Galveston Economic Report
David Stanowski Publisher
by David Stanowski
09 January 2009
As the citizens of Galveston prepare to devise a "recovery plan", I believe that there are four "key issues" that each of us should take into account, if we hope to develop realistic "models" for recovery. In addition, any proposed plans should address how they will receive initial funding, and whether or not they will be self-sufficient after that.
This article will examine these key issues and then outline and critique six possible "models" for recovery, including the likelihood of funding, and self-sufficiency.
Since I normally focus on the world of finance, from time to time, some readers feel that it is necessary to remind me that there are more important things than money; and I wholeheartedly agree! However, I will return the favor by reminding them that no matter how idealistic or Utopian your ideas and plans, the difference between fantasy and reality is something called money!
There is a big difference between survival, recovery, and prosperity. Galveston will survive the devastation from Hurricane Ike, but a true recovery is much less likely, because, for that to happen, the City not only has to get back to pre-Ike conditions, it has to reverse the decline that it has been in for almost 50 years! Sharing in the prosperity enjoyed by our home state is also a possibility, but it would take a paradigm shift of enormous proportions, to pull that off!
Some suggested recovery plans may need to include forecasts for conditions many years in the future, but this analysis will only consider likely conditions over the next two to five years.
One possibility is that the current international economic and financial decline will be ending soon, and that 2009 will see a recovery to conditions similar to what were in place two years ago. This scenario will be referred to as "Business as Usual".
Another possibility is that what happened in 2008 is just the first leg down in what will prove to be a Depression as bad or worse than the 1930's. Such an event will cause great upheaval in our way of life as stocks and real estate continue to plunge, unemployment surges, and credit becomes very costly or unavailable to most people. Such an outcome would spell an end to the consumer-spending binge of the last 40 years, and usher in a new Age of Frugality. This scenario will be referred to as "Hard Times".
Any realistic vision of how to rebuild Galveston should consider how any proposed plan will fare under both of these scenarios.
The two major issues that must be considered are the primary ways that electricity will be generated, and whether automobiles will continue to be our primary mode of transportation.
One possibility is that fossil fuels will continue to supply the bulk of our energy, and that the price will stay low enough that it does not force major changes in our standard of living or lifestyles. This scenario will be referred to as "Fossil Fuels".
Another possibility is that there is a massive shift to alternative energies. At the present time, I am not aware of any alternative fuel that can offer cheap and abundant energy, competitive in price with Fossil Fuels. This means that if there is a major switch to alternative energy, either Fossil Fuels will skyrocket in price and/or become unavailable; or alternative energy is mandated by the government. Therefore, if we find ourselves in a world run by alternative energy it will probably be at the expense of a major decline in our standard of living. This will be referred to as the "Alternative Energy" scenario.
If the automobile is still the dominant mode of transportation, in most parts of the country, many people will probably be unwilling to give up the comfort and convenience of their cars, so plans for car-free zones or mass transit will be unlikely to work unless and until the car plays a very different role in our society.
It must be noted that the current low price for Fossil Fuels is already undermining or destroying the cost-benefit trade offs of some Green initiatives like recycling and ethanol, as well as making many petroleum exploration projects unprofitable. The longer that this continues, the more difficult it will be to make a major shift to Alternative Energies.
Lending Woes Push Alternative Energies to Back Burner
Any realistic vision of how to rebuild Galveston should consider how any proposed plan will fare under both of these scenarios.
3. City Government:
Galveston's population and economy have been in decline for almost half a century. Many of the current City leaders have been in office for the last 10-15 years, and have shown no interest in, or ability to reverse this trend.
Any realistic vision of how to rebuild Galveston should consider how it will be achieved in spite of the current City government, or it must include a plan to change our government dramatically.
Another arm of local government, the Wharves Board, has allowed the City's most valuable asset, the Port, to languish for 50 years. Can the Port regain its former position as the City's economic engine under the management of the Wharves Board, or will it have to be sold to a private company that can invest the needed capital and manage it more effectively?
Finally, the local government school system, GISD, is not performing satisfactorily, and is often cited as the primary reason that members of the middle class leave the City. Can the schools be sufficiently reformed if they remain a government school system, or will they have to be privatized in some way, such as using vouchers?
The "underclass" currently make up a significant portion of Galveston's population. Any realistic vision of rebuilding this City must address how it will be achieved in spite of the current demographics, or it must include a plan to change them dramatically.
