America's Route to Recovery

Continuing to look for solutions to the Great Recession, the report on America's Road to Recovery was released by Reuters today and it provides great insight into the way out of this economic morass as well as the life of the future which all of us, even us gray-beards, need to recognize for our own survival. The Reuters report is fairly long but worth reading.

On this occasion, may the new decade be good to you and your family!


SPECIAL REPORT-America's route to recovery
Tue 29 Dec, 2009
Reuters

(For the Reuters multimedia project Route to Recovery, a team of journalists toured America to examine the impact of the recession and posted their reports online. The following story is the last installment in the series that can be found at www.reuters.com/routetorecovery)

(To hear Nick Carey discuss the project on Reuters Insider TV please click on http://link.reuters.com/nec88g)

Successive bubbles masked underlying economic woes
Chasing smokestacks no longer the key to prosperity
Renewed focus on small business and education
By Nick Carey

YOUNGSTOWN, Ohio (Reuters) – When Bob Hagan was a boy people hereabouts equated the coke dust they swept off their doorsteps each day with opportunity, for it came from the steel mills that built this city.

After graduating from high school more than 40 years ago, Hagan worked briefly at one of the local steel mills that dominated the local economy. In 1971, he became a locomotive engineer at railroad company CSX Corp, switching rail cars in every mill and yard in the area over the years.
The job afforded him a ground-level view of the slow-moving disaster that would tear out Youngstown’s heart over the next decade and a half — as it did many other towns in America’s Rust Belt.

“In my rides through this valley on the train, I used to watch the fires of prosperity burn,” said Hagan, 60, an Ohio state representative since 1986 who still works for the railroad when not in session. “And then, years later, I watched the lights go out.”

On September 19, 1977 — remembered locally as Black Monday — Sheet & Tube Company laid off more than 4,000 workers in a single day. In the following years, the steel industry all but died here.

In hindsight, the big mistake was trying to save it.

“We have spent the past 20 to 25 years looking in the rearview mirror,” said Jay Williams, the city’s 38-year-old, independent mayor. “Letting go of the past has been difficult for many people because the past was so good.”

Today, the city immortalized by Bruce Springsteen’s 1995 Rust-Belt anthem “Youngstown” is moving on. Among other things, it has created an incubator to attract the types of small businesses that are expected to drive future growth. Despite the thousands of vacant homes that serve as reminders of a traumatic past and turbulent present, some business and civic leaders think this heartland city has a chance to lead the U.S. into its next era of prosperity.

Getting to there from here, however, won’t be easy — for Youngstown, for Ohio, for the nation.

BURST BUBBLES

Youngstown is an extreme but by no means unique case in America. On a basic level, it represents some of the challenges facing the country today in the wake of the longest and deepest downturn since the 1930s.

After two economic expansions based not on sustainable growth but on asset bubbles — the dotcom boom of the 1990s then the far more damaging housing mania this decade — longstanding problems have been brought into sharper focus.

Even during the recent good times, the U.S. manufacturing sector, the muscle behind U.S. post-war economic might, was buffeted as corporations shipped low-cost production overseas.

“The easy, blue-collar shot to the middle class is gone,” said Mike Rollins, president of the Austin Chamber of Commerce. “It’s going to take a lot more work to get there now.”

In short, the world’s largest economy is at a crossroads.

With a smaller manufacturing sector and a consumer base less able to keep leveraging future earnings, where will sustainable, long-term prosperity come from? And more immediately, where will jobs come from?

This is a debate that is taking place at the local level around the country, from Youngstown to El Centro, California, and many places in between. But it is also a discussion that few see taking place at the national political level.

“Washington just doesn’t get it,” said Shane Savage, a real estate agent in Pensacola, Florida, smoking a cigarette outside the home of a client who needs to sell fast in a down market. “It’s going to take a long time to fix the mess that we’re in and our politicians don’t have a clue how bad it really is out here.”

REINVENTING A NATION

Local politicians and businesses acknowledge that the answers to America’s primary problems have been long known.

The country has to get smarter and send more people to college, making it more able to compete in the global high-tech “knowledge economy” of the future. And America needs to keep attracting the world’s best and brightest to help it prosper.

Manufacturers must also continue moving up the value chain, switching to niche production that cannot be easily transferred to China or Mexico. In the future, the sector will involve fewer but more-educated workers.

Now civic and business leaders are looking closely at another part of the economic equation. After seeing the impact that the departure of large corporations can have, there is a renewed focus on fostering small businesses instead.

The reasons are simple: They create more jobs and can be more easily replaced if they leave.

According to the U.S. Small Business Administration, companies with fewer than 500 employees accounted for 64 percent of new jobs from 1993 to the third quarter of 2008.
Small firms also tend to be more involved in their local communities than major corporations.

“We have forgotten in this country that there is so much more to capitalism than just the exchange of goods and services,” said Amy Kedron, who runs Buffalo First, which sells books of coupons promoting businesses in this city at the far northern end of New York State. “It’s also about community.”

“And local businesses are the best at building communities,” she added, “because their owners are in it to make a living, not a killing.”

The other, not unrelated new focus is the “green” economy. Wind farms, solar panels and geothermal power plants will require someone to manufacture them, plus a trained workforce to run and maintain them. And if the private sector and government agree on anything, it’s that this industry must and will become increasingly relevant.

So at a time when critics have been quick to dismiss the U.S. economy as a has-been, some see the makings of an eventual if not immediate resurgence.

“America’s greatest ability has always been its capacity to reinvent itself,” said Diane Swonk, chief economist at Chicago-based financial services firm Mesirow Financial. “We may be able to emerge stronger and better, to the possible anger and envy of some parts of the world.”

