A Mid-Year Economic Report
From the Governorís Council of Economic Advisors
Last December, BrainstormNW convened members of the Governorís Council of
Economic Advisors for the first in a series of informal discussions about economic issues
facing Oregon. In May, we reconvened the group for an updated review of Oregonís
economic standing and an ongoing discussion of key factors affecting our stateís
economic health and long-term outlook. In attendance: William Conerly, Eric Fruits
(sitting in for Randall Pozdena), Ham Nguyen, Tom Potiowsky, Randall Pozdena (by
telephone), Hans Radke, Philip Romero, and Ralph Shaw.
BrainstormNW: Last year, we published figures from the Portland Business Alliance
that showed Portlandís downtown core lost 32,000 jobs from 1990 to 2006, falling from
117,000 to 85,000. Marpleís Pacific Northwest Letter came out with income statistics
that show that median income in Clackamas County is $2,000 higher than Multnomah
County. Is there a connection?
Pozdena: A lot of corporate offices of the banks left downtown. The U.S. Bank Tower
occupancy fell by half. There has been a change in the utilization of these buildings.
BNW: Thousands of condominiums have been built in downtown Portland in the last
five years. Joel Kotkin recently argued in the Wall Street Journal that it is a myth that
baby boomers are going to want to retire in downtown condominiums. We have heard
that condominium developers in Portland are having trouble selling them. How is South
Waterfront doing? Do we have the jobs and incomes to sustain these condominiums?
How does this fit into what drives the Oregon economy?
Romero: I have talked to Kotkin a lot about his theory. He uses what he calls the 9
oíclock test: How many lights are on when you walk down the streets at 9 p.m.? What he
finds is that in a lot of these gentrified urban areas the units are bought for second homes
or rentals. When the buyers move in they are typically empty nesters or retirees who
bring only their wealth and are not working.
Conerly: I was skeptical of the Pearl, and that proved foolish. There was a demand for
high-density urban housing. The question is, since the demand was surprisingly strong, is
Fruits: What is happening in the Pearl is different than South Waterfront. We are slowly
seeing some of the business center of downtown shifting toward the Pearl. You now have
office buildings in the Brewery Blocks. Law firms and architecture firms are taking some
of the traditional downtown business activity and shifting it to the Pearl.
BNW: The WSJ ran an article, ďBuilding a Better Bike Lane,Ē with a sidebar listing the
top five cities in America with the highest percentage of bike lane capacity. Portland was in the top five. Other cities on the list were Ann Arbor and Boulder, both medium-sized
college towns. Portland is attempting to combine bike culture with new urbanism, where
people with money would buy condominiums and create a lifestyle, which Kotkin says
isnít happening. Do you have any sense of how much is myth and how much is reality?
Pozdena: It is in between. We are building the infrastructure for a Manhattan-style
lifestyle. The whole model makes sense if the downtown and regional economy booms,
and if most of that boom is near the downtown core. But, I donít think the model works.
Pozdena: We are not doing what the state and the region need to do to attract businesses.
We have constraints on the size of the urban area that raise the peripheral values of land
approximately twice to three times that which will attract manufacturing enterprises to
the region. We are not seeing export-oriented businesses coming to the region. By
various other policies, we have lost companies like Louisiana Pacific, lost major banks to
acquisitions outside. I sometimes wonder where the growth is going to come from
because I donít see the region as being attractive to outside investors.
Romero: You are familiar with Richard Floridaís argument to attract the ďcreative class,Ē
and then all good things will flow. Kotkin would say in essence that a lot of these creative
designers or digital media types end up working at Starbucks. They donít create a lot of
Pozdena: Itís true. We are attracting a lot of young, enthusiastic people who arenít
particularly well trained and who arenít bringing a lot of human capital to the region. We
are attracting a lot of people looking for jobs in green sustainable industries. That is the
ad we have put out, but there isnít a lot of there there.
Conerly: However, we have a lot of really bright people, and a number of them are
entrepreneurial. They are working at Starbucks today. But they want to do something.
When I need to hire on a contract basis, if I want somebody to do some marketing work,
if I want a graphic artist, if I need some website stuff, it is cheap.
Nguyen: Of those moving to Oregon, we see their education levels to be: 14 percent
graduate degree, 20 percent college degree, 8 percent some college, 24 percent high
school graduate, 26 percent high school or less for the state as a whole.