Models for Recovery:
2. Going Green
3. Bedroom Community
6. Small-Business Haven
Even though each of the models for recovery, listed above, and detailed below, focus on just one specific sector of the local economy, each model assumes that other segments of the economy must play a supporting role to make the plan work. For example, the first model will focus on UTMB with the understanding that the Port, tourism, retail, etcetera are still essential to a plan with an emphasis on UTMB.
1. UTMBUTMB was the largest employer in Galveston, and it may still continue to be, even at this time, so many people believe that rebuilding it, back to what it was, is the key to recovery. This model would have to rely on funding provided by foundations and state and federal government to rebuild its infrastructure, and it would also require ongoing subsidies to offset operating losses, if it maintained the same mission it has had in recent years. There is also the possibility of creating a hospital district to tax residents within some proximity to the hospital that would offset some of the operating losses.
It is certainly possible that UTMB's mission could be refocused and/or major changes could be made to restructure its operations and management in such a way so as to reduce its losses, but such changes would have to be spelled out in detail before they could be evaluated.
The fundamental problem with the UTMB model is that the two most dysfunctional businesses in this country are health care and higher education. A medical school combines the worst of both worlds! However, this is certainly not a problem unique to UTMB.
These businesses are dysfunctional, because they are inefficient and overpriced, due to a lack of any meaningful discipline from market forces. Health care is distorted by the high-cost medical insurance that is provided by some employers and government agencies, at little or no cost, which insulates those who have it from the actual cost of their treatments.
Higher education maintains its high cost structure due to government and private loans and scholarships that make it possible for students to pay much higher prices than they can really afford, which prevents cost and price reform.
Note that from 1978 to 2004, the overall CPI grew from 100 to 300,
while Medical Care went from 100 to 500, and College Tuition and Other Fees went from 100 to 750! At the same time, some products
that are subject to full market forces, like Televisions, fell in price
from 100 to 27.
Close up: 1998 to 2008.
The U.S. spends more per capita, by far, on medical care
than any other country in the world, but it has the fifth
WORST life expectancy of all the developed nations!
This is a business model that is definitely broken, and
socialized medicine will only make it worse! If you think
health care is expensive now, wait until it is "free"!
It is very difficult to imagine any kind of business model for UTMB where it can prosper on its own without continuing subsidies from foundations and state and federal government. This could, and may eventually be done, but we have already learned that if UTMB survives with subsidies, it will collapse once they are withdrawn. Therefore, this would be a very tenuous way to lead our recovery.
Obviously, someday, the health care and higher-education businesses will be forced to completely restructure to become self-sufficient, but that is unlikely until it is done on a national basis. Making individuals buy their own health insurance, putting alternative medicine on an even playing field, and more competition from foreign medical facilities could help to make American health care more efficient and cost effective. One of the latest trends is for people to fly to other countries to have operations performed at a fraction of the cost of U.S. Hospitals. Medical Tourism
Key Issues and the UTMB Model
Economic/Financial - UTMB is much more likely to receive the necessary subsidies to rebuild and resume operations if conditions go back to Business as Usual rather than during continued Hard Times.
Energy - If Alternative Energy replaces Fossil Fuels, the expense of rebuilding and operating UTMB will probably be much higher.
City Government - Getting more UTMB employees to live in Galveston, where their incomes will add to the local economy, will require improvements in City government;
Demographics - and probably better demographics.
2. Going GreenAnother model that is popular with some is transforming Galveston into the Greenest city in Texas. This would entail rebuilding and retrofitting 20,000+ structures with more insulation, energy and water saving systems, Green building techniques, and alternative energy sources, such as solar panels and wind turbines. Since all of these technologies will cost a lot more than the standard way of doing things, this plan will require billions of dollars of subsidies from foundations and the federal government.
Other Green ideas involve banning automobiles from certain areas like The Strand Historic District and the Seawall, building bike trails, adding additional mass transit, and using the East End Flats for a wind or solar farm. Some have even suggested banning cars from the entire City Center.
The argument for this model is that the more Green we become, the more appeal the City will have to Green tourists and people who want to live in a Green city. The Green movement is largely ideological in nature, so it does attract like-minded people.
However, if Going Green requires ongoing subsidies, it could also leave the City vulnerable to failure if the subsidies are removed at a later date. Getting everyone to comply with the necessary changes will also require draconian regulations, which will certainly drive away those who do not embrace this vision.
Key Issues and the Going Green Model
Economic/Financial - If the economy remains in the Business as Usual mode, Going Green will be more costly and strain our limited financial resources. If Hard Times are our fate, this model could be impossible to finance.
