Fate of the States: The New Geography of American Prosperity (20 page)

Teachers and other public-sector employees want what was promised to them, but suddenly voters are pressuring politicians to fight as hard for their interests as unions fight for their members. And what voters and taxpayers want is good public services with the lowest tax burden possible—a goal incompatible with the mission of public-employee unions. In the private sector the threat of layoffs and business failure has been unions’ biggest incentive to compromise. Perhaps a similar dynamic will promote compromise with the public-employee unions. In Central Falls, Rhode Island, the unions would have been better off taking the deal on the table before the city filed for bankruptcy. Since 2010 the ranks of state and local government workers have declined by almost seven hundred thousand; state spending growth is decelerating nationally and declining in many of the populous coastal and Sun Belt states. The issue of willingness to pay bondholders and pensioners is now coming to the forefront of the debate in local politics. Citizens—even prounion ones—are demanding an end to cuts. “In a liberal city, in a blue state, I got a near 70% yes vote,” said Reed, the San Jose mayor, of the pension reform vote he thinks will become a national model. “There has to be something here.”
²⁴

Pensions and retirement benefits are the key to fixing state and local finances, but there are smaller steps that can be taken too. Shared services is one such example. Everybody likes the idea of having their own local police department. The town of Mamaroneck, New York, actually has three—one police force for the town, one for the village of Mamaroneck (a district within the town’s borders), and one for the village of Larchmont (another district). Of course, having three separate police forces for a town of 19,000 makes little fiscal sense. A Grant Thornton study found that nearby Nassau County, New York, could save millions of dollars a year by streamlining the police force under one reporting structure (down from four), which in turn would lead to better monitoring and lower overtime pay (including scheduling shifts in accordance with actual crime patterns) as well as the consolidation of procurement and other back-office functions. Outsourcing and privatization are other options. In 2008 the town of Molalla, Oregon, spent $507,973 on employee salaries and other expenses to handle building permits, inspections, and other construction-related regulation. After outsourcing most of these duties, the town was spending only $150,000 a year for the same work. All of this requires political will, but these are the low-hanging fruit available to governors, mayors, and other local lawmakers.
²⁵

Despite so many dreary economic headlines, the potential still exists for a powerful recovery in the United States. Manufacturing is bouncing back, adding some five hundred thousand new jobs since 2010. The growth rate of our biggest economic rival, China, continues to slow, and Europe seems stuck in a Japan-in-the-2000s-style malaise. Domestic oil and gas production is increasing for the first time in over twenty years. We now boast the lowest natural-gas prices in the world, which is a giant magnet to global manufacturers. Clearly there’s a lot to like. However, if states don’t have the money to build business-friendly infrastructure and to educate and train their people, their communities will suffer because of it. The real-estate industry that transformed the nation over the past thirty-plus years has now left much of it weakened, sparing only those states that it ignored during the bubble. The damage can be fixed, so long as states get serious about digging themselves out of debt. Good leaders acting quickly is the only hope for the worst-off states, for they’ve been left with the smallest margins of error. As my grandfather used to say, you can’t expect to make a lot of money if you owe a lot too.

This book was born out of my love of history and my deep appreciation for all of the advantages that living in America has given me. Although I have written prolifically for years, I never had any intention of writing a book. All of that changed one night over dinner in New York with Michael Ovitz and Andy Walter. I credit Michael not only with convincing me to write a book but also with introducing me to Adrian Zackheim, the publisher of this book. He, Niki Papadopoulos, and the team at Portfolio were excellent partners throughout the process and I thank them for that. For a first-time author, patience is a scarce commodity. Adrian had enough patience for both of us. Thank you also to Bob Barnett at Williams & Connolly.

On the research side, Angela Cantu, Marc Lombardo, Brittani Caetano, and the rest of the MWAG team have been invaluable. Brittani, you are wise well beyond your years. Thank you.

This book benefited greatly from the cooperation and contribution of the people on the front line of state issues. Thanks go to the governors, mayors, and other representatives who were so gracious with their time: Mitch Daniels, Rick Scott, Mary Fallin, Terry Branstad, as well as Gina Raimondo, Chuck Reed, Edward P. Mangano, Susan Combs, and so many more.

