The Revival of Heartland America

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The greatest
real estate deal in man’s recorded history was the sell-off of the
Louisiana Purchase by the U.S. Government, beginning after the War
of 1812 ended in 1815, when the Mississippi River’s outlet into
the Gulf through New Orleans was assured. For about $1.25 per acre,
immigrants could buy land. They did not even have to pay cash.

Most of this
land was fertile. Transportation costs were low and then got lower.
The Mississippi River, the great lakes, the Erie Canal, and finally
the most revolutionary invention of the nineteenth century, the
steam railroad, converted 800,000+ square miles of raw land into
high-value, mostly family-owned capital. Jefferson thought it would
take centuries to fill the American heartland. It took less than
a century.

Politically,
this shift was reflected in the substitution of Ohio for Virginia
as the home state of presidents. What had been the Old Northwest
in 1787 became the center of the country by 1887.

Nevertheless,
New York City’s financial dominance and New England’s educational
dominance produced a coastal view of America. The communications
system, the roadways, and the movies added California to the East
Coast’s cultural dominance. Yet the accent of California remains
the Ohio accent. This is also true of the movies and television.

With the steady
decline of the number of people employed in manufacturing after
1950, the Midwest lost its economic clout. This decline included
the political clout of the industrial trade unions. The steel belt
became the rust belt.

The heartland
lost the best and the brightest to the coasts. This was a crucial
factor in the comparative decline of the region. Brains moved east
or west, where there seemed to be greater opportunities.

Today, this
process has begun to reverse. The establishment media, being coastal,
have ignored it.

Meanwhile,
the South has become integrated economically into the heartland.
Air conditioning and the low political power of trade unions in
the South combined to make the region acceptable to entrepreneurial
immigrants from above the Mason-Dixon line.

Then came national
retail chains after 1970. You cannot tell where you are on Main
Street anywhere in the country. They all look alike. America’s homogenized
culture has overwhelmed every region. This has reduced the culture
shock of a move into or out of a region.

One major barrier
remains: the cost of real estate. As in 1850, heartland America
has the edge: the lowest cost prime real estate on earth.

WHERE
OPPORTUNITY LIES

Prime urban
real estate around the world is now beyond the reach of the next
generation of home owners. Government subsidies to the real estate
market in the form of loan guarantees and central bank inflation
have combined to create demand for urban real estate. In the world’s
largest cities, anything that we would regard as comfortable, middle-class
living can no longer be purchased by members of the middle class
who do not already own real estate to sell to first-time buyers.

The heartland
is not where most people have preferred to live. Cold weather and
a more traditional lifestyle for eight decades failed to attract
the best and the brightest. The up-and-coming urban professionals
moved to the coasts.

The coastal
regions filled up with opportunity-seekers.

They bid up
the price of real estate after 1960. Today, their grandchildren
are locked out of the housing markets.

The U.S. government
responded politically to that age-old desire to "own your own
home." The government subsidized the creation of low-down payment
mortgages. This enabled home buyers after 1950 to lock in 30-year
mortgages, which they paid off. Now they are selling to late-comers.
The effect on housing prices of government-insured lending institutions
that issue mortgages is analogous to the effect of Medicare on health
care prices: upward.

First-time
buyers are becoming debtors to the tune of $500,000 to $700,000
in places like Boston and Southern California. They are locked into
30-year mortgages for the rest of their lives. They will pay 40%
of their after-tax income to buy their homes.

Family by family,
their children will either move out of the region, or else find
themselves strapped with lifelong debt, forced to live as dual-income
status for the rest of their lives.

This is good
news for entrepreneurs who own profit-seeking day cares (www.demischools.org).
For everyone else, it isn’t.

Whenever there
is a recession, thousands of these debt-burdened home owners will
be forced to abandon their homes. Their credit ratings will suffer.
They may be in debt for $100,000 or more after their homes are sold
out from under them in a foreclosure. Bankruptcy will become their
only option.

