Bankers' Lunch: Second Course
With the national economy in the tank and the local election season just around the corner, we thought it time to reconvene our panel of high-finance pundits to discuss the state of affairs here on the ground.
Patrick Cleary, 49, spent 17 years as an investment banker on Wall Street — 10 with Chase Manhattan and seven with the Trust of the West Company — before moving to Humboldt County 10 years ago. He is the owner and general manager of Lost Coast Communications, which operates three local FM radio stations: KHUM, KSLG and "The Point." He serves as chair of the Headwaters Fund Board, a county agency that oversees the $22 million in economic development funds received by the county in 1997 as part of the deal between Pacific Lumber Co. and state and federal government over the Headwaters Forest.
Thomas Bruner, 38, has a masters degree in international finance from Thunderbird, the Garvin School of International Management, one of the most prestigious business schools in the country. After graduation he moved to Seattle, where he worked as a consultant for a variety of financial companies, including an investment bank and a venture capital firm. He is the co-founder of LiveListings.com, a business-to-business firm specializing in the automotive parts market. Since moving to Humboldt County, he has been a lecturer in the HSU Department of Economics.
As it did two years ago — see "Bankers' Lunch," Feb. 2, 2006 — the panel met for lunch at Curley's Grill, Ferndale. Bruner had the Chinese chicken salad and a light beer. Cleary had the ahi tuna with salad. The Journal had the catfish sandwich and fries.
State of the County
NCJ: Looking back at the last time we talked, here. We talked a lot about lumber — the timber economy. Marijuana. Humboldt State, education. A lot of those things have changed, and most of them for the worse, in the last two years. The timber economy has gone way down, almost to zero.
Cleary: Well, you've had two things happen. You've had the national slowdown in house-building, which has particularly impacted the Douglas fir market. A little less for redwood. You've had the Pacific Lumber bankruptcy. The Pacific Lumber bankruptcy has had a very large impact on the local economy. Fortunately the trees are still growing, so it shouldn't be a prolonged thing.
But, you know, I believe the last numbers I saw were interesting. The level of timber harvest is not any lower than it was in the early '80s. Now, the early '80s were not a good time in Humboldt County — I'm not trying to say that. But we've been through these cycles before with timber. The remarkable difference is that in the early '80s the unemployment rate was close to 20 percent.
Our unemployment rate hasn't responded the way it did in the '80s. We're far more insulated to the timber industry than we were back then.
Bruner: We were so dependent on timber back then. We're more diversified.
Cleary: The February unemployment rate was 6.9 percent.
Bruner: It's usually about one, one and a half above California.
Cleary: Only over the last five years. Over the '90s, it was consistently higher than California.
One of the things that I think is there's a coming shift in Humboldt County — not only in Humboldt County, in a lot of rural counties — the entry-level workforce is going to decline over the next couple of years. Because the number of kids coming out of school is going to decline. You have 1,600 kids right now in the 12th grade. And then you've got basically, in the sixth grade, 1,200 kids. A certain portion of those are going to drop out, so you're looking at about 30 percent decline in high school graduation coming over the next six years.
In addition you have the baby boomers starting to retire. So you have a replacement workforce needed. And, you know, what you are hearing a lot more in Humboldt County, which you never used to hear, is not that there are no jobs but that there are no employees to fill the jobs. That is a profound shift in our local economy.
It's true in a lot of rural communities. And there's an element ... a certain percent of the youth is always going to migrate to the city. The population of the United States has gone to primarily an urban population over the last hundred years. Right, Thomas?
Bruner: Absolutely. Just as we're seeing this happen in developing nations — India, China — a mass influx of people into the cities and causing problems. Evolutionary cycles ...
Cleary: That's also in the book I gave you — The Logic Of Life. It talks about the impact of competition and stimulation of the cities. The question is: Does the Internet allow you to compete with that? And the answer is: Partially.
The Disappearing Worker
NCJ: O.K., you're saying that the crisis now is that there aren't enough employees.
Cleary: Really, it's a question of skilled employees.
Bruner: What kind of skills?
Cleary: Accounting. God, I mean ...
Bruner: That's true. You're talking to someone who's been looking for professionals, and oh, my God!
Cleary: Nurses. Tech workers. Web designers.
