On the cover North Coast Journal


February 2, 2006

Heading: BANKERS' LUNCH-Recovering high-finance bigwigs dissect the Humboldt County economy, by Hank Sims

Patrick Cleary, 47, 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 eight years ago. He is the owner and general manager of Lost Coast Communications, which operates three local FM radio stations: KHUM, K-SLUG and "The Point." He serves a 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, 35, 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.
The Journal sat down with the two over lunch at Curley's Grill in Ferndale last Friday to talk about the state of play of the Humboldt County economy, and its future. Bruner ordered the French dip sandwich and tomato-basil soup. Cleary had the "Catch of the Day" sandwich and French fries.

Journal: Twenty years from now, what's your utopia and dystopia scenarios for Humboldt County? How do we get there?

Cleary: I was at a brainstorming session a couple of years ago where we were talking about the future of the economy. We asked ourselves: If there's any one thing we could do to improve the overall economy, what would it be? And I threw out the idea of a new university.

Because universities, obviously, they import people. They tend to create very high-paying jobs. They tend to create a more intellectual community, which tends to lead to more innovation and therefore more businesses being spawned from that.

A variation of this, which [Humboldt State President] Rollin Richmond has proposed, is doubling the size of HSU. To me, that's a really interesting prospect. Because as a general rule, university towns are very prosperous -- not in a blue-collar way, though there are obviously support business. But that's certainly something we could offer, that we have the right settings for, in terms of natural beauty. And you have an opportunity for continuous education, which is almost a requirement in order to compete in the 21st century. It's not going to be just 20-year-olds going to school anymore.

And there's interesting stories going on that are not necessarily known. Humboldt Creamery essentially doubled in size last year...

Bruner: There's a phenomenally well-managed operation, no doubt about it. A lot of it has to do with management.

Cleary: And there's Cypress Grove Chevre...

Bruner: Smart gal. I worked with her.

Cleary: Yeah. They're at a point, too, where they're importing goat milk and other milk from other counties. So you do have some other businesses.

I find one of the interesting things is that somehow in the 1970s, there was a wave of entrepreneurism that happened in Humboldt County. That's when you had the Kokatats and the Yakimas -- all these sort of companies formed. They were pretty small when they formed, and now they're pretty good-sized companies.

But I haven't seen that wave of entrepreneurism reoccur. That's one of the challenges we face. Maybe it's there and I haven't seen it. I'm actually encouraged by [Rob] Arkley's Economic Fuel business challenge [see this week's calendar listings] -- I think that's a great idea, to try to create an entrepreneurial class, if you will, because entrepreneurs tend to attract each other. But that's one of the challenges we face.

Bruner: Ultimately -- and maybe we agree to disagree -- I don't see any great growth in Humboldt County. The other side of it is, nobody in Humboldt County really wants great growth. I mean, they do in a way -- they want the nice, high-paying, environmentally friendly jobs, whatever that means. I'm not sure we ever had those before. But if that comes along, doesn't that mean more pollution, more congestion, more strip malls, more of everything people say they don't want? So, it's very contrary, to me. So basically you're saying you want all these great, high-paying jobs but you don't want any of the stuff that comes with it everywhere else.

Humboldt County, on a whole, is very subsidized by the state of California. Our economy does not pay for everything we need here, as far as infrastructure and government and law enforcement. We don't pay our way.

Cleary: It's slightly more complex than you frame it.

Bruner: Fair enough. What I'm trying to get at, though, is that we are linked to the state of California and the nation. And I have to ask the question "Where are we?" before I get to the question of where we're going.

Ultimately, this story tells me, I don't see a lot more money coming out of the government to help us with all of our problems. Which is what I hear a lot of. "Mmmm, the government will buy us a railroad. The government will buy us something else. The government will clean up this area, the government will build us new infrastructure." Nice ideas, and we had a lot more money 10 or 20 years ago to do these things. I think in the future we're going to see a lot more belt-tightening. You're going to find that this area is going to be harder-pressed to get government moneys.

