Thursday, February 22, 2007

Leverage, Part I

Yet another chapter in the book that I plan on writing someday will deal with leverage - the concept that investments in distressed city neighborhoods will have a 'spillover' effect and positively influence their immediate neighbors, with perhaps the likelihood that a single key investment can become the 'tipping point' and turn a neighborhood around. Leverage is a key concept, one that is used to justify initial investments, and is cited later as proof that these investments have had an impact. Yet, leverage is a notoriously difficult effect to quantify and to prove. And frankly, its something that is not often subject to rigorous analysis, for fear that it will evaporate or diminish under scrutiny.

Walk through any Cleveland neighborhood, and its easy to find areas of blight - abandoned houses, blocks of vacant land, empty storefronts. Fortunately, it is also relatively easy to find evidence of investment, efforts to counter decline. When you see a tidy yard and well-kept home, a vibrant business, or a new park in areas that are otherwise in distress, it is worth wondering whether these are isolated, stand-alone efforts that will remain disconnected from whatever larger forces lie behind the decline, or whether they are sparks that will catch fire.

Whether the capital for improvements come from government, or private business, or from simple elbow grease generated by a prideful homeowner, ultimately its a form of a bet that things will get better. Not counting the few diehard individuals who will do the right thing regardless, and maintian home, business and community in the face of overwhelming evidence of decline, most people want to be a part of a trend, and hopefully, an upward one. This is the 'enlightened self-interest' that is one of the main conceptual bases for capitalism - we all want to bet, we all want to win, and yet we know, there are going to be winners and losers.

Some folks are risk-averse and will stick with the tried and true - a job with a steady paycheck, a home in the most distant of suburbs, and an aversion to taxes, government and people who do not look like themselves. They tend to vote Republican (this may be my own prejudice - mea culpa). Others are forced to the middle, and work in unstable jobs, live in 'the old neighborhood' even though it is no longer fashionable, and feel there is some role for government, unions, and other counter-forces to capitalism. These folks have tolerated risk, perhaps unwillingly, but they will welcome change when they feel it's positive. They tend to be Democrats. Then there are the idealists, who want to be a part of 'turning things around,' who are the early adopters for neighborhoods, causes and movements. They will take on the most risk, and in fact, welcome it. They tend to be independents, but will vote Democrat when that is the alternative.

OK, there's my cartoon version of America. Nevertheless, regardless of the accuracy of my characterization, here we are - different groups of Americans, engaged in daily living, trying to make the best of things, placing their bets.

There are also exist those, like owners of check-cashing businesses, predatory lenders, phony preachers, crooked contractors, who exploit a downward cycle - but we will leave them aside at the moment. They will exist no matter what we do, and especially when a system in decline exposes weakness and masks corruption.

So, in the midst of these folks living their lives, there are neighborhoods and regions which have declined while others prosper. People from the upper, middle and lower economic rungs make choices where or where not to live, work and pursue happiness - or they are forced to make choices based on circumstances over wich perhaps they have little control. Whatever the micro forces might be, a mobile society like ours starts to look like rough topography - areas of concentrated wealth and poverty, new homes and abandoned ones, massive shopping complexes and struggling storefronts, wealthy schools and poor - and at the margins, newly trendy neighborhoods with artists and entrepreneurs, trying to be part of the next trend. People vote with their feet and move when they can, to bet on what they feel is in their own best interest.

I suppose if you left these forces alone, there would be a natural sorting - the 'destructive creativity' of capitalism. But then you might be left with a third world country, highly polarized between the haves and have nots, shocking wealth and appalling poverty.

Some countries have chosen to intervene - social democracies like Denmark, highly homogenous societies where the social contract exceeds individualism and everyone lives more or less the same, modestly, but with health care, education and housing all provided, generously supported by whopping big income taxes.

Other countries are essentially social Darwinists, with the wealthy explointing the poor, and ineffective or corrupt governments. Mexico comes to mind.

In some, the poor are actually trying to take on the powerful - the popular revolution in Bolivia, where the government attempt to privatize water was met with opposition, and successfully so.

Meanwhile, in the US, we are not sure where we should be, and our efforts to intervene are carried out by ever-changing coalitions of government, non-profit organizations, foundations, and individual activists. We veer to the right and to the left, ultimately ending up somewhere in the middle.

Let's return to leverage. This is what everyone hopes for and points to when projects are planned, dollars are committed, and ribbons are cut. But what does it take for leverage to actually occur?

That will be the subject of my next posting. I am going to have to think about it.