BrainstormNW invited five of the twelve members of the Governor’s Council of Economic Advisors to provide a year-end review of the Oregon economy and to address questions concerning the state’s performance in job creation and income growth. In attendance were the chair of the Governor’s Council, Ralph Shaw of Shaw Management, Phil Romero, professor at the University of Oregon’s Lunquist School of Business, Bill Conerly of Conerly Consulting. Eric Fruits, senior economist at EcoNorthwest, who participated in the place of Randall Pozdena, also of EcoNorthwest.

BrainstormNW: Give us a brief description of where the Oregon economy is headed.

Shaw: One of the things we have not done in the state is examine a point in time in the future. Assuming things continue to move as they are moving today — where would we be in the year 2012? What would the economy look life? What would the workforce look like?

Look at a significant portion of our industrial economy — what we used to call high technology — and what is taking place in a lot of those companies. Some of them are actually going away.

You can go down the list, and you will see an awful lot of the companies that are paying the highest wages in Oregon today in the industrial marketplace could very well be gone. They will be doing an increasing amount of their manufacturing outside of the United States. InFocus will be gone by 2010 or 2012. Planar Systems may very well be gone by that time.

The other part of that forecast that is needed, I suspect, has to do with demographics. Today the leading age of the baby boom is 60. We are going to see an increasing number of people retire over the next 15 years. What does that suggest for the community and for the state? The demographic trend developing is only going to get worse and the PERS problem is not fully solved.

If we don’t replace those high wage jobs that are currently at InFocus or Intel, then we will have an increasing population that is essentially bifurcated or separated from the higher income of the wealthier people in the community.

If you ask, how do we replace these high wage jobs and how do we prevent this increasing number of lower wage jobs in this state, I see only one solution, and it is not by attracting people from outside Oregon. It is by educating the kids who are here so that they have skills that will enable them to compete with the companies that are basically eating the foundation of our state. That means we have to be better than Asia when it comes to education in math, biotechnology and general electronics. And that’s not all the job of higher education. It has to start before that.

BNW: Why can’t Oregon just attract the people we need? And why won’t a growing economy solve our problems?

Romero: When economic historians look back on this period, they will conclude that Oregon’s primary, and just about sole comparative advantage, was quality of life. That quality of life allows you to attract creative English majors and one generation of software engineers, but it does not allow you to attract entrepreneurs. And even those who set up companies will find as their industries mature that they will have to shift more of their production process offshore. That last part is not unique to Oregon but happens faster if you don’t have an engine forming new firms behind old ones.

Quality of life will not attract entrepreneurs to set up businesses. If there are other competitive disadvantages militating against growth, like high taxes, restrictive land use policies, and an education system that is below standard so you can’t get a skilled workforce, entrepreneurs will find it not very sustainable here. And when global competitive pressures drive their margins down, they will shift more and more of their functions outside the state.

Shaw: We have had quality of life here since 1985-86. In 1981-82 the quality of life deteriorated dramatically because interest rates were so high that the lumber industry crashed and Oregon fisheries suffered from an absence of salmon. We had problems in agriculture. Since 1985, however, we have had quality of life, and we have had a very significant increase in population, and we have outdistanced most every state in population growth. This corner of the county did bring in a lot of people, but when you look at companies that were established and can compete worldwide, however, very few companies have been formed here in the last 15 years.

Romero: As a result, the per capita incomes have stayed very well below the national average.

Conerly: There is something that is leading people to move here. We can observe that, and we know that they move here even when wages are below average and our unemployment rate is above average.

Fruits: If you look at the list of states that had the largest draw of retirees, Oregon was in the top five. Those people don’t necessarily need to worry about job opportunities. Trees and beavers are great for them.

Shaw: If you take the last 15 years, count the number of start-up companies that have been financed by professional investors in this state — and I’m not talking about coffee shops. I am talking about companies that will employ more than three or four people. That number has dropped down to virtually nothing.

Romero: I am coming to believe after seven years here that much of this is a cultural issue. There are two dysfunctional aspects to our culture: The first is the embrace of mediocrity. The second, which is more pervasive and which is a mystery to me, is why the American education system hasn’t attracted a lot more students to take math, science or engineering at higher education levels.

Conerly: I think one of the reasons we get plenty of English majors to move here is because the fate of most English majors is not to wait tables. What we have instead is a world where a person with brains can be successful. Most of the jobs paying $75,000- plus do not require a technical undergraduate degree. There are a lot of people in business, in management, who will tell you that the guy who runs commercial lending for Wells Fargo has a degree in Spanish history.

