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August 13, 2008

Energy Prices and Where We Live and Work

For those of us who are aged 50 and older, it is easy to forget that younger generations did not experience the energy crunch of the 1970s nor the many (often failed) public policy responses to the OPEC oil price run-ups. With today’s similar developments in energy markets, it is fascinating to compare the two eras. In some ways, history repeats itself. In other ways, it does not.

The auto industry upheaval appears to be repeating the 1970s. As then, domestic automakers (and their fuel-consuming fleets) are suffering dearly from the sudden hike in gasoline prices; foreign-domiciled automakers, not so much. In both the 1970s and today, the vehicles of Asian automakers tend to be smaller and more fuel-efficient. Unlike the 1970s, however, today even Toyota is paying for its lurch toward large vehicles such as its large pickup truck, the Tundra.

Another apparent similarity between the eras is that some analysts are predicting that rising fuel costs will reshape our patterns of living and working toward more compact urban forms, to the detriment of far suburban and rural areas. However, the actual shifts that took place in the landscape of America surprised us somewhat during the 1970s and early 1980s.

The U.S. was already well-suburbanized by the mid-1970s. But in response to higher fuel prices, it was commonly thought that beleaguered central cities were in store for some respite from the population flight that they had been experiencing. With their denser housing patterns, high job concentrations, and well-developed public transit systems, large cities would offer shelter from high gasoline prices. In suburban and rural areas, where driving distances were long, residents would pay the price. The pace of suburban sprawl would slow, the pace of rural shrinkage would accelerate. For those of you too young to remember, these predictions did not come to pass.

These same predictions are being made today as gasoline prices have doubled. In a recent study, Joseph Cortright offers evidence that shifts toward more compact cities are already underway, as households eschew housing on the urban fringe where commuting distances are long. Indeed, in large metropolitan areas like Chicago, housing prices in closer-in neighborhoods have been holding up relatively well over the past year. The era of urban sprawl has been pronounced dead, with households and employers expected to favor greater density as a way to economize on energy-related travel costs.

However, the contrast between expectations in the 1970s and what actually came to pass may give us pause in assessing today’s predictions. Just the opposite took place in the 1970s era. Central cities of large metropolitan areas, especially in the Northeast and Midwest, experienced their worst decade of the century. Population tended to flee to the suburbs, especially middle and upper middle income residents. The apparent reasons for flight included rising crime, school desegregation, and the near-completion of an interstate highway system that funneled homeowners to cheap and abundant housing on the perimeter.

While rural areas in some areas of the U.S. did continue to decline, on the whole the 1970s was hailed as the decade of the “urban to rural turnaround.” The charts below indicate population growth over past decades for metropolitan versus nonmetropolitan counties. Though energy expenditures were higher on average for rural households, rising energy prices for coal, natural gas, and petroleum raw materials spurred a boom in exploration and mining in many parts of the U.S. Rural rebound was also spurred by a resurgence in prices and exports of agricultural commodities and processed foods. The falling exchange value of the dollar against world currencies following the dollar’s detachment from gold in 1971 was accompanied by favorable prices for U.S. foodstuffs on global markets. Faltering agricultural production in some foreign nations such as the former Soviet Union contributed to rising U.S. farm income. So too, thanks in part to the interstate highway system, some types of manufacturing began to discover rural areas as hospitable sites for production.

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Click to enlarge.

Will these surprising patterns repeat themselves in the current era of high prices for energy materials? Rural areas are once again finding themselves amidst an energy and food commodity boomlet. Surging agricultural demand from developing nations has contributed to rising U.S. exports and commodity prices. The falling value of the U.S. dollar since 2002 has also contributed, as have the U.S. legal mandates and subsidies for the use of corn-based ethanol as a transportation fuel. In the Seventh District, the growth pattern in farmland prices looks much like the late 1970s and early 1980s, rising at double digits annually through the decade.

In other regions, coal mining and energy exploration activity are buoyant.