But getting there will take a lot of time, effort and money in a nation not renowned for patience and long-term planning.

“Neither our political system nor our capital markets are used to anything but a short-term view, and fixing K through 12 is a long-term proposition,” Swonk said. “Not addressing the issue is an option we don’t have. There is a difficult decade ahead of us.”

The first step toward inventing the future, as Youngstown has found, is acknowledging that the past is gone.

“The thing we’re starting to understand is that the prosperity of the steel mills was the past,” Hagan said. “So let’s accept it and let’s move on into something that makes it even better.”

CASTLES BUILT ON SAND

What sets America’s current downturn apart from most past recessions is that the Great Recession has been national in scope. “Other recent recessions have been regional in nature,” says Swonk. “But this time, there is nowhere to hide.”

Data from the U.S. National Association of Realtors shows the median home price rose every year from 1989 to 2006 before the slide began in 2007. According to real estate website Zillow.com, as of the third quarter of this year 21 percent of all American homeowners owed more than their homes are worth. That equates to 12.4 million single-family homes with mortgages in negative equity, Zillow.com said.

Real estate gains have been a major source of wealth creation and class mobility, so the hangover from the recent binge is likely to prove more painful than usual.

“I keep telling people this is not a housing downturn,” said Al Muller, a partner at Pensacola, Florida-based Metro Market Trends Inc, which tracks real estate markets in Florida and Alabama. “We are in the middle of the bursting of the biggest real estate bubble in the history of this country.”

The wealth destruction in Florida, which along with California has been among the hardest hit by the property tailspin, has been staggering.

“In the years of easy credit we all thought that we had more money,” Muller said after flicking through a wad of papers that included the names and addresses of the 3,018 foreclosures for the first 10 months of 2009 in Escambia and Santa Rosa counties where Pensacola is located.

“The people in foreclosure could be your neighbors, your friends or you could go to church with them or work with them,” Muller said pointing to the papers with evident sadness.

“We all thought (in the boom) that we could live in a bigger house. But we never realized that we were not getting any wealthier… Now there’s simply less money everywhere.”

From its peak in 2005 to the second quarter of 2009, U.S. home equity fell 37 percent, or $4.7 trillion, according to the Federal Reserve. To put that into context, China’s economic output in 2008 totaled around $4.3 trillion.

By the second quarter of 2009, Americans’ total net worth had shrunk 17 percent or $10.7 trillion from its peak in 2007.

FEWER JOBS EVERYWHERE

As well as their money, many have lost jobs. Unemployment stood at 10 percent in November after hitting a recession high of 10.2 percent in October. More than 7 million Americans have become unemployed since the recession began in December 2007.

For areas like Wilmington, Ohio, the job losses involved a single major employer.

This town of 14,000 was home for two decades to express delivery company Airborne Express. In 2003, Airborne was bought by DHL, a unit of German post office operator Deutsche Post, which was looking to take on America’s homegrown package giants FedEx (FDX.N: Quote, Profile, Research) and UPS (UPS.N: Quote, Profile, Research) on their home turf.

After spending billions of dollars, DHL gave up and shut down its U.S. domestic operations in January of this year, with a cost of 9,500 jobs.

DHL was the biggest employer not just in Wilmington, but in the five surrounding counties. The shock waves are being felt in communities filled with people who were able to make a good living with relatively little education.

“I hate to say it, but you have to wonder whether in the long run it was a good thing having DHL and Airborne Express here,” said Katy Farber, president of the Chamber of Commerce in nearby Highland County.

Some 2,800 people out of a population of 42,000 in Highland County lost their jobs when DHL left. The county had Ohio’s highest unemployment rate in October — 15.9 percent. Unemployment in the area before DHL began ratcheting down operations in May 2008 had long been around 3 percent.

“For decades our children were able to make $50,000 to $60,000 a year throwing boxes without even a high school diploma,” Farber said. “We have to retrain our workforce because those jobs are gone.”

It’s a challenge to which Michigan, home of the automobile, has become accustomed.

“The hardest thing for many auto workers who’ve been doing the same job for 25 years or so to accept is that instantly, permanently, their standard of living has been ratcheted down 80 percent,” said Douglas Stites, chief executive of Capital Area Michigan Works, a career center in Lansing, Michigan. “You may have been making $25 an hour making widgets for years, but now your skill set means you’re worth $8 an hour.”

The center is a hive of activity, with people filing in to make job applications and sign up for retraining courses.

Stites recalls a group of Hmong men who turned up after being laid off at an auto supplier. Although they moved from Southeast Asia to America decades ago, their low-skilled jobs meant they never had to bother learning English.

“What do you tell people like that?” he said. “There is no way they’re ever going to be able to sustain the lifestyle they’ve become accustomed to.”

Accepting that many of the easy, high-paid jobs of the past are gone is the first step in a process that some communities have taken toward reinvention. Youngstown, for instance, spent many years looking for a way to revive the steel industry.

“We have had to embrace the fact that we are going to be different and there is no going back to where we were,” said Mayor Williams. “But being smaller can also be better.”

Part of Youngstown’s Plan 2010 strategy involves trying to revitalize neighborhoods that can be saved and — in a city with 4,500 vacant homes — letting go those that cannot.

“We are aiming to focus on the neighborhoods that can be saved,” said Phil Kidd, a community organizer at the nonprofit group Mahoning Valley Organizing Collaborative. “But we have to accept the fact that we are going to have to wind down some neighborhoods gracefully.”

From a peak of 28.3 percent in 1953, manufacturing’s share of U.S. Gross Domestic Product fell to 11.5 percent in 2008.

