Tuesday, February 21, 2012

How a Population Strategy Works

In my last blog I suggested that what Santa Fe needs (as an example of how to spark local economic development) is a population strategy, one that would concentrate on the "missing middle"--the young people who can bring innovation, entrepreneurship, and energy to a flagging economy.

A population strategy can work. I know, because I've seen one work. I was part of the team in Portland, Oregon in the 1970s that put a population strategy to work. Here's what happened.

If you visit Portland today, you'll see a city that is widely admired, both here and abroad, for its livability. The downtown is charming, the neighborhoods desirable places to live. The public transportation system is a model, with light rail lines and bike paths that offer reliable, dependable, and affordable alternatives to the automobile. The Waterfront Park is delightful, the housing options in the Pearl District represent wonderful living spaces for a broad demographic.

It wasn't always like this. And it didn't happen by accident.

In the mid-1970s, a poll of Portlanders revealed a startling trend: middle income families with children were beginning to leave the city and move to the suburbs.

If you lived in almost any other city in America, of course, that kind of suburban flight had already happened. Freeway construction had torn through urban neighborhoods, worsening race relations had polarized communities, and the suburbs beckoned to many middle class, middle income families.

But it hadn't happened in Portland . . . yet.

At the time I was an assistant to Mayor Neil Goldschmidt, who was working to rescue and revitalize the city on a number of fronts, from stopping a disastrous freeway from wrecking Southeast Portland, to implementing an innovative Downtown Plan, to trying to make Portland's neighborhoods safer. This poll and the threat of losing a key demographic from the city's population became the policy glue that held all the pieces together.

The Mayor and his team adopted a Population Strategy: the goal was to use the city's resources and policy instruments to convince middle-income, employed families with children to choose to stay in the city. We wanted them to vote with their feet--by staying put.

Why?

Because middle-income, employed families with children provide social glue to an otherwise unstable community fabric.

Without that cohort, Portland would be a city like so many other cities--a place filled with retired people living on their pensions, and young, unmarried people, just starting out their work lives and careers. Nothing wrong with either group--but not enough in the middle to hold the community together.

We needed the middle-income employed families with children so there'd be a group of people who cared deeply about the health and well-being of the city's neighborhoods; who had a stake in the schools; who had the time and motive to volunteer to be den mothers and scout masters; who would look out for their neighbors and their neighborhoods; who could afford to pay taxes and contribute to charities. And if we lost that group, then we'd lose a critical component that held so much of the rest of the community together.

The Portland Population Strategy knit the pieces of the Mayor's vision together into a coherent approach to problem-solving.

Why stop the Mt. Hood Freeway? Because it would destroy the livability of Southeast Portland, destroy much-needed housing stock, dump more cars into downtown Portland, add more air pollution to the mix, and facilitate the flight of families to the suburbs of the East Side. Building it would mean Portland was committing suicide!

Why implement the Downtown Plan? Because a healthy city core would contribute to the health of the surrounding neighborhoods. If downtown was vibrant, there'd be another reason for people to live in Portland's neighborhoods, another attraction to urban life. There'd be shopping, jobs, conventions, arts, culture, vitality.

Why invest in crime prevention? Because safe neighborhoods, with neighbors looking after each other, not only stopped stranger-to-stranger street crime from happening; safe neighborhoods, where neighbors knew each other and looked out for each was an antidote to the anonymous suburbs. Community was better than isolation.

There were other pieces, as well: the quality of public education, improvements in parks and recreation, efforts to recruit new companies and new investments.

But what made it work was that the pieces all fit together, once you framed it in terms of a population strategy. Efforts to bring companies to Portland and have them locate their new factories and facilities in particular parts of the city were linked to transportation investments that both protected neighborhoods and made for an easy commute. When the first OPEC oil embargo drove up the price and availability of gas at the pumps, a Portland Energy Policy became another argument for living in the city: the commute was less expensive--and you could do it using public transit.

The reason Portland looks the way it does today draws directly from the Population Strategy of the 1970s. And interestingly, in making life better for employed, middle-income families with children, Portland has also made life better for the senior citizens living on their pensions and the new generation of young people looking to get started in their lives.

A Population Strategy can work--it can help a city focus its efforts, use its resources more wisely, and bring together the pieces of life and work that create a desirable, attractive, and livable community for everybody who lives there.

How do you make it work? It takes leadership and vision, courage and conviction. It takes a fresh way of looking at the world and an innovative way of solving problems.

