There are several such indicators available to states and regions. As a measure of current net job growth, the Bureau of Labor Statistics (BLS) releases state estimates with a three-week lag from the previous month, and metropolitan area estimates with a four- to five-week lag. Recent total nonfarm payroll job trends (below) show that job growth in the U.S. has generally been stronger than in the Midwest (and declines have been more severe).

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Estimates of total payroll employment are derived from a sample of business establishments that report on employees, hours, and earnings of their workers. The estimates are revised one month following their initial release to include information from late-reporting firms. Since the estimates are based on just a sample of firms, they are also benchmarked (once per year) to a near-universe of business establishments. For example, BLS reports that “the average absolute benchmark revision at the state total nonfarm (jobs) level was four-tenths of a percent (0.4%) in March 2008. The range of percentage revisions across states were –2.8 percent to 1.5 percent.”

Given such imperfections in accuracy and timing, alternative indicators are eagerly watched, especially if they have exhibited some previous power in “leading” or predicting past job market turnarounds.

Among the most timely current indicators is “initial claims for unemployment insurance”. After a one-week “waiting period,” newly terminated workers may file for umemployment insurance (UI). These claims are compiled weekly at the state level and reported in a news release by the U.S. Department of Labor. UI claims are an incomplete picture of the job market in several ways. For one, not all workers are covered by, or eligible for, UI insurance. But most importantly, from a conceptual standpoint, UI claims reflect only “job destruction” and not “job creation.” Newly hired workers are not counted in this administrative-type data.

For the U.S. overall, UI claims have generally been falling. Initial UI claims peaked above a weekly average of 650,000 (seasonally adjusted) for March of 2009. By January of 2010, UI claims had fallen to 467,000. Still, these numbers remain higher than in the recent past. For all of 2007, UI claims averaged 322,000 per month.

The charts below illustrate the recent labor market improvement, as measured by initial UI claims, for the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.[1]
The lines show the time path of UI claims filed for each of the years 2007–09 and January of this year.

State experiences have varied somewhat, though with a similar general pattern. All states experienced a significant surge in claims during the second half of 2008 (blue line), especially during the fourth quarter. Job destruction worsened into the first half of 2009 (red line). But by the fourth quarter of 2009, UI claims had fallen below those of 2008 in every District state. Nonetheless, for the fourth quarter of 2009 and into the first month of January, UI claims in Iowa, Wisconsin, and Illinois remained well above those experienced during in the same period in 2007.

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Other indicators also help to presage rising job creation. Observations of “help wanted advertising” measure the demand for labor, indicating soon-to-be-filled employment transactions. The Conference Board tracks national and state online job vacancies on a monthly basis. Their recent release reports a third consecutive month of strong national gains in advertised vacancies. The gains were widespread across U.S. regions, including the Midwest. Ohio was among those states recording the strongest January over December gain since the data series began in 2005. Seventh District states Illinois, Michigan, and Wisconsin all recorded monthly gains of 10 percent or more.

Analysts also follow the “contingent worker” or so-called temporary help employment series to foreshadow an eventual upswing in total nonfarm employment. In situations where general business conditions are improving but still somewhat weak, and before employers are willing to commit to permanent hiring, firms may begin to contract for workers from specialized employment services firms. Employment at such firms is sufficiently prevalent in four of our District states so that monthly data are reported by the BLS. As shown below (red line), employment of temporary workers grew in the second half of 2009 in Michigan, Indiana, Illinois, and Wisconsin.[2]

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As another measure of potential labor market tightening, the BLS also reports average weekly hours worked of production and nonsupervisory workers for states and metropolitan areas. During slack production times, firms may choose to ratchet back their employees’ hours rather than to lay them off entirely. If so, once production begins to pick up, and before any new hiring takes place, firms will tend to add back work hours for existing employees. Currently, the BLS reports these data for manufacturing workers only.

As seen in the charts below, average weekly hours worked has begun to rise in the U.S. (blue line) and in each District state (red line) except Illinois. Though the manufacturing sector has experienced sharp declines over the past two years, it has begun to recover early in the aftermath of the 2008–09 recession.

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Local chapters of the Institute of Supply Management (ISM) also track manufacturing employment through their monthly survey of purchasing managers. ISM Indices are directional only (they do not measure levels), indicating expansion versus contraction of various categories of business activity at their establishments. A reading of 50.0 indicates that, during the previous month, activity was equally balanced between expansion and contraction; readings above 50.0 indicate a greater reported tendency of establishments to expand. The Chicago ISM survey reported at the end of January (for December) that its reading on employment “leapt to the highest level in nearly five years.” In contrast, the ISM survey for Southeast Michigan reported “declines for the third straight month, continuing its downward spiral to (a reading of 36.0).

What to make of these many indicators? An understanding of the wide array of labor market indicators can provide both workers and the unemployed with a better “read” on when labor market opportunities are arising or when they will improve in their region. In contrast, the most followed labor market indicator, local unemployment rates, can be misleading. As more jobs open up, some workers who have been waiting on the sidelines (and not hunting for jobs) will actively seek employment once again. Once they are actively looking, the survey from which the unemployment rate is calculated begins to count them as “unemployed,” thereby raising the unemployment rate even as net job growth is taking place.

And so, in the coming months, the unemployment rate in both District states and the U.S. may continue to climb, even as the labor market situation may be improving in some locales and industry sectors.[3]

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[1] It is also possible to gather UI claims at the local level of geography. For example, initial claims for metropolitan areas are gathered and reported in Ohio. (Return to text)

[2] These data are also reported for metropolitan areas. These data are also subject to annual revision in March of every year. The data are benchmarked to March of the previous year and projected forward from that benchmark. Hence, the data are re-benchmarked once again the following year, once another benchmark is established (Return to text)

[3] Both the Bureau of Labor Statistics and state and local government agencies provide additional indicators for specific occupations, industry sectors, and local areas. (Return to text)

Even with such accomplishments, Chicagoans have a more fundamental reason to pause when assessing their economic direction and performance. Following some very painful years of restructuring that took place during the 1970s and 1980s, the Chicago area economy and its central city experienced a surprising revival from the late 1980s through the 1990s. The revival led many local leaders to believe that the region had begun a new improved course of growth and development. The charts below first show the metropolitan area’s unemployment rates since 1980. Following the 1981–82 national recession, when the local unemployment rate had soared to above 11 percent , the unemployment rate began to fall steeply; it rose again during the 1990–91 recession, but it then continued to fall to just above 4 percent by the year 2000. By comparing the Chicago area’s unemployment rate with the nation, we can see that Chicago’s labor market tightness exceeded the nation’s during the mid to late 1990s, before rising above the nation’s once again over the recent decade to date. Was Chicago’s strong economic performance during the 1990s an aberration?

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Chicago’s turnaround following the 1980s was remarkable in that a fundamental restructuring supported it. Specifically, though the metropolitan area shed much of its manufacturing base, its work force shifted increasingly into professional and business services. In response, many Chicagoans crafted a new image of their metropolitan region: Instead of being a “hog butcher for the world” and the regional locus for manufacturing and transportation, Chicago (at least in the mind of its citizens) was moving into a new role as a global city, one whose economic connections were being forged with other world business capitals. Chicago was seen as a city casting off its roots for something better.

During this time, a central city revival contributed greatly to the wider metro economy. For example, Chicago became a magnet for young educated workers who occupied jobs in the rapidly growing business and professional services sectors. The central city’s quality of life and amenities reputedly brought in “knowledge workers,” in turn attracting companies or those parts of companies that desired access to the young, highly skilled labor pool. The number of central area jobs in professional and business and financial services grew robustly; and the city’s unemployment rate improved, gaining ground on that of its suburbs from the early 1990s onward. The central city gained population during the 1990s for the first time (counting the decade’s total) since the 1940s, although immigration of lower-skilled workers from Central America accounted for a majority of the gains.

Chicago’s performance in the current decade looks much less sanguine. As seen in the charts above, the metro area’s unemployment rate rose rapidly during both recessions of the 2000-09 decade, lingering above the national average for much of the first several years. Shortly after the 2001 recession, a gap of one-half percentage points or more opened up to Chicago’s disadvantage, and it did not dissipate until 2006. And over the past year or more, the Chicago unemployment rate has once again been running 0.5 percentage points or more above the nation’s.

Were some especially negative but transitory factors at play earlier in the 2000s' decade that would suggest that the outlook for the coming years should be revised upward? Yes, to some degree. Chicago’s sizable manufacturing sector declined disproportionately compared with that of the nation in the early part of the recent decade. In part, the Chicago area’s manufacturing base was steeped in telecommunications equipment, which was especially hard hit nationally. Although the current national downturn in manufacturing is also very steep, Chicago’s manufacturing job base is weathering the recession modestly better than the nation’s.

The post-9/11 fallout in travel and tourism also left Chicago vulnerable earlier in the decade. And while the current economic environment has also been very challenging for the travel-related segments, these segments have fared better than earlier in the decade.