Bruner: Well, nurses and medical are going to be huge in the future because you've got nothing but old people coming up here.
Cleary: It's interesting — at the Headwaters Fund we realized that sitting back and waiting for grants to come to us wasn't getting us the quality of grants that we wanted to see. So we decided to try to take a more proactive role and look for initiatives where we could make a difference.
And so we had a series of meetings and we invited employers, and we invited people who run municipal infrastructures, and we invited educators, and we invited different people to talk about their concerns. And the number one concern, and this surprised us — it's fair to say it surprised the entire board — and the number one concern was lack of a skilled workforce.
Bruner: Were you really surprised by that? I can understand how the bureaucrats would be surprised by that. They don't know crap. But I'd be surprised that you were surprised by that.
Cleary: Well, the fact that Humboldt Moving and Storage is paying approximately $20 per hour for entry-level employees ...
Bruner: A pretty good wage, you'd think.
Cleary: And they can't ...
Bruner: And you don't need a high school employee to work there, right?
Cleary: No! But you have to pass the drug test. And you have to not have a criminal record, because they don't want convicted felons going into peoples' homes. And I think your article was talking about how they were bringing in people from Poland! [Ed. note: See "No Work? No Workers!" March 29.] Danco Construction's always struggling with trying to have enough construction workers. Their workforce has aged five years in the last five years. Basically meaning that they're not hiring younger people because they're having trouble finding younger people to come into the trade.
NCJ: So you often hear a refrain that's been in the community for quite some time now: "We're losing our children. Our children are moving away."
Bruner: Of course they are. Wouldn't you?
Cleary: If you look at the entire school population — 1995 to now — it has declined about 20 percent over the last 10 years. It's not like we're losing them; we're not making them!
Bruner: That's a good point. If you correlate it to the birth rate of the United States, we are negative, of course. Western countries, all of them are negative on birth rates. Which always goes back to the immigration thing, which is so stupid. We need immigration; without it we're screwed.
Cleary: And the other thing is that we have Humboldt State, which is a natural source of young people. So some people's kids go out of town to college, don't come back. Humboldt State students can come here and stay, if they choose to.
Bruner: Mmmm! That's the thing! If they choose! That's my argument — we need to give them more reasons to choose to stay.
NCJ: Just to be clear, you're saying that it's bogus. The argument that we don't have good jobs here, that the economy can't support new workers and so therefore our kids are moving away, you're saying that's unfounded.
Cleary: I prefer "unfounded" to "bogus," yes.
Barriers to Entry
Cleary: Here's the thing. I was talking to one of the entrepreneurs who started his business here in the '70s, and who runs a very big company here now. You know, you go back to the Yakimas, the Kokatats...
Bruner: The people who moved here and understood that they had to make it on their own, and did.
Cleary: ... the Plaza Designs. And there was this sort of wave of entrepreneurialism that happened in the '70s and maybe the early '80s that has never quite been replicated. And so I was asking him, "What happened? Why did all these things happen?"
And he said "You gotta understand, back in those days we had cheap real estate and cheap labor. That was our competitive advantage." And now that paradigm has shifted in Humboldt County. It's gone.
Bruner: I think you're missing a significant portion of it, and that goes to my argument. It's lower barriers to entry. You think — back in those days you did not have all the government regulations and rules, and people coming down on you, and major hurdles that you have to deal with now. If you're entrenched and large and own land and are in the business of selling hardware or something else, you have a monopoly position that is now being protected by the NIMBYs.
You didn't have to fight all that back in the '70s and '80s. "You want to start a business? More power to you. Thanks a lot, citizen, for creating jobs and helping us all out." Today it's "Good luck."
NCJ: You think that's true?
Cleary: It's especially true of California.
NCJ: And some would say here, too.
Bruner: I'd say worse here than California in general.
Cleary: It goes to the issue of the general plan.
Bruner: Which is where I'm coming from, too. Lowering barriers to entry will create more opportunity and keep people around.
Cleary: It's on every level, too. I'm trying to build a new radio tower right now. I'm getting no opposition from the county, no opposition from the state. But the feds are concerned because of the birds flying into the guy wires.
NCJ: Legitimate concern, or no?
