A New Year for the Midwest

Nobody, especially Midwesterners, will be sad to see the end of 2010. If the Great Recession is now officially ended, it's hard to spot the evidence amid the economic wreckage left behind.

Other places -- Nevada, for instance, or Florida -- got hit harder by the foreclosures that followed the sub-prime mortgage collapse. California's state budget woes are even worse than those of Illinois. Unemployment remains relatively high everywhere, little dented by the slow recovery.

But the agony is worse in the Midwest, because the recession only enervated an already reeling regional economy. If the Midwest didn't fall so far as some other regions, like the Southwest, that's because it had less far to fall. To a nation wrestling with recessionary pain, the Midwest could say, "welcome to the club. We know how it feels."

It would be nice to say that 2011 offers real relief. In some places, it may. In a region that had been suffering economically for years, the recession definitely focused minds on a new and different future. But it would take a lot of champagne to put much bubble into the region's new year hopes.

The problems facing the region were summed up in a recent paper by the invaluable Bill Testa, the director of regional research at the Federal Reserve Bank of Chicago, who has made a career out of casting a cold eye on the Midwest's debits and assets.

Testa's paper is entitled "Can the Great Lakes Region Break Free of Its Long-term Slide?" His answer, basically, is maybe, but don't bet on it.

The "long-term slide" that Testa has in mind doesn't have much to do with the recession. He grants that the Midwest suffers particularly in a recession because it still specializes in manufacturing, especially durable goods, including cars and machinery, which people stop buying when recessions hit. Because of this, there's every reason to expect that Midwestern industries will snap back smartly when good times resume.

But don't break out that champagne quite yet. As Testa points out, we've been here before, and a fat lot of good it's done us.

The reason is that reliance on manufacturing. The Midwest still makes things -- refrigerators, heavy machinery, cars, machine tools, car parts, RVs. In some of these areas, we make more than we ever did. But in all these industries, global competitive pressures and the miracles of technology have enabled us to make all these things with fewer workers. When good times come back, we'll sell more goods -- but there will still be fewer workers making them.

For sure, good times will raise demand for workers. Some unemployed workers will get their jobs back -- but there won't be as many of them as there was before. Average workers will see their pay go up -- but not so high as it was before.

With every economic dip, it seems, the Midwest hits a new low. With every economic recovery, it goes up a bit but not to the levels it enjoyed before the dip. And then the next dip takes it lower still.

See Testa's chart comparing per capita income in the Great Lakes region to that of the nation as a whole. Back in the 1960s, when the manufacturing economy boomed, per capita income in the Midwest stood sharply higher than the national average. This dipped sharply in the 1970s, when so many good jobs moved to the Sun Belt. After a brief upswing in the late '70s, the Japanese challenge plus growth in imports and the farm-debt crisis sent the region's per capita income down again.

All this leveled off in early '90s. Gas prices went down, making bigger cars more attractive. The nation boomed, and the Midwest boomed with it. But as Testa says and his charts point out, this was an "aberration," almost a mirage. Once it ended, with the slow-growth years of the past decade, Midwestern incomes plunged again, relative to the rest of the economy. Now, with the recession, they've as far below the national average as they were above it in 1960.

Once manufacturing provided one-third of Midwestern incomes. Now it's 10 percent. Nationally, the number of manufacturing jobs has gone down by 39 percent in the past 40 years: in the Midwest, that decline is 52 percent.

This is no argument for getting rid of manufacturing. Industry still supports 2.6 million jobs in the Great Lakes region. It's still an important part of our economy.

But if we don't want to get rid of manufacturing, nor do we want to rely on it -- or at least traditional durable goods manufacturing -- for our future. Factories will stay here, but they will employ ever fewer people, to meet global competition.

As Testa says, this presents the old industrial cities of the Midwest with a challenge because they were "fashioned as hubs for production and overland transportation of goods, not as centers of advanced service and finance." What this means is that, if these cities are going to survive, they have to reinvent themselves to provide the goods and services that the 21st-century economy needs.

Hard to do -- but vital. Testa's charts show that the Midwestern cities that are doing the best -- Minneapolis, Columbus, Indianapolis -- are the ones which had the lowest share of manufacturing jobs back in the 1960s. This meant it was easier for them to move into services requiring information technology and higher skills. Such cities as Des Moines and Omaha aren't on his chart, but their recent history is the same.

By contrast, cities such as Buffalo, Cleveland and Detroit had the highest share of their work force in factories in the 1960s -- and they remain the low-growth cities of today.

Should they then just turn out the lights? Not necessarily. Both Milwaukee and Chicago had high heavy-industry employment in the 1960s, but neither has lost jobs or populations so severely as, say, Detroit.

The moral? A history of heavy industry is a handicap in dealing with the modern global economy, but it's not necessarily fatal. What is fatal, however, is sticking with that heavy industry to the exclusion of seeking newer, more knowledge-intensive industries.

For Midwestern cities, that's the challenge of 2011. Personally, I'm fairly optimistic. I've talked with enough people in these cities to know that they understand the challenge, that a real change of hearts and priorities has taken place. Midwesterners, at long last, have stopped kidding themselves and are looking forward the future, starting now.

To all these good people, I wish a very happy and productive new year.

For more information on economic development, visit the In the News section of the Global Midwest Web site.

Comments

[Mike Wagner]

Love this dose of reality; thanks for administering it!

"if these cities are going to survive, they have to reinvent themselves" Agreed, but will they?

Are cities like people who change for one of two reasons, inspiration or desperation?

From my work as a pastor and now as a leadership consultant I know desperation seems to work best. But it is always amazing to see just how desperate the situation has to become for the willingness to change/reinvent arrives.

Thanks again!

Keep creating...tough love articles like these,
Mike

[Leena]

This is a great article.

I was in southern Illinois over the holidays where I read a series of articles from the St. Louis Post-Dispatch titled "Can St. Louis Compete?" The journalist, David Nicklaus, is asking the very same questions that are asked and debated on this blog.

The problem, though, appears to be the governments in the Midwestern states. In Missouri, for instance, there really hasn't been public investment in activities that would bring or grow new industries in the state. There are few resources for entrepreneurs, but lots of tax incentives for real estate developers.

In many areas in the Midwest the only economic development plan seems to be using tax incentives to lure the Wal-Mart from one county to the next.

Even Milwaukee's Third Ward, which was intended to draw young professionals and tourists, has many vacant store fronts and many, many unsold condos. Given the real estate crisis, I can't imagine the Third Ward becoming the next Lincoln Park (in Chicago) any time soon.

Wisconsin's new governor has turned down the federal funds for the high speed railroad. New Ohio Gov. John Kasich is expected to do the same.

These new leaders don't seem to have a vision for Midwestern economic development beyond tax cuts and tax incentives, neither of which seem to work long-term to spur growth and development in this region.

I see things getting worse before they get better.

Am I wrong?