Chicago’s lagging post-recessionary recovery earlier in the decade can also be traced to its hefty professional and business services sectors. After 2001, Chicago’s payroll job growth in these sectors lagged the end of the U.S. recession by two full years. Many of these industries behave like investment or capital goods (e.g., real objects owned by individuals, organizations, or governments to be used in expanding production and sales of other goods or services). That is, during post-recessionary periods companies do not begin to expand their purchases of capital goods until their existing capacity begins to strain and the prospects for market expansion become buoyant. Looking forward, this means that these important business sectors for Chicago may once again experience a sustained period of growth. But the current economic signal is unclear as to whether the Chicago area economy is in a lull, or whether its long-term growth prospects have dampened.

Hindsight does give us some perspective as to the degree to which the Chicago metro area economy has truly divorced itself from its regional business roots to connect with a newly emerging structure in global markets. One chart below shows a ratio of broad economic activity—namely, per capita income—for the Chicago region to that of all other metropolitan areas over the past four decades; the other chart shows the ratio of per capita income of the Chicago area to that of the industrial Midwest states of Illinois, Indiana, Wisconsin, Michigan, and Indiana. First, in comparing Chicago’s per capita income to that of all other U.S. metropolitan regions, Chicago’s relative income is seen to fall modestly in the 1970s and then steeply over the first half of the 1980s. But then, from the mid-1980s throughout the 1990s, per capita income gained steadily on the U.S. average; by this metric, Chicagoans were correct about their economy’s performance: It had truly been on the rise over that period.

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However, it is more difficult to draw the conclusion that the Chicago area had successfully restructured its jobs base away from its surrounding region to become a global city. Whether Chicago had become more of an interconnected global financial and business center, such as New York or London, is still an open question. As seen above, for much of the 1990s, the Chicago region’s per capita income made little if any gains on the Great Lakes region. Rather, by way of explanation, the surrounding Midwest region was also experiencing a comeback of the same degree [1]. Domestic automakers were well on their way to profitability in producing energy-hungry passenger vans and sport utility vehicles. Meanwhile, rapid growth in the developing world supported Midwest production of capital goods machinery, such as farm and construction equipment. The Chicago regional economy continued to restructure toward high-skilled service provision, but its linkages may have remained somewhat parochial. That is, the Chicago area’s own growth appears to have been achieved through the provision of professional and transportation services to its traditional Midwest business partners.

In reappraising the era of the 1990s (especially in light of the Chicago region’s recent subpar economic performance), Chicago leaders and analysts may be motivated to look more carefully at possible directions for the future. Relative to some other Midwest and Northeast cities, the Chicago area has many assets, such as its prodigious base of professional services and a vibrant central city, which may provide ample opportunities for growth. Yet the future of Chicago’s economic direction and structure remain somewhat murky.

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[1]In the current decade, Chicago’s gain on the surrounding region largely reflects rapidly falling incomes and economic activity in Michigan. (Return to text)

The U.S. Census Bureau recently released its state population estimates through mid-2009, with a breakdown of population change. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin; of these five states, Michigan alone is estimated to have experienced a decline in population between July 1, 2008, and July 1, 2009[1]. This marks the fourth year in a row, beginning with 2006, that Michigan has had that distinction. Michigan also lags every state in the nation in cumulative growth since 2005. Michigan has cumulatively lost 121,000 people over the period 2005–09.




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The “natural increase” in population, namely, births minus deaths, is typically the largest component of year-to-year population change. But the states’ different migration trends can tell us the most about their relative attractiveness. A state’s “net domestic migration” measures how many people come in from other states to live there versus how many residents leave for other states. In the table below, it’s clear that all five Seventh District states experienced domestic out-migration in 2009. This has been their typical experience over the past decade. Only Indiana experienced any years of positive domestic net migration during the decade (over the period 2006–08).

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Converting net domestic migration to a rate of migration (per 1,000 residents) helps us to scale these figures relative to the size of each state. Here, Michigan’s rate of domestic out-migration easily outweighs the other states’, though Illinois’s is also quite high. For 2009, Illinois’s rate of domestic net-migration, at -3.8 residents per thousand ranked 46th in the nation; Michigan ranked 50th.

Illinois and Michigan differ greatly in the degree to which net foreign in-migration offsets domestic out-migration. Illinois’s net gain of 36,000 individuals through foreign in-migration in 2008–09 offset virtually three-fourths of the state’s domestic out-migration. In contrast, for example, Michigan’s net foreign in-migration offset only 15 percent of the state’s domestic out-migration. According to demographer William Frey, states having important “gateway” cities for immigrants, such as Chicago, are especially advantaged in this regard.

Surprisingly, even though Michigan’s economy has foundered over the past decade, the state’s pace of domestic out-migration held steady rather than climbed in 2009. Michigan’s state demographer, Kenneth Darga, has carefully documented the state’s demographic trends over many years, including net migration back to 1961. As seen below, net out-migration during the early years of the 1980s easily outpaced those of recent years. By way of possible explanation, in comparison to today, there were more states back then having labor market opportunities that unemployed Michiganders found attractive, compelling them to move away. Recall that some energy-producing states, such as Texas and Louisiana, were then faring well; and other states were benefiting from surging national defense expenditures and a technology boom in personal computers and related equipment and software.

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Other explanations have been offered. Demographer Frey and others note that the overall U.S. domestic migration rate has been declining; it is currently at its lowest point since such statistics have been reported, back in the late 1940s. Americans are less likely to move far away from their current homes for economic opportunities out of state, as both average age and homeownership rates have climbed. Michigan—with 76 percent of its households being homeowners—does have among the nation’s highest rates of homeownership. At the same time, because of its flagging economy, the share of Michigan homes whose current market value exceeds the size of the mortgage debt on the property is also among the highest. In contemplating a move to another state in search of employment, some of these Michigan households may find themselves too cash-constrained to finance job searches outside the state. That is, even if they managed to sell their homes and move away, they would likely need to pay off the remaining balances to their homes’ existing mortgages.

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[1]Among all 50 states, only Michigan, Maine, and Rhode Island lost population year over year over this time period. (Return to text)

Economists have long analyzed the purposes and benefits of high density living and working. And since high density cannot be achieved without tall buildings, many of the reasons to why we build so high can be found by considering density’s relationship to urban productivity.

Looking back over human history, transportation of goods and people has presented a costly impediment to beneficial manufacture, trade and travel. For this reason, the land area surrounding natural “nodes” of easy transportation such as water ports and harbors, and later railroad hubs, became very prized. That is to say, the transportation costs of accessing transportation nodes could be economized by intensively using surrounding land. And so, land rents rose there; and buildings for warehousing, factories, trade, and finance mounted as far skyward as the building technologies would allow.

Chicago’s economic history reflects these forces in some very special ways. As documented in two books about Chicago’s economy in the nineteenth century, Nature's Metropolis and City of the Century, wealth creation in the small area surrounding the mouth of the Chicago River literally exploded. Here, a unique node of transportation was developed at the nexus of two vast waterway systems, the Great Lakes-Erie Canal to the east and the Mississippi River Basin to the west. Later in the century, some timely investments in railroad added another important transportation hub to Chicago.

On Chicago’s land, markets were made in grain, livestock, and lumber. Materials were further processed, warehoused, manufactured, and shipped to markets, both domestic and abroad. Marketing and financing were arranged. Specialized retailers evolved to serve western farmers and ranchers, as did machinery makers.

A special Chicago role in building technology was spurred by its rapid economic growth and the intensity of activity on the land surrounding its ports and railroads. In response to the urgency and high cost of downtown land, many innovations in constructing tall buildings emerged here. The innovation of first iron, and later steel, frames and skeletons supporting skyscrapers allowed developers to build higher and stronger, as did the technologies of “floating foundations” that allowed construction of skyscrapers on Chicago’s soft and shifting soils.

Today, the importance of materials movement and manufacturing to Chicago have eroded somewhat [1]. Still, the tall buildings and the attendant high density of work, play, and residence remain and, in fact, they have multiplied to serve other economic sectors. For the most part, the high density and proximity that tall buildings facilitate serve to allow people to communicate in highly efficient and often creative ways. While advances in electronic and digital communication such as the internet and cell phone are very helpful to business communication, they are incomplete. The modern economy has become more “information intensive,” not only in the communication of bulk, digitized information, but also in the face-to-face transmission of ambiguous information. In business meetings large and small, in organized forums and in random networking and social activities, information is created, debated, and transmitted. Workers hatch ideas, learn new concepts, cut business deals, and organize initiatives through such interactions. The “office meeting” has not died. And arguably, the chance encounters from which new ideas often arise have become more important than ever.

The “globalization” of trade and commerce which has taken place in recent decades has also raised the value of inter-personal communication. Globalization has increased the complexity of business transactions as well as increasing the variety of human cultures in which trust and understanding must be established in order for business to flourish.