Energy - If Fossil Fuels remain affordable, the cost differential in Going Green will be even more extreme. If FFs become unaffordable or unavailable, this model will become more competitive, but there may only be sufficient funding for very rudimentary forms of Alternative Energy, so this model could include a sharp drop in our standard of living.
For example, we could find ourselves setting up cisterns to catch rain water to funnel to our backyard solar-water heaters just so we can take a hot shower once a week.
City Government - The conversion to a Green City would require a lot of cooperation from City government. Is this likely with the current administration? If not, what would be required to work around them?
Demographics - The Green City that is envisioned by the proponents of this model is a world inhabited primarily by the upper middle class who have the resources to pay for its additional cost. If the City did get huge subsidies to get this plan rolling, members of the middle class, who don't like it, may have the resources to start a new life elsewhere, but what about the underclass? Will this plan create a great deal of demographic dislocation?
If lower-class neighborhoods are made Green using subsidies, will there be ongoing subsidies for the higher costs of operation and maintenance of the AE systems; if the residents can't perform this function?
3. Bedroom CommunitySome cities have done quite well without anything more than a basic retail and service economy; they call them suburbs or exurbs. They are bedroom communities where few people work, because they commute to where the high-paying jobs are located. Galveston has not succeeded as a bedroom community, so far, but this could change with a new commuter rail system to Houston.
Key Issues and Bedroom Community Model
Economic/Financial - This model could be a success if the economy goes back to Business as Usual conditions, and the $250-300 million can be raised to build the commuter rail system. If Hard Times are here to stay, the money may not be available to build commuter rail, and people will be a lot more anxious to work close to home, to save time and money on commuting.
If commuting becomes much less popular, new passenger rail systems may focus on longer runs like Houston to Dallas. It is unlikely that a train from Galveston to Houston could pay for itself, if it is not used for commuting; such a route might be better served by buses making the run 2-3 times a day.
Energy - If Fossil Fuels remain affordable, some people are bound to choose to commute in their cars, making it more difficult to gain adequate ridership on the train. If FFs soar in price, trains would be a lot more cost effective which should force people out of cars and make it more likely that a commuter train would succeed financially.
City Government - The commuter rail system is a massive and complex project. Will our current City government be able to play their role to get it built? If they stumble, can it be built without them?
Demographics - One of the major hurdles to building a successful bedroom community is the current demographics of this City. Commuters move to the suburbs to escape inner-city problems, but many areas of our City Center have the same problems as the big cities: poverty, crime, poor schools, etcetera. Why should anyone choose a bedroom community that does not allow the intended escape? There are some who can overlook our crime rate and poor schools, but will there sufficient numbers for a successful bedroom community?
In 2006, the Crime Index for the City of Galveston was 636, which is 97% higher than the national average of 321! In contrast, an established bedroom community, like Friendswood, has a Crime Index of 110; six times lower than Galveston's!
GISD currently ranks number 812 out of the 1036 school districts in the State of Texas, while Friendswood (FISD) ranks number 12! Source: Schooldigger via Texas Education Agency.
In 2007, the Median Household income in Galveston was $35,610 versus $85,509 in Friendswood.
4. ResortThis model would focus on making Galveston the undisputed playground for the State of Texas. Current attractions would be upgraded, and others would be added. More condos and beach houses would be built, and rehabs would continue on historical homes in the City Center for second homes.
The Strand Historic District would be transformed into a New Urban Center that would be a destination in and of itself for visitors within 150 miles. Parking meters would be installed on the Seawall that would be dedicated to funding and maintaining the beaches and building public restrooms on the Seawall. The virtually untapped tourist market related to the historic nature of the City would be developed with tours of the historic districts, more events like the Historic Homes Tour and the Reenactment of the Battle of Galveston, and lectures and seminars on historic topics, including genealogy.
Galveston would become a Port-of-Call to bring in more customers by ship, and casino gambling would top off the list of the new attractions.
Key Issues and the Resort Model
Economic/Financial - This model could work quite well, if the economy returns to Business as Usual, so that people have sufficient discretionary income to devote to the leisure and entertainment sector. However, if Hard Times are here, most people will be forced to give up much of their leisure spending to focus on life's necessities, which could decimate this industry, and it would also be devastating to the second-home market.
The Restaurant Performance Index peaked in early 2004, and has been declining for almost five years! It also shows that the restaurant business has been in outright contraction for more than a year. Since restaurants are one of the key components of the Leisure and Entertainment sector, this does not bode well for this industry!
