Economy and Government and Manufacturing & Technology and Technology

ECONOMIC ANALYSIS: Diversifying economy requires new mind-set

April 17, 2006

The microwave oven has been a staple in most American kitchens for so long that there is now a generation of young adults who've never lived without them. And for that same generation, the doughy, limp texture of foods like pizza quick-cooked in a microwave, in contrast to the crisped, browned texture produced over a longer time by conventional heat, is associated with the food, not the technology. If you've grown up eating from a microwave, that's the way food's supposed to taste.

So it is with the issue of diversification in the Indiana economy. We are the most manufacturing-intensive economy in the nation, and have been so-or nearly so-for several generations. Outside Indianapolis, the dominance of manufacturing is even stronger, with cities like Elkhart and Kokomo anchoring economies where manufacturing's share of the economic pie is three or four times larger than the national average.

We've gotten quite comfortable with that. In fact, being able to point to a single industry as the main driver for the overall economy, as countless communities around Indiana and the entire Midwest can say for manufacturing, seems perfectly normal.

And yet it is not normal. The continued dependence of our region, and our state, on manufacturing stands out as an exception to the remarkable trend of diversification apparent in most parts of the country. The oil industry no longer determines the economic fate of Texas, nor do textiles or tobacco hold sway over the economies of Massachusetts or Virginia anymore.

Consider, for example, the economy of northern Virginia. It's hard to describe it in a single sentence, or even in a paragraph. The federal government clearly has a huge presence, but it is also home to the defense industry, technology companies like AOL, and headquarters operations for countless contractors and consulting firms. And it attracts a substantial numbers of tourists who visit Washington, D.C., and the Civil War battlefields.

We're moving in that direction, too, although not by choice. From 2002 to 2004, manufacturing employers eliminated more than 900,000 jobs a year nationally. Even if that shocking trend smoothes out a bit over the coming years, it still points us in a direction where manufacturing jobs continue to shrink in number, and even more in relative importance.

Faced with this daunting prospect, this question is often heard in communities around the state: What will take manufacturing's place as our economic anchor?

I think I know the answer, but it is not one that puts people at ease. Because the answer is this-nothing will take manufacturing's place. For one thing, manufacturing's not going away; it's just changing. What we make and how we make it has evolved and will continue to evolve, uprooting some businesses and creating opportunities for others. Even with fewer cars in the employee parking lots, manufacturing companies will continue to be an important part of the economic mix in our state for the foreseeable future.

What fills the void left by the larger footprint these companies used to have here? The experience of other states is this-everything else. Economic diversification doesn't really make headlines. There will likely be no large new employers coming to every town, gobbling up workers by the hundreds or thousands, offering lifetime employment for generations the way manufacturing companies once did. The dribs and drabs of job growth as new and existing businesses adjust and adapt to the circumstances and opportunities that present themselves may not make the front page, but they will ultimately determine each community's fate.

In some parts of the state, leadership is starting to think about helping that process along, by improving tax climates, infrastructure and work-force preparation. But for many Indiana communities brought up in an era of manufacturing dominance, diversification still doesn't taste right.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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