Why Rich Kids Can Afford to Take Low Paying Jobs

There are distinct differnces in socioeconomic upbringing, that inevitably influence the choices that we make. Take for example, one child brought up whose family income is $350,000 per year. The choices in this example, are not dictated by money as much as consumption and values.  If your family income is $30,000 per year and you have two siblings and a single parent, life's choices are much different along with the child's perspective of consumption.  The privileged child, would often have parents who are philanthropic and teach the child the  value in giving back to the community through charitable donations and community service. The lesser privileged family typically will focus on what can be leveraged, to maximize opportunity for their children, in effort to give the appearance of being 'middle-class.' The class structure brings a mindset or psychological value to their children in the form of socioeconomic status.  The children who move up the socioeconomic ladder from middle to upper class (or lower to middle) will generally have drive to do whats best for them financially in order to not fall into the same trap that plagued their parents.  This may involve minimizing opportunities in areas such as teaching and public service, both of which are admirable professions. The marginal value of each dollar earned is inherently more expensive to those on the lower end of the socioeconomic spectrum. This leads to less charity as they move up the ladder. For children with more privilege, the marginal value of every dollar may be worth less (to themselves), given there status in society is more secure. The financial security provided by family is embedded in their psychological decisions, with few concerns of dropping out of the top 10%. With the former, an insecure social safety net will tend to favor less charity -- they do not have wealthy families to fall back on.  The case for contributing to charity is obvious -- those who have more ought to contribute more for the greater good of society. Moreover, the socioeconomic status of one's family will generally have a profound effect on charitable contributions-- those who feel their status in society is secure will donate more. 

The interaction of interest rates and house prices

The rise in interest rates will have a substantial impact on the affordability and price of homes in the future.  With Mr. Bernanke's Quantitative Easing, the pass through of security purchases goes directly into mortgage rates by using Agency Securities.  The ability of the Fed purchases to effect the housing recovery will be diminished psychologically over an extended period. However, the Fed can raise interest rates on the back end to influence investor activity.  As areas such as Washington, DC metro heat up, investment activity in construction improves, affecting the jobs picture positively.  The subsequent rise in house prices following a bust are much more sensitive to rising rates, as the minimum level of interest is met to spur investment activity and business decisions.  At this point, any change in rates may sway decisions, if investors are concerned with a fixed level of return associated with the corresponding interest rate.  However, over time, more consumption breeds more consumption, and the money multiplier spurs investment activity.  The psychological effect of borrowed money through low rates improves over an extended period of years.  The housing starts create construction jobs, the home purchases create retail and service jobs. The psychological effect of housing has a significant lag, like the multiplicative effect of money borrowed.  House prices do not increase until demand exceeds supply.  Builders and investors need a clear sign that the recovery is real before considering new investment. Thus, by the time higher level activity improves, the effect of the interest rates have already passed through to the micro-economy.  The psychological impact on housing is a large contributor to GDP in the form of jobs and consumer activity.  These jobs areas are significant contributor of income to many non-college graduates. The commercial and urban-suburban development phase has even longer lag, as the population migration and new income is needed to support increased commercial services - like food, retail, grocery and banking.  The divergence between cities like D.C. has a significant impact on inequality.  The urban development phase goes at a much higher and robust rate, spurring more jobs and services.  Areas with declining population often receive minimal commercial development (if any at all).  Therefore the gap in geographic and income inequality increase with population migration.

Chi-town (fiction)