Landry's is likely the dominant company in Galveston's Leisure
and Entertainment sector. During the current Bear Market,
their stock has plunged 80%, while the S&P 500 has "only"
declined 53%, reflecting the vulnerability of this sector,
if Hard Times continue.
Energy - If Fossil Fuels remain affordable, it will allow the inexpensive travel to the Island that is essential for this model to work. If prices on FFs rise dramatically, it will hurt the resort business.
City Government - To take this model to its full potential, City government must help the private sector overcome many difficult political hurdles to acquire a Port-of-Call and casino gambling. If they don't, can these critical attractions be acquired without them?
Demographics - Some believe that the low-end demographics of the City actually help to provide a labor force for low-paying jobs in the resort industry, but many of these workers prove to be unsuitable and unreliable which leaves local businesses in dire need of a better labor force. In addition, low-income neighborhoods make it nearly impossible to upgrade the entire City into an upscale island resort like Hilton Head or Marco Island.
5. The PortThis model relies on the revitalization of the economic engine that built this City. The Port has been struggling under City ownership and management since 1940. Selling it to a private company would give the Port the capital to catch up on maintenance, and then upgrade its facilities, as well as expanding into container operations on Pelican Island. Private ownership would also bring a more entrepreneurial approach to management, and find the Port paying millions of dollars in property taxes to the City.
The Port is the perfect heavy industry for the City, because its a business that invests a lot of capital per employee, which allows it to pay above-average wages. If it can be sold to a private company, it would offer one of the few models for recovery that does not require large capital infusions from the government and/or foundations.
Key Issues and the Port Model
Economic/Financial - If the economy returns to Business as Usual, the Port is the ideal engine to drive the local economy. If Hard Times are in store, ocean-going shipping could take a big hit unless the economies offered by water-borne transportation allow it to capture market share from trucks and rail.
The Baltic Dry Index, a measure of ocean-going bulk shipping
rates, has plunged recently, reflecting the current difficulties
in this business.
Energy - If Fossil Fuels remain affordable, the shipping business should rebound as the economy improves. However, even if FFs become very expensive, that could work to the advantage of the shipping business with its ability to carry more cargo than any other mode of transportation for the same amount of oil burned.
City Government - If our City government can be persuaded to sell or lease the Port to private interests, the upside could be very dramatic, but if the Wharves Board stays in control the potential is much more limited.
Demographics - Demographics probably have little impact on this model except that it makes it more difficult to find skilled and reliable workers who live on the Island.
6. Small Business HavenSmall business has been creating roughly 80% of the new jobs, in recent years, it has contributed a great deal to economic growth, and it has paid a large share of the taxes. However, most small businesses do not make enough money to pay the ever rising taxes, fees and regulations heaped on them by local governments. Is there any place where local government is more of an obstacle to small business than in the City of Galveston?
For this reason, Galveston has the opportunity to turn its greatest deficit into its greatest asset! If our local government could do a complete about face and become the most business-friendly government in the State, just imagine how entrepreneurs would flock to the City! Such a change would not just attract businesses that target residents and tourists as customers, it would be a big advantage to those that do business anywhere in the world!
In a time when debt will continue to crush banks, businesses and individuals, the local business community would do its part by creating an organization that would help local businesses raise equity capital in efficient and inexpensive ways. This would include innovative methods for raising equity financing for umbrella corporations in areas like the Strand Historic District, and neighborhood business districts.
Local business groups would also lead the way with innovative thinking and support for a new "informal" small business model which would include home-based businesses, street markets, and other forms of mobile vendors.
Arlington, TX Center for Entrepreneurship
and the Small Business Haven Model
Economic/Financial - This model would be very compelling whether or not the economy went back to Business as Usual or suffered under Hard Times. The nature of how small business would be conducted, and what businesses would be most profitable, depending on which scenario was operable, might change dramatically, but business would want a business-friendly government in either case.
Energy - Likewise, no matter what energy source was dominant, a small business haven would still be a big draw to entrepreneurs.
City Government - Obviously, the critical element to make this model work would be a seismic shift in our local government. It would have to shed many employees, cut its payroll and benefit costs dramatically, make all interactions with entrepreneurs, like permitting, efficient and seamless, and become a true partner with the business community. Their motto would have to become; "How can we help you make more money, so we can increase our sales and property tax revenue?"
Demographics - The current demographics could present a problem as the new crop of entrepreneurs, that moved to the City, found it somewhat difficult to find skilled workers. They would have to rely on commuters from the Mainland for some jobs until the mix began to change for the better.
