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Annual
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Report
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1986
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Federal·
•Reserve
Bank· 0·1•
Cleveland
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-,T~e lllustratlons used
In the 1986 annual
repo,rt were _created',
,.
~Y a Cleveland
,
.
- artls_t
using color ;
, ..
xerography. T_
ha· .
watches .o~ the cover .
-· . are a reminder.that , economic ~ystems
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,
, are constantly
~h~nglng -~ve~ time.
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Our 1986 annual report examines the economies of the four largest cities in the
Fourth Federal Reserve District - Cincinnati, Cleveland, Columbus, and
Pittsburgh. -
These cities began the nineteenth century with similar
advantages - natural resources, skilled labor, transportation routes - but they
have followed dramatically different economic paths. Today, the four economies
range from struggling to successful. -
In this essay, we discuss how
cities within a relatively small geographical area can experience such economic
diversity. We consider ,the significance of comparative advantage and the aging
of dominant Industries in explaining economic disparities across regions. We .
also suggest ways In which we can affect our own economic future.
3
The President's Foreword
4
Common Bonds, Divergent Paths:
An Economic Perspective of Four Cities
20
Comparative Financial Statement
22
Directors
23
Officers
Karan N. Horn, President
2
The 'President's Foreword
• witb the satisfaction of having achieved
Oµr nation's econor;ny showed many
many goals. I _will miss the energy, crf •
signs· of strength, in 19.86. The ec_o- .
ativity, and commitment of this Bank's
nomic expansion continued and interdirectors ; officers, and staff.
est rates remained low. Perh'aps one of .
_This Bank has been most fortunate
·the most impressive aspects of . the
in having the leadership of William H.
past two years is the enormous · reKnoell (president and chief executive
structuring that has ,taken place in our
officer of Cyclops Corporation) , who
economy during a period of overall staretired from our Board ot Directors
' bili ty and growth.
after serving as a member _since 1981
.· Although this process· began long
and as chairman I and Federal Reserve .
ago, it is 'difficult,. even for those of us '
who have been clo1se to the process, to • -Agent since 1984. Special thanks go to
ccimpreherl9 the extent and scope of • . the directors on our Cleveland Board
.who-have completed their terms of serthese changes. Once-prominent indus•vice: J. David Barnes (chairman and
tries have declined , in absolute or in
chief executive officer, Mellon Bank) ,
_rei'ative importance. Under the pressure
who has served since 1981; and John
of competition, nationally and locally
R. Hall (chairman of the .board and
important firms have . been forced to
·chief -executive officer, Ashland ._ Oil;
alter operations and restructure facili Inc .), who has served S!nce 1984.
ties. Economic restructurjng is ,usually
We.are also grateful for the contripainful for,the people and the communbutions of Dr. Robert E. 1 Boni (chairities ,involved , but if change is inevitaman .of the board and chief,executive
ble aRd leads to a better world, then •
officer, Armco.Inc.), who has served as
much has been accomplished. •_
lhe results of restructuring are evi- • ,chairman of the Cincinnati. Board since
1984 ; Vernon J. Cole (executive vice •
dent •in the emerging economic struc~
president and chi~f executive officer-,.
tunt of the Fourth Federal Reserve DisHarlan National Bank) , who has-served
trict. An assessment of the ultimate
•
on our Cincinnati Board since 1984;
••outcome for area industries has been
and G.R. Rendle (president and chief
greatly complicated by large swings in ·
executive officer ; Gallatin National
ttie exchange rate of the do!lar, but two
Bank) , who has served· on our Pitts-·
observations can be_made concerning
burgh Board since 1984. Their valuable
• the future of the Fourth District and'the
. and dedicated.service ·and guidance, as
United States economies . . First, the
well as mat of all the·directors and the
. manufacturing sector will probably
members .of the 1986 Small Bank and
; (emain strong but will employ a.smaller
~ecSmall ~usiness Advisory Councils, are
proportion of the labor force and :
to
certainly appreciated .
ond , the s~rvice _sector will continue
I greatly enjoyed being a part of this
grow, as, measured both by .employ,.and I will miss my assoorganization
•
outpu(
by
and
. mi.mt
many fine people in the
the
with
ciatiim
several
raise
These likely, outcomes
System · and • in the
Reserve
Federal
and
r';
labo
management,
for
issue·s
communiti~s:
District
Fourth
_
central
the
perhaps
education. But
iss~e facing us is, how can we as a
people better adap·t to ecop omic
Sincerely,
change? The ·1986 annual report
Divergen_t
Bonds,
,''Common
·ssay,
e
Paths," analyzes_how four cities wft~in
the Fourth District have been affected
• by the forces of econo.rriic change, and
Karen N: Horn
we hope that it will provide some inPresipent
•
phange.