Thank you to Jon Birger, the excellent writer who helped get me over the finish line.

Mom, I cannot thank you enough for all of the wonderful encouragement you have always given me.

Lavelle Layfield was both supportive and constructive with his feedback.

Leigh Gallagher and Shawn Tully, thank you for all of your smart, sage, and extremely generous feedback. You are dear friends. Maria Bartiromo, one of the hardest-working people I know, thank you for both your support and friendship.

I am so very grateful for the consistent support and example of Ken Wilson, Diane Taylor, Ed Herlihy, Tom Hoenig, Rich Handler, Molly Ashby, Jim Robinson III, Ken Langone, Rodgin Cohen, and Michael Lewis.

Finally, to my husband, John Layfield, who is exhaustively curious and makes me smarter every day.

Introduction

1.
  Michiyo Nakamoto and David Wighton, “Citigroup Chief Stays Bullish on Buy-outs,”
Financial Times,
July 9, 2007, http://www.ft.com/intl/cms/s/0/80e2987a-2e50-11dc-821c-0000779fd2ac.html#axzz2JwvzZCZO.

2.
  Steve Rosenbush, “Citi: That Sinking Feeling,”
Bloomberg Businessweek,
November 1, 2007, http://www.businessweek.com/stories/2007-11-01/citi-that-sinking-feelingbusinessweek-business-news-stock-market-and-financial-advice.

3.
  Corey Hajim and Adam Lashinsky, “How Bear Stearns Lost Its Way,”
CNNMoney,
August 21, 2007, http://money.cnn.com/2007/08/20/magazines/fortune/bear_stearns.fortune/index.htm.

4.
  Credit Writedowns and Global Macro Advisors LLC, “Credit Crisis Timeline,”
Credit Writedowns,
2009, http://www.creditwritedowns.com/credit-crisis-timeline/.

5.
  Susan Burhouse and Yazmin Osaki, Federal Deposit Insurance Corporation, “2011 FDIC National Survey of Unbanked and Underbanked Households,” September 2012, http://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf.

6.
  Federal Housing Finance Agency, “City HPI Data, MSA HPI Comparisons,” 2012, http://www.fhfa.gov/Default.aspx?Page=216&Type=compare&Area1=11180&Area2=27260&Area3=38060.

7.
  U.S. Department of Labor, Bureau of Labor Statistics, “Historical State Unemployment Rate Maps,” http://www.bls.gov/lau/maps/stseries.pdf; U.S. Census Bureau, “Quarterly Summary of State and Local Taxes,” table 3: “Historical State Tax Collections by State,” http://www.census.gov/govs/qtax/table_3.html.

8.
  William La Jeunesse, “California Residents, Businesses Consider Bailing on Golden State over Taxes,”
FoxNews.com,
January 23, 2013, http://www.foxnews.com/politics/2013/01/23/california-residents-businesses-consider-bailing-on-golden-state-over-taxes/.

9.
  Monica Davey, “Questions Persisting as Illinois Raises Taxes,”
New York Times,
January 12, 2011, http://www.nytimes.com/2011/01/13/us/13illinois.html?_r=0.

10.
  U.S. Department of Labor, Bureau of Labor Statistics, “Historical State Unemployment Rate Maps,” http://www.bls.gov/lau/maps/stseries.pdf.

11.
  Steven Greenhouse, “Tentative Pact for City Teachers Increases Pay, and Workweek,”
New York Times,
June 11, 2002, http://www.nytimes.com/2002/06/11/nyregion/tentative-pact-for-city-teachers-increases-pay-and-workweek.html.

12.
  Kenneth C. Wolensky, “Barbara T. Zolli on ‘A Drop of Oil,’”
Pennsylvania Heritage,
35, no. 2 (spring 2009), http://www.portal.state.pa.us/portal/server.pt/community/history/4569/drake_well__oil150/471308.

