August 11, 2014
Economic Development in Detroit
By Rick Mattoon
Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities. see “Industrial clusters and economic development in the Seventh District’s largest cities”). Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950 to the most recent estimate of just under 700,000. This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive.
Detroit’s Industry Structure
Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware.
Economic Development Strategy in Detroit
In December 2012, the Detroit Strategic Framework Plan was released. The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030.
• Stabilize the residential population at between 600,000 and 800,000.
• Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people.
• Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development.
• Establish an ongoing framework for civic involvement.
The plan also has specific economic development elements that are captured by five implementation strategies.
• Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters.
• Use a place-based strategy for growth. In practice, this would target “employment districts” where resources would be channeled to promote growth. The plan establishes seven of these districts and assumes these geographic areas have the greatest ability to bring job growth to scale. This would be complimented by growth in industrial business improvement districts and developing capacity for green business.
• Encourage local entrepreneurship and minority business participation. The strategy here is to develop local business clusters that serve the Detroit market—for example, using local suppliers to feed existing businesses as well as seeking to diversify the economic base of the city. This strategy assumes the provision of low-cost shared space and improvements in other local services that are currently being underprovided in Detroit.
• Improve skills and support education reform. Much of this focuses on improving existing work force training by linking it more closely to the private sector and aligning training to local industry needs. It also calls for better integrating work force development with transportation, encourages hiring of Detroit natives, and calls for a study designed to improve city-wide graduation rates.
• Review land regulations, transactions, and environmental actions. This is a broad land-reuse program that focuses on land banking for industrial and commercial property as well as improving development outcomes by speeding permitting in employment districts and identifying alternative sources of capital for development.
It is clear that much of Detroit’s plan emphasizes stabilizing the current economic base as a necessary step to attract new investment. The plan also emphasizes the creation of home-grown businesses, which is likely necessary to fill in declines in retail and other services found in many Detroit neighborhoods.
If we look at Detroit’s recent history of employment growth over the recent business cycle (figure 2), we see that for almost the entire 2000s, Detroit had negative year-over-year employment growth and performed significantly below the average for the Seventh District. However, emerging from the Great Recession, Detroit’s employment growth is above the Seventh District average up until late 2013 and early 2014, which happens to coincide with the bankruptcy filing. The rise coming out of the recession likely reflects the rebound in the domestic auto industry, which still exerts a heavy influence on Detroit’s economy.
 http://www.freep.com/interactive/article/20130723/NEWS01/130721003/detroit-city-population (Return to text)
November 12, 2013
Michigan Automotive, More Than Production
The dispersion of auto assembly line-type jobs from Michigan to the rest of the U.S. has been widely discussed. But it may be important to examine whether other jobs in the automotive value chain have also dispersed, particularly R&D and headquarters-administrative jobs. It is possible that a sizable part of automotive R&D and administration are spatially separable from production, with important implications for the economic health and growth prospects of Michigan.
To shed some light on this, we use microdata from the IPUMS CPS to track trends in production, office, and R&D jobs in both Michigan and the rest of the U.S. We sort any individual who reports working in the auto industry into one of these three occupational categories. For example, we classify engineers and technicians as R&D and assembly line workers as production workers. (We further classify as “other” those occupations that could fall into multiple categories, such as security or janitor).
Figure 1 shows that total employment in the automotive industry has been relatively steady in Michigan, averaging 413,000 from 1970 to 2005. Since then, there has been a distinct decline; by 2012, Michigan’s auto employment was 262,000. In contrast, auto employment steadily increased in the rest of the U.S., rising from 588,000 in 1970 to a peak of 974,000 in 2007. The rest of the U.S. also saw heavy losses in the second half of the 2000s, with auto employment at 710,000 in 2012.
Trends in the R&D segment of the auto assembly are quite different. As figure 2 shows, R&D employment in Michigan grew steadily until the 2000s, from 28,000 in 1970 to a peak of 90,000 in 2001. Growth in R&D jobs in the rest of the U.S. generally kept pace, though with the exception of a couple years in the early 2000s, the majority of R&D jobs have resided in Michigan.
And so we see that R&D employment has made up an increasing share of overall auto employment in Michigan. In 1970, 6 percent of Michigan’s auto employment was found in R&D. By 2012, this share had climbed to 22 percent. This contrasts sharply with the rest of the U.S., where the proportion of auto employment in R&D grew from 1 percent in 1970 to 6 percent in 2012. Looking more broadly, 46 percent of Michigan’s employment is in either R&D or office occupations, compared with 24 percent in the rest of the U.S. At least by this measure, Michigan remains the nerve center and the creative engine of the U.S. auto industry, even as production jobs have dispersed.
This glimpse of the changed employment composition of Michigan’s auto assembly sector raises further questions. In particular, what is the outlook for Michigan’s R&D activities in light of the shifting geography of auto production activities? And what, if any, public policies might be influential to R&D’s continued success in the state?
cps.ipums.org. IPUMS CPS provides an occupation variable that is unified across changing occupational coding schemes from 1968 to present. The CPS survey combined Michigan and Wisconsin from 1968 to 1976. To allow the time series to extend back to 1968, we calculated by employment category the proportion of worker-years Wisconsin contributed to combined MI-WI totals from 1977 to present. We then used that proportion to scale down the pre-1977 MI-WI employment numbers to represent only Michigan and to scale up the ROUS numbers so to include Wisconsin. (Return to text)
September 29, 2009
Work Force Adjustment Conference in Detroit
The Midwest automotive belt faces an extraordinary challenge of work force transition; namely, profound structural change in the auto sector on top of the cyclical impact of a deep national recession. At an upcoming conference, the Federal Reserve Bank of Chicago will partner with the Brookings Institution’s Metropolitan Policy Program, the Federal Reserve Bank of Cleveland, and the Upjohn Institute for Employment Research to gauge the dimensions of the challenge, provide conceptual and evaluative foundations for work force and human capital policies, and discuss regional and federal initiatives for workers and their communities in the Midwest.
Given the dismal national unemployment picture, the state of worker dislocation in Michigan and other Midwest automotive communities may not be fully appreciated. But unemployment in these communities is significantly worse than national averages. While the national unemployment rate has just now reached 9.7%, Michigan’s unemployment rate is now at 15.2% and has exceeded 10 percent since December of last year. Payroll employment in Michigan has fallen (year over year) in every year of this decade. Coupled with the current national downturn, an industry shift of automotive production away from Michigan has meant the state has lost more jobs in automotive than those jobs that remain. If current expectations are met, national economic recovery will offer only limited help. So, although job recovery is expected to unfold nationally, albeit at a slow pace, throughout 2010, areas dependent on the auto sector will lag significantly. Unlike the recovery period following the deep 1980-82 recessionary period, North American automotive sales are not expected to bounce back smartly this time.
In view of this bleak outlook, redevelopment of both industry and work force in the Midwest will be needed. Michigan communities are working hard to develop and attract new industries to the state and to attract capital investments. Most notable among emerging industry sectors here are energy technology initiatives, medical-related technology companies, health care, and tourism.
For workers, the current environment poses some particular challenges. Among these are fewer prospects for re-employment in other regions due to relatively high unemployment in many parts of the country. Neither do today’s demographics in Michigan favor easy out-migration; on average, the state’s work force is older and less educated. So too, falling home prices mean that households cannot easily tap pools of home equity to use in re-locating to job markets in other regions.
