Wednesday, October 06, 2010

Recovery Stronger In Rust Belt

With the exception of Texas, the global economy has shifted away from the Sun Belt. With the exception of Michigan, the Great Recession has been relatively kind to the Rust Belt. Financial Times has the geography story:

But the national figure hides a sharp divergence between rust-belt manufacturing states in the north and east, where unemployment is high but new job losses have fallen, and sun-belt states in the south and west, where the labour market remains in flux.

This pattern provides a clue to a vital policy debate: does high unemployment just reflect weak demand, in which case the Federal Reserve might be able to do something about it by launching a new round of asset purchases? Or is it a structural problem, showing that workers are in the wrong place or have the wrong skills, in which case monetary policy can do little? ...

... In the rust-belt states much of the surge in unemployment was caused by the woes of the car industry. That rush of job losses has ended but it almost certainly left behind some workers whose location and skills meant they would struggle to find jobs, even if there were strong demand for labour. That was probably true before the recession as well, however: Michigan had a 7 per cent unemployment rate during the boom of 2006-07.

An argument for geographic mismatch is North and South Dakota. There unemployment is below 5 per cent, yet the states are not so distant from Michigan, at 13 per cent. As Lawrence Mishel of the Economic Policy Institute pointed out, however, these states are small and their workforce would have to expand vastly to absorb the unemployed from a state such as Michigan.

Another concern is that the house price crash has trapped people in homes that they can no longer sell but has also led to a huge number of foreclosures, which force people to change location by turning them out of their homes.

More striking to me, the data point to the increasing ineffectiveness of regional abstractions such as "Rust Belt" and "Sun Belt". Both national and regional economic policies make little sense. The emerging landscape seems to elude the analysts at Brookings Great Lakes Economic Initiative. The most recent report offers sweeping policy suggestions that are often divorced from what is going on in these cities. The variation of recovery within the megaregion is ignored. The basis for the geographic abstraction is explained on page 15:

The vast majority of communities in the Great Lakes region share an economic past, and present, dominated by manufacturing: In 1970, the share of residents employed in the sector exceeded the U.S. average of 22.1 percent in 16 of the 21 largest metros (see map below); that number remained the same in 2009 (though the precise communities did not). As described in this report, the region’s manufacturing heritage has had a profound impact on its growth and development; it is for this reason that “older industrial metros” is used frequently throughout this report as a fitting, if not perfectly inclusive, moniker for these communities.

The exceptions (metros whose share of manufacturing employment was below the national average in 1970) to the above rule are as follows:

  1. Minneapolis
  2. Madison
  3. Des Moines
  4. Columbus
  5. Syracuse

We're left to wonder what that map would look like now. Many of the communities above the national average in 1970 have dramatically diversified their economies and are now some of the strongest performing metros nationally in terms of recovery.

The opposite is true for those towns and cities more dependent upon the automotive industry. Other manufacturing has already restructured during past recessions. That's why most of the Rust Belt defies the pejorative moniker. The policy geography is stuck in 1970.

No comments: