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What Will Become of Cities?

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12 minute read

From the Brownstone Institute

BY Jeffrey A. TuckerJEFFREY A. TUCKER 

Everyone was supposed to be back at the office by now. It’s not really happening, however, and this has huge implications for the future of the American city.

Part of the reason is the cost, not only the finances of commuting but also the time. Another contributing factor is the crime and homeless population, which can be quite scary. Between inflation, rising poverty, substance abuse, and rampant post-lockdown incivility, the cities have become far less attractive. The impact on the commercial sector is becoming ever more clear.

Leases are coming up for large office spaces in major cities around the US. But there is a serious problem on the way. Occupancy of these offices is dramatically down in most places around the country. The decline is 30 percent on average and much more in San Francisco, Chicago, and New York City. That’s for now but many tech companies and others have laid off workers, meaning that even the companies that renew will be looking to downsize dramatically and with shorter-term leases.

Dylan Burzinski of Green Street writes in the Wall Street Journal:

“What began as a two-week work-from-home experiment in March 2020 evolved into an entrenched hybrid/remote work environment. Despite return-to-office mandates, office-utilization rates (how many people are physically in an office on any given day) have failed to pick up meaningfully this year and are still 30% to 40% below 2019 levels for most office markets across the country. Employers have shed office space as a result, helping send the amount of office space available for lease shooting up to historic highs across most major U.S. cities. The so-called availability rates are hovering at 25% on average compared with slightly above 15% before Covid—and things could get worse before they get better.”

You might say: there is nothing wrong with remote work. This would have happened regardless. Cities as we know them will pass into the night eventually as the whole world becomes digital.

That might be true in the long term, but it would have been far better to happen organically and not by force. That was the essence of what Burzinski calls the “pandemic” but of course it wasn’t a pathogen that sent millions out of the cities and leaving for the suburbs. It was the forced closures and then vaccine mandates and compulsory segregation by vaccine status.

For a time, cities like New York City, Boston, Chicago, and New Orleans were using state power to exclude shot refuseniks any normal public accommodations. The unvaccinated could not go to the library, the theater, restaurants and bars, and museums. It’s hard to believe that this actually happened in the land of the free but that is the real history of just two years ago.

Then once workers got a taste of remote work, and they fully realized just how ridiculously annoying the commute and office culture truly is, they would not and could not be pushed back into a full-time relationship with the office. That has left half and fully empty skyscrapers in multiple cities in the US.

The signs of doom are everywhere. A poll of New Yorkers has 60% saying that life quality is falling and this is in part due to far less quality foot traffic. San Francisco has record office vacancies. Even large cities in Texas have 25% vacancies. Population declines in many cities are continuing long after pandemic restrictions have been lifted.

And here is Boston.com:

Absent flexibility from building owners, businesses worry that downtown will see even more vacancies and that tourists and office workers slowly returning to the neighborhood will have less reason to make the trip. Consider the worst-case scenario: Downtown falls further into post-pandemic disarray or a long-feared “doom loop.”

Like many big-city downtowns, Boston is still in the midst of its recovery after COVID. Many offices and ground-floor spaces remain empty, and buildings lately have sold for sizable losses. Fears about what downtown will become were only exacerbated by the bankruptcy of the coworking giant WeWork, one of the largest office tenants in Boston.

How far this will go and what the implications will be is anyone’s guess. Will the skylines change? Are we looking at demolitions of some of the grandest structures in the coming years? It’s not entirely out of the question. Economic reality can be like a brick wall: when the expense consistently outpaces the revenue, something has to change.

Why not convert office spaces to domestic apartments? It’s not so easy. The buildings put up after the Second World War were made for air conditioning and had wide footprints without windows in a large swath of the space. That simply doesn’t work for apartments. Cutting a giant hole down the middle is technically possible but economically expensive, requiring the rents in the resulting properties to be in the luxury range.

The next phase will be the fiscal crisis. Dying business districts, declining population, empty office buildings all mean falling tax revenue. The budgets won’t be cut because of pension obligations and school funding. The next place to look is to the capital for bailouts and then of course the federal government. But those will only buy time and certainly won’t address the underlying problem.