With so much working against the state’s economy, and with so much at stake, it is important that the many work force adjustment and re-training programs underway are effective. Rebuilding Michigan’s economy will require effective training, job placement, and other support services.
The central idea of the October 8–9 conference event will be to hold up work force programs and initiatives against the realities of current conditions and the state of knowledge about what works and what doesn’t work. Accordingly, conference sessions will be grouped by general category of work force initiative. Sessions will address first-response initiatives in the job placement and retraining arena, followed by discussion of worker training targeted toward the expected emergence of specific industries, such as health care and energy technology. The conference will also address entrepreneurial programs that promote both self-employment and the subsequent development and support of new firms and industries.
August 12, 2009
City-Suburban Population and the Housing Bust
Demographer William H. Frey calls to our attention a striking turnaround in population growth in the central cities of metropolitan areas. Since the 2005-06 peak of the housing construction boom in the United States, the growth rates of central cities have begun to gain ground on surrounding suburban areas. Beginning with 2005 and ending with population estimates reported by the Census Bureau for mid-year 2008, Frey illustrates a convergent city-suburb trend for U.S. metropolitan areas having a population over one million. These trends hold for all four major U.S. regions—North, Midwest, South, and West. (The 12-state Midwest population performance is shown below).
Similarly, Frey reports that these gains “are not confined to the very largest American cities. Among the 75 cities with populations exceeding 200,000, 41 grew faster in 2007-08 than in the preceding year, and 54 grew faster than in 2004-05.” We show the population trends for such cities by region below. Once, again, we can see that the turnaround has taken place, on average, in all Census regions of the U.S.
Within the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin, growth has also tended to rebound in cities over 200,000 in population (below). For the year ending in the middle of 2008, six of seven cities exhibited positive population growth. However, the City of Detroit is an outstanding exception with an accelerated decline in the mid-year ending 2008.
On average, Seventh District cities shifted from zero or negative growth in 2005 to an annual growth rate of 0.5 percent for 2008. The largest swings in performance were registered by Des Moines, with a swing from minus 1.3 percent in 2004 to plus 1.2 percent in 2008, and Chicago, with a swing from minus 0.7 in 2005 to plus 0.7 for 2008.
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At this point in time, the reasons for this shift toward central cities remain open to speculation. But given the timing, there are strong reasons to believe that the housing bust lies behind much, if not most, of the reversal. A general rise in demand for housing, such as that which occurred earlier in this decade, exerted a magnified impact on the fringe of urban areas. Given the lower price of land on the fringe and the ease with which larger single family homes can be constructed there (rather than tear-downs closer in), both population and housing generally shifted towards the periphery. Construction jobs related to fringe development likely bolstered the trend, as some households followed job opportunities to the suburbs. And now we may be seeing a reversal of such trends as home demand and employment have fallen off.
William Frey also attributes the urban population resurgence to the nature of the urban economies, citing “broad economic diversity at a time when smaller cities … are vulnerable to economic shocks” and the “resiliency of large urban centers that are economically and demographically diverse.” There may be some wisdom in thinking that this is so. In pursuing economic development, central cities have been trying to attract and grow “Eds and Meds,” (education and health care). As measured by George Erickcek and Tim Bartik of the Upjohn Institute, health care and hospitals, along with colleges and universities have been a bulwark of the economic base of many cities. These sectors of the U.S. economy have tended to grow and expand consistently, and cities have benefited. From the 2000 Census, Bartik and Erickcek report that earnings derived from the education sector are, on average, 36 percent more concentrated in the principal cities of the nation’s 283 metropolitan areas. Health care earnings are 12 percent more concentrated.
Nonetheless, with the release of the next mid-year Census estimates (for 2009), it will be interesting to see if central cities are able to sustain their momentum of population growth in relation to suburban areas. Beginning with 2009, the influences of the sharp U.S. recession and related job declines may become important.  Favoring central city economies, the education and health care sectors are steady performers even in recessions. So too, many central cities no longer host manufacturing production, which tends to be hit particularly hard during recessions. However, in many cities other elements of the economic base are both concentrated and highly sensitive to economic downturns. Such sectors include professional and business services, law, tourism/business travel, and especially the financial sector, which has been buffeted by the recent financial crisis.
Little evidence is available so far concerning the differing impact of the two national recessions, 2001 and the current one, on city versus suburb. However, in a recent report by the Metropolitan Policy Program at Brookings, Elizabeth Kneebone and Emily Garr report on year-over-year unemployment rates for city versus suburbs in the nation’s 100 largest metropolitan areas. They find that “in contrast to the last recession,” when city unemployment rates rose more sharply versus their suburbs, “unemployment has increased at nearly equal rates in cities and suburbs.”  The table below excerpts the year-over-year rise in unemployment rates for cities and their suburbs for several Seventh District cities and their suburbs and for the four major regions of the United States.
Note: Thank you to Emily Engel and Matt Olson for assistance.
The difference in the gap between the two recessions is not large. Year over year changes in unemployment rates in cities rose by 1.9 percent in primary cities versus 1.4 percent in suburbs from May 2001 to May 2002. For May 2008 to May 2009, year-over-year rates rose by 3.9 and 3.7 percentage points, respectively, for cities and suburbs. However, city/suburb unemployment rate differences in level are wider currently than in the 2001-02 period.(Return to text)
July 2, 2008
Michigan—Brakes and Shocks
Few outside the state of Michigan are fully aware of its economic woes. Nationally, the U.S. economic slowdown, housing market decline, and rising gasoline prices have captured the headlines. Even within the Midwest, spring and early summer flooding have dominated our news. Somewhat lost in the shuffle, Michigan payroll jobs are down more than 10% from their peak in June, 2000, representing over 486,000 jobs. Recent developments are no more encouraging. The state's (preliminary) unemployment rate rose by 1.6 percentage points in May, to a seasonally adjusted 8.5% percent—topping the U.S. rate of 5.5% by 3 full percentage points. Preliminary statistics estimate that payroll jobs in Michigan fell by 68,000 over the month (seasonally adjusted). Minus Michigan, reported U.S. employment would have grown by 19,000.
Michigan’s economy currently suffers from unfortunate industry composition, with an added dose of structural shocks to several of its prominent lines of business. In particular, the automotive, tourism, and office furniture sectors are highly sensitive to national swings in economic activity. As the U.S. economy slows, such industries tend to decline even more. Moreover, in the case of automotive and tourism, structural changes are tending to further dampen economic production and hiring in Michigan.
Michigan’s economy remains far and away the nation’s most concentrated in motor vehicle manufacturing. Its overall employment concentration lies 8.5 times the national average in combined automotive parts and assembly, with many attendant jobs in manufacturing, distribution, and professional service companies that are customers or vendors to automotive producers.
While U.S. automotive sales remained robust until recently, the former Big Three automakers (now more appropriately called the Detroit Three) and their suppliers have been steadily losing market share to imports and to foreign nameplate producers located elsewhere in the U.S. As of May 2008, market share of the Detroit Three automakers had fallen from 67.8% in 2000 to 47.2%. Prominent parts supply companies, including Delphi, Dana, Tower, and Collins & Aikman, have folded, merged, or are currently trying to emerge from bankruptcy.
