Second Opinions

Seeking professional advice for Oregon's ailing economy

In a June 5 Oregonian op-ed, Tim Duy, University of Oregon economics professor and director of the Oregon Economic Forum, looked back over the past twenty years of Oregon's economic woes, lambasting the too-rosy growth projections underpinning the state's present catastrophic budget shortfalls. Job gains made in Oregon during the tech boom of the late 1980s and '90s have been almost completely wiped out by job losses sustained during the 2001 and 2008 recessions, Duy wrote. Wages, sub­­mediocre even at their high point—94.3 percent of the U.S. average in 1997—have shrunk considerably, to a meager 89.4 percent of the U.S. average as of 2008 (which should be noted is not a B-plus, but rather a fraction of a C grade). With positive job growth recorded for the first time since early 2008, the state's latest Economic and Revenue Forecast contends that the recession has bottomed out here as elsewhere in the country. But with Oregon taking thirty-fourth place in the national Blue Chip Job Growth rankings, job growth here remains relatively sluggish, and it is not expected to exceed 2 percent until 2012. In short, over the past two decades Oregonians have become steadily poorer and less economically secure in relation to their national counterparts, and this trend continues.

Contemplating these figures, I felt a familiar sense of frustration. I'm used to hearing that the region's economy is going to hell, especially lately. Yet the stock diagnoses and remedies for this problem, whether they originate from left, center, or right, always seem tainted by essential flaws. These include circular logic (by funding education, we can grow the economy in such a way that we can afford to fund education), questionable factual assumptions (Oregon's tax and regulatory structure is unfriendly to business relative to that of other states), and, most sadly, reliance on a political system that's unequipped to act (the economy is being destabilized by a dysfunctional public finance system that needs to be—but seemingly never will be—reformed). What was I missing? Did better solutions exist?

Of course I couldn't find answers to these questions in any simple way, but with the backing of Oregon Humanities, I could at least start a few illuminating conversations.

I approached eight people, some who influence regional economic policy on a daily basis, others who bring alternative perspectives to the subject, with this question: “What advice would you give Oregon's next governor to strengthen the regional economy in 2011 and beyond?” The results of the ensuing conversations, which I've summarized below, don't add up to a cure-all prescription for Oregon's economic ailments, but they do point to what I consider significant findings: though not every assertion I recorded clearly lined up with facts, fresh, cogent thinking about Oregon's economy does exist.

1. Invest in green

Relative to investing in general infrastructure such as highways and schools, subsidizing individual firms and industries is a pretty marginal, poorly assured way for governments to spur economic growth (even if it generates some jobs, a subsidized wind farm can go bust). Nonetheless, people who think about Oregon's economic challenges spend little time talking about roads and lots of time talking about specific industries to target for growth, and there are good reasons for this. Namely, the benefits they produce are measurable and, well, targeted: unlike a highway, a wind farm at least has a chance of producing a discernible number of jobs at discernible (and high) wage levels, inching the economy in the direction we want it to go.

Choosing target industries is like betting on horses, and when asked if there was a way to objectively vet such recommendations, Joshua Lehner, a numbers guy with the Oregon Office of Economic Analysis, laughingly assured me there was none. But the same five “target” industry-clusters get touted repeatedly, whether you consult public agencies, such as the Portland Development Commission and Business Oregon (an office of the state government) or the private Oregon Business Council. The latter's widely cited Oregon Business Plan makes a case for these generally representative picks: (1) clean tech, particularly energy-efficient building and renewable energy; (2) advanced manufacturing, including metals, machinery, and transportation equipment; (3) athletic/outdoor gear and apparel; (4) natural resources, including agriculture, nursery products, and timber products; (5) “hi-tech,” meaning primarily semiconductor chip manufacturing, an industry that continues to contribute meaningfully to the region's economy despite deep job losses in the past decade.

Our participants enthusiastically endorsed two of these picks, starting with clean tech. Participants told me that unlike certain overhyped economic panaceas of the past (e.g, hi-tech), sustainability is intrinsic to the region's culture, and some of our homegrown firms and industries are already taking a national and global lead.

“It's such a good fit for our values, history, and creativity,” says Erin Flynn, urban development director for the Portland Development Commission (PDC). Industries such as energy-efficient building and clean energy are already far enough ahead of the curve that many people, Flynn says, “share the vision that Oregon can become to energy-efficient building what the personal computer was to Silicon Valley.” Oregon's relative lack of large research universities and ready capital make our path more challenging than Silicon Valley's, Flynn admits, but that reality shouldn't stop leaders from working creatively—and swiftly—to further consolidate our lead. “If I were the governor, I'd be putting massive amounts of money into demonstrating how a state, and a major metro area, can become more energy-efficient than any other place in the U.S.,” Flynn says.

