Galveston Recovery

8/14/2019 Galveston Recovery

1/24

Galveston Recovery?by David Stanowski09 January 2009

Abstract:As the citizens of Galveston prepare to devise a "recoveryplan", I believe that there are four "key issues" that each of usshould take into account, if we hope to develop realistic"models" for recovery. In addition, any proposed plans shouldaddress how they will receive initial funding, and whether ornot they will be self-sufficient after that.

This article will examine these key issues and then outline andcritique six possible "models" for recovery, including thelikelihood of funding, and self-sufficiency.

Since I normally focus on the world of finance, from time totime, some readers feel that it is necessary to remind me thatthere are more important things than money; and Iwholeheartedly agree! However, I will return the favor by

reminding them that no matter how idealistic or Utopian yourideas and plans, the difference between fantasy and reality issomething called money!

Introduction:There is a big difference between survival, recovery, andprosperity. Galveston will survive the devastation fromHurricane Ike, but a true recovery is much less likely, because,for that to happen, the City not only has to get back to pre-Ikeconditions, it has to reverse the decline that it has been in foralmost 50 years! Sharing in the prosperity enjoyed by ourhome state is also a possibility, but it would take a paradigmshift of enormous proportions, to pull that off!

Key Issues:Some suggested recovery plans may need to include forecasts

1
http://www.galvestoneconomicreport.com/Texas-Still-Number-One.htmlhttp://www.galvestoneconomicreport.com/Texas-Still-Number-One.htmlhttp://www.galvestoneconomicreport.com/Texas-Still-Number-One.htmlhttp://www.galvestoneconomicreport.com/Texas-Still-Number-One.html


2/24

for conditions many years in the future, but this analysis willonly consider likely conditions over the next two to five years.

1. Economic/Financial:

One possibility is that the current international economic andfinancial decline will be ending soon, and that 2009 will see arecovery to conditions similar to what were in place two yearsago. This scenario will be referred to as "Business as Usual".

Another possibility is that what happened in 2008 is just thefirst leg down in what will prove to be a Depression as bad orworse than the 1930's. Such an event will cause greatupheaval in our way of life as stocks and real estate continue

to plunge, unemployment surges, and credit becomes verycostly or unavailable to most people. Such an outcome wouldspell an end to the consumer-spending binge of the last 40years, and usher in a new Age of Frugality. This scenario willbe referred to as "Hard Times".

Any realistic vision of how to rebuild Galveston should considerhow any proposed plan will fare under both of these scenarios.

2. Energy:The two major issues that must be considered are the primaryways that electricity will be generated, and whetherautomobiles will continue to be our primary mode oftransportation.One possibility is that fossil fuels will continue to supply thebulk of our energy, and that the price will stay low enoughthat 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 toalternative energies. At the present time, I am not aware ofany alternative fuel that can offer cheap and abundantenergy, competitive in price with Fossil Fuels. Thismeans that if there is a major switch to alternative energy,

2


3/24

either Fossil Fuels will skyrocket in price and/or becomeunavailable; or alternative energy is mandated by thegovernment. Therefore, if we find ourselves in a world run byalternative energy it will probably be at the expense of a

major decline in our standard of living. This will be referred toas the "Alternative Energy" scenario.

If the automobile is still the dominant mode of transportation,in most parts of the country, many people will probably beunwilling to give up the comfort and convenience of their cars,so plans for car-free zones or mass transit will be unlikely towork unless and until the car plays a very different role in oursociety.

It must be noted that the current low price for Fossil Fuels isalready undermining or destroying the cost-benefit trade offsof some Green initiatives like recycling and ethanol, as well asmaking many petroleum exploration projects unprofitable. Thelonger that this continues, the more difficult it will be to makea major shift to Alternative Energies.

3


4/24

Recycling Scrapped

Lending Woes Push Alternative Energies to Back Burner

Green-Collar Jobs?

Any realistic vision of how to rebuild Galveston should considerhow any proposed plan will fare under both of these scenarios.

3. City Government:Galveston's population and economy have been in decline foralmost half a century. Many of the current City leaders havebeen in office for the last 10-15 years, and have shown nointerest in, or ability to reverse this trend.

