Politics aside: Getting a handle on Oregon's struggling economy

Politics aside: Getting a handle on Oregon's struggling economy

PORTLAND, Ore. - It’s election season, and that means the campaign rhetoric is at full-throttle.

In Oregon’s governor race, a hot topic is jobs and the economy, and Republican Chris Dudley and Democrat John Kitzhaber have their theories on the state’s economy and how it should be fixed.

It’s times like these a nonpartisan voice can be helpful in allowing us to step back and look at the big picture. On Wednesday, Sept. 29, I interviewed Tom Potiowsky, Oregon’s economist, by phone for about 25 minutes to get his thoughts on the economy. It’s his job to put politics aside and inform lawmakers, the governor and the public on the economic state of the state through quarterly economic and demographic forecasts.

Recently, he and other economists have had the unfortunate task of delivering bad economic news and forecasts to state legislators. In his August forecast, Potiowsky announced that state revenues would fall short by $377 million.

In my interview with Potiowsky, we discuss some of the factors that affect Oregon’s economy both here and abroad.

He says there are bright spots in Oregon’s economic recovery, but the bottom line is it’s going to take time for the state to fully recover from the devastating national and international recession.

Q: The politicians have their theories as to why Oregon’s economy is in the tank, and they have their reasons for them, but from the viewpoint of an economist, what factors contributed to the downturn of the U.S. economy and of Oregon’s?

A: Well, really it was the demise of the housing industry that first started the ball rolling, and then the amazing financial crisis, really what was now in hindsight was various financial assets that were really absolutely worthless. And that worthlessness came to full fruition and really caused the downturn in both national, international (economies) and Oregon was not immune to these factors.

Q: How do you think the federal stimulus helped Oregon, if at all?

A: It helped, just like, I think, it helped just about every state where it was spent in. You have spending by businesses really starting to shut down. And this maybe was not a very large shot in the arm, but it was a shot in the arm to help businesses revive a little bit. So, it helped but it wasn’t enough to stave off the recession.

Q: What specific areas in Oregon did it help?

A: If you go to the Oregon.gov website you can see all – it’s listed by counties on an Oregon map – and where money has been spent. So really, it kind of touched all the counties overall. And so (it’s) hard to say which ones where helped more or less by the stimulus package, but all received some money.

Q: Any specific industries that were helped?

A: Well, probably things like construction because there was a lot of infrastructure-type work, whether it be retrofitting buildings to make them earthquake protective, undertaking water supply upgrades, highways, bridges. So in a very rough sense, construction was helped out a little bit. But even saying that, construction was hit so hard that even this wasn’t able to reverse the tide of a huge drop in construction jobs in the state.

Q: With all this federal stimulus spending, we hear people concerned about the federal government spending itself into a huge debt and then passing that debt onto later generations. What is your take on that and how bad is that going to affect the overall economy of the U.S.?

A: We’re in a situation where we really hadn’t seen this type of financial crisis in quite some time, basically relative to the Great Depression. And we threw everything at it and the kitchen sink. So, the consequences of that is that we ran up a tremendous amount of federal debt.

So going forward, how do we take care of this? I think we have to be kind of careful and maybe take out a page of history. We really ran up our debt quite high in World War II, and we got that down as a percentage of our economic activity over time, but it took quite awhile.

So I think we’re going to see the same thing with this. If we’re a little bit careful and kind of get this down we should be able to get out of this. The danger is if the economy can’t kind of pick itself up or we have Congress pass even further packages that have much longer-ranged spending plans, then it gets a little bit more dicey.

In the end the worry is that future generations may be faced with higher taxes in order to help out the generation before them to get out of this mess.

Q: After World War II there was a lot of stuff that was happening. People were coming back from the war and were starting families, and they started building America back up through manufacturing and other things. What kinds of things may be happening after this recession that might really help us get going?

A: What we need is to get back to a level playing field. And what I mean by that is we had so many things out of whack. We have way too much housing supply relative to housing demand. We’re getting housing prices to come down. We’re not building as many houses. We’re starting to get the supply to come down. So once those things get into more of an equilibrium, then I think we’re set to start to grow.

Households are getting their debt house back in order, so they’re retiring debt. All this really slows down our economic activity, but it’s a sign of health getting to that point.

So the tricky part is can we get through this OK, and it’s going to be a long, long road before we get a robust recovery.

For example, we’re looking at the Oregon economy not really getting off its seat until probably when we start getting into the second half of 2011. And we’re probably not going to return to the same level of employment that we had just before the recession hit until we are probably well into 2015.

So that’s a very long, slow road to recovery, but this is not uncommon having faced coming out of a financial crisis.

