Fate of the States: The New Geography of American Prosperity Read online

  The consequences for homeowners in housing-bust states have extended beyond the loss of home equity. Everyone knows neighborhoods can deteriorate, yet nobody expects the town where they’ve put down stakes to be the one singled out in the newspaper for fiscal dysfunction. The typical home buyer thinks he’s getting a good deal—due to the neighborhood, the schools, proximity to a metropolitan center, or the fact that (until recently, at least) the value of their house seemed to go up every year. They take for granted all the things that keep a neighborhood and a city and a real-estate market humming, such as smooth roads on the interstate or trash collection right at the curbside every Monday and Thursday. These are basic services everyone expects in an attractive, functioning community. They expect them for good reasons: Property taxes are high, and for most Americans, the home is the largest purchase they’ll make as well as the biggest debt they’ll incur. Life savings hang in the balance, and there ought to be some dividend from this massive investment, right? What homeowners forget is that many of the services they take for granted are not mandatory but discretionary. The only thing more shocking than seeing trash collection curtailed or parks closed is clicking over to Zillow and discovering that the value of their homes has declined another 5 percent.

  None of this was inevitable, as we’ll see in the pages that follow. Some local leaders identified the risks early and acted accordingly. Far too many politicians either ignored the risks or assumed they’d be gone from office before the you-know-what ever hit the fan. Just as reckless consumers piled on mounds of household debt during the real-estate boom, reckless local leaders mindlessly larded on billions of dollars of new municipal and state debt to fund pet projects or to give crazy contracts to politically influential unions—like the 16-plus percent pay raise New York City gave its eighty thousand teachers back in 2002.11 What too few voters appreciated at the time was that they would be just as liable for the pension and municipal debt approved by their elected officials as the mortgage or credit-card debt they had incurred on their own. Whether the bill comes in the form of a monthly mortgage payment or higher taxes, it’s still the consumer/voter who pays it. And just as with credit cards, it’s the compounding that kills. A little more debt piled on today translates into a much higher bill tomorrow. Not at all coincidentally, the states and municipalities where consumers are drowning in debt are the same ones where governments are drowning in debt. Consequently, the financial gap between the strongest and weakest states in the United States has rarely been wider.

  There are any number of ways to tell the story of all that’s gone wrong economically and what the future now holds. My focus is on the states—some whose futures have been clouded by shocking amounts of leverage and overspending but also others now enjoying an upsurge in economic growth and job creation because they didn’t spend or borrow themselves into oblivion during the housing boom. With clean balance sheets, probusiness governors, and proximity to cheap energy and labor, these states are growing as fast as or faster than some emerging markets like Brazil, Russia, India, and China.

  America is moving forward, but there are badly battered states that are holding back the overall growth of the U.S. economy. I have never been more optimistic about growth inside some parts of the United States; however, I have also never been more pessimistic about other areas that seem doomed by structural unemployment and skyrocketing poverty rates. This book addresses the boom and bust reshaping America, how they happened, and what can be done to narrow the gap between America’s new have and have-not states. The first half of the book explains how we got into this mess. Economic cycles are nothing new, of course. What’s different about this latest boom and bust is the fact that there were no inevitable external forces at play. This wasn’t the New England whaling industry of the 1800s, whose fate seemed sealed the moment Edwin Drake drilled the world’s first commercial oil well outside Titusville, Pennsylvania, back in 1859.12 The housing boom and bust did not have to happen. They were a by-product of flawed public policy on the federal level combined with terrible strategic planning by the banks. For a while the housing mania enriched not only banks and homeowners but also state and local governments. Awash in new tax revenues, cities and states borrowed and spent as if the good times would never end. Unfortunately, they did.