With the recent economic slowdown, automotive sales are resuming their cyclical pattern of retrenchment. To some degree, the historical behavior of sales declines was allayed in the aftermath of September 11, 2001, when automakers offered generous sales and financing incentives to prospective buyers. However, today’s slowing economy appears to be leading consumers to avoid the purchase of new autos. As discussed recently at our annual Automotive Outlook Symposium, rising gasoline prices are curbing driving behavior while draining household income.
The recent run-up in gasoline prices has magnified loss of market share and erosion of profitability of the Detroit Three automakers and their suppliers. Over the past year, the Detroit 3 share of domestic sales has fallen by 7.1 percentage points. To some degree, this repeats the pattern of the 1970s when U.S. consumers turned to (imported) foreign-domiciled automakers who offered vehicles with greater fuel efficiency. Domestic automakers are more reliant on trucks than on cars, and they tend to lag foreign manufacturers on fuel efficiency.
Not only the automotive sector has been impacted by rising energy prices. Michigan’s tourism, recreation, and hospitality industry has taken on added importance in the wake of the state’s waning automotive industry presence. Many parts of western and northern Michigan feature attractive scenic and semi-rural locales for retirement, recreational living, and seasonal tourism. In addition to its many inland lakes, the state is endowed with 3,126 miles of Great Lakes shoreline, which is attractive for boating, fishing, and other recreational activities like hiking, cycling, and golf. In particular, the state registers nearly as many boats as Florida or California. Such activities in Michigan are especially related to vacation and seasonal homes. As of the last Census, 5.6 percent of homes in Michigan were of this variety versus a national average of 3.1 percent.
The map below shows recreational counties as designated by demographers Calvin Beale and Kenneth Johnson. The northern tier counties of Michigan and Wisconsin have long been recreational destinations, especially for Michiganders and residents of the greater Midwest region.
Recreational spending is highly discretionary on the part of consumers. As household income falls, recreational spending can be easily curtailed by households in an effort to maintain spending on necessities.
Recent declines in Michigan recreational spending are reflected in data collected by the State of Michigan on sales tax collections imposed on overnight lodging. These accord with declining lodging occupancy rates collected by the industry. Both are down so far in 2008 on a year over year basis. A broader index of Michigan’s tourism activity is displaying a modest uptick for the first quarter of 2008 versus one year ago. However, with rising gasoline prices, the index (and activity) is expected to trend lower in coming months.
Two additional factors may be restraining recreation sector growth in Michigan. Michigan’s recreational counties are characterized by ownership of second homes. The run-up in housing prices and the subsequent rash of foreclosures and price declines have been especially severe in recreational/seasonal home locales. Seasonal home residents who have experienced asset price losses on their second homes may be especially aggressive in re-building their household balance sheets by restraining current spending in the second-home locales.
The second, more obvious, factor affecting recreation this year is rising gasoline prices which raise both travel costs to vacation locales and, in Michigan's case, the cost of boating. However, some domestic vacation locales may benefit from a backwash effect as households choose nearby attractions rather than long distance adventures. Nonetheless, in most instances, the overall effect tends to be a dampening. For these reasons, tourism industry analysts in Michigan are forecasting declines in tourism activity for 2008.
In addition to automotive and recreation sectors, Michigan has a strong presence in the furniture sector. Indeed, Western Michigan hosts the nation’s largest concentration of makers of office furniture. This industry took shape in the late nineteenth century during rapid industrial growth, which was accompanied by rapid growth in office employment. Taking advantage of the region’s abundant hardwoods and skilled immigrant craftsmen, most furniture companies in the area had developed as manufacturers of high-end traditional style home furnishings. However, the labor-intensive wood furniture industry declined in Grand Rapids and other northern centers by the mid-1900s due to competition from Southern producers. In response, the Grand Rapids industry shifted its focus from household to office furniture, led by companies that would become industry giants: Steelcase, Haworth, and Herman Miller.
The U.S. Census reports that the state is the nation’s leading producer of office furniture and fixtures, with 17,000 direct employees in 2005. Broadly defined, the state’s industry share accounts for 24% of the nation’s shipments. (Michigan’s share is larger according to the way that the industry trade association defines the industry).
Michigan’s office furniture companies have been affected by competition from China and other low-cost locales. Despite competitive pressures, the companies have successfully responded in two ways. To some extent, producers have moved or offshored production of select product lines to low-cost locales while maintaining high value added and custom design services domestically. More importantly, these companies are characterized by great innovation in product and processes. They have succeeded and grown by offering custom and advanced products and services.
However, office furniture sales and production have been highly cyclical. The industry experienced sagging sales in the late 1980s and early 1990s when U.S. businesses downsized middle management positions and as the U.S. economy sagged. So too, the “technology bust” years that began the current decade saw a falloff in demand for office systems and furniture, especially in the IT sector.
So far in the current environment, industry production has been holding up well. However, if industry observers are correct, office furniture may be “one more shoe about to drop” in Michigan. An opinion poll of office furniture executives has been flashing negative for the near term outlook, and the industry association has recently lowered its forecast of 2008 production.
If such expectations develop, this would further dampen economic activity and the labor market in Michigan. Cyclicality of certain businesses can be planned for and absorbed by states such as Michigan and its neighbors. However, cyclical episodes in the economy can be exceptionally severe when shocks such as rising energy prices are in play and when longer term structural changes are taking place, as they are in Michigan’s automotive sector.
Thanks to Graham McKee and Vanessa Haleco-Meyer for assistance.
September 25, 2007
Transportation and GHG regulation
On October 15, the Detroit Branch of the Federal Reserve Bank of Chicago will convene a conference examining various policy approaches to reducing carbon dioxide and other greenhouse gases (GHGs). Following electric power generation, the transportation sector is the second largest source of carbon dioxide emissions in the Midwest, as well as in the overall U.S. (Carbon dioxide emissions generally arise from the burning of fossil-based transportation fuel—gasoline more so than diesel fuel.)
Following the energy price spikes of the early 1970s, federal regulations were issued to improve fuel-efficiency of cars and light trucks. Corporate Average Fuel Economy (CAFE) regulations place fleet-wide fuel-efficiency limits on manufacturers for their passenger cars and separate standards for their light trucks (including so-called minivans and sport utility vehicles, or SUVs).
The CAFE standards are sometimes credited with maintaining fuel-efficiency during the late 1980s and throughout the 1990s, when gasoline prices plummeted and one might have otherwise expected vehicle size and fuel consumption to have grown once again. Nonetheless, CAFE standards are often criticized. For one reason, the added cost of introducing new fuel-efficiency technologies into the latest models may be counterproductive. That is because, in confronting higher vehicle costs, automotive buyers may delay scrapping their old vehicles, thereby keeping an older (and less fuel-efficient) fleet of vehicles on the road.
Fuel-efficiency standards have also been criticized for imposing unnecessary and distorting restraints on consumers’ choices of vehicles. Logically speaking, penalties to modify behaviors to align with socially desirable outcomes should be fashioned to most closely target those behaviors that give rise to social costs. Accordingly, rather than forcing fuel-efficiency standards on specific types of vehicles, a preferable approach would be to penalize the actual behaviors that give rise to carbon emissions regardless of vehicle type. That is, a tax on fuel at the pump would be preferred to vehicle fuel-efficiency standards. And a tax per unit of carbon associated with a particular fuel—such as gasoline over diesel—would be preferred to a general fuel tax. Nonetheless, to date, fuel-efficiency regulations have been more palatable to the American public than alternatives such as direct gasoline taxes.
