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BBA Economic Digest: The Great Decoupling

Photo by Alfred T. Palmer

The Great Decoupling Continues

Press reports from Washington indicate that members of Congress are discussing ways to prompt American companies to move operations out of China.

This could, and let me stress could, have major ramifications for communities nationwide were this to actually happen.

China remains the epicenter of much of the world's supply chains. Cutting ties could take years and possibly inflict short-term economic pain.

One idea being floated around is that of a $25 billion “reshoring fund” to encourage U.S. companies to drastically revamp their relationship with China, Reuters reports. President Donald Trump has long pledged to bring manufacturing back from overseas, but the recent spread of the coronavirus and related concerns about U.S. medical supply chains dependency on China are “turbocharging” proposals now being discussed.

The Senate last week approved a legislation that would require foreign companies to follow U.S. accounting standards, or otherwise certify that they are not owned by a foreign government. The measure is clearly aimed at China. Companies may be banned from listing their shares on a U.S. stock exchange for noncompliance.

Both Republicans and Democrats are crafting bills to decrease U.S. reliance on China-made products, which accounted for some 18 percent of overall imports in 2019.

Meanwhile, a new survey by industrial data and tech company Thomas shows that nearly two-thirds of more than 1,000 North American manufacturers say they are likely to bring production back to the continent.

The U.S. manufacturing sector had seen a minor return stateside in recent years, but since March, the share of North American manufacturers who say they are interested in bringing their operations home has leapt 10 percent to 64 percent, Thomas found.

A Political Football

Virtually all state and local governments operate on balanced budget provisions. And while that may sound great, it can a reduction of services and even layoffs during economic downturns.

So far state and local governments have laid off about 1 million workers because of the pandemic, which will likely weigh on the nation's economic recovery, Federal Reserve Chairman Jerome Powell told the Senate Banking Committee last week.

Powell acknowledged that huge job losses across the country are possible as state and local governments are forced to make their books come out even. "13 percent of the workforce is in state and local government," Powell said. "Critical services are at state and local level, and balanced budget amendments mean that when revenue goes down, it can mean job cuts." Millions more jobs could be lost later this year -- even as the economy begins to reopen. Funding states' budget gaps has become a political football.

In February, Ohio was running a $200 million budget surplus. Two months later, as tax revenue plummeted and public health expenses skyrocketed because of the coronavirus pandemic, the state faces a $777 million hole.

A coalition of five Democratic governors said last week that state and local governments will need $1 trillion in federal relief or they will be forced to decide between funding public health care programs or laying off teachers, police and other workers.

Here in Dallas where I live, the city projects to lose more than $50 million next fiscal year which begins on Oct. 1. The city has already furloughed 472 workers.

Photo by Luca Bravo

A City Needs Both

Big cities have long had a bad rap as cesspools of disease, an image that aligns with prejudices about poverty and race and crime. Thomas Jefferson wrote that cities were “pestilential to the morals, the health, and the liberties of man.”

Pandemics, to be sure, aren’t particularly good for a city’s brand. According to one recent poll, nearly 40 percent of adults living in cities have begun to consider moving to less populated areas because of the coronavirus outbreak. When New York City became the country’s biggest hot spot, many experts blamed its population density. With 28,000 residents per square mile, New York is far more crowded than any other major city in the U.S. But many “hyperdense” cities in East Asia have been able to contain their outbreaks. Even in New York, the densest borough, Manhattan, has some of the lowest rates of infection, while Staten Island, the most spread-out borough, has some of the highest. More important factors are likely household overcrowding, poverty, and participation in the work force.

“It’s not that there are too many people in cities,” Mary T. Bassett, director of the FXB Center for Health and Human Rights at Harvard told The New York Times. “It’s that too many of their residents are poor, and many of them are members of the especially vulnerable black, Latino and Asian populations.”

The Times editorial board argues that our big cities are broken because affluent and Americans are largely segregated from each other.

The Greek philosopher Plato wrote in “The Republic” that “any city, however small, is in fact divided into two, one the city of the poor, the other of the rich.”

Even in ancient Greece, inequality was a fact of urban life as it is to day. This pandemic should reveal that the haves and the have nots actually need each other. The rich need labor and the poor need capital. And a city needs both.

