The Son of the Housing Bubble: First-Time Homebuyers Tax Credit

Dean Baker
Co-director, CEPR
author, ‘The End of Loser Liberalism: Making Markets Progressive’
Posted: 04/18/2012 9:04 pm

It’s often said that the difference between the powerful and the powerless is that the powerful get to walk away from their mistakes while the powerless suffer the consequences. The first-time homebuyers’ tax credit provides an excellent example of the privilege of the powerful.

The first-time homebuyers tax credit was added to President Obama’s original 2009 stimulus package. It was introduced by Senator Johnny Isakson, a Republican from Georgia, but the proposal quickly gained support from both parties. The bill gave a tax credit equal to 10 percent of a home’s purchase price, up to $8,000, to first time buyers or people who had not owned a home for more than three years. To qualify for the credit, buyers had to close on their purchase by the end of November, 2009, however the credit was extended to buyers who signed a contract by the end of April, 2010.

The ostensible intention of the bill was to stabilize the housing market. At least initially it had this effect. There was a spike in home purchases that showed up clearly in the data by June of 2009. House prices, which had been falling at a rate of close to 2.0 percent a month stabilized and actually began to rise by the late summer of 2009, as buyers tried to close on a house before the deadline for the initial credit. There was a further rise in prices around the end of the extended credit in the spring of 2010.

However once the credit ended, prices resumed their fall. By the end of 2011 they were 8.4 percent below the tax credit induced peak in the spring of 2010. Adjusting for inflation, the decline was more than 12.0 percent.

The problem was that the credit did not lead more people to buy homes, it just caused people who would have bought homes in the second half of 2010 or 2011 to buy their homes earlier. This meant that the price decline that was in process in 2007-2009 was just delayed for a bit more than a year by the tax credit.

This delay allowed homeowners to sell their homes for higher prices than would otherwise have been the case. It also allowed lenders to get back more money on loans that might have otherwise ended with short sales or even defaults. The losers were the people who paid too much for homes, persuaded to get into the market by the tax credit.

This was the same story as the in the original bubble, but then the pushers were the subprime peddlers. In this case the pusher was Congress with its first-time buyer credit.

According to my calculations, the temporary reversal of the price decline transferred between $200 and $350 billion (in 2009 dollars) from buyers to sellers and lenders. Another $15-25 billion went from homebuyers to builders selling new homes for higher prices than would otherwise have been possible.

While this might look like bad policy on its face, it gets worse. The tax credit had the biggest impact on the bottom end of the market, both because this is where first-time buyers are most likely to be buying homes and also an $8,000 credit will have much more impact in the market for $100,000 homes than the market for $500,000 homes.

The price of houses in the bottom third of the market rose substantially in response to the credit, only to plunge later. To take some of the most extreme cases, in Chicago prices of bottom tier homes fell by close to 30 percent from June 2010 to December of 2011, leading to a lose of $50,000 for a buyer at the cutoff of the bottom tier of the market. The drop in Minneapolis was more than 20 percent or more than $30,000. First-time buyers in Atlanta got the biggest hit. House prices for homes in the bottom tier have fallen by close to 50 percent since June of 2010. That is a loss of $70,000 for a house at the cutoff of the bottom tier.

Many of the 11 million underwater homeowners in the country can blame the incentives created by the first-time homebuyers credit for their plight. This was really bad policy, which should have been apparent at the time. Unfortunately, it is only the victims who are suffering, not the promulgators of the policy. Welcome to Washington.

Follow Dean Baker on Twitter: www.twitter.com/DeanBaker13

 

Small Business Financing May Suffer From Obama’s Proposed Budget and Political Wrangling

Jerry Chautin
Business Mentoring
Posted: 02/21/2012 10:11 am

Lenders are concerned that President Barack Obama’s proposed 2013 budget and the political scuffling in Congress may leave the U.S. Small Business Administration and U.S. Department of Agriculture with inadequate loan-guarantee authority to satisfy the needs of small-businesses owners. If that happens, and “guarantee coffers are low, the borrower needs to worry if their loan will be approved before the program runs out of money,” says Mike Rozman, co-president and chief strategy officer of BoeFly.com. The New York City-based company matches borrowers with lenders online. Of further concern, he notes that “there is still limited conventional financing for start-ups.”

Before the financial meltdown and the Great Recession, start-ups were able to get financing when the applicant had related experience, invested approximately 20-percent equity into the venture and pledged collateral. That has changed drastically and fledgling entrepreneurs are left with few, if any alternatives. For more mature companies, however, “we’ve seen an increase in conventional lending over the past six months for existing profitable businesses seeking to expand or refinance debt,” Rozman says.

Kraig Kramers, a management consultant and consummate entrepreneur who turned around such Fortune 500 Companies as Snapper-brand lawn mowers, has advice for surviving economic turmoil and a possible tightening of credit. “Stay close to lenders and prospective investors long before you need them,” Moreover he says, “You must have prior happy relationships with those who will provide the cash timely when you really need it.”

He also coaches business owners to drill down “into cash management with tools you can introduce into your business to accelerate incoming cash.” Additionally, “Delegate these tools to those managers and employees who can do the best with them.”

Borrowing an idea from “a Fortune 500 company,” he says, “Look at a detailed balance sheet, yes, to the penny.” As a result, “we found a half-million-dollar stock certificate that had been forgotten.” But the technique is not just for large corporations. Kramers also found “recapturable deposits in several smaller businesses this way.”

