Ohio Offers Clues On Cause of Low Growth

By CLARE ANSBERRY
Staff Reporter of THE WALL STREET JOURNAL
March 14, 2005; Page A2

The U.S. economy, being the sum of many parts, has a couple of stragglers, which raises this question: What explains the divide between high-growth and low-growth states?

Ohio, the nation's seventh-most-populous state and one that was pivotal in President Bush's re-election, is one of the laggards and may offer some clues. As the Kerry campaign was eager to point out, Ohio has lost more jobs than any other state since 2000. Things haven't improved since the election. While most indicators suggest that employment is picking up across the country -- businesses added 262,000 new jobs in February, double the pace in January -- plans to expand employment are spotty in what the Federal Reserve calls the Cleveland district, according to the Fed's latest Beige Book report.

And while the Cleveland district also includes West Virginia, Kentucky and Pennsylvania, Ohio trails those states, too, which have essentially tracked national employment growth since the beginning of 2001, while Ohio trailed the national average by more than four percentage points, according to the Fed.

The problems seem to be threefold: the number of manufacturers, the type of manufacturers and the state's tax structure.

Ohio relies on manufacturing for 15% of its employment. Manufacturers have laid off thousands of workers since the recession that began in March 2001, and have been slow to restore them, in large part because gains in productivity have made adding more people unnecessary. In Ohio, manufacturing lost 3,000 jobs in January.

[Jobless Divide]

As manufacturing goes, so goes the service sector, says Don Mottinger, president of Cleveland-based Superior Products, which makes gas fittings and assemblies. Manufacturers outsource payroll functions, computer systems, accounting, transportation and maintenance. "If manufacturing goes down, service goes down," he says. "There's a distinct connection between the two." Indeed, nationwide, nonmanufacturing jobs increased 2% since the start of 2001, but fell 1.6% in Ohio. Latest job figures for the state show losses in professional and business services, leisure and hospitality, and trade and transportation.

But having a big manufacturing base isn't the only issue. Nor does it have to be a negative. After all, as the Federal Reserve points out, neighboring Pennsylvania, with 12% of its jobs in manufacturing, has lost 2% more manufacturing jobs than Ohio. Yet Pennsylvania's 5.1% unemployment rate in January was much lower than Ohio's 5.9% and was even lower than the national average in January of 5.2%.

A second factor is the composition of those manufacturing jobs. Richard DeKaser, chief economist at National City Corp., says that the region's manufacturing sector tends to be more on the losing side of international trade, especially with China, than on the winning side. Products that are increasingly imported from China -- plastics, furniture and auto parts -- tend to be made in the Ohio region, while products leaving for China -- electronics, aerospace, or advanced medical machinery -- aren't, he says. "Our particular manufacturing composition is most vulnerable to increases in global trade," he adds.

A third factor is the state's tax system. Ohio has had a long tradition of providing tax breaks to ailing big industries, which in turn puts a greater burden on smaller start-up companies that could have greater growth potential. The state also has the highest taxes on business inventories and equipment in the nation, which is especially hard on smaller companies because they often end up holding inventory for bigger companies that want just-in-time delivery.

Gov. Bob Taft wants to phase out the taxes on business inventories and equipment, among other tax proposals, and replace them with a broad-based low-rate commercial-activity tax. Overhauling any tax structure is difficult because shifting the burden, or losing revenue, can affect services that create other problems. Still, the momentum is there for some tax changes, in large part because the state's economic performance is so lackluster. While changing the tax structure could help in the short term, it isn't a long-term solution. Manufacturing as a share of employment has declined throughout the states, regardless of how progressive their structure is.

No one is suggesting that the state further winnow its manufacturing base just because manufacturing has had a difficult few years. Moreover, the surviving manufacturers remain for a reason: Productivity gains have kept costs and prices down and made them more competitive on the export market and in fending off foreign competitors. Capital-goods exports are strong, which helps heavy-machinery makers and their suppliers, like Eaton Corp. and Parker Hannifin Corp.

"The productivity gains in manufacturing have been phenomenal," say Brian Bethune, an economist with Global Insights. That, coupled with the weak dollar, is boosting exports of capital goods, heavy machinery and aircraft, which in turn will lead to employment growth. "The foundations are in place with strong productivity gains and a lower dollar. The manufacturing sector is in good health and will see improvement, more so in the second half of 2005," Mr. Bethune says.

The key is to build on the expertise in production and materials. For instance, the polymers industry is big in Ohio, thanks to the state's history of tire-making. Cleveland-based metal and forging companies are now making hip-replacement implants out of titanium, and chrome coatings for medical instruments that make them easier to disinfect. Logistic companies are sprouting up to take advantage of its central shipping location.

The state can build on its inherent strengths, including its Midwest location. Shipping, mainly over highways and through ports on Lake Erie, is booming because the state is centrally positioned in terms of trucking goods to the Northeast and Southeast. To attract drivers, trucking companies are raising wages. Logistics companies are sprouting up. Northeast Ohio has top universities and health-care facilities, notably the Cleveland Clinic.

Mr. Mottinger, of Superior Products, says productivity and sales per employee increased 30% last year because of new technology, creating growth without adding workers, a situation mirrored at smaller companies in the region. "We're not seeing a lot of job growth and that's not necessarily a bad thing for the future of manufacturing," he says. His own 80-employee company will be adding five or six new people this year because of new product lines. His main concern: finding educated workers who are sophisticated about technology.