David Chen, principal of Equilibrium Capital, a Portland-based venture capital firm specializing in investments in sustainability practices, also believes Oregon has “a tremendous leadership role to play” in the sustainability field. His figures show that several wind-industry firms worth several hundred million dollars apiece—Iberdrola Renewables, Vestas, Horizon Wind Energy, SunPower, and Element Power—are located here, as are more than forty companies involved in producing energy-efficient vehicles and transportation infrastructure. Oregon is poised to dominate in these and other areas, such as land planning and management, water management, environmental services, and urban design, he says.

But other participants touted Oregon's strengths in another set of “green” industries: natural resources. The numbers don't necessarily back up this assertion: a roughly $4 billion industry in Oregon, agriculture represents a mere 2.5 percent of the state's GDP; wood products make up only an additional 1.5 percent, a dramatic drop since the 1960s and '70s, when that number was 11.2, on average. However, Francisco Lopez, executive director of the Salem-based immigrant rights coalition CAUSA, says agriculture is an underappreciated player in Oregon's economy, deserving of greater public support. During the high-tech boom, “we literally abandoned local economic development—growers, farmers, nurseries, and others who were doing a great job,” he says. Moreover, despite job losses caused by mechanization and other factors, the timber industry is far from dead, says Ron Fox, executive director of the Medford-based nonprofit Southern Oregon Regional Economic Development Inc (SOREDI). Oregon is still the nation's biggest producer of wood products, and though dimensional lumber mills may be going the way of, well, old-growth forests, Fox says, “We still grow the same volume of trees, maybe even more, because of better management practices,” in Josephine and Jackson Counties, and those raw materials are being turned into high-value products.

Carl Abbott, urban historian at Portland State University and author of How Cities Won the West: Four Centuries of Urban Change in Western North America, concurs that although natural resources industries play a smaller role in Oregon's increasingly diversified economy than they once did, they remain essential to Oregon's past, present, and future identity. The challenge today is to figure out how to use our natural resources more effectively—as Oregon firms are already doing, Abbott points out, by making high-value beer and wine from locally grown hops and grapes, transferring cheap hydroelectric power from the defunct aluminum industry to burgeoning Google and Facebook server farms in the Dalles and Prineville, and, perhaps next, using forests for biomass fuel.

2. Invest in innovation—but warily.

Oregon's current governor has made innovation the central feature of his economic growth-catalyzing initiative, the Oregon Innovation Council (Oregon InC). Our participants echoed the belief that innovation is an essential driver of economic growth—the driver, arguably, as, globally, dwindling natural resources force drastic reconsiderations of how to meet increasing human demands. But their opinions differed as to how public policy should support this rather abstract principle.

John Morgan is a member of Governor Kulongoski's council and CEO of HemCon, one of the country's fastest-growing medical technology firms, whose primary product—a bandage derived from shrimp shells—was developed in a government-funded lab. Notwithstanding his own company's interests in supporting such endeavors, Morgan argues that it's the public that benefits most from the “venture-like returns” of public investments in innovation. Funds funneled by Oregon InC into science/technology R&D; initiatives—such as the Oregon Nanoscience and Microtechnologies Institute, the Oregon Translational Research and Drug Development Institute, the Oregon Built Environment and Sustainable Technologies Center, and Oregon Wave Energy Trust—have generated “nine to ten times what we've invested ... in grant funding and new commissions,” he says. The state's public financing troubles could threaten the continuation of the program just when it should be expanding, Morgan warns.

But Abbott cautions against being “seduced by the buzz” when it comes to putting public dollars into the latest futuristic industries. Ten years ago, he recalls, “Everyone said, ‘There are gonna be biotech firms on South Waterfront, we're gonna catch this wave, put money into public infrastructure and it'll happen.' But nothing's happened.”

Abbott also reminds us that, competitive technological advancements notwithstanding, many of Oregon's most valuable industries and firms have, historically, created their market niches primarily through means other than tech-wizardry (in Nike's case, for instance, brand-building comes to mind). “This isn't to denigrate homegrown companies like Tektronix or Electro Scientific Industries,” Abbott says, naming two of the state's powerful late-twentieth-century tech firms, “but while they were important niche-market businesses, they weren't [technologically] cutting-edge.” As for sportswear giants such as Nike, he reflects sardonically, “What's a more traditional industry than clothing?”