Midwest-domiciled automakers, especially the Detroit Three (Chrysler LLC, Ford Motor Co., and General Motors Corp.), have so far found it more difficult than other manufacturers to achieve CAFE fleet standards on cars and light trucks. Going back to the 1970s and earlier, Detroit Three automakers have tended to offer larger vehicle models for sale, and this specialization has continued into recent years.
The figure below displays the reported average fuel economy in 2006 for major companies selling vehicles in the U.S. market. For both passenger cars and light trucks, the measures of fleet average fuel-efficiency for both Toyota and Honda easily exceed those of the Detroit Three. Indeed, for passenger cars, the fleet fuel economies of Honda and Toyota already approach the hypothetical standard that is being considered for the year 2020.
CAFE standards may soon become even more onerous for automakers. In June 2007, the U.S. Senate passed legislation mandating stricter standards on both passenger cars and light trucks. By the year 2020, fuel-efficiency standards would rise for such vehicles so that they must achieve 35 miles per gallon. (Such revised CAFE standards will likely be considered by the U.S. House of Representatives during the fall of 2007).
The vehicle fuel-efficiency of major automakers has been changing in recent years. Per the figure displaying the fuel economies of passenger cars below, Toyota’s and Honda’s have gained markedly over those of the Detroit Three during the decade. In contrast, these Japanese automakers have not widened their fuel-efficiency advantages in the light truck category. Within the category, Honda and Toyota have been selling more models that are heavier and less fuel-efficient than they had before; these models would include the Honda Pilot and Toyota Land Cruiser SUV.
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From a Midwest perspective, the region’s light vehicle production facilities tend to be those of companies that will likely find it most difficult to meet more stringent standards. The map below displays the assembly plant locations of the Detroit Three automotive companies, as well as those of the foreign-domiciled automakers. A large majority of the Detroit Three’s light vehicle production facilities are located in Midwest states. In the northern part of the U.S. automotive corridor, which includes the states of Ohio, Michigan, Indiana, Illinois, Wisconsin and Missouri, 24 of its 31 light vehicle plants are owned by the former Big 3 domestics. Accordingly, the region’s residents will be interested to see that any prospective carbon reduction policies are as cost-effective as possible.
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Not everyone believes that GHGs from human activity are significantly contributing to global climate change or, if so, that mitigation policies are advised. Still, it would appear that mitigation policies, including more stringent CAFE standards, will be forthcoming. An informed and judicious choice of alternative policies can contribute to achieving cost-effectiveness while reducing GHG emissions.
September 14, 2007
The Midwest and the regulation of greenhouse gas
After years of inactivity in regulating so-called greenhouse gases (GHGs), U.S. policy may be on the verge of doing so. In April 2007, the U.S. Supreme Court ruled that the federal government was authorized to regulate GHG emissions from human activity, which some believe accelerate warming of the earth’s atmosphere, causing disruptive and costly climate changes. Carbon dioxide is the major source of such GHG emissions, making up 75–80 percent of the total volume. This fall, the U.S. Congress is expected to consider bills to control GHGs. Regionally, state and local governments are already acting to reduce GHGs or curb their growth. Most notably, California proposes to reduce emissions by one-third from 2004 levels by 2020. According to this plan, such reductions will be achieved by requiring more fuel-efficient cars and buildings and by requiring that the state’s electricity is generated from renewable energy sources and less carbon-intensive fuels.
Costs are an important consideration in choosing among the various ways to reduce GHG emissions. For this reason, some U.S. and global regions are choosing to set up or participate in “cap-and-trade” systems for GHG emissions, which will function like markets. Some private companies have also chosen to participate in cap-and-trade systems, such as the Chicago Climate Exchange. In these systems, the total allowable amount of GHG emissions is capped. Each participant is awarded or sold permits, or “allowances,” to release specified amounts of GHG into the atmosphere such that the total permitted GHG by all participants does not exceed an overall cap. In limiting emissions in this way, cost savings accrue from the ability of permit holders to buy and sell their allowances with other participants. Those who can manage to reduce their needs for permits can sell them to others; those who cannot manage must purchase permits. In cap-and-trade systems, there are strong incentives for participants to manage and conserve emissions, since doing so generates cost savings. More importantly, cap-and-trade participants are motivated to come up with emission-conserving technological innovations. Seven governors of the Northeast are moving their states toward a “Regional Greenhouse Gas Initiative,” which will cap carbon emissions from the region’s electric power producers.
Market-based systems such as these can be important to regions in keeping down the costs and impact of mandated reductions of GHG emissions. How will the Midwest adapt to the regulation of GHGs? The Midwest economy will likely be affected by carbon regulation in two major ways, both of which will be addressed at a Chicago Fed conference to be held at the Detroit Branch on October 15. The first avenue of regional impact concerns the degree of direct carbon reduction that may be required of Midwest households and businesses, especially in the generation and use of electric power. A second avenue of impact is less direct. The U.S. Congress is considering greater stringency in the fuel-efficiency of cars, trucks, and other transportation vehicles. Major automotive companies are domiciled in the region, many of which are now financially beleaguered and many of which are thought to face added challenges in complying with heightened fuel-efficiency standards.
Emissions of carbon dioxide have been climbing over time in the Midwest and in the U.S. as a whole. Generally, carbon dioxide is released along with the burning of fossil fuels—coal, petroleum, and natural gas materials. Over time, our growing energy-hungry economy has burned more fuel. Since 1950, U.S. energy consumption is up over three fold, almost entirely from greater consumption of fossil fuels.
U.S. carbon emissions continue to lead the world (China is second), and U.S. carbon emissions have grown more rapidly than the nation’s overall energy consumption. Electric power generation is the source of the more rapid rise in carbon emissions. Among major energy-consuming sectors of the U.S. economy, electric power generation has outpaced the others. The burning of coal remains the primary means to generate electric power, and it is the most carbon-intensive fuel.
Despite rising emissions, the overall carbon intensity of the Midwest economy and the U.S. economy has been falling rapidly along with heightened overall energy efficiency. Over time, the U.S. economy can produce a dollar of real output with less energy input. As shown below, carbon dioxide emissions per dollar of real output are approximately one-half of what they were in the early 1960s. By this measure, the Midwest carbon intensity exceeded the nation by 17.8 percent in year 2001 versus an excess of 4.1 percent in 1963.
Surprisingly, it is not the Midwest economy’s greater concentration in heavy industry that explains its greater carbon intensity—at least not directly. The figure below reports that the region’s industrial sector accounts for a lesser share of its overall carbon emissions versus the nation’s in its overall emissions. Rather, the region’s electric power sector makes up a larger share of carbon emissions versus that of the U.S., a 42.8 percent share in the Midwest versus 38.4 percent for the nation.
Nor is it the case that the region’s residents consume considerably more electric power than the national average. Rather, the means of power generation in the Midwest tends toward the burning of coal along with attendant carbon emissions. As shown below, power generation facilities in every Midwest state (save Illinois) burn coal to a greater degree than those of the nation, a 41 percent greater share in May 2007. Illinois’ lower carbon intensity derives from its use of nuclear facilities to generate electric power. Indiana and Ohio are especially dependent on coal to generate power at the present time.