But it can be done. And it can work. I know. Because I've seen it happen. And I've seen the results.

The first step? Looking at the data, seeing what's missing, what's at risk, what can leverage the most change. After that, it's a question of fitting the pieces together into a coherent whole. It's how a town can create its own future.

Thursday, February 16, 2012

All Economics Is Local

For those of you who don't recognize the reference, it was former Speaker of the House Tip O'Neill who famously said, "All politics is local."

Today, if you take a minute and look around, you'll see that despite all the rhetoric of globalization, all economics is local.

Take Santa Fe, New Mexico, my home town. Not even a town, at roughly 70,000 people, a village really.

The economic base of Santa Fe has been a three-legged stool: it's the capital of the state, so there are government jobs; it is a tourist destination; and it has had a booming real estate business for people looking for second homes or a place to retire. Cutting across these categories is the art market: Santa Fe boasts a large community of artists and a concentration of art galleries and artistic events, from the Indian Market to the Santa Fe Opera.

But the last couple of years have been tough.

State government has been starved for funds; tourists aren't coming to visit, and if they do come, they've curtailed their spending; and real estate, well, you know that story--that's the cause of much of the pain in the first place. That leaves the art community. And while it's an asset and a boon to the town, it has yet to become an economic force on its own terms: It takes tourists to come to buy the art, new home owners to need art to decorate their walls, collectors to feel flush enough to add to their art holdings.

The town is suffering. Help isn't going to come from the federal government. The state government doesn't have a strategy for state-wide economic development, never mind local economic development. Even if the economy starts to recover, tourism and real estate aren't going to return to pre-crash levels any time soon, if they ever do.

So it's time for serious reflection: What does a local economic development strategy for Santa Fe look like?

Most economists agree that there are two kinds of investments that can promote economic growth: investment in infrastructure and investment in human capital. Infrastructure investment can help put people back to work, and, if it's truly strategic, can add to a community's productivity and attractiveness--whether the investment builds a light rail line, adds new parks, or puts in place a city-wide Internet network. Investment in human capital is the smarter play, but requires longer-term thinking: better public schools produce a generation of well-educated kids who are capable of working smarter and generating more income; job retraining takes people out of unproductive, dead-end careers and outfits them to adapt to the changing demands of a changing economy, public-private partnerships provide mentors and markets to teach aspiring business leaders how to play the game and win.

But Santa Fe's problem--as is true for the small towns across the country--is different. It needs a new way to think about and look at an economic strategy. Public schools aren't going to get better any time soon; and there isn't the money or the political intelligence or will to create an infrastructure investment strategy. As the economy recovers on its own, the town may get a little healthier around the edges, and maybe complacency will return.

But the question is, what can and should Santa Fe do--right now--to craft a strategy for a better economic future?

I don't think the answer is to do more of what is already there, or even to do it a little better. Better marketing, better messaging, better packaging--that won't change the game.

Santa Fe--and the Santa Fe's of America--need to think different, not about what assets the town has, but about what's missing.

In Santa Fe's case, what's missing are talented, entrepreneurial young people. Santa Fe suffers from "the case of the missing middle"--young people in their 20s and 30s who can start businesses, grow enterprises, take entrepreneurial risks, look beyond government and tourism and real estate and art and see a much bigger picture.

It could be that this all-important cohort is missing from Santa Fe's demographic profile because there isn't anything meaningful, productive, or exciting for them to do in town. Or it could be that there isn't anything meaningful, productive, or exciting for them to do, because they're missing.

Cause and effect aren't the issue here, however. What's at issue is the need for an explicit strategy, targeted, not at jobs, or reviving tourism, or helping promote art.

Santa Fe needs to ask a different question if it hopes to get a different answer. The right question is all about a population cohort, not an economic category.

Santa Fe needs a population strategy that aims explicitly at keeping the young people who come to school in Santa Fe and New Mexico, attracting more young people to the mix, and giving them the tools, the incentives, the technology, the entrepreneurial opportunities that will make Santa Fe a vibrant place for creativity and innovation to flourish.

The right question for Santa Fe to ask is, "How do we attract, retain, develop, promote, and reward a missing demographic group--well-educated, technologically sophisticated, entrepreneurial young people?"

That's the right question, and asking it can lead to the right answers.