Shaw: Although the population has grown, the per-hour wage has not grown; it is
BNW: Back to the WSJ article about bike lanes and Portland being in the same category
as Ann Arbor or Boulder ó are we building the kind of city that might fit as a model for
100,000 or 200,000 but is very problematic for a city of 2 million that has to compete in
the world economy?
Pozdena: The bike lane thing is just a manifestation, and a relatively minor one, of
another problem: Why are we trying to build an economy around 1880s technology? We
are spending a lot of money on MAX, which has almost no patronage and which
cannibalizes the use of bus systems in order to achieve that level of patronage. We are
trying to resurrect a bygone era of how people lived in cities before there were cars, cell
phones, fiber optics, the Internet, everything else that causes activity to disperse from the
BNW: Our government leaders would say there is global warming, weíve had to fight
two wars over oil, by God, weíd better move away from fossil fuels and automobiles.
When businesspeople complain about being saddled with infrastructure that is not
competitive, government leaders say we are progressive, we are thinking 20 years ahead.
Pozdena: I am little bit wary of carbon accounting. That is what the price mechanism is
for. I am assuming we are getting the right price signals; maybe they are a little bit too
low. I am wary of some of the underlying science in the whole global warming argument.
I encourage you to read ďThe Politically Incorrect Guide to Global Warming and
EnvironmentalismĒ if you want to see the hard science behind it. I like accounting in
front of me in the form of a price. The Europeans have a $6 a gallon price on gasoline. Is
anything there really different? Do you think a $3 carbon tax on top of fuel would be
Conerly: We need to take into account the cost of congestion. This community has a
worse congestion cost than the average city. It is getting worse faster than the national
average. When you convert a lane of car traffic into a bike lane you are not reducing
congestion. Think about the truckers who are driving at 20 miles an hour instead of 50
miles an hour. That is a hard cost to all of us.
BNW: Clearly there is a model that government leaders are pursuing for this area. But
what is the region going to look like if the model doesnít work?
Pozdena: We want to have the compact development that evolved naturally on the East
Coast in the pre-automobile era. We want to achieve that through a series of artificial
manipulations of market forces, namely an urban growth boundary, taking road services
and using them for light rail lines that carry almost no people, tearing up downtown and
putting a crossways light rail line where buses were serving more people than the light
rail line ever will. Itís a sort of Disneyland view of what a city should look like ŗ la
1880s. My point is that all the economic forces, such as the Internet and fiber optics,
favor dispersion of economic activity, more rather than less living space. Our entire
regional model is fighting all those forces. It will win with some subset of the population,
but it is not going to win in the broader competition with other regions that donít buy into
BNW: Is this reflected in our housing prices?
Pozdena: When the National Association of Home Builders affordability ranking is
released, it is spooky that after San Francisco and San Jose, comes Medford, Eugene,
Portland, and Corvallis, especially when balanced against the wages that this region
generates. The entire top of the least affordable cities are big California cities or dinky
little Oregon cities that sit basically on a featureless plain in the Willamette Valley with
plenty of space to grow.
Romero: That is essentially because of the Urban Growth Boundary, I presume?
Pozdena: The average Oregon wage is 93 percent of the national wage, and the national
wage is not a high wage. We are 75 to 80 percent of the Bay Area wage. It is just odd to
see Corvallis at the top of the ranking. If you throw a rock, you are not going to hit
anybody. So why is housing so expensive in Corvallis?
Shaw: The problem isnít the wages that are being paid; it is that average wages being
paid reflect the lack of demand for quality people who expect higher wages. The reason
you donít have demand is because you donít have enough companies here that are
looking to compete nationally, internationally. The average wage at Nike is higher than
the national average, certainly not 93 percent of the U.S. average. The average wage at
Schnitzer Steel is higher than the national average. These few companies canít find the
kind of people they need without bringing them in from somewhere else. The only way
they can bring them in from somewhere else is to pay them the same kind of salary they
were getting in their previous jobs. We have to look at the cause of low wages, and it is
not because of bike lanes, and it is not because tax rates here are higher. It is because we
donít have enough Nikes and Schnitzer Steels here ó the kind of organizations that
Pozdena: The reason we donít have these organizations here is because we made it such
a struggle to locate here. There is a very comprehensive report done by one of our
competitors on the inventory of industrial land, for example. There is basically no
inventory of industrial land that has any kind of services. We turned a perfectly good rail
yard into the Pearl District.