Cleary: And actually, on that score, I saw some statistics this morning that the amount of government money available to help with water systems and sewer systems has been dramatically cut back.

Bruner: We're going to have to pay more and more of our own way.


Journal: And you sound very pessimistic. You're saying we're not going to be paying our own way.

Bruner: I said we're going to have to.

Journal: But how are we going to do that?

Bruner: Well, one of the ways -- Dan Ihara did a fantastic study showing that HSU contributes an enormous amount to the local economy. About $200 million, total. That's huge. When you look at the numbers, HSU is exceptionally important.

Right now, HSU is going through an enrollment crisis. It amazes me, because you read things in the paper -- people are angry at HSU, people are angry at Rollin, who I think is a fantastic man who took on a much worse situation that he ever imagined he was getting himself into. The last administration left a real mess for him, and I think he's done a phenomenal job, to be honest. He's very patient, and he's one of the most open-minded people I've ever met. Very hard-working.

If HSU doesn't figure out how to recruit more people, more students from out of the area, it will begin to lose more and more funding. The school will shrink, not grow. And as that school shrinks, you'll see the Arcata economy shrinking and the Humboldt County economy shrinking with it. Humboldt State is vastly more important than the majority of people understand.

HSU is a huge issue. Timber will decline. I think it will always be sustainable...

Cleary: Trees keep growing. Part of the battle there has been getting people to think in time horizons. I know that some of the timber companies now have started looking 50 years out. For a redwood tree, that's not a very long time horizon, but for a timber company or a human being to say, "Here's my 50-year plan..."

Journal: It goes against nature.

Bruner: Ultimately, then, what else do we have to work with? It's a beautiful place. Why am I here, why is Patrick here, why are you here, probably? Why are so many other professional, smart people who could do other things with their lives and probably make significantly more money in other places, why are they here? Well, the natural beauty, the grandeur and all these sorts of things. So we have all decided, whether consciously or subconsciously, that we will forgo $50,000, $60,000, $100,000 extra a year to go somewhere else. To us, the value is intrinsic to here, that we will give that up. And I think that will continue to be.

But that will never attract Intel, it will never attract Microsoft. Once again, we don't have the infrastructure, we don't have the brain pool. These things are not going to happen.

Cleary: Why don't we have the brain pool?

Bruner: Because, I think, the younger populace is always going to be more interested in being in a city environment, wanting to meet other people, wanting to go to the clubs and the dances. This Humboldt County environment is attractive to a smaller proportion of the younger set of people who get out of college and want to move up in the world.

Cleary: You and I both have the luxury of the fact that we could live anywhere we wanted, and both of us chose here. One of my criteria was that I didn't want to move to some backwater place, where there wasn't thought, where there wasn't stimulation. I mean, we actually have a reasonably well-educated, intelligent, thoughtful populace here. I don't always agree with their thoughts, but, you know...

Why do we have more media outlets per capita here than any place in the country? Well, obviously we must consume a lot of media. Who consumes a lot of media? People who are interested, people who are engaged. I think we're attracting some of those people.

Bruner: I think we attract a lot of those people, absolutely. But I'm just talking about the realities of the situation -- what you have to work with. Most of the people, though, you have to admit, start a business here because they want to be here. They don't come to Humboldt and go, "Humboldt's a great place to start this business."

Journal: Investment from the outside, in other words.

Bruner: They come in here saying, "OK, well, I'm willing to work maybe a little harder, to have slightly less revenue, higher expenses, but I like Humboldt so I'm going to work here." But this idea that people will come here because it's the spot for my business -- I think that's not going to happen.


Journal: This gets to what the official county strategy is.

Bruner: (Sardonically) I don't know. What is the official county strategy?

Cleary: Prosperity.

