We should use government investment to build human capital before the new austerity sets in

In the past week, two economists from the Bank of Montreal have been complaining loudly about what a bad idea it is for the government of Canada—and of the USA, too—to further reduce government spending. Chief economist Dr. Sherry Cooper warned that “…the misplaced belief that the road to economic prosperity is paved by near-term fiscal tightening, as espoused by our own Prime Minister Stephen Harper and British Prime Minister David Cameron last week, shows we have learned nothing from Herbert Hoover’s response to the Great Depression.” Her colleague, Dr. Douglas Porter of the same bank, told a Toronto audience this: “Governments shouldn’t be aggressively cutting spending when the economy is gasping for air. That’s certainly the wrong prescription.”

Yet that’s precisely what America’s Tea Party-led Congress is doing. Going with the anti-government rhetorical flow that the Republican presidential candidates recite in their televised debates, President Barack Obama is on the anti-deficit, anti-spending program. Governors are, too. Some historically minded folks keep bringing up 1937, the year when Franklin Delano Roosevelt decided to embrace austerity and cut back his own New Deal program of government spending, which had succeeded in bringing the Depression-era unemployment rate in America down from 25 percent to about 10 percent. The result of FDR becoming a deficit hawk? Unemployment shot back up.

Here in Upstate New York, however, because we’re already living in relative comfort and stability thanks to our state government’s massive transfers of New York City money into our pockets, we will be spectators on the distress of the rest of the country, even while our new regional economic development council composes a plan to apply for even more government money.

The presumption here is that Wall Street will keep churning out the tax revenue that the rest of New York State gets to spend. Is it safe to assume that no matter what happens in Washington, the state revenue will keep flowing? Probably. But if it’s going to flow, what should we spend it on?

When Satish Tripathi was sworn in as UB’s 15th president, he said something remarkable: that he wants to create 100 endowed chairs and to hire hundreds more faculty. The professors who will occupy those yet-to-be-funded endowed chairs, and who will work as UB faculty, will all take some version of the trip that a recent visitor to our city took. Like her, they will arrive at the Buffalo-Niagara airport and be as surprised as she was that she couldn’t take the Metro from the airport to downtown. (She was even more surprised to be the only, single, unique passenger on the once-an-hour bus from the airport to downtown.) If they do go downtown, they might take the bus down Genesee Street, which looked to our guest exactly like every other Rust Belt city she’d ever been to, with poor people of color inside the “beltway” and affluent whites sprawling invisibly beyond it. Like her, they will be happy to visit Elmwood but may be surprised to see that our university is so small. “That’s the college,” we had to explain to her. “The university is in the suburbs.”

Overall, her impression was that we live in a small city where the “young” people look like Boomers, a city that is largely empty between the airport and downtown, a city with a nice park on the waterfront but a river that is inaccessible (unlike Milwaukee’s, Chicago’s, Cleveland’s, Boston’s, Philadelphia’s, Washington’s, Columbia’s, Portland’s, etc.), and a university the size of Ohio State that is in the wrong place. As an educated parent of young children, she said, she was impressed by the livable scale and by the architecture, but wondered where the people are. And she had never heard of UB.

Like her, the candidates for our new UB faculty positions will wonder where the people are, and wonder why the great university is so far from the city, but mainly they will decide whether or not to work at UB on whether UB and this place will help them meet their personal and professional goals.

Lucky for us and for UB, we have a consensus in the Buffalo-Niagara Falls region: We like government handouts. Our chamber of commerce clamors for more and more handouts. We are pinning our hopes on economic salvation on more government investment in our university. But the investment our university has some prospect of getting—because the $5 billion construction-focused plan for UB 2020 that Tripathi’s predecessor championed was ridiculed by Governor Andrew Cuomo—is more in the region of $40 million.

What can a government-loving region buy for its future with $40 million in new government funds? Before anti-government austerity becomes policy in New York State, we should listen to Tripathi, and think about $40 million going into professorships and endowed chairs.