  The second half of the book focuses on a lesser-understood element of the Great Recession—the states that were ignored by the banks during the boom and are recovering more quickly as a result of that benign neglect. In the central corridor states, government finances are healthier, taxes lower, and government services and infrastructure more robust. Shrewd local leaders are beginning to leverage those advantages in order to lure employers and employees away from the coasts. Not all hope is lost for the housing-bust states, but in order to remain competitive in an economy in which production, labor, and capital have never been more mobile, state leaders must make tough and potentially unpopular decisions on everything from energy policy to taxes to pay and benefits for public workers. The fixes are certainly doable, but they are not necessarily likely to be done—which is why the smart money is already betting on the central corridor emerging as the new driver of the U.S. economy.

  PART I

  The Fall

  Chapter 1

  It Starts at Home

  Forget everything you think you know about the direction of the American economy, about our growing need for foreign oil, about the rise of the service economy and the decline of American manufacturing. The story of the next thirty years will not be a repeat of the last thirty. Growth in America is going to come from making things—and not Big Macs or e-cards but important stuff like fuel and chemicals and cars. We are now close to producing more oil than Saudi Arabia. We are the single greatest natural gas producer in the world. We are the largest agricultural exporter in the world.1 What’s more, manufacturing is bouncing back in the United States almost as quickly as it once left. Honda, Toyota, BMW, Toshiba, and Airbus are all building new U.S. plants or already are producing goods here.2 The “all in” cost differential between producing goods in China and the United States has narrowed dramatically. On the global stage, the United States looks competitive relative to other countries and regions. America offers one common language, one common currency, a stable inflation environment, relatively unequaled political and social stability, and developed legal and capital-markets systems.

  Despite these common strengths, the rebound is not occurring everywhere in the United States. It’s happening mainly in central corridor states not bogged down economically by foreclosures and budget chaos. They have the money to retrain workers and offer tax incentives to relocating companies—flexibilities not found in housing-bust country. Economic power in the United States is shifting away from longtime coastal strongholds toward the interior. What’s going on today is tangibly different from any other time in American economic history because shifting geographic fortunes are not being driven by external factors such as new technology or even immigration—things local leaders could never have controlled or anticipated. In the past, cities and towns lived and died with the industries that dominated them. This is familiar. What is unfamiliar is communities being gutted by government ineptitude. Here we are in uncharted territory. Never before have industry and population been more mobile. Americans and global business alike can choose where to produce, where to locate, and where to invest, and they are voting with their feet. Everything is cheaper today. Moving is cheaper. Communication is cheaper. Technology is cheaper. Relocating a business is cheaper.

  The housing industry that drove growth in America for the past thirty years is a perfect example of the new velocity of capital. Banks and home builders do not stay the course. When home prices start dropping, they pick up stakes and search for new markets. There is no loyalty in housing because everybody understands that housing demand is fickle. The market is built entirely on perception—the perceived attraction, for example, of retiring in a warm, sunny climate where you could
buy a $300,000 condo today and watch its value double in a few years. The real estate market was never built on need. Home prices in Las Vegas, Arizona, Florida, and California didn’t skyrocket because people had to move there. They rose because speculators and second-home buyers believed more people would move there.

  Of course, changing geographic fortunes are nothing new in U. S. history. New economic winners and losers emerge every couple decades. Technology changes, demography shifts, and consumer tastes evolve. Yes, the cycle is spinning faster this time around—change is occurring over years instead of decades—but it’s important to understand how this process has played out in eras past because the spoils for the winners and penalties for the losers are much the same today as they were a hundred years ago. Drive across the United States and you will encounter your share of abandoned mills, dilapidated housing, overgrown railroad tracks, and other telltale signs of the American ghost town—communities that once swelled with people and industry but are now beset by decay and neglect. Many grew up around single industries like coal production or manufacturing and attracted newcomers thanks to plentiful job opportunities. As long as the industry did well, so too did the towns. Jobs and personal-income growth enabled company towns to build and improve upon public services like schools, parks, and libraries. However, once the industries began to decline or move on, employment and personal income often declined with them. Over time, municipal governments struggled to pay for services they could afford when tax bases were healthier. Towns were forced to cut back, and with those cuts the towns became less and less attractive places to live. This is how boomtowns become ghost towns.