Chapter 1: It Starts at Home

1.
  World Trade Organization, “International Trade and Market Access Data,” http://www.wto.org/english/res_e/statis_e/statis_e.htm; U.S. Energy Information Administration, “Countries: Overview,” http://www.eia.gov/countries/; United States Department of Agriculture, Foreign Agricultural Service, “Frequently Asked Questions About Agricultural Trade,” http://www.fas.usda.gov/itp/Policy/tradeFAQ.asp.

2.
  Michelle V. Rafter, “Manufacturing Jobs Making a Comeback in Southern U.S.,”
NBC News,
December 20, 2012, http://www.nbcnews.com/business/manufacturing-jobs-making-comeback-southern-u-s-1C7660234.

3.
  Eugene R. Dattel,
“
Cotton in a Global Economy: Mississippi (1800–1860)
,” Mississippi History Now,
October 2006, http://mshistorynow.mdah.state.ms.us/articles/161/cotton-in-a-global-economy-mississippi-1800-1860.

4.
  “America the History of Us, Episode 4: Division,”
History.com
, http://www.history.com/shows/america-the-story-of-us/articles/episode-4-division; Heidi Ridgley, “An Industrial Revolution,”
National Parks
, Spring 2009 Issue, http://www.npca.org/news/magazine/all-issues/2009/spring/an-industrial-revolution.html.

5.
  Amanda Ripley, “Kerry’s Massachusetts: The Not So Favorite Son,”
Time
, August 2, 2004, http://www.time.com/time/printout/0,8816,994770,00.html; History of Lowell, Massachusetts, Wikipedia, http://en.wikipedia.org/wiki/History_of_Lowell,_Massachusetts.

6.
  Chris Isidore, “GM Bankruptcy: End of an Era,”
CNNMoney.com
, June 2, 2009, http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/.

7.
  U.S. Census Bureau, State Government Tax Collections, “2011 Annual Survey of State Government Tax Collections,” http://www2.census.gov/govs/statetax/2011stcreport.pdf; U.S. Department of Commerce, Bureau of Economic Analysis, Regional Data: GDP and Personal Income, Gross Domestic Product by State, http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=1#reqid=70&step=1&isuri=1.

8.
  Meredith Whitney Advisory Group, “Tragedy of the Commons Third Edition: 2012 Update”; U.S. Department of Commerce, U.S. Census Bureau, “Quarterly Summary of State and Local Taxes,” table 3: “Historical State Tax Collections by State,” http://www.census.gov/govs/qtax/table_3.html.

9.
  William H. Frey, “The Great American Migration Slowdown: Regional and Metropolitan Dimensions,” Brookings Institution, Metropolitan Policy Program, December 2009, http://www.brookings.edu/~/media/research/files/opinions/2011/1/12%20migration%20frey/1209_migration_frey.pdf.

10.
  Wendell Cox, “The Export Business in California (People and Jobs),”
Fox & Hounds,
May 11, 2012, http://www.foxandhoundsdaily.com/2012/05/the-export-business-in-california-people-and-jobs/.

Chapter 2: Housing Revisited

1.
  Library of Congress, Primary Documents in American History, “Homestead Act,” http://www.loc.gov/rr/program/bib/ourdocs/Homestead.html.

2.
  Mary Evans, “Better Homes in America/Making Bricks with 1st Graders,”
National Archives
,
Hoover Blackboard,
October 15, 2010, http://blogs.archives.gov/hoover-blackboard/2010/10/15/better-homes-in-america/; Wenli Li and Fang Yang, “American Dream or American Obsession?: The Economic Benefits and Costs of Homeownership,” Federal Reserve Bank of Philadelphia, 2010, http://www.philadelphiafed.org/research-and-data/publications/business-review/2010/q3/brq310_benefits-and-costs-of-homeownership.pdf; Eduardo Porter, “Buy a Home, and Drag Society Down,”
New York Times
, November 13, 2005, http://www.nytimes.com/2005/11/13/weekinreview/13port.html.

3.
  Dennis Cauchon, “Why Home Values May Take Decades to Recover,”
USA Today,
December 15, 2008, http://usatoday30.usatoday.com/money/economy/housing/2008-12-12-homeprices_N.htm.