From these cursory observations, it would appear that, to avoid costs and penalties, the Midwest’s electric power generators would be called on to reduce carbon emissions in the event that state or national policies begin to control GHG emissions. Possible avenues to do so are to rely on more (carbon-free) nuclear generating plants or on renewable means, such as the conversion of wind power to electricity. Various technologies to scrub coal of its carbon are also available or on the drawing board.
In choosing among these vehicles to reduce carbon, cap-and-trade systems are in some respects highly suitable for electric power producers. Electric power plants tend to be large and fixed in number. Accordingly, the issuance, monitoring, and trading of emissions permits can be carried out with little monitoring and administrative cost. Of course, the ultimate costs of achieving carbon reductions remain uncertain. In the 1990s, the nation had favorable experiences with a cap-and-trade market among power producers in reducing sulfur dioxide emissions as required under the Clean Air Act. Emissions were reduced below expectations at costs that were far below expectations. It is hoped that a similarly successful marriage of technological progress and market-based incentives will once again come about.
July 18, 2007
Automotive wages in flux
As the “Detroit 3” automotive companies have experienced shrinking profits and market share, many midwestern communities have experienced falling jobs, income, tax revenues and public services—to say nothing of the households and families working in the industry. This summer, automotive workers and communities are watching closely as the terms of automotive employment—especially wages—are being renegotiated. On July 20, for example, the UAW labor union opens contract negotiations with Ford and Chrysler (July 23 for General Motors) for contracts that will run for 4 years. And earlier this month, auto parts maker Delphi announced settlement terms with its workers as it undergoes operational restructuring. Only four Delphi production plants will remain in operation in the U.S. as its customers will source parts from its overseas operations or from alternative suppliers. Remaining Delphi production workers will be on the receiving end of cuts to health care benefits, employment security, retirement and wages. Wages for production workers will be reduced from $27 per hour to a maximum of $18, $14 for new hires.
How should we view the wage settlements as they are announced in coming months? One perspective is to compare them to average wages for production workers in U.S. manufacturing. Production workers are typically those who have few or no supervisory roles in manufacturing plants; in other words, most assembly line workers would fall into this category. The chart below displays average wages for production workers back to 1967. These wages represent the average in compensation for overtime and regular time. The wages are expressed in current dollars, adjusted over time for changing prices by the Consumer Price Index.
The bottom line shows that, across all manufacturing industries, average wages have remained largely flat since 1967, ranging between $17 and $20 per hour. Wages were rising until 1980. With several deviations, the average wage settled at $ 18.59 in 2005, which is the latest available data from this particular source.
In the same graph, we can see that that production workers in motor vehicle parts industries (blue line) have fared somewhat better over time, but that their wages have been converging with the remainder of manufacturing workers since the 1980s.
Workers in the automotive assembly industry (green line) are smaller in number than those in parts production. In the U.S., there are approximately three workers in parts production for every worker in an assembly plant. Unlike their brethren in parts production, assembly workers’ wages have been generally rising since 1967. By 2005, the U.S. Census Bureau reported an average production wage of $35.84.
The second graph below plots the premiums in wages for automotive workers. This premium is expressed as the percent by which wages exceed the average of all U.S. production workers across all industries. As of year 2005, the average wages of automotive assembly workers topped their counterparts by 50 percent. For motor vehicle parts workers, the wage premium has fallen below 20 percent from a peak of 31 percent in 1980. Approximately one-third of workers in the parts industry are represented by labor unions versus three-fourths of domestic assembly workers.
Declining employment has accompanied softening wages in many instances. From a geographic perspective, declining automotive jobs is nothing new for many midwestern states and communities. The industry was highly concentrated in the Midwest throughout the first half of the twentieth century but afterward began to disperse—first to other U.S. states and later around the globe. Considering domestic employment in automotive parts and assembly combined, the next graph shows that the states of Ohio, Michigan and Indiana accounted for over three-fourths of automotive employment through World War II. By 2005, their employment share had fallen under one-half.
During the current decade, the automotive job decline has been precipitous. The final graphic (below) indicates that the three-state decline in automotive jobs has fallen by almost one-third since year 2000, from 576,000 to 383,000 over the first half of 2007.
The reasons for these employment declines are several.
As always, productivity gains are reducing the labor content in automotive production. Labor hours per vehicle assembled by the “Detroit 3” car makers, for example, declined from 24–28 hours in 2002 to 22–23 hours in 2006. Beyond assembly, estimates by Martin Baily of the McKinsey Institute and the Institute for International Economics report that labor hours to produce an auto in North America, including parts, are decreasing at an annual average of 1.7 percent annually since 1987, and are now approaching 100 hours total.
Globalization of production has resulted in both off-shore operations and competitive pressures on domestic producers. Since 1996, the import share of light vehicle sales has increased from 12 percent of sales to 20 percent, year to date. Approximately one-quarter of domestically used automotive parts are now sourced abroad.
Despite some periods of re-concentration over the past 2 decades and the siting of many new plants in various Midwest communities in recent decades, the overall industry continues to disperse to other states, especially in the South.
Note: Thomas Klier contributed to this entry.
May 14, 2007
Congestion tolling and privately operated roads—An idea whose time has come?
As our roads become increasingly congested, tolling and privatization of highways will be increasingly important lifelines, especially for large urban economies. The idea that motorists should pay tolls when driving on congested highways has long been advocated by economists. Conceptually, the “public” part of highway transportation is limited to the necessary intervention by public authorities to strategically acquire land for transportation and assure that all have access to travel freely in pursuit of commerce and recreation. However, the individual’s use of a roadway is often “private” in that it imposes congestion costs on other drivers (and some pollution as well). That is, in the motorist’s decision to use a road, the individual driver does not consider the congestion costs imposed on other drivers, thereby leading to the overuse of limited public roadway capacity. As a remedy, congestion tolls bring these individual driving decisions back into line with the greater public good. As the degree of road use (and congestion) varies by time of day and by day of the week, so should the amount of tolls vary accordingly.
After a long hiatus, interest in congestion tolling and privately operated roads has been climbing. European and Asian cities have made innovative headway in congestion fees. Both Stockholm and the City of London have implemented motor vehicle charges for the privilege of access to their central area; so has Singapore. Most recently, New York City has proposed to charge auto motorists $8 for the privilege of driving around Manhattan during peak traffic hours, with higher fees for those driving trucks.
Such actions are largely being spurred by rising congestion—which did not materialize overnight. The Texas Transportation Institute (TTI) creates a “travel time index” that indicates the relative change in travel time from peak traffic to free-flow traffic. In a TTI report, Chicago in 1982 had a travel time index of about 1.2, meaning that given a 40-minute commute during a free-flow period, a person driving during peak hours would drive about 48 minutes (20% longer than it “should” take). This had climbed to 57 percent longer by 2003. In four major cities of the Seventh District, the added time to a commute during peak hours has increased from 14% in 1982 to 46% in 2003.
Click to enlarge.
Prior to the recent spate of toll programs, some highway authorities experimented with non-price-rationing measures such as “high occupancy vehicle” (HOV) lanes. To curtail congestion, HOV lanes set aside and dedicated freeway lanes to those vehicles, including cars and buses that have multiple occupants. Unfortunately, the results were sometimes disappointing in relieving congestion because HOV lanes merely attracted vehicles that already contained multiple occupants, without prompting a significant number of single-passenger motorists to carpool. So, too, the dedicated HOV lanes, while often uncongested, tended to push even greater congestion onto unrestricted lanes of the highway.