of
sights into the process
March 12, 1987
As many of you may know, I will_ be
resigning as president of the Federal Re' r
serve Ban~ of Cleveland in early April
to accept position in the private sec_tor. My five years witn the Bank have
been extremely rewarding, and I leave
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"ft w~s the best of ·times,' It was the 'worst'of times ... _it -~aithe
spring of hope,,it wa~ _
the winter of ,despair.:· •
• Charles Dickens. ATata of Two'Clllas. 1859'
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Dickens's ;ag.a A Tale of Two Cities isi
. like-spirit of the region . Unlike the East
reminder that cities with seemingly comCoast, the Midwest had no prior e·xpemon b.on~s • of hJ~tory and commerce • -. rience -with industrializatio_
n~and con, can follow divergent paths. T~e same
sequently no exisJing institutions or
is true in our present-~ay economy,.
norms to' stand in the way of ·change.
'The United States is often,portrayed
Instead, the area was ripe for new ven- ..
as a monolithic economy, withi_n' which
tures and offered opport!]nities for ·indFvarious regions march in· step. This is
viduals' to pursue their dreams'.
far from the truth. The country is a patchMa_!ly of the natur11I resources.availw
o
rk
of different regional economies, able
to the eritreprene_\JrS of .a century
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link~d by a market system, thrnligh :·
ago can still beJound here. In fact, the
which people, capital, ideas, and tech"
range of available resources has expands
nology1nove back and,forth , A similar , • ed- to include the· capital stock and·
type of diyersity and interconnectedinfrastructure of a hig.h-income-society,
ness exi$ts within the Fourt~ District. •
cultural amenities, ski_lled ,labor_ and •
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The Fourth District,covers a relative-·
- well-developed educational systems.
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ly small geographical area. It includes
- But, VJhile these resources are still
alfof Ohio: western PenrisyI:vania, east~ttractive to firms, the probleq,s:·of
ern Kentucky, and the W.est Virginia
indus,trial-belt cities seem to outweigh
• • . panhandle. Yet, much ILke the cities of
t~e advantages. High wage.rates, unions,
London anq Paris ,during the time of .
high energy prices, cold winters, high .
Dickens's novel, ,the four largllst cities
taxes, and /a detetiorating infrastrucof the Fourth District - Cincinnati,
ture are all cited as contributors to an
,, Cleveland', Columbus, and Pittsburgh unfavo'rable business climate.
-sta~d in staj:k contrast to each other.
. The Curse' of.Succass It Ci,in be ar_Cincinnati and Co1uinbus are keepinggu~·d that the industrial empires forged •
•, pace, with or surpassing national emduring the early years stan~ in the way
ployment and populatiOrJ growth ·rates\
·of_f_uture progress. This WqS ~ot inten-- ,
whil.e Cleveland ·and Pittsburgh have
tional. Rather, according to the indus-- fallen behind.
trial lif!l cycle theory, the sheer size of
Y..,hat _caused some of •the cities , _ these industries and their dominance of
- within the •Distri~t to· fare better a~
the -region significantly affected their
times than others? There is no-simple
Jo:cal economies in ways th~t produced
ans!'er, but' economists tr,adifionally
resis,tance to cnange : •
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•The industries' d(;lmand, for labor
hqve fQcused on resource endowment . and cost factors, especially the cost of , . drove up wages and employed the best
labor and -capital. Another part _of the • _ and the brightest workers and managers. Their desire · to build new plants
explanation: lies in the region's histori•c'al deve1opment and the.industries that
tied up financial resources. Thei ~large
- came to dominate th·e local. economies.
scale of operation' cor_nered resources _•
The frlsa and Fatrof a Region The 'rise
aild markets. Moreover: as these domiI,
nant industries matured, institutions
of the Midwest as an.industrial Center
• is relatively easy to understand. During
and coalitions formed to preserve the
the 'late 1800s, the ''industrial belt" cit- industries that had brought employment
and prosperity to the_region ._ These
' ies had a·comp_ar~tive advantage fn the
forces created -a barrier, to,,.the develproduction of steel, auto1Dobiles, a'nd
machine tools because' of their ·near- _ opment of new econ,omic actf vi ties aird -weakened the comparattve .advantage
,ness to iro_
n ore and othE1,r raw m~t-erial
of doing business in these areas.
inputs,, as well as their easy access to
This theory of the natural evolution
- the Great Lakes_-and the Ohio River. ,
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-Equally iTllportant was the-- frontier- , • • of an industry and a.commu~ity sheds .~
1ight on several things that are puzzling about the Fourth District economy.