4.
  U.S. Department of Commerce, U.S. Census Bureau, “Historical Census of Housing Tables,” 2011, http://www.census.gov/hhes/www/housing/census/historic/owner.html.; U.S. Department of Commerce, U.S. Census Bureau,
U.S. Census Bureau News
, January 29, 2013, http://www.census.gov/housing/hvs/files/qtr412/q412press.pdf.

5.
  Paul Sullivan, “Despite Critics, Mortgage Deduction Resists Change,”
New York Times,
November 8, 2011, http://www.nytimes.com/2011/11/09/your-money/despite-critics-mortgage-interest-deduction-persists.html?pagewanted=all&_r=0.

6.
  Dan Andrews and Aida Caldera Sanchez, OECD, “The Evolution of Homeownership Rates in Selected OECD Countries: Demographic and Public Policy Influences,”
OECD Journal: Economic Studies
, http://www.oecd.org/eco/growth/evolution%20of%20homeownership%20rates.pdf; Nation Master, People Statistics: Home Ownership by Country, http://www.nationmaster.com/graph/peo_hom_own-people-home-ownership.

7.
  Mark J. Perry, “Due North: Canada’s Marvelous Mortgage and Banking System,”
American,
February 26, 2010, http://www.american.com/archive/2010/february/due-north-canadas-marvelous-mortgage-and-banking-system.

8.
  Federal Housing Finance Agency, Office of the Inspector General, “History of the Government Sponsored Enterprises,” http://fhfaoig.gov/LearnMore/History.

9.
  U.S. Department of Commerce, U.S. Census Bureau, “Housing Vacancies and Homeownership (CPS/HVS): 2012,” table 5: “Homeownership Rates for the United States: 1968 to 2012,” http://www.census.gov/housing/hvs/files/qtr312/tab5.xls.

10.
  Federal Housing Finance Agency, Office of the Inspector General, “History of the Government Sponsored Enterprises,” http://fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf.

11.
  Alan S. Blinder and Ricardo Reis, “Understanding the Greenspan Standard,” prepared for the Federal Reserve Bank of Kansas City symposium, The Greenspan Era: Lessons for the Future, August 4, 2005, http://www.kc.frb.org/publicat/sympos/2005/pdf/blinderreis.paper.0804.pdf.

12.
  Alan Greenspan, “Understanding Household Debt Obligations,” remarks
at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C., February 23, 2004, http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/.

13.
  Christopher Mayer, Karen Pence, and Shane M. Sherlund, “The Rise in Mortgage Defaults,”
Journal of Economic Perspectives 23,
no. 1
(Winter 2009): 27–50, http://dss.ucsd.edu/~grondina/pdfs/week2_mayer_risemortgagedefaults.pdf; Kelly Edmiston, “Foreclosures: A Closer Look at Nebraska and the Region” (paper presented at the Banker’s Roundtable on Community Development, University of Nebraska, Lincoln, NE, September 18, 2007), http://www.kansascityfed.org/speechbio/speeches/ForeclosuresNE.pdf.

14.
  Sue Kirchhoff and Barbara Hagenbaugh, “Greenspan Says ARMs Might Be Better Deal,”
USA Today,
February 24, 2004, http://usatoday30.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm.

15.
  Sheila Bair, interview by members of
Fortune
editorial staff, New York, January 17, 2008.

16.
  Data from CoreLogic Loan Performance Database and Federal Housing Finance Board, “Monthly Interest Rate Survey”; Yuliya Demyanyk and Otto Van Hemert, “Understanding the Subprime Mortgage Crisis,” Federal Reserve Bank of St. Louis (Supervisory Policy Analysis Working Paper 2007-05, August 2008), http://www.stlouisfed.org/banking/pdf/SPA/SPA_2007_05.pdf.

17.
  James R. Barth, Tong Li, Wenling Lu, Triphon Phumiwasana, and Glenn Yago, Milken Institute, “The Rise and Fall of the U.S. Mortgage and Credit Markets,” January 2009, http://www.milkeninstitute.org/pdf/Riseandfallexcerpt.pdf; “Top Residential Originators in Q2 07,”
National Mortgage News,
September 10, 2007, http://www.nationalmortgagenews.com/nmn_issues/31_49/-448295-1.html.

