A More Inclusive Way To View Performance

Durham, North Carolina where I finished my career and still live in retirement just issued a report on how well the convention center here has been doing at erasing operating deficits.

There were some inconsistencies and misperceptions.

At both the city and county levels, Durham has always had excellent professional management during my twenty-five years here and none more so that under Tom Bonfield as city manager.

Governments at every level are not known for being able to fully account for and allot both revenues and costs to facilities. But neither are those in the free market economy.  More on that later including a new approach applicable to all sectors.

The convention center in Durham was always expected to run a deficit.

Back in the day when consultants weren’t punished for being candid with both pros and cons and most were not for sale, the consultant for the proposed Durham convention center projected a $450,000 annual deficit, which would be $1.8 million today.

But thanks to new management it now runs a $167,000 deficit and that is without fully attributing all related revenues.

For instance, if parking and ticket assessments are being used to make DPACs performance look even better, as they should, it seems the city should attribute revenues from the lease of “air rights” above it to the convention center’s bottom line.

The convention center here has always been hampered from harvesting more than its share of the out-of-town conventions and meetings drawn to Durham overall by having far too few hotel rooms in walking distance.

That is about to be more than remedied when by this summer the number of guest rooms at or within less than a block will increase nearly double to nearly 400 and another 259 within a few blocks.

A few are made feasible by revitalization but a good share are due to incessant communication, over nearly three decades now, by Durham’s marketing agency to point out downtown’s strategic location.

It is four miles from Research Triangle Park, adjacent to one Duke campus and two miles from Duke’s main campus and that of North Carolina Central University, as well as the most proximate to dining and entertainment districts.

But as the new management company has proven, the original management company back in 1989 could have closed the gap, had it not cursed the facility with a convoluted identity and a sense of entitlement.

When it opened, it not only made sense to contract management with the adjacent hotel owner but that contract was calibrated as an incentive by essentially covering all of the private hotel’s fixed costs.

But instead, the hotel company tried to brand the convention center merely as its private meeting space while still demanding preferential treatment, if not sole-sourcing to out-of-town groups selecting venues.

The city and county bear some responsibility for their own self-inflicted deficits by being passive until a few years ago with everyone except Durham’s marketing agency which it insisted must refer to the facility by it true identity while somehow dealing with the obfuscation it tolerated  elsewhere.

I cringed when news reports repeated (although in much more genteel language) an urban legend that somehow Durham’s community marketing agency felt “uncomfortable” with the arrangement inferring less had been done for the convention center back when I ran the DMO.

The cardinal rule for a DMO is to do what’s best for the community as a whole when it comes to optimizing visitation including the 10% who attend conventions, while maintaining a level playing field.

When it comes to attracting out-of-town meetings, this isn’t just about being fair to local stakeholders such as hotels and other privately-owned meeting space as well as the convention center but to be absolutely fair to meeting planners and organizers.

The job of a DMO is to draw attention to Durham and then assist while meeting planners and other site selectors make the best decision for their groups as to which venue and part of town are best for their needs.

It is up to each facility including the convention center by that point to close the deal and harvest their share while the DMO provides level platforms for information.

A few community DMOs play favorites, but it is at their peril as has been so often proven, including elsewhere in North Carolina.

However, a level playing field meant that the Durham DMO always did much more to promote downtown Durham, and thus the convention center, than it did for other facilities.

We made sure the other facilities understood why, but that this extra effort would stop short of ever “sole-sourcing” the convention center to a meeting planner which is what the management company and owner of the adjacent hotel demanded.

What did we do extra?  A special section on downtown including several pages of schematics on the convention center, dining maps to show proximity of restaurants, a walking tour, a time/distance/frequency shuttle schedule to and from other hotels and facilities to name just a few examples.

We even intervened to smooth over relations between the convention center management and planners from time to time back then when a sense of entitlement threatened to poison the site selection process.

But none of this overcame the primary reason the convention center performance was limited – the lack of nearby hotel rooms.

Of course there were market trends to blame.  The facility opened just as the nation’s meeting planners shifted preferences to hotel meeting facilities and away from downtowns and conventions centers because the number of facilities rapidly increased, while the number of conventions went into a long slow decline,

That is still underway today.

Until now, Durham’s local governments have avoided the slippery slope many communities have fallen down when they disguise deficits by creating special slush funds to pay out of town groups subsidies to use certain facilities.

Durham visitation outperforms those communities that do “pay for business” according to analyses of participation in activities such as conventions, sports and performing arts where that tactic is used.

