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How Can Regional Economies Grow and Prosper?

money.jpgBy John S. Adams

Editor's note: Adams, emeritus professor of geography planning & public affairs at the University of Minnesota, submitted this post in response to "A Measure of Well-Being," published in the Fall 2012 issue of Momentum.

During the recent presidential and congressional campaigns we were smothered with endless babble about jobs, jobs, jobs, tax cuts, entitlements, fiscal cliffs and other sound bites supposedly aimed at clarifying a path to rejuvenated prosperity.

We didn't learn much.

Our country should be understood as a mosaic of metro-centered regional economies, but despite the intensity of campaign debates we didn't learn much about the different ways a region can obtain its income and grow its economy, nor how national economic growth plays out unevenly from the global to the inter-regional to the local scale.

The question that should have been probed and debated by our candidates is this: What are the current trends that matter, that affect how regions grow? Some candidates tried to keep this question the table, but results were hit and miss.

Think About GDP

Here's another way to tackle the question of how regions grow.

Think about the concept of GDP or gross domestic product, which we hear so much about. What is it? And what does it tell us?

GDP was defined in the 1930s as a set of annual economic flows--essentially, consumption spending per year + new business capital investment put in place per year + government spending per year + net exports for the year (i.e., exports minus imports). Remember? Econ 101. Simon Kuznets led the effort at the National Bureau of Economic Research that developed the GDP concept, and received the Nobel Prize for Economic Sciences in 1971 for his work.It was an important contribution--but had flaws. 

How so? During the Depression years of the early 1930s our country enjoyed a solid asset base, but was experiencing a slowdown in investment, a tightening of credit by banks and a steady drop in consumer expenditures. Assets in each region of the U.S. consisted of human capital, natural resources, built environments, and local institutions (governments, laws, traditions, attitudes and outlooks, human service professions, schools, colleges and universities, churches, etc.).
We took those assets for granted and, with leadership from the White House, we adopted the diagnosis that cash flow through the national and regional economies was the best way to evaluate performance of the economy--that we could take the nation's asset base for granted, but cash flow needed a major stimulus. Sound familiar?

The policy response by the Roosevelt Administration focused on promoting more spending--by consumers, by businesses and by government--and we've been thinking that way ever since.
But this line of thinking in 2012 contains serious flaws. Following the GDP prescription, governments hoping to strengthen the economy routinely act as though they believe that a dollar spent on prisons is as valuable as a dollar invested in pre-K education. Or that a "Cash for Clunkers" program (i.e., destroying assets to stimulate cash flow) is a good idea, even though it makes as much sense as taking turns burning down our houses. Or welcoming hurricanes because they create reconstruction jobs. Or borrowing from the Chinese to bankroll economic stimulus checks for every household so that we can make an extra trip to Walmart to buy more Chinese exports.
That's not sound economics. As my old college economics teacher, John Helmberger, would say, "That's nonsense." Stepped up cash flow is not the same as economic development. 
It's like saying that in good times, sales at Target go up; therefore if we want good times to return, we should step up sales at Target. Or when a factory is really busy, smoke comes from the chimney, so during a recession we'll put people back to work by running the boiler at full capacity. No, things don't work that way.
Think About Balance Sheets

When I would reach this point with students, I'd ask them if they know what is a balance sheet. 

As many grown-ups know (but often the students didn't) it's a financial statement prepared at the end of the year listing the assets, liabilities and net worth of a household or business. Every business evaluates its performance using not two financial statements: (1) a profit and loss statement listing revenues and expenses during the year, and (2) a balance sheet listing assets, liabilities, and net worth at the end of the year. At the end of the year we compare this year's balance sheet with last year's, and if the business had a good year, the balance sheet is stronger now.
But here are some problems:

First, in business accounting, depreciation is treated as a real cost. If a manufacturing company buys a machine, it's an asset. If the machine is expected to last five years, each year one-fifth of the value of that machine is treated as a cost, and that reduction shows up on the balance sheet.
Governments do it differently. They tell us that if annual revenues equal annual expenditures, the budget is balanced. Governments normally don't maintain balance sheets the way businesses do, so they don't usually put depreciation charges on their annual revenue and expense statements. As a result, their annual budgets are misleading. If a business failed to depreciate its machine, it would overstate its profits and its balance sheet would look healthier than it really is. But that's what governments routinely do.
Take another example: If a business has a future obligation like an account payable or an employee pension commitment, that commitment goes on the balance sheet as a liability. But if a government promises to pay pensions and health care for retirees, there normally is no convenient balance sheet to look at (as we're discovering as some states now realize they are close to bankruptcy). 

Governments don't have or use balance sheets in this conventional way, so we can't tell if we're better off or worse off at the end of the year. Think of the I-35W bridge collapse; an enormous asset, here one day and gone the next.
Think About Positive and Negative Trends

A negative trend that matters for regional economic development has been movement away from an economy of earning money to one of making money through various forms of "rent seeking," whereby producers and sellers of goods and services figure out legal and protected ways to consistently be compensated more for the goods and services they produce than they would receive from willing and informed buyers who used their own money. But that's a topic for another day.

Bottom line: a positive trend has been some movement toward an economy that is beginning to think in balance sheet terms--of building up our assets--in addition to focusing almost exclusively on annual cash flows.
The negative trend of making money instead of earning it remains a serious problem and a drain on regional economic health.

The positive trend toward strengthening our long-term asset position--human capital, built environment, institutions, natural environments--represents movement toward economic prosperity in the years ahead.
In a nutshell: We must ensure that as individuals, families, communities, states and nation we get only what we pay for, and pay full price for what we get. It's not going to be easy, but it's the only way to regional and national growth and economic prosperity down the road. 

John S. Adams is emeritus professor of geography planning & public affairs at the University of Minnesota. Image ŠiStockphoto.com/RusN


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