Any realistic vision of how to rebuild Galveston should consider

4
http://www.telegraph.co.uk/earth/greenerliving/3502220/Green-scheme-scrapped-as-household-recycling-is-sent-to-landfill.htmlhttp://www.chron.com/disp/story.mpl/business/6190611.htmlhttp://www.heritage.org/Research/EnergyandEnvironment/wm2122.cfmhttp://www.telegraph.co.uk/earth/greenerliving/3502220/Green-scheme-scrapped-as-household-recycling-is-sent-to-landfill.htmlhttp://www.chron.com/disp/story.mpl/business/6190611.htmlhttp://www.heritage.org/Research/EnergyandEnvironment/wm2122.cfm


5/24

how it will be achieved in spite of the current Citygovernment, or it must include a plan to change ourgovernment dramatically.

Another arm of local government, the Wharves Board, hasallowed the City's most valuable asset, the Port, to languish for50 years. Can the Port regain its former position as the City'seconomic engine under the management of the WharvesBoard, or will it have to be sold to a private company that caninvest the needed capital and manage it more effectively?

Finally, the local government school system, GISD, is notperforming satisfactorily, and is often cited as the primary

reason that members of the middle class leave the City. Canthe schools be sufficiently reformed if they remain agovernment school system, or will they have to be privatizedin some way, such as using vouchers?

4. Demographics:The "underclass" currently make up a significant portion ofGalveston's population. Any realistic vision of rebuilding thisCity must address how it will be achieved in spite of the

current demographics, or it must include a plan to changethem dramatically.

Models for Recovery:

1. UTMB2. Going Green3. Bedroom Community4. Resort5. Port6. Small-Business Haven

Even though each of the models for recovery, listed above,and detailed below, focus on just one specific sector of thelocal economy, each model assumes that other segments of the

5


6/24

economy must play a supporting role to make the plan work.For example, the first model will focus on UTMB with theunderstanding that the Port, tourism, retail, etcetera are stillessential to a plan with an emphasis on UTMB.

1. UTMBUTMB was the largest employer in Galveston, and it may stillcontinue to be, even at this time, so many people believe thatrebuilding it, back to what it was, is the key to recovery. Thismodel would have to rely on funding provided by foundationsand state and federal government to rebuild its infrastructure,and it would also require ongoing subsidies to offset operatinglosses, if it maintained the same mission it has had in recentyears. There is also the possibility of creating a hospitaldistrict to tax residents within some proximity to the hospitalthat would offset some of the operating losses.

It is certainly possible that UTMB's mission could be refocusedand/or major changes could be made to restructure itsoperations and management in such a way so as to reduce itslosses, but such changes would have to be spelled out in detailbefore they could be evaluated.

The fundamental problem with the UTMB model is that the twomost dysfunctional businesses in this country are health careand higher education. A medical school combines the worst ofboth worlds! However, this is certainly not a problem uniqueto UTMB.

These businesses are dysfunctional, because they areinefficient and overpriced, due to a lack of any meaningfuldiscipline from market forces. Health care is distorted by the

high-cost medical insurance that is provided by someemployers and government agencies, at little or no cost, whichinsulates those who have it from the actual cost of theirtreatments.

Higher education maintains its high cost structure due to

6


7/24

government and private loans and scholarships that make itpossible for students to pay much higher prices than they canreally 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.

7


8/24

Close up: 1998 to 2008.

8


9/24

The U.S. spends more per capita, by far, on medical carethan any other country in the world, but it has the fifthWORST life expectancy of all the developed nations!

This is a business model that is definitely broken, andsocialized 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 modelfor UTMB where it can prosper on its own without continuingsubsidies from foundations and state and federal government.This could, and may eventually be done, but we have alreadylearned that if UTMB survives with subsidies, it will collapseonce they are withdrawn. Therefore, this would be a verytenuous way to lead our recovery.

Obviously, someday, the health care and higher-education

businesses will be forced to completely restructure to becomeself-sufficient, but that is unlikely until it is done on a nationalbasis. Making individuals buy their own health insurance,putting alternative medicine on an even playing field, andmore competition from foreign medical facilities could help tomake American health care more efficient and cost effective.One of the latest trends is for people to fly to other countries

9


10/24


11/24

become, the more appeal the City will have to Green touristsand people who want to live in a Green city. The Greenmovement is largely ideological in nature, so it does attractlike-minded people.

However, if Going Green requires ongoing subsidies, it couldalso leave the City vulnerable to failure if the subsidies areremoved at a later date. Getting everyone to comply with thenecessary changes will also require draconian regulations,which will certainly drive away those who do not embrace thisvision.