Cleary: I don't know. Fish and Wildlife has produced a study, supposedly, that 50 million birds a year are killed by guy wires on towers. And there are a lot more towers than there used to be, because there's cell phone towers in addition to radio towers.
But, you know, what has happened in our society — from, I think, well-meaning people who have been trying to address histories of abuses — is that we have an overregulated society, to some degree.
Bruner: [Thumps table.] Because we're so wealthy. We're a victim of our own success. When you're worried about putting a roof over your head and feeding your children, you don't have a lot of time to go out and sweat a lot of the small things that people are getting a little over the top on.
There are reasonable arguments and there are unreasonable arguments. I come across them all the time in this town. I have no problem with health and safety and ADA regulations — O.K., I can live with that ...
Cleary: But you also don't want a pulp mill built right next door to your house.
Bruner: Not next to my house. Maybe next to someone else's.
Bruner: It entrenches monopoly position as you raise barriers to entry. The idea that any of us could really go out and buy some land and build on it in Arcata, is practically absurd. The money, time and energy it would take you would go well beyond the realities of doing the job. Getting through the bureaucracy, going to people, knowing who's your friend, who's not ...
A lot of this crap comes down to "Do I like you? Do I like your politics?" This and that — it's stupid. You've wiped out a population that has no way to engage in this economy, to compete and push us forward.
Cleary: Part of the problem — part of the frustration with going through the building department — is that the process can feel arbitrary. And the process can feel like — "Wow, you just threw something new at me." A lot of the time, I think it's just that they're not organized.
This is one of the things we've discussed at the Headwaters Fund. We haven't figured out how to do it. But: Could you create a business ombudsman?
Bruner: That's exactly what I was going to suggest, and that's where I would see that kind of money being ...
NCJ: Within the county?
Cleary: Yeah! Hire two or three people ...
Bruner: I say, you take a couple of hundred thousand and — exactly — hire smart people to say, "I'll be your middle man." Because otherwise you've got to go find the right people, spend tens of thousands of dollars to get through the bureaucratic hoops. Because on your own, if you don't know anything about it you're screwed.
If you really wanted to be honest about it — hire somebody who completely understood that side, knew the people. You say, "This is what I want to do." And they go, "O.K., you want to do this ..."
Cleary: "You gotta talk to X, Y, Z ..."
Bruner: They go! These are my representatives. They know the rules and regulations and how it's done and they can present it in the way they see it. Now, that's efficiency! That is lowering barriers to entry. You're allowing others to participate in your economy. More competition, more prosperity. As opposed to holding it back.
Cleary: My friend who built the Redwood Harley-Davison — the Taj Maharley — the building process was excruciating. Every time he turned around: "Oh, you're close to a wetlands. You need to talk to so-and-so." The cost of going through that ...
Nobody said to him up-front, "O.K., here's what you have to go through ..."
NCJ: This is City of Eureka. So often you hear complaints about the county planning department, but you're saying that the problems are common.
Cleary: I think one of the issues is a coordinated approach. Which is a difficult thing to swallow, because someone has to give up a bit of jurisdiction. But if you had a single system everyone could go through ...
NCJ: So Patrick's got an idea — one way to lower barriers to entry is to keep the regulations in place but to streamline the path through them.
Bruner: Oh, that came to my mind right away. Because you can't reduce regulation. We all know that. These bureaucrats are entrenched. It's their job. They're going to fight tooth and nail over it. It's going to become political.
NCJ: But are there no reasons for regulation?
Bruner: Obviously I want buildings that are built soundly, and I want them fair and accessible. And there are rules that should be there. I have no problem with that.
But there are some politics out there — I think we've all run into it. It'd be nice to clean that up. I don't think we can do it on a local level at this point. I'm not saying we can. But I like the idea of finding someone who knows the system. Which you never hear anyone talking about.
Cleary: The other thing, Thomas, for when you write your book: the law of unintended consequences. You put in regulations, probably for a good purpose. You earthquake-retrofit something because it's going to fall down in an earthquake if you don't. But can the regulations lead to a point ... you know, you've got unreinforced masonry buildings in downtown Eureka that clearly aren't safe as they are, but nobody's going to tear them down, because that's going to cost money.
