"A Cloud of Contagion": States, Cities, and Federal Default

The Pew Center on the States has released a new report examining the impact a potential federal default would have on state and municipal governments. The picture isn't pretty.

According to Pew, "A federal default could have a serious impact on states and cities by constricting their borrowing and budgets while they are still feeling the aftershocks of the Great Recession." Loss of faith in federal debt securities could have a knock-on effect on government debt at all levels, causing jittery ratings agencies to downgrade state and local credit ratings in turn. One ratings agency, Moody's, has already warned that up to 7000 municipalities could see their bond ratings lowered in the wake of a federal default, and has placed five currently AAA rated states on a downgrade watch list. Ratings downgrades would lead to increased borrowing costs for state and local governments, restricting their long-term ability to finance desperately needed infrastructure upgrades.

In addition to raising borrowing costs, a federal default could also directly impact federal program dollars currently allocated to state and local governments. According to Pew, such transfers amounted to "$478 billion in 2010 alone." States and municipalities, already stressed by years of budget challenges, might suddenly find themselves even more cash strapped. In addition, the report points out that the suspension of federal payments to individuals, such as social security recipients and government contractors, could cause a drop in state and local tax receipts as individual incomes drop and commerce slows. While Pew feels states and local governments are "highly unlikely" to face a shutdown as a result of a federal default, they could be left scrambling to find alternative funding sources to cover already budgeted expenses they were expecting to meet with federal support.


Cities Have Outgrown Their Role as Mere Creatures of the Provinces

The Martin Prosperity Institute recently released the map below, which compares the GDP of several US metropolitan areas to the size of national economies. For instance, the Boston-Cambridge-Quincy metropolitan statistical area (MSA) has a GDP of $311.3 billion dollars. If it were a country, it would be the 40th biggest national economy on earth, ahead of countries such as Denmark ($310.1) and Greece ($303.4). The Houston-Sugar Land-Baytown MSA has a GDP of $378.9 billion, which would make it the 31st biggest national economy, bigger than Austria ($375.5) and Argentina ($368.9). New York-Long Island-Northern New Jersey ($1.28 trillion) isn’t all that far behind Canada ($1.57 trillion).

While trotting out such comparisons is an interesting exercise, the comparison also gives us some important perspective.  Despite the fact that these cities, as well as many others, produce as much as large countries, they have nowhere near the same fiscal levers at their disposal. Further, they are subservient to higher levels of government. The same problem exists in Canada. The Greater Toronto Area’s economic output ($233.9) is nearly equivalent to Finland’s total GDP ($270.6). Note that this definition is far less expansive than the US metro areas listed above. If the definition were expanded to include the entire Golden Horseshoe, it would be closer to the Size of Norway ($414.3 billion).  Yet the City of Toronto can’t finance a public transit expansion without the two senior levels of government. Calgary ($62.5 billion), roughly the size of Lithuania, couldn’t decide to create a municipal sales tax. Vancouver ($85.5 billion), slightly bigger than Serbia, can’t even decide how to allocate gas tax dollars without a special deal with the federal government.

The problem isn’t that we have too little government spending, but that revenue collection and spending decisions often happen at the wrong level. Revenue generation and spending should take place as close as possible to the point of delivery. There is no reason why someone in Moose Jaw should pay federal income taxes so that the Federal Government could partner with the province of New Brunswick to build a highway near Moncton. Similarly, there’s no reason why someone in Edmonton should send property tax dollars to the province so that it can pay for a transit expansion in Calgary. Not only is filtering money through multiple layers of bureaucracy inefficient, but it leads to bad decision making. Decisions both on the revenue, and expenditure side need to be made at the lowest level of government possible.

In order to ensure that cities can meet their infrastructure requirements, provincial governments should gradually devolve spending responsibilities and revenue generating capacities to the municipalities, and the federal government should end the practice of intervening in infrastructure issues altogether. Some municipalities may choose to raise property taxes, others may increase user fees, and still others may experiment with municipal sales taxes. But regardless of how municipalities decide to raise revenue, they are better placed to determine how much revenue is required, and which projects are really essential. More importantly, devolution gives more direct control over decision making to the people that are actually impacted by the decisions. Devolution means more accountability, and more local input. And if tiny Iceland can fund it’s own infrastructure, there’s no reason why Winnipeg or Edmonton couldn’t do the same.