In response, the so-called “high occupancy toll” or HOT lanes have sometimes been called into action. HOT lanes are essentially HOV lanes that allow single-occupancy vehicles to motor in them—but for a price.
What has brought us to this state of affairs? Under the best of circumstances, motorists prefer to drive when and where they choose at no charge. But Americans’ penchant for driving has far outrun our financial ability to build roads. Lifestyle changes have tremendously raised the miles traveled in cars by U.S. households. Rising household incomes have lifted the desires for ever larger houses and lots, which are, in turn, often satisfied by homes located quite far from work sites. In addition, owing to the desire for residential privacy, homes are often built on dead-end or nonthrough streets, which has aggravated traffic on the major arterial roads surrounding residential communities.
Also, the rising trend of two-earner households makes it difficult for both earners to simultaneously live near their workplaces. More generally, there are extensive logistics (and driving miles) for today’s American family to coordinate their many trips for work, shopping, education, and recreation. By one estimate (DOT), highway travel miles climbed 23.4% from 1995 to 2005 in comparison to a population increase of 11.4%. To accommodate such rising traffic, road expansion has climbed by only 2.6% over the same period.
Many observers recognize that improved community land use planning could help curtail our appetite for driving. For example, allowing developers to build high-density apartment-type residences around existing commuter rail stations would allow at least one of a household's commuters to keep a car parked during the workday commute. So, too, stronger community planning efforts to assure that households of modest means can find affordable housing could help curtail the need for very long commutes. In the Chicago area, for example, policy think tanks such as Chicago Metropolis 2020 and the Metropolitan Planning Council spearhead efforts and programs that promote such community planning. Still, however sensible such planning may be, there has been very little of it implemented in many U.S. cities to date, and so, the increased commuting has often overtaken existing roadway capacity.
In past decades, state governments have often tried to keep pace with rising demands for driving and for far-flung housing by building more roads, including freeways. Several forces are now conspiring to slow such construction, especially tight fiscal conditions. The primary source of highway grant assistance to states, the Federal Highway Trust Fund, is replenished from the federal tax on gasoline. But the tax of 18.4 cents per gallon has not been raised since 1993 so that while revenues do rise somewhat along with vehicle miles traveled, they do not keep pace with rising gasoline prices and higher milage automobiles. Meanwhile, the revenue resources of state governments have also been besieged. Many state gasoline taxes are themselves imposed on a stagnant "cents per gallon" basis, and the voting public strongly resists the raising of gasoline taxes—especially as motor fuel prices have put increased pressure on household budgets over the past three years.
This leaves state government officials in a quandary, since the costs for competing public services, especially health care, education, and prisons, are concurrently squeezing state budgetary funds. State and local governments are hard pressed to even maintain existing highways, let alone fund expansions to curtail growing traffic congestion.
In addition to charging tolls, elected officials are also responding by increasingly turning to the private sector to assume responsibilities that include the financing, planning, marketing, construction, operation, and pricing of roads and bridges. Many combinations and arrangements of these functions are being attempted, from simple outsourcing of management and toll collection of highways to the all encompassing long-term leasing of highways as a publicly regulated private business entity.
Increased congestion and financial stress are not the only reasons behind the privatization and tolling of transportation infrastructure. New and improved technologies for payment of highway tolls have recently come to the fore. In contrast to the driver of yesteryear who had no option but to deal with the delay-plagued coin and cash toll booths, today’s driver can often make payment with little or no slowing down. Toll payments can be made online by transponders carried within vehicles or offline by remiote reading of license plates.
Seventh District initiatives lie at the recent epicenter of these movements in the U.S. In particular, the City of Chicago entered into a 99-year lease to a private consortium in 2005, turning over operational responsibility for and revenue returns from an 8-mile stretch of toll highway called the Chicago Skyway. By many accounts, the City benefited greatly from this transaction, while the public interest of drivers was also well served by enhanced operational efficiencies. The City of Chicago used income from the deal to retire existing debt on the Skyway infrastructure, and with the remaining revenue, it also set up a trust fund and purchased a sizable annuity that will help finance the city’s general operating funds well into the future. The driving public now enjoys rapid roadway maintenance and toll collection and eased congestion, albeit with prospective increases in toll fees.
Following Chicago’s lead, the Indiana Finance Authority leased its east–west toll turnpike for $3.8 billion in 2006. In large part, Indiana will use the proceeds to fund and maintain highway infrastructure throughout the state.
Meanwhile, in an effort to reduce rush-hour congestion around the Chicago area, the Illinois Tollway Authority introduced differential time-of-day pricing for only trucks in 2005. This program also doubled tolls for drivers in autos who choose to pay by cash at toll booths rather than by electronic transponder as they drive through rapidly. Revenues from these schemes are being used for repairs and expansion of the tollway system; they are also being used for the capital costs of new and reconfigured “open road” (or no-stop) toll collection system, which enables vehicles to pay tolls while traveling at highway speeds.
As the Illinois Toll Authority and other examples show, privatization and tolling of roads are separable actions. But in some ways they reinforce one another. Turning one’s operations over to private companies may provide one way to overcome the public’s resistance to congestion pricing, especially in contrast to government authorities who may be encumbered or distracted by non-transportation responsibilities or political constraints (i.e., the lack of political will to appropriately price use of the asset). Privatization potentially may also allow the operational authority to change pricing regimes and payment technologies more quickly in response to changing roadway conditions. Also, cost efficiencies and service quality are presumably improved when private agencies are watching the bottom line, though this has not always proved to be the case.
Still, the issues inherent in privatization schemes are contentious with respect to both purported operational efficiencies and sound fiscal management by governments. In awarding operational and pricing autonomy to private companies, it is not always clear whether the public interest is less than optimally served in favor of the profitability of the private operator. In particular, monopoly-type pricing by a private operator may be worse than publicly directed underpricing of congested facilities. Similarly, the data collected from the publicly rather than privately operated system may be more readily available for systemic public land use and transportation planning across entire metropolitan areas. For these reasons, as they enter into such partnership arrangements, elected officials must carefully craft contract terms and then follow up by monitoring the private companies during the terms of the contract.
Other concerns center on the behavior and actions of governments when they first enter into such agreements. Upfront revenue windfalls from the leasing of public infrastructure may cloud the judgment of governments and elected officials. Without proper disclosure and oversight of government by the public, the sale and leasing of transportation infrastructure to private buyers may pander to the near-sighted proclivities of elected officials. To plug current budget holes, or to plump up current spending for self-motivated reasons, public officials may unwisely commit large revenue streams immediately received from the sale or lease, while concurrently widening future budget deficits by eliminating public revenue streams. As always, the voting public and their representative think tanks must be on guard to oversee the terms of public–private partnership arrangements.
Elected officials must also represent and protect the public’s interests in matters of fairness and equity. Lower-income households are those who will be disproportionately burdened to pay for the use of less-congested roadways. In many ex-urban and suburban places, lower-income households must travel long distances to access their workplaces. Equity concerns are often compelling, since these workplace commutes are often lengthened by land use restrictions undertaken in high-income communities that limit the availability of affordable housing near work sites.