Equally as important, cleaning up your financial statements, footnoting the most important line items and highlighting key financial ratios, prepares you for making a loan application. Furthermore, include an extensive discussion telling the loan officer and her committee how you arrived at the forecast for the next 12-month’s proforma.

Rozman adds that if customers get the cold shoulder from their exiting bank, the borrowers will need to be “aggressively seeking alternatives.” BoeFly’s 1,500 participating lenders pay subscription fees in order to view applications from entrepreneurs seeking financing. In addition to conventional loans, some of the lenders make loans that are partially guaranteed by SBA and USDA and may consider start-ups — especially for franchises.

SBA’s 7(a) loans are suitable to finance real estate, equipment, machinery, working capital, and to purchase an existing business. The agency’s 504 program is for fixed assets and most suitable to build, expand or purchase real estate. More recently, SBA initiated a temporary 504 program to “rescue” borrowers who have existing loans with balloon balances coming due and find that take-out lenders are scarce.

The basic 504 program requires job creation or retention and does not include working capital. But the temporary refinancing program waives the job-creating requirement. And it also allows some working capital for projected operating expenses.

USDA’s Business and Industry Loan Program is similar to SBA’s 7(a) but the businesses must be in rural locations. Sometimes, sparsely populated locations on the fringe of urban areas are approved. Unlike SBA’s loan limits of $5 million for 7(a) and approximately $10 million for 504, USDA’s B&I program tops out at $25 million under certain circumstances. And the loans may go up to $40 million for rural cooperative organizations that “process value-added agricultural commodities,” according to USDA’s web site.

Small-business owners are holding their collective breaths as the Obama Administration’s proposed budget wends its way through the politically-charged Congress. It is as much the chief executive’s opening salvo, as it is his wish list. But if the budget that survives includes large reductions of SBA and USDA guaranteed loans, you need to be prepared.

To test the water, talk to your bank’s loan officer about your chances of getting financing. It is better to see if your loan officer tap dances and stutters now than before crunch time. And if you don’t get a positive reply, start looking for other funding alternatives.

Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at http://www.Twitter.com/JerryChautin

Copyright © 2012 Jerry Chautin — All rights reserved
Huffington Post readers are permitted to distribute with attribution to the author

Follow Jerry Chautin on Twitter: www.twitter.com/JerryChautin

Is There a Wikipedia to Go Dark for Homeowners?

David M. Abromowitz
Senior Fellow at the Center for American Progress
Posted: 02/ 6/2012 5:44 pm

When Congress was on the brink of pushing through legislation that Internet advocates opposed, over four million online signatures were gathered quickly. Congress relented.

Today, millions of American households are poised to benefit directly from the opportunity to reduce mortgage payments, avoid foreclosure, build up some savings, or have a few thousand dollars to spend a little more freely. Yet while even conservative economists believe that easier refinancings will boost the economy and help millions more families — a major part of Congress is ready to say a big, “No, let’s not even try.”

Not a day elapsed after President Obama outlined a more ambitious set of proposals to let average families take advantage of the same low interest rates that have benefited upper income households and large corporations before Speaker Boehner among others declared the idea dead on arrival.

“All [the refinancing plan] does is delay the clearing of the market,” Speaker Boehner told reporters. “As soon as the market clears and we understand where the prices really are — [that] will be the most important thing we can do in order to improve home values around the country.”

Saying millions of families should wait until the “market clears” is the modern equivalent of “let them eat cake.” Clearing the market is an economist’s term for letting the tidal wave of foreclosures continue. But unchecked foreclosures drag down everyone’s home values, let vacant homes pile up in neighborhoods, and force families to choose between struggling to make needlessly high mortgage payments or become another default statistic with ruined credit.

It is time to ask lenders and investors to shoulder some of the burden, and Congress should be taking the lead on this, not finding objections. As my colleagues at the Center for American Progress and I explain in detail, the principles of accountability to avoid more foreclosures — especially for families who haven’t missed payments — is at the core of the administration’s expanded proposal for making refinancing easier.

Families with mortgages, however, are not an easily organized constituency. Unlike the protesters most engaged in social media who were the bulwark of those moved to criticize SOPA and PIPA, borrowers are not necessarily the internet generation nor an easily reached interest group.

But given the politics of “embrace the opposite of what Obama proposes,” homeowners struggling to keep making payments could use a Wiki dark day of their own. And so could the tens of millions of others who live next door, as no neighborhood really wants another foreclosure.

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America’s Jobs Deficit, and Why It’s Still More Important Than the Budget Deficit

Robert Reich
Chancellor’s Professor of Public Policy,
University of California at Berkeley;
Author, ‘Aftershock’

The most significant aspect of January’s jobs report is political. The fact that America’s labor market continues to improve is good news for the White House. But as a practical matter the improvement is less significant for the American work force.

President Obama’s only chance for rebutting Republican claims that he’s responsible for a bad economy is to point to a positive trend. Voters respond to economic trends as much as they respond to absolute levels of economic activity. Under ordinary circumstances January’s unemployment rate of 8.3 percent would be terrible. But compared to September’s 9.1 percent, it looks quite good. And the trend line — 9 percent in October, 8.6 percent in November, 8.5 percent in December, and now 8.3 percent — is enough to make Democrats gleeful.

But the U.S. labor market is far from healthy. America’s job deficit is still mammoth. Our working-age population has grown by nearly 10 million since the recession officially began in December 2007 but many of these people never entered the workforce. Millions of others are still too discouraged to look for work.