Shaw: If you take U.S. Bank, which started here, which grew here, which was one of the best performing banks in terms of the metrics, what you have is U.S. Bank now owned by a company headquartered in Minnesota. The company can have all these great jobs, but the marketing jobs go into headquarters. The higher-level jobs don’t go to the regional divisions, they go to the headquarters.

Fruits: However, if you look at Intel, it’s a Fortune 500 company and their largest operation is here in Oregon. It is wrong to say that because they don’t have their headquarters here that we are not benefiting from large corporations.

Shaw: That’s an important point, but if you speak to the people at Intel they are not going to locate any more people here.

BNW: Why?

Shaw: Because Intel perceives its opportunities to be overseas. Yes, Intel’s largest facility is here, and yes, a large part of those jobs are in research, but research jobs are now also in Asia.

Conerly: States with top educational institutions are net exporters of talent. Oregon is a net importer of talent. We are getting bright people educated on somebody else’s dime.

Romero: It is not uncommon for a small state to take a free ride on the educational systems of larger states. There is one question: Is the economic environment in Oregon conducive enough to economic growth to keep that talent? My belief is that the public sector here imposes a variety of barriers reflecting a culture of mediocrity. This culture is pervasive in the electorate and impedes entrepreneurship, leading to a reduction in small firm growth. Yes, we get a lot of Ph.D.s, but they don’t see the opportunities to really grow, and many of them migrate away.

Fruits: There is a disdain for profit-making here. Part of the culture believes that people who are engaged in moneymaking enterprises are somehow not as good. What we really need to do as a culture is send a message that says entrepreneurship is rewarded here. The best way to show we are business friendly is to drop the corporate income tax altogether.

Shaw: Here is my view of what happened to the Oregon economy: Tektronix had close to 20,000 workers in ’86. Tektronix had no departmental budgets. It was a laissez faire organization. Tektronix had patents that enabled them to collect very high margins, so they could afford to do that. They hired some of the most creative guys from the around the world and said, “Do whatever you want.” Today, Tektronix employs less than 2,000. If you look at where the start-ups came from in that period from 1982-90, the great bulk of them came from Tektronix. But Tektronix has not spun off a new company for 15 years.

Conerly: What that means is that all of that money they put into R and D didn’t earn them a return. They were living off (Howard) Vollum’s original concept, and when they were done milking it, they had nothing left.

Shaw: One of the interesting things Tektronix did was that each department, each product line had their own marketing people. They were all little businesses within Tektronix, so they created entrepreneurial companies. Five people would leave the company together: a finance guy, a marketing guy and product development guys. The same thing was true with Intel. In 1983, Sequent was formed by the heads of Intel’s micro-processing division, the memory products division, advanced research, international finance, and human resources. Intel was a memory chip company, and memory chips go up and go down. When they were down and Intel was cutting programs and they were just beginning microprocessors, those people formed Sequent. We had a unique environment when Tektronix lost its patent position, and they had to start laying off people because they began to lose money. Those people who were then supported by Tektronix all left and formed companies. But today, there is no spin-off opportunity anymore.

Professional economists like to talk about clusters. What are clusters here in Oregon? Well, one is graphics; one is displays. What are the display companies? Clarion, and they are no longer in business. They were bought out by Planar Systems. How is Planar Systems doing? They have been laying off people at a pretty steady basis. How about InFocus? They are going out of business at a rapid clip. When you go down the list, what you find is that there’s no display cluster here. The display business is now in Taiwan and Japan.

We kid ourselves about biotechnology. This state is going to spend $700 million to support biotechnology. Name one product that has come out of Oregon research. OHSU has averaged more than $200 million per year for research funding for more than a decade. OHSU can’t name one product. Two billion dollars and not one product.

BNW: Does it matter who is in the governor’s office?

Conerly: The governor does not control the economy. He doesn’t run the levers.

BNW: Atiyeh would say that a generation ago he set up a pro-business atmosphere. Can a governor have some influence?

Conerly: I think Goldschmidt did a valuable job of saying that Oregon is open for business again. I think the regulatory climate has an effect — it has a long-run effect, not a short run effect — so if there is a benefit from a good regulatory policy you start feeling it. Maybe you feel a little bit in the first year or two, but it’s a five and ten year out thing.

Romero: We faced this in California 15 years ago. What we found was once we had a pro-economic growth governor in place, we were able to start using state levers to punish cities that were obstructing corporate investment. The way I used to put it, government doesn’t create jobs, but it can destroy them.

Shaw: Let’s assume that if we went down the road some five years — a long enough period to see trends — if you were to look to 2015, what do you see as the likely drivers of employment in this state?