Much of that decline in the recent past has been due to production moving overseas to developing nations like China or across the U.S. southern border into Mexico.

This is a source of frustration and anger for workers like the 1,100 former employees at the Whirlpool (WHR.N: Quote, Profile, Research) refrigerator plant in Evansville, Indiana, which has said it will shut in 2010 as the company shifts production to Mexico.

“It was like a punch in the gut,” said Natalie Ford, 42, of the announcement in August. Ford worked at the plant for nearly 19 years, while her husband Jim, 47, counts 18 years there.

“After all we have done for Whirlpool, I feel like we’ve been betrayed,” she added, her eyes misting over.

A NEW REVOLUTION

Leslie Taito is executive director of Rhode Island Manufacturing Extension Services (RIMES), a nonprofit that provides consultation for small and medium-sized manufacturers in Rhode Island, a state of 1 million people.

Rhode Island was the home of America’s first mechanized cotton mill, but since Taito arrived 16 years ago, the number of manufacturers here has fallen to 1,945 from 2,800. Still, she believes that all of those that are left can be helped to survive and thrive — and the best way is to get smart and not try to compete with low-cost Chinese producers.

“Manufacturers have to specialize and find a niche where they develop high-end goods that are not sold just based on cost,” Taito said. “Sure, China can make it cheaper than we can,” she said, while weaving in and out of traffic en route through the heart of Providence. “But what they don’t have is the design or engineering capabilities that we do.”

One of the companies that RIMES has worked with in the past is Pawtucket-based Blow Molded Specialties, which makes products from hot plastic that is blown into molds where it sets. Its clients are predominantly in the healthcare sector.

President and majority owner Tom Boyd describes how the company’s largest customer switched production of a basic product to Mexico because it could be made there for 2 cents apiece instead of 8 cents in the United States.

That company had accounted for some 35 percent of business. “That was nearly the end of us,” Boyd said with a wry smile.

So instead of trying to compete on low-cost products, Boyd’s company specializes in high-end, complicated and intricate products, and even develops products for customers.

In the company’s meeting room, he shows off some of the firm’s products including one which looks almost like a plastic accordion and is about the same size, with evident pride.

This, he explains is a plastic bellows his firm developed for a healthcare company, whose name he says he cannot divulge. It has a special function. Conventional practice in organ transplants has been to ship organs on ice. But Boyd says it has been found that a better way to ship organs is to keep them functioning, and the bellows he holds in his hands is part of a device to keep a set of lungs pumping while in transit.

Asked how much Blow Molded charges for a pump like this, Boyd shrugs his slight shoulders. “Maybe a few dollars each. And we only sold a few of them.”

But then he leans forward with right eyebrow and right forefinger raised. “Ah, but you see, the money’s not in the product,” he said, his grin widening. “The money’s in the engineering. We bill our customers for the development work we do.”

Communities around the country say they want to attract small firms like Blow Molded rather than focus on major corporations, for the simple reason that when a giant plant shuts down, it is almost impossible to replace the jobs lost.

The classic example is Wilmington, Ohio, where empty store fronts on Main Street are grim testimony to what happened when DHL axed nearly 10,000 jobs.

“When a big company like that goes, it leaves a very large hole to fill,” said Mayor David Raizk (pronounced “risk.”)

“I’d rather see 200 small companies with 50 employees each than one big one,” he said. “You can lose one, two or even 10 of those and find a way to replace them. Big companies are great when they’re in town, but when they leave they devastate communities.”

One such small firm is Computer Technology Solutions Inc, the largest privately-held software firm in Alabama, which has added some 40 jobs this year and now employs 150 people. “If that’s what we can do in a recession, imagine how we can do when the economy improves,” said president Sanjay Singh.

CTS got its start in a business incubator run by the University of Alabama in Birmingham. Singh said that unlike big corporations — which tend to be bureaucratic, slow-moving and inclined to withhold responsibility from young employees — CTS gives its 20-something employees multimillion-dollar projects to run on their own.

“If you give young people responsibility, they deliver,” he said. “We don’t hang over our employees’ shoulders waiting for them to get things done, we just let them do it.”

GREEN ECONOMY A LONG HAUL

There are great expectations that alternative energy or the “green economy” will help move America forward.

According to Lisa Frantzis, managing director for energy at Navigant Consulting Inc, in 2009, 7,000 megawatts of wind power was installed in America with the creation of 70,000 jobs — 50,000 direct and indirect jobs, plus 20,000 service-related jobs. Solar power saw 300 megawatts installed with the creation of 60,000 jobs.

Jay Paidipati, a Navigant managing consultant who works with Frantzis, said because of the industry’s breadth and relative youth, it is hard to make forecasts. “I would feel comfortable saying that the number of green jobs will be in the millions,” he said. “Just how many millions, I don’t know.”

It will be years, however, before that potential is realized. One of the main problems is the mass of rules and regulations that make building plants a lengthy process.

Imperial County in southern California has hit on a novel way to get around red tape, using a provision of state law that allows local authorities to streamline the approval process for building a plant, as long as it is under 50 megawatts.

This loophole enables officials to handle the approval process in as little as a year, compared to several years at the state level.

“Getting anything done in California is hard,” said Imperial Valley Economic Development Corporation CEO Tim Kelley, at his office in El Centro some 100 miles (160 km) east of San Diego. “But it is less hard to get it done here.”

This area has 360 days of sun a year and has suitable geological conditions for geothermal power — there are 10 such plants already. Thirty others for solar, geothermal and wind facilities, are in the process of acquiring permits.