What bugs me most about this is just how much it fits with the dream of Anthony Fauci as he and his co-author explained back in August of 2020. Writing months after lockdowns, with American cities on fire with protests, he wrote that we need “radical changes that may take decades to achieve: rebuilding the infrastructures of human existence, from cities to homes to workplaces, to water and sewer systems, to recreational and gatherings venues.”

If your view is that the real problem with infectious disease traces to “the neolithic revolution, 12,000 years ago,” as they claim, you are going to have a serious problem with cities. Recall that this is the guy who said we need to stop shaking hands, forever. The notion of a million people working and socializing together in a few square miles of space is something that would run contrary to the entire vision.

Klaus Schwab of the WEF, too, has an issue with large cities, too, of course, with constant complaints about urbanization and the imagined world in which large swaths of our lives are spent online rather than with friends.

So a tremendous downscaling of cities might have been part of the plan all along. You will notice that none of the cities on the chopping block seem to be offering a viable plan for saving themselves. They could dramatically cut taxes, deregulate childcare, open up more schooling options, turn police attention to petty crime and carjacking instead of traffic fines, and open up zoning. That’s not happening.

New York is going the opposite direction, having effectively banned AirBnB in the city. Why did the city council do this? Because too many renters with space found it more lucrative to offer short-term rentals and overnight stays rather than make long-term contracts for residents. This is a sneaky way of pillaging property owners, not exactly a good plan for attracting real estate investment.

All of this speaks to a much bigger problem, which is that the whole political system seems to be engaged in an amazing game of “Let’s pretend” despite the overwhelming evidence of the disaster that has befallen us. No serious efforts are underway to reverse the damage of pandemic lockdowns and vaccine mandates and segregation. This is partly because there has been zero accountability or even honest public debate about what governments around the country did from 2020-2022. We live amidst the carnage but justice seems farther off than ever.

Yes, a complete reversal is possible but it seems ever less likely, especially with the continued efforts to purge from public life those who dissented during the crisis, as well as the intensifying censorship on all mainstream media platforms.

Once you step back from it, nothing really makes sense. One might suppose that when a whole society – and really globe – embarked on such a crazy experiment and utterly failed in every way, that there would be a major effort to come to terms with it.

The opposite is happening. Even with America’s treasured cities in such grave danger, so much of it provoked by terrible policies over four years, we are still supposed to either not notice or chalk it all up to some inexorable forces of history of which no one has any control.

Author

  • Jeffrey A. Tucker

    Jeffrey Tucker is Founder, Author, and President at Brownstone Institute. He is also Senior Economics Columnist for Epoch Times, author of 10 books, including Liberty or Lockdown, and thousands of articles in the scholarly and popular press. He speaks widely on topics of economics, technology, social philosophy, and culture.

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Business

Broken ‘equalization’ program bad for all provinces

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From the Fraser Institute

By Alex Whalen  and Tegan Hill

Back in the summer at a meeting in Halifax, several provincial premiers discussed a lawsuit meant to force the federal government to make changes to Canada’s equalization program. The suit—filed by Newfoundland and Labrador and backed by British Columbia, Saskatchewan and Alberta—effectively argues that the current formula isn’t fair. But while the question of “fairness” can be subjective, its clear the equalization program is broken.

In theory, the program equalizes the ability of provinces to deliver reasonably comparable services at a reasonably comparable level of taxation. Any province’s ability to pay is based on its “fiscal capacity”—that is, its ability to raise revenue.

This year, equalization payments will total a projected $25.3 billion with all provinces except B.C., Alberta and Saskatchewan to receive some money. Whether due to higher incomes, higher employment or other factors, these three provinces have a greater ability to collect government revenue so they will not receive equalization.

However, contrary to the intent of the program, as recently as 2021, equalization program costs increased despite a decline in the fiscal capacity of oil-producing provinces such as Alberta, Saskatchewan, and Newfoundland and Labrador. In other words, the fiscal capacity gap among provinces was shrinking, yet recipient provinces still received a larger equalization payment.