One time, in September, I went to a bachelor party in Chicago. On Saturday we went to the Wrigley rooftops, and they had like 7 or 8 different Goose Islands on tap. My favorite was the Cubby Bear Blue. Second favorite was the 3-1-2, or as I say, the 'three-one-deuce', which is a Wheat Beer and is really good too. They also have a Green line beer and a Honkers ale and that is all I could remember. It was all you can drink and eat, so needless to say I drank all of them. Then me and my boy Scripps, whom I shared a bed with at hotel (it was Kosher, don't worry) made friends with a group of Puerto Ricans on the rooftop. After the game we went with our Puerto Rican friends to the Cubby Bear Bar across the street, who just happened to have the sweetest DJ in the world bumping the Bone-Thugs and Biggie at like 4:30 in the afternoon....so we took the RedLine back downtown to hotel to meet up with the group we were with that we lost at some point in afternoon. Later that evening we went to a late dinner at this place called the Admiral's Theater, which doesn't serve alcohol (you just go to bar beside place which is annoying, but effective).They put on this show at about 11:30pm and 1am where they get these two girls on stage, and there is a glass shower, and they have water that some how gets in the shower and then girls....use your imagination. I am still having trouble figuring out how on earth they get the water into the shower on stage...perhaps it was the all day drinking, but I wouldnt be so sure... I take that back, the 11:30 scene was two girls in the shower. The 1am was two girls dressed like Egyptians (post-Mubarak era) that were in a tomb that looked like King Tut and really liked each other. A lot. Kinda like what you see online but much better in person. Then the cab driver we got back that night at like 3am was either drunk or asleep or lit up or all of the above. I was shitfaced (obvi) by this point, but this mother F*kr couldnt drive a straight line to save his life and he was driving like 40mph on the interstate or like 80...no middle ground whatsoever. First I asked if he was ok then I just started talking shit to him. I wasnt as confident in his abilities as the actresses at the theater......

The Decline of the Dollar (1977-78)

Case Analysis: The Decline of the Dollar

            The central issue facing the Carter administration in 1977-78 was how to stop the rapidly depreciating U.S. dollar, without hurting domestic employment.  The run on the dollar was primarily a function of high (relative) inflation, increased deficits in the current account, and a lack of confidence in the administration. The theory behind floating exchange rates was that the currencies would self-regulate and provide market based corrections to eliminate deficits and surpluses in the balance of payments.  However, this adjustment often took place gradually, as it took time for policy makers to develop a suitable plan to increase confidence in the currency.  Additionally, the support for the dollar creates a paradox as policymakers must choose between a stronger currency (implying high interest rate strategy) and easy monetary policy to promote the domestic economy.

The era of the mid to early 1970s was characterized by increased deficits in the balance of payments, high inflation and obstructionist policies regarding free trade.  The Bretton Woods system of fixed exchange rates was implemented shortly after WWII and allowed countries to adjust the exchange rate to reflect structural defects in the balance of payments.  In 1971, the Nixon administration reached a deficit in the BOP of $30 billion and dollar liabilities of greater than $50 billion.  In anticipation of large quantities of dollar exchanges (fixed at $35 per ounce of gold), Nixon devalued the dollar by 10% and removed the U.S. from the gold standard.  The Smithsonian accords led to a temporary bounded exchange rate, with a range of 2.25%. The quasi-floating exchange rate was pressured as Nixon relaxed wage and price controls and speculators anticipated inflation.  By March of 1973, the industrialized countries of the West held floating exchange rate systems.

The policy of a fixed exchange rate was difficult to maintain and relied on a proactive government to constantly buy and sell currency to maintain a fixed market price.  In the event that a country such as France or Britain would run a large deficit, speculators would sell that country’s currency and buy stronger ones.  Speculators played an active role in promoting market based pricing, constraining the government’s ability to maintain a fixed rate.  Speculators often had more access to capital than governments, forcing devaluations by buying and selling large quantities of currency. Other constraints included inflation and U.S. demand for foreign goods (oil).  The result was reflected in the large deficit in the U.S. current account.   The current account balance went from a surplus of $4.3 billion in 1976 to a deficit of $15.3 billion in 1977, followed by consecutive negative balances in each quarter of 1978.  Meanwhile, Germany and Japan managed current account surpluses, while the United Kingdom broke even.  The theory behind the floating exchange rate system was currencies would self-regulate.  

President Carter’s first policy move was to obtain swap lines of credit with various central banks. According to the supplement, aggregated swap lines were approximately $30 billion.  The purpose of this policy was to use borrowed money to buy dollars (and sell foreign currency), stabilizing the value of the dollar.  This policy provided direct access for intervention in capital markets, much like a fixed exchange rate system.  This policy did not address underlying causes of the declining value of the dollar – appetite for foreign products (oil), current account deficits and inflation. The effect of this policy is shown in Exhibit 9, as net dollar support approached $2 billion.

President Carter’s administration also announced they would sell gold and reduce the size of the federal deficit.  Selling gold would imply devaluation relative to gold – using proceeds from gold sales to prop up demand for the dollar.  The effects from BOP deficits and inflation outweighed the ability of the administration to intervene in gold markets.  The attempt at reducing the federal deficit did little to quell market expectations for the future of dollar because neither addressed the root cause.  Current account surpluses from Germany and Japan also hindered Carter’s strategy.  The strong currency of Germany and Japan did not adjust ‘automatically’ as the theory suggested.  The countries with the strongest currency maintained surpluses in 1977-78 as the dollar declined dramatically.  U.S. consumers had a strong demand for foreign products.  The ability of Japanese and German to exporters to produce quality goods supported the value of their currency, even with higher prices for their exports.