Q: Why is it, do you think, the state has higher unemployment than the nation as a whole?

A: Well, it still is somewhat of a mystery overall. But historically, if we look at it, on average, Oregon tends to always be about one full percentage point above the U.S. average. And that’s right about where we are right now. … So we’re about where we should be, historically.

The bigger question here is why is that? Some people have chalked it up to the type of economy we have, which we tend to have an economy that basically makes things. And when you have a manufacturing-based economy, it is much more volatile through the business cycle.

Likewise, we have a huge mix of rural and urban areas. Some of the rural areas tend to have higher unemployment rates throughout time.

There’s so much dependence sometimes on one particular industry. And so if something happens to that there aren’t very many options for people to go someplace else.

We generally have a higher population growth than the U.S. average and so trying to assimilate those people into the workforce in terms of being employed may take a little longer. …

Q: I’ve read somewhere that Oregonians tend to like Oregon and stay here even if they’re out of work, so they kind of don’t move elsewhere to find new work. So would that also be a contributing factor do you think to high unemployment?

A: That is. What we find is that people kind of hunker down all over. The whole pattern of migration starts to really kind of slow down as you get into recessions, except if you have regional differences of recession where you have one region which is still somewhat growing and another region that is not. Then you tend to get the migration patterns. But when you get a recession like this that’s across the whole U.S. you don’t get that much movement going on.

Now back in the early 1980s, I think it was 1982, Oregon lost population. That’s the last year (the state) lost population – given that horrible recession back then. Our population growth really slowed down this recession but we’re still adding people – not the rate we used to do. But that’s probably a contributing factor.

Q: I’ve heard many economists and commentators, I’m specifically thinking about (Paul) Krugman, where he says that there’s not enough consumer demand in the economy. Do you agree with that and if so, how do we get more consumer demand?

A: Well, we used to think that no one can spend money like Americans can. We’re the best in the world at it, but this recession has really changed, I think, households around, and they’re being very much more careful with the dollars that they do have.

So, to get them to spend again, you need to have them feel more safe about their jobs, about the outlook of the economy, and I think that will be the way that we’ll start to see that spending starting up again.

You want to keep in mind too, not only do you have from people’s perspective that they are reluctant to spend, but from the institution perspective of giving them the funds and credit to spend. That also has decreased quite dramatically.

So you can’t go in and put an ‘X’ down on the piece of paper and they give you a mortgage these days, you actually have to show a source of income. So that’s a change of what we had in the heydays of the housing boom.

So just the ability to spend, being able to get the credit and so on, that’s also much tighter. So you’ve got two things going that are keeping the spending down. They’re both, by the way, starting to loosen up, but it’s going to be a long road before they truly do.

Q: And is that loosening up something that has been guided by government or is this something that is really kind of working itself out through the market? Or is it a combination of both?

A: It’s probably a combination of both. I think that the government was able to stave off another repeat of the Great Depression, but we also had one of the worst recessions we’ve seen since that downturn in the 30s. … If you want to see something good about this is that when the spending comes back, it should be having a stronger basis to it rather than a made up or make-believe basis that we had basically from 2004 to 2007. …

People are doing it (spending) off of their incomes, not off of pie-in-the-sky credit that if the deck of cards fell, they were going to go under. And that is what happened.

Q: Even though our unemployment only increased by roughly 5 percent since the beginning of the recession, how does that cause so much lost revenue?

A: We’re an income-tax based government, and of course our neighbors to the north (Washington) is almost exclusively sales-tax based. And this time around as the economy dips, as people lose jobs, of course they’re losing income, and if they lose income they are not paying income taxes.

In a way, there’s almost an automatic cut in taxes. It sounds strange to say it that way but as people lose jobs and so on, they don’t pay as many taxes. So their taxes don’t stay at the same rate they were while they had the income and they don't have to keep paying that amount, they pay much less, and so as you have this sweeping recession across almost all our industries and with the unemployment rising, people lose jobs, people lose income, they don’t pay the income taxes.

Q: In Washington, they’re more on a sales tax, when they lose income and their incomes go down, I’m assuming they are spending less money and, therefore, they’re going to have a decrease of revenue in that state as well, why is it so much bigger for Oregon?

A: What you want to think about, and this recession by the way is a bit different than past ones, because this one consumers really did drop their spending dramatically. And so a state like Washington got hit, basically, much harder than they did in past recessions in terms of their tax revenues.

If you think about it, income goes up and down. You know, it’s got a cycle to it, through the business cycle. People’s spending has the same up and down but it’s fixed a little tighter. It doesn’t generally dip as much, and it doesn’t generally rise as much because what people will try to do is smooth out their consumption.

