Weekly Report – February 29, 2016

Building a World Class Transportation System

Dianne Harrison, the President of CSU Northridge & L.A. Coalition Member, penned an Op-Ed on transportation


“Improved mass transit opportunities will have positive ramifications for CSUN, the San Fernando Valley and Los Angeles beyond the benefits to our students. Including our employees and the thousands more who come to campus for our multi-faceted arts, culture and athletic programs, the number of people making multiple trips to and from campus each week exceeds 50,000, pushing the number of car trips each week well above 100,000, clogging surface streets with more traffic, jamming neighborhoods with parked cars, and polluting the air with dangerous carbon emissions. When you consider that CSUN is already a designated mass transit hub for the northeast section of the San Fernando Valley, enhancing service to campus has much broader benefits…

Based on extensive research and discussions with leaders from across the Valley, CSUN has identified six priorities for enhancing service to CSUN. I encourage you to visitwww.CSUN.edu/transitpriorities for the details…

I am grateful to the area leaders who have made CSUN a key part of their transit proposals, and I urge them and the Metro board to include CSUN priorities in their transit plans. I also encourage everyone, but especially our students, employees and alumni, to attend the transit summit sponsored by Sen. Bob Hertzberg and the Valley Economic Alliance and hosted by CSUN on March 3, at 6 p.m., in the Grand Salon and join us in championing a complete transit plan for the San Fernando Valley.”

L.A. Metro announces Metro Expo Line extension from Culver City to Santa Monica will open May 20

The line will span more than 15 miles — the expansion adds 6.6 miles to the current Expo Line route — and have seven stops, including Palms, Westwood Boulevard, Expo/Sepulveda, Santa Monica College and downtown Santa Monica. Officials estimate the ride from the 7th Street/Metro Center Station to Colorado and 4th in Santa Monica will take 46 minutes, with trains departing every 12 minutes from 4 a.m. to midnight. Hours will be extended through 2 a.m. on Friday and Saturday nights. The estimated ridership is expected to reach 64,000 a day by the 2030 period.

The U.S. Department of Transportation announced the availability of $500 million nationwide in TIGER Grant funding

L.A. Metro, with strong support from their Board of Directors, the L.A. County Congressional Delegation and Coalitions like the L.A. Coalition, has actively sought TIGER grants since the program was created under the American Recovery and Reinvestment Act of 2009 that was signed into law by President Obama (February 17, 2009). Below are the TIGER grants L.A. Metro has secured over the past several years.

  • $546 million TIFIA loan for Metro’s Crenshaw/LAX Transit Project (underwritten by a $20 million TIGER Grant)
  • $15 million TIGER Grant for Metro’s Rail to Rail (River) Active Transportation Corridor Connector Project
  • $11.8 million TIGER Grant for Metro’s Eastside Access Improvement Project
  • $10.3 million TIGER Grant for Metro’s Willowbrook/Rosa Parks Station

Metro will be actively seeking to secure funding through the USDOT’s Fiscal Year 2016 TIGER Grant program and will continue to support this effort.

Building a World Class Economy

L.A. Coalition member Bruce Ferguson, the President of Otis College of Art and Design, hosted a broad and diverse section of L.A.’s leaders for the release of Otis College’s Annual Report on the Creative Economy of the Los Angeles Region

Since its inception in 2007, Otis College of Art and Design’s Annual Report on the Creative Economy of the L.A. Region has been an invaluable tool to assess the tremendous impact and influence of the area’s creative sector on the economy. In 2013, the California Arts Council awarded Otis funds to expand the report to include analysis of the entire state of California, showing how the state’s economy is effected by jobs in the arts, design, education, entertainment, nonprofits, and independent creative professions, and providing a forecast for 2015. Their commitment underscores the belief that creativity is essential to California’s successful workforce investment and economic development strategies. The Report is prepared by the Los Angeles Economic Development Corporation (LAEDC) and the 2015 Otis Report is now available at: http://www.otis.edu/otis-report-creative-economy.

