Fate of the States: The New Geography of American Prosperity (15 page)

Without job training, food stamps and welfare just create another sort of dependency. Nobody wants to live on food stamps. Anyone who has witnessed the shame and embarrassment of someone using food stamps at a local grocery store understands that. What people want are jobs, and it is ultimately the responsibility of the state to provide the training and economic environment required to create jobs. At a minimum it is in the best interest of the states to provide job training to get their residents back to work. However, unless the federal government specifically directs and administers monies for jobs training, most states cannot afford the large-scale job-training programs needed to resuscitate their economies. The Great Recession resulted in states depleting their unemployment-insurance trust funds as high unemployment rates persisted alongside the depressed economy. Many states that relied upon federal assistance to help with unemployment insurance now must pay the federal government back. It’s yet another example of how borrowing money against future tax revenues has undercut states’ ability to fund key services—such as job training.

We have to break the cycle of poverty in this country. We all know how to do it: Invest in education and create jobs. What’s so harrowing about the fiscal condition of many states today is that achieving those goals seems antithetical to the financial realities. But what other option is there? There is no way a society with such a high and growing poverty rate can sustain itself without truly calamitous consequences. It doesn’t have to be this way, though. There is a solution right in front of us that U.S. politicians have been embarrassingly slow to embrace: privatization.

Imagine you are in a financial bind. Your choices: Use your kids’ college savings fund to make ends meet or miss some mortgage payments, which could mean losing the family home. Put in that situation, you’d look for an alternative. Before draining the college savings fund or ditching your mortgage, you might sell the second car, hawk some valuables on eBay, or cancel the annual Christmas vacation. That’s common sense. Yet many states, if put in the same position, would apparently prefer raiding the kids’ college savings to monetizing salable assets. States are not supposed to be asset or real-estate managers, but in many cases, that’s exactly what they have become. And bad ones at that. States have neglected to perform basic upkeep of roads, bridges, and tunnels yet refuse to sell them to those who would. Imagine a homeowner not tending to the basic upkeep of a house by ignoring a broken stoop, not replacing a failing furnace, or not repairing a leaky roof. The house would ultimately collapse from neglect. That is what states are risking by not servicing existing infrastructure due to lack of funds.

Governor Mitch Daniels of Indiana set a precedent, albeit a controversial one, when he leased a state toll road to a private company for seventy-five years in exchange for almost $4 billion.
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Some viewed it as a short-term fix, but it gave the state the money to invest in the kind of infrastructure—building highways and making other road improvements—most likely to boost commerce and jobs. The bottom line is that when cash is really needed, the adage “sell what you can, not what you should” truly applies. Just look at the banks around the world after the credit crisis. What did they do as one of several efforts to improve their balance sheets? They sold stuff. And some of the stuff they sold wasn’t necessarily stuff they wanted to sell. What choice did they have, after all? They had to downsize in order to survive. Just like consumers, and just like many state and local governments, they thought the good times would never end and they got too big to support themselves. The government has been behind this big-bank downsizing, and it should also be behind states’ downsizing through unwinding assets, such as infrastructure, that desperately need investment for overall public safety.

Although selling assets is nothing new for governments in other parts of the world—such deals were especially popular in Europe during the 1990s—even the suggestion of selling assets (otherwise known as privatization) draws ire from some here at home. Proponents of the strategy argue that selling roads, tollways, airports, and other state-owned assets can raise badly needed money, lower operating expenses, and oftentimes result in more efficient, better-operated infrastructure for users. (Singapore’s Changi Airport, voted the best airport in the world by
Business Traveler
magazine, has been partially privatized since 2009.)
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Opponents of such a strategy argue that it is just a short-term fix—that it robs the state of future revenue streams and leads to higher usage fees for state residents.

Certainly in the wrong hands—e.g., those of a governor who wants to use a one-time windfall to, say, give raises to state workers—privatization has some downsides. However, if the alternative to selling state assets is raising taxes or cutting services, then selling assets may well be the least bad option. Backed against a financial wall, states must embrace whatever cash-generating options are at their disposal. In addition to selling assets, a few states are also using public-private partnerships—basically outsourcing assets like toll roads to private companies—to raise money to improve roads, bridges, and airports. Too many American states and cities have been reluctant to embrace such moves. “Why sell the revenues of tomorrow for near-term cash today?” they say. The clear answer: because they have to. Just as strapped families raise money by holding a yard sale, U.S. states and cities will inevitably be forced to go a similar route. It all comes back to kitchen-table economics.