Sadly, community marketing organizations and chambers of commerce are often the ones leading communities over this cliff.  But ultimately, the problem is not just a failure to understand the law of supply and demand.

If instead of subsidizing events, cities and counties as well as surrogates such as DMOs and chambers, where they contract other, traditional economic development services, would adopt full cost as well as full attribution accounting, they could make or recommend much better decisions.

This would be looking at the benefits as well as costs of events and facilities more holistically, like an ecosystem.

Maybe the convention center deserves partial credit for an event its existence helped intrigue even when another local facility in the community is selected.

Maybe the Museum of Life & Science deserves partial credit for increased property values in surrounding neighborhoods.  Maybe facilities and events that cannibalize underwriting, should deduct that from overall an event’s overall impact.

It isn’t as far-fetched or complicated as it sounds.

But cities and counties are not alone in the struggle to adapt accounting to be more consistent and inclusive when it comes to fully allotting costs and benefits.

The free market has long avoided “full cost accounting,” instead pushing what are called negative externalities (certain costs) off on consumers and taxpayers.

Even countries are now being challenged to move beyond merely using GDP (gross domestic product) or inputs minus subsidies in value as a measure of economic health.

An alternative to using only GDP is called IW (inclusive wealth) an approach that measures the positive change in human well-being across generations in a country by factoring in the social value of all capital assets, natural, human and produced.

It is consummately free market, just without opaque freeloading.

It has been under refinement since at least 1987 and linked here is the 2014 Inclusive Wealth Report. It doesn’t reject the value of GDP.  It just takes a much more full-accounting approach to growth, and particularly sustainable growth.

Natural capital includes fossil fuels, minerals, forests including non-timber resources and agricultural land.  Human capital involved education and health.  Produced capital includes equipment, machinery, roads etc.

Add them up and deduct things like oil capital gains and carbon damages and you have an Inclusive Wealth Index.  My interest is in natural capital so I’ve read and re-read the 2012 report with a focus on that area.

Each report gives a rating overall for 140 countries and then zeros in on one of the three areas of capital, sort of like a balance sheet is used by the private sector but far more inclusively.

Accounting and metrics such as these are important because they help individuals, communities, states and countries make decisions with a full understanding of the inherent tradeoffs.

To bring it back to subsidizing events, even when the dollars are raised privately, they didn’t just magically appear without having an adverse impact on areas including other events.

Failing to grasp subtleties such as this is how communities make decisions that gradually hollow out unique sense of place.

Inclusive Wealth is a better way of looking at deficits and surpluses as well as a far more inclusive way of measuring impact.

The sooner it filters down to the local level, the better it will be for communities still able to salvage the distinct sense of place that make them worthy of love by both those who live there but those who visit regardless of purpose.

The Same Ole’ Enemy – 239 Years Later

Taking a long-view of economic history is another way to pinpoint the fact that climate change is a direct result of human activity.

Years before it would be confirmed by Berkley Earth by scientists who were skeptical about climate change but who found the link after going over data from the last 250 years, one could see the link pinpointed in the work of economic historians such as the late Dr. Angus Maddison in his book entitled Contours of The World Economy 1-2030 AD.

Berkley Earth reconstructed climate data to make their link, while Maddison reconstructed economic growth over three millenniums to find a pattern.  He learned that between the years 1 and 1000 AD, around the time that another era of climate change spawned Viking conquests, people had actually become slightly poorer overall.

Between 1000 AD and 1820, economic growth was stagnant even in western Europe and spinoffs such as the American colonies and fledgling United States of America.  The surge following 1820 was brought about as the industrial revolution kicked into ever higher gears.

Ironically, the seminal Boston Tea Party protest was not over unfair taxes but a revolt against a tax loop-hole created by the British for a “too-big-to-fail” corporation at the disadvantage of small independent merchants, some of them smugglers, as noted in this excellent TED Presentation  published on “Black Friday” by Stacy Mitchell, a senior researcher for the Institute for Local Reliance.

I agree with Republican lawmakers that there is something wrong with government but, in my opinion, size isn’t the real issue.  Making government more nimble and responsive seems much more important. Nor do I buy the part of their tightly-woven narrative that this group’s frequent stalemating is on behalf of small businesses.

I am far more persuaded that the policies that have marginalized the middle class over the last thirty years and eroded small business by consolidating almost every part of the economy into the control of a few top-heavy players has been engineered not by government or the free market but by those on whose behalf lobbyists have rigged the system.

Even the process of devising regulations has been polluted by special interests; and those who argue that regulations should be simplified are far too often only fronting for interests, such as outdoor billboard companies, eager to see these regulations further rigged to their exclusive benefit.

