States Facing New Economic Realities

Capitol Ideas Growth and Prosperity Special Edition / April 21, 2011

The U.S. economy is at a turning point, economist Zachary Karabell says, and states must respond to the expected changes.

One only needs to look at the recovery following the Great Recession that many say ended in late 2009, and compare it to previous recessions over the past 60 years, he told an audience during The Council of State Governments’ Growth and Prosperity Virtual Summit.

“… Unemployment has certainly spiked as recessions have intensified, but really very quickly, within 12 to 18 months of it ending, employment has improved dramatically. That has been part of the cyclical nature of the economy,” Karabell said.

“At every other point, where we are now, there would have been substantially more hiring than we have today.” Karabell said.

Unlike many others, Karabell believes the U.S. needs to approach the current economic situation as a structural phenomenon, not as a cyclical one.

“We live in a system today where the United States is embedded and enmeshed in the global system,” he said. While the U.S. still has the largest single national economy, it is not the only player in that global system, according to Karabell.

The impact of that global marketplace can be seen by looking no further than the iconic American companies, IBM and General Motors. Both companies, he said, are seeing most of their most dynamic growth outside the U.S. In the 1950s, Charlie Wilson, a cabinet secretary for President Eisenhower, said what is good for GM is good for America.

Karabell said that’s not necessarily true today.

“Today, what is good for GM might be good for China, but it is not necessarily good for America,” he said. “And in many ways what is good for GM, in many respects, is not good for the American economy as a statistical entity, because what’s good for General Motors is following the most dynamic, fastest-growing, most-profitable, highest-margin opportunities for its business, which happen to be in China right now.”

But Karabell is quick to point out that even though those companies’ fortunes may benefit other countries, that doesn’t mean states don’t get benefits. State pension plans may have invested in those companies.

“Insofar as China is a source of growth for IBM and IBM is thriving, then the benefits of that will at least indirectly percolate back into the domestic economy by IBM shares going up and the pension obligations (of states) are able to be met,” he said.

“That frankly is a bit invisible in our national statistics, so it is not a pure zero-sum reality that these companies are thriving abroad even as they are reaching the limits of their growth and their need to employ in the United States. But it does have implications for the U.S. workforce.”

The bad news is that jobs are disappearing, and it’s not all due to failures. In some cases, Karabell said, it’s because the U.S. has been successful. In fact, the U.S. manufacturing output hasn’t declined as jobs have disappeared and actually remains the same as it was 40 years ago.

But today, as state and local officials tout the location of a new manufacturing facility, they’re talking about hundreds of jobs, not the thousands it would have brought 40 to 50 years ago. That decrease, he said, is because of technology.

“That’s not a reality of our structural economy that we have an easy discussion about, because it’s a much more complicated one to address than simply the externalizing our issues and blaming China, or as we did in the 1990s, blaming Mexico,” said Karabell.

Meanwhile, states and local governments have been creative in their thinking about the world. Even as citizens complains about loss of jobs to China, states are wooing Chinese companies to locate within their borders.

State leaders, he said, need to recognize that thinking of themselves “as part of that global nexus and not simply one of 50 distinct components of this nation called the United States is likely to create opportunities far more than not.”