  With roots in a core agrarian economy, the U.S. population was once spread across the country, with big rural populations in the South. Cotton production in the South gave birth to industry along the Mississippi River and created boomtowns like Jackson and New Orleans. With highly fertile soil, proximity to great waterways, and—shamefully—an abundance of slave labor, Mississippi became one of the United States’ biggest exporters and wealth creators. After the invention of the cotton gin in 1793, annual cotton production in Mississippi soared to 535 million pounds in 1859 from zero in 1800. Big Northeast real-estate concerns like the American Land Company and the New York Land Company rushed to buy up valuable Mississippi farmland. “Cotton provoked a ‘gold rush,’” writes cotton historian Eugene Dattel, “by attracting thousands of white men from the North and from older slave states along the Atlantic coast who came to make a quick fortune.” The Civil War and the end of slavery brought an end to that gold rush, and now Mississippi ranks the poorest state in the country.3

  By 1850 the textile mills of Lowell, Massachusetts, had emerged as a new epicenter of American industry and population growth. Among young people, Lowell is probably best known as the city featured in the based-on-a-true-story movie The Fighter, in which Mark Wahlberg portrays the poor kid who makes good in the big league of the boxing circuit. But back in the midnineteenth century, there were ten thousand textile workers in Lowell producing fifty thousand miles of fabric every year—their looms powered by mills and waterwheels built alongside the Merrimack River. Lowell became the first large-scale factory town in America. Some called it the “cradle of the American Industrial Revolution,”4 as raw cotton could be turned into cloth all in one centralized location. But just as new technology created Lowell, it played a part in Lowell’s decline too, as rail lines made canals obsolete and steam power and turbines improved on Merrimack River waterwheels. Electric streetcars also enabled workers to live farther away from company towns, foreshadowing the suburbanization to follow.

  Industrial Revolution (1750–1850)

  Agriculture, manufacturing, mining, transportation, and technology. Migration from the UK to New England/Mid-Atlantic.

  Economic development regionally limited as the power source was water based.

  By the late 1800s, New Bedford and other New England cities with their own seaports began to eclipse Lowell. By the 1900s, the textile industry started to abandon the Northeast altogether for the South—particularly the Carolinas—as steam-powered mills and cheaper labor made production there more profitable. Some New England mills were closed outright or forced into bankruptcy. (Others stayed open but barely, allowed to wither on the vine by absentee owners who refused to make the necessary but costly improvements required to keep the old mills competitive.) Lowell became a shell of its former self in the second half of the 1900s. Some even claimed it resembled Europe after World War II.5 Today some of the mills and canals have been turned into national parks and museums—a sure sign of a place whose glory days have come and gone.

  Power Revolution (1850–1920)

  Steel production, railroads, chemicals, petroleum, electricity, early auto/mass production.

  The Southeast and West opened up as the power source switched to the steam engine, then to electricity.

  Central and western Pennsylvania is another example of a onetime economic hotbed whose fortunes faded. Coal-mining towns like Bethlehem, Easton, and Allentown embodied the power revolution and economic boom of the 1860s through to the 1920s. Thanks to plentiful supplies of coke—a coal by-product used to make steel—Bethlehem and its eponymous steel company grew into the second-largest steelmaking town in the country, behind only Pittsburgh and its big employer, U.S. Steel. As steel production began to shift overseas in search of lower labor costs, however, Bethlehem Steel fell on hard times, going out of business for good in 2001. Its old plant is now home to a casino and shopping mall operated by Las Vegas Sands. Sadly, this has become the fate of many of these once-vibrant towns. Hospitals and universities have replaced I beam producers and steelmakers as Pennsylvania’s largest employers.