Certain large and diverse cities, often called global cities, help to meet the requirements of global service exchange and deal making. Chicago definitely fits the bill. Its dense urban core and other features have vaulted Chicago to prominence as a global business center[2] . The metropolitan area now hosts 29 Fortune 500 headquarters offices, and ten Fortune global headquarters. Chicago’s presence in professional and business service is both sizable and closely aligned with business headquarters. Prominent companies in advertising, financial exchanges, research and development, human resources, management consulting, accounting, law and logistics serve businesses in Chicago and around the world. Chicago ranks among the top three U.S. metropolitan areas in the hosting and staging of business meetings and conventions. Top-flight universities add to the mix, including two of the world’s top five graduate business programs at Northwestern University and the University of Chicago. There are over 1,500 foreign-owned firms in Chicago and 30 international chambers of commerce.

Economists usually refer to the added productivity that comes along with high density, large scale population, and a broad scope of (inter-connected) activities as “economies of agglomeration.” What this really means is that the whole of related activities amount to more than the sum of the parts; in Chicago, the co-location of the activities above add up to heightened economic productivity and wealth creation.

What are the interactions and transactions of co-location that give rise to heightened productivity? Some examples would be Chicago's headquarters gathering superior and cost-effective services from local professional service firms; professional firms finding customers at the city’s many international trade shows; recruitment by local firms of graduates from Chicago's outstanding universities; and ample continuing education opportunities for workers at all levels.

In addition, in contributing to agglomeration economies and a successful global city, businesses in the Chicago area also benefit from the city’s important and unique infrastructure, including an international airport. As more companies establish a global presence, they need more frequent face-to-face interactions with their counterparts and customers around the world. Chicago’s O’Hare and Midway airports offer nonstop or direct flights to 148 North American destinations and serve an additional 68 foreign destinations. This scale and reach of travel options are sustainable because of the extensive use of the facilities by (otherwise unrelated) local industries and, thanks to Chicago’s mid-country location, because of additional business from connecting traffic.

The judicious and well-planned configuration of tall buildings in Chicago's downtown is a necessary condition for co-location of the aforementioned activities. And it is well worth noting that ground transportation and easy circulation are equally necessary to achieve a density that works well[3]. In most instances, the intent of vertical infrastructure is to economize on horizontal transportation costs. Overly congested roadways or poor public conveyance could easily undo these vertical advantages. While average travel times to work in the Chicago area are among the highest in the nation, six-hundred thousand workers do converge on Chicago’s central area each working day, of whom 55 percent of whom use mass transit [4] .

The conference attendees of the CTBUH will be considering such issues of tall buildings and urban habitat as they meet in Chicago. These issues may even provide welcome relief from a business environment which has, in many instances, left the financing of extant and prospective tall building developments in precarious condition.

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[1] Although Chicago’s manufacturing concentration registered one-third greater than the nation during much of the twentieth century, that sector is now about on par with the nation. However, owing chiefly to national railroad convergence in Chicago, the metro area remains the nation’s premier location for inter-modal surface freight transportation. (Return to text)

[2] It is Chicago’s core area that is most notable for its density of tall buildings. Over 50 percent of the metropolitan area’s office space can be found in the central area. Nonetheless, employment sub-centers with dense commercial configurations are an increasing phenomenon in large cities. In the Chicago metro area, Dan McMillen’s study finds that such sub-centers grew from 15 in 1990 to 32 by year 2000. (Return to text)

[3] While we tend to associate tall buildings with large and densely populated cities, it is interesting that we sometimes see tall buildings in rural areas where horizontal travel costs are low (and land rents are cheap). As analyzed by urban economist Arthur M. Sullivan, the logic of such buildings owes to their specialized functions in which people circulate frequently within such buildings to designated sites so that a single multi-story building becomes optimal. For this reason, we may see tall hotels, dormitories, and hospitals even in rural areas. (Return to text)

[4] The central area also houses extensive retail and educational activity. Per World Business Chicago, 65,000 students attend class there. (Return to text)

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.

Waukegan, IL, has responded to the challenges of a diminished manufacturing base by looking to its assets and opportunities. Over the past decade, the U.S. has experienced steep declines in manufacturing jobs, especially in Midwest towns—the heart of the industrial belt. Many of these same towns have come to recognize that manufacturing may never be what it once was for them. Therefore, while continuing to tend their remaining industries, they have also been making plans to integrate themselves into the growing knowledge-based economy. In developing workplace and residential amenities, these towns are now targeting a new “creative class” of workers who can possibly revitalize these once manufacturing-dependent areas.

Waukegan, IL, with a population of 92,066 [1], lies 40 miles north of Chicago, on the coast of Lake Michigan in Lake County. Over the past 40 years, Waukegan has seen a sharp decline in its manufacturing sector. In 1972, Waukegan had 10,100 manufacturing jobs; approximately 15.5% of its total work force. By 2002, manufacturing employment numbers had dropped down to 4,780, making up only about 5% of Waukegan’s work force [2]. During the 1970s and 1980s, Waukegan experienced a number of plant closures, for example U.S. Steel’s mill, which took away a few thousand jobs. Another plant closure was that of Johns-Manville—at the time an asbestos manufacturer. Another local manufacturer, Outboard Marine Corporation (OMC), began downsizing its operations over the past few decades until it filed for bankruptcy in 2000, laying off 7,000 employees from all of its plants. While OMC’s assets were acquired from the bankruptcy court by Bombardier Corporation which moved manufacturing operations north to Pleasant Prairie, Wisconsin, the research & development operations are still located on Waukegan’s lakefront.

Such economic changes have meant, not only diminished employment opportunities, but stresses on the local tax base to finance school and municipal services. At the same time, public service requirements have grown along with the city's swelling population. Waukegan's population expanded by 27% in the 1990s decade alone. As seen below, the most significant change has been the rapid growth of its foreign-born population, which increased 148% between 1990 and 2000. Most of these immigrants are recent arrivals to the U.S. (within the last ten years).

In appraising its opportunities for redevelopment and growth, it appears possible for Waukegan to link its economy to the surrounding prosperity. Towns in Lake County and in nearby Kenosha County have generally enjoyed rising prosperity. As seen below, Lake County has registered consistently higher annual per capita personal income relative to that of the Chicago metropolitan area. The trend seems to show a continued growth in the income gap, as it widened to just over $12,000 in 2007. The second chart below shows that the pace of total employment in the Lake County/Kenosha area has been positive on a year over year basis since 2002, whereas the pace of total employment in the Chicago Metro area only turned positive between 2003 and 2004. The Lake County/Kenosha area’s growth rate reached a plateau in 2005 at 2.0%; although this fell to 0.8% in 2006, it has been steadily rising since then. Even with its own decline in manufacturing jobs, Lake County, between 2001 and 2007, has seen a consistent growth in the number of total jobs; its manufacturing job losses have been offset by new jobs in other sectors.

Accordingly, some Lake County towns are actively transforming themselves by expanding their residential amenities for the workers who occupy emerging jobs throughout the broader region. Nearby towns with a similar manufacturing heritage to that of Waukgean (e.g., Kenosha, WI) have already started implementing development plans emphasizing such amenities—e.g., by building condominiums on the lakefront (namely, HarborPark) and creating city parks along the lake. Besides the growing job base in Lake County itself, Waukegan and other towns throughout the county may be able to attract workers from Chicago and Milwaukee. Waukegan is situated between these two large and prosperous job markets. With appropriate development, greater numbers of new and existing Waukegan residents could one day find themselves commuting to these larger job centers.

So what types of projects is Waukegan undertaking to attract knowledge-based workers? For starters, Waukegan is currently in the process of a large multi-million dollar downtown and lakefront revitalization project. Waukegan seemingly has a myriad of opportunities to build up the community by enhancing currently underutilized resources. The town has 1,400 acres of property and 3.5 miles of Lake Michigan coastline to work with—one of the last remaining underdeveloped lakefront areas in the Chicagoland area. The city already has established assets, too. It boasts two harbors—one built as recently as the mid-1980s and substantially upgraded within the last year. Together, these harbors can hold nearly 1,000 boats of a variety of sizes, and both are relatively quiet and peaceful. Other marina-based businesses nearby offer further amenities for recreational boaters. In addition, the Genesee Theatre, which was the start of the city’s plan to transform the downtown area, finished its renovation in 2003, after being vacant for more than a decade. The total cost of the renovation was $23 million, but now the Genesee Theatre has become a destination spot, drawing attendees from both Illinois and Wisconsin.