In response to equity concerns, some states and localities are adding capacity and subsidies to public transportation—both light rail and buses. When funding is short, as it usually is, governments often earmark part of highway toll revenues to such dedicated purposes.
However, for many households, public transportation is not an option. According to the 2000 U.S. Census, only 4.7 percent of workers currently use public transportation. The table below shows average usage of public transportation for Seventh District states. Public transportation is, of course, more viable in densely populated places, including large cities such as Chicago. Since large cities also coincide with highway congestion and tolling practices, the use of tolls to fund public transportation subsidies will work better there.
The use of congestion pricing, privatization, and new payments technologies remain in their infancy. Yet, because of the ever-increasing demand for driving, accompanied by little highway expansion and poor land use planning, heavy congestion will soon be a reality in many communities. For this reason, the Federal Reserve Bank will hold a one-day workshop this June to understand how pricing schemes, public–private partnerships, and emerging payment mechanisms can be used to address congestion and efficiency in commuter networks.
February 14, 2007
The auto region continues to reshape
By Guest Blogger Thomas Klier
On Wednesday, February 14, DaimlerChrysler AG announced a restructuring of its North American Chrysler Group. Adjusting its vehicle production capacity to continued market share losses, the company will eliminate shifts at three different assembly plants (Newark, DE, and Warren, MI, in 2007, St. Louis, MO, in 2008) and idle the Newark plant in 2009 (that plant is identified in figure 1 by a blue star).
Conversely, Toyota Motor Corporation, in response to strong growth in the North American market, is about to announce where it will build its next vehicle assembly plant in North America. The company is looking to expand its footprint of production facilities to meet its goal of achieving 60% of local production. Several weeks ago a story appeared in the Wall Street Journal identifying a handful of locations that are being considered by the company (identified in figure 1 by the red stars).
What are the main drivers underlying a decision to locate an assembly plant? This blog suggests a number of influences.
First, let’s briefly outline the current industry geography. Today there are 68 full-size assembly plants (plus two currently under construction) producing cars and light trucks, such as minivans and sport utility vehicles, in the U.S. and Canada. Figure 1 shows them all with the exception of the lone West Coast plant (the GM-Toyota joint venture called NUMMI, which is located in Fremont, California, in the San Francisco Bay area).
The striking feature of figure 1 is the high degree of clustering exhibited by this industry. The vast majority of the plants are located in the interior of the country, extending south from Michigan and Ontario in a rather narrow band. In addition, one can see the importance of transportation infrastructure. It is a key location factor for manufacturing industries, such as the auto sector, which are operating based on lean manufacturing principles. Interstate highways and rail lines (the map only shows interstate highways) are enabling assembly facilities to connect with their supplier base on a just-in-time basis.
In a second quarter 2006 issue of Economic Perspectives, Thomas Klier and Daniel P. McMillen analyzed how the geography of assembly (as well as auto parts production) facilities has evolved in the U.S. and Canada since 1980. They identify noticeable changes in the industry’s geography. These changes, however, occurred gradually, in evolutionary fashion over the last three decades.
Two major trends have shaped the footprint of today’s assembly facilities: Foreign-owned assembly plants gravitated towards the southern end of the auto region, preferring warmer climes and a work force that had not previously been employed in auto assembly. With two exceptions, all of foreign-owned assembly plants operating today have been so-called greenfield plants, i.e., newly constructed plants on land that was previously not a manufacturing site. The domestic assembly facilities, on the other hand, re-grouped in the northern end of today’s auto region after decades of serving the major population centers directly. They began shutting down their coastal plants in the late 1970s in response to the changing economics of transportation costs associated with serving the national market.
And so today’s auto region with a clearly defined north-south extension came about. Concentration of locations remains very important for this industry: Assembly plants need to be near their supplier base. Yet there are reasons for them not to be right next to one another. Assembly plants are large manufacturing facilities drawing their work force from an area larger than the immediate vicinity. Notice in figure 1 how many of the 50-mile circles drawn around assembly plant locations do not overlap.
How do the latest developments fit the ongoing re-shaping of the auto region described above? Chrysler, in line with recent restructurings last year by GM and Ford (plant closings in Georgia, Michigan, Minnesota, and Virginia as indicated by the other blue stars on the map), is trimming a production facility at the periphery of its manufacturing footprint. As a result, the domestic vehicle production has recently become more concentrated in the Midwest than it has been for many decades. For example, the announced closing of the Delaware assembly plant leaves only one vehicle assembly facility in the Northeast (there were six as recently as 1980). Should Toyota choose one of the locations mentioned in the press, it could best be described as "in-fill" development. It would fill a gap in the auto region which was extended considerably further south by assembly plants that located in Mississippi, Alabama, Georgia, and South Carolina during the 1990s.
And so the combination of recently announced plant closures and a soon to be announced plant opening are reinforcing the shaping of an auto region that is located in the interior of the country, with a north-south orientation, extending northeast into Ontario.
What are the implications of this analysis for Michigan and the Midwest? In Michigan especially, intense discussion is under way concerning what role, if any, public policy can play in shaping the region’s future. Currently, the competitive struggles of the domestic automotive companies (formerly known as the Big Three) and their suppliers are affecting the Midwest economy. Surely, much will depend on individual companies’ abilities to restructure and find ways forward. However, as the research by Klier and McMillen suggests, at the same time as traditional automotive companies are retrenching, they are also regrouping closer to the traditional (midwestern) center of the automotive industry. Actions speak louder than words in many instances. Here, locational decisions strongly suggest that the Midwest remains a highly productive place to manufacture automotive parts and vehicles. The region’s advantages lie in the fact that: 1) it is already the center of production so that proximity to suppliers makes it cost effective in many respects, 2) its transportation infrastructure is highly developed to serve manufacturing, and 3) its existing work force is highly skilled and trained in these industries. Accordingly, in addition to moving in new economic directions, local policy actions to help restore the region’s place in manufacturing seem not misplaced.
February 12, 2007
Sports Franchises and Urban Development
Are there worthwhile benefits to large urban economies from professional sports franchises and events? Critics are especially hostile to the idea of tax breaks, incentives and other public subsidies to sport franchises and events. At best, they claim that local spending on sports events displaces local spending on other activities, with no net impact on expenditure or income. Worse, they claim that public monies spent or foregone to subsidize sports franchises or events could have otherwise been more productively spent on enhanced public education or the like.
In rebuttal, there is another school of thought that posits that the changing nature of urban economies has heightened the value of recreational amenities as a draw for coveted workers. As the productive basis of city economies has shifted away from the manufacturing and distribution of goods, and towards a greater focus on information exchange by skilled and educated workers, some policy analysts argue that the successful workplace location is now driven by where people want to live rather than by its strategic location for moving materials.
In some instances, major league sports teams and professional sports events, such as the Super Bowl, can be counted highly among cities’ “public goods” amenities that attract and retain productive workers. In this, sporting events may be among several amenities whose sum total is more than the some of the parts because a large city’s varied restaurants, museums, cultural diversity, arts, and sports all go into making it “an interesting and exciting place to live.”