However, this time around, conditions would seem to favor central cities versus rural and far suburban areas more than in the 1970s. Rates of crime declined over the 1990s in most major U.S. central cities. Central city schools continue to struggle to educate and graduate low-income students, in particular. Yet, most such school systems enjoy greater financial stability, and many have innovated and expanded their offerings to serve populations who are diverse culturally, as well as economically. Rather than shunning large cities, many highly educated households are finding the older architecture, diverse community, and rich array of amenities in central cities attractive. To some degree, employers have followed educated employees back into central cities; or they have found that the density of the central city makes for more productive business activity in the “new economy,” which rewards face-to-face contacts in conjunction with sophisticated telecommunications. Should these recent trends continue, higher gasoline prices may only add one more advantage to the higher density of older central cities.

These trends may leave some suburbs on the fringe as the losers in the current era. The map below illustrates the average commuting time for suburban areas of the Chicago metropolitan area. Many households who buy or rent in suburban areas choose the low housing prices that such areas offer at the expense of longer trips to work. The sudden rise in gasoline prices may have left many such households with larger shocks to household budgets than their more urban counterparts. The Center for Neighborhood Technology in Chicago has constructed neighborhood maps of U.S. metropolitan areas which estimate average household expenditures for commuter travel. For Chicago and most other metropolitan areas, these estimates show that average household energy expenditures climb on the fringes of metropolitan areas. Even as measured as a share of household income, far-suburban households are more severely affected by rising fuel costs.

Click to enlarge.

Some revisionist interpretations of the 1970s experiences of “urban to rural” turnaround have also been made by analysts such as Paul Gottlieb. And it seems that the turnaround of that period has been overstated by an inherent bias of measurement—the tendency to overstate the population growth of nonmetropolitan counties during periods in which household growth is robust nationally. In such periods, population growth in nonmetropolitan counties can flip their defined status from nonmetro to metro, thereby inflating the measured pace of growth in consistently defined “nonmetro” counties.

Given the experience of the 1970s, it is difficult to draw firm and rapid conclusions concerning whether an era of higher fuel costs will reshape our urban, suburban, and rural landscape and, if so, how. To be sure, higher fuel costs have changed the desirability of work and residential locations. But we also know that households and businesses can adapt to such marked price shocks in other ways than moving. In particular, as today’s fleets of autos and trucks wear out, they will surely be replaced by more fuel-efficient vehicles, thereby allowing many long commutes and delivery trips to resume at moderated cost. Such was the case following the energy price shocks of the 1970s.

Note: Thanks to Vanessa Haleco-Meyer, Bill Sander, and Graham McKee for comments and assistance.

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Posted by Testa at 10:33 AM | Comments (2)

August 2, 2008

A Resolution (Revolution?) for the Midwest

By Rick Mattoon

“The Midwest is failing the challenge of globalization, largely because it’s so balkanized, with each state trying to compete in the global economy. Midwestern states are simply too small, too incompetent, too obsessed with the wreckage of the industrial economy, to deal with the problems of the future, like education. It’s time for other players -- cities, businesses, especially universities -- to come together in a concerted regional approach that would leverage the Midwest’s strengths, not undermine them,” said Richard C. Longworth, senior fellow, Chicago Council on Global Affairs and author of the new book, Caught in the Middle: America's Heartland in the Age of Globalism.

Can regionalism boost the prospects of the Midwest? This is a theme investigated in several previous blogs by Bill Testa on this website. When is cooperation and when is competition the right approach in gaining regional advantage? How do you get people to “think regionally”? These questions were at the center of a two-day program that brought together a group of 100 business, academic and policy leaders in Minneapolis on June 26-27. The program was cosponsored by the Committee for Institutional Cooperation (which represents the Big 10 universities as well as the University of Chicago), the University of Minnesota and the Minneapolis Fed and was designed as a companion to two previous conferences in 2005 and 2006 held here at the Chicago Fed. The program had a specific mission—to discuss the role of human capital in the economic development of the region and to investigate whether greater regional cooperation might hold the key to a more vibrant future for the Midwest.

Human capital is a clear determinant of regional fortune. Evidence presented at the conference suggested that this is a two-edged sword for the Midwest. The region is rich in institutions that educate residents and produce valuable research. However, the Midwest is only average when it comes to its share of college educated workers in the regional labor market. There is also ample evidence that the region produces research at a prodigious clip and yet lags in product commercialization and the ability to attract venture capital.