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First, .it helps t~ explain why -many • 1 torical ~ccident favored some indus-~
industries within the region · have lost
• tries more than others,. these cities
j heir comparative advantage. Second,
• began to .take divergent paths. :
it provides a better understanding of
We. will loo~ first at. the economic
-the economic diversity among various
heritage of each city, and then -discuss
cities in th_e F~urth{)istrict.
.
how it helps to explain present em'ployCommon ~onds, Divergent Paths This
m_ent patterns. Using-both the.locational,
• essay examines the diversity of four , • ' advantage and the industrial life cycle
major cities within the Fowth District - • 'theories,, we expla.in how s·uch diverse
• Cincinnati, Cleveland, Columbus, and
growth trends can exist within a relativePittsburgh. Each city, at some time i~ly small geographical area. Finally, "':l{e
. its history, shared man.y of the same
describe the potential .growth sectors
basic 'manufacturing· industries. Howand the conditipn~ that are necessary to ••
ever, as locat.ional ·advantage and liis, launcb regiori!, into a new economic era.
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'"A•ihough the rich~woodla_nd ~as 'probabl~ among the greatest :
: ,forests ever to grace the earth·, the .settler~ were ·more inierested in -.
., . • •
.other ·riches."
Ohio's N'atural Heritage, 1979
Past Advantages ·_
The Fourth District ·experi~ncedjt~ inCleveland Cleveland's prominence
dustrial renaissance durjng the early
as an early ·nineteenth-century trade
•and commerce c·enter:-developed from
part of this ce~tury, prima~ily because
of the comparatf ve advantages the re- .
its position on the Ohio and Erie Canal;
• . gion offered at that•time in t_he produc- • ' which was complete_d in 1832. Cleve- • tion of steel, automobiles, a_nd machine
land's,strategic location made it way
· tools. As _one might expect, the· m(ijor
statiOA-- to the West and, with the
cities in the Fourth District.had similar
• developme~t'of ports, a leading ship•
characteristics, sucti as an abunda~~e
. ping.center on Lake .Erie.
of raw materials and well-developed
In the mid-1800s,.·Cleveland also
transportation systems·.
•
benefited from the opening of the,rail• As aresult of these similarities, many
.roads; from the,discovery of vast iron
of the same'industries emerged in each
ore resources in the_neighboring Lak!! Su- ·
_gity 'during the-region's initial develop-,.
·perior region,.and from the development.
ment. Over a· relat_ively short.period of · - of the coal and petrole,um industries. ·
.. • _ time, however, a weed.ing-out process • . These factors encouraged indu·strial di"
• 'left _some industries more· heavily en-1versit~ in -Cleveland and made -the city
trenched in certain parts of the District i
a center for mercantile activity.
than in others. This subsequenlly:led to·
. Clnclnn~tl Cincirinati wasflso stra-.
the development of different industrial
tegically .located near a major waterway
structures in the major cities'.
,
- the Ohio River. However, because the
·,
Pittsburgh . The.comp,arative advancity had agreater abundance of agricultages of Pittsburgh' wer~ apparent early _ . tural-resources· than mineral resources:
, in jts development. The city's access to
it followed a different path from' Cleve-.
abundant natural resources led to -the
land and Pittsburgh. The economy inirapid expansion of its manufacturing
.ctially developed around agriculture and
base during the late'.1800s.
- • , livestock. Canals and a major railroa'd
• The region offered greatreserves 9f
were built to facilitate transportation
• . high-quality coking coal, local 1deposits
of wheat, corn, and other farm produce.
·.__ For many years, Cincinnati was the
of iron ore, apd valuable deposits of
sands and clays for use in glass and clay
most -important· milling center west of
the Appalachians. It was· also ✓nick:·
products. Natural routes of transporta- •
tion were provided by ·several major
named "Porkopolis" because th_e pork. waterways leading into Pittsburgh. The · ·
--: convergence of three,maj<lr-river valleys
_ allowed easy access to the city. •. •
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packing business was very prosperous.
