Thursday, July 29, 2010

It's Time for Open Source Economic Development

There are few things as repetitive as watching economic development presentations from different cities, counties, and states. Everyone's got an educated workforce, everyone's got a top ranked symphony, everyone's got a website with pictures of lab coat techs starting at test tubes. And just about everyone still has high unemployment.

The me-too wastefulness of the economic development industry is best seen in the billions poured into convention centers over the last decade. For some reason, sports stadiums make a lot of academics angry, but convention centers can actually be far more wasteful. Here in DC, there was all kinds of moaning about the $611 million stadium the city built for the Nationals, which is generating more than enough revenue to cover its debt service. But there was barely a peep over the me-too $800 million convention center that the city is struggling to fill.

But instead of wasting taxpayer dollars on copycat slogans and convention centers, it's time for economic development to draw on taxpayers' unique knowledge of their hometowns. Residents are already altering perceptions of cities and states with YouTube clips, from the Arlington Rap to the Hastily Made Cleveland Tourism Video to Minnesota Gurls, all of which get far more hits than any of the vapid symphony, science, and art videos put up by economic development authorities.

Rather than get surprised by some 18 year old's YouTube clip, it makes more sense for recruitment campaigns to incorporate more input from residents. Some cities will hold charettes and go through all kinds of planning debates over a 10 acre parcel of land. But economic development strategies are more important to these cities' futures than the position of the parking garage next to the new "lifestyle center". Moreover, many people developing those strategies are cautious government employees who do not want to venture too far away from conventional themes with predictably mediocre results. So why not involve citizens more?

Monday, July 26, 2010

Big Economic Development Win for Greenville/Spartanburg Region

Big win for Laurens County, SC, which is about 30 minutes south of Greenville, SC, with the ZF Group announcing a $350 million plant where the German manufacturer will produce auto transmissions. One of the company's largest customers, BMW, has a facility nearby in Spartanburg.

One of the most interesting aspects of this new plant is the level of employment it will support per capital dollar invested. It's expected to create 900 jobs once it's fully up and running, or one job for every $390,000 of capital invested. This is fairly labor-intensive for modern manufacturing, and quite a bit lower than the $650,000 of capital Toyota will spend for every job it creates at its new Corolla and Prius plant in Blue Springs, Mississippi. It's also far more jobs per capital dollar than the Dow Kokam battery plant in Midland, Michigan, which Joe Biden and Jennifer Granholm have been treating like an economic savior, yet will only create one operational job for every $1 million of capital invested. The ZF plant will need more than 2.5x as many workers per dollar invested than that heavily publicized battery plant.

South Carolina, which has struggled during the recession, has also stayed focused. There haven't been any silly "cool cities" campaigns in Columbia, Greenville, or Charleston, and it's continued to recruit manufacturers, and not fallen for any of the creative city Richard Florida hype. In addition, it's now putting together supply chains of one producer selling to another, which is far more sustainable economically than creating yet another "urban artists neighborhood".

Friday, July 23, 2010

Los Angeles Celebrating Metro Rail's 20th Birthday

If you're in LA, you can attend the big bash at the Staples Center today for the MTA rail system. Now carrying 327,000 people a day, the system carries as many people as the Bay Area's regional BART rail, although total Bay Area light rail/heavy rail ridership is right at 500,000 when you factor in Muni.

The LA Times story noting the anniversary breaks down into a debate over whether the initial blue line should have been a bus instead. I often think bus service is underrated, because it serves the very important role of getting low wage workers, many of whom don't own cars, to work. But in this case, the rail line hooked up with others that go into some fairly wealthy areas in the Valley as well as with future lines that will run between downtown and Santa Monica. Additionally, with close to 8,000 people per square mile, LA not only had the people to support rail, it had the population density, something we don't see with toy trains that get proposed in smaller cities.

Wednesday, July 21, 2010

Wind Power is Much Better than Solar for Manufacturing Jobs

Solar manufacturing is incredibly capital-intensive. For new solar fabs, like the Amonix plant near Las Vegas, and the Solexant plant near Portland, capital outlays are coming out to just over $500,000 per job created. Solexant, for example, will create about 200 jobs on a $107 million capital investment. Contrast that to the new Vestas wind turbine plant in Brighton, Colorado (a few miles northwest of Denver Int'l Airport), where 850 permanent jobs will be created with just $100 million of capital investment, or about $120,000 of capital outlay per job. So for less capital investment, the wind turbine plant is creating over four times as many new jobs as the solar fabs.