The most direct way of measuring the jobs deficit is to look at the share of the working-age population in jobs. Before the recession, 63.3 percent of working-age Americans had jobs. That employment-to-population ratio reached a low last summer of 58.2 percent. Now it’s 58.5 percent. That’s better than it was, but not by much. The trend line here isn’t quite as encouraging.

Given how many people have lost their jobs and how much larger the total working-age population is now, we’ve got a long road ahead. At January’s rate of job gains — 243,000 — the nation wouldn’t return to full employment for another seven years.

When they’re not blaming Obama for a bad economy, Republicans are decrying the federal budget deficit and demanding more cuts. But America’s jobs deficit continues to be a much larger problem than the budget deficit.

In fact, we can’t possibly achieve the growth needed to reduce the budget deficit as a proportion of the total economy unless far more people are employed. Workers are consumers, and consumer spending is 70 percent of economic activity. And cutting the budget means fewer workers, directly (as government continues to shed workers) and indirectly (as government contractors have to lay off workers) and therefore fewer consumers.

Yet deficit hawks continue to circle. State and local budgets are still being slashed. The federal government is scheduled to begin major spending cuts less than a year from now. Republicans are calling for more cuts in the short term. Austerity economics continues to gain traction.

Meanwhile Congress is debating whether to renew extended unemployment benefits. This should be a no-brainer. The long-term unemployed, who have been jobless for more than six months, comprise a growing share of the unemployed. (In January they rose from 42.5 percent to 42.9 percent).

Republicans say unemployment benefits are prolonging unemployment, that people won’t get jobs if they get unemployment checks from the government. That’s claptrap, especially when there’s only 1 job opening for every 4 people who need a job. Republicans also say we can’t afford to extend jobless benefits. Also untrue. Jobless workers spend whatever money they get, and their spending keeps other people in jobs.

Government should extend unemployment benefits, and not cut spending until the nation’s rate of unemployment is down to 5 percent. Then, and only then, should we move toward budget austerity.

The job situation is better than it was but it’s still awful. The jobs deficit is still our number one economic problem. Forget the budget deficit until we tame it.

Robert Reich is the author of Aftershock: The Next Economy and America’s Future, now in bookstores. This post originally appeared at RobertReich.org.

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The Power of Owner-Entrepreneurship Education to Restore Our Middle-Class

Steve Mariotti
Founder, Network for Teaching Entrepreneurship
Posted: 01/26/2012 12:44 pm

President Obama focused squarely on the middle class during his third State of the Union address. He declared that, “We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.”

Obama’s speech has set off flares from the right about “class warfare” and from the left about “the disappearing middle class.” There’s no denying that the wealth gap is widening. In June 2010, a report from the Center on Budget and Policy Priorities confirmed that the gap between rich and poor in the United States had reached levels not seen since 1929. Currently, the United States ranks fourth in the world in income disparity, after Chile, Mexico and Turkey.

The fact is, the middle-class is in serious trouble. The key question is: What are we going to do about it? As the founder of the Network for Teaching Entrepreneurship (NFTE) and an educator of at-risk youth who has been in the poverty trenches for over thirty years, I can tell you that I’ve seen only one thing consistently create new members of our middle-class: Owner-entrepreneurship education.

At NFTE, we call our programs owner-entrepreneurship education, in order to stress the power of ownership as a means to create wealth. Disadvantaged youth are seldom let in on this secret to wealth creation. I once asked a leading venture capitalist and philanthropist, who has donated millions to helping low-income children attend private schools, “What about teaching kids the ownership skills that made you your fortune, so they can become financially independent?” He responded, only half-jokingly, “But then who would do the work?”

His comment illuminates a core issue in our society: If only the wealthiest people own the increased profits resulting from the better education of our low-income youth, how much has really been accomplished in helping our most impoverished citizens achieve the American dream?

This is why NFTE teaches owner-entrepreneurship education. We teach not only entrepreneurial skills like record keeping, sales, finance, negotiation, opportunity recognition, and marketing, but also the power of ownership. Our students learn how to properly value and sell a business, and how to build wealth utilizing franchising, licensing and other advantages of ownership.

Let me share with you the story of two courageous at-risk youth who traveled from extreme poverty into the middle-class through the power of owner-entrepreneurship education. Jabious and Anthony Williams were living crammed in with their mom and eight other family members into their aunt’s two-bedroom apartment in Anacostia, a violent southeast Washington, D.C., neighborhood. Every day the boys walked miles to the nearest Exxon station to pump gas for tips. “Typically, we would earn about thirty to fifty dollars a day to help support my mom,” says Jabious Williams.

Luckily, the Williams brothers met Mena Lofland, a caring NFTE-certified business teacher at Suitland High School in Maryland. She got the boys into a NFTE entrepreneurship class. NFTE currently reaches over 60,000 students a year in the United States, as well as in ten countries. There are 400,000 NFTE graduates globally.

Like many of our low-income students, Jabious and Anthony experienced tough childhoods that encourage independence, toughness, salesmanship and hard-won street smarts, and as a result, both showed great aptitude for entrepreneurship. I’ve seen this repeatedly: Our at-risk youth are uniquely equipped to handle the risk and uncertainty inherent in entrepreneurship. They also have valuable insights into their local markets.

