Great Recession Recovery Geography

If you could move, then where would you go to take full advantage of the recovery (such as it is)? Professor Ernie Goss surveys a few experts and dishes the dirt:

But more important is that Texas is not just an energy-producing state. "The best places are centers that use that energy resource to diversify their economies," said Doug Henton, the CEO at Collaborative Economics, a consulting firm. ...

... The outlook is bright for Pittsburgh as well. Despite its heavy-manufacturing past, the Steel City has fared well by "shifting from more-traditional industries to more knowledge industries," said Henton of Collaborative Economics. The University of Pittsburgh and Carnegie Mellon University have attracted a strong biotechnology presence to the region. Similar growth is happening in San Diego, where the local University of California campus has helped make the city a leader in health care technology.

The mention of Pittsburgh is notable because of the doom and gloom forecast for the rest of the Rust Belt. Moody's Analytics is bullish on manufacturing "in less urbanized parts of the South". This is the typical greenfield argument for industry location, to the non-unionized and less taxed go the spoils. Of course, that's bad news for Michigan and Ohio.

I have a different take on the matter. Going forward, the geography of talent will be a better predictor of where the manufacturing jobs are. The transition to an export oriented economy won't be easy:

The structural shift towards exports will be difficult and time-consuming mainly because producing the high-tech goods that the US should be exporting requires a skilled workforce, which has largely been lost and cannot be re-created overnight. During the ten years preceding the peak of the bubble in 2007, about four million jobs were lost in the US manufacturing sector, whose share in total employment fell from more than 17% to 12%. Unemployment remained low because the booming domestic economy created enough jobs in services and construction.

Reversing this shift quickly seems impossible. Most construction workers are rather low-skilled and thus cannot be re-deployed to modern high-tech manufacturing. The same applies to real-estate agents, social workers, and managers of credit-card accounts.

During the bubble years, the situation was exactly the opposite: most of the workers released by a rapidly shrinking manufacturing sector could be employed easily in construction and social services, which require only low skills (likewise, real-estate services demand only rather general skills).

The key point is not that manufacturing jobs are somehow better, but rather that we must consider the asymmetry in the structural-adjustment process. It is relatively easy to manage a structural shift out of manufacturing during a real-estate boom, but it is much more difficult to re-establish a competitive manufacturing sector once it has been lost.

Post-bubble economies thus face a fundamental mismatch between the skills available in the existing work force and the requirements of a modern export-oriented manufacturing sector. Unfortunately, there is very little that economic policy can do to create a strong exporting sector in the short run, except alleviate the social pain. Labor-market flexibility is always touted as a panacea, but even the highest degree of it cannot transform unemployed realtors or construction workers into skilled manufacturing specialists. Experience has also shown that retraining programs have only limited success.

You can offer tax breaks and other incentives, but does your region have the skilled workforce that manufacturing needs to be globally competitive? Following the investment dollars tells a different story:

For example, in 2008 Ohio landed the greatest number of new plants and expansions in the entire United States - a whopping 503. Texas had 497 projects. Michigan, Pennsylvania and North Carolina were the next top three.

In other words, the Rust Belt states ranked quite high in the number of new plants. But if you listen to the negative commentary and much of the news, you hear nothing but bad news about these areas.

Texas and North Carolina ring true with Moody's recovery picture, but it doesn't explain the growth in Ohio, Michigan and Pennsylvania. Right to work and low taxes aren't quite the predictors they are made out to be. Yet we still lean heavily on the established regional stereotypes that have defined American economic geography for at least the last 40 years.

A good example of the enduring nature of the above economic geography is a political attack ad on Ohio Governor Ted Strickland. You can find the script text here:

Male actor: One thousand two hundred and fifty jobs. Gone.

Female actor: NCR?

Male actor: Yeah. Strickland couldn’t hold on to them. Moved to Georgia.

Female actor No. 2: ..Novelis moved jobs there, too.

Male actor: We lost 400,000 jobs under strickland.

Female actor No. 1: Got to be a world record.

Female actor No. 2: Strickland doesn’t get the jobs done.

Male actor: Wonder when ours go…..

I'm sure NCR's relocation is still fresh in the minds of Dayton voters. What's interesting is how these headlines inform economic analysis and forecasting (not to mention the strong influence on voting behavior). Popular folklore wields much more power than data tales. Campaign managers understand this. Georgia is as useful a bogeyman as China.