            The Federal Reserve conducted monetary policy by raising interest rates (discount and fed funds rate) and increasing reserve requirements for banks, therefore increasing the amount of leakage in the system.  The policy was a direct response to inflation—higher leakage in the system would imply a tighter supply of money and reduce the multiplier effect of money.  Inevitably, the interest rate policy would provide confidence and support for the dollar by attracting foreign capital.  Inflation in the U.S. was running about 8-10% annual growth in the CPI in 1978.  The discount rate was increased to 9.5%. Fed Chairman Paul Volker was largely credited with breaking inflationary cycle and restoring faith in the dollar. 

            The policy of high interest rates and an independent Federal Reserve System allowed the U.S. to implement a strategy for contesting the market devaluation of the dollar.  The unique independence of the Fed was vital to restoring confidence.  Inevitably, devaluation of currency implies that imports become more expensive and exports will increase due to the relative affordability.  As interest rates rise, foreign capital flows into the domestic economy and increases the demand for dollars.  Currency speculators played a large role in the decline of the dollar, as did the strength of Japanese and German exports.  The market often takes time to adjust to new policies and can act rationally or irrationally in the short run. The long run effect of supporting the dollar was shown through a stronger currency and stronger domestic economy.  Ultimately, the Carter administration was troubled by the paradox of choosing between a strong dollar and a strong domestic economy. 

The Barry Bonds Witch Hunt

Steroid Facts:

• FDA did not send Andro warning letters until March 2004: http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/2004/ucm108262.htm
• MLB Drug Policy on Andro, June 2004:  http://mlb.mlb.com/news/article.jsp?ymd=20040629&content_id=783595&vkey=news_mlb&fext=.jsp&c_id=mlb
• Barry Bonds Single Season OBP 2004: 0.609; OBP 2002: 0.589: http://www.baseball-reference.com/players/b/bondsba01.shtml
• Waxman committee hearings begin Feb 2005: http://oversight-archive.waxman.house.gov/investigations.asp?start=25&ID=244, http://democrats.oversight.house.gov/index.php?option=com_content&id=2332&Itemid=2
• Mark McGwire interview, USATODAY, June 2010: http://usatoday30.usatoday.com/sports/baseball/2010-01-11-mcgwire-steroids_N.htm

The United States Financial Crisis of 1931

Case Analysis:

The United States Financial Crisis of 1931

The United States Financial Crisis of 1931

            The rapid deterioration of the economy in September of 1931 was sparked by Great Britain leaving the gold standard, in addition to the US policymakers’ inability to use decisive measures to combat the currency runs.  Policy solutions available today such as insuring bank deposits, a floating exchange rate and the Federal Reserve’s use of open market operations are essential to the strength of the financial sector and overall economy. 

            Fearing a debasement of the dollar in relative terms of gold, the article highlighted the willingness of investors to exchange dollars for gold in a time of panic.  The policy of refusing to exchange currency for gold in Great Britain on September 21st resulted in a direct loss of $116 million in U.S. gold reserves the following day.  By the end of October, the U.S. banking system lost approximately 15% of bullion reserve, or $727 million.[1]  The lack of deposit insurance was devastating to bank shareholders, leading to over 500 bank failures and a severely constrained money supply.  The advent of the Federal Deposit Insurance Corporation in 1933 was a direct response to the massive bank failures that occurred during the crisis (Harvard Business School 1983).

The Federal Reserve System

            The structure of the Federal Reserve System played a fundamental role during the panic.  Established by the Federal Reserve Act of 1914, the Fed used a decentralized structure of member banks in each region of the country, with the Federal Reserve Board located in Washington, D.C. The relationship between the member banks and the Board was complex and undefined, with a profound effect on the way the supply of money and credit was allocated throughout the system (Moss 2007). 