The Williams brothers started their own hip-hop clothing line, for example, with support from Lofland, and two local mentors — Phil McNeil, managing partner of Farragut Capital Partners, and Patty Alper, a dedicated volunteer, philanthropist and former entrepreneur.

Now 24, Jabious is a scholarship graduate student at Southeastern University and operates Jabious Bam Williams Art & Photography Company. Anthony heads a youth-mentorship program. They recently gave their mom $5,000 as a down payment on a house. “If it weren’t for the NFTE classes and the support of our teachers and mentors, we would have likely dropped out of school,” Jabious notes.

The story of the Williams brothers is just one of countless examples from NFTE’s files that beg the question: If entrepreneurship education can create jobs, prevent students from dropping out, and provide economic rescue for people in our low-income communities, what’s it going to take to open a conversation about making owner-entrepreneurship education standard in every high school in America?

Professor Andrew Hahn of Brandeis University points out the social consequences for an entire generation brought up in poverty that has never set foot in a workplace-and the potential benefits of entrepreneurship education. Hahn notes:

Research shows the scarring effects of early unemployment. The lack of work experience among minority teens contributes to a host of more serious challenges in their early twenties. Studies demonstrate that NFTE’s entrepreneurship programs create jobs and are among the few strategies that work during these periods of massive youth joblessness.

I’ve seen firsthand that entrepreneurship education gets disaffected teens excited about school again, and about their futures. It teaches them that they can participate in our economy and make money. They quickly realize that to do so, they must to learn to read, write and do math. I’ve also seen how owning even the simplest small business fills a teen with pride.

Owner-entrepreneurship education is a great way to teach basic subjects to children who are failing to learn through traditional academic approaches, because it provides concrete incentives. Owner-entrepreneurship education teaches young people that they can create jobs for themselves and do not have to be victims of this economic downturn, but rather view it as an opportunity to start a business. It also makes them more employable in the long-term, because by running their own small businesses, they learn how business works and what makes an employee valuable. This shift in viewpoint can immeasurably benefit the psyche of an unemployed teenager, and also benefits companies that hire them.

Currently, our national strategy to combat poverty among low-income youth is built around improving K-12 education. That’s a good choice, yet we’re not teaching entrepreneurship, even though most Americans would probably agree with President Obama that small business is the driving engine of our economy.

Instead, most of our national education efforts seek to teach low-income youth to become better workers. Given the widening gap between rich and poor in this country, I’d like to raise one critical point: Why aren’t we also teaching them how to own? If entrepreneurship is the engine of the American economy, why aren’t we raising more creative entrepreneurs like the Williams brothers?

On an income statement, workers are located on the “wages” line. Professional business owners, venture capitalists, and private equity firms have a distinct advantage in the creation of wealth because they can sell the profits generated by workers for a multiple of a business’s earnings. One dollar of profit can become $3, $10, or even $50.

This is how fortunes (and jobs) are created — an entrepreneur starts a business, sells some or all of its ownership, and uses the resulting capital to start and build other businesses that he or she can sell in the future, creating more capital. Workers, on the other hand, spend their lives selling only their time for hourly wages, or perhaps a salary.

Teaching business skills without also teaching the power of ownership potentially creates wealth for an owner down the line, not necessarily for the entrepreneur who created a business. Even well-educated entrepreneurs can find themselves at a disadvantage when dealing with professional owners who are experts in valuation and procuring a high rate of return in exchange for investing in a business.

We seek to demystify wealth creation for our low-income students, so they will have the same knowledge that a child of wealthy parents might pick up at the dinner table. Owner-entrepreneurship education empowers young people to make well-informed decisions about their future, whether they choose to become entrepreneurs or not. They become aware of five assets that every individual has: time, talent, attitude, energy and unique knowledge of their communities. They learn to use these assets strategically as they move along in their careers — which may include creating businesses and jobs, and building wealth in their communities.

Owner-entrepreneurship education reveals that anyone can start a business and use it to create wealth. This awareness can be a matter of life or death for at-risk young people like the Williams brothers. Through owner-entrepreneurship education, they discovered the value of their assets and created a business out of a comparative advantage — in this case, their unique knowledge of hip hop culture and what kind of clothes would appeal to other kids in their community. As a result, they became motivated to stay in high school, went on to college and helped their mother become a homeowner.

As the Williams brothers learned, owner-entrepreneurship education can help solve the youth unemployment crisis, rescue our low-income communities by increasing home ownership and employment, and even bring about a fairer distribution of wealth. We need a national debate on owner-entrepreneurship education, particularly for low-income youth. We must raise the consciousness of those who have been left out of our economic system, so that they comprehend the joys and responsibilities of ownership.

As Jabious Williams says, “Because I own my business, I know I have a future.”

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80 Percent Of Homeowners Behind On Mortgage Ineligible For Loan Modification Program

Loren Berlin

loren.berlin@huffingtonpost.com

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First Posted: 1/9/12 06:34 PM ET

Updated: 1/10/12 10:57 AM ET

Less than 20 percent of homeowners who theoretically qualify for a government mortgage modification are actually eligible, according to data released Monday by the Treasury Department.

Although roughly 4.6 million U.S. homeowners have missed at least two mortgage payments — making them technically eligible for Making Home Affordable, the federal government’s flagship homeowner assistance program — a whopping 80 percent of those borrowers cannot be helped by the program. According to the Treasury report, just 900,000 homeowners actually qualify for a loan modification under Making Home Affordable.