Significant findings in the 2015 Otis Report on the Creative Economy include: 

  • The Los Angeles region is the creative capital of the nation and the state. The Los Angeles metropolitan area has the largest number of creative industry workers in the nation, ahead of New York, Chicago and San Francisco. Over forty percent of the state’s workers in creative occupations are located in the Los Angeles-Orange County region.
  • The net economic contribution of the creative industries to the Los Angeles regional economy (Los Angeles and Orange counties) was $109.1 billion in value added, which was equivalent to nearly 13 percent of the region’s gross product of $861 billion in 2014.
  • The Los Angeles regional creative economy’s 418,200 direct wage and salary workers were equivalent to 8.4 percent of all 4.9 million wage and salary workers in the region during 2014.
  • In Los Angeles County, total creative industries employment (direct, indirect and induced) accounted for nearly one in six wage and salary jobs in the county (or 18 percent of wage and salary employment) in 2014.
  • The creative industries in the Los Angeles – Orange County region generated $7.7 billion in tax revenues (property, state and local personal income and sales taxes) in 2014, which was nearly 50 percent of the $15.5 billion in tax revenues generated by the creative industries in California.

A highlight of the event was a lecture by the 2001 Nobel-prize winning economist, Dr. Joseph Stiglitz, who looked to address the issue of “When we move into a knowledge economy and innovation economy, will these new economies be able to produce jobs for our young people as they join the labor force?”

I had the honor of moderating a Q & A discussion with him on this topic.

Highlights of Lecture and Q & A 

Stiglitz draws a striking parallel of today’s economic challenges to the Great Depression, which is often attributed to a meltdown of the banking system.

The conventional wisdom is that the Fed caused the Depression by tightening the money supply. If only the Fed back then had increased the money supply, it is said, a full-blown Depression might have been averted. This enduring belief among economists explains why the Fed is now massively expanding the money supply, i.e. “to avoid the mistake of the Great Depression.”

In reality, according to Stiglitz, the banking crisis of 1933 didn’t cause the Great Depression. The financial meltdown reflected a phase change in the economy from an agricultural economy to a manufacturing economy. The financial meltdown of 1933 was the consequence not the cause of the Great Depression. The joblessness of the times was a sign of the economic phase change already well under way.

Thus in 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. With better farming practices, fewer people were needed.

At the beginning of the 1930s, more than a fifth of all Americans still worked on farms. A much smaller percentage was actually needed. Today, 2 percent of Americans produce more food than we can consume. The Great Depression was about finding jobs for all those who were no longer needed on farms.

Thus the breakdown of the banking system in the Great Depression didn’t culminate until 1933, after the Depression began and after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. The underlying cause was a structural change in the real economy.

With accelerating productivity in the 1920s, farm output increased faster than demand. Prices and incomes fell sharply. Farmers then (like workers now) borrowed heavily to sustain living standards and production. A financial crisis ensued because the farmers couldn’t pay back what they owed and the banks that had lent them money became insolvent.

The economy stumbled along for almost a decade after the meltdown in 1933. It only recovered by accident, as a result of World War II. Government spending unintentionally completed the necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing.

Stiglitz sees today’s problems of the banking sector, though bad enough, as a red herring in our search for real solutions. The real solutions are “rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with.

The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced.” A crisis of the real economy is the cause of the current Great Stagnation, just as it was the root cause of the Great Depression.

Stiglitz sees a strong parallel between the origin of the Great Depression and the origin of our current Great Stagnation. In the Great Depression, the economy shifted from agriculture to manufacturing. Today we are once again moving from one kind of economy to another.

Stiglitz notes the shift of jobs out of manufacturing. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today, as a result of greater productivity and a disastrous outsourcing of manufacturing overseas. The millions of jobless former factory workers of today are the modern-day equivalent of the Depression’s doomed farmers.

The transition to the Creative Economy

If the phase change in the Great Depression was a transition from agriculture to manufacturing, what is the transition to today? Stiglitz sees it as a transition from manufacturing to a service economy.

A service economy is certainly one looming possibility for the US economy, but a service economy per se is unlikely to be an American success story. If all American workers do is mow lawns, cut hair, export raw materials, and market and sell goods manufactured in other countries, the wealth of the nation is unlikely to be great.