Journal: The official county strategy is -- We're a local government, we're a local agency. We don't have a lot of control. We're sailing with the wind. There's the global economic situation, the national economic situation, the state.

Patrick can correct me, but to me the county's strategy is "OK, what we can do is fund and encourage and network our entrepreneurs. We can encourage that spirit here, and we can create those new companies again -- another wave of Kokatats. And that's what's going to carry us.

Bruner: I think education is phenomenal. The SBDC [Small Business Development Center]? Phenomenal. RREDC [Redwood Region Economic Development Commission]? Phenomenal. The fact that Greg [Foster, of RRDEC] can get the kind of return he does on the small business loans he makes, that he gets them to perform the way he does, speaks very well for Greg and that program. That's not Prosperity. Don't confuse the two.

Cleary: So what was your wince about?

Bruner: Well, Prosperity. Prosperity is a group of other individuals, and I don't know... They produce this fluffy document. What's in the document? It was 70 pages, and I still got nothing of what this thing was and what they were going to do. I've gone back to them a couple of times, to look at what they're doing, and I'm still grasping at finding the value in Prosperity. SBDC, it's very clear. What is Prosperity doing besides creating jobs for Prosperity people?

Cleary: The premise behind Prosperity is that industries tend to grow when they have a critical mass.

Bruner: So you need a government agency to pull these industries together?

Cleary: No, that's not necessarily the conclusion. The thought was, if you can provide strategic assistance to some of these industries, you can help to build that cluster and build that critical development, that then will have a multiplicative effect.

Bruner: So Prosperity somehow has some greater insight into the strategy of these businesses than the businesses themselves?

Cleary: What Prosperity is doing, though -- they're not doing this in a vacuum. They're meeting with these industry clusters.

Bruner: So they're getting the information and regurgitating it back to them and saying, "This must be the strategy. Look, I've proved my value as Prosperity."

Cleary: One of the interesting discussions going on right now is about Humboldt-grown beef. Can you create a business out of that? You happen to have cows, here. They happen to be grass-fed. Can you create something that actually is a business, that has a brand, that has identity?

So there's a Headwaters grant looking at this, there are industry cluster meetings. Because none of the individual farmers have the resources to pull this off. But just like Humboldt Creamery is a co-op -- are there mechanisms by which you can seed things like this to make it happen? I think that's the premise of Prosperity.

Bruner: OK. Sounds good. Let's see it happen. We've had, what, five years since Prosperity has been around?

Cleary: At least.

Bruner: And they've done ...? I remember looking at a list that they produced saying, "Here's what we've achieved," and 90 percent of that list was from the Small Business Development Center.

When I first moved here five years ago, I had much greater hope for the idea of subsidized small-business development. I got very involved. I made phone calls. I spent a lot of my own money taking everyone out to lunch. I got lists from everyone, people with businesses, people involved in economic development. I met them all. And they got to know me -- at least over lunch.

Because I really wanted to learn. I wanted to know. Can this be done? Because I thought, here I was, coming in with my degrees and my experience, I'm going to come to Humboldt and I'm going to help them, to teach them about capital marketing and business plans and maybe help them raise financing, venture capital, all that fun stuff. Didn't I?

Cleary: (Laughs.)

Bruner: Oh, boy. So I put a lot of work and effort into that, and I always had good intentions about it. But I always kept hitting that same brick wall. And all the people that wanted to help would show up and go to the meetings, and they'd do this and that, and people would talk, but nothing would ever really happen. And ultimately, if you started talking about something that was outside the group-think -- the theory of Prosperity or whatever -- if you didn't match up with where they wanted this thing to go, you would begin to feel yourself pushed to the margins. And you'd also see that nothing happened, and that people would stop going to the meetings.

