Understanding the Global Competitiveness of the Midwest Rick Mattoon Senior Economist and Economic Advisor Federal Reserve Bank of Chicago CIC/CASIC April 1, 2011

What defines competitiveness? Proposition: success (economic growth) is a function of capital + labor + total factor productivity (or the efficiency with which capital and labor are deployed) The question therefore is what is the Midwest stock of capital and labor and are their barriers to the efficient deployment of these components of growth? Finally, is there a preferred form of growth? We will come back to this.

Indicators of Capital Assets Industry structure Investments Infrastructure

Industry structure Industry-level employment data are available at an annual frequency measuring full-time and part-time employment. The industry structure is created by dividing major sector employment by total employment. Source: BEA

1997–2006 Change in GSP Per Capita Source: BEA/Census

2005 Research & Development by GSP R&D expenditures reported for the FY2005. Expenditures calculated as a ratio per $1,000 GSP for Source: NSF/BEA

2005 Venture Capital Calculations made for venture capital financing per $1,000 GSP. Source: Indiana Chamber $85 $80 $75 $70

Foreign Direct Investment, 2007 Excluding Indiana this represents 15% of total foreign investment These 8 states have 23% of total employment by foreign firms Source: BEA, International Economic Accounts StateGross Property, Plant and Equipment (millions $) Employment Illinois48,626273,300 Indiana(D)141,600 Michigan24,062150,600 Ohio43,438231,600 Wisconsin14,56084,300 Iowa9,47648,200 Minnesota16,23797,200 Pennsylvania39,824263,500 U.S.1,293,7355,593,500

Indicators of Labor and Human Capital Need for appropriate human capital Issues of production, retention and attraction

Human capital Current stock Future trends

Population Projections— Big 10 Region

Educational Attainment Degrees attained as a percentage of total population. The population of 25 years and older is depicted here (data for the population of 18 years and older are also available). Source: Census

2005 College Attainment, by OECD Country, Younger & Older Adults Data are available by country (OECD or partner economies) and age group on an annual basis. Data can be divided into various levels of educational attainment. Data presented are the percent of the population that has attained an associate’s degree or higher. Source: OECD

2005 College Attainment, by State, Younger & Older Adults Annual data available for age groups and their educational attainment. Varying levels of education are available. Depicted are ratios of adults with an associate’s degree or higher over total population of that age group. Source: Census

1990 to 2000 Change in Existing Stock of Bachelor’s Degrees Data calculated removed those bachelor’s degrees awarded during the period. Population consists of ages 25–64. Source: NCHEMS

2004 Innovation Assets—Doctorates in Science & Engineering A measure in innovation assets includes the number of PhDs per 1,000 workers in science and engineering. Source: CFED

2004–2014 Change in Occupations Requiring Postsecondary Training U.S. 2006–2016 percent change is projected to be up 16%. Data by occupation available, but no historical series provided. States with unavailable data are DC, KS, TX, & VA. Source: Career Infonet

2005 Graduation Rates Data are available outlining the various completion lengths of students attending degree-granting institutions. Data include breakdowns in ethnicity and gender as well as some distinction among certificates awarded. The figure depicts the graduation rates of students in four- year institutions that take up to six years to complete their studies (or 150% of the normal time). Source: IPEDS

Production and Retention of Graduates Compiled of the New Economy Index, IPEDS, ACS, and the 2000 Census, this quartile chart divides the production and retention level of educated capital. The New Economy Index is described in later slides. It consists of a scoring that rates each state’s performance in categories that are part of the main drivers of the current economy. Source: Census/NCES/ITIF/NCHEMS High Production-Capital ExporterLow Production-Capital Exporter High Production-Capital ImporterLow Production-Capital Importer New Economy Index (2002) Top Tier Middle Tier Low Tier Import/Export Ratio of 22- to 29-Year-Olds with an Associate's Degree or Higher Production of College Grads (Undergrad Credentials Awarded per 1,000 residents ages 18– 44 with HS Diploma or some college but no degree)

Turning to TFP Are there barriers to efficient regional operation? Probably not in capital Standards harmonization in occupations, transportation, taxation, regulation In-state vs. out-of-state tuition

Do we have the right geography/form for growth? The world is an increasingly urban place Glaeser, “Triumph of the City: How our greatest invention makes us richer, smarter, greener, healthier and happier” What are the successful cities in the region? – Chicago, Minneapolis, maybe Pittsburgh – What about the rest? Is part of this a need for an urban strategy Do we need a Midwest “eurozone”?

Long term growth in income versus job/pop growth: Who are the Great Lakes winners? Winner? CHI merely on the continuum?

A possible economic development paradigm for refocusing competitiveness Brookings—Urban focused, export oriented and green Gap is that trade is not just international but also inter-regional and intra-regional Has to have a human capital component. A 10% increase in college grads in a metro area raises wages by 7.7% (across all education levels) Policy focuses on barriers to trade wherever they might exist. Improve capital and labor efficiency

Population, Innovation Commercialization, Patenting and Doctorates Awarded, MSA/CMSA2000 Population SBIR/STIR Grants ( ) $ 000s/year Venture Capital ( ) $ 000s/year No. of IPOs No. of Patents per Year No. of Science and Engineering PhDs (2001) Chicago9,1587,214116,416382, Detroit5,45610,40219,442162, Indianapolis1, , Milwaukee1, , St.Louis2,6042,37241, U.S average3,2499,644110,606211, Boston5,81996,916608,997773,3691,314 San Diego2,81426,548169,727321, San Francisco 7,03942,3461,872, ,9301,291

Midwest Economic Integration Geoff Hewings, University of Illinois/REAL IO model – Findings Domestic trade is far more important than international trade for Midwest states Trade is highly dependent on other Midwest states Midwest trade between Midwest states was $450 billion in 2007 (7 th in the world)

2007 Trade StateDomestic trade (000s $) Foreign trade (000s $) % Foreign% US% Domestic/ Midwest Illinois399,91348, Indiana252,02325, Michigan226,87544, Ohio369,82442, Wisconsin172,12518,

As one state goes… StateJob losses% of indirect impacts Illinois-419,000 Indiana-14, Michigan-11, Ohio-12, Wisconsin-9, Rest of Midwest-46, Rest of US-188, Total-653,

Conclusion The future of the Midwest requires an economic development strategy that enhances competitiveness by recognizing the region’s integration, removes barriers to trade, encourages productivity and is urban focused The Midwest won’t grow faster, so it must grow smarter