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 it sated?

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.

BNW: Why?

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 economic activity.

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 declining.

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 downtown.

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 economically justified?

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 that model.

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 compete internationally.

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 the total?

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 company left.

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 depended on.

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?

Radke: Yes.

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 space.

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 Silicon Forest.

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 doing.

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 job.

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 policy environment.


BrainstormNW - June 2007



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