Cleary: I think there is a natural tension between business and government. Business people have a very low tolerance for meetings. One of the things about democracy -- you know the famous Winston Churchill quote, about democracy being the worst form of government except all the others? There's a lot of truth to it. There's a lot of inherent inefficiency in our process, because we are inclusive. It's difficult to circumvent, and 95 percent of the time the people who are most vocal tend to a minority, rather than a majority.

The great contribution that Prosperity made was: Stop hoping that Hewlett-Packard is going to open a plant here. It's not going to happen. Let's nurture what we've got.

Journal: Don't look for the silver bullet.

Cleary: Don't look for the silver bullet. And I think that's really the message we need to follow.


Cleary: The interesting thing about capitalism is that, yes, capitalism is certainly efficient and, yes, it allows the cream to come to the top. The issue, which is almost a non-economic issue, is: What do you do with people who can't cut it?

Bruner: Right. Absolutely.

Cleary: If you have this system where the best are going to thrive and survive, what do you do with a displaced worker? Who -- you know what? -- he's not going to learn how to use Excel. He's 56 years old and his livelihood has just disappeared, and his world has disappeared. What do you do with those people?

Journal: The people who are pulling green chain are the people who are not going to be learning Excel.

Cleary: What we are seeing here is a dislocation. We're seeing the traditional livelihoods go away, and we are having people who don't fit in to the new economy. This is happening around the world, and it's an issue. And I think we're reaching a kind of world economy now where continuous education is going to be mandatory. You're not going to be able to go to school, come out of school and know everything you need to know for the rest of your life. The world is changing too fast.

Journal: So you say that we have to evolve into a society where everyone's in a continuous state of learning, to adapt and change with the times. Well, there's quite a few people here -- most of our elected officials, as I wrote recently -- who say, look, we can provide high-paying blue-collar jobs. We've got the bay, we've got a railroad that could theoretically be amped up...

Bruner: Most everyone knows that it's just not feasible.

Cleary: I know people who would say that it's a 19th century solution to a 21st century problem. I'm not sure I'd put my name on that quote, but the question is: Let's say we open up the railroad and we open up the harbor. And I think the harbor is certainly an underutilized asset. But what are we going to do -- cut more trees? We're cutting as many trees as we've got. Are we going to import cars and ship them on the rail down there? I don't think that's what we're going to do.

The Harbor District just got a grant from the Headwaters fund to do a business plan. What do we do with the harbor? But that's a really big issue. The railroad? I don't know anybody that really knows the answer to the railroad. I do know that in a state where you're crying out for resources -- and California is stretched -- the railroad just never seems to be the priority. The bond issue that Schwarzenegger just announced has a sort of unspecified thing for "other railroad projects," but our railroad's just not in there.

Bruner: Who has interest in a railroad? Who is producing things that they can move right now on rail that they wouldn't move on truck? See, if you have a product that is going to many places, if you put it on rail it's just going to one place. If you put it on truck, it's much easier to diversify. Some will go to Redding, some will go to the Bay Area.

A lot of people will say even if there was a railroad, I'm still using trucks, because it serves my interests better as a business.

Journal: Who are we talking about?

Bruner: I don't want to say any names. Local businesses.

I was always curious about this idea of the railroad, too. But to use Patrick's phrase -- what was it you said? "God's not quite done with that country yet"? Maybe the engineers are going to tell us that they can build it so it will never slide again. But think about this, now. Once you've built it, you've spent $150 million. That $150 million -- we could have put up, what? Four or five hospitals? Some schools? Rebuilt our own roads?

Resources. $150 million. Would you rather take that $150 million put that into health care, education, infrastructure and a variety of other projects we could think of around here, or would you rather try to build the railroad and hope that maybe something could be done with it? Would we ever make that money back? Or if you have $150 million and gave it to residents here -- $150 million, there's 130,000 people here, so everybody in Humboldt County gets $1,000 dollars. I'm betting that creates more economic development in a matter of five years than a railroad would.

Extreme example, but you see what I'm saying. I'd rather use those funds elsewhere. I think the railroad's a pipe dream. What are you shipping?


