America’s Route to Recovery: Part One – Castles Built on Sand.
For the Reuters multimedia project Route to Recovery, a team of journalists toured America to examine the impact of the recession and posted their reports on reuters.com. For the last installment in the series, reporter Nick Carey has written an extended overview of the challenges and opportunities facing the country. The first part of this three-part report is below:
YOUNGSTOWN, Ohio – When Bob Hagan was a boy people hereabouts equated the coke dust they swept off their doorsteps each day with opportunity, for it came from the steel mills that built this city.
After graduating from high school more than 40 years ago, Hagan worked briefly at one of the local steel mills that dominated the local economy. In 1971, he became a locomotive engineer at railroad company CSX Corp, switching rail cars in every mill and yard in the area over the years.
The job afforded him a ground-level view of the slow-moving disaster that would tear out Youngstown’s heart over the next decade and a half — as it did many other towns in America’s Rust Belt.
“In my rides through this valley on the train, I used to watch the fires of prosperity burn,” said Hagan, 60, an Ohio state representative since 1986 who still works for the railroad when not in session. “And then, years later, I watched the lights go out.”
Barbed wire protects a building still standing from Youngstown, Ohio’s industrial past November 22, 2009. REUTERS/Brian Snyder
On September 19, 1977 — remembered locally as Black Monday — Sheet & Tube Company laid off more than 4,000 workers in a single day. In the following years, the steel industry all but died here.
In hindsight, the big mistake was trying to save it.
“We have spent the past 20 to 25 years looking in the rearview mirror,” said Jay Williams, the city’s 38-year-old, independent mayor. “Letting go of the past has been difficult for many people because the past was so good.”
Ohio Gas Mart owner Paramijt Singh (C) is reflected in the rear view mirror of a car while talking to his employees in Youngstown, Ohio November 21, 2009. REUTERS/Brian Snyder
Today, the city immortalized by Bruce Springsteen’s 1995 Rust-Belt anthem “Youngstown” is moving on. Among other things, it has created an incubator to attract the types of small businesses that are expected to drive future growth. Despite the thousands of vacant homes that serve as reminders of a traumatic past and turbulent present, some business and civic leaders think this heartland city has a chance to lead the U.S. into its next era of prosperity.
Getting to there from here, however, won’t be easy — for Youngstown, for Ohio, for the nation.
Youngstown is an extreme but by no means unique case in America. On a basic level, it represents some of the challenges facing the country today in the wake of the longest and deepest downturn since the 1930s.
After two economic expansions based not on sustainable growth but on asset bubbles — the dotcom boom of the 1990s then the far more damaging housing mania this decade — longstanding problems have been brought into sharper focus.
Even during the recent good times, the U.S. manufacturing sector, the muscle behind U.S. post-war economic might, was buffeted as corporations shipped low-cost production overseas.
“The easy, blue-collar shot to the middle class is gone,” said Mike Rollins, president of the Austin Chamber of Commerce. “It’s going to take a lot more work to get there now.”
In short, the world’s largest economy is at a crossroads.
With a smaller manufacturing sector and a consumer base less able to keep leveraging future earnings, where will sustainable, long-term prosperity come from? And more immediately, where will jobs come from?
This is a debate that is taking place at the local level around the country, from Youngstown to El Centro, California, and many places in between. But it is also a discussion that few see taking place at the national political level.
“Washington just doesn’t get it,” said Shane Savage, a real estate agent in Pensacola, Florida, smoking a cigarette outside the home of a client who needs to sell fast in a down market. “It’s going to take a long time to fix the mess that we’re in and our politicians don’t have a clue how bad it really is out here.”
REINVENTING A NATION
Local politicians and businesses acknowledge that the answers to America’s primary problems have been long known.
The country has to get smarter and send more people to college, making it more able to compete in the global high-tech “knowledge economy” of the future. And America needs to keep attracting the world’s best and brightest to help it prosper.
Manufacturers must also continue moving up the value chain, switching to niche production that cannot be easily transferred to China or Mexico. In the future, the sector will involve fewer but more-educated workers.