Shaw: The entrepreneurial spirit in this environment is very limited. Count how many
new companies have started up in the last 20 years that are still around. How many
publicly traded companies headquartered in Oregon are unprofitable as a percentage of
Pozdena: We did a study a couple of years ago for the Portland Development
Commission on what causes a sector to grow rapidly in an economy. What causes a
sector to grow rapidly is that you have to have an endowment, a base load of that sector,
that industry, in your economy for it to grow fast. In other words, the Bay Area has a
bioscience base, 260 companies in the bioscience area. We want to be in bioscience, but
we are never going to get there. We donít have the base. A lot of it is serendipity. Seattle
has a very vibrant software industry, a very vibrant electronics industry, a very vibrant
bioscience and manufacturing industry, because it has Boeing. And it is also where Bill Gates decided to start Microsoft. I agree; there is serendipity. But you canít control
serendipity. What you can control is the friendliness of your smile when companies come
looking for a place to locate. We do location studies for companies, and those companies,
when you do the math, decide the Portland area doesnít pencil out very well. We have a
lot of congestion for our small size, relatively high home prices for our size, and we seem
to be building a consumer Disneyland rather than a business-oriented environment. We
chased off the forest products industry. We have trampled all over property rights.
Shaw: In the software business you donít need any land. You donít need a lot of
transportation. You want high-speed Internet. We have all the high-speed Internet you
can shake a stick at. Yet, when you look at the fast-growing businesses in the software
industry, we donít play much of a role. Why?
Romero: Is Randy saying that he thinks the deficiency in entrepreneurialism is being
driven largely by hostile public policy?
Nguyen: That is his point.
Romero: Ralph, do you see some alternate explanation?
Shaw: The first explanation I see ó comparing one period to another ó is the demise of
Tektronix. Tektronix was our large technical ďuniversityĒ that employed 20,000 people
back in the í80s. The number is now less than 2,000. Another key is the question: What
environment stimulates ideas? If we want to celebrate all these young guys with
advanced degrees, who understand the Internet, fine. But where are the new businesses?
Who do we attract, and why do they come here? If you come here for quality of life,
thatís one thing. But does quality of life mean that you work 50, 60 hours a week? I donít
think so. We talk about our cluster economy, and weíve spent a lot of money trying to
figure out what our clusters are. What are our growth clusters? One of them was imaging
and display technology. Where are we today in this field? Well, we have one profitable
Radke: In the late í80s and í90s Oregon was one of the fastest growing states in the
union. We took a dip, but we are right back on the average. I donít understand this
pessimism. To come out and say that we chased the forest industry away ó the forest
industry did the same thing as the fishing industry. We mined the industry. In the í70s
basically the private industry cut themselves out of business. They expected to go into the
public sector, but there wasnít much public sector support there. We still have to take a
look at where we were economically in the í90s, what we didnít do so well in the í90s.
We didnít do what any business should have done. We should have invested in
infrastructure, which we didnít do.
Shaw: In the middle í80s Oregon was the 6th
most active state in venture capital in the
whole United States. Number six. In í94, í95, we had more capital expenditures in the
semiconductor industry than the rest of the U.S. combined. So that was serendipity? How
many more semiconductor companies have come here since then?
Nguyen: One. SolarWorld.
Shaw: What has happened to Fujitsu? To Toshiba? To Komatsu? What has happened to
all the guys who came here during that period of time? The difference is, if youíre
Mentor Graphics, and you have 3,000 engineers working in Wilsonville, and you want to
hire quality engineers, which you need every year because the technology gets driven as
much by what takes place in the university as it does in your laboratories, you cannot find
anybody out of our university system to hire.
Radke: We havenít kept up on our infrastructure.
Potiowsky: We are talking about the economy, and we are looking at symptoms that we
see in it. From mid-2003 to just recently, we were either in the top 5 or top 10 fastest
employment growth states in the U.S. We are 17th
now. Unfortunately, we have quite a
volatile economy. In 2002, we were up at about 8.5 percent unemployment. But we also
had the fastest fall in the unemployment rate of almost any state, although we are still
above the national average.