Red tape is not the only challenge.

Paul Rich is Chief Development Officer at Deepwater Wind LLC, which aims to develop America’s first offshore wind farm, in Rhode Island. The farm, which would eventually provide 15 percent of Rhode Island’s electricity, should come in two phases. The first test phase with six to eight turbines could be installed off the coast by 2012. By around 2015 the wind farm would contain around 100 wind turbines.

Rich described the coast between Maine and Maryland as the “Saudi Arabia of wind,” predicting an “enormous, exponential leap in jobs, manufacturing and infrastructure.”

Part of the reason for the long lead time is the need for extensive tests of local wind conditions, he said.

“It won’t happen overnight,” Rich said. “We are trying to create a truly new industry here and it has to be done right.”

“A far bigger concern for us is finding a qualified workforce to run and maintain the wind farm when it becomes operational.”

In blighted states like Michigan, many former manufacturing workers are already training for green jobs, even though relatively few have been created.

Matthew Derra, 41, lost his job at struggling auto supplier American Axle & Manufacturing Holdings Inc (AXL.N: Quote, Profile, Research) in July 2008. Now he is taking an associate degree in renewable energy and wants to find a job maintaining wind turbines.

“There’s nothing out there in my old field of work,” he said. “And there will be thousands of people out there chasing every green job, but I have to try.”

“I can’t just sit home and watch television.”

Even in California, which has America’s most aggressive climate change regulations, just 159,000 of the state’s 18 million jobs are considered “green” as of the start of 2008, according to public policy group Next 10.

Still, there are encouraging signs that money is flowing into renewable energy even in a sluggish economy.

Bill Gibson, is a business broker and principal of Gibson & Associates Inc in Pensacola, Florida. Gibson finds buyers for companies that want to sell.

He noted that companies selling luxury items are having trouble finding buyers because gun-shy banks won’t lend for that kind of investment, but he has noticed a lot more interest in renewable or alternative energy firms.

“There are definitely going to be haves and have-nots,” Gibson said. “Green energy is part of the future.”

The green energy industry is also seen as an opportunity for manufacturing firms to retool.
“What concerns me is when I hear people talking about manufacturing in the past tense,” said Virg Bernero, mayor of Lansing. “If we want wind turbines, someone here should manufacture them.”

GEEKS AT THE TABLE

Laurie White, president of the Greater Providence Chamber of Commerce, keeps a board covered in bad news — headlines from The New York Times, The Washington Post, The Boston Globe and The Economist about how badly the economy of the state has been faring. Rhode Island’s unemployment rate was 12.7 percent in November, the second highest in the country after Michigan.

“Our problems have made not just national but international headlines,” White said. “That motivates me to find a new way forward.”

Rhode Island is pinning its hopes on a strategy dubbed “Strengthening Providence’s Knowledge Economy.” It has involved bringing together local and state government, the Chamber of Commerce, the Rhode Island Economic Development Corporation (RIEDC) and hundreds of small hi-tech software companies.

“The geeks have finally been offered a seat at the table,” said business consultant Jack Templin.
White said there was an easy explanation: “The geeks are just about the only ones creating jobs right now.”

Companies like Working Planet, which handles algorithmic online market research for its clients, are now at the table.

“Up until a few years ago the chamber was focused on major companies and its existing membership base,” said Working Planet Marketing Group Inc president and co-founder Soren Ryherd. “Over the past three years the chamber has done an about face and is now also about the smaller companies that are creating jobs.”

“We have also become more organized because we need to reach the local universities so we can find and retain top talent,” he added.

Mike Saul is the interim executive director of the RIEDC and has spent much of his career as a “turnaround guy” taking poorly performing companies and making them thrive. He wants to do the same here, in part because three of his four children, like many of the state’s offspring, live outside Rhode Island because there was no work here for them.

“In any turnaround that is going to work you have to ask where is the enterprise value that I can push forward,” he said. According to Saul, the state’s education system and its wind potential create much of its enterprise value.

“Rhode Island’s attempts at economic development have been episodic in the past, but this time everyone is on the same page,” Saul said. “A crisis makes things happen. It helps individuals reinvent themselves and will help this country reinvent itself.”

‘CHASING SMOKESTACKS’

The idea of the “knowledge economy” is a common thread in different parts of America.
Commercializing research and leveraging highly-qualified university students, plus helping create small businesses via incubators has become a major focus in many communities.

The University of Alabama at Birmingham, for instance, has an incubator called the Innovation Depot, which provides low-cost space and resources for small startup firms. The incubator is currently home to around 70 small companies.

UAB’s annual research budget of around $400 million is 80 percent focused on biomedical research, followed by engineering and the physical sciences.

Birmingham, like Youngstown, was once a steel town. The city’s population has dropped more than 30 percent to 230,000 from 340,000 in 1960 and it has focused too frequently on trying to lure back big industry, according to Richard Marchese, vice president of research at UAB.

“The city has done its fair share of chasing smokestacks,” he said. “Birmingham has undergone an important adjustment by realizing that it needs to transform itself from an industrial based economy into an economy driven by innovation.”

Youngstown, like Birmingham, is betting part of its future on an incubator, the Youngstown Business Incubator, which has 28 business-to-business software firms in its portfolio with some 300 employees. The incubator occupies three renovated buildings in downtown Youngstown — which was mostly dead a few years ago — and will move into a fourth in 2010.

“We didn’t want to have a broad range of industries that we couldn’t serve properly,” said James Cossler, the incubator’s CEO. “We wanted to pick one sector and be a world class incubator… We picked software because it is in almost everything we use.”

