A Midsummer Night’s Meanderings

I drove each major commercial corridor in the Green Bay metro area this weekend as I attended weddings, birthdays and graduation parties. As we mark the fourth anniversary of the Great Recession, it is reassuring to know that people still graduate, marry and have children. Weddings and children remind me that people do not exist to work, consume, occupy real estate, make money, pay taxes and fund entitlements for aging baby boomers. Rather people exist to know, love and to serve their creator and each other. As politicians argue about economic policy, we must remember that growth is always an expression of hope and confidence in the future. The question isn’t “when” will the economy improve, rather “why” will it improve?

 

The amount of commercial property available along these corridors is staggering. This leads to renewed thoughts and questions about how we got so overbuilt, how these properties will be sold and who will occupy them. What activities can go on within these spaces that aren’t happening now somewhere else and what kind of rent will those activities be able to support? Who will organize and fund these activities and why will people be willing to undertake them? Whose needs and desires will these enterprises be fulfilling?  The properties stand empty as owners and lenders hope to get lucky or as they simply delay the losses they are not prepared to take. Behind the vacancy signs stand the municipal and school district budgets which are only beginning to respond to lower incomes and property values. Behind the municipalities and school districts stands the State of Wisconsin which has provided much of the revenue to fund local services. The state delayed the local day of reckoning by borrowing and by using federal stimulus dollars to delay structural change. Behind the lenders holding mortgages on the vacant properties stands the FDIC trying to get the banks to recognize their pending losses without causing further declines in property values, more bank failures and more claims on the already empty FDIC Insurance fund. The Federal Reserve maintains the facade of calm control as it feverishly searches for some macro monetary tool to perpetuate its image as the apolitical guardian of our economic wellbeing.   Behind the political wrangling lies the question that will not be ignored. Who really is responsible for the economic well being of individuals, families and communities?

 

I came home from the east coast in 1983 and have spent the last 28 years intensely immersed in this region’s economic activity.  I came home to a state still reeling from the recession of 1980-1982. Unemployment reached 12 percent in 1982 at a time when inflation was in double digits. The prime rate reached 21 %. The landscape was littered with failed and failing enterprises. This was the last time we thought it was “lights out” for Wisconsin. From 1983 until 2000 we enjoyed a run of almost unbroken prosperity. Below the surface there were disturbing trends. By the 1980s, Federal agricultural policy had become what writer Wendell Berry characterizes as “get big or get out”. This was very bad news for a state whose climate, topography and culture were particularly well suited for smaller scale farming. Consolidation of land holdings and increasing dairy herd sizes were established trends in the state, but they really picked up steam in 1980s. Through subsidized lenders and various guarantee programs, the Federal government took effective control over agricultural finance.  Not being an Ag lender, I really didn’t notice this trend at the time, but anyone who grew up in Wisconsin could not miss the physical and cultural decay of rural areas. Within the state, consolidation of rural population brought vibrancy and prosperity to smaller cities such as Green Bay, Appleton, Wausau, Madison, Eau Claire and La Crosse. Rural areas with water and woods masked the decline in forestry and agriculture with growth in recreation based industries. The migration of well-educated, hard-working rural kids to these smaller cities coupled with a more favorable business climate propelled a remarkable flowering of small manufacturing and service firms across the state.   Children who grew up milking cows seven days a week thought a 60 hour work week at $12 per hour was easy living. With two such incomes and perhaps a little side work they could even buy hunting land or a small cottage up north.

Competition with far eastern labor rates began to impact small manufacturing in the early 1990s. This accelerated the in-migration of Hispanic and other minorities who were willing to work for lower wages here. The passing of Most Favored Nation status for China in 1996 triggered a massive capital investment in China.  Small domestic manufacturers were now competing with both far eastern labor and capital. There was a mad scramble to consolidate what production could be done here and to figure out how to capitalize on the sale of capital goods and know-how to the east. In the late 1990s we bravely told ourselves that this adaptation was both inevitable and desirable. Consumers enjoyed the cheap prices of Asian goods and we told ourselves that capitalism would soften communist political repression in China.  By the turn of the century, surviving Wisconsin manufacturers had become very nimble and creative, as well as tougher and fewer.