Dean Baker, an economist and co-director of the Center for Economic and Policy Research, said that fact reflects the program’s low goals. “If 900,000 are eligible, and this is your main program for helping underwater borrowers, and we know that not all 900,000 can be helped, this doesn’t look very ambitious,” he said.

The numbers reinforce just how far short the program, initiated by President Barack Obama with much fanfare in early 2009, has fallen short of its goals and fuel critics’ assertions that the program is largely ineffective. “This program, in its design, is set up to help a very small portion of people,” said Baker.

(Under Making Home Affordable, homeowners who aren’t yet delinquent in mortgage payments but are at risk of imminent default might also qualify for loan modifications. The Treasury data did not include that population.)

Borrowers are locked out of the federal program for a myriad of reasons, including the kind of loan they have and the property at issue. Not covered by the program: rental properties, “manufactured” homes, homes with Federal Housing Administration loans, and homes with Department of Veteran Affairs loans.

Many borrowers can’t get help because their monthly mortgage payment is deemed affordable, irrespective of whether it actually is for the borrower. The idea behind the loan modification program is to make the monthly mortgage payment more affordable, defined as a payment that is less than 31 percent of the borrower’s total monthly debt payments (think car payments, student loans, credit cards, etc.). One-third of homeowners who would otherwise qualify are ineligible because they already have a mortgage payment that meets this criteria, according to the Treasury report.

Borrowers who have abandoned their property are also ineligible, the assumption being that they are not committed to their home.

“If you look at the large number of vacant properties, I think that speaks to the fact that, in many cases, the borrowers were reached too late in the game,” said Baker. “The borrower assumed they’d lose their home so they walked away. You could say those people aren’t eligible, but they might have been if we’d reached them earlier.”

Source: Treasury Department report.

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The Green Economy Will Easily Overcome Solyndra’s Bankruptcy

Steven Cohen
Executive Director,
Columbia University’s Earth Institute
Posted: 9/19/11 08:23 AM ET

The bankruptcy of the solar cell maker Solyndra, despite massive federal loan guarantees, has analysts and pundits declaring the demise of the green job movement. Don’t look now, but I think the corpse is breathing. One bankruptcy will not kill the trend toward green jobs.

Moreover, the failure of a private company is not a rarity in the United States. Typically over 50,000 businesses file for bankruptcy every year. From June 2009-June 2010 this number approached 60,000. Without question the Solyndra loan was a bad idea. However, the sustainability movement in the United States is a primary driver of economic growth, and one high profile failure does not alter that reality.

Part of the problem is the definition of “green jobs.” All of the work involved in managing, designing and implementing reductions in energy, water and resource use are green jobs. All of the workers devoted to preventing or mitigating environmental pollution hold green jobs. In New York and California, major efforts to enhance energy efficiency are now underway and are creating lots of opportunity for jobs and growth. A company I advise, Willdan Energy Solutions, works with utilities and commercial businesses to help them reduce energy waste. In both California and New York a surcharge on our electric bills goes into a fund that is used to help businesses and households eliminate wasted energy. All the jobs at Willdan, their competitors, and the many contractors they work with to install energy saving technologies are green jobs.

Of course the largest stimulator of green jobs in the world is probably Walmart. This company asks all of its 100,000 suppliers to examine their carbon footprint and use of natural resources. This drive for sustainability is good for Walmart’s image, but is also good for their bottom line. Products that are more efficiently produced cost less. Products that use less packaging are cheaper to ship and also use less of Walmart’s scarce shelf space. All of this helps Walmart’s bottom line. All of the jobs created to make Walmart and its suppliers more resource-efficient are green jobs.

Green jobs are the future as we learn to make our economy more sustainable. Anyone thinking seriously about a planet of seven billion people realizes that we need to move our economic consumption from our dependence on finite resources to the use of resources that can be reused or re-grown. Obviously, loaning money to companies to subsidize solar manufacturing is a weak policy prescription. Government money would be better spent funding basic research into the technology of renewable energy, waste treatment, recycling and water filtration. I am far from the first to observe that a tax on fossil fuels could generate the funds for this research and hasten the day when renewable energy is less expensive than fossil fuels. That day will come, but it is in America’s economic and foreign policy self-interest to bring that day sooner rather than later.

If we are to develop the high production and high consumption economy needed to enable seven or eventually ten billion people to live like many of us do here in America, we need a sustainable economy. That is an economy that does not use up the planet’s finite resources or poison the air, water and food that the biological creatures called human beings require. Building this sustainable economy will require massive amounts of technological and managerial innovation. We do not yet have the technology or organizational capacity to build a sustainable economy. But it is urgent that we learn how to develop the ability to build a green economy as soon as possible.

There’s a simple reason for the need for speed. We seem to be making more and more people, but we haven’t figured out a way of making more planet. Technology has enabled us to improve the productivity of the planet, but if we destroy the ecosystems that sustain life, we will threaten our own survival.

Everyone knows the planet is getting more crowded. Traffic and congestion are getting worse, not better, in many places. The answer is to make better use of the resources we have. New York City loses substantial amounts of water between the time it leaves the reservoirs to the north and the time it comes out of local faucets. That will be improved when the multibillion dollar third water tunnel is fully operational. Similarly, investment in a smart grid electrical system would improve the efficiency of power distribution.