One condition for startups to receive benefits and resources, including deferred and reduced rent and paid utilities for furnished offices, is they must share their expertise and resources with other member companies, even after they “graduate” and move out.

Craig Zamary owns Green Energy TV, which he describes as the “YouTube of the green movement.” It takes videos from around the world on innovations in alternative energy.
Zamary said that not long after Green Energy TV moved into the incubator in early 2008 he told a fellow business owner he was having trouble with code for his website. The next day the fellow business owner turned up with the code he needed.

“I was wondering what he was going to bill me for it, but he said ’That’s not how we do things around here,’” Zamary recounted. “Some day if he needs something from me I’ll be able to repay the favor.”

Cossler said office space in Youngstown’s incubator costs $8 per square foot compared to $200 in Silicon Valley, while “programming talent” costs about 60 percent more in California. There are also several universities within an hour’s drive, including Youngstown State University a few blocks away.

Cossler said criticism of the incubator — that it will not return Youngstown to its former size — has been misguided.

“We’re not going back to where we were,” he said. “Nothing can take us back and we have had to embrace the fact that we are going to be a smaller city.”

“But it’s absolutely realistic to expect that within a few years we could have 2,000 to 3,000 people employed here,” at the incubator or around it, he added. “This could be very powerful and very transformational for Youngstown.”

Youngstown’s Plan 2010 was developed by Youngstown State University in conjunction with the city and reflects a common thread between this city and other parts of the country like Rhode Island, Birmingham, or Austin, Texas, in that all of them have developed a strategy requiring cooperation between the authorities, local businesses and a local university.

MIND FACTORY

Unlike Youngstown, Birmingham or Rhode Island, Austin has had a business development strategy in place since the 1980s.

“We made a very clear and conscious decision that above all we were going to kowtow to the creative classes,” said Lee Cooke, a former mayor.

From food to music and entrepreneurial opportunities, Austin has focused on attracting creative people.

“It’s very simple. Creativity begets creativity,” said local state senator Kirk Watson.

Austin’s strategy has paid off. The city’s population has tripled to around 750,000 in 2009 from 250,000 in 1970. According to the U.S Bureau of Labor Statistics, the city of Austin had the highest level of job creation in America from 2003 to 2008. Private sector jobs overtook public sector ones — it is the Texas state capital — in the mid-1990s.

Austin has become known as a city of entrepreneurs — Michael Dell founded computer maker Dell Inc (DELL.O: Quote, Profile, Research) while studying at the University of Texas in 1984 — and has grown as people have flocked here looking for jobs.

While the inflow has slowed during the recession, the city is still a magnet for people like Norbert Wangnick. An entrepreneur who sold his niche recruitment firm in Germany at the peak of the market in 2007, Wangnick, 45, moved to Austin late in 2008. After a year off, he is looking to either invest in a company or start a new one.

“Austin has so much energy,” he said. “It’s a great place to be if you want to start a business.”

The city, which hosts the annual SXSW live music festival and considers itself a cultural oasis in Texas, is a strongly Democratic city in a Republican state. Former mayor Cooke, a Republican, said Austin’s political leanings are not in line with his own or the more conservative business establishment. But he added that this fact is irrelevant.

“The choices we have made concerning the economic future of this city transcend politics,” he said. “This is about everyone pulling together.”

Cooperating for the good of the community is something Cooke said is lacking at the national level in America.

“I’d like to get rid of all 535 politicians in Washington and get rid of all the politics of the last 75 years,” he said. “Washington is all about the politics of self-perpetuation, not doing what is right for the country.”

The cornerstone of Austin’s strategy is coordination among the city, businesses and its biggest asset — the University of Texas at Austin. With 50,000 students, it is one of the country’s largest universities and a research powerhouse — biomedical science, engineering, math, physical sciences. UT vice president for research Juan Sanchez estimates some 10 companies graduate from the university’s incubator every year.

Senator Watson said Austin’s fortunes have been a mixture of luck and the sense to capitalize on its “enterprise value.”

“We were lucky in that we weren’t like Detroit, we didn’t have an old industrial factory to protect,” he said. “In places like Detroit it’s understandable spending a lot of energy trying to save the old factory because it means jobs for local people. What we have here is UT.”
“UT is our mind factory.”

Watson describes that “mind factory” in largely industrial terms, even referring to students as “natural resources.”

Watson and Gary Farmer, chairman of Opportunity Austin — a regional economic development strategy — recall visiting Samsung Electronics Co Ltd <005930.ks> in South Korea in 2005 with UT’s Sanchez to persuade the world’s top maker of memory chips to choose Austin for a new semiconductor plant.

Watson and Farmer say a critical moment came when Sanchez informed Samsung executives that there were hundreds of Korean students at UT. In April 2006 Samsung said it would invest $3.5 billion in a plant here creating nearly 1,000 jobs.

“The authorities in Austin, the business community and the university have marched in step for a long time,” Sanchez said. “Much of this has been based on the recognition of UT’s potential.”
Sanchez said such recognition is growing in America.

“There is a growing understanding that intellectual capital is going to be at least as important as manufacturing and natural resources,” he said.

FIXING ‘K THROUGH 12’

Conversations with civic and business leaders around the country support that statement.

In Evansville, Indiana, while Mayor Jonathan Weinzapfel laments Whirlpool’s decision to move production abroad, the company’s decision to keep its research and development facility here is something he says the city can build on.

In cooperation with colleges like the University of Southern Indiana, Weinzapfel argues Evansville may be able to attract other R&D operations. “You have to find what your strengths are,” he said. “And you have play to those strengths.”