“Rent-seeking,” the term economists give this loathsome activity probably dates back to the 1879 book Progress and Poverty, written by economist Henry George in the early years of the Gilded Age.  George observed that poverty occurred back then when policies permitted absurd “economic rents” to be charged by monopolists including landowners resulting in an over-concentration of unearned wealth.

George proposed solutions he believed would benefit both capitalism and labor while curbing these rent-seekers.  Seven years after the book was published, George sought the office of mayor of New York City but finished behind a Tammany Hall candidate.

However, the coalition forged by George caught the attention of the third place finisher, Republican candidate Theodore Roosevelt.

Henry George had forged a coalition of groups that in a few years would become nationwide force known as the Progressive Era, which sought, in part, to curb the excesses of the Guided Age.  A variation would elect President Theodore Roosevelt and inspire the Square Deal including conservation and anti-trust.

It isn’t easy being a Republican right now.  A social network feedback-loop has the party torn between a “circle the wagons” approach and a desire to open up to alternatives.  A new poll for ABC, Washington Post and the Pew Center shows that by 53% to 27% Americans will blame Republicans if the current impasse persists.

The party would do well to study T.R., one of its greatest Presidents.  The real enemy isn’t government or taxes and it isn’t Democrats or women or minorities.  Just as it was in Boston harbor as the dawn of the American Revolution, the common enemy is still economic rent-seekers.

This issue isn’t about the 1% or the wealthy, although many didn’t earn their wealth but used rent-seeking instead.  The issue economic rent-seeking, as Joshua Brown, who blogs at The Reformed Broker, put it so eloquently a year ago is about the fact that:

• “America hates unjustified privilege,
• it hates an unfair playing field and crony capitalism …,
• it hates privatized gains and socialized losses,
• it hates people who have been bailed out and don't display even the slightest bit of remorse or humbleness in the presence of so much suffering in the aftermath
• it hates rule changes that benefit the few at the expense of the many…”

Demagoguery Falls Between Pawn Stars and American Pickers

The adjustment I made a few weeks ago so that my mortgage payment would be sure to reflect a modest increase in local property taxes made me think back to something I read in a book a month or two ago.

I found it interesting that:

“the federal government accounts for about 65 percent of total tax revenues, while state and local governments account for 35 percent.”

“…the United States collects around 18 percent of GDP in tax revenues at the federal level and another 12 percent of GDP at the state and local levels. Washington currently returns around 4 percent of GDP to the states to implement health, education and infrastructure programs at the state and local levels.”

Equally interesting was the data that the book’s author, clinical economist Dr. Jeffrey Sachs, used to illustrate that “federal tax revenues as a share of GDP were nearly constant from mid-1950s onward at 17 percent to 18 percent of GDP.”

He continued by asserting that “in the United States, there has been essentially no change in the tax-to-GDP ratio since 1965.” The title of Sachs’ book, The Price of Civilization, comes from a quote by U.S. Supreme Court Justice Oliver Wendell Holmes Jr. in a speech he made in 1904, just a few years after he was made a recess appointee to the court by Republican President Theodore Roosevelt.

Holmes said that “Taxes are the price we pay for civilization.”  He had been wounded in combat, fighting for the Union during the American Civil War.  He died two days shy of his 94th birthday in 1935 --  just more than a decade before I was born and only a few years after he retired from the nation's highest court.

To put that in perspective, I was two years old when the 1st Cavalry Division was breaking through Korea's Pusan perimeter and the last time taxes were this low as a share of the nation's economy, according to the Associated Press. 

So I smiled yesterday as I read a weekly opinion column in the Washington Post by Richard Cohen who wrote that “it is entirely appropriate that last week’s GOP debates fell between ‘Pawn Stars’ and ‘American Pickers’ in the 10 most-watched cable television shows.”

I admit to watching two of the three.  I avoided the debate probably because, in the words of another WP columnist Kathleen Parker written a few months ago, I have trouble with “the Palinization of the GOP, in which the least informed earns the loudest applause.”

I agree with Cohen that the GOP appears to have “turned hostile to thought, reason and the two most important words in the English language: It depends.”

As with taxes he continues, “Should they be raised? It depends. It depends on economic and fiscal conditions — and on whose taxes will be raised and by how much.”  It depends!

“The answer cannot be “No, never.” That’s not an economic position; it is an ideological one and exhibits a closed mind.”

By the way, is it just me or is Rick on Pawn Stars a dead ringer for Homer Simpson?