It’s important that we don’t derive the wrong lesson from Solyndra’s bankruptcy. A failed subsidy doesn’t mean that all subsidies are bad. A poorly thought-out public policy does not mean we need to abandon public policies and let the market determine everything. The private market is a powerful force in the drive for a sustainable economy. We are seeing many companies looking to reduce their use of energy, water and other resources. That is stimulating the development of new technologies and new ways of doing business. Government needs to encourage this trend. Well thought-out changes in the tax code, investments in basic R & D and even subsidized capital are all needed. Poorly thought-out, symbolic, politically motivated and possibly corrupt government programs should be avoided.

Follow Steven Cohen on Twitter: www.twitter.com/earthinstitute

American Jobs Act’s Project Rebuild Aims to Revitalize Vacant Homes

Geoffrey Anderson
CEO, Smart Growth America
Posted: 9/14/11 10:12 AM ET

When the housing bubble popped in 2009, it left many American communities with foreclosed and vacant homes and businesses.

The American Jobs Act would help restore thousands of these abandoned properties and put construction workers back to work in the process with Project Rebuild. The $15 billion project would create thousands of jobs to tear down abandoned properties, renovate foreclosed homes and maintain abandoned properties until they can be sold once again. Intended to initially help communities with the largest number of foreclosed properties, Project Rebuild would create much-needed jobs and energize the country’s blighted communities at the same time. Key components of the project include:

• Stabilizing communities by focusing on distressed commercial properties and redevelopment;
• Federal funding to support for-profit development — when consistent with project aims and subject to strict oversight requirements;
• Increased support for “land banking“;
• Establishing property maintenance programs to create jobs and mitigate “visible scars” left by vacant/abandoned properties.

It can be difficult for a city to recover when, on top of unemployment, homes are boarded up or downtown is empty. Vacant properties can weigh down the value of nearby homes, increase neighborhood blight and crime, and stand in the way of economic recovery. Project Rebuild’s strategies are exactly how smart growth can help communities facing these challenges.

Communities are already using all of Project Rebuild’s strategies with great success. Between 2005 to 2009, foreclosure rates rose rapidly in greater Cleveland, Ohio, resulting in tens of thousands of vacant or abandoned properties. These unproductive areas of the city lowered property values and scared away businesses. In response to the crisis, the Cuyahoga County Land Bank was formed to revitalize neighborhoods, improve the local economy, and create jobs. The quasi-governmental organization takes land off the books of lenders if they agree pay for demolition of the properties.

New York State has also used the strategies outlined in Project Rebuild. Governor Andrew Cuomo signed the New York Land Bank Act into law on August 1, giving local governments across the state a critical tool to return vacant and abandoned properties to productive, income-generating use. Land banks can promote reuse of existing land, spur downtown investment, and speed neighborhood revitalization. And land banks put control in the hands of local leaders, making it possible to work with specific community circumstances and goals.

Vacant property revitalization is just one of the smart growth strategies included in the American Jobs Act. The bill also includes strong funding for public transportation projects, as well as road repair — both of which have been proven to create more jobs per dollar than new highway construction. Smart Growth America’s analysis of 2009’s American Recovery and Reinvestment Act revealed that public transportation projects created 70% more job hours per dollar than highway projects. In addition, studies of transportation job creation show that on average, road repair produces 16% more jobs per dollar than new road construction. Both these types of transportation infrastructure projects mean this bill will help communities above and beyond its direct job creation potential.

The American Jobs Act recognizes that America’s towns and cities are a worthy investment. The proposed investments in transportation choices, land banks and vacant property redevelopment as well as the federal grant programs that support these strategies are exactly what many struggling communities have been waiting for. Congress should pass this bill to put thousands of Americans back to work now and rebuild the country’s economy for years to come.

Follow Geoffrey Anderson on Twitter: www.twitter.com/smartgrowthusa

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Raising Owner-Entrepreneurs Would Solve Youth Unemployment, Spur Growth, and Rescue Low-Income Communities

Image by ifmuth via Flickr

Steve Mariotti
Founder, Network for Teaching Entrepreneurship
Posted: 9/9/11 08:37 AM ET

Speaking forcefully and with great determination, President Obama mentioned small business at least five times in his American Jobs Act speech Thursday night, telling Congress: “Everyone here knows that small business is where jobs begin.” The president admitted that large corporations “have come roaring back” from the recession, but “small businesses haven’t. And he described tax cuts and hiring incentives in his jobs bill especially designed to stimulate and support small business, which he has often referred to as “the engine of our economy.”

I have just one question: If entrepreneurship is this vital to the American economy, why aren’t we teaching every high school student in this country how to start and operate a small business?

I’m not just picking on the president; I didn’t hear entrepreneurship education mentioned during the GOP debate on September 7 either.

Yet, if you think the current 9.1% unemployment rate in this country is frightening, take a look at youth unemployment. On September 2, the Department of Labor reported a teen unemployment rate of 25.4 percent. The rate among African-Americans teens is almost 49 percent, more than four times the national average. The rate for Hispanic youth jumped up nine percent this summer to 35 percent. The number of teens living in poverty in the United States has reached almost 19 million — with the majority in African-American and Hispanic communities.

I don’t believe our teenagers lack initiative or don’t want to work. I believe many do not know how to create opportunities for themselves because they have not been exposed to the tools necessary to create ownership of assets within the free enterprise system. As an educator of at-risk youth for thirty years and the founder of the Network for Teaching Entrepreneurship (NFTE), I have seen firsthand the powerful effect that learning to start and operate a small business has on young people.