Locals around Bentonville, Arkansas — home to America’s biggest private employer Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research) — say it is no coincidence that while Arkansas has one of America’s worst education systems, this local area’s school system is among the better performers.

“Walmart has provided a lot of support for the local school system,” said Jonathan Watson, pastor at the Bella Vista Assembly of God in nearby Bella Vista. “This is no accident, as Walmart uses the schools as a feeder system for providing well-educated future employees for its headquarters.”

According to Andreas Schleicher, the Paris-based head of the indicators and analysis division of the Organization for Economic Cooperation and Development (OECD) — a group of 30 mostly high-income, democratic nations — the problem with primary and secondary education in the United States, known as K through 12, is that it has been in suspended animation.

“For decades America has mostly been treading water while the rest of the world has been working hard to get ahead,” he said.

In 2007, some 78 percent of U.S. high school students graduated, slightly below the OECD average of 82 percent.

OECD data from the 1960s shows that 80 percent of American children graduated from high school then, compared to just 37 percent in South Korea. Now some 97 percent of South Korean children complete high school.

“America has been falling behind,” Schleicher said. “By the age of 15 a quarter of American students have problems with math and science, which foreshadows the problem many have completing high school.”

He added that although America spends more on education than many countries, its school systems are far more uneven in quality, particularly in inner cities. The graduation rate in some inner cities in America in 2008 was 50 percent or below.

“We’ve known about problems with America’s education system for the past four decades, but we haven’t had to deal with them,” said Mesirow Financial’s Swonk. “We were able to just stick under-educated people in factories and not worry about dealing with the problem. That is no longer an option.”

Sheldon Steinbach, a senior counsel in the postsecondary education practice at Washington-based law firm Dow Lohnes, said the United States has plenty of top-quality colleges and universities, but the problem does not lie there.

“As the old saying goes, if you put garbage in you get garbage out,” he said. “America’s K through 12 system has been broken for a long time and I am not sure if can be fixed because there are too many different authorities, federal, state and above all local, involved.”

UT’s Sanchez said if more young people make it to higher education, the pieces are in place for long-term growth.

As he notes, according to the OECD America still leads the way in research and development (R&D) spending. In 2007, the latest year for which data are available, America accounted for around 41 percent of R&D spending in the OECD. Japan was next with 26 percent. China’s R&D spending was equivalent to around 11 percent of the OECD total.

“It was not so long ago that China spent nothing on R&D,” Sanchez said. “Now they are a major power.”

“America is still clearly the global leader by a long way,” he added. “But we can’t afford to rest on our laurels.”

Two of the problems with the U.S. college system, however, are that it is expensive and too little is done to prepare school children to apply. State colleges and universities charge on average close to $20,000 a year, while some private institutions charge $30,000 to $50,000, Steinbach said.

David Kyvig, a distinguished research professor in the history department at Northern Illinois University, whose specialties include the Great Depression, notes that President Franklin D. Roosevelt’s New Deal in the 1930s helped but did not solve the country’s economic ills. World War Two lifted the economy thanks to massive government spending, funded by higher taxes. The U.S. government deficit stood at $10 billion in 1939 but hit $100 billion in 1944.

“The myth today is that Americans will never accept higher taxes,” Kyvig said. “But the deficit during the war was funded by higher taxes and Americans were willing to pay more because they knew it had to be done.”

He said that a large chunk of government spending went on the GI Bill — passed in 1944, it provided returning World War Two veterans with a college or vocational education.

“The GI Bill was the backbone of a quarter of a century of American prosperity and helped create America’s middle class,” Kyvig said. “It was not cheap, it cost an awful lot of money. But it paid off.”

Former Austin mayor Cooke, a Republican, agrees something like the GI Bill could help now.
“Americans will pay more in taxes if they know what they’re paying for,” he said.

In 2002 some 52 percent of high school graduates went on to tertiary education. That figure reached 62 percent in 2009 and is expected to hit 64 percent in 2010.

“We still have a long way to go,” said Opportunity Austin chairman Farmer, echoing state senator Watson’s analogy: “We need to develop a better pipeline for our mind factory.”

ATTRACTING THE BEST AND BRIGHTEST

The six-minute plus video that Mary Tribble prepared for the annual meeting of the Charlotte Chamber of Commerce is aimed at encouraging business to embrace another changing dynamic in the U.S. economy — immigration.

As technicians bustle about preparing for the meeting, Tribble plays the film, making a slightly nervous gesture that says “humor me, please.” A music video appears entitled ‘I see,’ featuring ordinary residents of Charlotte, many of them Asian, Hispanic or black.

“This is a major departure for the chamber,” said Tribble, owner of Tribble Creative Group, an event organizing firm. “The cast of this film does not reflect the composition of the audience that will see it.”

What she means is while those in the video are ethnically diverse, the audience will be almost entirely white.

“Charlotte has changed a lot over the past few decades and the people here need not just to be aware of that fact, they should embrace it,” she said. “If we embrace diversity, more people will come and keep our local economy growing.”

Charlotte saw its white, non-Hispanic population decline to 55.3 in 2008 percent from 70 percent in 1990. Its black population edged up to 28.7 percent from 26.3 percent during that period but its Asian population more than doubled to 3.9 percent and Hispanics soared to 10.2 percent from 1.3 percent.

It’s a similar story nationwide. In 1900 one in eight Americans was not white, by 2000 that number was one in four. Census Bureau projections put whites in the minority by 2050.

Immigration has become a hot button issue, especially when it comes to low-skilled Hispanic workers from south of the border. Critics complain these immigrants steal American jobs.

But many people warn against shutting the doors to newcomers, noting that a big part of America’s success has been its ability to attract the highly educated people who can contribute to future U.S. prosperity.

