Monday, August 31, 2009

Early Indications August 2009: Informational Geography

As the U.S. economy has shifted away first from agriculture and then
manufacturing as its core activity, numerous side effects have
emerged. In this newsletter we'll look at some of these, particularly
in regard to land and space issues. As we have witnessed, the
information age closely parallels the emergence of services as the
primary economic driver: the first commercial computer application
(payroll) was installed at GE's appliance operation in Louisville in
1955, so we'll look at roughly the past 50 years.

Macro Trends in Employment
As for the shift to a "services economy," the Bureau of Economic
Analysis numbers (sampled at 5-year intervals) tell several stories,
two of which focus attention on the 1970s. First of all, if we look
at "personal consumption expenditures," which are separated from
investment, the U.S. crossed over from spending more on goods to more
on services in 1970. From that 1:1 ratio, the momentum stayed with
services, to the point where in 2005 services spending approached a
2:1 advantage over goods. Second, at about the same time the U.S.
swung from a trade surplus to a trade deficit of roughly the same size
in only 5 years, a 181% swing between 1975 and 1980. Finally, and
significantly, we still export more products (70% of the total) than
services (30%).

From the employment side, was manufacturing ever dominant? As of
1919, according to the 1950 Statistical Abstract of the United States,
mining, construction, and manufacturing constituted only 47% of the
non-agricultural work force. Transportation and utilities, retail,
finance, services (as in auto repair but not domestic servants) and
government (excluding armed forces) added up to the remaining 53%. As
of 1959, according to the Bureau of Labor Statistics, the 19 million
goods-producing jobs unsurprisingly lagged services jobs, which
totaled 34 million, 8 million of which were government positions.
Since that time, several trends bear mention:

-In the goods-producing sectors, three distinct cadres emerge. The
number of miners and loggers in 2008 was nearly identical to the 1959
total of 789,000, yet wild swings can be seen repeatedly in that
50-year span: 658,000 was a two-decade low in 1971, then a 50-year
high of 1.2 million was achieved only 11 years later. In
manufacturing, current numbers are 2 million lower than 1959, but
population has nearly doubled, from 177 million to over 300 million.
The final goods-producing sector, construction jobs, grew even faster
than population, from 3 million to 7 million.

-Services-sector job growth reveals some truisms and some surprises.
Government employment more than tripled in 50 years. Leisure and
hospitality quadrupled. Education and health jobs (the category is
bundled) have multiplied six-fold, some of which adds further to the
government total. The financial sector grew 330%. The biggest
surprise since 1959 among services sectors is information, which
barely doubled by 2000 and has been shrinking since, presumably led by

The American geography reflects these changes in many ways, some of
them subtle. The boom in both construction and leisure sectors, for
example, helps explain Florida. Financial services consolidated first
in a few cities (Boston, metro New York, Charlotte, Atlanta, Dallas)
then in a handful of firms in those areas; other cities, most notably
Philadelphia, declined in banking prominence. The rise in
education/health and government sectors makes Austin, San Antonio, and
North Carolina's Research triangle logical beneficiaries. As the New
York Times pointed out, Detroit's steady decline contrasts sharply
with the rise of Washtenaw county, only 45 minutes away, powered by
the University of Michigan.

Other regions are seeing decline, of course. Buffalo may have been
the country's first victim of globalization as the St. Lawrence seaway
bypassed the former grain gateway and then the steel industry also
left town: the city's population has fallen by half in less than 60
years. Now, only 75 miles away, Rochester copes with the falling
fates of information industry pioneers Kodak and Xerox, with only
partially compensatory development in education and health care:
together, Xerox and Kodak employ fewer people than the University and
only 3,000 more than Wegman's grocery stores and its headquarters
operation. Population has declined by 37% since 1930.

Timber industries are in retreat as newsprint consumption goes down
and furniture-making moves offshore; home construction, while
cyclical, is not enough to compensate even in the boom years. Since
the 1960s Maine has lost shoe-making and other manufacturing jobs, and
even though there's no shortage of trees, the lack of saw- and paper
mills contributes to a downturn in both logging and the companies that
sell capital equipment to the paper industry. Pennsylvania is the
nation's leader in hardwood lumber, meanwhile, but that business is
hurt both by Chinese furniture factories (and the accompanying new
sawmills) and the housing bust: demand for oak and maple cabinets and
floors has fallen.