Unlike solar manufacturing, which requires heavily filtrated clean rooms and expensive printing and cutting equipment, much like a semiconductor fab, wind turbine manufacturing requires a lot of people. And if you're the sort who spends more time thinking about microeconomics than microbikinis, you'd say wind turbine manufacturing is labor-intensive.

The diameter of the largest turbine rotors has surpassed 400 feet, so the economics of production are very old-school, dependent on a lot of people converting raw materials into a large item. This is very different than manufacturing a 4 inch solar cell using machinery from semiconductor plants. Building the wind turbine takes a lot of people, building the solar cell a lot of capital equipment.

In addition to differences in manufacturing costs, wind turbines are expensive to ship. While Vestas has imported turbines here from its native Denmark, moving 400 foot wind turbines around is no small effort, and makes outsourcing manufacturing to Asia a very costly effort. Meanwhile, two of America's largest solar manufacturers, First Solar and SunPower, are building new facilities in Malaysia and the Philippines.

Now what's even more impressive about the wind turbine plant is how it compares to factories where other centralized, alternating current technologies are built. I posted a few weeks ago about the new steam turbine plant going up in Chattanooga that will cost $300 million to build, and produce all of 325 jobs. The Brighton wind turbine factory will produce about seven times as many jobs per capital dollar invested as the Chattanooga steam turbine plant.

While most economic development professionals, as well as politicians, are eager to pounce on anything that remotely looks like a "green job", it's becoming very clear that some green jobs are far more sustainable than others. While wind farms produce very few jobs, and are models of efficiency and productivity, a wind turbine plant is hard to outsource, and creates far more jobs per capital dollar invested than just about any electricity generation technology.

Tuesday, July 20, 2010

Air Travel's Coming Back

Delta Airlines just completed an incredible quarter, with passenger revenue increasing 19%, and cargo revenue increasing 22% from year ago levels. Additionally, airports across the country are seeing increased traffic, with Charlotte reporting 9% more passenger enplanements in May than it saw in 2009, and even Pittsburgh attracting more passengers than it did this time last year.

Delta flew 1.7% more passengers in the second quarter of this year than it did in 2009. And it was able to charge a lot more, with passenger yields increasing 17% to over 14 cents of revenue per mile flown.

Cities and states waiting around for a recovery need to look beyond the headline data coming out of the Federal Government, because the passenger and cargo figures coming out of ports and carriers are looking very strong.

Monday, July 19, 2010

Office Buildings Are So 1997

Last week, I posted a link to a story showing Port of LA cargo traffic is at record highs. At the same time, the office market is still getting worse, with vacancies in the LA-Orange-Inland Empire region pushing 20%.

The Los Angeles CSA (LA, Orange, Inland Empire), has lost 1.7% of its jobs over the last 12 months, but 3% of its office space has been vacated over that same period. Moreover, in Orange County, vacancies are still rising while employment in business and professional services has actually started going up again. Office space leases aren't just lagging, they're contracting at a time when data centers, hospitals, schools, and other workplaces of the 21st century are expanding.

I cover the data center industry in my consulting business, and the industry is adding new capacity as we speak. Unlike the office REITs, data center REITs are seeing double digit annual growth in rent revenue.

Few offices are likely to be needed this decade in the massive Southern California market. Vacancies fell 10 points in the 90s economic expansion, and 7 points in the 2000s expansion. Even in the most optimistic scenario, it is very hard to see overall vacancies in the market dropping below 10% this decade. But this does not mean jobs will not be created, just that they won't be done in the 20th century workplace known as an office building.

Thursday, July 15, 2010

Port of Los Angeles Breaks Monthly Record for Cargo Volume

Over half a million containers came through the Port of Los Angeles in June, a new record. Traffic was also strong as the neighboring Port of Long Beach. There is still a disturbing trade imbalance at both ports, but according to the LA Times, the logistics jobs tied to the ports are the leading source of stable blue collar jobs in Southern California.

Tuesday, July 13, 2010

Cities Should Focus on Creating Wealth, not Jobs

There's a lot of debate going on these days about Macroeconomics. One the one hand, there are people like Paul Krugman, who basically thinks it's still 1933, and that we should deficit spend our way back to prosperity. On the other side are people like Larry Kudlow, who thinks we need to tax cut our way to prosperity. But I think they're both wrong, especially in the context of urban economic development, because creating jobs has a lot more to do with microeconomic reality than macroeconomic policy.