“The last generation of immigrants in has a tendency to want to close the door behind them,” said Swonk. “But if we descend further into populism we risk losing that ability.”

Since the al Qaeda attacks of Sept. 11, 2001, the visa process for foreign students has become tougher, and the system also makes it hard for many to stay after they graduate.

CTS’ Singh in Alabama describes himself as the “poster child” for what America has represented to the world.

Revealing a history he says he has preferred not to divulge over the years, Singh said he came to America in the mid-1980s as a college dropout from India. While flipping burgers for a living, a chance meeting with an academic who interrogated him about the courses he had taken in India led to an invitation to enroll in an MBA course at Georgia College & State University in Milledgeville, Georgia. After his MBA , he did consulting work for some large southern corporations.

“Here I was advising the CEOs of big companies two years after flipping burgers,” Singh said.

“The point being that with an education anything is possible in America.”

He said on recent visits to India he has talked to young, well-educated Indians who feel less inclined to come to America because of visa difficulties, plus growing employment opportunities closer to home as the Indian economy grows.

“America’s two biggest strengths have been its ability to reinvent itself and its ability to attract the best and brightest from around the world,” Singh said. “The moment that stops being the case, it’s over.”

DETERMINATION

There is no doubt the world’s largest economy faces a multitude of challenges. But many are convinced they can be overcome. The feeling among many Americans is that the United States must embrace what needs to be done and move forward.

In Youngstown, U.S. Congressman Tim Ryan believes that thanks to its software incubator and other local businesses, “this area could lead the recovery.”

State representative Bob Hagan — who watched this city stagger and fade as the steel mills left — is also convinced that Youngstown, and America, will emerge stronger.

“We can make a better future for our children,” he said. “But it won’t be quick, it won’t be easy and at times it will be painful.”

“We will get there. But we’re not there yet.”(Editing by Jim Impoco and Claudia Parsons)

Holiday message 2009

Dear friends, clients and colleagues,

As the first decade of the 21st Century draws to an end, America is in the midst of an economic recession destined to change our economy, fighting two wars and trying to manage at least two rogue nations (Iran and North Korea) seeking to produce nuclear weapons, while coming to grips with universal health care, global warming and a whole host of other adversities. Our social, political and economic fabric is changing radically.

We, as a nation, are facing many challenges – with a large number of Americans facing the challenge of providing for their family – a circumstance we all thought was part of the past – not the present. And, yet, our country was born in adversity….lest we forget:

A week before Christmas '77 Washington's army took up winter quarters at Valley Forge on the west side of the Schuylkill. Although the General's choice of location was sharply criticized, the site he had selected was central and easily defended. Then came a cruel race with time to get huts erected before the soldiers, barefoot and half naked, froze to death. Hundreds of horses did in fact starve to death, and for the army starvation was a mortal danger. "No meat, no meat!" was the constant wail. Improvements came about after Nathanael Greene assumed the duties of Quartermaster General on March 23rd.

Yet, despite the ever-present fear of mutiny, no real disaffection occurred. As Hessian Major Baurmeister conceded, the army was kept from disintegrating by the "spirit of liberty." Men and officers accepted their tragic plight with a sense of humor and extraordinary forbearance, but it was an ordeal that no army could be expected to undergo for long. Nathanael Greene wrote to General Washington, "God grant we may never be brought to such a wretched condition again." - The Spirit of 'Seventy Six*

From the Revolutionary War and the travails of Valley Forge, a new nation was formed as a contract among men which grew to become a leading nation among the nations of the world. And out of the Great Depression where 25% of Americans were unemployed and another 25% were “underemployed” came the Empire State Building, the Hoover Dam, the Chrysler Building, the Golden Gate Bridge, Rockefeller Center, the SEC, FDIC, Ginny Mae, Fannie Mae, Freddie Mac, the 30-year mortgage and Social Security among other significant and revolutionary institutions.

Do not lose heart for we have seen from our past experience that we can, and will, survive this ordeal and we have the opportunity to grow from the experience into better people. It is a tough environment, one which those of us younger than eighty have not experienced first-hand, but we have a collective memory and a strength of spirit to survive – and soon to prosper once again – is unfailing. The question soon will be: What have we created and built as a result of the Great Recession? Will it be Green buildings, less volatile financial markets, alternative energies, universal healthcare, a global spiritual consciousness or all of the above?

My prayer this holiday season is for you and yours to enjoy good health, love, peace and hope – hope for a future without fear for as President Roosevelt said in his first inaugural address: “…the only thing we have to fear is fear itself.”

May God be with you during these times and may you remember that “Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.” **

As always,

Paul L. Jones, 12/7/09


* Excerpt from: http://americanrevwar.homestead.com/files/VALLEY.HTM** Excerpt from the Inaugural Address of Franklin D. Roosevelt, January 1933

Banks Report CRE Exposure Risky but Manageable

A new eblast service I receive is from CoStar: It is a WatchList which is a weekly column focusing on distressed market conditions, commercial real estate properties, mortgages and Corporations Published by CoStar News. I highly recommend it...

The following article which was published today shows the disparity in the views of bankers who think their problems are manageable and those of real estate practitioners who believe that they are living with their head in the sand with the depth of the problems for CRE loans. A key part of this article is that banks are reducing their exposure to CRE which means that they are not making any loans to new borrowers anytime soon.....which is contrary to the goals of the bailout our Federal government initiated and explains why things are not getting any better....money is currency and needs to flow for it to grow....but there is always next year, right?