Romero: Personal services and health care in general.

Fruits: I know that Metro and others keep sweating that there are a million people coming here in the next 20 years, and they ask, “Where are they all going to live?” No one has asked the question, “Where the heck are they going to work?”

Romero: Thinking of Oregon and the likely engines of job formation in this state in the near future, I mention health care as an example. But that is an industry that has chronically low productivity growth, and as you know, productivity growth is what generates income growth. Second, health care and most of the other industries where you can perceive growth in this state are basically population-serving industries and are not exporting industries.

Conerly: But the whole globe is a population serving industry.

Romero: For a small state like Oregon if you don’t have high productivity growth and exporting industries, you are not going to see rapid income growth — barring the arrival of biotech or some other silver bullet that would export a lot of product and have higher productivity growth, like electronics was in the ’80s and ’90s.

BNW: So what does our governor do? How does Gov. Kulongoski send a message, like Atiyeh sent, that we are business friendly?

Romero: Bill Conerly’s point is that the governor is not the puppet master of economic growth.

Shaw: I disagree. Romero: Having worked for one governor (Pete Wilson in California), I know what a governor can do if he can talk a legislature into it. The governor can change the business environment for good or for ill to either attract or drive away corporate investment that can affect economic growth for 10 to 15 years.

Shaw: In my opinion, it was Gov. Atiyeh who destroyed the higher-education system in the areas of technology. In 1982, when this state was suffering severely, in terms of tax resources and so on, Gov. Atiyeh, with great courage, reduced the budgets of higher education. If I recall correctly, it was 25 percent, which was an incredibly courageous decision, but he cut the budget of the one area in this state where everyone who was graduating could get a job — that was the engineering school at OSU. He cut it by 25 percent. Why did he cut it by 25 percent? Because it was fair. Oregon State has never recovered.

Fruits: That’s why fair is a four-letter word sometimes.

Shaw: Governors can affect the long term. When we funded a company, when we put the money in, it took six or seven years before we knew whether that company was going to be successful. Policies put into place today won’t show up during the governor’s term, but they could show up in the next governor’s term.

Conerly: The actions by Atiyeh you describe were actually Atiyeh and the legislature.

Shaw: We could have done something different than that. Atiyeh took all the credit for the cuts in the university system. Could he have persuaded the legislature and whoever made that decision to cut engineering by less than 25 percent? My guess is he could have gone to the public. He is in the bully pulpit position. That’s what leadership is all about. It is true in corporations, and it’s true in the governor’s role. What we need is somebody who says, “Here is where we are going to be at some point and time in the future, and we are going to work towards that,” instead of saying, “Here is where we are going to be in the next biennium.” If we work year-by-year, we end up with the same kind of success that Wall Street complains about with corporate America, where everybody is thinking short term.

Conerly: I think that one of the things we’ve done an incredibly poor job of is setting priorities. The shining example of that is the governor saying that he wants to find a way to get more state patrolmen on the highways. Okay, you’ve had four years. If that’s important to you, why didn’t you push that at some point?

Shaw: We know the trend has been that when people retire they come here.

The first consideration is that you are going to have more retirees relative to the population than you have today. The next question is: If you take the fact that only 15 percent of the students who enter high school graduate from college in this state, does that make us competitive in an increasingly global environment? I don’t care what happens in California. It is no longer Oregon vs. California. It is now Oregon vs. the rest of the world.

Theoretically 30 percent of the population — leaving out immigrants to the state — is not going to have a high school diploma. What does that mean in terms of income levels for non high-school graduates?

BNW: Dr. Fruits, what do you think of Conerly’s limited view of the governor’s power as compared to Shaw and Romero’s view?

Fruits: The governor can act as a cheerleader. He can throw up the banner saying open for business, and then he can work with the legislature to try and do things, such as get rid of the corporate income tax. But you wouldn’t immediately see businesses swarming into the state. You would see a long lag that would probably occur after the governor was gone.

Romero: Politically, if you have a compliant legislature you can see the results in months. But economically, if your goal was a 25 or 50 percent increase in external investments coming into this state, and the jobs they create, that is going to take you five to 10 years.

Shaw: Why is the governor so limited in his capability of really influencing change?

Conerly: Because government is not that important. It has importance in its tax structure, in its basically regulatory structure, and those are things that we rarely change. But most of what goes on for Oregon’s economy is being driven by the nation and the world.