Livestock also supplied the material for
the food, lard, ,soap, candle, _and
leather industrfes:
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After the Civil War, the character of
Cincinnati's industri~.s- changed. The
devastation of. the South eliminated tbe
once-flourishing southern market for
Cincinnati's-- whiskey, salt pork, , corn
meal, and textiles. Also, heavy industries, notably steel c3:nd iron, suddenly
became a mainstay of the American
econoryiy, but Cincinnati had neither.
the iron ore nor the coal .that was ,
needed to smelt it.
- • Consequently, the cities along ~ake •
Erie, such as Cleveland,· or-near the coal .
'fields. ~uch as Pittsburgh, surpassed Cincinnati in pqpulation and industry. In• stead of specialjzing in one or two dom, iriant industries, Cincinnati expanded
into variety of inpustries, includil')g
machine tools and consumer products.
Columbus The early economic development of Col~mbus was i,nf,luenced
by the decision to locate the state's
, capital there and, later, the state's larg- ,
est university. One of the reasons for
_locating the capital high on the e~st · .
bank of the Scioto River was its central
'location within the state, a feature that
has contributed to .its prosperity today.
At first, Columbus's manufacturing
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was constrained by the r_elatively limited
resqurces available nearby and by the
small size of the markets it- served:
. Most ,of the businesses catered primarI
ily to the Meds of the region. ,Binderies
·were opened to serve the trade· generated by the state and county governments, arid foundries and handicraft
shops catered to the farm market. . ,
Local transportation and trade.institution's began to flourish as the capital ·
city gre~ in size and influence. Initially, processing agricultural raw mate1ials was the city's principal industrial
activity. As the city developed further, .
manufacturing gradually replaced much
of the ·processing of agricultural ra~
materials. 8eginning in 18:19, the, carriage and buggy industry begafi its long
and famous development in Columbus .
• ' After· 1830, the c·itY'.s position was
greatly en_hanced by'the opening of the
Ohio and Erie Canal and' by the extension westward of the ·National Road.
. Later, the construction of railroads provided even greater ac<;ess to resources
and markets, w_hich gave rise to a host
of new activities with1n the community.
' • The expansion of trade, especially with
southeastern Ohio communities, led to ,
, the develop~ent of an extensive.merchandising systeni within the region, which
has not changed appreciably since then.
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. . Econom,ic progress, in a_capitalist society, means turmoil.''_
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Jos~ph A. Schumpster; 1942
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Present Diversity
A century and a half of economic
metamorpbosis has create~' four unique
metropolitan areas. To~ay, Cin9innati,
Cleveland, Columbus, and Pittsburgh
account for m'ore than 40 percent of
. the Fou'rth District's 1-6 million inhabitants. Among the~e metropolitan.areas,
population ranges from 1.3 million for
Columbus .to 2.2 million.for Pittsburgh.
, Employment Trends Three distinct employment trends characterize the devel- ·
. opment of these four cities ,over th~ last
two decades. Between 1964 and 1985,
Columbus outperformed th~ national .
growth rate for total employmeht, Cin- .
-cinnati lagged slightly behind, and Cleve• land and Pittsbu'rgh fell far behind.
Over, this perjod, total nonfarm employm_ent in Columbus rose by more than
90 percent, while total employrrient. in
Cincinnati grew ne~rly 50 percent (see
figure 1). ;rotal employment in Cleveland and Pittsburgh increased by only 18
percent and 11 percent, respectivE)ly.
'These differences in trends are even
more striking over the last two busi"
, ness cycles. Since the business cycle
peak of 1980, Cincinnati's employment
has grown at a rate almost equal to the
natibnal rate of 12.4 percent, and
Columbus has substar:itiafly surpassed
·it. During the same· period, Cleveland
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Fo!Jr separate
economies have
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evolved from a
similar historical
'beginning: (from left
to right) Pittsburgh. /
Cleveland. Cincinnati,
and Columbus.
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Cincinnati
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Growth Trends for Employment
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. Total
Figure 1
200
• · 100
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1986
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Figure 2
140
100
1986
· 40 ·1964
has struggled' to re.turn to its 1980
'even smaller- COIJC~n.tration of manufacemployment level, while Pittsburgh ; ,• 'turing employment than that of:,Columbus. :
• rehlains-4 percent belo~ i~s 1980 level.
co·lumbus, Cincinnati, and Cleveland
- Not only do the tot_al employment .
experienced' similar, but less oraniatic, •
trends of eac;h city differ, but employcompositi'onal . change. Today, Pitts. burgh and Cdlumbus show strong simiment patterns also vary substantially·
larities, as do,Clncinnatl and Cleveland, ·.