In the process of its revitalization, Waukegan has created a master plan to guide its development, which focuses on two main things: being a great city and having great places. The master plan’s guiding principles include an emphasis on transit-oriented development; connections between the downtown and the lakefront; protecting, restoring and enhancing the ravine and park system; ecological restoration to create recreational amenities; improving the transportation framework to provide clear access and establish civic places. As part of its redevelopment effort, the city plans to build up to 3,700 new residential units along the lakefront to take advantage of this vital asset which has been long underutilized. They are looking to restore the facades of the historical buildings in the downtown to bring back the ambiance they once provided; for the most part, Waukegan will maintain their distinctive appearance, but also retrofit their facilities to modern use. The town plans to use tax incremental financing (TIF) dollars to help subsidize these changes, and several projects have already been completed. Along with the buildings, Waukegan has begun improvements to the downtown area by adding 16 blocks of streetscape, and Waukegan Park District has developed a new veteran’s memorial park as a public open space in the downtown. In addition, Waukegan plans to enhance its lakefront area that gives it a distinctive advantage over other cities, especially since it boasts a commuter rail, Metra stop, within walking distance of the lakefront and downtown. Rather than build up all the area around Lake Michigan, the city wants to design a large open space for community use and entertainment similar to Chicago’s Millennium Park, but on a smaller scale,as well as maintaining a public open space along much of the lake shore.

In conjunction with the city’s revitalization, steps need to be taken to clean the Waukegan Harbor further. The harbor was classified as an area of concern (AoC) in 1975 when toxic polychlorinated biphenyls (PCBs) were found in the sediments of the water related to the past industrial uses along the lakefront. During 1993, OMC completed environmental remediation by cleaning up the sediments in and around its property, removing about 1 million pounds of contaminated sediment. According to the environmental protection agency (EPA) website, OMC is not alone as other major remedial actions have been undertaken at Waukegan Manufactured Gas and Coke, Johns-Manville Company, Waukegan Paint and Lacquer, North Shore Gas North Plant, and the Waukegan Tar Pit.” If such actions continue, the goal would be to get the harbor off the AoC list, which would help advance Waukegan’s plans to revitalize the lakefront.

In sum, Waukegan’s city planners want to revitalize and transform Waukegan as a place for people who desire the amenities that a lakefront offers, but perhaps at a more affordable price. Their efforts might make Waukegan also appealing to those who prefer the quieter suburban lifestyle or those who can commute easily to jobs in Lake County, Milwaukee, or Chicago. Waukegan is hoping to rebuild its community and bring residential interest, commercial activity, and people back into a once booming industrial town.

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[1] 2006 Census Estimate (Return to text)

[2] Census of Manufactures Geographic Series 1972 and 2002 (Return to text)

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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.

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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. [1] 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.

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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.” [2] 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.

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Note: Thank you to Emily Engel and Matt Olson for assistance.

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[1]To some degree, people tend to locate their residences in proximity to their jobs, so that job locations would tend to drive population growth as well.(Return to text)

[2]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)

When such migrations take place in response to sharp negative economic shocks, they can be painful and costly both for the households who move and for the communities left behind. Those who migrate are often in desperate circumstances, and so there are high costs associated with loss of friends, family, and knowledge of local living pathways. Shrinking communities do not adjust easily. The least fortunate populations may be left behind to be supported by a tax base that has dwindled. And for those communities with shrinking population, the neighborhood housing and public infrastructures are not easily re-configured to serve smaller populations.

Nonetheless, due to its vast size, common laws, and common language, the United States is often considered to be a place where the ease of spatial mobility facilitates economic adjustments. This is true despite a few institutional impediments, such as non-portable state unemployment insurance systems as well as health insurance tied to workers’ local employers.

Home ownership may be another significant impediment that has grown over time. Since the 1940s, homeownership rates had expanded from 44 percent of households in 1940 to 69 percent by 2005. The sale of a large asset such as a home is typically accompanied by large transaction costs. And today, in the aftermath of the national freefall in home prices, many local housing markets are stagnant as would-be buyers await price stability. Moreover, price declines have left many homeowners “under water,” meaning that the likely sales price of their home would be less than the amount of the mortgage they must pay off at the time of sale. In some instances, homeowners cannot cover such losses from their savings or secure another loan to pay off the mortgage. Consequently, in situations where homeowners do not default and walk away from their obligation, or where households are uprooted due to foreclosure, the soft housing market is likely to slow migration in search of employment.[1].

According to a recent report from the Census Bureau, the rate of interstate migration from 2007–08 was the lowest since 1948. Comparing migration in the year ending mid-year 2008 versus the previous year, 30 states experienced declining net domestic migration.

Other factors lie behind the falling trend rate of interstate migration. The U.S. population is aging, and older households tend not to move as readily. But the more recent falloff is likely tied to the aforementioned economic developments; migration rates have been found to respond to imbalances in regional economic conditions. Demographer William H. Frey notes that, during the middle years of this decade, the fast-growing metropolitan areas in Florida, Arizona, Nevada and California experienced enormous in-migration spurred by both the house price appreciation and the attendant jobs in construction and related economic sectors. Now, in-migration to such places has cooled and even reversed in some places, as home prices and jobs have declined.

More generally the national slowdown in economic activity may also be impeding inter-state migration. In investigating business cycles over the past 60 years, Raven E. Saks and Abigail Wozniak find that labor migration rates rise with cyclical upturns and fall with downturns, especially for younger working age people. These effects are independent of the degree of differences in inter-state economic conditions, and may reflect the shifting costs of job search and job matching that take place over the business cycle.

Despite such costs, migration remains attractive for some households whose local economies are particularly depressed. For example, in Michigan, the national recession has sharply deepened economic trends that have long been underway. Owing to unprecedented restructuring in its automotive sectors, the state’s labor markets have been weakening all decade long, with a cumulative decline of nonfarm payroll jobs of 17 percent. Its current unemployment rate of 15.2 percent leads all other states.

The chart below shows Michigan’s annual rate of net domestic outmigration (in red) juxtaposed against the difference between Michigan’s unemployment rate and the U.S. rate (in blue) [2]. As Michigan’s labor market has weakened over the decade, the rate of outmigration has accelerated [3]. At mid-year 2008, Census figures estimate that the state lost 92,600 in domestic population. Cumulatively, domestic outmigration amounts to an estimated 315,600 over the decade (table below).

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Outmigration is one of several mechanisms by which Michigan workers will adjust to the shocks to their economy and job market, but not the preferred one in most situations because of the adverse impact on households and local communities. National and global economic recovery will help, too, by lifting demand for cars and other Michigan products and services. Other adjustments will involve re-training for emerging local jobs that may come about as new industries and investment opportunities develop in the state.

Note: Thanks to Vanessa Haleco-Meyer for assistance.

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[1] Some studies find no difference between owners and renters, however. For example, see http://www.federalreserve.gov/pubs/feds/2007/200732/200732abs.html (Return to text)

[2] These data report only interstate movements of existing residents. In-migration of foreign population are not included, and these vary greatly by state. (Return to text)

[3]Population migration estimates are very uncertain. However, the general patterns and rankings cited and displayed here for Michigan are largely corroborated by alternative estimates that have been made by a state agency in Michigan, as well as by tallies of inward and outward bound shipments reported by residential moving companies. (Return to text)

A few weeks ago, at the Detroit Branch of the Federal Reserve Bank of Chicago, we held a workshop that discussed the significant challenges in meeting the federal government’s new fuel efficiency standards. To help meet these challenges, the President recently signed into law a “cash-for-guzzlers” bill. Funded to the tune of $1 billion dollars, this program is designed to subsidize the sales of new vehicles in exchange for scrappage of older, less fuel-efficient vehicles. If this new program succeeds, it will take some older cars and trucks off the road, marginally improving the overall fuel efficiency of vehicles on our roads. It will also have the salutary effect of boosting sales at a time of great stress for automotive producers.

This bill is part of a broad-based policy effort by the current administration to improve fuel efficiency in the motor vehicle sector. This policy effort includes other measures such as accelerating the timeline from 2020 to 2016 for meeting the tighter corporate average fuel economy (CAFE) standards. In addition, there is the Advanced Technology Vehicle Manufacturing Loan Program, administered by the U.S. Department of Energy, which will fund innovative vehicle technologies designed to reduce our dependence on oil.

Technical details of the cash-for-guzzlers program, such as how dealers are to register for the program and how the payment of incentives is to be administered, will be worked out by the U.S. Department of Transportation by July 23, the program’s expected launch date (see www.cars.gov). Yet one can already comment on the broader aspects of this bill.

What incentives are available? Under this new program, a buyer can get up to $4,500 from the federal government toward the purchase of a new car or light truck (used cars do not qualify for this incentive). The actual amount given by the government is contingent on the improvement of fuel efficiency between the "trade-in" (the vehicle to be scrapped) and the new vehicle to be purchased. That is, this amount is staggered depending on the improvement in the miles-per-gallon (mpg) rating between the old and new vehicle. The vouchers available come in the amounts of $3,500 and $4,500. A "trade-in" is eligible for the lesser amount if the mileage improves by 4 mpg for cars and 2 mpg for light trucks. In order to get the maximum amount of $4,500, the mileage has to improve by 10 mpg for cars and 4 mpg for light trucks.