18.
  Associated Press, “Wachovia Acquires Golden West Financial,”
NBC News.com,
May 8, 2006
,
http://www.nbcnews.com/id/12680868/#.UQ_5kR3Ac9U.

19.
  Christopher Palmeri, “JPMorgan Chase to Buy Washington Mutual,”
Bloomberg Businessweek,
September 26, 2008, http://www.businessweek.com/stories/2008-09-26/jpmorgan-chase-to-buy-washington-mutualbusinessweek-business-news-stock-market-and-financial-advice.

20.
  Eric Dash, “BB&T Takes Over Failing Colonial BancGroup,”
New York Times,
August 14, 2009, http://www.nytimes.com/2009/08/15/business/15bank.html.

21.
  Dan Fitzpatrick, “BofA’s Blunder: $40 Billion-Plus,”
Wall Street Journal,
July 1, 2012, http://online.wsj.com/article/SB10001424052702303561504577495332947870736.html.

22.
  U.S. Department of Housing and Urban Development, “The National Homeownership Strategy: Partners in the American Dream,” May 1995, http://www.globalurban.org/National_Homeownership_Strategy.pdf; Peter Coy, “Bill Clinton’s Drive to Increase Homeownership Went Way Too Far,”
Bloomberg Businessweek
, February 27, 2008, http://www.businessweek.com/the_thread/hotproperty/archives/2008/02/clintons_drive.html.

23.
  Dean Baker, “The Housing Bubble and What Greenspan Should Have Done,” Center for Economic and Policy Research, January 11, 2012, http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/the-housing-bubble-and-what-greenspan-should-have-done.

24.
  Kathryn J. Byun, “The U.S. Housing Bubble and Bust: Impacts on Employment,”
Monthly Labor Review,
December
2010, http://www.bls.gov/opub/mlr/2010/12/art1full.pdf.

25.
  U.S. Department of Commerce, U.S. Census Bureau, Housing Vacancies and Homeownership: Historical Tables, table 14: Homeownership Rates for the U.S. and Regions: 1965 to Present, http://www.census.gov/housing/hvs/data/histtabs.html, http://www.census.gov/housing/hvs/data/histtab14.xls.

26.
  Federal Housing Finance Agency, House Price Indexes, State HPI Comparisons, http://www.fhfa.gov/Default.aspx?Page=215&Type=compare&Area1=CA&Area2=FL&Area3=; Federal Housing Finance Agency, Downloadable Data, Purchase Only Indexes: U.S. Summary through 2012Q4, http://www.fhfa.gov/Default.aspx?Page=87, http://www.fhfa.gov/webfiles/24974/4q12POSummary.xls.

27.
  Homeownership rates data from U.S. Department of Commerce, U.S. Census Bureau, The 2012 Statistical Abstract, Construction and Housing: Homeownership and Housing Costs, http://www.census.gov/compendia/statab/2012/tables/12s0993.pdf; unemployment data from U.S. Department of Labor, Bureau of Labor Statistics, Archived News Releases|Regional and State Employment and Unemployment, year 1994 and 2006, http://www.bls.gov/schedule/archives/laus_nr.htm; GDP data from U.S. Department of Commerce, Bureau of Economic Analysis, Regional Data: GDP and Personal Income, Gross Domestic Product by State, http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=1#reqid=70&step=1&isuri=1.

28.
  Meredith Whitney Advisory Group; Federal Reserve Bank of New York, “Household Debt and Credit Report: Historical Reports,” http://www.newyorkfed.org/research/national_economy/householdcredit/county_report_by_year.xlsx.

29.
  Rachel Baye, “MontCo Lawmakers Criticize Schools for Using Surplus on Pay, Not Classes,”
Examiner,
May 16, 2012,
http://washingtonexaminer.com/montco-lawmakers-criticize-schools-for-using-surplus-on-pay-not-classes/article/619171#.UFiw96SXQxI.