Precedents for governments privatizing or partially privatizing assets—airports especially—exist all across the globe. The United States, however, has been so rich for so long that it is woefully behind the curve—and woefully underinvested in the infrastructure and maintenance of its entire transportation system. In Europe efficiency wasn’t considered much of a virtue until the early 1990s, when European countries had to apply for entry to the European Economic and Monetary Union. At the time, in order to qualify for entry to the EU, budget deficits needed to be below 3 percent of a country’s GDP. The best way for many countries to clear that hurdle was by raising cash through privatizing telecom networks, utilities, public administration, airports, and other assets. By 1993 most EU countries had launched privatization efforts to help raise money and pay down debt. From 1990 to 2009 nearly $1 trillion was raised by EU countries via privatization. Here at home $1 trillion would go a long way toward solving states’ fiscal woes. In Europe the privatization of telecommunication networks that were once state owned raised over $200 billion. Another $200 billion in utilities were also privatized. Sales of financial and real-estate assets raised another $200 billion. And anyone who has visited Europe lately can attest to the beauty and upkeep of European roads, train stations, and airports. In the twenty years from 1990 to 2009, over $100 billion was raised through privatizing transportation assets.
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Within the United States, states have the opportunity to privatize or partially privatize toll roads, bridges, airports, and other valuable assets. Some states have already begun by privatizing prisons, roads, and some small regional airports. Chicago mayor Rahm Emanuel, for instance, is pushing to privatize Midway International Airport.
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But what’s being discussed now barely scratches the surface of what’s possible. In fact, over the past twenty years the United States has contributed 80 percent less than Europe toward infrastructure public-private partnerships for roads, rail, water, and buildings.
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The clear benefits of privatization include quick cash—in the form of either a large upfront payment or ongoing gains in the form of revenue sharing, expense reduction, debt reduction, and the chance to attract outside capital, and importantly jobs, to improve state and local services. Oftentimes the private sector does a better job too. Over the past twenty-five years, the United States has planned and funded less than one-fifth the number of infrastructure projects undertaken by Europe. In fact, by some estimates the United States needs to spend over $1 trillion to improve its infrastructure and become safer, more efficient, and more competitive. These dollars are unlikely to come purely from taxpayers.
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What’s more, the cost of maintaining decrepit roads, bridges, tunnels, and other transportation infrastructure has become a drain on state budgets. Is it really in citizens’ best interests for states to hold on to noncore assets simply because they don’t want to sell them or because politically influential public-employee unions oppose the idea? This is a particularly important question for housing-bust states, where the proceeds could be used to pay down debt or to spare education and other programs from deeper cuts. Another consideration: Privately funded infrastructure improvements will bring investment and job creation to states that need it most.

To date Indiana, Florida, Texas, Ohio, and Virginia have been the most open to public-private partnerships and have laws and regulations on the books most conducive to privatization. However, as states’ finances grow more strained, expect more states to venture down this path—so long as voters and public-employee unions don’t get in the way. California has done privatization and public-private partnerships in the past, but more recently voters shot down one privatization initiative pushed by Governor Brown.

Case Study Indiana

One of the arguments against privatization is that private operators tend to raise tolls and usage fees. It’s not as if those tolls and fees had held steady under government stewardship. Take the Holland and Lincoln tunnels connecting New York and New Jersey. In 1992, when I moved to New York, the cost of going through one of those tunnels was $4.00. Today it’ll cost you $12.00. Note that from 1975 to 1991 the cost was between $1.50 and $3.00. In Indiana the cost of a toll on the state toll road was $4.65 from 1985 to 2008, when the rate was hiked to $8.00—where it will stay until 2016. This hike was implemented as part of a privatization plan that raised almost $4 billion for the state. It is hard to argue that drivers in Indiana are worse off due to privatization than drivers in New York/New Jersey. The biggest difference is that in Indiana the state had more money to invest in new roads and education.
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When Mitch Daniels came into office in 2006, he arrived with a specific agenda: Reduce state debt and rationalize state finances toward a sustainable operating model. Another goal was using current revenues to pay current expenses—which, of course, is what average Americans do every day. When federal dollars became scarcer, Daniels refused to cut into programs like education and infrastructure. He also refused to borrow more or raise taxes. Instead he cut waste and conducted the most successful state auction for a toll road in U.S. history, raising $3.8 billion for the state in exchange for leasing the Indiana Toll Road to Cintas and Macquarie, two private firms, for seventy-five years. Whatever the opposition was to the project at the time, Daniels had almost $4 billion in additional money to reinvest in the state, and he didn’t have to raise taxes or cut education.
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He did, however, raise taxes on liquor and beverages as well as on rental cars. Raising taxes on all businesses or individuals would have been self-defeating as far as Daniels was concerned. The state needed to attract more businesses and individuals to ultimately raise tax revenues. Raising income- or corporate-tax rates would just discourage businesses and individuals from moving to the state. As Governor Daniels describes it, businesses must believe in the sustainability of the state in order to locate there. Investments in airports, roads, schools, and job training are all part of the equation. Unless states prioritize such investments, they will fall by the wayside—damning their residents to a diminished economic future. With stakes this high, the best thing some states have going for them is the fact that a few good options—unconventional though they may be—are still left on the table. For Mitch Daniels doing nothing was never an option because he understood the velocity of money and realized just how quickly other states could exploit inaction.