BNW: In 1990, timber was 10 percent of the Oregon economy and high-tech was 1
percent. In 2001, timber was 3 percent of the economy and high-tech was in the mid-20s.
Did we chase the timber industry out?
Radke: The timber industry in the early 1970s knew they were going to be out of private
trees from about the mid-80s until now. In a few more years you will see more timber
coming on again because of the growth. The timber industry is very dependent upon time.
You canít have a few national forests that basically the industry should have never really
Conerly: Go back to the Beuter Report of 1976. He looked at the long run fiber available
from the forests and he said, gee, we cut the private land first because it was low
elevation and easy to get to, and the federal land was the stuff nobody wanted in the early
days. But he said itíll all work. He said we can even increase the harvest currently but we
have to cut some national forests and cut the state forest when the Tillamook Burn re-
grows. What the industry misjudged was the shift in attitudes about cutting the national
forest. So they made a mistake, but itís a pretty reasonable mistake. The second thing was
the development of Oriented Strand Board (OSB) that would use low-quality fiber. It
used to be that to make plywood you needed a high-quality tree, and we had the high-
quality trees. In the old days you couldnít make great panels from the southern forests,
but today you can. Technological change made our resources less valuable, and then it
turned out we had fewer resources.
Pozdena: I think we chased the timber industry out. We are simply not optimally
harvesting the forests we have. And Bill is right about the shift to OSB, but that was as
much a supply-driven shift as it was a demand-driven shift. Louisiana Pacific, Stimson
and Weyerhaeuser have all been under pressure because of the lack of supply.
Radke: Weíre getting to the point where we cannot compete with production of fiber. If
youíre just producing fiber, you can be producing fiber at twice the rate in the South and
New Zealand and Chile. Youíve got more wood in Africa now that was planted that they
canít even get out of there. So if youíre just in the fiber market and not in specialty
products like alder, this area is not going to compete.
BNW: Technology has taken away our comparative advantage in wood products?
Pozdena: I disagree. Weyerhaeuser is making a very handy profit in the alder business.
Anybody would be making a very handy profit in the dimension lumber business, if you
were allowed to cut a tree. And this state will wait for the Tillamook Burn to be
Tillamook Burn Part II before we allow harvest in the Tillamook State Forest. Weíll wait
for the eastern part of the state to burn before weíll allow even burn stumps to be
harvested. Iím not saying the South doesnít have some advantages in a panel-oriented
industry, but we have by no means lost our comparative advantage when you look at the
size of the resource that surrounds us.
BNW: Letís get back to our discussion about the economic model Oregon is following.
Pozdena: Weíre following the model of stacking people like cordwood, as per an 1880s
model of what a downtown looked like. Thatís working against forces that are evolving
in the economy, like the Internet. Thatís not money well spent. Money well spent would
be on improvements in the university capability to provide technically trained people.
There are probably a number of other areas where Iíd rather be spending all that money,
if I had to spend it. Weíve got an attractive region, and thereís a lot of space to grow in
this state. But we donít have a welcome mat set out for businesses. Iím a friend of the
president of Cypress Semiconductor, and Iíve asked him a couple of times, why doesnít
Oregon have more venture capital? He says itís not the kind of place where youíd want to
send your staff. Itís risky. For example, Multnomah County levied a 1.5 percent income
tax increment to underwrite a school system that is shrinking in size. And IRS migration
statistics show the county lost $300 million in adjusted gross income. A thousand
taxpayers. So they lost a thousand tax filers, whose average filing AGI was in excess of
$300,000. Werenít those probably entrepreneurs? I mean, whom do we think weíre
attracting with policies like that?
Shaw: You say Cypress Semiconductor wanted to come up here ó if you want to make a
silicon wafer for solar energy, thereís plenty of space up here. Itís not a question of
Pozdena: Ralph, itís $18 a square foot for the land instead of $6.
Shaw: If they want to come on up here and rent low-price space itís available in the
Nguyen: I second what you have said, Ralph. You realize SolarWorld paid a fraction of
the original price for the Komatsu property. It cost Komatsu $40 million in land and
whatever to build.
Shaw: So what does that tell you? It tells you there wasnít enough demand for that kind
of facility. Itís not just a question of available space.