Problem with macroeconomists is that they fall in love with theories the way teenage girls fall in love with quarterbacks. But at least the teeny boppers are fickle, macroeconomists can hold onto their crushes for decades. Krugman likely fell in love with Keynes in college, and has had hearts in his eyes ever since.

Back in the 30s when Keynes was coming up with the ideas Krugman and other disciples now cling to religiously, it was much easier for government to create jobs. This wasn't because FDR was some clever guy, but because capital labor costs were much lower. Hoover Dam, for example, cost $9,400 per construction worker to build. Adjusted for inflation, this works out to about $132,000 of capital expenditures per construction job. Yet today, a modern power plant costs about $2-$4 million per construction job. Cap labor costs have gone up about 7-8% a year since the 30s, while inflation's only gone up about 2-3%. As a result, it's gotten much harder for any government to create jobs, regardless of whether policymakers listen to Krugman, Ron Paul, Larry Kudlow, or Larry the Cable Guy.

In recent articles, I've pointed out the $1 million capital-invested-per-job steam turbine plant in Chattanooga, the $4 million capital-invested-per-job data center in Iowa, and the $25 million capital-invested-per-job wind farm in Oregon. It simply requires too much capital now to create a job, and this figure is not going to stop rising faster than inflation, especially when all the workers need health benefits. If it only cost $132,000 in capital investment to create a new job like it would if cap labor costs had stayed at the same level as broader inflation, then there'd be no issue, we could just have a 1930s economic policy, and Krugman would be a hero. But we don't, so the answer is to shift regional economic development away from just creating jobs, and focusing more on recirculating wealth.

Perhaps one of the best examples of recirculating wealth is the Lowell, Mass Venture Development Fund, which doesn't try to recruit massive factories that only need 300 workers, but rather locally owned shops and restaurants, which don't need tremendous amounts of capital to justify hiring someone. Additionally, the owners live locally, so the profits don't get sent to Toronto, Toledo, or Tokyo. Increasingly, regional economic development will have to focus more on building local businesses like this, because workers are simply too productive to be hired by the thousands anymore.

Friday, July 9, 2010

The Workplace of the Future

Been reading a lot lately about changing workplaces. It seems a lot of urban pundits, especially the BS artist whose last name is also a coastal state, have just woken up to the world those of us in the tech industry have been living in since 1995. Actually funny to read all the stories about "results-oriented work environments", working from coffee shops, and casual dress. When I see these, I feel like I should be able to click on the Top Stories link, and get the latest breaking news on the President's affair with Monica Lewinski.

While urban pundits only have something to write about if things are changing, one thing that's not changing is simple economics. And one of the most fundamental economic principles for cities, employers, and employees, is that you're usually better off owning a scarce resource than an abundant one. And there is no shortage of nonsense being published today about 1990s-style work arrangements that aging pundits have just picked up on. And as I've written many times, Jennifer Granholm and many in the econ development industry are very impressed, and are preparing their cities and states for the economy we had in 1997.

The workplace of the future is still a place, not an Internet connection. Because for every new T-1 that gets installed, face-to-face becomes an even scarcer commodity, especially where that human interaction does not depend on any sort of connection to the Internet. Nurses, part of an incredibly fast growing profession, aren't meeting their clients at Starbucks, 3rd grade teachers are not turning their classroom into "ROWEs" where students only have to show up if they have a meeting with another kid. And health care and education are now a quarter of the economy and growing.

The workplace of the future exists today, and anyone who's smart isn't moving to Portland or some other slacker city urban pundits can't stop fawning over, but is looking for a job where they will have to interact physically with the people paying the bills, whether they're clients, patients, or students. Face-to-face is only going to become scarcer, not unlike Javascript skills were in 1998, except it's not going to be outsourced to Bangalore, unless you decide to visit India. So smart people today are not planning a tech startup, but rather thinking about how they will build on the scarce resource of face-to-face contact.

Not all face-to-face jobs will pay well, but at least working face-to-face can prepare you for future jobs that require that skill. Sitting in Starbucks writing a blog won't.

The workplace of the future doesn't look that exciting from a let's-hype-some-trend perspective. Restaurants, hospitals, and schools are far too mundane for the chattering class to start talking about. But the foosball playing, cappuccino machine-in-the-office companies we read about now are just implementing the workplaces of today. Trying to recruit such companies does little to prepare a city for the future.

Wednesday, July 7, 2010

Why City Branding Fails

The National League of Cities put up an interesting post recently about city branding campaigns. These have been tried for years, but they often don't work, mostly because few cities are willing to be known for something, and would rather be known for everything.