The conference also investigated both the public and private returns to education. A presentation by Lance Lochner of the University of Western Ontario traced the income returns (i.e., the rate of financial return from investment in education) to varying levels of educational attainment. Lochner looked at the average financial returns received by men over the period 1940 to 2000. His findings suggested that returns were highest for high school graduates over this period but that the return to a four-year college education exceeded the returns from two-year college programs. Lochner noted that in addition to increased lifetime earnings, additional schooling improves health outcomes, increases personal satisfaction and often leads to more enjoyable careers.

Paul Glewwe and Amy Damon of the University of Minnesota examined the “public” or social benefits that taxpayers in Minnesota receive when students enroll in the university. The study identified several categories of benefits, including increased state tax revenues, reduced crime, increased civic engagement and lower unemployment. They estimated an annual economic benefit to the state of $672 million versus a cost of $284 million. This is a conservative estimate because it excludes any benefits from research activities and excludes other public colleges and universities in the state.

Another aspect of human capital discussed was the returns to early childhood education. Art Rolnick of the Minneapolis Fed discussed efforts to expand early childhood education access to low-income families in Minnesota. Research from several studies suggests that early childhood education has a significant impact on both economic and academic outcomes. Rolnick offered a model for expanding early childhood programs and suggested that the public returns to such efforts will be substantial. Early education programs would not only focus on child development but also on increasing the resources and training of parents in support of their children.

The focus of the conference shifted in the afternoon to a discussion of whether a regional approach would be best suited to solving policy challenges such as improving the region’s human capital. Lou Anna Simon, President of Michigan State University, suggested that institutions do have ample opportunity to increase cooperation to their mutual benefit. For example, Midwestern universities could cooperate on grant applications to improve their chances of obtaining research funds. Simon said that turf battles are often detrimental to the region’s overall success.

So, who takes ownership of a regional agenda?, Simon asked. Is there a blueprint for creating an organization that can promote regional cooperation? Many regions have looked enviously at the Southern Growth Policies Board as a model. Giving a Midwest example was Frank Beal of Chicago Metropolis 2020, an organization founded eight years ago with the goal of making the Chicago metropolitan region more economically competitive. This initiative emerged from a study conducted by the Commercial Club of Chicago in the late 1990s. The strong commitment, influence and resources of the Commercial Club and its continuing support have been important in helping Metropolis 2020 aggressively pursue change in four areas: the criminal justice system, early childhood education, regional growth and transportation.

Beal offered eight factors in Metropolis 2020’s success that might be applicable to a future Midwestern regional organization. Metropolis 2020:
1. Has a clear blueprint of what the organization wants to accomplish.
2. Benefits from having a relationship with the Commercial Club that provides stature and access to people and resources.
3. Avoids agenda creep. Has a disciplined approach to reviewing new issues or taking on new assignments.
4. Collaborates with other organizations only on its own terms. In practice this means clearly establishing the program goals before inviting others to join.
5. Has mostly older senior professionals on staff. These people are issue experts, and they are doing this work because it matters to them.
6. Does not view government as the problem. Many of the staff have had senior government positions and respect the role government plays in getting things done.
7. Will not tackle an issue unless it is a natural fit with the organization’s expertise. Changing public policy requires expertise.
8. Is ambitious and does not mind tackling audacious goals.

One final perspective on regionalism was offered by Tom Holmes of the University of Minnesota. Holmes observed that a fundamental challenge to any notion of regionalism is that any region is both arbitrarily defined and composed of a series of sub-regions. And so, depending on the issue, coalitions must form with an ever-changing cast of characters. Often the desire in regionalism is to establish a large umbrella organization to promote a broad regional agenda, but these efforts fail to recognize that the most successful regional policy efforts contract and expand to fit the size and scope of the issue.

The program concluded with the signing of a resolution by all of the attendees. The resolution recognized the shared history of the region and the challenges of adjusting to economic change. Solutions to the Midwest’s economic challenges will require an integrated response by business, public policy and higher education. Specifically, the resolution concludes, “We hereby resolve to actively explore ways to work collaboratively on solutions, bringing our best from business and industry, public policy and higher education, to contribute to a stronger economic future for the region.”

The next step in this investigation of regional cooperation is being sponsored by the Chicago Council on Global Affairs on October 6th of this year. This one-day program will examine the impact of globalization on the Midwest and why thinking regionally should matter. While the ultimate form of regional cooperation is clearly a work in progress, this discussion is clearly gaining momentum and reaching an ever larger audience.

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Posted by Testa at 7:47 PM | Comments (3)