The Rise

A New Map of Prosperity

It sounded like yet another corporate cutback story.

In March 2009 Tampa Bay–based Sykes Enterprises told city officials in Minot, North Dakota, that the company was going to have to lay off two hundred workers and shutter the call center Sykes had been operating there since 1996. A sign of the bleak economic times—right?

Well, there’s a wrinkle to this particular story. Sykes’s problem, according to the
Tampa Bay Times,
was not a lack of business. In fact, business was booming. The problem was that Sykes just couldn’t find enough employees in Minot to handle all the demand. The company had originally hoped to expand its Minot call center to 450 workers. But in North Dakota’s booming economy—one in which fast-food joints are paying high-school kids $20 an hour and young oil workers are pulling in $100,000 a year—hiring has become a huge challenge for employers like Sykes. “They’d been advertising all the time for employees but just couldn’t find them,” said Minot mayor Curt Zimbelman, noting that true unemployment in North Dakota oil country “probably doesn’t exist.”
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North Dakota may be an extreme case, but believe it or not, the U.S. economy is on the road to recovery. There’s just one big problem: The road is unevenly paved. Parts of the country are growing at rates on par with some of the world’s fastest-growing emerging markets, while others are being dragged down by high unemployment and mounting debt loads. The dichotomy is obscured by national economic data that show the overall U.S. economy growing at a sluggish 2 percent a year. The strong growth of the central corridor is being obscured by the weakness in the housing-bust states. From 2008 to 2011 Louisiana’s economy grew 16 percent, North Dakota’s by 27 percent, and Iowa’s and Nebraska’s by 11 percent. All in all, the seventeen states that I call the central corridor collectively grew their economies by 8 percent from 2008 to 2011. The United States as a whole grew its economy by 6 percent. The housing-bust states grew theirs by 2 percent.
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The reality is that the central-corridor states have more resources to attract newcomers because they are not choking on debt and crazy pension obligations and forced into a dependency on higher and higher tax rates. Not coincidentally, these same states are also investing in the right things: jobs, infrastructure, and education. These same states are competing with not just other states but with other countries for businesses that are deciding where to set up shop or expand operations. In an increasingly digital economy unhinged from the demands of geography—corporate titans like Exxon and American Airlines, for instance, no longer need to be headquartered in New York just to be near Wall Street or Madison Avenue—the states that are in the worst financial shape are struggling to compete.

Where are the businesses and jobs going? Texas, for one. In April 2012 the cost of renting a U-Haul truck for a one-way trip from California to Texas was twice that from Texas to California, according to Mark Perry, an economics professor at University of Michigan’s Flint campus. “The price ratios,” Perry writes, “suggest that demand for trucks leaving California is roughly double the demand for trucks coming into the Golden State.” By 2012 corporate flight from California had become so pervasive that the state legislature sent a team to Texas to learn best-business-practice lessons from state officials.
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The current population outflow from California to Texas foreshadows a bigger interstate migration to come. Over the next thirty years, businesses and population will migrate from the coasts and Sun Belt to America’s central corridor, which extends northward from Texas up though North Dakota and eastward from Colorado to Indiana. Flyover no more, the central corridor will drive the U.S. economy in much the same way the Sun Belt and coastal states powered the nation over the past sixty-plus years. All the while, the coasts and especially the Sun Belt won’t be aging gracefully. They’ll be slogging through a slow, painful recovery from the housing bust, and they’ll likely be more of a drag on the overall economy than a true contributor.