The time is now for an unprecedented initiative in owner-entrepreneurship education to reduce these catastrophic youth unemployment rates — before we see London-style riots in the streets of our own cities. Without such an initiative, we risk losing this generation to a permanent depression and long-term structural unemployment.

Let me share with you the story of two at-risk youth who were saved by owner-entrepreneurship education. Jabious and Anthony Williams were living crammed in with their mom and eight other family members into their aunt’s two-bedroom apartment in Anacostia, a violent South East Washington, D.C. neighborhood. Every day the boys walked miles to the nearest Exxon station to pump gas for tips. “Typically, we would earn about thirty to fifty dollars a day to help support my mom,” says Jabious Williams.

Luckily, the Williams brothers met Mena Lofland, a caring NFTE-certified business teacher at Suitland High School in Maryland. She got the boys in to a NFTE’s owner-entrepreneurship class. NFTE currently reaches over 60,000 students a year in the United States, as well as in ten countries. There are 400,000 NFTE graduates globally.

Like many of our low-income students, Jabious and Anthony displayed an aptitude for entrepreneurship, born of tough childhoods that encourage independence, toughness, salesmanship and hard-won street smarts. I’ve seen this repeatedly: Our at-risk youth are uniquely equipped to handle the risk and uncertainty inherent in entrepreneurship. They also have valuable insights into their local markets.

The Williams brothers started their own hip-hop clothing line, for example, with support from Lofland, and two local mentors — Phil McNeil, managing partner of Farrgut Capital Partners, and Patty Alper, a dedicated volunteer, philanthropist and former entrepreneur.

Now 24, Jabious is a scholarship graduate student at Southeastern University and operates Jabious Bam Williams Art & Photography Company. Anthony heads a youth-mentorship program. They recently gave their mom $5,000 as down payment on a house. “If it weren’t for the NFTE classes and the support of our teachers and mentors, we would have been likely to drop out of school,” Jabious notes.

The story of the Williams brothers is just one of countless examples from NFTE’s files that beg the question: If owner-entrepreneurship education can create jobs, prevent students from dropping out, and provide economic rescue for people in our low-income communities, what’s it going to take to open a conversation about making owner-entrepreneurship education standard in every high school in America?

Professor Andrew Hahn of Brandeis University points out the social consequences for an entire generation brought up in poverty that has never set foot in a workplace — and the potential benefits of owner-entrepreneurship education. Hahn notes: “Research studies show the scarring effects of early unemployment. The lack of work experience among minority teens contributes to a host of more serious challenges in their early 20’s. Studies demonstrate that NFTE’s entrepreneurship programs create jobs and are among the few strategies that work during these periods of massive youth joblessness.”

I’ve seen firsthand that owner-entrepreneurship education gets disaffected teens excited about school again, and about their futures. It teaches them that they can participate in our economy and make money. They quickly realize that to do so, they must to learn to read, write and do math. I’ve also seen how owning even the simplest small business fills a teen with pride.

Entrepreneurship education is a great way to teach basic subjects to children who are failing to learn through traditional academic approaches, because it provides concrete incentives. Owner-entrepreneurship education teaches young people that they can create jobs for themselves and do not have to be victims of this economic downturn but rather view it as an opportunity to start a business. It also makes them more employable because by running their own small businesses, they learn how business works and what makes an employee valuable. This shift in viewpoint can immeasurably benefit the psyche of an unemployed teenager, and also benefits companies that hire them.

Currently, our national strategy to combat poverty among low-income youth is built around improving K-12 education. That’s a good choice, yet we’re not teaching entrepreneurship, even though most Americans would probably agree with President Obama that small business is the driving engine of our economy.

Instead, most of our national education efforts seek to teach low-income youth to become better workers. Given the widening gap between rich and poor in this country, however, I’d like to raise one critical point: Why aren’t we also teaching them how to own? If entrepreneurship is the engine of the American economy, why aren’t we raising more creative owner-entrepreneurs like the Williams brothers?

On an income statement, workers are located on the “wages” line. Professional business owners, venture capitalists, and private equity firms have a distinct advantage in the creation of wealth because they can sell the profits generated by workers for a multiple of a business’s earnings. One dollar of profit can become $3, $10, or even $50.

This is how fortunes (and jobs) are created — an entrepreneur starts a business, sells some or all of its ownership, and uses the resulting capital to start and build other businesses that he or she can sell in the future, creating more capital. Workers, on the other hand, spend their lives selling only their time for hourly wages, or perhaps a salary.

Disadvantaged youth are seldom let in on this secret to wealth creation. I once asked a leading venture capitalist and philanthropist, who has donated millions to helping low-income children attend private schools, “What about teaching kids the ownership skills that made your fortune, so they can become financially independent?” He responded, only half-jokingly, “But then who would do the work?”

His comment illuminates a core issue in our society: If only the wealthiest people own the increased profits resulting from the better education of our low-income youth, how much has really been accomplished in helping our most impoverished citizens achieve the American dream?

This is why NFTE teaches owner-entrepreneurship education. We teach not only entrepreneurial skills like record keeping, sales, finance, negotiation, opportunity recognition, and marketing, but also the power of ownership. Our students learn how to properly value and sell a business, and how to build wealth utilizing franchising, licensing and other advantages of ownership.

Teaching business skills without also teaching the power of ownership potentially creates wealth for an owner down the line, not necessarily for the entrepreneur who created a business. Even well-educated entrepreneurs can find themselves at a disadvantage when dealing with professional owners who are experts in valuation and procuring a high rate of return in exchange for investing in a business.