My son Scott
recently moved to Southern California. He and two others rent a
3-bedroom townhouse for $2,100/month. He tells me that because of
the high price of owning a home, rentals stay on the market for
only a few hours. You need to call to rent as soon as you see an
ad.

Newcomers in
his age bracket — under age 30 — who don’t earn $60,000 a year are
locked out of home ownership. This makes the two-income family a
necessity in most cases. The single-income family is a thing of
the past in the housing bubble regions.

My daughter
bought a 2100 square foot house in Nashville for about $170,000.
It has a decent sized back yard. In a comparable neighborhood in
Southern California, that house would sell for close to $700,000.

The difference
in price is not based on regional income levels. People in Nashville
don’t earn a third to a quarter of what people in Southern California
do. The difference has to do with the concentration of population.
People are paying heavily for weather and lifestyle. But the warm
weather and lifestyle are now overwhelmingly based on massive lifetime
debt.

High taxes
and extensive government regulation in California and New York and
Massachusetts are steadily reducing the level of economic opportunity.
Nevada is booming — an escape hatch from the tightening grip of
government across the border: no income tax. New Hampshire serves
the same function for people who want to escape the People’s Republic
of Massachusetts: no income tax, no sales tax.

We know from
the real estate mania on the coasts that, with respect to property
values, there is a lot of upward potential in the heartland. People
are willing to indebt themselves in every region. No longer is the
old "25% of income" rule operational. Yet heartland real
estate is still obtainable by honoring the old rule. The difference
is the decentralization of population in the heartland. The distribution
of population is much greater. The price of land has not been bid
up to such a degree.

Now telecommunications
are allowing residents of the heartland to make incomes comparable
to those on the coasts. This is creating economic opportunities
for young families. Women can work at home. Husbands can earn higher
salaries. Entrepreneurs can hire well-educated locals and recent
immigrants from the coasts. What took place in Austin, Texas, from
1985 to 1995 is indicative of what can happen in a decade: from
an oil economy bust to a digital economy boom.

The upward
pressure of population is relentless.

There are over
300,000,000 people in the United States. This will go to 400,000,000
by 2050. If these newcomers want to own their own homes, they will
have to find less expensive places to live — in Texas rather than
California or Phoenix.

YOUNG
FAMILIES WILL MOVE INLAND

Young people
want to own their homes. This is not going to change anytime soon.
They will move to regions where they can afford to buy a home. They
have been doing this since approximately 1640.

As American
families grew smaller after 1957, the links to existing regions
grew weaker. For a century, people moved to Southern California,
just as they had moved to New York City. Their children did not
move away from the parents and siblings. But now they must leave
family behind if they want to own their own homes.

The price of
entry-level housing in Southern California is now limited to Hispanics,
who are willing to put more than the immediate family into the same
home and share mortgage costs, and to highly successful two-income
families, especially Asians.

If you don’t
understand this, spend ten minutes on www.Realtor.com.
Look up any zip code in Southern California. Start with Anaheim:
92802. It was mostly orange trees in 1950. Then came Disneyland.
Begin with homes in the $400,000 range. Check the square footage.

One of the
most astute commentators on this major demographic shift is Joel
Kotkin. In a recent article in "The American Interest,"
titled "Little
Start-Up on the Prairie
," he describes Aurora, Nebraska
— population 4,500.

With its
neat town square and red-brick civic buildings, it suggests a
reflection of America’s bucolic past. Yet it may also represent
an oblique looking-glass glimpse into America’s future. In the
first half of the 21st century, as the nation grows
from 300 toward 400 million people, Aurora and other places in
the American Heartland will provide a critical outlet for the
restless energies and entrepreneurial passions of its people.

As I read it,
I thought of the
article
written by America’s most detail-conscious social observer,
Tom Wolfe. He wrote on the origin of Silicon Valley. The pioneer
was Robert Noyce of Intel, who grew up in Grinnell, Iowa. Noyce
brought the Protestant ethic of his youth and his college years
to Silicon Valley.