Effectively, the central corridor of the United States will be the new emerging market of the country—the same role Alberta has played for our neighbor to the north, Canada—with outsized growth, greater employment opportunities, and lots of new arrivals from states with higher taxes, shrunken police forces, and declining public schools. You can see it happening already. Texas has one of the lowest unemployment rates in the country, while California has one of the highest. When businesses move out of California to Texas, they take jobs with them. Consumer spending is rising at a faster clip in the Midwest states than in California because they have jobs and less than half the debt of Californians. To be sure, some of the migration under way is tied to booms in agriculture in Iowa or in oil production in North Dakota and Texas. However, Apple didn’t choose to open a new campus in Austin because of new oil fields in West Texas, just as cloud-computing company Appirio did not add three hundred jobs in Indianapolis due to strong corn crops in nearby Carroll County.
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Moreover, not all of the central corridor’s advantages are geographical or geological. They’re political too. The reality is, California could reap the same shale-oil and shale-gas bounties now benefiting North Dakota. Politicians simply choose not to. California’s Monterey shale deposit is considered one of the bigger undrilled hydrocarbon deposits in North America, with an estimated fifteen billion barrels of recoverable oil, about twice the oil remaining on Alaska’s North Slope. The economic impact of developing the Monterey shale would be so vast, “it could potentially solve the state’s budget deficit,” says Katie Potter, an oil-industry recruiter for staffing firm NES Global Talent. Evidently, state pols are not interested.
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“I asked Jerry Brown about why California cannot come to grips with its huge hydrocarbon reserves. After all, this could turn around the state,” John Hofmeister, former president of Royal Dutch Shell’s U.S. business, told the
Daily Beast
. “He answered that this is not logic, it’s California. This is simply not going to happen here.”
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That’s too bad, because communities located near the Monterey shale, like Santa Maria, desperately need the jobs—a point California Lutheran University economist Bill Watkins drove home to an audience in Santa Maria. “If you were in Texas,” Watkins said, “you’d be rich.”
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Unemployment in the central corridor is nearly half of what it is in Nevada and California. In parts of the central corridor, such as North Dakota, there aren’t enough people to fill all the available jobs. Along with jobs comes personal-income growth, which is clearly stronger in the central corridor. From 2008 to 2011, for example, personal-income growth in states like Texas, Louisiana, and Tennessee grew by between 5 percent and 10 percent. In both North and South Dakota, personal-income growth grew by over 10 percent. Meanwhile, in California, Nevada, Arizona, and Florida, personal incomes barely grew.
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Without doubt, Louisiana and Texas have been clear beneficiaries of rising oil prices. And the natural gas boom in the United States is creating booms in states like North Dakota, Oklahoma, Wyoming, and Pennsylvania too (though not in New York, where political infighting over fracking—a technology that’s been around for fifty years—has stymied efforts to develop New York’s own natural gas reserves). Cheap natural gas is a huge competitive advantage not just for the producer states but for the whole country. Natural-gas prices are three to four times lower here than in Europe, a price advantage now prompting chemical companies—particularly those that use natural gas as a feedstock—to expand operations here at home. This has Europe worried: “The threat is that the [U.S.] chemical industry attracts more investment and that goes to the expense of the EU industry,” Wim Hoste, a chemicals analyst at KBC Securities in Brussels, told the
Wall Street Journal.
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Were natural gas to take off as a transportation fuel, the economic impact would be even greater. Natural gas “is the only long-term viable option to diesel,” said Michael G. Britt Sr., director of maintenance and engineering at United Parcel Service, which recently added forty-eight CNG trucks and plans to deploy more once more natural-gas fueling infrastructure is in place.
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This energy boom has literally transformed the financial landscape of the central corridor, creating jobs and rising incomes. In late 2012 North Dakota, Oklahoma, Wyoming, and others had unemployment rates in the lowest quartile in the United States.

Unemployment Rate (August 2012)

SOURCES: BLS AND MWAG

Personal Income Growth (2008–2011)

SOURCES: BEA AND MWAG

Over the past forty years, more and more U.S. jobs have been shipped offshore due to lower labor costs in places like China. However, the differential in production costs between the United States and China is now narrowing, especially when you factor in the cost of shipping large finished goods from China to U.S. markets. In 2000 the average wage in China was 50 cents an hour. Now it’s $3.50.
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Transportation costs in China are soaring. A 2011 article in the
New York Times
cited the cost of trucking goods within China as $2.50 to $3.00 a mile compared with a mere $1.75 in the United States.
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The point is that the United States is well positioned to compete globally if it can get its fiscal act together locally.

While large corporations are leading the hiring charge in the central-corridor states, small businesses are also creating jobs in those regions. Why? Because they can. Consumers and small-business owners in the central corridor have smaller debt loads than folks on the coasts. The average debt-to-income per capita in California is 170 percent, compared with 80 percent in Texas. The percent of homes with negative equity was 29 percent in California in 2012 versus 9 percent in Texas.
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The most common way entrepreneurs get their first funding is by tapping into personal credit cards or equity in their homes. If they’re too deep in debt, there is obviously nothing to tap. California used to be considered the small-business capital of the world. The world, clearly, has changed.