This piece originally appeared at the Frontier Centre for Public Policy Blog.

Steve Lafleur is a public policy analyst with the Frontier Center for Public Policy.

Attracting National and Global Tourists to Houston

PWC ranked Houston #11 *in the world* for business, life, and innovation - a really amazingly high ranking when you think about it.  Here's what they said:

Best : #2 in cost of owning business space, entrepreneurial environment and life satisfaction, #3 in commute time and cost of living  

Worst : Last in foreign job-creating investment and international tourists  

Details: Houstonians love Houston. So do US business owners. The rest of the world ... not so much. With lax zoning laws and plentiful space, Houston's low cost of living and doing business is a dream for American businesses and middle class workers, but the rest of the world pretends as though the city doesn't exist. The city has fewer international tourists than any other comparable global city.

That sparked an interesting debate started over at HAIF on how to improve Houston's tourism, especially for foreign visitors.  This has always been a tough issue for Houston.  We just don't get tourism proportionate to our global economic standing, and out-of-sight is out-of-mind.  But what would a realistic strategy possibly be?

  • Out family-fun Orlando?
  • Out weather California?
  • Out beach Florida or Hawaii?
  • Out culture New York?
  • Out museum DC or New York?
  • Out gamble/adult-fun Las Vegas? (or South Beach?)
  • Out ski Denver or Salt Lake City?
  • Out history New Orleans, Boston, Savannah or Charleston? (or even San Antonio)

See what I mean?  People choose vacation locations for specific reasons, and the winners are pretty damn dominant.  We're stuck as a local/regional "big city" tourism destination like Chicago is for the midwest and Atlanta is for the southeast, with our share of great museums, restaurants, shopping, and a few attractions - but not enough to pull people from across the country - much less the world - to vacation here.  Our one niche exception - something with some global pull - has been NASA JSC and Space Center Houston, but who knows what the future is there.

Here's a long-shot proposal I made a few years ago on my blog, one that would build on the NASA niche:

Finally, Houston needs to upgrade its tourism experience. All great, world-class cities offer a compelling tourism experience, even if only for a short trip. Even with NASA, the Galleria, and solid museum and theater districts, this has been one of Houston’s most glaring weaknesses, and one that has kept us off the radar for educated, well-traveled professionals. Again, the light rail network and some vibrant pedestrian districts will help greatly, but we really need one powerful, anchor “mega-attraction” that will actually draw people to Houston for at least a long weekend. One niche where I think Houston could be distinctive would be the world’s largest engineering and technology museum – something along the lines of DC’s National Air & Space Museum, Munich’s Deutsches Museum, and Chicago’s Museum of Science and Industry. It could even be one of the Smithsonian’s network of National Museums, which have started to move out beyond Washington DC (Design in NYC, Industrial History planned for Pittsburgh). Think of it as Houston’s version of Paris’ Louvre or London’s British Museum. The combination with Space Center Houston could create a national draw, not to mention a wonderful source of educational and career inspiration for our youth. As far as sites, 109 acres just became available at the end of the light rail line with the closing of Astroworld – not to mention the old Astrodome - both easily accessible to downtown and Reliant Park conventioneers. Any well-heeled philanthropists out there?

Done on a large enough scale, I could see it attracting not just the usual tourists, but multi-day student group field trips from all over like Space Camp does in Huntsville or the Smithsonian complex in DC - inspiring a new generation of scientists and engineers.  It should not just focus on history, but articulate the great engineering and technology challenges we face going forward.  It would be a big, bold, expensive gamble - but could be just the ticket to move us up to the next level in tourism and international recognition.


Australia's 2011 Census: Chock Full of Surprises

There is nothing better than a good old count to check out what’s really happening.  And a lot has happened across Australia over the last five years.  But what actually has happen to the country’s demographic fabric might surprise many. 
There are ten trends which I think will emerge out of our next national count on Tuesday 9th August.