            The Fed used three primary tools to control the supply of money- the discount rate, purchasing acceptances in international transactions and conducting open market operations.  Of the three measures, the discount rate was the most widely used policy tool for controlling credit (at the time of the crisis).  The discount rate was a lever used to inject liquidity.  A higher discount rate would imply less borrowing in the banking system through higher interest rates.   Through acceptances, the New York Fed had the autonomy to guarantee short-term loans by charging a fee, or acceptance rate.  The New York Fed created friction among other Reserve banks by their unique position in the market, justifying the need to meet constantly-changing market conditions.  Open market operations were an unrestricted monetary policy tool of buying (or selling) securities in the market. The open-ended nature of open market operations was the most controversial at the time and not fully realized under fixed-rate exchange system. The conflict between the New York Fed and the Board among acceptances and open market operations led to reorganization with diminished political clout and more direct control in Washington (Harvard Business School 1983).

Like other banks, the Fed’s position in providing credit was stipulated upon receiving productive assets.  In turn, the Fed held a gold standard equal to a minimum of 40% of the value of bank notes, along with 35% of the deposit base.  Additionally, government securities purchased in the market were not valid forms of collateral or insurance.  These stringent collateral requirements were instrumental in restricting the ability of the Fed to deal with the crisis sufficiently and hindering the effectiveness of open market operations.  When inevitable bank runs occurred, depositors demanded gold putting significant pressure on the Fed’s reserves.  This resulted in political pressure by the Fed to raise the discount and acceptance rates to stop bank runs in October of 1931.[2]

The false sense of security in higher interest rates may have helped the Fed retain gold reserves, but it hurt the ability of commercial banks to borrow money and expand the economy.  The belief that tight money was a sufficient response to a liquidity crisis proved to be a disastrous form of monetary policy, even though the Fed won approval from the Hoover administration and news organizations such as Business Week and the Commercial and Financial Chronical.  The gold standard was a fixture in U.S. policy at the time, lacking the political capital to follow the British lead.  The foreseeable international crisis that ensued when the British dropped the gold standard was compounded by strict regulations requiring the Federal Reserve to collateralize bank notes the Treasury issued with a deteriorating supply of commercial paper and bullion (Harvard Business School 1983). 

Central Issue

The central issue for policy makers and stakeholders was how to shore up the banking system, preventing bank failure and instilling confidence in the financial system.  Underlying this issue was the departure of Montagu Norman from the gold standard, sparking investors to seek safety for their money. The belief that money could be transferred into gold at a fixed value provided stability and insurance. Gold had benefit of being a desirable asset, an alternative to paper money and immune to the decisions of policymakers.[3]  However, this asset class was devastating in a deflationary business cycle- the bullion supply could not be expanded quickly enough to meet the demand of central banks when the asset was needed most. Instead, central banks were forced to contract the money supply, charging higher rates of interest to keep confidence in the system and gold in the vaults. 

When the Bank of England removed the gold facility, Montagu inferred a devaluing of the pound against gold. Because the pound conversion rate was previously fixed at a higher exchange rate than the dollar, the move implied that the fixed dollar rate conversion at $20.67 per ounce was not justifiable – dollars were now worth less, even though the exchange rate remained fixed.  The banking system’s fixed exchange rate proved to be problematic in times of crisis. Based on current policy, the dollar exchange rate was not able to freely adjust to take into account exogenous shocks to the system.  Franklin D. Roosevelt (FDR) ended the policy of exchanging dollars for gold in 1933 (Moss 2007).  Moreover, the Fed lacked the necessary policy tools to maintain confidence in the banking system.

Policy Recommendation #1: Open Market Operations

One policy solution would be to let the New York Fed conduct open market operations more freely, injecting capital into the system, encourage borrowing at lower rates of interest and expanding the monetary base . This has the advantage of creating liquidity through excess reserves that the banking system desperately needed.  The premise of open market operations is that lower rates will spur borrowing, investment and demand for assets as the dollars multiply throughout the system. The disadvantage is that the excess liquidity may not necessarily create new money in the form of loans and capital investment.  According to the case study, borrowing from the Fed declined 83% between July of 1929 and September of 1930.  Unfortunately, the widely assumed theory at the time implied that raising discount and acceptance rates would increase cash flow and earnings, albeit without additional liquidity.  The political desire for open market operations was mute.  The widespread belief by the committee was that money was freely available, where the New York Fed unsuccessfully lobbied for expansion through open market operations in January of 1930 (Harvard Business School 1983). 

