For good reason, public frustration with the quality of political discourse in our country is growing. At a time when both parties should be coming up with ideas to seize the economic future for the next generation, we are instead treated to petty bickering and endless discussions about lifestyle choices by free people. Whether or not a woman decides to stay at home with her child does not affect my life and, anyway, it’s none of my business. The fact that we have to spend so much time talking about whether gay people should be able to marry strikes my kids and most of the younger generation as ludicrous.
In Seattle, we are focusing on more on lifestyle issues than economic ones and seem to ignore the good news happening under our noses (more on that later). Our civic discussions focus on things like whether or not to extend closing times for bars, raising and lowering parking rates (for what purpose, it’s not exactly clear). And our latest civic obsession, getting an NBA franchise from Sacramento or some other city getting the screws put to it by NBA Commissioner David Stern to fork over ever more public money.
At the national and local levels, these issues will not affect our economic recovery in any appreciable way. We need both political parties and local, county, state, and federal governments to focus on something that is quite simple: How to recover from 30 years of subsidizing consumption, cutting taxes, and divesting capital from productive uses, like education and transportation?
This is the theme of a recent presentation by Walter Kemmsies, chief economist at Moffat and Nichol. Kemmsies was hosted by the Port of Seattle to discuss short- and long-term economic trends and how our political system is failing to adequately take advantage of our strengths while planning for problems down the road.
While we have gotten ourselves into a bit of a bind, there are some good fundamentals to build on, particularly in the short term, as we continue the long slog out of recession. We should remember that the 2007–2009 gross domestic product (GDP) collapse was the worst since the years 1929–1932. Recovering from this “supply side” recession will take a long time and will require the creation of a new economic structure — one based on focused public and private investments in productive capacity.
First, a few key takeaways from Kemmsies’ presentation:
- Europe is harmless. The obsession with austerity measures is hindering their recovery and creating unnecessary misery. Lesson: let’s not do that here.
- If you want to know where the action is in the future, look to countries with young populations, Mexico, Brazil, India, Russia, China (even though China is aging, the sheer numbers make them huge players).
- American consumers will not lead the global economy beyond the near term recovery, nor will Europe. In the longer term the recovery will be led and sustained by consumers in those countries that are growing. For instance, China buys 23 million cars while the U.S. buys 16 million. It is apparent by the numbers that exports are leading the way. Shipping container volumes increased by 8 percent in 2011. The vast majority of that increase was in exports.
In this situation, we must ride the wave and focus on public and private investments that are productive — that is, they grow our production capacity. This means education and innovation, educating our people to take advantage of the opportunities that will be there for them if they have the right skills. Technical training and having strong community college systems to retrain workers are just as important as our four-year universities.
A big part of the cost of production is in transportation. Investing in existing infrastructure, more efficient management of our roads, and creating opportunities for private capital to flow into these investments can begin to turn the tide from subsidizing consumption to subsidizing production and catch us up.
We can never compete with the developing world on the basis of cheap labor. We can, however, take advantage of relatively cheap capital that is now mostly flowing into natural resource speculation, or worse, sitting on the sidelines. This also means that those exports that are capital intensive, like agricultural products, energy, large capital goods, and technology, give us a competitive advantage over those countries that don’t have ready access to capital.
So what can our political leaders do to take advantage of this obvious opportunity? President Barack Obama wisely focused on exports early on in his administration, recognizing the demographic realities of an aging America (consuming less) and a younger developing world. As noted earlier, exports are leading the way to recovery. But we can do more. In fact, exports accounted for a third of economic growth in the last eight quarters.
The Seattle Times recently reported that “the state's manufacturing sector added 14,600 jobs — most of that growth in the Seattle area — over the 12 months ending in March.” In fact, half of private-sector job growth in March was in manufacturing.
Remember that most of the growth is actually happening in the Seattle area. For those who think our industrial area should be redeveloped or put into consumptive rather than productive use, these numbers cannot be ignored. Chris Hansen, the hedge fund manager trying to bring the NBA back to Seattle recently told The Seattle Times that industrial areas in cities inevitably evolve, eventually being redeveloped into office buildings, hotels and other commercial uses. Hansen told the Times: "To the extent that we're accelerating that process a little bit, hopefully that's a good thing.”
I don’t blame Hansen for this line of reasoning. He’s not alone. But the economic numbers tell a different story and prove how important maritime (the sector where I work) and manufacturing are to Seattle. Even with the recent jobs numbers and the proof that manufacturing and exports are leading the charge to recovery, those sectors still don’t make it into the “highest, best use” calculations of elected leaders and civic boosters.
Anything that imperils the ability of these types of businesses to thrive, whether traffic gridlock, incompatible adjacent uses, or public policies that inhibit growth should be resisted by policy makers. The debate about a new NBA Arena in the SoDo area should be considered in light of these economic realities and cautions.
According to Seattle's Industrial Lands Study in 2007, only 12 percent of city land is zoned for industrial use in 2006. That is down from 14 percent in 1984. But that land is really important if you care about jobs and economic growth. In fact, "In 2006, the industrial sector accounted for $5 billion in taxable sales which translates to 33 percent of the City's retail tax revenue." The report further states that "industrial businesses also generated 32% of the of the City's total B&O tax revenue."
At the federal level, the U.S. Congress should authorize a surface transportation bill that has been languishing due to the inability of the Senate, controlled by Democrats, and the House, controlled by Republicans, to come to agreement. Both legislative bodies have only recently passed separate bills that differ widely. Larry Ehl at Transportation Issues Daily reports that pessimism persists regarding a final deal even as the Federal Highway Trust Fund will go broke in 2013. The federal government can also do more to help states invest in university and K-12 education. The federal and state leaders mainly criticize universities for hiking tuition while they themselves divest public resources from the system. University leaders don’t have many options and we all suffer.
So how do we judge good investments? And do deficits matter?
Kemmsies shares some insights into this debate. In a normal economy government investment is usually 15 to 20 percent of GDP. In China, investment (when both private and government activity are combined) is 50 percent of GDP. Looking at the economies from another persepctive, in the Eurozone, the debt-to-GDP ratio required by the 1992 Maastricht Treaty is 60 percent. Here, where the economy is doing better, the U.S. debt to GDP ratio is 100 percent; while Japan’s is a whopping 250 percent.
While we cannot ignore deficits in the long term, making investments that increase production to meet growing demand are far too important in the short term to cut in the name of deficit reduction. Investments must be judged on the basis of increasing capacity for production and exports (both of which will help us pay down the debt over the long run). This generally means that transportation and education will deliver the biggest bang for the buck.
And lest we fear that only countries with natural resources can be successful, we should consider post-war Japan. Japan invested in transportation and education and became great innovators and the second largest economy. Currently, Japan is third, behind China and the United States. Unfortunately, they have had some major setbacks coupled with demographic realities — an aging population — that have taken a toll. But they have bounced back before and likely will again.
There is already a new economic order rising from the ashes of the 2007–2009 collapse. America can once again be a leader in shaping this new reality. But much will depend on our political leaders having a productive dialogue about how to take the near term good news to the next level and begin subsidizing production over consumption.
Listening to Kemmsies’ presentation it was impossible to guess if he was a Democrat or Republican. A refreshing respite from what passes as political debate.