1.            Acceleration towards suburbia.  Despite what we are feed by the intelligentsia most Australian’s want to live in a suburban settling.  The amount of new development on the fringe and the proportion of the population living out there will have increased over the last five years.  This trend is also likely accelerate in coming decades as to will a shift to “opportunity” regions, many of which being regional towns.  And there is the real surprise, many of those that moved to suburbia are young – the 25 to 34 age group. 

2.            Increase in household size.  Household sizes are no longer shrinking.  2006’s 2.6 people per household average will be closer to 2.8 this census and may rise even higher in the future.  Why?  The baby bonus, change in overseas migrant mix, low housing affordability and poor government decisions like, ironically, the first home owners grant and the more recent increase in owner-resident transfer duties in Queensland.

3.            More family households.  Despite forecasts of more lone person and couple households, we are likely to see an increase in the proportion of family households this census.  In fact the proportion of lone households is likely to fall, as many are forced to live in shared arrangements or move back home with family. 

4.            Increase in net wealth.  Despite the GFC, rising household costs and now declining house prices our net household wealth will have risen sharply between census periods; as too will our household incomes. Equity in our homes (and investment properties) will have also risen, with more people owning their home outright than ever before.  The August 2011 poll will also find that Australia’s net household wealth is also at a record high.

5.            Working longer.  The number of hours reported as worked each week will be up, but when they were clocked will be increasingly outside of the core 9 to 5.  Yet, and whilst not a census measurement, our productivity and ability to innovate will be down.  In broader terms our economic measurements are wrong – we have suffocating, quarterly consciousness and proprietary trading rather a focus on nurturing talent and innovation.  The county is far less dynamic as a result.

6.            Change in demographic mix.  A shift in overseas migrants from China, India, Africa and the Middle-East and less arriving here from more traditional sources such as the United Kingdom, Europe and New Zealand.  This means bigger household groups, a younger age profile and rising demand for detached housing (and burqas too).  

7.            Larger homes.  Whilst there has been shrinkage in apartment sizes of late and only really to make them easier to sell, most other housing types across Australia over the last five years have gotten bigger.  High and rising land costs, relatively cheap building costs and increasing household sizes are the main reasons why.  Our aging demographic will also want big new homes – assuming that baby boomers move – but how cheap new housing will be to build in the future is uncertain at present.  Home owners are also moving less often and the distance, when the do move, is becoming less.  “Fewer moves, local focus” should be the catch-cry for the next decade.

8.            Fewer marriages.  And those that are taking the plunge are getting married later.  The average age of mothers having their first child should exceed 30 years. 

9.            Dissolution of relationships.  Not only are fewer Australians getting married, but we are breaking off relationships at an increasing rate.  Family and relationship disbanding reflects our declining resiliency and mounting acceptance of the nanny state.  We don’t seem to overcome hardships these days, just “cut and run”.  From a housing prospective if our households are fracturing so easily, then why are our prescriptions for housing increasingly rigid?

10.          Less religion.  Last census more Australia’s nominated that they believed in the Order Of The Jedi than Christianity, so maybe the census is bunkum after all.  Yet more Australian’s are likely to nominate that they have no religion at all.  Whilst we are not America, we do live largely an American way of life and were founded on similar values – industriousness, honesty, marriage and social cohesion – but these seems to be unravelling.  This census count should show us how far lost we have become.

To paraphrase international urban authority Joel Kotkin “Whatever your politics or economic interests, the 2011 census will show that the country is changing and in a dramatic way – if not always in the ways often predicted by pundits, planners or the media.  It usually makes more sense to study the actual numbers than largely wishful thinking of mostly urban-centric, big-city based and often quite biased analysts.”  As we wrote after the last census, it maybe time for the planning industry to take a breather and set a different course with regard to our urban land use.  Hopefully this time around the planning intelligentsia will take some notice.

The Matusik Snapshot is opinion and not advice.  Readers should seek their own professional advice on the subject being discussedComments are welcome, contact me on

Land Use Regulation Blamed for High Hong Kong House Prices

The Wall Street Journal  reports that growing concern about Hong Kong's high house prices has led the special administrative region's Chief Executive Donald Tsang to promise an overhaul of housing and land use policies in the fall.     