Policy Recommendation #2: Free Floating Exchange Rate

Allowing the exchange rate to float is another recommendation for improving economic conditions at the time.  This policy implies that the dollar-gold exchange rate would change dynamically with market conditions. Another advantage was that it allowed the Fed to control how much money was created (Moss 2007).  In reality, the demand and price of gold fluctuated because of its scarcity- indicating downward pressure on real prices (even though the nominal exchange rate remained fixed).  The advantage of a floating currency is the Federal Reserve would not be required to exchange gold at the fixed rate of $20 per fine ounce. For example, a floating exchange rate from a devalued dollar would imply $35 per ounce if the shift in market expectations was drastic. This would alter investors’ decisions about whether they should exchange dollars for gold at the devalued price, since $35 per ounce would not be as attractive (Moss 2007). The effect of a floating exchange rate is the Fed would experience significantly less stress on the excess reserves in deflationary environments, increasing the ability to maintain higher levels of capital. 

The disadvantage of this policy is the possibility of inflation and unpredictable consumer behavior.  Consumers may fear the worse and still end up exchanging dollars for gold at the lower price (driving the price of dollars down further).  Additionally, foreign investors may exchange dollars for other forms of currency with higher rates of return, causing further downward pressure.    Allowing a currency to float had the ability to bring about inflation. With a gold standard, the ability to print money was limited by the amount of gold available in reserves.  On the other hand, a free floating currency could print as many dollars as necessary to devalue the currency, expand the economy and facilitate inflation (or prevent deflation). 

Franklin D. Roosevelt accomplished part of this policy by devaluing the dollar against gold by 40% (Moss 2007). Executive order 6102, signed in April of 1933 prohibited the hoarding of gold by private citizens.  The order maintained the Federal Reserve was the only entity allowed to do so legally (Peters and Woolle n.d.). This policy had many of the same benefits as does a freely floating exchange rate system, creating excess liquidity and relieving the Fed of the stress of constantly removing dollars from the system.   

Policy Recommendation #3: Insuring the Consumer Deposit Base

The insurance of consumer deposits was an instrumental policy strategy, manifesting in the creation of the Federal Deposit Insurance Corporation in 1933. The FDIC proved to be a unique strategy, aimed at providing protection to citizens in the event of bank failure.  The bank runs were sparked out of fear that the customer’s money would be lost for good.  The mistrust in the banking system and inability to insure citizens that their dollars were safe led to massive bank failures in the late 1920’s and early 1930’s (FDIC n.d.). 

The main goal of the FDIC was to establish confidence in financial sector, limiting the bank runs and insuring consumers that their money was safe.  The FDIC would be funded by premium charged to banks for insuring their deposit base.   The long-run disadvantage of insuring deposits is that the corporation could go bankrupt in the event of widespread bank failure, exactly what it was designed to prevent.  Moreover, it could be difficult to set guarantee fees to anticipate future crisis. It is inevitable that premiums charged to depository institutions may be too high in times of panic and too low when the economy is expanding (FDIC n.d.).  Despite the disadvantages, deposit insurance could be the swiftest, least controversial and most effective policy tool if issued as Executive Order based on emergency measures.

Conclusion

            The U.S. Financial Crisis of 1931 was ignited by Norman Montagu’s decision to take Great Britain off a fixed gold-pound exchange rate in September of that year.  This led to momentous losses in U.S. gold reserves.  Policymakers eventually implemented powerful solutions to shore up confidence in the financial sector, but were slow to react to the dynamic changes in the market economy.  The gold standard hindered the ability of the Federal Reserve to conduct open market operations and devalue the dollar against the bullion. Ultimately, 1933 saw the creation of the FDIC helped prevent bank runs by insuring citizens that their money was safe.  Furthermore, FDR outlawed the hoarding of gold by private citizens and devalued the dollar against the bullion using an Executive Order, creating desperately needed liquidity.  The timely implementation of these solutions could have helped prevent additional bank failures, job losses and lessened the impact of the Great Depression.

Works Cited

Ahamed, Liaquat. Lords of Finance: The Bankers who Broke the World. 2009.

FDIC. History of the FDIC. n.d. http://www.fdic.gov/about/history/index.html (accessed February 2013).

Harvard Business School. "The United States Financial Crisis of 1931." Harvard Business School. http://www.hbsp.harvard.edu, 1983.

Moss, David A. A Concise Guide to Macro Economics. Boston: Harvard Business Review, 2007.