When they
were in their teens, Noyce and his brothers made their pocket
money by mowing lawns, raking leaves, and babysitting. In Grinnell
that was socially correct behavior. To have devoted the same time
to taking tennis, golf, or riding lessons would have been regarded
as a gaffe of the genus Conspicuous Indolence. There was no Country
Club set in Grinnell or anything approaching one.

Wolfe’s main
point was that in the Midwest, engineering was respected. This was
not the case "Back East," where pure science and the humanities
were fashionable. This was an aspect of European snobbery, Wolfe
said.

As a result,
the way to today’s Information Superhighway, more recently known
as the Digital Revolution, was paved entirely by geniuses from
the Midwest and farther west. The inventor of the lightbulb, which
started it all, was Thomas Edison from Port Huron, Michigan. The
inventor of the vacuum tube, which made possible the development
of the high-speed electronic computer, was Lee De Forest from
Council Bluffs, Iowa. The three engineers at Bell Laboratories
who won Nobel Prizes for inventing the transistor, which replaced
the vacuum tube, were John Bardeen from Madison, Wisconsin, Walter
Brattain from Seattle, Washington, and William Shockley from Palo
Alto, California. The chief of the fabled Bell Labs in those palmy
days was Oliver Buckley from Sloane, Iowa. The two inventors of
the integrated circuit or "microchip," the very heart
of the Revolution, were, first, Jack Kilby, from Jefferson City,
Missouri, whose chip was made of germanium, and, six months later,
Noyce, whose chip was made of silicon and became the standard
for the industry and gave the Silicon Valley its name.

Wolfe is wise
enough to know that Asians are pioneers in engineering in Silicon
Valley. They are from Way Back East, whose outlook is more Iowa
than Massachusetts. But the cultural atmosphere created by Noyce
and his team made their entry into the ranks of the creative engineers
far easier.

The brains
moved to the coasts, especially California, after World War II.
This process is now reversing, according to Kotkin.

Low electrical
costs, access to Interstate 80 to Omaha and Lincoln, and excellent
high-speed telecommunications make Aurora a desirable location
for several growing businesses. So, too, does a reliable, literate
and highly trainable workforce. . . .

Unemployment
barely exists, and the biggest problem — as in many other places
in the Heartland — is finding new workers.

The establishment
media do not perceive what is happening, Kotkin says. This is not
surprising; the establishment media are coastal.

Most media
coverage portrays a kind of Mad Max environment — a desiccated,
postmodern, Lost World of emptying towns, meth labs and militant
native Americans. Typical was a 2006 New York Times article describing
North Dakota as "Not Far From Forsaken." Its imagery
was of "irresistible decline" — dying towns, aging populations,
a place for the curious Easterner to visit now before it all blows
away. . . .

If there
is anything positive, according to such accounts, it lies in the
hope that much of the country between the Mississippi and the
Rockies might end up as a giant enviro-playground, subsidized
by environmentalists like Ted Turner.

This image
is mostly bunk, according to Kotkin.

Restoring
the natural environment where possible is no doubt a good thing,
but many places in this vast swath of the country also are rebounding
in terms of jobs, population and income — in many cases more so
than parts of urban coastal America. Fargo, North Dakota, for
example, grew by more than 20 percent between 1990 and 2000. Scores
of other Heartland towns and cities — Sioux
Falls, Des Moines and Bismarck among others — have seen similar
expansions.

He calls this
micropolitan growth. It is where most of the growth is nationally.
This is reasonable; anything large reaches its limits to growth.
The rate of growth slows.

Indeed, as
we look at the fastest job growth in the country, micropolitan
areas are fairly dominant: Of the 393 fastest growing regions
in the country, fifteen of the top twenty were micropolitan areas,
while only one, the sprawling city of Las Vegas, ranked among
the fastest job-growing metros in the country.