How long will government incentives be available? In its current version, the program is set to end November 1, 2009, unless the funding is depleted earlier.

Which vehicles qualify for trade in? There is no restriction as to where the vehicle was produced. Restrictions in the bill are of two kinds: the age of the vehicle to be traded in (it cannot be older than model year 1984), as well as its fuel efficiency (its mpg rating cannot be higher than 18).

Our estimate of the potential number of trade-ins

Two factors determine the eligibility of vehicles for the scrappage program: 1) vehicle fuel efficiency [1] 2) today’s resale value of vehicle models[2]

To approximate how many eligible post-1984 vehicles are still on the road today, we applied an estimate of vehicle scrappage rates to the number of vehicles sold in each model year[3].

The two charts below show the level of today’s surviving vehicles by model year for both cars and light trucks. Additionally, for each model year we identify the number of vehicles eligible for the scrappage program, distinguishing vehicles produced by the Detroit Three from those made by other producers.

We find that this program covers far more light trucks than cars. Just over 16% of all surviving car sales since model year 1984 are eligible,—85% of which are Detroit Three (Chrysler, Ford, and General Motors) products. Also, 66% of all light truck sales from the same period are eligible, and 88% of these represent Detroit Three sales.

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What impact on motor vehicle sales is expected? Assuming an equal mix of fuel efficiency improvements, the average voucher handed out would be worth $4,000. The program is funded with $1 billion. That amount represents 250,000 vouchers of $4,000. To the extent these vouchers are taken up, they would increase light vehicle sales in like amount. At the seasonally adjusted annual sales rate of 9.5 million units recorded during the first five months of 2009, 250,000 additional sales would boost light vehicle sales by about 10% over the three months of this program’s existence. This estimated boost represents an upper bound as some of these trade-in transactions may have taken place anyway.

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[1] Data on fuel efficiency is available at fueleconomy.gov. (Return to text)

[2] See this link for a list of eligible car and truck models by model year: http://www.edmunds.com/industry-car-news/cash-for-clunkers-eligible-vehicles.html. (Return to text)

[3] Richard L. Schmoyer, 2001, unpublished study on scrappage rates, Oak Ridge National Laboratory, Oak Ridge, TN, as cited in Transportation Energy Data Book: Edition 23—2003, available at www.ornl.gov/~webworks/cppr/y2003/rpt/118917.pdf, pp. 3-13, 3-15. (Return to text)

A recent symposium at our Detroit Branch addressed the automotive industry’s challenges in meeting stricter fuel efficiency standards. The 2007 energy bill set a new target of 35 miles per gallon for the corporate average fuel efficiency (CAFE) of new vehicle sales . The new fuel efficiency requirements will be phased in beginning with model year (MY) 2011. Such standards are motivated by concerns for the global environment (e.g., global warming), as well as national security (since gasoline and petroleum are imported from volatile regions of the world). Yet, efforts to meet the stricter standards will impose higher costs on all automakers selling in the U.S., including the domestic ones, which are already strained.

Recently the Obama administration moved up the year by which the new requirements have to be met from MY2020 to MY2016. The National Highway and Traffic Safety Administration (NHTSA) is charged with issuing and monitoring compliance with fuel efficiency standards. The Obama administration also instructed the U.S. Environmental Protection Agency (EPA) to regulate for the first time greenhouse gas (GHG) emissions by automobiles. Although separate rules will apply as determined by CAFE and GHG standards, the two government agencies intend to harmonize and coordinate their efforts.

New rules regarding the fuel efficiency standards will be administered based on each individual vehicle’s “footprint,” meaning the area of the vehicle as one looks down from above. Per the new standards, each class of vehicle, as measured by its footprint, must meet a certain level of fuel efficiency by 2016. There was consensus at our workshop that the new standards can be met with existing technology. Yet, there was wide disagreement on how costly compliance will be. In any case, the cost of complying with the new requirements is expected to be higher for larger vehicles.

Tighter requirements for fuel efficiency could be quite onerous for vehicle manufacturers—especially were the price of gasoline to stay low. That is because consumers will continue to demand large cars and powerful (fuel-burning) engines. In contrast, during last summer’s episode of high prices for gasoline, consumers responded by switching to more fuel-efficient vehicles (see below).

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As gasoline prices have fallen since then, there’s a shift once again toward larger and more powerful vehicles. With regard to future fuel prices, few believe that the current administration and U.S. Congress intend to raise the road-use tax on gasoline. However, the price of gasoline could go up if a carbon emissions “cap-and-trade” program were implemented. Such programs have been and are currently being considered in both the House of Representatives and the Senate. A Congressional Research Service study estimates that at a price of $15 per ton of carbon, the price of gasoline would rise by 14 cents based on its carbon content.

In order to meet the new fuel economy and greenhouse targets, automakers will be looking to use technologies available at the lowest cost per fuel economy improvement. There was agreement at the meeting that most likely we will see further improvements to the internal combustion engine as well as increased use of more advanced transmissions, such as six-speed automated transmissions and dual clutch transmissions. Reduction of a vehicle’s weight and engine size (a smaller engine in combination with turbocharging can provide similar power to that of larger engines) are also in the mix. Finally, there are several advanced engine management options, such as cylinder deactivation, variable valve timing, and gasoline direct injection. These technologies would improve fuel economy between 3% and 7% each, at a cost of up to $300 each. In addition, increased use of biofuels can represent significant benefits to carmakers in terms of achieving CAFE compliance. It is also widely expected that automakers will apply improvements to a vehicle’s air conditioning system to achieve reductions in GHG emissions.

The application of diesel-burning engine technology—popular and proven to be quite successful in Europe—will be more challenging in the U.S. because of stricter regulations related to the control of smog (which is associated with some noncarbon emissions). Finally, possible next generation technologies such as hybrid powertrains as well as fuel cells, while intriguing, were widely characterized as being not yet cost competitive.

The Federal government will assist domestic auto producers in improving energy performance. Today Energy Secretary Steven Chu announced the first tranche of funding awarded to support improvements in energy efficiency in the motor vehicle sector. The advanced technology vehicles manufacturing program, appropriated in fall of 2008, will provide $25 billion dollars in loans to companies making cars and components in U.S. factories that increase fuel economy at least 25 percent above 2005 levels.

Despite the fact that the U.S. is Canada’s largest trading partner and vice versa, northern border crossing conditions have sometimes been given short shrift. Today, in some places along the border, freight and travelers use outdated infrastructure in a post 9/11 world where security concerns have tended to slow cross-border movement. Accordingly, suggestions have been raised on both sides of the border to improve passenger and trade flows between the two countries. The Seventh District’s Great Lakes crossings, specifically the Detroit River crossings, are focal points of the growing debate on how best to improve the U.S.–Canada border.

U.S.–Canada Border Crossing Policy

Over the last few years, the majority of U.S. border policies have focused more on Mexico and the flow of immigrants and illicit activity crossing the southern border into the U.S. The heightened attention on the Mexico border has been a concern both to Canadian officials and those whose economic interests depend on cross-border trade between our two countries. For example, automotive-intensive communities in Michigan and much of the surrounding region are especially keen to see border crossings made easier. Much of the fragile North American automotive industry continues to operate with highly inter-connected supply chains that traverse the border between the Midwest and Ontario.

Responding to these concerns, the Brookings Metropolitan Policy Program and the Canadian International Council held a forum recently on the challenges and opportunities to improve U.S.–Canada border policy and management. Among the experts to speak at the Brookings forum, Christopher Sands of the Hudson Institute discussed his paper characterizing the U.S.–Canada border policies past and present and recommending a broad framework for improvement. Sands specializes in Canada, U.S.–Canada relations, and North American economic integration. He followed up his appearance at the forum with a meeting here at the Bank.

Sands divides the U.S.–Canada border into four separate traffic corridors. The Great Lakes Corridor sees the highest volume of automobile and truck traffic, most notably the crossings at Detroit–Windsor, Buffalo–Niagara, and Lake Champlain, which connects Montreal and New York City. All Great Lakes crossings see heavy volumes of what Sands calls “amateur” traffic, those who cross rarely, usually on vacation. However, these Great Lakes crossings also provide infrastructure support for commercial goods and services to travel back and forth from both countries’ manufacturing centers. The Michigan border crossings directly link the Great Lakes, where 28% of US GDP is produced, and Ontario, where 41% of Canada's GDP is produced.

Sands’ Policy Recommendations

Precision, decentralization, and consensus, Sands argues, should serve as the framework for future discussions on improving the border. Precision revolves around defining the specific problem and efficiently targeting and solving it. Decentralization refers to engaging local and regional stakeholders in the policy process while taking care not to stall the process by giving any party too much power. Canadian officials tend to agree more on border initiatives because most of the Canadian population lives near the border and is affected by border policy; they don’t have the regional rivalries exhibited by the debates and issues seen in U.S. border cities and their inland counterparts. Consensus occurs when all levels of government agree on the future of the border and how it should be managed.

