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Eugene Gets the State University, Salem the State Pen. Why?

June 4, 2009

Why did Eugene Get the State University and Salem the State Pen? Salem Got First Choice
By Fred Thompson
Oregon Economics Blog

When unemployment rates are pushing 12 percent, it’s hard to remember that economic growth and development is not simply about jobs, but that is the case. The sine qua non of per capita growth is increased total factor productivity. At the local level, economic development means replacing less productive jobs with more productive jobs. And, that means growing or attracting high-value added businesses to a region, especially those that export their services to folks who live outside the area. These days, that means activities like product development and design, biotechnology, medical services, mass entertainment, and higher education, generally the kind of work that requires substantial investments in human capital and large doses of creativity and imagination. Two things it does not mean are agriculture and forestry and mining and manufacturing, at least not the fabrication component manufacturing.

This last observation is somewhat paradoxical because no other sectors of the American economy have experience higher total factor productivity growth than these over the last 100 years or so. But the simple fact is that these sectors of the econmy are now so productive that direct labor adds little value to most products, in high-tech businesses, often less than five percent of the total.

This fact is illustrated by the tale of two cities reported in yesterday’s Wall Street Journal, Ann Arbor, Michigan, with a population of 116,000, and Warren, Michigan, population 126,000. Ann Arbor is the home of the University of Michigan; Warren is a factory town. “In 1979, the average family in Warren made $28,538 annually, not much below Ann Arbor’s average of $29,840.” By 2007, before the recent layoffs and plant closures, Ann Arbor’s average of $106,599 had nearly doubled Warren $60,813.

This is a general phenomenon. We know that manufacturing plants are disproportionately located in minority or poor communities. The environmental justice literature argues that this is because businesses disproportionately chose to site manufacturing plants in minority or poor communities. Recently, however, Ann Wolverton looked at the characteristics of those communities at the time the plant location decision was made, taking account of several variables that are important to a plant’s location such as land and labor costs, the quality of labor, and distance to rail transportation. What she found is that, although communities accommodating manufacturing plants now have significantly higher minority and poverty populations, they were not generally poorer and definitely did not have higher minority populations on average when the plants were built. Indeed, according to Wolverton, poverty is generally a deterrent to plant location. The clear implication is that manufacturing plants are linked to poverty, not because poverty attracts them, but because they attract poverty, i.e., they retard local economic development. Similar results have been reported for farms and military bases.

Last year, Willamette University’s Center for Governance and Public Policy Research looked at the economic development of Salem and Marion County. We found that entities like Salem Hospital and Willamette University, even the state prisons (they have high-value added jobs and higher average wages than most of Oregon’s universities, provide services to the whole state, produce small negative spillovers), are the leading contributors to its economic growth. Statewide, one might infer that among Oregon’s more important engines of development are the major state universities – University of Oregon, Oregon State, Portland State University and Oregon Health Sciences University. Over the longer term, however, the state’s productivity growth depends upon the effectiveness of its elementary and high schools – high-productivity jobs are high skill jobs.

Oregon’s legislators should keep these facts uppermost in their minds as they practice the budgetary triage needed to cope with the current fiscal situation. Nobody wants them to be penny wise and pound foolish.

By Fred Thompson
Oregon Economics Blog

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