Monitoring the Illinois Economy: When Will It Get Better?

1. Monitoring the Illinois Economy: When Will It Get Better? Geoffrey J.D. Hewings Director Regional Economics Applications Laboratory University of Illinois Institute of Government and Public Affairs 217.333.4740 217.244.9339 (fax) hewings@uiuc.edu www.real.uiuc.edu Forum on Fiscal Integrity, hosted by Vision for Illinois Agriculture, Bloomington, August 2010

2. Introduction to REAL Formed in 1989 • Goal: enhance quality of public policy decision-making through creation of strategic analysis of state and local economies • Move from theory to formal analysis to public policy presentation • Train next generation of economic analysts to be “schizophrenic” • Present analysis in one form for academic audience • Present modification in form suitable for policy analysts • Provide monthly employment analysis Illinois; monthly index leading indicators for Chicago economy and soon each MSA; housing market analysis and forecasts • Annual forecasts for Illinois, Chicago and other Midwest state economies through 2040 • Developed models for states and regions in EU, Brazil, Colombia, Chile, Japan, Korea, Indonesia. • Participants in 2010 from: Chile, Brazil, Bolivia, Indonesia, Bangladesh, Korea, Japan, Colombia, Turkey, Spain, Puerto Rico, Nigeria, Guatemala, China • Provided support (2 years or more) for >40 doctoral dissertations in economics, agricultural economics, urban and regional planning and geography • “bolsa sanduiche” program with University of São Paulo

3. The Reality • When will Illinois recover from the recession? • Which one? • Illinois has lost over 400,000 jobs in the current recession but Illinois never recovered from 2000-2001 recession • US recovered in February 2005 (now, of course, is well below levels of 2000) • June jobs data for nation and state point to a slowing of job growth after five months of positive numbers

4. The Reality • Current data reveal potential for a “double-dip” in the recovery process but would be erroneous to extrapolate from one month’s data • Since the beginning of the recession in Dec 2007, Illinois has posted negative job changes 24 times and positive job gains five times through June, 2010. The state of Illinois now has a net loss of 368,200 jobs since the beginning of the recession.

5. The Reality • State is 441,700 below prior peak (November 2000) • “translates” into loss state income tax revenue of almost $6 billion over the 10 years • Before this, longest recovery was 8 years • Current employment in Illinois matches that for April, 1997 • Illinois has 5 of 10 sectors with employment levels below those of 1990 • Manufacturing, Information, Construction, Trade, transportation & utilities, and Financial activities

6. The Tax Revenue Loss

7. The Reality • Illinois has only enjoyed 3 years since 1980 when its employment growth rate exceeded the US – and all were before 1990 • State typically enters recessions after US (3-6 months) and exits much later (1-4 years) • Since 2000, only one year in which employment growth was >50,000 • If Illinois economy turned round in 2010, still would take minimum of 8 years to reclaim 2000 employment levels – a 17 year recession

8. The Response from Springfield • Failure to address structural problems in the state’s economy –bickering at the margin • Quinn’s recovery Commission first attempt to embrace the notion that the state’s economy was a major contributor to the the state’s fiscal problem • However, both sides of the aisle fail to see the whole picture • Debate is not between “pro business” and “pro labor” • Need a “pro economy” perspective • Between 1977 and 2005 jobs creation in existing activities matched those in start-ups; in some years, over 2/3rds of new job creation was in existing firms

9. The Response from Springfield • What has the state done to retain existing activity, grow new firms, and make Illinois a destination for new development? • Indicted two former Governors • Accumulated $14 b in current account debt and $80 b in pension liabilities • Performed triage rather than take bold steps • Failed to convince its citizens that the “problem is under control” • (fill in the blank)…..

10. The Response from Springfield • State’s fiscal condition directly tied to • Policies • Fiscal capacity • State’s tax system based on an economy of the 1970s in which manufacturing was dominant

11. Illinois and the National Economy US ILLINOIS Since early 1990s, Illinois’ growth rate fallen behind the US and Rest of the Midwest, but converging with the latter Through June 2010, Illinois had added jobs at <33% US rate since 1990

12. Illinois and the National Economy Differences between Illinois and US are trivial

13. Illinois and the National Economy • Yet, Illinois: • Enters recessions after US and recovers after US • Grows at slower rate • Export dependence highly concentrated: • Very dependent on Rest of Midwest as: • Source of inputs • Market for products (40% domestic exports) • Has >36% of international exports going to Canada and Mexico

14. How has the Illinois Economy Changed? • Three important characteristics: 1. State is hollowing out – typical establishment is now less dependent on sources of inputs within the state and on markets within the state ---- ripple effects of change within the state are now smaller than 20 years ago 2. Structure of production is changing – fragmentation is now a characteristic of production • The value chain is now longer • Firms are organizing production to exploit economies of scale in individual plants in specialized component production and shipping to other plants to add further components

15. How has the Illinois Economy Changed? Fragmentation • The value chain can be long, complex and involve production co-ordination across many states and or countries • Main result: state becoming more interdependent at the same time they are becoming more competitive in attempting to retain or attract parts of the value chain