The US will in effect have become a Third World economy. It will be unable to support even the current standard of living, let alone an improving quality of life. In effect, a service economy with sharply lower incomes and standard of living for most people will be politically unacceptable.

Instead the needed transition is from a factory economy to the Creative Economy.

The Creative Economy is one in which both manufacturing and services play a role. It is an economy in which the driving force is innovation. It is an economy in which organizations are nimble and agile and continually offering new value to customers and delivering it sooner. The Creative Economy is an economy in which firms focus not on short-term financial returns but rather on creating long-term customer value based on trust.

Further highlights from my research

Steve Denning, an expert on radical management, leadership, innovation & narrative, says that most large firms of today are ill-equipped to compete in the emerging Creative Economy, in which globalization and the shift in power in the marketplace from seller to buyer have put the customer in charge. Most big firms still have a factory mindset oriented to economies of scale. They are focused principally on maximizing short-term shareholder value. They are not organized for continuous innovation.

This way of managing is unable to mobilize the full creative talents of their employees. As noted above, the rate of return on assets and invested capital has been in steady decline for decades. Many firms are currently over-capitalized and yet unable to find productive uses for the money in a stagnant economy. Lending more money to these firms will do little to help revive the struggling economy.

Roger Martin, Dean of Rotman School of Management at the University of Toronto, says that “We must shift the focus of companies back to the customer and away from shareholder value. The shift necessitates a fundamental change in our prevailing theory of the firm… The current theory holds that the singular goal of the corporation should be shareholder value maximization. Instead, companies should place customers at the center of the firm and focus on delighting them, while earning an acceptable return for shareholders.”

The Fortune 500 must master the management principles needed for continuous innovation that delights customers. The command-and-control management of hierarchical bureaucracy is inherently unable to delight anyone–it was never intended to. To delight customers, a radically different kind of management needs to be in place, with a different role for the managers, a different way of coordinating work, a different set of values and a different way of communicating.

Firms like Apple [AAPL], Amazon [AMZN] or Salesforce [CRM] are showing the way. Those firms that opt not to change won’t survive. The choice is clear: delight or die.

The Creative Economy will also be partly built on manufacturing. This is not about a shift out of manufacturing into services. In fact, although jobs were lost, manufacturing never died. Even adjusted for inflation, manufacturing output is near an all-time high. In real terms, we’re making more than twice as much today as we were in the early 1970s.

True, some manufacturing subsectors were lost due to short-term profit taking. In the foreign outsourcing of manufacturing, managers chased economies of scale, often overlooking the additional costs of transport, inventory management, quality control, sales, marketing and distribution of large production runs, as well the risks involved in such extended supply chains. They paid scant attention to the long-run costs of losing knowledge and the opportunity to learn.

Now the economics of large-scale production runs carried out overseas are being undermined by the possibility of making, selling and delivering millions of manufactured items one unit at a time, right next to the customer. Digital manufacturing is beginning to do to manufacturing what the Internet has done to information-based goods and services. Just as video went from a handful of broadcast networks to millions of producers on YouTube within a decade, a massive transition from centralized production to a “maker culture” of dispersed manufacturing innovation is under way today.

What must government do?

Stiglitz advocates “a massive investment program—as the U.S. did, virtually by accident, 80 years ago, to increase the nation’s productivity for years to come, and to also increase employment now.

This public investment, and the resultant restoration in G.D.P., increases the returns to private investment.” He suggests large investments in infrastructure, technology, and education for decades, as well as support for “small and medium-size companies, especially new ones, which are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending.”

Stiglitz questions whether we can actually bring ourselves to do this, in the absence of mobilization for global war. He thinks, maybe not. Clearly, when politics is dominated by issues such as whether the President is born in Kenya (he wasn’t), whether the country should repay its debts (it must), whether people should have affordable health care (they should), or whether the country should maintain its infrastructure (it has no choice), it is reasonable to wonder whether the country can muster the intelligence and the will needed for such a great effort.

Nevertheless, change will happen: the economic situation will continue to deteriorate until the pain becomes so great that action will have be to be taken. The question is whether we fight the phase change or facilitate it.

The good news for Southern California – the Creative Economy is a huge opportunity to generate further economic growth and the quality jobs that come with it.