The measurable evidence on this effect is sparse, but several statistical studies have found favorable impacts. A thorough and balanced review of studies has been conducted by Mark Rosentraub. No doubt that many subsidies are ill-conceived. But Rosentraub concludes that the net value of a sports investment by the public sector rests on its context and the particular outcomes for the city and county making the investment. For example, the placement of publicly-subsidized stadiums in downtown areas have been found to help enliven and revive struggling downtowns. Another study found that Indiana residents valued the intangible benefits of having the Indianapolis Colts sufficiently to justify public subsidies. And in a statistical study across metropolitan areas, Jerry Carlino and Ed Coulson found that households tend to pay higher housing rents in metropolitan areas that choose to host sports franchises. Apparently, the value of nearby sports activity affects land and housing congestion that arises as greater population is attracted to such sports-minded places.
Among the most intangible, most difficult-to-measure benefits attendant to sporting events are the advertising or marketing values associated with the opportunity to re-cast a city’s image to a national or international audience. Places whose images become distorted or unfairly known due to their past travails may especially view large sporting events as valuable in setting the record straight.
In particular, an enhanced image may be helpful as businesses consider investment decisions and as workers consider various recruitment offers. The City of Detroit, for example, went to great pains and took great pride in successfully hosting the Superbowl XL in their new stadium situated amidst extensive downtown renewal.
This year’s two Super Bowl contestants, Chicago and Indianapolis, likely welcomed the media coverage of their cities deriving from both the Miami telecast and from national pre-game media hype. Chicago has been working to boost its image as a national and global city having superior amenities and functionality. In fact, it is one of two U.S. cities still vying to host the 2016 Olympic Games.
Meanwhile, Indianapolis has been pursuing sports-minded economic development for quite some time. During the 1970s, the city began to boost its support for amateur sports facilities and events, meeting some success in hosting the Pan American Games in 1987 and, among other things, it is now the headquarters locale of the National Collegiate Athletic Association. During times when high-profile events are not taking place in Indianapolis, its sports facilities are often in use by young athletes who come to town (often with their families), patronizing the city’s hotels and restaurants.
Despite scoldings by the majority of public policy analysts, many of which are well-founded, some cities still see gold in them thar’ games!
September 28, 2006
Michigan automotive and white collar jobs
Loss of market share from the traditional Big Three automakers to global competitors has impacted Michigan’s economy, leading to some deep concerns about its future. To date, most attention to this issue has focussed on job loss related to automotive production activity. Auto assembly and parts production continues at a strong (though eroding) clip in the United States, but it is rapidly shifting away from Michigan. So far, the “new domestic” carmakers have avoided siting new production plants in Michigan, preferring to site them in the South, as well as in Ohio and Indiana, such as Honda’s recent announcement to build a plant in Greensburg, Indiana. However, another important employment component for Michigan also relates to the health and sales market share of the Big Three—that is, the nonproduction activities of these auto assembly companies. These activities include research and development (R&D), sales, finance, and management operations, which form an outsized economic engine for the state. In what ways does the survival (and growth) of Big Three companies go hand in hand with the nonproduction jobs located in Michigan?
Nonproduction employment of auto assembly companies typically amounts to a surprising 35%–45% of total employment and an even larger share of payroll. While Michigan is highly concentrated in automotive production—with 15 auto assembly plants—it is also the domicile of the Big Three's headquarters along with significant company R&D and other operations. For this reason, it is not surprising in Michigan to find that nonproduction automotive employment is more concentrated than elsewhere. In counting Big Three nonproduction employment at their production plants, headquarters, R&D centers, and other auxiliary facilities in Michigan, nonproduction employment likely outnumbers production employment, making up a minimum of 55%–60% of total Big Three jobs in the state.
Moreover, additional Michigan personal income and jobs are generated from local services purchased by headquarters-type operations. As Chicago Fed economist Yukako Ono has found in recent studies, headquarters operations often purchase key services for the entire company network. These purchases may include financial services, R&D, information technology (IT) products and services, strategic management consulting, and many more. From the regional economy’s standpoint, these purchases are often sourced locally to a large extent. In fact, Ono discusses the possibility that the choice of location by headquarters may be influenced by the cost and availability of such business services.
Similar behavior of automotive headquarters makes Detroit and its surrounding environs much more than just a factory economy. Specifically, much of the value of Big Three automobiles derives from product development and design, and most of that R&D activity is conducted in Michigan. As derived demand from the domestic automotive industry, key business services are largely produced in Detroit. My blog entry from August 16 shows that the Detroit metropolitan area far and away tops other midwestern metropolitan areas in its concentration of professional and technical services employment. Among Detroit’s top sectors are engineering services (employment at 51,594 jobs in 2002) and scientific research and development (18,126 jobs in 2002).
Nationally, much R&D is funded and performed by automotive companies and their affiliates. According to the most recent survey of industry funds for research and development, which is conducted by the National Science Foundation, the automotive industry accounts for $14–$15 billion in annual R&D funding in the U.S. To be sure, in recent years, as auto assemblers have increasingly relied on their first-tier suppliers for entire components and automotive modules, some significant R&D responsibilities have been shifting away from assembly companies and toward automotive parts companies. Still, today, the lion’s share of this R&D is performed in-house, that is, largely by auto assembly companies themselves.
These practices have kept Ford, General Motors (GM), and Daimler-Chrysler among the largest R&D performers in the U.S., with Michigan at the hub of such activity. For this reason, Michigan ranks second only to California in funds for industrial R&D. And for 2003 as the figure below shows, the motor vehicle assembly and parts industries in Michigan accounted for $10.7 billion of the $15.2 billion industry-performed R&D in the state. The ties between these expenditures and local employment is apparent. According to a parallel survey by the National Science Foundation, the Detroit metropolitan area employed 102,500 research scientists and engineers in 2003—a concentration of 5.2% of the work force as compared to 3.9% nationally.
Would Michigan retain this important function in the event that Big Three sales shares continued to decline? On the positive side, there are some indications that the Detroit area’s role in automotive research is in the process of growing beyond its historic roots. For example, the “new domestic” automakers have all sited research, development, and design facilities in the Detroit region, such as Toyota’s recently announced $150 million R&D center investment in Ann Arbor. Others, such as Hyundai and Nissan, have also recently expanded their facilities or announced plans for similar expansions.
So, too, Detroit’s attractiveness to automotive company headquarters operations displays some sparks of growth. Major automotive parts producer Borg Warner moved its headquarters from Chicago to the Detroit area last year. More generally, Chicago Fed economist Thomas Klier has documented an upswing in auto parts company headquarters moving to Michigan. The presence and growth of automotive parts headquarters in Michigan probably bodes well for company-sponsored R&D activity as well.
Still, competitive challenges are at play both here and abroad. Domestically, figures from the U.S. Bureau of Economic Analysis show that the annual R&D funding in the U.S. by Asia-domiciled automotive companies, at $125 million, makes up a very small share of automotive R&D in the U.S., amounting to less than 2 percent. And while the Detroit metropolitan area has so far attracted many of these transplant R&D activities, historically, it is not uncommon to find that attendant service activities eventually follow production in manufacturing. In this direction, the movement of U.S. automotive production from the Midwest toward the South is drawing the attention of those seeking R&D activities as well. For example, Clemson University in South Carolina has launched a research program and industrial park to foster technology development and transfer in cooperation with companies such as BMW and others.
And so, Michigan has several important economic activities at stake amidst the current upheaval among automotive companies.
September 13, 2006
Where is automotive employment in the Seventh District?
Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.
But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.
A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.
The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.