Key Issues and the Going Green Model

Economic/Financial - If the economy remains in the Businessas Usual mode, Going Green will be more costly and strain ourlimited financial resources. If Hard Times are our fate, thismodel could be impossible to finance.

Energy - If Fossil Fuels remain affordable, the cost differentialin Going Green will be even more extreme. If FFs becomeunaffordable or unavailable, this model will become morecompetitive, but there may only be sufficient funding for veryrudimentary forms of Alternative Energy, so this model couldinclude a sharp drop in our standard of living.

For example, we could find ourselves setting up cisterns tocatch rain water to funnel to our backyard solar-water heatersjust so we can take a hot shower once a week.

11


12/24

City Government - The conversion to a Green City wouldrequire a lot of cooperation from City government. Is thislikely with the current administration? If not, what would berequired to work around them?

Demographics - The Green City that is envisioned by theproponents of this model is a world inhabited primarily by theupper middle class who have the resources to pay for itsadditional 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, butwhat about the underclass? Will this plan create a great deal ofdemographic dislocation?

If lower-class neighborhoods are made Green using subsidies,will there be ongoing subsidies for the higher costs of

12


13/24

operation and maintenance of the AE systems; if the residentscan't perform this function?

3. Bedroom Community

Some cities have done quite well without anything more than abasic retail and service economy; they call them suburbs orexurbs. They are bedroom communities where few peoplework, because they commute to where the high-paying jobsare located. Galveston has not succeeded as a bedroomcommunity, so far, but this could change with a new commuterrail system to Houston.

Key Issues and Bedroom Community Model

Economic/Financial - This model could be a success if theeconomy goes back to Business as Usual conditions, and the$250-300 million can be raised to build the commuter railsystem. If Hard Times are here to stay, the money may not beavailable to build commuter rail, and people will be a lot moreanxious to work close to home, to save time and money oncommuting.

If commuting becomes much less popular, new passenger railsystems may focus on longer runs like Houston to Dallas. It isunlikely that a train from Galveston to Houston could pay foritself, if it is not used for commuting; such a route might bebetter served by buses making the run 2-3 times a day.

Energy - If Fossil Fuels remain affordable, some people arebound to choose to commute in their cars, making it moredifficult to gain adequate ridership on the train. If FFs soar in

price, trains would be a lot more cost effective which shouldforce people out of cars and make it more likely that acommuter train would succeed financially.

City Government - The commuter rail system is a massive andcomplex project. Will our current City government be able toplay their role to get it built? If they stumble, can it be built

13


14/24

without them?

Demographics - One of the major hurdles to building asuccessful bedroom community is the current demographics of

this City. Commuters move to the suburbs to escape inner-cityproblems, but many areas of our City Center have the sameproblems as the big cities: poverty, crime, poor schools,etcetera. Why should anyone choose a bedroom communitythat does not allow the intended escape? There are some whocan overlook our crime rate and poor schools, but will theresufficient 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! Incontrast, an established bedroom community, likeFriendswood, has a Crime Index of 110; six times lower thanGalveston's!Source: City-DataSource: City-Data

GISD currently ranks number 812 out of the 1036 schooldistricts 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.Source: City-DataSource: City-Data

4. ResortThis model would focus on making Galveston the undisputed

playground for the State of Texas. Current attractions wouldbe upgraded, and others would be added. More condos andbeach houses would be built, and rehabs would continue onhistorical homes in the City Center for second homes.

The Strand Historic District would be transformed into a New

14
http://www.city-data.com/city/Galveston-Texas.htmlhttp://www.city-data.com/city/Friendswood-Texas.htmlhttp://www.schooldigger.com/go/tx/districtrank.aspxhttp://www.city-data.com/city/Galveston-Texas.htmlhttp://www.city-data.com/city/Friendswood-Texas.htmlhttp://www.galvestoneconomicreport.com/Strand-Historic-District.htmlhttp://www.thefinancialhelpcenter.com/Galveston-Economy/Downtown-Galveston-Under-New-Management.htmlhttp://www.city-data.com/city/Galveston-Texas.htmlhttp://www.city-data.com/city/Friendswood-Texas.htmlhttp://www.schooldigger.com/go/tx/districtrank.aspxhttp://www.city-data.com/city/Galveston-Texas.htmlhttp://www.city-data.com/city/Friendswood-Texas.htmlhttp://www.galvestoneconomicreport.com/Strand-Historic-District.htmlhttp://www.thefinancialhelpcenter.com/Galveston-Economy/Downtown-Galveston-Under-New-Management.html


15/24


16/24

The Restaurant Performance Index peaked in early 2004, and has been declining for almost five years! Italso 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 bodewell for this industry!