Peters, Gerhard, and John T. Woolle. Franklin D. Roosevelt: 34 - Executive Order 6102 - Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government. n.d. http://www.presidency.ucsb.edu/ws/index.php?pid=14611.

Salsman, Richard M. The Bank Runs of the Early 1930s and FDR's Ban on Gold. April 2011. http://www.forbes.com/sites/richardsalsman/2011/04/06/the-bank-runs-of-the-early-1930s-and-fdrs-ban-on-gold/ (accessed February 2013).

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[1] Franklin Roosevelt abandoned the conversion of dollars into gold in 1933. The policy of fixed exchange rate would come back into favor again, but vanished completely during the Nixon administration in 1971.

[2] Raising the discount and acceptance rates had the effect of contracting the money supply when demand for liquidity was at its peak. This is the exact opposite of policy used today by the Federal Reserve Board.

[3] Gold was immune in the sense that it could not be created artificially through policy decisions. Germany’s crisis of hyperinflation in the early 1920’s to repay war reparations with worthless currency left a lasting impression of the dangers of hyperinflation. 

Evolution of America's Cities

The Urbanization of America:

Evolution of America’s Cities and the Role of Urban Policy

March 7, 2013

            The evolution of cities in the United States was shaped by a confluence of economic opportunity, immigration, federal urban policy, as well as racial and ethnic tensions. The urbanization that occurred over time was direct result of the convergence of cultural norms that developed alongside economic growth opportunities and broader migration patterns.  Today, urbanization in America is best described by Richard Florida’s notion of the creative class--cities that flourish focus on attracting economically ambitious individuals with advanced degrees, thus creating sustainable neighborhoods.  Historically, technology has played a central role, influencing population movements and facilitating the transportation of people and goods across greater distances. This was first evident in the Industrial Revolution.

Industrialization 

            Urbanization in the 19^th century was facilitated by industrialization and technological advancements.  The production of steel was vital to growth of industrialized cities. Steel and concrete was produced in mass, used for construction of large buildings, and transported across rail and waterways. The advancement in mass production created jobs and economic opportunity in cities across the country such as Pittsburgh and the Midwestern United States. 

The advancement in transportation technology enabled the urbanization of cities as industrial manufacturing used the rail and waterways for the sale of goods across greater distances.  The continental railroad system was built out, resulting in an increase from approximately 9,000 miles of track in 1950 to nearly 260,000 miles of track in 1900.[1]  Cities such as Chicago created jobs and grew at breakneck speed as agricultural and manufactured goods could be produced in one location and moved using rail and waterways.  The Erie Canal connected Chicago to the Great Lakes and where goods were ultimately sold in New York, the eastern continental U.S. or even Europe.  Geographic location at the intersection of waterways or a large port was an important factor in the growth of cities during the Industrial Revolution.  The economic growth in cities that ensued from industrialization was dependent on a growing population and labor supply.  

Immigration

Immigration and the supply of cheap labor were instrumental in the growth of cities in the 19^th and 20^th centuries.  At the start of the 19^th century, New York had just 60,000 residents, compared with 3.4 million by 1900.  According to Judd and Swanstrom, 33.5 million foreigners migrated to America between 1820 and 1919.  Population growth was needed to support the industrialized economy as well as finance trade and investments.  The urban community was formed among class conflict between social and ethnic identity from immigration.  For example, working-class immigrants were found to be segregated, often in slums in close proximity to downtown or near wharfs.[2]  The segregation of immigrant communities was commonplace-- new migrants found familiarity among people that spoke the same language.  Migrants from Ireland and Germany were among the most prevalent groups that came to the United States.  New York and Chicago were noted for having over 80 percent of the population made up of first and second generation immigrants in 1870.  As populations grew, so did the need for basic services such as police, fire protection, water and sewer facilities. 

More recently, the rise of illegal immigration has created cultural and ethnic tension in places such as Arizona and Alabama.  The legislation passed in these states has required law enforcement to check for proper documentation, threatening jail time in the event that the legal (or illegal) resident does not demonstrate their ability to be a ‘lawfully present.’ The implication of this law is that legal Hispanic residents will no longer trust or respect the legal process if they are subject to unnecessary harassment.  The paradox created by immigration in urban areas is evident in the need for population and economic growth –housing consumption, labor, and services are demanded and sought by new migrants. The conflict arises when existing residents feel their political power and cultural norms threatened by the influx of new residents. 