Banks Report CRE Exposure Risky but Manageable
Multifamily Lending Showing Signs of Turning a Corner
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By Mark Heschmeyer
December 2, 2009
For the U.S. banking sector overall, commercial real estate exposure remains a significant risk. But it appears the risk level is becoming generally more manageable -- more so among the largest financial institutions than regional mid-size and smaller banking institutions, according to the Federal Deposit Insurance Corp.

As of Sept. 30, FDIC-insured commercial banks and savings institutions held $1.1 trillion of nonresidential commercial real estate loans and another $216.5 billion in multifamily loans. Of that exposure, approximately $149.3 billion of that had been charged off, was delinquent or the collateral backing the loan turned over to the banks, according to the FDIC.

Overall, the amount of commercial real estate and multifamily loans becoming delinquent has stopped increasing. While they are still much higher than June 2008, nonresidential income-producing property loans becoming delinquent have seemed to hit a plateau.

Noteworthy, too is that multifamily delinquencies have started to decline. Equally encouraging is that banks have also begun disposing of foreclosed-upon multifamily properties. The total volume of such assets has dropped from $1.58 billion three months ago to $1.44 billion. Banks also again increased their lending on multifamily properties in the last three months, marking the second quarter the amount has risen. The total outstanding loan volume on multifamily properties has increased from $210.6 billion at the end of March to $216.5 billion at the end of September - a nearly 3% increase.

However, banks have not shown equal leniency on nonresidential income producing properties. The amount of such properties being foreclosed upon or taken over by banks continues to escalate rapidly - more than doubling in the past year to $5.84 billion.

According to the Federal Reserve's October Senior Loan Officer Opinion Survey on Bank Lending Practices, conditions in the nonresidential construction sector generally remained quite poor. Nonresidential construction and employment continued to decline. Also, bank lending standards and terms tightened on commercial real estate loans because of widespread paydowns and charge-offs. At the same time, demand for new commercial construction as developers are reluctant to begin new projects or purchase existing projects under current poor economic conditions, which include a surplus of office space as firms downsize and vacancies rise.

Nearly all of the nation's 22 largest banks reported to the U.S. Treasury that they were actively reducing their exposure to commercial real estate loans, because they expected delinquencies to persist. The outstanding balance of commercial real estate loans among the 22 banks decreased 1% in September. However, they continued to show a willingness to renew loans to existing customers. Total renewals of commercial real estate accounts increased 18% from August to September.

Fitch Ratings completed a review of commercial real estate exposures across its universe of rated U.S. banks in November. In that review, Fitch estimated that simply taking into account assumed vintages by origination year and average changes in actual and expected values of commercial real estate, this total balance is exposed to a potential impairment of 10%. This level of impairment reflects the amount current loan balances may need to be written down in the future to support an assumed loan-to-value ratio of 75%.

Notably, Fitch said that does not mean it expects banks to report charge-offs in their commercial real estate portfolios of 10%. Rather, the 10% is Fitch's attempt to quantify the problem, which in this case represents the difference in value between current loan balances and the level such loans would need to be adjusted to achieve an underwriting standard of a loan to value of 75%.

A 10% reported loss rate would be a high water mark for this asset class and would exceed the levels of losses reported by the industry in the commercial real estate crisis of the late 1980s and early 1990s. Fitch said it does not believe the magnitude of the problem in today's commercial real estate portfolios exceeds the levels of past crisis levels in aggregate.

Fitch's analysis shows that a relatively small 20% of this impairment, or 2% of total outstanding, is represented by loan balances in excess of assumed collateral values (i.e. loan to value greater than 100%). The remainder of this impairment, which is the majority of the balance, represents loan balances that are protected by collateral values, but at levels that Fitch would view as at risk until meaningful improvements in commercial real estate values become evident.

Importantly, these amounts exclude the roughly $500 billion of construction loans, including residential construction loans, that are subject to even greater risk.

While a 10% impairment would appear manageable even after accounting for the greater risk exposures represented by the construction portfolio, the size, geographic concentrations, and product mix of individual bank portfolios differ materially and need to be evaluated on a case-specific basis, Fitch noted, for example, that none of the four largest U.S.-based banks (assets in excess of $1 trillion) have commercial real estate in excess of 10% of total loans.

Overall, commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. (FDIC) reported aggregate net income of $2.8 billion in the third quarter of 2009, but loan balances declined by the largest percentage since quarterly reporting began in 1984. Quarterly earnings were more than three times the $879 million the industry earned a year earlier and represented an improvement over the industry's $4.3 billion net loss in the second quarter of 2009. More than 26% of all insured institutions reported a net loss in the latest quarter, up slightly from nearly 25% a year earlier.

The number of institutions on the FDIC's unpublished "problem list" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "problem list," up from 416 on June 30. This is the largest number of "problem" institutions since Dec. 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

The U.S. thrift industry broke even for the second consecutive quarter in the third quarter of 2009, the Office of Thrift Supervision (OTS) reported. The industry's profit of $1.3 billion for the third quarter was a significant improvement from the losses of 2008 and early 2009. However, $1.1 billion of the third quarter profit resulted from a non-operating gain at one thrift. Without that gain, the industry's net income would have been $200 million - essentially breaking even.

The number of problem thrifts was 43, up from 40 in the previous quarter and 23 one year ago.

Download this story and all of the stories in the Watch List Newsletter here. The Adobe pdf version also includes all of this week’s leads of distressed properties and loans of concern, lease cancellations applied for in bankruptcy proceedings, local and national facility closures & layoffs, banks with distressed real estate portfolios and lists of loans approaching their maturity date. Plus the pdf version contains bonus news items not found in these columns or the CoStar Group web news pages.

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