So in down times they may start to what we call dis-save. They’ll go into their savings so that their spending doesn’t fall as far as their income.

But possibly in good times, they do increase their spending, but may be they’ll also increase their savings a little bit.

So the consumption tends not to be as volatile as income and consequently if you’re a sales tax state, your tax revenues tend not to be as volatile as an income tax-based (state).

And I say that is the usual case, but this recession is kind of unique because this time consumers not only when their income went down, they really cut their spending dramatically.

Q: Turning to foreign trade. I’ve heard terms like absolute and comparative advantage thrown around when talking about how the nation trades with the rest of the world. I’m curious, can those terms be applied to Oregon and how it trades with the rest of the world and how it trades with other states? If so, what does Oregon have an absolute and comparative advantage in?

A: When we talk about absolute advantage, we’re really talking about a product that Oregon would have that really no one else has, or if they could have it would be at a much higher cost than ever could be done in Oregon.

We’ve got a little bit of that possibly in forest products. We’ve just got a great place to grow trees. We probably do it at less cost here than a lot of other places, but having said that, it depends on where you part the trees and which ones you look at, because you can have quite a bit of competition, for example, coming from the southeast of the United States in terms of various wood products, and also around the world – Canadian wood products are competing very strongly.

So we probably don’t have what we call an absolute cost advantage in tree growing but it’s somewhat close to that.

Otherwise, it really, I think, comes down to comparative advantage. We do fairly well in the computer chip area. Some people might feel that China or Vietnam, that they’re able to produce chips cheaper, but we can do that here, maybe at somewhat a higher price, but we can produce a whole lot of chips with a very productive workforce and a lot of capital.

Our trade overseas is strong in that area, in computer chips, and likewise in some of our agricultural products. That might be a little tougher for them to do over there, but the tide is changing a little bit, especially in the orchard area. China is developing apples, pears and things like that that may in the end compete very strongly with the products up here in the Northwest.

Q: Can Oregon really compete in that area?

A: I think we can really compete but you know we have higher labor costs up here, but in essence we have lower capital costs. So we tend to be a little bit more capital intensive and the labor that we pay for tends to be more productive, given the capital it can work with.

So we’ve got some advantages there in the type of products that take a lot of capital investment as opposed to products that are mostly labor intensive.

Agriculture has really kind of turned to being a little bit more capital intensive – in terms of farm machinery, water systems – so there’s been less and less labor needed to those farm products.

At the same time, you can have labor being very cheap, for example, in China – lots of available labor, but very little capital. So, although you’re paying them less, their productivity also is much less.

We do the things that we have a capital intensive nature to, and then we trade in the things that mostly have a labor intensive nature to them.

(But) a place like China is becoming more industrialized (and) is having more capital with their labor to work with. Thus, they (will become) much more competitive.

I think our comparative advantage right now is we’re innovators. We start new products and that’s what we export out, and once that gets to a point of being mass-produced then it moves over offshore.

And in Oregon, we’re still innovators here, possibly the green-sustainability-building movement is where we have a comparative advantage. To what extent that adds to more jobs is still kind of a question mark, but as around the world they start moving more and more in this (green) direction, we may see more fruits to having that comparative advantage in that area.

Q: I was reading your latest (economic) forecast and it appears that Japan is a declining (export) market for Oregon but China is an emerging market. Is that correct?

A: Yes. You know, what we’re seeing with Japan is that it’s a very mature market. Of course, it’s been having some tough times over the last couple of years. China, it wasn’t even one of our top-20 trading partners, say back in 1995. It is now our top trading partner.

But I would still say that even though Japan is somewhat declining, it still is an important trading partner for us – within our top three or four countries that we trade with.

Q: Do you think the fact that computer product exports make up almost half (45 percent) of all Oregon exports, do you think that might be a problem if for some reason on the world market something goes wrong and we’ve put all our eggs into one basket?

A: It can. You know, you want to keep in mind when the recession hit that that segment of exports fell dramatically, and we had exports down in this recession well over 40 percent overall, and a lot of it was due to the steep fall in the computer and electronic products.

Interestingly enough, as the Pacific Rim countries weren’t quite hit as badly in this world recession as a lot of other countries were, they started to pick back up in importing Oregon products and we’re almost back to the peak of our exports that hit just before the recession. We’re almost back to that point now.

Tom Potiowsky is on leave from Portland State University while he serves as the state’s economist in the Office of Economic Analysis. He was the chair of the economics department at PSU and holds a Ph.D. in economics.