16. How has the Illinois Economy Changed? • Three important characteristics: 3. The organization of production is changing • More establishments are part of multi-regional and multi-national enterprises • Decision-making – on location of new activity, introduction of new production lines and services – is now more often removed from the location of production

17. Illinois and the Midwest Economy • Domestic trade still far more important than international trade for the Midwest states but significant share of Midwest interstate flows end up in international exports • Dependency on the other Midwest states prominent • Midwest export trade to other Midwest states in 2007 was $450 billion – would rank 7th in World

18. Illinois and the Midwest Economy • Decomposition of international trade reveals strong Canada and NAFTA dependency Dependency >40% highlighted in bold Midwest Trade: Key Characteristics

19. The “Costs” of Interdependence Impacts of Job Losses in Illinois

20. The “Costs” of Interdependence Spillover Effects of Jobs Losses in Midwest Percentage Distribution in other states Change in Impacts in state

21. Draft Baseline Forecasts [1]: GRP Note : 1. DRI forecasts are used as main exogenous (independent) variables both in MW2REIM and MW6REIM. 2. MW2REIM forecasts for MW variables are also used as main exogenous (independent) variables in MW6REIM. 3. MW6REIM forecasts for MW variables are derived by summing up the forecasts for five states (i.e. IL, IN, MI, OH, and WI).

22. Draft Baseline Forecasts [4]: Total Jobs Note : 1. DRI forecasts are used as main exogenous (independent) variables both in MW2REIM and MW6REIM. 2. MW2REIM forecasts for MW variables are also used as main exogenous (independent) variables in MW6REIM. 3. MW6REIM forecasts for MW variables are derived by summing up the forecasts for five states (i.e. IL, IN, MI, OH, and WI).

23. Draft Baseline Forecasts [5]: Personal Income Note : 1. DRI forecasts are used as main exogenous (independent) variables both in MW2REIM and MW6REIM. 2. MW2REIM forecasts for MW variables are also used as main exogenous (independent) variables in MW6REIM. 3. MW6REIM forecasts for MW variables are derived by summing up the forecasts for five states (i.e. IL, IN, MI, OH, and WI).

24. How Bad Will It Get? • Probably see continued erosion of state’s competitive position (dropped from 4th to 15th in terms of per capita income in the last 15 years) • Job growth for the rest of 2010 remains uncertain – exacerbating the pressure on state revenues

25. When Will It Get Better? • REAL’s estimates suggest: • Federal Stimulus Package will create 33,000 jobs directly and through ripple effect about 66,000 in total (but spread over 2+ years) • House Bill 210 about 74,100 (182,500 in total) • But – double counting in latter (includes some Federal stimulus funds): suggest an annual impact of 74,000 in total from both initiatives

26. Challenge • Illinois enjoys a Gross State Product in excess of $600 billion yet spends virtually nothing on economic research on the economy • State faces a long-term problem of economic structural change exacerbated by government corruption • People are voting with their feet – net migration drains $1.6 billion from the state’s economy each year • Out-migrants enjoy higher per capita income than in-migrants • This erosion has continued for >10 years and contributed to decline in state’s position in US

27. Challenge loss of jobs loss of people loss of expenditure loss of business expansion

28. Challenge (2) • Illinois’ problems are a Midwest problem • Midwest legislative leaders have failed to: • appreciate the strength of state-state connections • The advantages of a region-wide approach to recovery –region’s physical and human capital endowments, transportation networks, international connectivity etc are significant • That development is not necessarily a zero-sum game - example of Ford

29. The Case for a Midwest Approach • Ford Plant Closure Assumed that the Ford plants in the Chicago area are closed in Year 2007. The existing level of plants’ activities are • Output: $2.1 billion • Direct Employment: 3,580 • Direct Income: $374 million • Purchases from the suppliers: $1.5 billion

30. The Case for a Midwest Approach • Output (in Chained $2000) • Direct: $2.1 b • Indirect: $5.2 b • Total: $7.3 b • Spatial Distribution of the Indirect effect • IL: 17.3 % IN: 12.9% • MI: 19.7% OH: 9.1% • WI: 1.7% RUS: 39.3% Midwest concentration: 60.7% • Multiplier = 3.51

31. Indirect Employment Impacts Across States ? Impacts in Canada? 31

32. The Ford Example is a Metaphor for a New Approach • Development in Illinois affects other states and is affected by other states – we need to champion growth and development in the rest of the Midwest and engage in more coordination • Talented workers are voting with their feet and moving elsewhere; entrepreneurs are expanding their activities in other parts of the country and the world rather than Illinois • Illinois has an attractive economic base, an enviable competitive location and no vision

33. Final Remarks • Why are own leaders so willfully ignorant of the economy they have been elected to serve? • How can they begin to debate policy options before they have undertaken the necessary investment in understanding how the state’s economy functions, the challenges it faces and the opportunities that exist for growth? • Can we imagine a state administration that views the economy holistically and avoids the fiction that either a pro-business or pro-labor approach will triumph and bring about the recovery we need?

34. For more information visit www.real.illinois.edu

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