Now civic and business leaders are looking closely at another part of the economic equation. After seeing the impact that the departure of large corporations can have, there is a renewed focus on fostering small businesses instead.
The reasons are simple: They create more jobs and can be more easily replaced if they leave.
A waitress waits for plates in the kitchen of a restaurant in Bayou La Batre, Alabama November 10, 2009. REUTERS/Carlos Barria
According to the U.S. Small Business Administration, companies with fewer than 500 employees accounted for 64 percent of new jobs from 1993 to the third quarter of 2008.
Small firms also tend to be more involved in their local communities than major corporations.
“We have forgotten in this country that there is so much more to capitalism than just the exchange of goods and services,” said Amy Kedron, who runs Buffalo First, which sells books of coupons promoting businesses in this city at the far northern end of New York State. “It’s also about community.”
“And local businesses are the best at building communities,” she added, “because their owners are in it to make a living, not a killing.”
The other, not unrelated new focus is the “green” economy. Wind farms, solar panels and geothermal power plants will require someone to manufacture them, plus a trained workforce to run and maintain them. And if the private sector and government agree on anything, it’s that this industry must and will become increasingly relevant.
So at a time when critics have been quick to dismiss the U.S. economy as a has-been, some see the makings of an eventual if not immediate resurgence.
“America’s greatest ability has always been its capacity to reinvent itself,” said Diane Swonk, chief economist at Chicago-based financial services firm Mesirow Financial. “We may be able to emerge stronger and better, to the possible anger and envy of some parts of the world.”
But getting there will take a lot of time, effort and money in a nation not renowned for patience and long-term planning.
“Neither our political system nor our capital markets are used to anything but a short-term view, and fixing K through 12 is a long-term proposition,” Swonk said. “Not addressing the issue is an option we don’t have. There is a difficult decade ahead of us.”
The first step toward inventing the future, as Youngstown has found, is acknowledging that the past is gone.
“The thing we’re starting to understand is that the prosperity of the steel mills was the past,” Hagan said. “So let’s accept it and let’s move on into something that makes it even better.”
CASTLES BUILT ON SAND
What sets America’s current downturn apart from most past recessions is that the Great Recession has been national in scope. “Other recent recessions have been regional in nature,” says Swonk. “But this time, there is nowhere to hide.”
Data from the U.S. National Association of Realtors shows the median home price rose every year from 1989 to 2006 before the slide began in 2007. According to real estate website Zillow.com, as of the third quarter of this year 21 percent of all American homeowners owed more than their homes are worth. That equates to 12.4 million single-family homes with mortgages in negative equity, Zillow.com said.
Daniel and Robin Akerman inspect their new house after buying in short sale in Pensacola, Florida November 11, 2009. REUTERS/Carlos Barria
Real estate gains have been a major source of wealth creation and class mobility, so the hangover from the recent binge is likely to prove more painful than usual.
“I keep telling people this is not a housing downturn,” said Al Muller, a partner at Pensacola, Florida-based Metro Market Trends Inc, which tracks real estate markets in Florida and Alabama. “We are in the middle of the bursting of the biggest real estate bubble in the history of this country.”
The wealth destruction in Florida, which along with California has been among the hardest hit by the property tailspin, has been staggering.
“In the years of easy credit we all thought that we had more money,” Muller said after flicking through a wad of papers that included the names and addresses of the 3,018 foreclosures for the first 10 months of 2009 in Escambia and Santa Rosa counties where Pensacola is located.
“The people in foreclosure could be your neighbors, your friends or you could go to church with them or work with them,” Muller said pointing to the papers with evident sadness.
“We all thought (in the boom) that we could live in a bigger house. But we never realized that we were not getting any wealthier… Now there’s simply less money everywhere.”
From its peak in 2005 to the second quarter of 2009, U.S. home equity fell 37 percent, or $4.7 trillion, according to the Federal Reserve. To put that into context, China’s economic output in 2008 totaled around $4.3 trillion.
By the second quarter of 2009, Americans’ total net worth had shrunk 17 percent or $10.7 trillion from its peak in 2007.