  The best modern-day example of the rise and fall of an American city is probably Detroit. As the home of the U.S. auto world and headquarters to Ford, GM, and Chrysler, Detroit embodies the devolution of the Factory Belt into the Rust Belt. From the 1920s to the early 1980s, Detroit and its surrounding cities were iconic symbols of U.S. auto production. The automobile industry was born in the United States, but by the 1970s the industry had overpromised and overspent on pension and benefit obligations for its employees. Sure, there were other contributing factors to Detroit’s decline—such as the arrival of Japanese imports sporting better gas mileage—but none had more impact than the uncompetitive labor costs, which drove millions of jobs overseas. In 1978 GM employed over 500,000 hourly workers. By 2009, when GM was ultimately forced to file for bankruptcy, it had 54,000 hourly workers. It is telling that even as GM had only 54,000 hourly employees in 2009, the company was still supporting 450,000 retirees who were receiving GM pensions and health benefits.6

  Manufacturing Revolution (1920–1980)

  Automobiles, assembly line, etc.

  Areas like Detroit, Cleveland, etc., became iconic manufacturing cities.

  Once the bastion of manufacturing wealth in the United States, in the past ten years Detroit has lost half of its population, and some residential areas are so decrepit—so littered with abandoned homes—that the city has embarked on a municipal razing project to remove them. The city is struggling to make a comeback, but that comeback will hinge on its ability to get people to move back to the city. It is the ultimate chicken-and-egg scenario: In order to attract more people, Detroit needs to spend big bucks getting its infrastructure and services up to snuff, but it needs more people paying taxes to be able to pay for better infrastructure and services.

  The U.S. economy is constantly transforming itself. Today cheap energy in the form of natural gas is creating a manufacturing revival in the United States, onshoring job that had once been lost and creating many new jobs within the central corridor, close to production. In the past, industry caused job and population shifts toward the South, the Northeast, and, more recently during the real-estate boom, the coasts. These changes are slow and steady, but before you know it, the country has been transformed.

  Economic booms and
busts have painful repercussions. Industries die, and towns and regions slowly die with them. Ghost towns materialize as drive-by relics of a region’s lost glory. With no jobs to be had, people moved on. In 1810, for example, Salem, Massachusetts, was the sixth-largest city in the country and one of its most important ports; today it’s not even the sixth-largest city in Massachusetts.

  Boom-and-bust cycles used to play out over multiple decades. This time around, it’s happening faster. Back in the 1990s, all the ingredients existed for America’s next economic thrust into housing: Baby boomers were getting ready to retire, borrowing costs were lower than they’d been in a long time, and the government was actively pushing a housing policy that explicitly encouraged homeownership. States like California, Arizona, Nevada, and Florida all boomed with retiree and second-home buying. Speculators drove prices even higher. Communities were born and expanded around real estate, not industry. People didn’t need to move there; they chose to buy homes in these areas. Thus, when the sand hit the fan in the housing bust, the people who could move on did, and local property-tax bases lost value with every departure. A city or town is only as vibrant as its housing market. When the tax base weakens, so too do the public services that property taxes underwrite. Lower services translate into lower home values, and the cycle goes on and on.

  Leverage/Housing Revolution (1994–2008)

  Real-estate assets inflate, cash-out refis, high homeownership, securitization, housing bubble.

  States closer to the coasts, such as California, Arizona, and Nevada, in the West, and Florida, Georgia, and North Carolina, in the East, rose to prominence.

  Today it isn’t technology or geography driving regional booms and busts. Cities and states are determining their own fates. Those that decide to borrow against future tax receipts in order to overspend are dimming their future economic prospects. Businesses and homeowners can almost always move to escape the final bill, gutting the tax base in the process. Federal taxes may be inescapable, but a California taxpayer or business can fairly easily pick up and move halfway across the country to avoid paying ever-rising California state and local taxes. In the world of telecommuting, some white-collar emigrants might not even have to leave their old jobs.