There are examples all over America of communities attempting just this strategy, creating incubators, partnering with academic institutions, offering technological incentives, pooling venture capital funds, sponsoring conferences and gatherings that bring young people together and give them a feeling that there is a community of like-minded individuals ready to work together to do really cool things. But it's not enough to know that there are lots of pieces lying around loose on the ground. Someone has to assemble them into a real strategy, so the pieces fit together and reinforce each other. They have to be particular to Santa Fe--or any other community looking for its population strategy--to the place, the history, the culture, and the context. And it takes work--real work--to execute a strategy. It won't just happen on its own.

In the end, all economics is local. And that means it's up to the people at the local level to articulate their own economic strategy, and then create their own economic future.

Wednesday, February 8, 2012

Solutions Close At Hand

If you haven't read Adam Gopnik's terrific piece, "The Caging of America" in the January 30 issue of The New Yorker, then take it from me--you've got to.

Not just because it's a brilliant description of the truly insane way in which our country approaches putting people in prison (and we do have more people in prison than any country on earth, or, as Gopnik reports, the 6 million Americans now incarcerated are more than were in the Gulag Archipelago under Stalin).

And not just because it is another in a very impressive line of pieces published in The New Yorker over the last half dozen years or so that look deep and hard at a difficult social problem and analyze just how and why we got where we are, and what really can and should be done about it--from gang violence in cities to cost overruns in hospitals.

The reason to read this piece is that it is an absolutely perfect template for what this country needs now, more than ever: solutions that work for problems that matter.

And we need to avoid fads, superficial remedies posing as serious solutions, false correlations that fail to prove causality, and catch phrases from any source that sound a lot better than they actually are.

So what's Gopnik say?

That America is brutally over-prisoned. The data are ugly.

More than half of all black men without a high school diploma go to prison at some time in their lives

In the past twenty years, the money spent on prisons has risen at a rate six times the rate of spending on higher education.

He describes how we got here: two different schools of thought about crime and punishment.

He points out the 2005 annual report of the Corrections Corporation of America, the biggest private sector company to which prison management contracts have been given, and chillingly points out that the company discloses that, the only real threat to its continued profitability would be if the supply of convicted criminals were to decrease. In other words, as long as we have crime and punishment, capitalism will triumph.

But the piece really gets interesting, turns an intellectual corner, when Gopnik reveals that crime in the streets of American cities--New York, for instance--has gone done as the prison population has gone up. This, despite the fact that 30 years ago or so, most people had pretty much resigned themselves to a future where a certain level of urban crime was simply a given.

Gopnik asks, what's the explanation--and brilliantly comments on the side: "things that work interest us less than things that don't." Exactly!

So what is the explanation?

He draws from a new book, "The City That Became Safe," written by Franklin Zimring, first telling us how rounding up the usual explanations doesn't suffice: it isn't demographic shifts, or jailing super predators, reducing the number of unwed mothers, changing the culture of welfare, alleviating poverty, reducing discrimination. It turns out the much-trumpeted "broken windows" strategy didn't do it, nor did cracking down on "turnstile jumping."

So what's the answer?

"Small acts of social engineering, designed simply to stop crimes from happening, helped stop crime."

The police put more cops in places where crimes were known to happen a lot--"hot spot policing."

The police used a program of "stop and frisk" (which Gopnik acknowledges is controversial).

Another key, common-sense insight: "Criminal activity seems like most other human choices--a question of contingent occasions and opportunity. Crime is not the consequence of a set number of criminals," he writes. "Criminals are the consequence of a set number of opportunities to commit crimes."

Toward the end of his piece, Gopnik reaches some very smart, plain-spoken conclusions.

We rarely find that a miracle cure is what cures a horrible disease. Most of the time, it's a small, common-sense approach to a problem that yields an over-sized benefit. Want to drive down the incidence of disease? Try better plumbing and more frequent hand-washing.

Most of the time, with most of our problems today, the literature--whether in books, op-ed pieces, or video talks on the web--is filled with hand-wringing and hopelessness. We can't fix public education until . . . We won't be able to remedy our health care system unless . . . There's no hope for the economy without . . .

And most of the time, we already have the answers to these problems. Right in front of us. Simple solutions that yield real results. Petrie dish sized projects, experiments, programs that actually work.

Adam Gopnik's piece reminds us of three things, three important truths: we need to stop focusing on the intractability of problems, and instead look hard at solutions that work; we need to be driven by tough-minded pragmatism, hard-headed empiricism, not fuzzy-headed ideology, and insist on real data and honest analysis; and we need to think small, think close to the ground, think practical.

