In the Peoria Journal Star today, Paul Gordon writes about a report produced by the Peoria area’s economic development organization. The report is designed to make everyone feel better about the local economy. Apparently, the Heartland Partnership has gotten some grief over its ad campaign that says “It’s better here,” even with the poor economy and layoffs at Cat.
I’m not convinced.
From the article:
The numbers show the area is faring better now than in earlier recessions, largely because of the way the local economy has diversified in the past 25 years and reduced its reliance on manufacturing, namely on Caterpillar Inc., the Partnership said during a news conference at its office Wednesday.
I would imagine that the local economy is less reliant on Cat. But is this true economic diversification, or has Cat’s contribution to the local economy shrunk to the point where the local economy just looks more diversified?
To think of this a different way, go check out the pie chart that was published along with the article. The economy looks diversified because Cat’s pie piece is relatively small. Now, imagine that the yellow Caterpillar pie piece was more than three times as big, as it was in the past. The economy now looks less diversified. This new economic “diversification” we seem to enjoy could just be the relative decline of Cat, while other parts of the economy remained largely fixed. Job figures cited elsewhere in the article might point to an answer to this question:
Another key statistic, the Partnership said, is the number of people working. In the five-county Peoria “metropolitan service area” – Peoria, Tazewell, Woodford, Marshall and Stark counties – there were, on average, 194,577 people working in 2008, before the layoffs began. In those same five counties in the late 1970s, before the recession of the 1980s, there were about 178,000 workers on average. By the end of 1985, that was down to about 146,000.
Basically, the Peoria area economy has generated 16,577 new jobs in 30 years – 552 jobs per year. I would want to look up some more comparative statistics, but given the growth of the overall U.S. economy in the last three decades, that does not strike me as anything to celebrate. And remember, none of this takes into account the layoffs taking place right now.
I also wonder if this idea of Cat’s reduced importance as an employer fails to capture the remaining essential reliance of the Peoria area’s economy on Caterpillar. Look at that pie chart again. How many of those other sectors (like leisure and hospitality, education and health, professional and business services) would decline precipitously without that sustaining wealth creation that Cat generates by brining in profts from around the globe?
Back to the article:
Saying he did not want to belittle the strife the area has seen during the recession, including recent layoffs at Caterpillar and other companies, McConoughey said the statistics nonetheless show “we are weathering this and doing fairly well. It is not better here than it was a year ago, that’s true, but it is when compared with recessions of the past and with how other areas are doing now.”
I think this is essentially true. If you compare the Peoria situation to where the economic bombs have really been going off (Florida, New York), we’re doing okay. Just consider the housing market. I was talking to a realtor I know yesterday, and he said that prices are holding up in Peoria. That’s certainly not true elsewhere.
However, that’s probably because Peoria never had as big of an economic run-up as other parts of the country. Think of all of the huge banker bonuses that bolstered the New York economy during the last few years. That point does come out in the article at one point:
Housing values have stayed steady because this area did not experience the housing bubble burst that occurred on the coasts and in Florida.
Moving on, according to the article, McConoughey made what, to me, was an alarming statement:
It’s important people know that, he said, so confidence can be restored. “We don’t want people to bury their money out in the back yard and then hole up waiting for the recession to end. We need to spend our way out of the recession,” he said.
Confidence is important, but I think this is dangerous, if not negligent, economic advice for individuals and households.
Consumers do represent about two-thirds of our nation’s economy. But part of the reason this recession will prove so disastrous is the debt overhang that individuals and consumers have from years of over-consumption. Quite sensibly, consumers are cutting back, especially when their jobs seem so insecure.
But that leads us right into Keynes’ Paradox of Thrift – the idea that what’s good for individuals separately is a disaster for everyone together. Everyone cutting back on their consumption will tank the economy, which will feed back into reducing people’s confidence, more job cuts, etc.
This, by the way, is the essential argument behind the stimulus bill. Government can act as that spender of last resort in the short-term, while consumers weather the economic storn, clean out their debt, and prepare to become stronger engines of the economy down the road. This kind of advice makes me think back to the “go shopping” rhetoric we got a couple of years ago.
And finally, things are likely to get worse:
Acknowledging the most recent layoffs by area employers, including Caterpillar, are not reflected in the December rate, the Partnership cited Bradley University economists as saying they don’t expect the region’s unemployment to reach beyond 9 percent during the current recession.
Yikes. Well, at least we won’t see 10 percent.
We’ll see if the Heartland Partnership can produce such an optimistic sounding report a year from now.
P.S. One last thing about that early 1980s recession that clobbered Peoria, much of the Great Lakes region, and the U.S. economy. I think it’s important to remember that that recession was not some sort of natual disaster. The Federal Reserve (under then-chairman Paul Volcker, now an Obama advisor) made a deliberate choice – with the backing of political leaders at the time – to crash the economy so as to kill inflation. Now, there’s a solid economic argument to be made for containing inflation. But that recession was done to us, in the name of saving the overall economy. It just happened to break the back of much of the industrial Midwest in the process.
I wonder at what point we’ll finally decide to break up the banking sector for the sake of the larger economy?
P.P.S. I happen to think that Paul Volcker is one of the best economic minds that Obama has near him right now. Far better than Larry Summers or Timothy Geithner. But unfortunately, signs have been that he’s not part of the inner circle.