Pozdena: Providence attempted to get a facility out in Hillsboro converted from
industrial to commercial use. They were willing to pay $18 to $20 a foot for the space,
but thatís what the market is at the fringes of the urban growth boundary. Thatís not
going to attract a greenfield manufacturing enterprise. Iím not saying a greenfield
manufacturing enterprise is going to solve our problems, but itís very hard to build a
critical mass when, at the entry point, the price of admission is so high. Itís the same
thing with South Waterfront. This is supposed to be the big bioscience area, right? Itís
supposed to draw 80,000 jobs to the area by putting a $50 million trolley in the middle.
Whatís happening? Absolutely nothing.
Shaw: Why do you think that is?
Pozdena: Itís too damn expensive.
Shaw: If you want to know what is happening, you should speak to the new president of
OHSU. He said that we donít have the entrepreneurs, we donít have the businesses here,
the whole concept was flawed. The biotech business didnít work here because we donít
have an environment of entrepreneurialism. Twenty years ago I paid one of my partners
to be on my board specifically for his medical background. He went up to OHSU once a
week, and in 20 years we didnít get one single idea that was worthwhile funding. It didnít
fail because of high-priced real estate. It didnít fail because of bus lanes or trolleys or
trams or whatever; it failed because the attitude was totally antagonistic.
Pozdena: Ralph, the transportation problems are part of the antagonistic attitude. If I had
my druthers, the model for the region would be that the public sector would do its job,
which is to provide the infrastructure thatís being demanded now, not the infrastructure
that was being demanded in 1880. And it would allow property to be converted to the use
that the marketplace wants for that property, the use the private market wants, and then
stand back. Our model instead is to interfere in all those processes in order to shape a
community in a certain way and then try to spend more money still to try to induce
people to come for a reason thatís not conducive to their industry.
BNW: Can you summarize our political culture?
Shaw: In 1982, Gov. Atiyeh made a very courageous decision. He was going to cut
higher education. And if I recall correctly it was by 25 percent. I said, ďGovernor, nobody
is buying our trees. Why are you cutting our electrical engineering as much as youíre cutting forest products?Ē And he said, ďYou have to be fair.Ē In my opinion, that was the
beginning of the end for the higher education system.
Romero: I think that Oregon exercises collegiality to a fault. Fairness is the enemy of
prioritization. In this state there is just a real fetish with fairness, which essentially means
not making decisions for all intents and purposes.
Pozdena: My model of Oregon politics is that itís captive to two forces: the public
employees unions and the teachers union. Ted Kulongoski ó thereís a reason why his
chief of staff is the former union head. Itís payback for his handling of the pension
reductions. Now itís payback time, and thatís why youíve got $300 million going into K-
12. That may be money well spent, but I suspect weíll have no accountability. Itís also
captive to the frustrated people who never had an HO Train set, who want to make
Oregon look a certain way whether or not it makes economic sense. It is better to use
more market-based principles to help the state evolve in a way that works naturally in
concert with rather than opposition to market forces. There are just a lot of regulatory
things that businesses have to do in this state that make it a hard place to do business.
Thereís a very interesting paper from La Jolla Economics. The author predicts the
relative performance of all the states and the entrepreneurial businesses in those states.
His prediction for Oregon is that there is only a 30 percent probability that weíll
outperform personal income next year. And he has been accurately predicting Oregonís
underperformance. He advises investors, and his advice to investors is that Oregon isnít a
very good place to invest.
Radke: I think a lot of times the business of the state should be to stay out of business
and stay in things it should do: educate its people and make sure they can get around. I
distrust the state when it gets into trying to manage the economy, except for things like
education. On the Oregon coast there are horrible decisions being made because of the
political stuff. So how do you make it more responsive? Lane County complains so much
about building permits, but it couldnít take any more growth. I think maybe Lane County
isnít doing enough to hold it back because itís too much and new residents arenít paying
their part. I see 15,000-sq.-ft. homes going up all over the place, yet somehow the
property taxes arenít high enough to support the system.
Shaw: In order to change, you have to have a desire to change. You canít expect that the
governor is going to wake up one day and say, Iím going to change this set of regulations
to attract more people, because that means more kids in schools, more congestion.
Radke: I agree with Pozdena on one thing: We have to somehow make the education
system a little bit more responsive. Weíve got to give some incentives for good people
and disincentives for bad people.
Nguyen: Remember that education policy is a reflection of the electorate.