I think what government needs is to evaluate its regulations and figure out how it can accomplish these things in a more streamlined way.
Bruner: Must I cite the law of diminishing returns, which I bring up to my class? You can bring so much regulation that will have consequence, but after a certain point you will get diminished returns for it. You're just creating more barriers to entry that are not worth the benefit that they're supposed to bring.
Now, I think the idea of an ombudsman — someone that would help you with getting through these hoops — is a fantastic idea. Here you are lifting people up, as opposed to pulling them down! Not just building, but starting a business. Because now you're getting into zoning issues — can you do it here, can you do it there? God forbid your business is near a residential area, because they all come into play.
Curse of the Oldster
Bruner: It comes back to opportunity. And that means allowing people to do well here. It means allowing people to open business here.
NCJ: But apparently the businesses are here. They don't have the employees. That's what Patrick was saying earlier.
Cleary: How do you address that issue?
Bruner: Well, O.K. I think people leave here — the smarter people leave here, especially — because there is a lack of opportunity.
Cleary: Present company excluded.
Bruner: Whoa, whoa. We made our fortunes elsewhere. We learned and paid our dues and made some money and then came here. Like so many. Like the vast majority of the older population that is moving here.
NCJ: But, but ...
Bruner: Wait, wait — you're right — while Patrick is stalling me, I'm trying to figure out how to get you there.
My statement is this. People are far more prone to stick around if they see that there's opportunity and room to grow, and there's a place for them. Yeah, I might go work here or there, but now can I start my own business, or do this and that?
So, my belief is that if you offer opportunity people will come. What do they have to stick around for now? Either getting in the marijuana economy and making far more — more than the $20 the moving company offers — or moving to another city. The issue of the marijuana economy — it's nice, but it's also drawing away talent.
Is that the total answer? No. But I just don't see us doing much in creating wealth for people. I see a lot of people fighting it. Somehow, if we aren't out there fighting it all the time this place is going to become strip malls ...
Cleary: Santa Rosa.
Bruner: ... and palm trees. Which is impossible. It's logistically impossible.
NCJ: The palm trees are.
Bruner: This is never going to be Santa Rosa. We're too damn far away from everything.
NCJ: But seems like there's a contradiction here. You say we have to lower barriers. But apparently the businesses are here. You're saying that the employees aren't here because they want to see that they can go on and start their own business. Really?
Bruner: Well, no. I'm having a hard time ... I'm trying to explain it ...
NCJ: It seems like there's an oversupply of business.
Bruner: I'm saying that I don't want to stick around in a town where I'm looking around — as a smart person, with a future in mind and a family — and saying, O.K., I've got this job, but am I worried about this thing going away, because of the trends of this county?
Also, I'm thinking, yeah, with my family, I'm going to want to grow. I'm going to want to send my kids to school. I'm going to need to make more money. Is that opportunity here for me? Do I see that happening here, or do I see that happening somewhere else?
Cleary: This is a beautiful place to live, but even at $20 an hour can I afford to buy a house? Can I afford to live here?
NCJ: I still don't quite understand. You say that we keep businesses down. The regulatory framework we've set up keeps businesses down. But there's an overabundance of business.
Bruner: I'm saying we keep new businesses out. There's a difference. There's a big difference. I'm saying that those that are here are entrenched — the old families, the old boys, whatever — and whether they're doing it on purpose or not, it doesn't matter. They are.
That's also an issue. By creating barriers to entry and limiting competition, you're now entrenching people that are here, and providing them far more market power than you should.
Cleary: Is part of the problem that there's no consensus — that you have the two extremes fighting each other?
Bruner: You will never have consensus.
Cleary: But when you say that there's a group that wants no growth, I would contend that's a very small but active and well-organized group.
Bruner: I see it growing because of the NIMBY population that's coming up here. They're like you and I — they come up here and they want to live this life they've envisioned.
Trinidad is a fantastic example of that. You've got two dozen people running a population of 3,000 — the greater Trinidad area — and all the money and resources are going into these wealthy ex-L.A. bluff owners who are fighting each other over their trees and crap. Meanwhile, they're paying no attention to the rest of the population — the water supply, the infrastructure issues they have — because they don't give a shit. They care about themselves. And they certainly don't want any growth in that town, because that's not why they came up here.