Write to Clare Ansberry at clare.ansberry@wsj.com

 

COMMENTARY

Economic Musings Hatched in Latin 'Paradise'

By MARY ANASTASIA O'GRADY
March 11, 2005; Page A11

LAKE ATITLAN, Guatemala -- Late on a lazy Sunday afternoon a couple of local men help us push off in our small boat. As we power away, they stand on the dock, smiling and waving goodbye. The two silhouettes in the fading late day sun outline a national portrait.

The older one wears the traditional calf-length skirt, a colorful woven blouse and sandals, a costume completed by a wide-brimmed hat. He is the archetypical Guatemalan of centuries past.

His hatless, 20-something son wears a button-down shirt, jeans and running shoes. He would look at home in my New York City neighborhood.

What first appears to be a mere difference in fashion tastes symbolizes a profound demographic shift hitting the Western Hemisphere. The old man is unlikely to ever leave the volcanic shores of this legendary lake. The young man, I learn, is scouting opportunities up north, not in the Guatemalan capital but in the U.S.

If he makes it, he will join millions more like him who are fueling a robust U.S. economy while their own Latin homelands are stripped of precious human capital.

U.S. policy makers are racking their brains trying to figure out how to get ambitious young Latins to resist the mighty magnetic pull of U.S. economic growth. But if you spend even a little time in this country the futility of that cause becomes apparent. Opportunity is to be found elsewhere, not here, and even the humblest Guatemalan peasant, washing clothes on a rock by the water's edge, knows it.

There is a certain irony in what, to borrow a term from Alan Greenspan, is a conundrum for the U.S. It has an immigrant "problem" because the U.S. economy is roaring while developing Latin America is stubbornly stuck in a kind of feudal time warp.

Economic modernization here is creeping along at too slow a pace to satisfy the aspirations of the best and brightest. Their motivation is strong and they find ways to slip through even today's beefed up border protections. A national poll last year by the International Organization for Migration projected that remittances to Guatemala from abroad would be equivalent to 10% of gross domestic product in 2004, an increase of two percentage points over 2003.

Railing at this formidable demographic impulse is a little like protesting gravity. A far more productive path would be to start looking more closely at the difference between the economic policy advice the U.S. takes for itself and what it gives its southern neighbors.

Not surprisingly, what one finds is that while the booming Bush economy is ingesting large doses of Reaganomics, minions of the State Department, the Agency for International Development (Usaid) and the International Monetary Fund have Latin America on a steady diet of Rubinomics and regulation. Is it any wonder that the U.S. is vigorous while its Latin stepchildren are frail and sickly?

There is wide agreement that development requires sound institutions that will defend the rule of law. But that's a political problem: It is hardly in the interests of the ruling classes to allow or facilitate the creation of institutions that will alter the status quo. Progress, then, relies heavily on the ability of parties other than the country's traditional powerbrokers to gain access to incomes and wealth. For this, countries need fast economic growth.

Yet rather than focus on this goal, the U.S. policy agenda in the region obsesses about deficits and condescendingly lectures the neighbors on corruption, illegal immigration, so-called social justice and drug trafficking. More egregiously, when crisis strikes a corrupt oligarchy like Peronist Argentina and presents an opportunity for profound change, the U.S. sends the IMF in to rescue the status quo. No wonder reformers can't get any traction.

What brought the U.S. economy out of a sluggish, recessionary environment inherited from the Clinton administration was Reaganomics: Cuts in marginal income tax rates, dividend taxes and capital gains taxes, have acted like smelling salts for the investor class and this week the effects have been dramatically apparent. The U.S. economy created 262,000 jobs in February and economists are raising their estimates of 2005 U.S. economic growth.

Contrast the Reaganesque optimism that set this recovery in motion with conventional Rubinomics, theologically grounded in class warfare and so popular with Washington's armies of economic "experts" fanned out around Latin America.

These Cassandras of dreary defeatism issue dire gloom and doom warnings daily, predicting twin deficit catastrophe in the U.S., and a widening gap between rich and poor. To hold back the apocalypse, the theory goes, taxes ought to be at whatever level satisfies politicians' appetite to spend. Balanced budgets and that great left-wing will-o'-the-wisp, income equality, are set as the highest goals.

This doesn't play well in America these days but retains its power in populist Latin America where the evils of "capitalism" have been preached for decades by politicians even as their own policy prescriptions generate poverty.

These "men of the people" actually are quite popular with the caudillos who sit on top of Latin economies because their policies guarantee that nothing will change and that free market capitalism will not intrude on existing domains to inflict creative destruction. It's no surprise that when career bureaucrats in U.S. embassies around the region preach Rubinomics, well-heeled defenders of the status quo shout hurrah.

What ought to further scandalize those who pay lip service to the poor and jobless in these miserable economies is the arm-twisting by the U.S. to insist that local governments impose regulations that raise the cost of labor. This has very little to do with serving the interests of Latin workers and a lot to do with American labor unions trying to reduce competition from lower cost producers abroad.

The sad truth for Latin America is that the American left has made the region its playground. There it takes its bad ideas that Americans have rejected but Latin caudillos eagerly embrace. If you want to understand the immigrant flow to the U.S. forget about why walls and guns don't hold back migrants. Look instead at where you would rather live your life.