Why WNY needs human capital

The structure of government in New York State may doom us to having an empty East Side for years to come, because there is zero political will to stop the housing industry from constructing new suburban subdivisions for our declining population. But the structure of government in New York State keeps shipping us pensions, salaries, Downstate college students, and various handouts for construction projects and healthcare services. If Washington stays on the trend-line that the Canadian economists complain about, namely, cutting back on public spending, will things in Western New York be disrupted? Will the flow of handouts be interrupted?

That’s a real possibility. And that’s why the next pile of public dollars we get should not be squandered in the way that the Erie Canal Harbor Development Corporation is squandering $153 million in New York Power Authority funds—on consultants, lawyers, and parking ramps. If austerity is ahead, then the next dollars invested should be dollars that create new dollars.

Harvard economist Edward Glaeser suggested this, clumsily, on his trip to Buffalo in 2007, when he said that too much of our government money goes into purchasing infrastructure, not into enhancing human capital. Indeed. For all the billions invested in various construction projects in the Buffalo-Niagara Falls metro area over the past half-century, the economy here has never become manufacturing-centered the way it was during and immediately after World War II.

Where we are

Understanding the components of the regional economy means looking at where people work and at the relative size of the various industrial sectors. Overall, only about 25 percent of the economy in this region is about producing goods that are exported. Three-quarters of the economy here is about services.

And right now, the economy is suffering. Unemployment in the Buffalo-Niagara Falls metro area is still far above where it was in 2008, when there were more than 24,000 more people working jobs than there are today. The latest figures from the Bureau of Economic Analysis in Washington show that gross domestic product for the region has been essentially flat since 2006, when private industry here had $33.8 billion of activity, which increased to $34.2 billion in 2010 after declining in 2007 (the year before the global financial crisis), 2008, and 2009. What the BEA refers to as “goods-producing industries” declined from a high of $8.5 billion in 2006 to $7.46 billion in 2010. Direct government activity is down, hospitality is down, transportation and utilities dropped, but professional services, financial activities, and both ambulatory and hospital-based health services have rebounded from the depths of the recession. Retail trade is about where it was in 2006, but only because Canadian shoppers, with their strong Loonie, are propping the malls up and boosting sales tax receipts for state and county coffers. The performing arts sector here started slipping in 2008 but amusement, gambling, and recreation seems to have rebounded. Construction—most of which is government-funded here—is back at 2006 levels.

It’s the indirect government spending that is demonstrably so crucial to the region’s economic profile. Manufacturing is $6 billion of the $40 billion regional economy. Government is $5.8 billion, but that figure needs to be adjusted upward, because so much of the $1.3 billion in construction and even more of the $3.8 billion in healthcare is government-funded. All the enthusiasm about UB 2020 is about Albany-funded construction—except for that part of it that will be funded by higher tuition on working-class students from the New York City metro. And all the enthusiasm for education as an economic driver is a very rational hope, so long as taxpayers elsewhere keep sending their money here.

The question for our regional economic development advisory group is not whether they want to spend some more public money. (That’s already been decided.) The question for folks inside our region is whether they see Buffalo-Niagara Falls in the same context, and subject to the same forces of demography and global economics, as outsiders do.

I hope that our regional economic development council recognizes that the worldwide anti-government movement could reduce the flow of funds to the Buffalo-Niagara Falls area. I also hope that there is some recognition that we’d better listen to outsiders about what they perceive when they visit our town.

Will a new building help a prospective grant-winning, intellectual-property-creating academic decide to work in Buffalo, or would the prospect of a good salary and strong research support close the deal? Would spending a few million bucks on a light rail connection from the airport to downtown, or from UB South to UB North, help to convince sophisticated scholars that this is a place where they’d be happy to live? Before austerity sets in, it would be wise to ask somebody other than the usual local insiders what will work for them—because the usual local insiders are accustomed to government handouts that the new age of austerity may cut off.

Bruce Fisher is visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.