We seek to demystify wealth creation for our low-income students, so they will have the same knowledge that a child of wealthy parents might pick up at the dinner table. Owner-entrepreneurship education empowers young people to make well-informed decisions about their future, whether they choose to become entrepreneurs or not. They become aware of five assets that every individual has: time, talent, attitude, energy and unique knowledge of their communities. They learn to use these assets strategically as they move along in their careers — which may include creating businesses and jobs, and building wealth in their communities.

Owner-entrepreneurship education reveals that anyone can start a business and use it to create wealth. This awareness can be a matter of life or death for at-risk young people like the Williams brothers. Through owner-entrepreneurship education, they discovered the value of their assets and created a business out of a comparative advantage – in this, case their unique knowledge of hip hop culture and what kind of clothes would appeal to other kids in their community. As a result, they became motivated to stay in high school, went on to college and helped their mother become a homeowner.

As the Williams brothers learned, owner- entrepreneurship education can help solve the youth unemployment crisis, rescue our low-income communities by increasing home ownership and employment, and even bring about a fairer distribution of wealth. We need a national debate on owner-entrepreneurship education, particularly for low-income youth. We must raise the consciousness of those who have been left out of our economic system, so that they comprehend the joys and responsibilities of ownership.

As Jabious Williams says, “Because I own my business, I know I have a future.”

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Why Inequality is the Real Cause of Our Ongoing Terrible Economy

Image via Wikipedia

Robert Reich is Chancellor’s Professor of Public Policy at the University of California at Berkeley.

Posted, Sunday September 4, 2011

THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal.

When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?

The economy won’t really bounce back until America’s surge toward inequality is reversed. Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke’s Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.

Look back over the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies — container ships, satellite communications, eventually computers and the Internet — started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems. Some were product entrepreneurs; a growing number were financial entrepreneurs. The pay of graduates of prestigious colleges and M.B.A. programs — the “talent” who reached the pinnacles of power in executive suites and on Wall Street — soared.

The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 percent of married women with young children were working for pay; by the late 1990s, 55 percent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money.

Eventually, of course, the bubble burst. That ended the middle class’s remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators — through early childhood education, better public schools, expanded access to higher education and more efficient public transportation.

We might have enlarged safety nets — by having unemployment insurance cover part-time work, by giving transition assistance to move to new jobs in new locations, by creating insurance for communities that lost a major employer. And we could have made Medicare available to anyone.

Big companies could have been required to pay severance to American workers they let go and train them for new jobs. The minimum wage could have been pegged at half the median wage, and we could have insisted that the foreign nations we trade with do the same, so that all citizens could share in gains from trade.

We could have raised taxes on the rich and cut them for poorer Americans.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It cut spending on infrastructure as a percentage of the national economy and shifted more of the costs of public higher education to families. It shredded safety nets. (Only 27 percent of the unemployed are covered by unemployment insurance.) And it allowed companies to bust unions and threaten employees who tried to organize. Fewer than 8 percent of private-sector workers are unionized.

More generally, it stood by as big American companies became global companies with no more loyalty to the United States than a GPS satellite. Meanwhile, the top income tax rate was halved to 35 percent and many of the nation’s richest were allowed to treat their income as capital gains subject to no more than 15 percent tax. Inheritance taxes that affected only the topmost 1.5 percent of earners were sliced. Yet at the same time sales and payroll taxes — both taking a bigger chunk out of modest paychecks — were increased.

Most telling of all, Washington deregulated Wall Street while insuring it against major losses. In so doing, it allowed finance — which until then had been the servant of American industry — to become its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. By 2007, financial companies accounted for over 40 percent of American corporate profits and almost as great a percentage of pay, up from 10 percent during the Great Prosperity.

Some say the regressive lurch occurred because Americans lost confidence in government. But this argument has cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government — Americans still wanted all the government services they had before, and then some — as against paying more taxes on incomes that had stagnated. Inevitably, government services deteriorated and government deficits exploded, confirming the public’s growing cynicism about government’s doing anything right.

Some say we couldn’t have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans’ average hourly pay has risen only 6 percent since 1985, adjusted for inflation, German workers’ pay has risen almost 30 percent. At the same time, the top 1 percent of German households now take home about 11 percent of all income — about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

THE real reason for America’s Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people “with great economic power had an undue influence in making the rules of the economic game.” With hefty campaign contributions and platoons of lobbyists and public relations spinners, America’s executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.

Yet the rich are now being bitten by their own success. Those at the top would be better off with a smaller share of a rapidly growing economy than a large share of one that’s almost dead in the water.

The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class. The spending of the richest 5 percent alone will not lead to a virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including the United States, to become a net exporter.

Reviving the middle class requires that we reverse the nation’s decades-long trend toward widening inequality. This is possible notwithstanding the political power of the executive class. So many people are now being hit by job losses, sagging incomes and declining home values that Americans could be mobilized.

Moreover, an economy is not a zero-sum game. Even the executive class has an enlightened self-interest in reversing the trend; just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts. The question is whether, and when, we will summon the political will. We have summoned it before in even bleaker times.

As the historian James Truslow Adams defined the American Dream when he coined the term at the depths of the Great Depression, what we seek is “a land in which life should be better and richer and fuller for everyone.”

That dream is still within our grasp.

[I wrote this for today’s New York Times]

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