If we do that, we'll not only discover how we got so deeply into some of these problems, we'll also learn that we're a lot closer to the solutions than we give ourselves credit for.

Wednesday, February 1, 2012

RIP IPO?

Here's my column from today's USA Today op-ed page:

The news that Facebook is preparing its initial public offering offers investors a bracing tonic after 2011, which The Wall Street Journal summarized as "another year of IPO blahs." At a minimum, Facebook's announcement will raise Wall Street's spirits.

But more important in today's economy, it raises fundamental questions.

What's the purpose of an IPO today -- compared with its original business rationale? Whose interests do IPOs serve -- and does going public actually harm a company's future prospects? Perhaps most important, have IPOs outlived their usefulness -- and will we see American business in the future that looks a lot more like American business in the past? Is it time to say RIP to IPOs?

One of the most vocal and well-informed critics of today's IPO market is Roger Martin, dean of the Rotman School of Management in Toronto. Martin is the author of Fixing the Game, a critical look at the pervasive problems with corporate finance today. I called Martin to get his take on Facebook's announcement, and on the role of IPOs in general.

"It's nice to have a liquidity event that will show just how rich Mark Zuckerberg is," Martin says. "But Facebook doesn't really need the money."

And that's the first big problem with today's IPO market. A company's decision to go public used to be based on its strategic needs: an IPO gave it much-needed growth capital.

Today, the IPO serves financial ends. "Private equity funds usually have three to five years to demonstrate to their limited partners what returns the fund has achieved," Martin explains. "They can't give their investors back their money or hand over stock in a non-IPO company. They need a "liquidity event," which not only rewards early investors but also represents a sizable payday for a company's founders and its initial employees.

Which poses another set of problems. "As soon as a company goes public, you often see a 'founder motivation problem,'" Martin says. "To make the company successful, the founder will work long hours and give the business almost all his or her attention. After the IPO, the motivation changes. The founder has had a big payday. You often see a founder gradually losing interest." To be fair to Zuckerberg, who has already turned down a king's ransom to sell Facebook, his passion for the business is likely to remain after the IPO; other founders, however, may lose focus.

As for attracting talent, Martin says, going public poses a similar challenge. "If employees got their options before the company went public, they face the same loss of motivation as the founder. And when it comes to attracting new employees after the IPO, if the stock doesn't perform as expected, attracting employees with the promise of stock options isn't going to work. Employees know their stock will be underwater."

Why wouldn't the stock go up? In a June column for The Washington Post, shortly after LinkedIn's IPO, Martin explained the problem: an almost unbridgeable gap between what the stock market expects a company to deliver and the reality of what it actually can deliver. Given LinkedIn's market capitalization of $8 billion, Martin calculated that investors would expect LinkedIn to generate about $560 million of value in the year ahead. But LinkedIn's profit in 2010 was $16 million. After doing the math, Martin concluded, "LinkedIn could grow net income 27 times over three years and still massively disappoint the market. To meet current expectations, it would have to generate 82 times profit growth in the same period."

And, says Martin, speaking about business in general, that gap between expectations and reality is what is preventing the U.S. from building great, enduring companies.

All too often, he says, what happens after a company goes public -- and then inevitably fails to reward its investors with the returns they expect -- is a spiral of disappointment. The stock goes sideways, the company is viewed as a failure, and sooner or later disappears or is acquired -- even though the company has sound fundamentals and a good competitive position.

Its IPO, which gave a few people a "liquidity event," has undermined the company's long-term ability to endure.

So what's the answer? RIP IPO.

The IPO has become such a standard feature in our culture of casino capitalism that we tend to take it for granted. But as Martin points out, the first 30 years of U.S. business in the 20th century were dominated by semi-public or privately held companies run by entrepreneurs or owner-managers.

"We're in an odd period right now," he says. "We thought that being publicly traded was the way to go. But it turns out not to be right: You can't build a company and its value over the long term given how the expectations market jerks companies around. I see us coming back to the days of privately held companies because of all the problems associated with being publicly traded."

It could turn out that this period of IPOs and publicly traded companies isn't the norm -- it's actually a passing fad, a financial anomaly.

If so, the real question won't be, when is your company's IPO?

It will be, when are you taking your company private?

All Rights Reserved 2009 (c) Alan Webber, Rules Of Thumb