Living on the Edge

JPMorgan Chase CEO Jamie Dimon said last week in a memo to shareholders that the coronavirus crisis should be used to build an economy that offers opportunities for “dramatically more people.” “The last few months have laid bare the reality that, even before the pandemic hit, far too many people were living on the edge,” Dimon said. My take: Dimon speaks truth. Since the pandemic took hold in the U.S., 36.5 million people have filed unemployment claims, and the toll has hit lower-income workers hardest: Nearly 40 percent of households with incomes of less than $40,000 have reported a job loss, according to Federal Reserve. “Unfortunately, low-income communities and people of color are being hit the hardest, exacerbating the health and economic inequities that were already unacceptably pronounced before the virus took over,” Dimon said. “An inclusive economy – in which there is widespread access to opportunity – is a stronger, more resilient economy,” he added. “This crisis must serve as a wake-up call and a call to action for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years."

Three Revealing Surveys

What will the world look like once the pandemic has passed? What are the top concerns of business leaders? Those are questions that economic developers everywhere should be obsessed with.

In its annual survey of CEOs of Fortune 500 companies, Fortune Magazine asked about some of the predictions being floated these days about how things will change. Among the findings:

  • Only 27 percent expect their workers to fully return to their usual workplaces this year.

  • A majority believe it will be the first quarter of 2022 before overall economic activity returns to levels reached before the pandemic, and another 27% don’t expect that until the first quarter of 2023.

  • Most say business travel at their company will never return to levels reached before the crisis.

  • Despite the economic impact, three-fourths believe the crisis will force their companies to accelerate their technological transformation.

In another survey, the World Economic Forum, Marsh & McLennan and Zurich Insurance Group asked nearly 350 senior risk professionals from large companies around the world as to their chief concerns.

Two thirds said a protracted global recession was the "most worrisome" risk. The report also flagged increased inequality, a weakening of climate commitments and the misuse of technology as top risks arising from the Covid-19 pandemic.

Deloitte’s latest CFO Signals Survey gives a sobering indication of how long it might take for conditions to return to normal. Among the findings:

  • 60 percent of the executives surveyed do not expect operations to return to pre-crisis levels until 2021 or later.

  • CFOs said they are primarily focused on cutting costs instead of growing revenue, as companies look to shield against the downside amid the pandemic.

  • They overwhelmingly expect more employees to work remotely, leading to companies having smaller real estate footprints.

I never really understood why some economic developers fall over themselves to listen to consultants, when they can read the business press and learn what the top business people are saying. And, yes, I say this as a consultant.

My Not-So Intensive Insights

Speaking of being a consultant, in this 41-minute "deskside chat" (you may want to make popcorn) with Amelia Stehouwer of Auburn University's Government & Economic Development Institute, I give you my take on the meaning of life.

Well, that's actually not true. But I do speak about the essence of economic development along with a whole lot of other stuff. Now I know what you're thinking -- "I've got better things to do than watch Dean prattle on for 41 minutes."

And so you do, which is why Auburn gives you a choice. You can watch me in a webinar. Or you can listen and drift off to sleep. Or, and this might be your best bet, you can read the transcript. Dare make your choice here.

In keeping with one of my drumbeat themes of late (Amelia says I remind her of a preacher), I criticize the business recruitment-only model as an unbalanced, inefficient approach to economic development. Can I get witness, brothers and sisters?

History can be a great teacher on how we should respond. I also speak about a steep fall of foreign direct investment, but add that rejiggered supply chains will create opportunities for re-shoring. I talk about why Covid-19 will accelerate automation, with the less skilled becoming more vulnerable to job loss -- which is why upskilling is paramount for communities to remain relevant.

The extraordinary good work of certain companies and economic development organizations, particularly those offering emergency loan funds to small business, is something that I talk about. Rural broadband development, a subject that I've been preaching about for sometime, comes up, and I speak to the need for more leadership from federal government, citing rural electrification as the model. Finally at the very end, I divulge my favorite Texas-made beer. So there you go.

What We're Reading and Watching (A Covid Free Zone)

Song Around The World Ripple (Above)

This Is How Hard It Is to Invest in Black Neighborhoods CityLab

Things Inside This 105-Year-Old Time Capsule Have Hardly Atlas Obscura

How two guys built a $13M revenue e-bike company in a year Electrek

This is SpaceX’s big chance to really make history

MIT Technology Review

10 Skills to Master Before Launching a New Business