Chou Hong-Wing, a real estate professor at Hong Kong University told The Wall Street Journal  that "Hong Kong isn't short of land." Chief Executive Tsang indicated agreement, saying that the only way to solve the problem in the long run is tackling "market demand and land supply."

A broad array of economic research has documented the higher house prices that occur where there land supply is overly restricted. In a survey of seven nations, Hong Kong was rated as the most unaffordable market in the 7th Annual Demographia Housing Affordability Survey in January, with a Median Multiple of 11.4 (median house price divided by median household income). Sydney and Vancouver, both with stringent land rationing (smart growth) programs ranked second and third, at 9.6 and 9.5 respectively.

Learning the right lessons from LA’s “Carmageddon”

Carmageddon has come and gone, and the world didn’t end. The catalyst for the predicted disaster was the closure of Interstate 405 in Los Angeles for construction for the weekend of the 16th and 17th of July. Freeway closures aren’t all that unusual, but the 405 is not a regular freeway. It is both the busiest, and most congested road in America. The 405 carries an estimated half million vehicles per weekday. Had traffic been even close to normal volumes—even weekend volumes—the event would have earned the nickname. However, less people drove. Way less people. In fact, the roads were unusually empty.

There are two lessons that one might be tempted to take home from this:

  1. Persuasion can cause people to drive less.
  2. America could do with less freeways.

These are the wrong lessons to take away. Using moral suasion or fear to alter people’s behavior can work under certain circumstances, but it hasn’t helped alter people’s day to day commuting patterns. People drive more now than ever, even though the glamorization of automobiles has diminished, and the appeal of urban living has increased. There are plenty of people who choose urban, auto-free living, but that’s a choice that isn’t made by public interest campaigns. It may be the case that there are compelling arguments for stalling the growth of urban freeways, but using Carmageddon to make that point would be disingenuous.

The two real lessons of Carmageddon are:

  1. Persuasion can convince people to drive less under unusual circumstances–temporarily.
  2. When faced with the right incentives, people will drive less.

The fear stirred up about the closure for months obviously worked. Billboards went up; the media counted down; celebrities Tweeted warnings at the behest of the city; Mayor Villaraigosa advised people to “go on vacation,” and councilor Paul Koretz told people to “stay the Hell away.” But this only works in acute situations, where there is a credible threat. The fact that the apocalyptic term Carmageddon caught on certainly helped permeate the public consciousness. But everyone knows LA traffic is usually incredibly bad, yet they endure it on a daily basis. People in LA are grudgingly willing to tolerate the country’s worst traffic, but they’re not willing to venture into the city with Interstate 405 closed unless they have to. Since it was on a weekend, most of them didn’t. Many radio shows even pre-taped segments to keep their guests from getting stuck in traffic. Several film and television productions were shut down for the weekend. These types of deferrals can be arranged, but rarely, and with sufficient notice. Citing Carmageddon as an example of how we can do with less automobile traffic is like pointing to a blackout as an example of how we can reduce electricity consumption.

The most important lesson, though, is that people respond to incentives. Since the city obviously doesn’t want people to “stay the Hell away” forever, they’re going to have to come up with another way to use incentives if they want to tackle gridlock. LA drivers spend over half a billion hours per year stuck in excess traffic delays, which costs the economy roughly $12 billion dollars. Adding more freeway lanes seems like an obvious solution, except for the fact that it doesn’t work. Studies have shown that every percentage increase in roads leads to an equal percentage increase in driving. In other words, more roads mean more driving. There are certainly exceptions to this, since the optimal level of roads isn’t zero, but it does illustrate the fact that we can’t just build our way out of traffic congestion. Instead, we need to introduce strong incentives other than fear to reduce congestion. That incentive is congestion pricing.