Romero: In California, when I was the state’s economist, we were experiencing the worst recession since the Great Depression in the early ’90s. We were manically focused on turning things around, which we did by the mid-’90s. And then we had the greatest boom since WWII. When I deconstructed how many of the jobs we gained in the boom could be attributable to state policy versus the national and international economy, I found we were responsible for about 15 percent, and that was putting all our efforts into it.

Shaw: There are trends that are in place already. And the best thing we can do today is to try to perceive where those things would lead us.

BNW: Okay, but if you know you need a million new health care jobs in 15 years, what do you do? What can government do to help create them?

Conerly: Part of our problem has been this central planning approach, even in education. Right now there are a lot of health care training programs that are absolutely full. What we need is more market-focused education, where the vocational training is actually reacting to the job opportunities out there.

Shaw: I suggested to Kulongoski in ’02 that it might be worthwhile for him to take a look at what happened in Atlanta, Ga., when that city was expected to default on its municipal bonds. Atlanta was one of the poorest municipalities in the U.S. Most of the wealth in Atlanta is in the suburbs, not in the city itself. What happened is that the city of Atlanta elected a new mayor. Shirley Franklin, interesting enough, went to the business community and said that if this thing continues the way it is going, we are going to be bankrupt. “Can you help us figure out how to change things so we can survive?” she asked. The business community responded completely. Companies like Coca-Cola and Georgia-Pacific put their best minds together to figure out how to solve problems. Within two years Atlanta was attracting businesses again.

Conerly: If you have a system that needs Superman or somebody who is just one notch below Superman to work, then you’ve really got a malfunctioning system.

Romero: If you look at the history of local and state economic development, you will find that most of the major success stories come out of a crisis, as in the Shirley Franklin example, as in the Vic Atiyeh example, and as in the Pete Wilson example. Under these circumstances, even a moderately impressive leader can marshal the forces to do more.

Shaw: If we extrapolate trends as best we can, we can conclude that we’re going to be in crisis at some point in the future. It is because we have fixed costs in our retirement programs. Thirty percent of our kids don’t graduate from high school, and eventually they are going to be on Medicaid. Maybe we will end up with a YouTube here and end up with lots of billionaires, and I hope that’s what happens. But do we have the kind of environment that in the past has created YouTubes? The answer is, we don’t.

BNW: Is our political culture too dysfunctional to create a positive atmosphere for business?

Romero: The major businesses of this state are not organized to pursue a cohesive agenda. Associated Oregon Industries (AOI), I think, has been a disaster in terms of representing more than a handful of businesses.

Conerly: So many of our large businesses are regulated: the banks, insurance companies, Regence Blue Cross, and the other health care companies. Those guys don’t want to bite the hand that regulates them. And those guys that aren’t highly regulated live in a world where what they do is circumscribed by government, like Nike. Nike is not a regulated industry, but what it does with its campus is pretty regulated. This results in a system where the corporate leader doesn’t rattle the cage of those in political office.

Shaw: Business in Oregon is libertarian by nature in the sense that they don’t think anything can be accomplished by government intervention, and they don’t believe their associations can accomplish anything either. Businesses in this state think we can’t do anything about the present situation. We’ve got the city of Portland, which has a high school form of government called the city council. We have a Potemkin mayor who doesn’t know what’s going on but feels that if he rides his bicycle through a red light he is going to get more votes. So the idea for business is, let’s not do anything. If you have a governor who doesn’t want to do anything, who doesn’t go to them and say, “I want to get something accomplished,” and who doesn’t perceive a crisis, you’re not going to get the people who are knowledgeable to even step up.

Romero: I have witnessed up close two major state fiscal and economic crisis: California in the early ’90s and Oregon in early 2000. In the first case, a governor basically browbeat a complacent legislature into passing changes that turned things around. Based on that experience, I wrote an op-ed during the ’02 Oregon election where I said that this is a defining moment. The electorate needs to be more concerned about the economy now than anytime in the last 10 or 15 years. This is the time for us to hold our gubernatorial candidates accountable. They didn’t do it.

Shaw: My experience is that strong leadership that understands what leadership is really all about, which in large measure in my opinion is marketing, can make a major change. A couple months back an article ran in the paper that said Kulongoski was absent without leave for two years and only in the last year has he become more active. Leadership is not being absent without leave. Leadership takes courage at times. Kulongoski is a very eloquent speaker. He can be very persuasive in front of a crowd. Does he have the courage to go ahead and choose a position? Any position?

Toward the end of Oregon’s ’07 legislative session, BrainstormNW will ask key members of the Governor’s Council of Economic Advisors to provide a mid-year economic review to assess progress. We welcome your comments and questions for the group.

BrainstormNW - December 2006