Landry's is likely the dominant company in Galveston's Leisureand 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 theinexpensive travel to the Island that is essential for this model

16


17/24


18/24

Economic/Financial - If the economy returns to Business asUsual, 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-bornetransportation allow it to capture market share from trucksand rail.

The Baltic Dry Index, a measure of ocean-going bulk shippingrates, has plunged recently, reflecting the current difficulties

in this business.

Energy - If Fossil Fuels remain affordable, the shippingbusiness should rebound as the economy improves. However,even if FFs become very expensive, that could work to theadvantage of the shipping business with its ability to carrymore cargo than any other mode of transportation for thesame 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 bevery dramatic, but if the Wharves Board stays in control thepotential is much more limited.

Demographics - Demographics probably have little impact onthis model except that it makes it more difficult to find skilled

18


19/24


20/24


21/24


22/24

their efforts have been in vain. A City that once boomed underthe control and guidance of great entrepreneurs is now run asa defacto monarchy by a government bureaucrat.

For some mysterious reason, the residents and business andproperty owners have entered into a Mokita to allow this tocontinue! If there is no avenue for improvement through thepolitical process, and a Committee of Barons does not step upto exercise some control over the king, what can the Long-Term Recovery Committee accomplish? Any funding that theLTRC is able to secure for the City will be turned over to ourlocal bureaucracy. If that does not give you pause, then youmust have dozed off.

The Prime Directive of the LTRC seems to be to reach aconsensus on how the City can recover. This article haspresented six potential models, and others will surely addmore. In my judgment, the first model, UTMB, is the leastlikely 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 verylittle private capital. It is also the most likely to succeed underany economic and financial conditions, and with any source ofenergy. Making the SBH work would "simply" require arejection of the current Mokita, and a local politicalrevolution; something that has very little chance of everhappening.

Others will surely disagree that the SBH is the ideal way to

spur the recovery of the City, so how will a consensus ever bereached on any one model? Maybe a consensus is NOT what weneed!

Consensus is most often the process of government, and rarelyexists in the free market. For example, consensus woulddecree that everyone who wants to own a car would have to

22
http://www.galvestoneconomicreport.com/Mokita.htmlhttp://www.galvestoneconomicreport.com/Fear-And-Greed-In-Galveston.htmlhttp://www.galvestoneconomicreport.com/Mokita.htmlhttp://www.galvestoneconomicreport.com/Fear-And-Greed-In-Galveston.html


23/24

buy one particular brand. The free market gives people thefreedom to choose from a wide assortment of brands, whichmakes everyone happy, and, if any one company goes out ofbusiness, there are still many other brands available.

Therefore, as the LTRC works to build a consensus model, tosatisfy the needs of both local and federal government, thereal answer for recovery may be for everyone to choose themodel that makes the most sense to them, and then join withlike-minded people to push several parallel efforts.

"Dissensus and Organic Process" addresses the problem that wecurrently face: since we can not know the details of the future

conditions in this City, with any degree of certainty; "aconsensus plan is NOT a good idea".

"Since these things cant be known in advance, though,whatever consensus you reach has a very real chance of beingexactly the wrong choice. This is where dissensus comes tothe rescue. In a situation of uncertainty, encouraging peopleto pursue different and even opposed options increases thelikelihood that somebody will happen on the right answer."

"Dissensus, it deserves to be said, is not simply a lack ofconsensus.

... where dissensus is encouraged, and individuals pursuetheir own visions rather than submitting to a socially basedconsensus, the results can include dazzling creativity."

"Evolution is dissensus in action, the outward pressure ofgenetic diversification running up against the limits ofenvironment and, now and then, pushing through to some newadaptation: the wings of bats, the opposable thumbs ofprimates, the cultural evolution of human beings. As we entera future of new limits and unpredictable opportunities, this isarguably the kind of organic process we need most."

23
http://thearchdruidreport.blogspot.com/2008/12/dissensus-and-organic-process.htmlhttp://thearchdruidreport.blogspot.com/2008/12/dissensus-and-organic-process.html


24/24

Documents

Galveston Recovery