While road tolls aren’t the most appealing thing to drivers, electronic tolls can reduce the amount of discretionary driving, and convince some number of people to take transit rather than driving. Some would describe this approach as a “War on Drivers,” but the reality is that the intention is precisely the opposite. It is an attempt to make sure that drivers can actually get where they need without soul crushing traffic. If that means they’ll have to pay $2 to drive to the store to get bread, maybe they’ll walk to the corner store instead. Incentives are important, and even small incentives can radically shift people’s behavior. Goading people into changing their behavior rarely works. Otherwise no one would drink cola, or eat trans-fats.  On ordinary days, people need to get places, and for most people, driving is more convenient. The number of people for which driving is the most convenient choice will decline if the urban renaissance being predicted does materialize, but we can’t count on the majority of existing drivers to abandon their cars and move to city cores. Acknowledging that cars will be the dominant mode of transportation for the foreseeable future, and that people drive more than they need to when it is free are key to addressing traffic congestion. Otherwise, everybody will continue to sit in traffic.

This piece originally appeared at the Frontier Centre for Public Policy Blog.

Steve Lafleur is a public policy analyst with the Frontier Center for Public Policy.

Adelaide Land Prices Top Sydney

The median price of serviced (improved) lots for new houses in Adelaide is reported to have risen above that of far larger Sydney by the Housing Industry Association of South Australia. Housing Industry Association of South Australian Executive Director Robert Harding attributed the high price of land to government policies that have limited the supply of land available for building. Nearly all thousands of square miles of land around Adelaide are off-limits to house building due to state government restrictions.

Adelaide is the slowest growing major metropolitan area of Australia, yet has some of the worst housing affordability among larger metropolitan markets. The 7th Annual Demographia Housing Affordability Survey found median priced Adelaide housing to be 7.1 times median household incomes, ranking the metropolitan area eighth most unaffordable out of 82 with more than 1,000,000 population.

Before the adoption of its strong smart growth (urban consolidation) land use restrictions, median house prices in Adelaide were one-half or less the present level (Figure). By comparison, new houses can be purchased in much of the United States for less than the median price of an empty lot in Adelaide ($180,000), though not in areas that have adopted smart growth restrictions.

Another Congressional Cut for High Speed Rail

July 15: Today there was another indication that the newly constituted House of Representatives understands the “litmus test” imperative of zeroing out high speed rail appropriations, in light of potentially required cuts in essential programs like Medicare, Social Security and others. $1 billion was switched to Midwest flood relief in an approval today of the Energy and Water Appropriations bill for the 2012 budget.

The bill may or may not pass the Senate and lobbying is underway to “obligate” the money before the rescission becomes law. Either way, this action and the previous action to reduce high speed rail funding by $2.5 billion in a previous budget deal with the White House indicates a very tough road ahead for the Administration’s high speed rail program, most of which is not genuine high speed rail.

The rescission would block funding that has been promised by the US Department of Transportation to a number of projects around the nation, such in California, North Carolina, Michigan, Missouri and Illinois.

Infographic: State Property Tax Data

Credit Sesame has created an interactive map showing property tax rates for all 50 states. Based on data from the Tax Foundation, the graphic also shows property tax rates as a share of home value and as a share of median income of homeowners. It's important to note that property taxes can vary regionally within states, and property taxes are only one part of overall state and local tax burden.

Mortgages –

Here's the Tax Foundation's numbers on overall state and local tax burden. For more on overall state business climates, check out our Enterprising States report.

Infographic: Which Industries Are Growing in Your State?

EMSI teamed up with Tableau Software to create this industry data display. You can visualize every broad-level (2-digit NAICS) industry by state over the last decade. Also, click on the dot for each state to see the trends for each sector. The bigger the dot, the more jobs that state has in the selected industry. It may take a few seconds to load.

A few observations:

1. Right off the bat, you can see the explosive growth of the mining sector nationally over the past few years. If you scroll to mining and oil exploration in the dropdown or isolate it by clicking on the chart, you can see Texas has by far the largest number of jobs among all states. We covered this sector and specific oil and gas extraction occupations in depth recently.

2. One of the cool things to do is scroll through each year to see the changing complexion of employment. There’s widespread growth projected for most states in 2011, with a few exceptions, but clicking back through the past few years shows a much different picture.

3. Another intriguing sector is manufacturing. In the last decade, it hasn’t fared well. That much is clear. But notice the tide start to shift in 2010, with Indiana and Michigan showing slight growth. And in 2011, nearly three-quarters of the US is expected to see job expansion.