No matter what model or models we choose to implement for our recovery effort, the chances of getting hit by another Hurricane Ike, in the next few years, are remote, but the people of this City are going to suffer from much greater stress, due to the threat of hurricanes, for the next few years, with the trauma of Ike fresh in their minds. Almost any hurricane in the Gulf will have Galveston in its "cone of probability" for some period of time. How are we going to encourage some of those who have decided to stay from changing their minds when they find themselves the possible target of another hurricane?
Building a seawall or dike around the island is a possibility, but is that feasible given the financial situation in the world today? Would such a project protect the whole island, or just what is already behind the Seawall? If Galveston makes a big push for this kind of protection would every city in Hurricane Country demand equal protection?
Galveston's Recovery is a long shot simply because of the counter-productive processes that dominate current thinking and habits in the City!
In the 19th Century, Galveston was blessed with some of the greatest entrepreneurs in the world, but then it suffered a nearly-fatal blow when the 1900 Storm devastated the City. Not to be defeated, these business owners pulled together to organize one of the greatest private-sector recovery efforts that the world has ever seen by building the Seawall, and raising the grade, as they rebuilt the City.
Then, for some inexplicable reason, after this phenomenal effort, they were unable to find a way to successfully respond to the completion of the Houston Ship Channel, in 1915, which opened the Port of Houston to ocean-going shipping. So great was this blow, that by 1940, the private owners of the Port of Galveston gave the Port to the City, which locked in the City's decline. With the City's economic engine sputtering, the population began to decline by 1960.
Throughout nearly half a century of decline, many individuals have stepped up to try to reverse this slide, but without sufficient support from an apathetic and dispirited citizenry, their efforts have been in vain. A City that once boomed under the control and guidance of great entrepreneurs is now run as a defacto monarchy by a government bureaucrat.
For some mysterious reason, the residents and business and property owners have entered into a Mokita to allow this to continue! If there is no avenue for improvement through the political process, and a Committee of Barons does not step up to exercise some control over the king, what can the Long-Term Recovery Committee accomplish? Any funding that the LTRC is able to secure for the City will be turned over to our local bureaucracy. If that does not give you pause, then you must have dozed off.
The Prime Directive of the LTRC seems to be to reach a consensus on how the City can recover. This article has presented six potential models, and others will surely add more. In my judgment, the first model, UTMB, is the least likely to succeed, and from there each becomes more likely, moving from one to six.
My favorite, number six, the Small Business Haven, does not rely on outside funding and subsidies, and it requires very little private capital. It is also the most likely to succeed under any economic and financial conditions, and with any source of energy. Making the SBH work would "simply" require a rejection of the current Mokita, and a local political revolution; something that has very little chance of ever happening.
Others will surely disagree that the SBH is the ideal way to spur the recovery of the City, so how will a consensus ever be reached on any one model? Maybe a consensus is NOT what we need!
Consensus is most often the process of government, and rarely exists in the free market. For example, consensus would decree that everyone who wants to own a car would have to buy one particular brand. The free market gives people the freedom to choose from a wide assortment of brands, which makes everyone happy, and, if any one company goes out of business, there are still many other brands available.
Therefore, as the LTRC works to build a consensus model, to satisfy the needs of both local and federal government, the real answer for recovery may be for everyone to choose the model that makes the most sense to them, and then join with like-minded people to push several parallel efforts.
"Dissensus and Organic Process" addresses the problem that we currently face: since we can not know the details of the future conditions in this City, with any degree of certainty; "a consensus plan is NOT a good idea".
"Since these things can’t be known in advance, though, whatever consensus you reach has a very real chance of being exactly the wrong choice. This is where dissensus comes to the rescue. In a situation of uncertainty, encouraging people to pursue different and even opposed options increases the likelihood that somebody will happen on the right answer."
"Dissensus, it deserves to be said, is not simply a lack of consensus.
... where dissensus is encouraged, and individuals pursue their own visions rather than submitting to a socially based consensus, the results can include dazzling creativity."
"Evolution is dissensus in action, the outward pressure of genetic diversification running up against the limits of environment and, now and then, pushing through to some new adaptation: the wings of bats, the opposable thumbs of primates, the cultural evolution of human beings. As we enter a future of new limits and unpredictable opportunities, this is arguably the kind of organic process we need most."
In closing, I will continue to participate in the consensus-building process required by the LTRC, to help get federal funding for the City, but I will also pursue dissensus by participating in any independent projects that appeal to me. I encourage others to do the same.
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