Bruner: There is the big elephant that we haven't touched, gentlemen -- I don't know if you want to get into it.

Cleary: Go.

Bruner: Well, it's the underground economy.

Journal: Ah! You know, I've tried to get answers from people about this. No one seems to know.

Bruner: It's far more important than people realize, or want to realize.

Cleary: Didn't one of your colleagues publish a number of, like, $200 million a year?

Bruner: We kicked it around. I remember the sheriff was talking about, in one article, how he thought that one out of three, or one out of four people -- it was really high -- had some sort of play within the underground economy. Mostly marijuana cultivation, of course.

That was one way to look at it. But then you can back in on the numbers. I'm told -- I can't confirm this -- that we have more restaurants per capita than San Francisco in Humboldt County, which is a very strange thing.

Cleary: Another stat, there ...

Bruner: What's that?

Cleary: Banks. In a time when the number of banks is shrinking rapidly around the country, we're getting new banks. You might want to put a call in, but I understand our bank deposits per capita are significantly higher than the rest of the country.

Bruner: That's fascinating. The numbers that we look at, the numbers we see -- they're constantly skewed because of this massive economy that goes on in Humboldt that you can't track. When you get all this influx of money in and you don't know where it's coming from, it sort of skews everything.

What did we say? $200 million? I think it's fair to say that it's as big if not bigger than the timber industry. Whether it's $150 million or $200 million, it's pretty damn big. I don't think there's anyone who's looked at it who says it's less than $150 million.

Journal: But it's fragile, possibly. Any little tweaks in the regulatory system, in prohibition...

Bruner: That's very good. That's why I always laugh, when people say, "Oh, we want to legalize marijuana." That's fine, if you want to do that, but I wonder if you understand that it's going to cost us about $200 million. And then the people go, "Oh, no, the Humboldt bud will always be the best." I promise you that Marlboro and everyone already have plans.

Cleary: On that score, this ties into another point I was going to make. One of the issues that HSU has, and I think that we have, from an economic development point of view, is that when you think of Humboldt County, what do you think of? The brand, if you will, of Humboldt, is not necessarily conducive to recruiting academics, to recruiting business.

Bruner: How many times do you go outside the county and say, "I'm from Humboldt," and it's the snicker, or the "Ohhhh..."

Cleary: I got the snicker in Iceland! But I do think that Humboldt County and Humboldt State need to create an identity for themselves outside that.

Bruner: Can you do that? Can you create an identity, or does the identity happen, based upon the actions you take?

Cleary: You can influence it.

Bruner: Well, how in the world can you shake that identity?

Cleary: You need to come up with something more interesting!

Bruner: If we can't sell the redwoods and the ocean, I'm not sure that we have anything much more interesting That's pretty interesting stuff.

Cleary: OK, here's a radical idea. How about if Humboldt State changed its name?

Bruner: To?

Cleary: I don't know. Redwood State.

Bruner: So you're saying, drop all the value created in the hundred years of branding of Humboldt State. Drop that value because of the stigma that's attached to the name "Humboldt," and start with a re-branding.

Journal: Didn't they just do a study that showed that something like fewer than half of the people in the Bay Area have even heard of Humboldt State?

Cleary: And maybe it's a negative. Because Mom says, "I know what goes on in Humboldt. You're not going to Humboldt!" But if it was Spituli State -- "Oh, where's that?" "In Arcata." "Oh, OK."

Bruner: Did you just come up with that?

Cleary: What? Spituli?

Bruner: No, the idea of renaming the thing.

Cleary: Yeah, no, I just came up with that.

Bruner: That's not bad.

Cleary: Is that my good idea of the day?

Bruner: It's not bad. Because what are you going to do, spend hundreds of thousands of dollars on a marketing campaign? "Humboldt: It's Not Just Dope."

Cleary: That's my rule in life -- to have one good idea a day.



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