The takeaway: in addition to promising, already extant growth industries such as sustainable practices and agriculture, Oregon's economic future will depend on jobs generated from yet-unimagined technologies. But innovation comes in many forms, not just technological, which tend to get left out of the discussion. Furthermore, though investing in innovation is important, it is also, by definition, risky. Rather than large, build-it-and-they-will-come infrastructure projects, public dollars might be better spent on strategic funding of research and commercialization initiatives (see item #3).

3. Teach Oregonians to love capitalism.

It's a vicious cycle, particularly in Portland. Our reputation for great lifestyle amenities and out-of-the-box thinking makes people who care about things like bike lanes and urban chicken coops want to live here. But our stumbling economy and anti-corporate gimmickry make people who care about money run away. Ergo, our populace contains a surplus of car-free, chicken-raising creatives, and a deficit of MBAs—an imbalance made worse by elected leaders' wrongheaded belief that this situation is actually good for the economy.

“Oregon likes to be first; it likes to innovate—but it doesn't like to lead,” says Chen. Despite cutting-edge advances made by Oregon firms in industries such as green building and land management, “we've yet to really find ways to aggressively grow these industries.” Rating an entire state's business acumen is a pretty subjective endeavor. But one could argue, coyly at least, that an analysis by the governor's Innovation Council, on which Chen serves as chair, at least partly supports the claim that Oregonians' record of business development lags behind our penchant for creativity. Numbers collected for 2006 and 2007 show that Oregon ranked a stellar fourth in the nation in patent filings per person, yet performed only middlingly well in measures such as the number of invention disclosures coming out of university systems (twenty-third), venture capital investment per $1,000 of gross state product (nineteenth), and entrepreneurial activity, as measured by the Kauffman Foundation's national index (thirteenth).

Though Chen is presumably trying to shift this picture through his investment work and his service on Oregon InC, he sees obstacles to his efforts: the region's deficit of money-making initiative, in combination with widespread anti-business attitudes—specifically, a press that's hostile to business-success stories and a regional government that delivers mixed signals, expanding dialogue with business on the one hand while raising corporate taxes on the other.

PDC's Flynn says raising Oregon's business acumen is bound to be a long-term process. The state's lack of a strong business school, the slow (but improving) pace at which the region's universities have made a priority of linking advanced-research activities to commercial ventures, a dearth of wealthy individuals with capital to invest in start-ups: all are factors feeding a self-reproducing cycle of economic doldrums, says Flynn. Breaking the loop will require nothing less than numerous sustained interventions on all of the above fronts (that's part of her job), combined with broad “psychic and cultural” shifts—such that Oregonians, particularly idealistic Portlanders, learn to associate profitable businesses with human benefits, not “rapacious capitalism.”

Perhaps nothing reflects locals' inverted values vis-à-vis livability and lucre more vividly than the “creative economy” initiatives promulgated by Portland's last two mayors. These efforts turn on the theory that cities should boost economic performance by attracting and retaining a young, educated workforce fit to compete in tomorrow's creative (aka innovation-based) economy—and can best achieve this by fostering a hip urban environment replete with galleries, bars, and other desirable lifestyle amenities. Besides sounding kind of flaky, such strategies may overlook the important fact that the mobility of workers, including those these initiatives seek to attract, is actually declining. Judith Johansen, president of Marylhurst University and former PacifiCorp president and CEO, argues they simply don't work. “You can't build an economy around bicycle shops and mocha shops,” she says, calling the creative economy strategy an “abject failure.” She suggests a more direct strategy for producing a young, educated workforce: funding education for Oregon's existing population (see item #5).

4. Look beyond the needs of the majority.

Of the roughly 32 percent of Oregon's population not crowded into the densely populated Willamette Valley, most of them—about 775,000 people—live in Central and Southern Oregon. In recent years these largely rural regions have made positive strides toward reinventing their faltering resource-based economies, and, in the commercial/cultural hubs of Bend and Medford, populations have boomed. But the recession has dealt a serious blow to progress: of Oregon's fourteen counties (out of thirty-six) that rank in the country's upper-fifth, or worst, percentile for unemployment, ten are in Central and Southern Oregon.

SOREDI's Fox stresses that small, remote communities with shrinking populations face challenges and opportunities distinct from those of limelight-grabbing major metro areas. For instance, while Portland puts energy into courting “young and restless” creative-economy workers, these timber-towns-in-transition are laying out the welcome mat for a different migrating demographic: emerging retirees. “A lot of Oregon's communities have the ability to be that place where you can step off the fast track but still have all the amenities you want, including health services.” That doesn't mean regions remote from I-5 are planning their own demise. High on Fox's strategy agenda is raising the educational achievement of the region's emerging workforce, something Oregon's next governor could help accomplish.