What you just said, I think of EPIC and those sorts of groups. Fair enough. They're here. They're allowed. Whatever. Fine. But on the other side, what I see is the vast increase in the last five years — and it'll extend well into the next 10 — is all those baby boomers cashing out, selling their homes to move to places like this and Montana. They're all NIMBYs. I don't want that stuff down the street, so screw you. This is my biggest fear.
End of the Line
Bruner: There is one more thing I wanted to bring up, if you don't mind.
Bruner: Why in the hell are we still talking about that train?
NCJ: Oh, the train ...
Bruner: Why did we give $100,000 to these people to do that whole business plan or whatever? Not you personally, but ...
Cleary: Now, hold on a second. Let me interrupt for a second. When the Harbor District came to [The Headwaters Fund], at least my understanding of it was they were looking at a short-sea shipping plan. And basically that was the idea — that Oakland was going to get too congested ...
Bruner: I've heard that story before, and I believe that Oakland will expand before they come up here, but O.K. ...
Cleary: So that was the study that was funded, and what happened was that the consultant came back and said, "That's not economically viable."
Bruner: Oooh, O.K.! I could have told you that for $10!
Cleary: I guess my problem is that you hear the argument about the railroad and people will tell you you have to have faith. I may be a spiritual person about certain things, but I'm not spiritual about railroads. I'm a business person. Nobody's shown a business model that makes sense for the railroad.
Bruner: I'm trying to figure out whose special interest is served by continuing to push this thing along. I don't believe it's faith.
Cleary: That's what they say.
Bruner: There's a lot of things people say, but there's something else going on there. Somebody's being served by pushing this railroad's agenda.
NCJ: Well, you said it yourself. Trade. It's going to grow. If world trade comes along, if Asia comes up even further, what we need is an entree into that global economy. Right? So there it is, the argument goes.
Bruner: But we're so isolated. We know that. No, that's not going to be a direct corollation to Humboldt, not in the near future. It comes back to the train. He knows it, I know it, you know it. The numbers don't work. It's infeasible.
NCJ: Have you seen numbers?
Bruner: Real numbers? Well, I've seen numbers about what it would cost. Then all I have to do is think to myself, "Let's see. Which product can we put on that train to ship back and forth. And will that even come close to paying for it, much less make money?" And I say no.
NCJ: But, look: Caltrans subsidizes our highways. The highways don't make money for us. It's a piece of infrastructure.
Bruner: That's fair enough, but they serve a lot more interests than a railroad, and railroads are not so much in fashion anymore.
Cleary: The argument I've heard the other way is, "Well, in Europe they are." But in America they're not.
NCJ: You were far more cautious last time we talked about the railroad. You're not so cautious now.
Cleary: I think the political pressures are shifting radically at this point. When you have Marin County, which is a very politically powerful county within the state ... if they cut off their support, then it's not going to happen.
I was hopeful that the short-sea shipping would give some opportunities for the port. I think what the Harbor District is trying to do is say, "Look, we have this asset, how do we use it?" The only way they've come up with to use it is dependent on having faith that the railroad would get built. There is not enough hard looking at the railroad.
The argument I've heard is that it's going to cost you $150 million to decommission the railroad, so you might as well spend $150 million to build it. But if it's not going to be able to get through Marin County ... I think that's what's really changed my perspective on it. If you're going to be fighting the better-armed, better-heeled Marin County to try to win this you're going to lose the political will.
To me, I've always been cautious about it because it's primarily a political thing. I've never seen any business come in and say, "I really want to run this railroad. I can make money doing it."
Bruner: Of course you haven't. You never will.
NCJ: Any real business, I suppose. You've got an operator right now. A private operator.
Bruner: Who says what? "I'll bring my train so long as you pay me and someone else builds it"?
NCJ: No, he has ...
Cleary: Well, he's not going to put in his own capital to build it.
Bruner: So what's the point?
Cleary: I'd like to see the redundant fiber put in first. That costs a lot less.
Bruner: Oh, hell yeah! That actually serves interests. People would use it and it provides value. Yes!
Cleary: And that will happen. The private sector will make it happen.
Bruner: But I don't get it. I don't get why I keep seeing the train pop up. I just don't get it.