of steps taken by the President, I doubt that any post-crisis action on the part of the federal government could have spurred a robust recovery.

So let’s look at his plan, starting with the payroll tax reduction. This is in two pieces—one for employers and one for employees. The employer portion we could do without. Corporations are not delaying hiring because they can’t afford to. Collectively, they’ve a lot of cash. And if they need more, borrowing is cheap. No—they aren’t hiring because they don’t see consumers lining up to buy more stuff.

The same principle applies to the idea of bribing firms to hire the long-term unemployed. Remember, companies aren’t broke and they can borrow cheaply. Coming off a recession, no company will hire someone they don’t really need. The $4,000 bonus will push a few companies over the line, of course. Other companies will claim the money for hiring they intended to do anyway. And the bonus might persuade a few companies to hire Mr. A who is “long-term unemployed” over Ms. B who isn’t. But the choice of Mr. A over Ms. B will have to be a genuine toss-up. The cost of a hiring mistake will exceed $4,000 in a heartbeat. This part of the plan won’t do much harm, but won’t do much good, either.

On the other hand, cutting the employee portion of the payroll tax was a good idea in 2010 (and would have been a good idea in 2008). Naysayers point out that prudent consumers won’t spend more, just save more, making the policy ineffective. Yet even if the tax cut isn’t spent but saved, it will improve the consumer’s “balance sheet” and hasten the day when the consumer is ready to spend again. High debt is one of the causes of our current malaise. The problem for Obama is that the program may not help until after the election, but that simply makes it ineffective politics, not bad policy.

I can certainly support more spending on infrastructure, provided we focus on improvements we’ll have to do anyway. The temptation, of course, is to build something completely new, which may or may not be needed. When we repair bridges or resurface highways, elected officials miss out on photogenic ribbon cuttings.

But shouldn’t we worry about policies that increase the federal debt? I’m just as concerned as the next guy about our federal debt. But now isn’t the time to cut it.

Karl Smith, an economist at the University of North Carolina at Chapel Hill, points out that the U.S. government is currently able to borrow for free. It reflects the weakness of the world economy—and the fact that confidence in the U.S. economy remains strong (relative to the rest of the world), regardless of what S&P has to say about the matter. Smith’s argument is more sophisticated than this—see his blog at www.modeledbehavior.com. He argues that the federal government could temporarily stop collecting taxes altogether, run the government on borrowed money and earn money on the “spread” when it is paid back. If the Treasury can borrow at, say 0.5%, and we’re confident that inflation will be at least 1%, then the taxpayer will be made better off by borrowing.

So do I support Obama’s plan or not? My word limit doesn’t allow me to opine on the rest of the plan, but I do think that  the fragility of the economy and of our collective psyche (which matters) justifies action. I don’t have confidence that any federal action will turn around the employment situation quickly—sorry, Mr. President—but the ridiculously low cost of federal borrowing suggests that we should do what we can to put more money in the hands of consumers.

ORIGINALLY published in Rochester Business Journal 9/16/11

The Regional Economic Development Councils is the vehicle by which Governor Cuomo is translating that bit of campaign poetry into energetic prose. The concept comes partly from Cuomo’s tenure at HUD, partly from a similar venture launched by the first Governor Cuomo in the late 1980s. The concept has merit—by appointing key leaders to ten councils across NYS, he is engaging the state’s leadership in a manner that is largely unprecedented. With Lt Governor Bob Duffy as the chair of every council, he has assured both that council members participate and that the state agency representatives show up and provide support.

And there is nothing like a contest to get Americans engaged—we love competition! The initiative promises to award $40 million to the four councils submitted the best plans. The remaining six councils will have a $40 million to divide among them, a relatively meager sum when split six ways. Thus if Bob Duffy’s presence wasn’t enough to get regional leaders engaged, the promise of money certainly has done the trick. It isn’t all real money—$25 million is capital money and the remainder is in the form of tax credits, which are certainly worth a lot less than real cash. But $25 million isn’t pocket money.

The process is articulated in a detailed manual that describes the process by which the deliberation of the councils and their designees in various workgroups, structured public input, and council action will create a strategic plan for the region. And there is a schedule—the effort is intended to reach closure by November 14. While this first year timetable is entirely too quick—another four months or so would be desirable—the Cuomo Administration expresses its intent to use the councils to guide funding decisions for its whole term of office. So there will be future years.

The Finger Lakes Council is led by Joel Seligman, President of the University of Rochester, and Danny Wegman, CEO of Wegmans Markets. The Governor’s press release is here. Leading members of the business community, higher education and the top elected official from each of the nine counties plus municipal leaders fill out the region’s 33 members. Subject workgroups include members of the Council plus other experts—about 150 people overall.