But rural regions beyond the Willamette Valley aren't the only minority interests needing attention from the halls of state power; communities of color do, too. Schools are presently failing these groups: nearly half of the students enrolled in Portland Public Schools district identify as racial or ethnic minorities, or as mixed race. According to the district's 2010 statistics, African American, Latino, and Native American students graduated at a much lower rate (31 to 44 percent graduated in four years) compared to their white and Asian American peers (61 and 69 percent, respectively). Oregon's economic competitiveness is dependent on the educational attainment of its workforce, says Nichole Maher, executive director of the Portland-based Native American Youth and Family Center. Therefore, she says, “When half of our kids are succeeding, or not succeeding, at those levels, we have a real problem with respect to how to make the argument to businesses to stay or come here.” Despite statewide efforts to improve the public education system, she adds, “these programs aren't targeting the kids who are struggling the most.”

Lopez says that immigrants are another population left out of the conversation, to the detriment of the state as a whole. In Oregon, he says, 32 percent of Latinos are undocumented immigrants, and most Latino families have mixed immigration status, with some family members having citizenship and others not. “Undocumented residents are the ones that usually work in the canneries, in the fields, growing our Christmas trees, harvesting all the berries that we and the rest of the world enjoy,” says Lopez. “The next governor needs to look at how we can bring stability to Oregon's agricultural industries”—and to Oregon's Latino families—“by legalizing the labor force.” It's not just left-leaning immigrant activists who are getting behind this idea: in a televised joint interview in June 2010, Fox News owner Rupert Murdoch and New York mayor Michael Bloomberg came out as supporters of legalization. Lopez adds that a recent UCLA study argued that by legalizing its eleven million undocumented immigrants, the United States would increase its gross domestic product by $1.5 trillion in ten years (versus losing $2.5 trillion by deporting them). “We should see legalization as not only the right thing to do,” he concludes, “but as a tool for economic recovery.”

5. The single most important thing Oregon can do to strengthen its economy: strengthen its education system.

The logic is clear: the best measure of a regional economy's strength is per capita income, and the best guarantee of a living-wage income is a good education. Said differently, the best industries—those that provide the high-paying, knowledge-intensive jobs of the future—like to locate in places teeming with creativity and brainpower. Unfortunately, Oregon doesn't rate well. Public investment in Oregon's public universities has declined by 44 percent over the past fifteen years, and per-student funding is the fifth-lowest in the country, according to a report by Oregon Business magazine earlier this year. Ergo, Oregon needs, desperately, to jack up the quality of its education system. If there was a single common theme among the people I interviewed, it was this.

“We have an emerging workforce that's grossly underprepared for the transition that's occurring in the marketplace,” Fox says. In SOREDI's service area of Josephine and Jackson counties, where that transition has involved the movement of low-skill lumber-industry jobs to cheaper markets overseas, the critical need to build “a skilled workforce, not just a body count” is apparent. “I hear from employers [in my area] that when they go to hire, they're not finding people who come with a substantive skill set that's meaningful to their business operation,” Fox says.

Fox, Johansen, and others called for three oft-recommended but difficult-to-achieve reforms: improve student achievement at the K–12 level; provide an adequate range of post-secondary options to fit diverse worker and employer needs, from two-year trade schools and community college training programs to four-year liberal arts colleges; and build a university system we can be proud of.

Even a participant whose paycheck is signed by a public university stressed the final point. “Not to knock on any of our universities,” says PSU's Abbott, “but Oregon's university system is underdeveloped and underfunded compared to those in other states. There are no top-twenty universities here. Washington has 'em, California has 'em, but we don't.” To rival these economically powerful neighbors, we need to do more than provide lifestyle incentives for well-educated transplants, Abbott says; we need to provide competitive educational options for “those who want to get their master's degrees here and then turn it to productive uses.”

No one was a stronger higher-ed advocate than PDC's Flynn, whose innovation/commercialization agenda for Portland (see item #3) depends on the presence of a top-flight university system. “Investing in higher education is probably the bedrock of economic development,” says Flynn. “That can sound trite, but it's absolutely true.” The bottom line, she says, is that Oregon “is relying on talent migration” to meet its workforce and business development needs. “That's not, ultimately, an adequate strategy.”

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