Shaw: In a democratic system the governor is there to respond to the majority of the
people. If the majority of people are satisfied with what they have, then thatís what they get. If we say business is good for the state and industry is good for the state, I think we
have to think again, is it really what the people want? In Lane County, the answer may be
probably not. We can talk all we want about the system of government, but when
Portlandís mayor gets a 70 percent approval rating, it tells you that people are happy with
how things are.
Pozdena: People vote with their feet. One of my colleagues met with a city commission
staff member and was telling them that they donít want to raise the business income tax
or institute a personal income tax in Portland or they would inhibit people moving into
the city. The staffer said, ďThen only the people who want the tax will be here.Ē
Conerly: The Oregon Progress Board said that one of our goals is to raise per capita
income. We do that by taking all the low-income people and pricing them out of the
housing market. So they leave.
Shaw: So unless the governor is a maverick, he wonít want to change things. If the
governorís agenda is to be popular and well liked, heís doing exactly what he should be
Pozdena: We are getting what we deserve. Everyone wants the amenities, but we are not
willing to sustain the ends that allow them to afford the amenities.
Fruits: Gov. Kulongoski made a big show about going on food stamps for a week and he
got his dog food and his bag of rice and such. What he really should have done to
demonstrate his simpatico with the people was spend a year trying to start a business in
Oregon. That would have really demonstrated how tough things are here because anyone
can live on food stamps for a week, but try to keep a business going for a year and youíll
see what true hardship is.
Conerly: From a management viewpoint, one thing is, you get what you celebrate. If I
pick up a daily newspaper in Portland, I see somebody bicycling to work, somebody
selling a high-cost product thatís green. Maybe what we need to do is find a way to
encourage people to celebrate entrepreneurial ambition.
Potiowsky: Weíve got a place thatís attractive, people like it here, but itís not
sustainable. Weíre on a road thatís going to go down, and basically the attractions that
are here are beautiful trees, but I have no food. Iím poor. And do I really want to be poor
in a beautiful area? Itís better than being poor in an ugly area, butÖ Weíre not sure what
the market vision is, but weíre sure the market will provide something better than the
road weíre going down. Iím trying to find out, is a vision necessary? Do you just let the
market do its job? Is there a role for government to play? I believe there are a lot of
externalities out there. Markets canít do everything. Government does have a role in
these externalities. Then, whose vision? Do we do a mix of a government vision to help
the market along? Which is the right vision?
Pozdena: There are externalities and businesses should have to pay them, individuals
should have to pay when they use roads or pollute or whatever. All that is fine. Itís
actually the visioning sometimes that gets us into trouble. We all remember when the
Ministry of International Trade and Industry supposedly so presciently guided the
Japanese economy. The economy fell flat on its face in 1990. The Japanese economy
imploded. Visioning is a precarious business. On the university side there is something
interesting. As you move further west, because of the land grant colleges, the proportion
of private university enrollment to public university enrollment drops precipitously. And
of course itís especially low in this state where thereís no major private university. And it
is Stanford, not UC Berkeley, that made Silicon Valley. In Boston, itís MIT, Harvard and
Boston University that made Boston, not UMass Amherst. Our first step might be to
privatize the public universities and let them see what the market wants. Visioning gets
us in trouble. The intervention and ďhands in every pocketĒ mentality that you have in
this state, I think, is a problem. Frankly, a lot of people would be happy with slower
economic growth in this state. They would be until itís 1982 again, and they havenít got a
BNW: Closing views?
Nguyen: I want to repeat a line from Rob Kremerís ďSchool TalkĒ column in BNW, ďA
majority of Oregon voters want nothing to do with reform. They like government and
want more of it.Ē
Pozdena: My own view is that business needs less assistance and more essential
supportive playing fields that get government out of the way except for those very few
places where externalities or other issues are important. No matter how much money we
throw at biotech to attract it here, I just donít think thatís going to happen in any big way.
But if it does happen it will happen because we attracted some groups or individuals who
will bring the entrepreneurship that Ralph thinks is lacking from the region. Maybe a
seed of industry will be planted here, but right now itís not where experts would suggest
anybody start a small venture business.
Romero: We have had serial failed industrial policies largely in vain attempts to
compensate for an overly interventionist government that has created an awful public
BrainstormNW - June 2007