Michigan’s Aging Infrastructure

Along the Michigan–Ontario border crossings, infrastructure issues have become pressing. Here, the Ambassador Bridge and the Detroit–Windsor Tunnel connect Detroit and the industrial Midwest with Windsor, Ontario, and Highway 401, which heads northeast through the major cities of London, Toronto, and Montreal. Combined with the Blue Water Bridge in Port Huron and the St. Clair rail tunnel just south of it, Michigan possesses some of the more important crossing points, making the state an important player in U.S.–Canada trade. As commercial and passenger traffic continue to cross the border in Detroit, added pressure has been put on infrastructure that is almost 70 years old and isn’t equipped to handle current traffic volumes.

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In recent years, federal, state, and local leaders in the U.S. have advocated for a new Detroit River border crossing approximately 2 miles south of the Ambassador Bridge that would be able to handle increased trade flows as well as implement post 9/11 security upgrades. Adding to the campaign, the Canadian Minister of Transport, Infrastructure, and Communities has publicly stated that Canada’s #1 infrastructure priority is the new Detroit River crossing. Currently, construction on the new bridge complex is scheduled to begin sometime next year, with the opening set for 2013. But first, Detroit and the state of Michigan have short- and long-term issues they must address. The land needed for the new bridge has not yet been purchased by the Michigan Department of Transportation; and critics argue that a new crossing isn’t needed due to slowly decreasing traffic flows. Competing claims for attention have arisen as the Detroit city government and Lansing legislators attempt to agree on expansion and administration plans for Cobo Hall, the region’s premier trade and convention hall, as well as how to contend with education budget deficits and recovery options for a poorly performing state economy.

Independent plans for a competing cross-border bridge in Detroit have further complicated the outlook. The private owner of the Ambassador Bridge has started construction of a second span next to the current Ambassador Bridge, albeit without government permission. (The publicly approved site for the Detroit River International Crossing is Zug Island, 2 miles south of the Ambassador Bridge, which would cross over into southern Windsor, where a new highway accessing Highway 401 is being constructed.) While the private initiative may be advantageous in some respects, its competing site will have the least negative impact on surrounding communities (no displacement of residents anticipated), is the most environmentally friendly, and is the one both nations favor.

Midwestern states along the northern border have keen economic interests in a national border that is secure, yet speedy. Because these interests are somewhat more diffuse throughout most of the remaining states, Midwestern residents would do well to take part in border-improving policy discussions.

The Chicago metropolitan area's experience may be especially helpful in informing policy throughout the Midwest states. While the Chicago area has shared a common course of development with its neighbors in the Great Lakes region, its central city has outperformed its counterparts over the past 20 years. The population of the Chicago area’s central city has grown by an estimated 1.9%, or 53,000, since 1990. In comparison, the central cities of the eight remaining largest Great Lakes metropolitan areas have clocked a 9% loss[1]. As for employment located in the central cities, from 1990 through 2004, the Chicago area’s city lost 4.6%, while those of the other areas lost 6.5%.

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Why have central cities such as Chicago and the Twin Cities experienced some rebound? Two major reasons have been advanced. For one, it is clear that there has been a reawakening of interest in living in central cities that relates to their unique amenities and features. Gentrification in many cities has focused on those neighborhoods that contain interesting architecture and history—not to mention lively entertainment scenes. In addition, big city mayors have capitalized on renewed interest in city living by lavishing attention on amenities such as outdoor recreation, lively shopping and arts districts, scenic streetscapes and waterfronts, and urban festivals.

In a recent study of residential location in the City of Chicago versus suburban areas, Bill Sander and I document the specific characteristics of urban denizens versus suburbanites for both 1990 and 2000. The importance of city services to households is apparent from our findings concerning their demographic characteristics. For example, with an eye on the quality or reputation of city schools, household adults with children of school age are much more likely to choose the suburbs over the city. As for the general importance of amenities, diversity, and built environment, we find higher educational attainment to positively affect households’ decisions to choose central city residence. In 1990, those with a four-year college degree were no more likely to live in the city; by year 2000, such householders were 4% more likely to live in the city rather than the suburbs.

The education-related aspect of urbanization is evident in the changing composition of Chicago’s residents. In 1990, 19% of all working age adults living in the city had attained a college degree. By year 2000, this proportion had grown to 26%. Gains among the younger adults were most striking. As shown below, for adults aged 25–34, the college attainment share had grown to 39% by 2006. Growth since 1990 in college attainment of young adults living in the city reversed the suburban advantage of 1990. On average, by 2006, college attainment of young adults in the city exceeded that of their counterparts in suburban areas. The number of those with a bachelor’s degree residing in the city grew by over 50% over the 1990s (not shown) [2].

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It is a mistake to attribute too much of the rising urbanization of college-educated householders to the siren call of city lights, museums, and lakefront parks. That is because job location also strongly pulls along residential location (and vice versa). Through a job channel, the rising importance of information exchange in the U.S. economy may be the second vital large force that may be reviving central cities. New ideas, their dissemination, and the coordination of a complex worldwide economy have come to dominate economic output in developed nations; therefore, the siting of jobs and meetings of workers in dense configurations, some have argued, augments productivity and value generation. Central city location of work has become more desirable, which has pulled some jobs back toward the center of metropolitan regions.

There is some evidence of this renewed role of central cities. At the same time that many central cities have shed some types of routine production jobs, gains have been made in occupations and industries that are steeped in workers who engage in information exchange and interaction. While the City of Chicago has been shedding manufacturing jobs—one of its historic mainstays—it has largely replaced such jobs with those in nonmanufacturing sectors. As shown below, city job losses are largely accounted for by the manufacturing sector alone; in fact, the city has experienced overall growth in employment net of manufacturing. More specifically, (not shown) over the period from 1991-2002, central city Chicago realized strong job gains in such industry sectors as business services (+34.4 percent), securities and commodities brokers (+61.8 percent), educational services (+25.1 percent), and engineering and management services (+13.6 percent).[3]

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In our recent investigation of household preferences for city versus suburban residence in the Chicago metropolitan area, we account for the proximity of households to their place of work. Once we statistically account for those city residents who also have found employment in the city, our estimates of the importance of educational attainment on household location in the city are somewhat smaller than we originally estimated. More importantly, "place of work" statistically explains much of the central city residential location decision. For this reason, we should not put too much emphasis on the importance of household amenities to central city living, nor perhaps should policymakers; jobs and job-attracting features continue to be important.

At this point, not much is known about the extent to which the changing economic structure of central cities is actually generating new jobs in related fields and transforming economic bases. And so, leaders and analysts in other Great Lakes cities are looking at the Chicago experience for insights as Chicago pursues policies to refashion itself as a “global city,” in both its residential amenities and in its attractiveness to highly skilled service industries that trade in world markets. Research initiatives that can discern the importance of the city as a job location from a residential location will be especially helpful to city mayors and other policy makers.

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[1]Cities with elastic boundaries—namely, Columbus, Ohio, and Indianapolis, Indiana—are excluded. (Return to text)

[2]Not all of these gains reflect shifting preferences toward the city. Gains in overall educational attainment of the general population, especially young adults, enlarged the population of those adults that were, in turn, more likely to choose urban residence. (Return to text)

[3] See U.S. Dept. of HUD, SOCDS County Business Patterns Special Data Extracts, http://socds.huduser.org/. (Return to text)

The conference’s morning sessions addressed the forces impacting the Midwest automotive region, along with lessons midwestern communities might draw from the South. Sean McAlinden of the Center for Automotive Research presented a graphic overview of the region’s auto-intensive counties, as well as the market position and outlook for the North American auto industry. Over the past ten years, payroll jobs in the automotive sector have been halved because of wrenching industry restructuring. Communities in Michigan have experienced an outsized share of these declines. Moveover, McAlinden’s long-term analysis and forecast of automotive sales suggests that U.S. light vehicle sales are currently in the early stages of a deep cyclical trough.

The afternoon program asked how communities are responding and adapting to the loss of automotive activity. At one of the afternoon sessions, four economists offered their observations and advice to those communities that are transitioning to a post-automotive economic base. George Fulton, research professor at the Institute for Research on Labor, Employment, and the Economy at the University of Michigan, highlighted the sharp dependence of Michigan’s economy on the Detroit Three automakers (Chrysler, Ford, and General Motors). By his measure, economic concentration in the Detroit Three is 16 times greater in Michigan than the remainder of the United States. In that light, it is perhaps not surprising that Michigan’s overall employment growth has closely tracked Detroit Three domestic automotive sales since 1991, up to and including the recent plunge in sales. For Michigan, Fulton predicts that the sales plunge will be accompanied by a loss of 239,000 jobs from the end of 2008 to the end of 2009—the largest job loss since at least 1956. By the end of 2010, Michigan’s automotive industry will employ barely one-half of its 2007 work force.