Beginning in
the 1970s, migration reversed. This has received little attention.
This has accelerated since 1990.

A decade
ago, Fargo was a classic backwater, and, after the release of
the eponymous movie, something of a national joke. A critical
shift occurred in the late 1980s when Doug Burgum, a local boy
from nearby Arthur, moved back home from Chicago to join a fledgling
local start up called Great Plains Software. Burgum recognized
the area’s considerable engineering expertise, both from North
Dakota State University and a large and expanding specialty farm
equipment industry, and he anticipated growth. . . .

The success
of Great Plains Software sparked other start-ups in fields ranging
from biotechnology to wireless networking to radio frequency identification
systems. Today, extrapolating from recent National Science Foundation
data, North Dakota has one of the highest rates of high-tech startups
in the nation, with the Fargo area as the undisputed epicenter.
The area is also luring businesses from the coasts.

A big part
of this shift has to do with lifestyle. What I decided in 1959,
when I left Manhattan Beach, California — what was to become the
consummate epicenter of Southern California’s real estate boom —
shaking the sand off my feet, is now becoming widespread. I wanted
out of that lifestyle.

So even in
the new, hipper Fargo, the real driver of success remains a set
of values — self-reliance, community spirit, a dedication to family
and faith — that have long been at the center of the Heartland
ethos. After all, along with its finer dining and hip bars, Fargo
has a microscopic crime rate compared to any major coastal city
and little in the way of an underclass. As in Aurora, local charities
thrive and community involvement is the norm.

These characteristics
are the main draw, particularly to relocating thirty-somethings,
notes Mike Chambers, founder of the fast-growing biotech firm
Aldevron. It’s an experience common to many companies in this
buckle of the Brain Belt. "Wherever you go you find people
who went out and came back," says Howard Dahl, CEO of Fargo-based
Amity Technologies, a fast-growing agricultural machinery firm,
and former head of the local Arts Council. "We constantly
get resumes from people at Boeing in Seattle or somewhere else.
They don’t come for the mountains or the sunshine or the culture
— they come back because of the kind of people who are here."

This shift
has religious overtones and implications. Americans are leaving
the "do your own thing" morally, in exchange for "do
more of your own thing" entrepreneurially.

Dahl, a former
Lutheran seminarian, says religion also plays a major role, but
not in the loud, assertive tones one might find in Houston or
Dallas. "Religion and family play a huge role in everything,
but it’s quiet. It’s people’s sense of ethics," he suggests.
"It’s that you care about your community and can count on
your neighbors."

What Robert
Nisbet identified as the quest for community back in 1953 is still
in process.

Such values,
Aurora’s Gary Allen believes, are the real secret behind the nascent
Heartland resurgence. In a town of barely 4,500, there are more
than thirty non-profit foundations, with assets in excess of $45
million. It is all part, notes Gary Warren, of a community spirit
reflected in the city’s extensive recreation facilities, its well-maintained
central square, library, senior center and museum. "Community
building is a way of life here," Warren offers. "You
give to your community the way you give to your church on Sunday.
It’s the essence of what it is to live here, and it’s why people
decide they want to come here."

CONCLUSION

For young families,
the heartland once again offers opportunity. The weather will not
get any better, but technology can overcome the worst aspects of
weather — air conditioning in the heartland South and heating oil
in the heartland North. I have preferred the South to the North.
Fuel costs may reinforce this preference over the next few decades.

For retirees,
the heartland is better. People move to Asheville, North Carolina,
not to Los Angeles, to retire.

For start-up
entrepreneurs, the heartland is better. Locate a university with
a good engineering department and move there. College Station, Texas,
gets my Good Entrepreneurship seal of approval. So does Auburn,
Alabama.

For young families
that don’t want to spend their lives as mortgage serfs, the heartland
is better.

The
South will rise again. It just won’t be the South. The South is
gone with the wind. If you think I’m wrong, let me know the next
time you see an all-white backfield at the University of Alabama.

February
20, 2007

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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