The all-things-to-all-people craze right now is tied to biotech and greentech, in the late 90s, it was just “tech”. But whatever the flavor of the month is in economic development, developing distinctive messages is not an industry strength. The NLC article mentions Milwaukee's “Freshwater Hub of the World” slogan, which is an unusually focused message, and also promotes the idea that the city is a place for trade. This is the sort of point that does not come across well when you try to sell yourself as a “Cool City” and your governor holds a “Creating Cool” conference.

Connecticut is also promoting a trade corridor around Bradley Airport, with tax incentives for companies that can prove they need to ship goods out of the airport. What's smart about this is the defining trait of successful regions right now is not how many Bachelor's degrees citizens have, or how much money their state's forked over to high priced speakers and consultants, but their presence in industries where America is a net exporter.

As I pointed out a few weeks ago in the Seattle vs. Portland post, Seattle's done much better in the recession than its neighbor to the south, largely because it has two large exporting industries based locally. Portland, on the other hand, has won more praise from urban pundits than just about anyplace in the country, yet has above average unemployment. It has plenty of overeducated slackers who are the envy of Jennifer Granholm, and according to Richard Florida, attracting such people should be the focus of economic development, even if they spend all day pouring coffee and skateboarding.

I'm curious to see what the NLC comes up with next in their discussion, because it would be a major advancement in economic development if cities and states started talking up the products they can export, and stopped pandering to people they're trying to import.

Monday, July 5, 2010

What Makes a City Cool? Not Telling Everyone You're Cool

Grand Rapids should really benefit from Jennifer Granholm's departure. Another "are we cool enough?" debate has broken out on the Grand Rapids Press website, after an article in its horribly named "Michigan 10.0" series started pondering Western Michigan's ability to be cool. It was followed with a story about ArtPrize, a local arts event, written in the context of making Grand Rapids a destination for the "creative class". It has also re-ignited debate on the website's message boards about how to build the local economy.

I say at this point, Grand Rapids is descending from sounding like a foolish place that actually listens to Richard Florida's bullshit, to one that sounds like a wannabe Jeff Spicoli. When you can't showcase local art without wondering if that makes you a cool city, you might as well just have the mayor skateboard around town asking 18-29 year olds if they're 420 friendly.

Grand Rapids, please stop. I've never advocated book burning, but if that's what it takes, create a bonfire with all the copies of "The Creative Class" you should be torching. Other industrial cities are looking at ways to rebuild their economies, and in spite of tremendous challenges, you don't see Youngstown acting like a 15 year old who can't make the cheerleading squad.

Friday, July 2, 2010

Microsoft Opening Data Center near Des Moines - $4 Million Capital Outlay Per Job

Microsoft is moving forward now with a $100 million data center near Des Moines, which will create 25 ongoing jobs. Data centers are known to be very light on new job creation outside of construction.

At $4 million per permanent job, this is about a quarter of most modern manufacturing plants, which are coming in around $1 million of capital expenditures per recurring job. But it's also about ten times more labor-intensive than a wind farm, where it typically takes about $30-$40 million in capital to produce a single job.

Thursday, July 1, 2010

A Success Story - 20 Miles Away from the Massachusetts Mishap

Yesterday, I wrote about Massachusetts misguided attempt to recruit solar manufacturing jobs, and how $58 million in incentives and credits are about to end up in China.

But just 20 miles away from the Evergreen Solar plant in Devens, MA, the former industrial city of Lowell is transforming itself into an urban suburb of Boston. The city launched a Downtown Venture Fund, which in spite of the term "venture" is financing local retail, not tech start-ups.

The fund has offered low interest loan packages to 31 restaurants, bars, and coffee shops, of which three quarters have survived. Moreover, local ownership means the profits are being recirculated locally, not sent to a distant headquarters or scattered shareholders.

The program has become a victim of its own success to some extent, with some Lowellites (is that what you call them?) saying it needs to put more emphasis on retail, and less on places to eat. While Lowell's proximity to Boston means its success would be hard for many declining manufacturing centers to replicate. It nonetheless has important lessons for small business creation.

With few VC funds being invested outside a handful of regions, and most new manufacturing facilities requiring tremendous capital investment per new job created (anywhere from $600,000 to $1 million per job), an increasing number of communities will need to do more to create and grow their own small businesses, rather than give away tens of millions of credits and incentives for some "cool jobs" that will be gone in nine months.