In assessing Michigan’s longer-term prospects, Fulton offered a detailed industrial analysis that showed that a fair number of industries have been growing recently. Despite the fact that 641 industry sectors experienced falling job levels in Michigan from 2002–07, 298 industries not only had net hiring outcomes but actually outperformed their counterparts in the overall United States. However, a downside to his findings are that average wages in declining industries outweighed average wages in growing industries by $14,000 per year. In searching for Michigan’s industries of the future, Fulton recommended not only those offering high wage jobs but those having a strong export component, long-term growth potential, and regional advantage (or assets) in providing products or services. In Fulton’s opinion, the automotive industry fulfills these criteria except for its long-term growth potential in Michigan. Instead, Fulton grouped Michigan’s promising industries into three categories: knowledge-based industries (including auto engineering and R&D), tourist-oriented industries, and those sectors supporting higher-income retirees.

Another helpful perspective was presented by George Erickcek, of the W. E. Upjohn Institute for Employment Research. For Michigan and many other Midwest communities, what has been happening in the Detroit-Three-related automotive industry is too big to ignore; in particular, the recent negative experience is much more magnified in intensity, and what that portends for the long term weighs heavily on them. Car and light truck sales reached 16.1 million units in 2007, but are now forecast to go as low as 11 million units in 2009. In responding to plunging sales, Detroit Three producers have curbed year-over-year production by over 60 percent, and the top Three Asian-domiciled producers (Honda, Nissan, and Toyota) have done so by over 50 percent. The long-term outlook for the Midwest reflects structural decline rather than a swift return to activity. As recently as 2001, the Detroit Three controlled 74 percent of U.S. auto sales. By 2008, the share had fallen to 48 percent.

The employment size of the domestic auto supplier industry exceeds that of auto assembly by a factor of three. Domestic auto parts suppliers have been especially impacted by falling orders from the Detroit Three, and they widely report that long-term relations with the Detroit Three have soured in disputes over pricing and delivery terms. In seeking survival strategies, many domestic auto parts makers have attempted to diversify away from the Detroit Three to Asian- and European-domiciled assembly companies with production facilities in North America. More generally, Erickcek referenced the recent Klier and Rubenstein book which outlines three survival strategies available to parts suppliers: They must survive as 1) producers who integrate automotive systems of other suppliers and deliver them to assembly plants, 2) high-tech module developers, or 3) low-cost parts makers.

Given the recent upheaval in the automotive industry, Erickcek noted, displaced workers face strong headwinds in terms of expected earnings losses upon re-employment, slow expected recovery in job openings in the coming years, and age discrimination for older workers as they seek re-employment. Still, even in these difficult times, job opportunities exist because new products are being introduced, new markets are being serviced, and aggressive companies are taking market share from their competitors. To illustrate, Erickcek noted that over the current decade, net job creation in Grand Rapids, Michigan, has typically been negative but that new job openings have tended to exceed net job loss by wide margins.

How can the communities that have been affected by the downturn in the automotive industry help match their recently displaced workers with the new jobs? First, Erickcek recommended that they base their initiatives on a firm understanding of the local labor market and on the particular skills and abilities of displaced workers. Local efforts to identify a newly emerging industry sector and to subsidize its growth in the community is an extremely risky strategy. Instead, communities should determine their community investments in infrastructure and work force training by identifying interactions (and the intersection) of three key elements: the effects of the regional economic structure, global factors, and technological factors on the community and its economic base. In closing, Erickcek cautioned communities from jumping on the bandwagon in trying to attract the “next best thing,” such as life sciences, without a strong foundation for success. Competition is fierce for such prospects, and these industry sectors are often strongly anchored to existing clusters. Importantly, many of such industries are top- heavy with highly educated professionals so that “job chains” may not reach the community’s unemployed and underemployed work force.

Ned Hill, Professor and Distinguished Scholar of Economic Development at Cleveland State University, offered his considered assessment of the realities facing communities with strong ties to the automotive industry. Hill reported trends in automotive production from North America showing that much automotive work will continue to be done in the U.S and North America in the coming years. While world automotive production has grown rapidly since 1999, North American production remains sizable, with modest shrinkage and import penetration.

For companies and plants, Hill emphasized that the keys to survival have changed little from recent years. Successful plants and companies are those that operate with flexible work force policies and that employ workers who labor with flexible work force rules. In the current environment, low debt levels and ready access to capital are important factors in survival. On the national and global stage, Hill argued that the long-term value of the dollar also influences the health of assembly plants. According to Hill, the pending “card check” of the proposed Employee Free Choice Act (EFCA) that is under consideration in the U.S. Congress may exert a pernicious effect on automotive investment in the Midwest, north of Interstate 70. If passed, Hill contended that new plants will gravitate as far as possible from those communities that tend to support labor union representation.

In advising Midwest communities that are being impacted by automotive plant closings, Hill noted that a lot has been learned from the region’s steel plant closings in the 1980s and from defense plant closings. One lesson, said Hill, is that legacy costs—such as overly generous pension benefits and health care—must be shed if new companies are to survive and invest. Hill also cautioned towns and states and the federal government to avoid “lemon socialism.” That is to say, governments are especially inept at knowing which plants and companies that can survive; heavy subsidization of chosen “winners” is usually wasteful and prolongs the agony of readjustment.

In looking to assist new industries, plants, and investments, there is no silver bullet. Yet, communities must mobilize quickly and move toward new realities and opportunities. In doing so, communities must pay attention to market trends and forces, and reinvigorate the assets of their people (their skills) and their infrastructure. In identifying assets to protect when a plant has closed, Hill emphasized that land is the critical asset. Communities would do well to bring land back to the market for redevelopment through brownfield cleanup and land banking. In contrast, towns should be skeptical of fads. Who isn’t targeting wind, bio, solar?

Even with good practices, said Hill, we still have much to learn about community revitalization. The experiences involving mass worker layoffs in the 1980s were not kind. Approximately, one-third of workers retired, one-third successfully adapted, and one-third fell into poverty. Redevelopment has not always been successful. And when it has been, revitalization has often taken a long time—up to 20 years.

In my concluding presentation, I observed that each community has somewhat unique opportunities, assets, and challenges. For this reason, a “one size fits all” revitalization strategy will surely fail. All communities must start with a sound factual assessment of its own situation. In charting its policy course of action, a community must draw on credible information concerning the many demographic and economic trends that are at play. In choosing among policy actions, a community must be cognizant of the successes and failures of similar choices that have been made by others.

The U.S. work force has been “upskilling” in recent decades, that is, average work force skills have been climbing. Evidence suggests that such upskilling has been taking place broadly across U.S. industries, including manufacturing. However, manufacturers have been especially disappointed by what they see as their inability to hire and retain skilled workers. In response, manufacturers and their associations are quite active in pursuing strategies and programs to fatten their pipelines of skilled workers.

As documented by Dan Sullivan and Dan Aaronson and others, upskilling across the broad U.S. work force is evidenced by rapid growth in educational attainment over the past century, particularly high school and college completion. Rising family incomes over the twentieth century led to unprecedented investments in human capital which were manifested in rising rates of both high school and college attainment. More recently, reasons for continued broad upskilling across U.S. industries and occupations are varied and debated, but the strongest impetus appears to have arisen from rising employer demands for skills. Accelerating technological advancements in recent decades have boosted the demand for workers who can most effectively use these tools in the workplace. In U.S. manufacturing plants, many less skilled production line jobs have been replaced by skilled workers operating computer controlled equipment and working in groups, with individual workers being trained to perform an increasing variety of tasks and operations.

As shown in the figure below using data from the Bureau of the Census[1], manufacturing’s general reputation for employing those with lower educational attainment continues to hold into the current decade. For both the U.S. manufacturing and nonmanufacturing sectors, each of the charts reports the share of work force by educational attainment with (1) less than high school, (2) high school or equivalent, (3) some college, and (4) a four-year degree or beyond. As compared to aggregate nonmanufacturing, the manufacturing sector’s work force features more workers with less than a high school degree, as well as those with a high school degree as their highest educational attainment.

Still, for both manufacturing and nonmanufacturing, the shares of workers with the least educational attainment are falling rapidly (see panel A below). Workers with a high school level education also represent a larger share of the manufacturing sector’s work force than in nonmanufacturing sectors of the economy. Here, the share is rising over the decade (at the expense of the below-high school share). For those with “some college” the shares are mostly flat for both sectors, but nonmanufacturing’s share of such workers lies 3-4 percentage points higher. For those with a college degree and higher, the spread widens to about 6-7 points to the advantage of the nonmanufacturing sector. In this instance, the gap between the sectors narrowed ever so slightly over the decade to 2007.