Why? Because a “fixed-growth rule,” introduced by the Harper government in 2009, ensures that payments grow roughly in line with the economy—even if the gap between richer and poorer provinces shrinks. The result? Total equalization payments (before adjusting for inflation) increased by 19 per cent between 2015/16 and 2020/21 despite the gap in fiscal capacities between provinces shrinking during this time.

Moreover, the structure of the equalization program is also causing problems, even for recipient provinces, because it generates strong disincentives to natural resource development and the resulting economic growth because the program “claws back” equalization dollars when provinces raise revenue from natural resource development. Despite some changes to reduce this problem, one study estimated that a recipient province wishing to increase its natural resource revenues by a modest 10 per cent could face up to a 97 per cent claw back in equalization payments.

Put simply, provinces that generally do not receive equalization such as Alberta, B.C. and Saskatchewan have been punished for developing their resources, whereas recipient provinces such as Quebec and in the Maritimes have been rewarded for not developing theirs.

Finally, the current program design also encourages recipient provinces to maintain high personal and business income tax rates. While higher tax rates can reduce the incentive to work, invest and be productive, they also raise the national standard average tax rate, which is used in the equalization allocation formula. Therefore, provinces are incentivized to maintain high and economically damaging tax rates to maximize equalization payments.

Unless premiers push for reforms that will improve economic incentives and contain program costs, all provinces—recipient and non-recipient—will suffer the consequences.

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Alberta

Alberta’s fiscal update projects budget surplus, but fiscal fortunes could quickly turn

Published on

From the Fraser Institute

By Tegan Hill

According to the recent mid-year update tabled Thursday, the Smith government projects a $4.6 billion surplus in 2024/25, up from the $2.9 billion surplus projected just a few months ago. Despite the good news, Premier Smith must reduce spending to avoid budget deficits.

The fiscal update projects resource revenue of $20.3 billion in 2024/25. Today’s relatively high—but very volatile—resource revenue (including oil and gas royalties) is helping finance today’s spending and maintain a balanced budget. But it will not last forever.

For perspective, in just the last decade the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and as high as $25.2 billion (2022/23).

And while the resource revenue rollercoaster is currently in Alberta’s favor, Finance Minister Nate Horner acknowledges that “risks are on the rise” as oil prices have dropped considerably and forecasters are projecting downward pressure on prices—all of which impacts resource revenue.

In fact, the government’s own estimates show a $1 change in oil prices results in an estimated $630 million revenue swing. So while the Smith government plans to maintain a surplus in 2024/25, a small change in oil prices could quickly plunge Alberta back into deficit. Premier Smith has warned that her government may fall into a budget deficit this fiscal year.

This should come as no surprise. Alberta’s been on the resource revenue rollercoaster for decades. Successive governments have increased spending during the good times of high resource revenue, but failed to rein in spending when resource revenues fell.

Previous research has shown that, in Alberta, a $1 increase in resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year (on a per-person, inflation-adjusted basis). However, a decline in resource revenue is not similarly associated with a reduction in program spending. This pattern has led to historically high levels of government spending—and budget deficits—even in more recent years.

Consider this: If this fiscal year the Smith government received an average level of resource revenue (based on levels over the last 10 years), it would receive approximately $13,000 per Albertan. Yet the government plans to spend nearly $15,000 per Albertan this fiscal year (after adjusting for inflation). That’s a huge gap of roughly $2,000—and it means the government is continuing to take big risks with the provincial budget.

Of course, if the government falls back into deficit there are implications for everyday Albertans.

When the government runs a deficit, it accumulates debt, which Albertans must pay to service. In 2024/25, the government’s debt interest payments will cost each Albertan nearly $650. That’s largely because, despite running surpluses over the last few years, Albertans are still paying for debt accumulated during the most recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15), which only ended when the government enjoyed an unexpected windfall in resource revenue in 2021/22.

According to Thursday’s mid-year fiscal update, Alberta’s finances continue to be at risk. To avoid deficits, the Smith government should meaningfully reduce spending so that it’s aligned with more reliable, stable levels of revenue.

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