The Great Migration

Prior to the Great Depression, a period of internal migration among blacks from the South to the industrialized North was referred to as “the Great Migration.” The blacks sought many of the same opportunities that foreigners were seeking – economic opportunity and freedom from racial persecution, among others.  The racially charged criminal justice system in the South and routine lynching of Blacks encouraged the Great Migration north.  Even though economic opportunity was abundant in the North, it was not equal and Blacks still faced barriers in housing and employment.  Blacks were not allowed in the most skilled occupations, nor were they permitted to live in exclusively white neighborhoods.  Restrictive covenants to prevent the sale of real estate to Blacks were widely accepted prior to 1948.  The breakthrough case, Shelley v. Kraemer, ruled that restrictive covenants to prohibit the sale of real estate based on race were in violation of the Equal Protection Clause of the 14^th amendment.   Despite legislative and judicial victories for African Americans, the presence of racial tension was a persistent social issue in urban areas throughout the 20^th century.[3] 

“White flight” was a term propagated by the movement of whites to the suburbs in the 1950s and 1960s.  The population explosion of whites to suburbs was fed in part by the movement of the black population into the inner cities and partly by the demand for housing from returning GIs.  Access to credit was plentiful (but not equal) with the creation of the Federal Housing Administration and the Veterans Administration.[4]  The policy of the housing agencies was to focus construction in neighborhoods outside the inner city.  Suburbanization became engrained in society, with a significant arrangement of racial segregation.  According to Darden, migration of Blacks to suburbia was concentrated in areas with existing minority populations, all but shut out of newer communities.  The flight to the suburbs among the African American population happened later and continued into the 1970s.  Darden noted that suburbs occupied by Blacks were characterized by being closer to the central city, high in density and more impoverished than similar neighborhoods occupied by whites.  The migration of whites to the suburbs left inner cities with a disproportionate share of poor residents in need of services, with little tax base to cover the costs. Discrimination in America’s cities was not impacted by legislation until the Civil Rights Act of 1964, the Housing and Urban Development Act of 1968 and the Fair Housing Act of 1968. 

Urban Policy

Urban Policy was a result of the geopolitical and demographic shift to the cities. The interaction of politics, policy and people in an urban setting precipitated the need for services.  The competition between rural and urban areas for finite resources at the state and federal level was at the heart of the urban policy debate.  However, representation based on population was not equal.  Until 1964, rural areas used legislatures to their advantage, drawing districts that were inherently unequal in population, with proportioned representation as high as 40-to-1.  In Wesberry v. Sanders, the Supreme Court mandated that Congressional districts be approximately equal in representation.  Going one step further, the Supreme Court also applied this ruling to state legislatures in Reynolds v. Sims.   These cases drastically altered the legislative representation of rural and urban areas.  Moreover, the cases improved the political capital needed to conduct urban policy at the federal and state-level.

The urbanization of America’s cities was significantly impacted by federal policy.  FDR’s New Deal policies had a substantial impact on restoring confidence in America’s cities following the Great Depression.  The National Industrial Recovery Act of 1933 and the Public Housing Act of 1937 was focused on improving housing conditions for low-income families.  The effect of Roosevelt’s policies was that it solidified a Democratic majority in the inner cities through relief and public works projects.  The overarching goal of LBJ’s Great Society programs was to cure social conflict with policies on civil rights, welfare and education, among others.  The crowning achievements of Johnson’s administration were the Civil Rights Act of 1964, the Economic Opportunity Act of 1964, and the Head Start Program.[5]  In the Carter administration, urban policy was concentrated in attracting jobs to distressed cities.  The urban trends faced by the administration was perpetuating on a multitude of levels - dealing with an unequal share of crime, poverty and social issues, coupled with declining tax base as middle income workers sought refuge in the suburbs.  In the 1980s, these problems were compounded by the Reagan administration’s policy of governing urban policy through states and local governments.[6]  According to Wolman, The Reagan policy was fixated upon a market approach, emphasizing economic growth at an aggregate national-level.  In Washington Abandons the Cities, Caraley hypothesized that Reagan and Bush policies had a profound effect on urbanization-- “accelerated the drift of large cities, especially the older ones of the East and Middle West, into underserviced, violence ridden, crack-infested, homeless-burdened, bankruptcy-skirting slum ghettos.” However, the unequal economic growth across geographic regions and within cities was persistent, some areas improved while others deteriorated from outward population and job migration.