 

When those planes hit those towers in 2001, economic activity plunged. The Federal government used every instrument at its disposal to flood the markets with liquidity and drive interest rates down. The expressed plan was to stimulate real estate construction to lead the economy out of recession.  Stimulus stimulated. Real estate and defense spending averted a more serious decline. Prior to that time real estate was not a “core industry” in Green Bay. We didn’t build buildings and look for an activity to fill them with. It was astounding to watch strip centers, office buildings and land developments spring up around the area. Almost anything anyone tried in real estate seemed to work. When it didn’t work there was another buyer backed by another lender to get everyone out. Almost anyone with an offer to purchase on a property could get 100% financing on construction and probably an interest reserve to pay the loan until the “vacancy was absorbed”. Real estate development, construction, banking, health care and insurance were our new growth industries. The houses got bigger as the families got smaller. My mid-summer drives five years ago provoked the question, “who is going to occupy all this space, what are they going to be doing there and why?”

 

I can’t unravel the political wrangling we all hear, but I know it affects us. I know there are no easy answers, but the inflow of answers from Washington needs to stop. Local problems need local answers.  There are plenty of brains, experience and heart around here to get us back on a sustainable track. We need to stop expecting that the federal or state government is going to guide us back a 2005 level of prosperity that wasn’t actually based on local needs. We were building the straw house federal leaders of both parties told us to. Without these federal signals I am sure we would be undergoing challenging change in our agricultural activities, our manufacturing plants and our real estate usage. In my career we have followed the federal pied piper down three major dead ends. It was federal policy that drove the industrialization of agriculture in Wisconsin at an unnatural pace in 1980s and 1990s. It was federal policy that triggered the dramatic decline in manufacturing in the 1990s and it was federal policy that drove the speculative boom in real estate in the 2000s. Federal policy is to solve each problem with a worse one.

 

Bankers, property owners and bank regulators are looking at the vacancy signs and wondering when will the “vacancy be absorbed” as if there were some external, impersonal and inevitable answer. In a state with little or no population growth and no major migration within the state there really is no natural “absorption rate”. These spaces will be filled when people find an activity that others can and will pay for in those spaces. In the meantime prices and rents will continue to decline.

 

Turning from the commercial corridors into the industrial parks provides a much different and more positive view. The overwhelming majority of manufacturing and service businesses are doing quite well. Most of them received a serious shock in 2008. They responded quickly and vigorously to volume declines in the fall of 2008. Salaries were cut, people were laid off, business lines were consolidated and balance sheets were shored up. 2009 was a mixed year and 2010 was a good year for most. 2011 is characterized by rising commodity costs and somewhat softer volume.  Banks are willing to practically throw money at them again, but most are very tentative about investing and hiring other than what is necessary to maintain and incrementally improve existing business. Many have the desire and the resources to grow, but the environment gives them little reason to stick their necks out. They are concerned about the interconnected crisis in real estate and banking and are shocked by the state of public policy in Washington and Madison. They hear the public sector entitlement engine thirsting after profits they have not yet earned on risks they see little reason to take.  They do not see the public sector seriously engaged in making the hard decisions small businesses faced in 2008.

 

Many residential neighborhoods are beginning to cope with the distress that washed over them in 2008. People who can afford to are realizing that it is okay to sell into the same lower market they are buying in. Severe distress remains, but we are seeing and approving a higher amount of purchase mortgage and construction loans requests than we have since 2008.     

 

It is not my intention to be pessimistic.  There are always reasons for hope. We just need to break the habit of hoping for the next set of answers to arrive from Washington DC or from Madison.  We need to recover our long history of working with and for each other.  In the meantime, summer is balmy, the land is fertile and our children still celebrate the beautiful milestones that mark the path to their future and ours. Empty buildings are the physical byproduct of baby boomers’ dreams of self actualized ease. They will be filled by the work, hope and dreams of our children and their immigrant neighbors.       

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