The initiative’s scope is broad, as reflected in the workgroups. Eleven in number, they include Advanced Healthcare & Life Sciences; Advanced Manufacturing; Agriculture & Food Processing; Business Services, Software, & Telecommunications; Community Development; Energy Innovation; Entrepreneurship & Innovation; Higher Education; Infrastructure & Transportation; Optics, Photonics & Imaging; and Tourism & the Arts.

It’s an impressive process that has energized key leaders from across the state. We’ll all be watching to see what emerges!

Economists love taxes. At least, we love the right kind of taxes, those that discourage bad actions and encourage good ones. Tobacco taxes, for example, make smoking a habit that hurts your pocketbook as well as your lungs. Evidence suggests that teens smoke less just because it has become so darned expensive. Hear, hear!

A “carbon tax” is one of the good taxes. If you accept any one of the following propositions – a)human activity has precipitated global warming, b)human activity hasn’t done so in the past, but it might in the future and this would be a bad thing, OR c) fossil fuel imports put money in the pockets of unstable nations and the world would be a safer place if we used less – then you should support a carbon tax. (If you don’t accept any of the above conditions, it is time to turn the page.)

The carbon tax is finally catching on—it no longer lives only in the gleam of an economist’s eye. British Columbia began to assess a tax on carbon in July, 2008. And it seems to be working as we would expect. Recent reports suggest that fuel consumption fell 4.5%, more than in the rest of Canada over the same period. Australia also joined the carbon tax party, imposing a carbon tax ($24/ton) on its 500 largest polluters (mostly power generators).

The model in British Colombia is designed to be “revenue neutral.” All taxes collected through the carbon tax will be converted into reductions in other taxes. Now set at $25/ton (on its way to leveling off at $30/ton in 2012), the tax adds about $.21/gallon to gasoline prices. The payback to taxpayers comes in the form of a 5% reduction in the bottom two income tax rates plus reductions in small business and corporate income taxes. BC politicians apparently know the value of symbolism, too: Every adult citizen receives an annual check for $100—a “Climate Action Credit”—and children received $30.

At this point, readers are likely divided into three camps: 1) “Good show, BC. We should do this here.” 2) “Sure, tax the bejeezus out of carbon. But don’t give the money BACK. Put it into supporting alternative fuels.” 3) “No tax is a good tax and no government has ever passed a measure that is revenue neutral. This is socialism masquerading as environmental policy.”

We economists like this sort of environmental policy because it is so much better than the alternative, i.e. subsidizing something that legislators, in their infinite wisdom, believe is a good thing. I offer two examples: Corn ethanol and solar power.

The scientific consensus on corn ethanol is clear: Growing the corn and converting it to fuel generates more carbon than we save when we use it to replace gasoline. It is an inefficient means of reducing either carbon emissions or our dependence on foreign oil. Earlier this summer the U.S. Senate finally saw fit to repeal the explicit $.45/gallon subsidy and $.54 tariff on imported ethanol, an action that doesn’t kill either measure but suggests that Congress is poised to do so. The Administration’s “renewable portfolio standard” still requires that 7.5 billion gallons of ethanol be mixed with gasoline next year, however, nearly double the total in 2006. Why? Because Corn Belt politics continue to defend this wasteful diversion of corn from food to fuel—4 of every 10 ears of corn, according to the New York Times.

And solar? Apparently it is not ready for prime time. I pass along an anecdote from my brother, now residing in Phoenix, Arizona. Barry’s employer, the charity Food for the Hungry, was offered a grant paying 100% of the cost of installing photovoltaic panels on its roof (51 panels generating 12 kilovolts of power, if you know about these things).

Unfortunately, the utility’s financial justification for this action is based on a slew of weak assumptions. First, the utility assumes that power prices will increase on average 6% per year. Second, it assumes no maintenance costs. Third, it assumes that the money invested in the project today has no alternative use, i.e. you can borrow it for free or, if you have the money, it would otherwise sit in a box under your mattress (no present-value discounting, for you finance geeks). Even with these rosy assumptions, the payback for the $52,000 installation is a lengthy 21 years. Assume you borrow for the project at 3% and prices rise at only 4% per year, and the payback stretches to 34 years. And this is in Phoenix, with 300 days of sun per year on a flat roof with nothing between the roof and the sky. I shudder to think what the payback would be in Rochester.

We’ve a long way to go before we run out of fossil fuels. Yet environmental concerns and worries about our dependence on Middle East oil suggest that we wean ourselves from fossil sources sooner than later. The critical policy question is, how? It is far better policy to drive up the cost of dirty fuels through taxation than to drive down the price of unripe technologies through subsidies, selected for us by federal and state legislators and regulators.

ORIGINALLY published in Rochester Business Journal 8/12/11