Role of Gentrification

            More current developments in the urbanization of America have focused on the role of gentrification and the rise of the “creative class”.   Michelle Boyd suggested that mid-century urbanization had the effect of centralizing African Americans in impoverished communities and stripping them of resources, thus laying the groundwork for gentrification through racial ordering.  The ‘downtown renaissance’ that has occurred in recent years is broadly based on condo and warehouse loft-developments, often using tax breaks to finance new housing construction. The new urbanization model is based on attracting the demographic of young professionals, known as the creative class.  The creative class is a term proliferated by Richard Florida, used to describe the upcoming generation of artists, hipsters and young professionals whose tax base and presence is vital to creating sustainable neighborhoods and new urban development.  Florida suggests that the new way to attract business is to focus on attracting the human capital.  He uses San Francisco, Seattle and Austin as prime examples of cities that have been able to attract the creative class.  The inevitable effect of this development pattern is that long-time residents and low-income renters often become displaced, evicted, or subject to eminent domain land acquisitions as gentrification takes place.  Balancing the needs of long-time residents and creating a sustainable neighborhood for the creative class builds a cultural conflict between residents of drastically different socioeconomic backgrounds.  These conflict and development patterns are likely to persist based on the growing inequality and separation of classes that exist in the U.S. today. 

Conclusion

            The evolution of America’s urbanization has been heavily influenced by technology, socioeconomic status, race and ethnicity, immigration and the political process.  The interaction of people, politics and demographics has influenced urban policy in the executive, legislative and judicial branches.  In the 19^th and early 20^th centuries, urbanization was concentrated on industrialization and transportation technologies that allowed the sale of goods across greater distances, setting the stage for a globalized economy.  The 20^th century was marked by the Great Depression, the flight to suburbia and the deteriorating quality of city life.  Current developments have focused on revitalizing downtown areas and attracting the creative class necessary for cities to prosper in the 21^st century.  The interaction among demographic and socioeconomic shifts in population migration often creates cultural tension among long-time and new residents. Furthermore, rising income inequality in combination with cultural conflict create a significant challenge for urbanization in the 21^st century. 

Works Cited

Boyd, Michelle. "Defensive Development: The Role of Racial Conflict in Gentrification." Urban Affairs Review, July 2008.

Caraley, Demetrios. "Washington Abandons the Cities." Political Science Quarterly , 1992.

CQ Researcher. Urban Issues. Sage, 2013.

Darden, Joe T. "Black Residential Segregation Since the 1948 Shelley v. Kraemer Decision." Journal of Black Studies, July 1995.

Florida, Richard. The Rise of the Creative Class. Philadelphia: Basic Books, 2002.

Judd, Dennis, and Todd Swanstrom. City Politics: The Political Economy of Urban America. Glenview, IL: Pearson, 2012.

Lichter, Daniel, and Leif Jensen. "Rurarl America in Transition: Poverty and Welfare at the Turn of the 21st Century." Conference on Poverty, Welfare and Food Assistance, May 2000.

Rich, Michael. "Riot and Reason: Crafting an Urban Policy Response." Publius, Summer 1993.

Wolman, Harold. "The Reagan Urban Policy and its Impacts." Urban Affairs Quarterly, 1986.

           

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[1] Competition for railroad development was intense, leading to an over investment by municipalities as bond defaults and bankruptcies became prevalent.  The railroad companies issued stock and bonds, as well as securing significant subsidies from state and local governments. 

[2] Historically, sailors and dock workers were thought to be at the bottom of the social pyramid. 

[3] Riots following the assassination of Martin Luther King, Jr. were a result of the racial tension between whites and Blacks.  The tension is predicated on the basis of power and representation in the legislative and judicial branches- often disproportionately in favor of the white majority.  This was and remains evident along socioeconomic status.  More recently, the acquittal of four white L.A. police officers in the beating of Rodney King led to rioting in 1992.

[4] The Veterans administration home loan program was authorized in 1944, while the Federal Housing Administration was created a decade earlier.

[5] It is noted in the literature that LBJ’s Great Society and FDR’s New Deal were successful not only because they benefitted residents of urban areas, but also the whole nation.

[6] In Riot and Reason: Crafting an Urban Policy Response, Michael Rich noted a 50% reduction of federal aid to urban areas during Reagan’s first term as president.