With the decline of the vast integrated steel mills that used to
dominate the industrial heartland in favor of lightweight minimills,
several things are happening. First, some cities including Pittsburgh
have reclaimed the real estate formerly occupied by mills to build
biotech and other facilities. The contrast between Boston/Cambridge
and Bridgeport or Worcester with regard to brass, leather, and similar
factories is playing out again, with Pittsburgh able to use education
and health care for economic growth while cities like Allentown and
Reading still struggle.

At the same time as steel mills have changed shape and location, coal
production for electricity generation has surged. West Virginia leads
the nation in coal mining employment, but productivity per miner is an
order of magnitude higher in the western open mines of Wyoming and
Montana. West Virginia also provides a fascinating contrast with its
close, intertwined neighbor (the states' northern borders overlap for
over 100 miles). Maryland is home both to unemployed crabbers and the
most highly-educated employees in the country. They work in such
units as the Department of Energy, National Security Agency, and the
biotech research complex at Fort Dietrich, where pioneering research
was done on surgical robots, for example. West Virginia, meanwhile,
ranks third in the nation in obesity, 49th in per capita income
(Maryland passed Connecticut to become #1), and in the bottom five in
educational attainment.

Sticking with commodities, no element is as intricately involved in
the information age as copper. Whether in microprocessors,
transformers, power lines and cables, or data networks, copper is
essential for both computing and communications. Michigan's upper
peninsula used to be an active producer, but starting in the 1960s the
emergence of open-pit mines in the American west, and more important,
Chile, made deep-shaft mining uneconomical. While iron continues to
be mined about 100 miles away, the "Copper Country" was transformed by
tourism and education as the former Michigan College of Mines emerged
as the area's economic engine, employing 1,600 people with an annual
budget of roughly $185 million. Nonetheless, both Houghton and
neighboring Keweenaw counties have been losing population in the 2000s
after staying flat the previous 20 years, according to Census Bureau

Policy Implications
What generalizations can we make about the past 50 years, dominated as
they are by the dual (but mysteriously correlated) forces of
information and services? In the northeast, deindustrialization means
more forests, closed mines, decommissioned railroad tracks, and
smaller tax rolls. It also provides the necessity and the possibility
of repurposing of urban industrial real estate. The simultaneous rise
of the South and West, meanwhile, stress-test the infrastructure of
the states that are growing. The budget crises in Pennsylvania and
California that have such different origins, Atlanta's water
emergency, and Florida's real estate collapse all indicate how
internal migration is creating structural difficulties in both the
stagnant and destination states. At the state and federal levels, new
policy issues proliferate.

1) Who Rules?

In addition to reshaping Congress and thus domestic spending
priorities, the 2010 census will tell a fascinating story about
internal migration. Given that there was substantial activity in
certain information industries in the 1990s, and that manufacturing
certainly suffered its share of setbacks, are there migration patterns
that we might expect to intensify when the next measures are taken a
year from now? Between 1990 and 2000, no states shrank, but 11 states
grew by less than half the rate of U.S. population growth, which was
about 13% for that period. Note the presence of Electoral College
heavyweights New York, Ohio, and Pennsylvania on the list, possibly
portending a shift in campaign strategy for 2012 as they lose
congressional impact:

-New York
-North Dakota
-Rhode Island
-West Virginia.

It will bear watching to see if such states as Nevada (66% population
growth in the 1990s) and Arizona (40%) will exhibit any population
artifacts of their role in the mortgage crisis. California,
meanwhile, grew at scale in the '90s, essentially adding the
equivalent of the entire state of Minnesota circa 1990. As the
state's financial and physical infrastructure creak under the load,
where will people move next?

2) Who Pays?
One facet of the change in employment patterns emerges in the need for
tax revenues. Three stories illustrate the extreme difficulties
imposed by the shift to a more virtual economy. First, telecom taxes,
which formerly contributed roughly $30 billion a year to federal and
municipal budgets, will continue to fall as a result of VoIP and
cellular substitution. The city of Boston is attempting to recoup
some of this loss by taxing telephone poles as property. Confusingly,
electric poles are already taxed, but Verizon's predecessor company
got a tax exemption in 1915 for the encouragement of universal
service. In any case, today's reality would seem to require new
arrangements all around, and the discussion continues.