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Regional Differences

Within the manufacturing sector, educational attainment shares vary by region, in part due to regional variation of types of manufacturing. The New England, the Mideast, and the Far West regions have higher shares of manufacturing workers with at least a bachelors’ degree. These regions also tend to have higher concentrations of high technology manufacturing clusters. On the other end of the spectrum, the Southwest has a higher share of workers with less than a high school education. The Great Lakes region falls in the middle of the distribution. Our manufacturing work force comprises larger shares with educational attainment in the high school and some college categories, with a smaller share of less than high school attainment. Our share of manufacturing workers with a college degree or higher is modestly lower than the national average.

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The Employee’s Perspective

Despite the upskilling taking place in the U.S. manufacturing sector, prospective workers may not perceive robust job opportunities in the sector. Total employment levels have been falling (see chart below). Especially since the 1980s to date, the trend is downward, with an annual average loss of 193,000 payroll jobs per year since 1982. Nor is the pattern of decline very predictable for those who seek to chart a career and training path on the basis of expected employment opportunities. While the sensitivity of employment to the national business cycle is evident, strong structural swings also take place, such as the three million jobs lost in manufacturing nationwide from 1998 to 2003.

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The Employer’s Perspective

Manufacturers may indeed have an availability problem with their labor market. As the overall labor market in manufacturing continues to shrink in the U.S., the market for workers with particular skills, and usable general skills such as literacy and computational ability, is likely getting thinner. At the same time, skills demanded are rising as global competition heightens and as the U.S. manufacturing sector aims to specialize in more skill intensive goods and services. U.S. manufacturers must also compete for skilled workers with nonmanufacturing sectors in the U.S. which are also upskilling. Surveys of manufacturing employers report widespread concern about the supply of skilled workers and its negative impact on production and customer service.

Wage offers by manufacturing companies to attract workers may be limited by global competition, which may be squeezing profit margins for production operations in the U.S. At the same time, costs of work force training are also under pressure. Traditional or legacy training programs—another avenue for manufacturers to acquire workers—may be similarly squeezed by cost pressures arising from falling numbers of students. That is, when manufacturing job numbers were in the ascendancy, local schools, unions, and employers could more easily gather a sufficient number of students to make the scale of operation affordable.

In responding to their dilemma, U.S. manufacturers are learning to “train and educate” smarter. Their approach has been to encourage programs that identify and define those particular skills that they value in the manufacturing workplace. Such skills are further linked along career pathways by which students or trainees may follow and invest. In this way, training programs and educators will find it easier to construct curricula and career pathways for workers and students. By certifying workers in those skills that employers value and recognize, schools can create incentives for students to invest in skills and training. A further benefit of such skills certification is to reduce search costs in the process of matching jobs and workers, as well as making skills more portable in the process. And since employers can more easily identify desired workers, their available supply of skilled workers will be enhanced.

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[1] American Community Survey (Return to text)

Throughout the nation, state governments have been crying uncle as revenues have hit a tailspin and expenses for Medicaid and public welfare have accelerated. Estimates of the cumulative deficit facing state governments exceed $100 billion, and the National Association of State Budget Officers is calling this the worst fiscal situation facing the states since World War II. Not surprisingly, states in the Midwest are feeling stress. Here I provide an update on current fiscal issues in Seventh District states (Illinois, Indiana, Iowa, Michigan, and Wisconsin), and I describe the impact on the region of the federal stimulus package (American Recovery and Reinvestment Plan).

Illinois

Illinois's new governor, Pat Quinn, presented his budget on March 18. In response to current estimates of the state budget deficit ranging from $9 billion to $11 billion, the proposal includes a series of tax changes. Foremost is an increase in the state income tax rate for both individuals and businesses. The personal income tax rate would increase from a flat 3% to a flat 4.5% and would include an increase in the standard deduction from $2,000 to $6,000. The corporate tax rate would increase from 4.8% to 7.2%. The changes would raise about $3.1 billion in revenues. The governor also proposed increases in fees for several licenses, along with a cigarette tax increase.

On the spending side, education expenditures would receive a modest increase. Transportation funding would see a substantial gain through the multiyear, $26 billion “Illinois Jobs Now” program. Much of the funding would come from increases in driver’s license and auto registration fees.

The depth of the state’s problems has been highlighted by several recent reports. The comptroller’s report estimates the current backlog of unpaid bills at $4.5 billion. A March 2 report by the Civic Committee of The Commercial Club of Chicago found that total liabilities (including those for state workers’ pensions and health care) now exceed $116 billion, or $10,000 per resident. The report noted that these liabilities are a chronic problem for the state—that is, they form a structural deficit, which was caused by prior budget actions. This structural deficit is now being exacerbated by the recession.

Indiana

The state’s economy has had one of the sharper reversals of fortune with the December unemployment rate rising to 9.2%, second worst in the Seventh District. In response, Governor Mitch Daniels has proposed a two-year budget of $28.3 billion, which includes an 8% cut for all state agencies, a 4% reduction in higher education spending, and no increase in K–12 education. The state also has the luxury of a $1.3 billion budget reserve, although the governor’s proposal does not draw on any of these funds.

On February 20, the state’s Democratic-controlled House of Representatives passed a one-year $14.5 billion plan. The plan received no Republican support and is likely to be revised in the state’s Republican-controlled Senate. A major sticking point is that the House’s plan requires spending $200 million of the state budget reserve as well as using $540 million in stimulus money for Medicaid. The bill also allows for some creative accounting by allowing schools to pay for utility bills out of capital funds. There is also a debate about which capital projects to support, with the Democrats favoring several higher education projects and the Republicans favoring prison expansion.

A final side issue has been a proposal to abandon the biennial budget in favor of a one-year budget. Proponents suggest that this would be more prudent in times of fiscal uncertainty. The governor opposes this, believing that more fiscal discipline is required in adopting a biennial budget.

Iowa

In the face of faltering revenues, Iowa legislators have been trimming Governor Chet Culver’s proposed $6.2 billion budget for fiscal year 2009–10. So far $133 million in cuts have been approved by the legislature. In addition it has been proposed that $100 million from the state’s reserve funds be spent in the next budget. The governor has also cut $30 million from the current budget to close a smaller current budget gap. The legislature is also investigating revenue-raising options including eliminating corporate tax breaks that are not designed to create jobs. There is also a proposal to create a middle-class tax relief program, which would be funded by ending federal deductibility in state income taxes.

On the positive side, a member of the state’s Revenue Estimating Conference suggested that the revised revenue projections for the state appear to be holding steady. The conference makes its next formal projection on March 20.

Finally, Iowa anticipates receiving $1.9 billion in stimulus funds from the federal government.

Michigan

Michigan—with the highest unemployment rate in the nation (11.6%)—continues to struggle. The state has faced a budget deficit every year since 2001. This year will be no exception. The estimated deficit for the next budget (beginning on October 1) is $1.4 billion. Governor Jennifer Granholm’s proposed budget will cut $670 million and calls for 1,500 state employee layoffs. The state is also planning on using $464 million in federal stimulus funds to help with Medicaid payments. The state’s budget director has been frank in stating that Michigan has two deficits—a structural deficit that has been ongoing since 2001 and a cyclical deficit that is compounding problems. Michigan intends to spend $313 million of the federal stimulus money during the current fiscal year.

Wisconsin

Governor Jim Doyle unveiled his plan to close an estimated $5.9 billion budget gap for the next biennium. On the revenue side, the governor proposed $1.4 billion in new taxes, including a new higher income tax bracket for families earning more than $300,000, an 85 cent increase in the cigarette tax, a new tax on multistate companies, a tax on oil companies’ windfall profits, and a sales tax on Internet downloads. Most of the tax package was signed into law on February 18. The budget also assumes $2 billion in federal stimulus money.

On the spending side, $2.2 billion is expected to come from reductions to state agency budgets and $245 million from “budget efficiencies.” No layoffs are included in the budget. The proposed budget would have Wisconsin spending in 2011 what it spends in 2009.

What will be the impact of the federal stimulus money?

Seventh District states would be facing even tougher times if it had not been for the passage of the federal stimulus package. With money flowing into transportation, education, and Medicaid, the states have been able to avoid raising revenues through taxes (and other means) and cutting expenditures. On the broadest level, the following two charts illustrate the estimated multiyear impacts of the federal stimulus package’s major proposals on Seventh District states.

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Relative to other federal aid efforts in past recessions, this package is notable for bolstering education spending. Previous programs tended to target Medicaid, unemployment insurance, and infrastructure. This package adds education to those other areas.

There are also estimates available for stimulus funds that have already been allotted as of March 12.

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Concluding thoughts

Despite federal stimulus money, state governments in the Seventh District are under significant stress. In some cases, sharp downturns in the local economy are partially to blame (e.g., Michigan and Indiana), but structural imbalances in state fiscal systems are in many cases compounding cyclical declines in the economy. The issues concerning restructuring state revenues in the face of current economic conditions will be the topic of a special program at the Chicago Fed on May 12. Click the link for more information on the conference Assessing the State and Local Sector: Where Will the Money Come From?—sponsored by the Federal Reserve Bank of Chicago, National Association of State Budget Officers, and National Tax Association.