Leaves gather in front of an empty and boarded-up house in Youngstown, Ohio November 21, 2009. REUTERS/Brian Snyder
FEWER JOBS EVERYWHERE
As well as their money, many have lost jobs. Unemployment stood at 10 percent in November after hitting a recession high of 10.2 percent in October. More than 7 million Americans have become unemployed since the recession began in December 2007.
For areas like Wilmington, Ohio, the job losses involved a single major employer.
This town of 14,000 was home for two decades to express delivery company Airborne Express. In 2003, Airborne was bought by DHL, a unit of German post office operator Deutsche Post, which was looking to take on America’s homegrown package giants FedEx and UPS on their home turf.
After spending billions of dollars, DHL gave up and shut down its U.S. domestic operations in January of this year, with a cost of 9,500 jobs.
DHL was the biggest employer not just in Wilmington, but in the five surrounding counties. The shock waves are being felt in communities filled with people who were able to make a good living with relatively little education.
“I hate to say it, but you have to wonder whether in the long run it was a good thing having DHL and Airborne Express here,” said Katy Farber, president of the Chamber of Commerce in nearby Highland County.
Some 2,800 people out of a population of 42,000 in Highland County lost their jobs when DHL left. The county had Ohio’s highest unemployment rate in October — 15.9 percent. Unemployment in the area before DHL began ratcheting down operations in May 2008 had long been around 3 percent.
“For decades our children were able to make $50,000 to $60,000 a year throwing boxes without even a high school diploma,” Farber said. “We have to retrain our workforce because those jobs are gone.”
People in a truck leave after shopping at Walmart in Rogers, Arkansas, November 8, 2009. REUTERS/Lucy Nicholson
It’s a challenge to which Michigan, home of the automobile, has become accustomed.
“The hardest thing for many auto workers who’ve been doing the same job for 25 years or so to accept is that instantly, permanently, their standard of living has been ratcheted down 80 percent,” said Douglas Stites, chief executive of Capital Area Michigan Works, a career center in Lansing, Michigan. “You may have been making $25 an hour making widgets for years, but now your skill set means you’re worth $8 an hour.”
The center is a hive of activity, with people filing in to make job applications and sign up for retraining courses.
Stites recalls a group of Hmong men who turned up after being laid off at an auto supplier. Although they moved from Southeast Asia to America decades ago, their low-skilled jobs meant they never had to bother learning English.
“What do you tell people like that?” he said. “There is no way they’re ever going to be able to sustain the lifestyle they’ve become accustomed to.”
Accepting that many of the easy, high-paid jobs of the past are gone is the first step in a process that some communities have taken toward reinvention. Youngstown, for instance, spent many years looking for a way to revive the steel industry.
“We have had to embrace the fact that we are going to be different and there is no going back to where we were,” said Mayor Williams. “But being smaller can also be better.”
Part of Youngstown’s Plan 2010 strategy involves trying to revitalize neighborhoods that can be saved and — in a city with 4,500 vacant homes — letting go those that cannot.
A man walks past a painted building in Youngstown, Ohio November 21, 2009. REUTERS/Brian Snyder
“We are aiming to focus on the neighborhoods that can be saved,” said Phil Kidd, a community organizer at the nonprofit group Mahoning Valley Organizing Collaborative. “But we have to accept the fact that we are going to have to wind down some neighborhoods gracefully.”
From a peak of 28.3 percent in 1953, manufacturing’s share of U.S. Gross Domestic Product fell to 11.5 percent in 2008.
Much of that decline in the recent past has been due to production moving overseas to developing nations like China or across the U.S. southern border into Mexico.
This is a source of frustration and anger for workers like the 1,100 former employees at the Whirlpool refrigerator plant in Evansville, Indiana, which has said it will shut in 2010 as the company shifts production to Mexico.
“It was like a punch in the gut,” said Natalie Ford, 42, of the announcement in August. Ford worked at the plant for nearly 19 years, while her husband Jim, 47, counts 18 years there.
“After all we have done for Whirlpool, I feel like we’ve been betrayed,” she added, her eyes misting over.
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