Tuesday, June 9, 2009

Preventing Jobless "Prosperity" in the American Mid-West

American Mid-West Dreams of Prosperity

As policy-makers throughout the mid-western United States look to rebound from decades of capital flight and de-industrialization, prosperity is the mantra of the day. Propserity is a new policy buzz word, which apparently means more tax revenues for government expenditures, and reversal of the population decline in many dying former industrial centers. The hope is that a series of economic reforms can attract Fortune 500 companies back into the region. Last week's infamous flight of NCR from Dayton, Ohio underscores the trend of major companies leaving the mid-west region to cut costs, taking thousands of jobs along with them. With capital flight has come a sustained cycle of joblessness, and it's correlating effects on economic security.

There is a growing consensus in policy debates that the future of economic growth in the region must refocus on former industrial cities like Dayton, Ohio. State governments are looking to spend unprecedented amounts of federal money to stimulate their economies through productivity growth. The logic holds that high-speed economic growth will benefit everyone and attract talented and skilled workers from other areas.

The percentage of productivity growth each year, has become an ever more important indicator for policy-makers during the current recession. But does greater productivity growth necessarily mean more equal opportunity for everyone? And to what ends are policy-makers willing to go to attract Fortune 500 companies into their districts?

Capital or Labor Intensive Industries

For the record, economic growth does not necessarily equal more jobs. The likelihood of more economic growth equaling greater economic opportunity and decent work for current or future residents depends largely on what kinds of industries come into the mid-western cities; capital or labor intensive.

Investopedia, a digital company of Forbes magazine defines a capital intensive industry as
A business process or an industry that requires large amounts of money and other financial resources to produce a good or service. A business is considered capital intensive based on the ratio of the capital required to the amount of labor that is required.
The opposite of capital intensive industries are labor intensive industries which are defined by the same source as
A process or industry that requires a large amount of labor to produce its goods or services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods/services; the higher the proportion of labor costs required, the more labor intensive the business.
Intuitively, the more labor intensive the industry, the more jobs created. But there are profitable reasons in the short-term for why Fortune 500 companies would choose to invest in a more capital intensive industry. Less workers mean fewer costs, and labor replacing technologies won't demand a living wage, a pension, or healthcare insurance for a family of four---a human being will.

Getting Growth Right

The strategy of many Fortune 500 companies is to increase the ratio of capital to labor, thereby avoiding the burden of paying labor costs. Policy-makers who care anything about creating pathways out of poverty for the poor and decent work for middle-class families should be doing the exact opposite, increase the ratio of labor to capital. The increasingly narrow bottom-lines of Fortune 500 companies, are not the same as those of public servants---or at least they shouldn't be.

The point is that policy-makers should be debating about what kinds of industries they want in their communities rather than competing for individual companies. A piecemeal approach to economic growth and prosperity will leave mid-western states weak and vulnerable to a few short-term bottom-lines; capital flows can easily reverse direction. Through responsible regional and state industrial policy, mid-western policy-makers can attract and sustain the kind of economic growth that will bring decent jobs and opportunity for all.

Admittedly, pulling this task off is easier said than done, but the first step is realizing the current approach is doomed to fail. A real economic growth strategy should be a job creation strategy first.

1 comment:

  1. This piece is very interesting- I felt like I learned a lot and it was put very clearly.