The second tax attempt came this summer in North Carolina, which
joined Rhode Island and several other states in attempting to tax the
transactions of small and medium businesses in the state that used
Amazon's storefront and payment engine to scale their market. Amazon
responded by cutting ties with the businesses to preserve the lack of

Third, I have not seen any estimates of the tax impact of offshoring
jobs, but if a given company's call centers or IT shop shrinks by
thousands, the savings in payroll will undoubtedly affect state and
local tax collections even as demand for unemployment compensation and
social services typically rises.

3) Who Regulates What?
A final policy question relates to the role of broadband. As sparely
populated areas shed jobs and possibly population, the Obama
administration continues to stress the role of network connectivity
without yet specifying who, how, or how expensive. Stringing copper,
coax, or fiber can get extremely expensive, particularly as population
density decreases: part of the pressure on wireline businesses comes
from the cumulative effect of so many defections. A social good whose
costs were shared broadly becomes incrementally more expensive as the
infrastructure costs get shared by fewer and fewer people.

Note that in the "revestiture" of the U.S. telecoms industry, neither
SBC (later ATT) nor Verizon (originally Nynex plus Bell Atlantic)
wanted Qwest and its vast, mostly sparsely peopled service area
extending from Washington to Minnesota and south to Arizona. Verizon
is selling off landline businesses in states such as Maine. Sprint,
meanwhile, spun off its heavily rural wireline business entirely in
2006 as Embarq. Saddled both by customer defections (10,000 a week)
and heavy debt, Embarq was subsequently bought in 2008.

Meanwhile, wireline providers have limited options as universal
service provisions remain in place: firing unprofitable customers is
rarely possible. The universal service provisions could conceivably
be augmented to mandate broadband, but rules that applied to
monopolies have yet to be overhauled to fit a competitive landscape:
in our small town, I could obtain some flavor of telephone service
from at least seven providers. How many providers does a network
require to be called competitive, and thus lightly regulated? Sprint,
AT&T, and Verizon have laid off nearly 30,000 people the past 12
months alone, yet how many regulatory entities are shrinking

The shift in emphasis to services, along with global competition, has
changed the American landscape in myriad ways:

-People can move south and west as a) air conditioning makes the
climate tolerable and b) jobs no longer connect to natural resources
and rivers or ports: compare Atlanta, Dallas, or Phoenix (defined
instead by their interstates) to their northern counterparts. In
historical terms, meanwhile, when will construction activity and
employment slow down their rapid growth?

-As agribusiness grows in scale, farmland in the northeast is
returning to (mostly unmanaged) forest. Deer populations now
constitute a serious problem in many states as habitat increases while
hunting and predation do not. The lack of timber industries allows
these forests to become recreational and ecological resources.
Reforestation and healthy watersheds raise the question: when will
fresh water turn again to become a major economic driver, particularly
in industries where virtual work is a possibility?

-Universities and hospitals have replaced factories as economic
engines in many localities, but as non-profits pay different kinds of
taxes compared to factories.

-In many ways the people who most need broadband, for distance
learning and telemedicine for example, are the least likely to have it
because of the high cost to serve remote populations. Remedying the
access paradox may not be the challenge that health care reform is,
but that does not make it a simple matter.

-As Maryland's physical proximity to but economic distance from West
Virginia shows, the world is not fully flat: local advantage can still
matter, and matter decisively. Detroit, meanwhile, shows just how
"local" local advantage can be.

-Competitive forces that reshape industries are not reflected in the
government portion of the services economy. Even seeing the true size
of state and federal government agencies is a challenge, much less
altering them. The Japanese automakers successfully challenged the
Big 3 on quality, for example, but taxpayers can't similarly defect to
a better performing government. The population of metropolitan
Washington, DC, meanwhile, grew 29% between 1990 and 2007, giving it
the final word on the reshaping of the American landscape in the
information age.