across groad economic _sectors within
• based' on the distribution of. employeach city. Between 1964 and 1985, Cincinnati experienced a 1.6 percent r,ement across br0adindustrial categories:
Manufacturing Employment- The comduction in manufacturing employment,
while service · sec_tor employment .rose
posi ti~>n of the manufacturing sect or
provides further evidence of the similar162 ' percent ·(see figures 2 and . 3) :
Columbus experienced el;(pansion in all
ities between -Cplumbus.and Pittsburgh,
of . its 11,road sectors ,· but its _most ,
as well as some. of the 'dissimilarities •
impressive growth was in services; •- among all four cities. An analysis_of where employineot rose 205 percent.
employment .patterns across industries
• Employment patterns in Cfeveland's
shows that PHtsburgh's reliance on pri-_
. mary metals -has fallen dramatically. A
and Pittsburgh's manufacturing and ser·decade ago, more thari 40 percent ot •
-vJces industries have diverged dramati"
• - cally. PiJ,tsburgh lost half of its rnanufac~
Pittsburgh's manufacturing employ. tur,i[lg jobs between 1964.and 1985, but , - hlent was in primary me'tals, particu
1
larly blast furnaces: 'today, that ·perdoubled its :service jobs. Qleveland lost',
26 percent of its manufacturing jobs,
centage has dwin_dled to 15 percent.
, Tpe shift aw<!y from primary, metals_
but more than doubled its service jobs. •
Employment ·Corilposltion Because of
has left Pittsburgh with a much more .
• the uneven _growth rates across secfprs,_ • _.diversified ma.nufacturing ·base. Pitts- burgh t1es Columbus for the most djver: .
_: the economtc composit_icin of these
_
metr9politan areas changed considersifieq manufacturing sector among the ,
ably between ·1964 and 1985. Each city
four cities. 1 Cincinna.tLh:as the highest
followed more or less the na.tional tra.n- . - concentration of manufac_turing c1.ctiv- .
sitioA from manufacturjng to services,
ity, while Cleveland has the, highest
·but each changed at a different pac;e.
c;oncentration of_employment in a~y ...,:
In 1964, Cincinnati, Clevelariq, and
one manufa~turing industry, machinery.
The diversity ·among the four cities •
i Pittsburgh had very similar ·economic;
is further illustrated·· by _the relative
structures. Manuf acturing's share of
. total employment averaged about 37
concentrations of specific. industries
percent, services . accounted f.or abo~t
within e~ch city. We measure a city's
14 percent, and wholesale and retai I
degree of specialization by comparing
,, • trade claimed .20 percent :· Columbus
the percerita·ge of,a city's employment
• within a particular industry to the perdiffered from . the other three' with a
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centage ot total employm·ent of the ·
smaller manufac,turing base and a larger government sector.
•
• • four cities within that industry.
•
.But since l964, the composition of
Using this definition, we find that •
each city's economy b,as changed consid- _ · within the manufacturing sector, Cleve- ',
land specializes· in machine tools -and .
:: erably. Pittsburgh exp_!lrienced the most
dramatic transformation. Its manufa.ctur- •• dies and measuring · ~nd analyzing ing base fell from 37·percent'in· f964 to '
equipment; Columbus produces leafher,
1t{ percent in 1985, while ifs service fn- .
clay, and glas§ products, and E1lectriq1I
dustry rose from 16 percent to· 29 perequipment; ano Cincinnati is noted for
__,cent (see figure "4). As a result, instead ·
. automobile assembly and chemicals,
- _ ·of 6eing the most industrialized city, ' • mo·stly soap· and household_products .
• -Pittsburph has now become the le<!st in•Pittsburgh still specializes irr primary
. d,ustrialized of all four_cities -- ~ith an . ' metals, altho~~h certainly no! as much
as in past years. :
- , The dominance .of certain industries
. iri the four metropo_litary economies refJects, to' large exten( the historical
development of the region. Today, PjttsI
• Services
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• Figure 3
340
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, 1986
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. burgh's roster of largest companies still . .still, associated with companies that
includes industrial giants that were espr~duce consumer nondurable p·roducts,
tablished during the industrial lfoom ,
Even though Columqus companies, ,
But alongsid.e these companies stand , . manufactured,' at various times, every-more service-oriented
companies,
thing from steam locomotives -to automo:
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Cleveland's present industrial base
biles, no one industry dominated the
also reflects, to a large extent, its early.
economy, Like Cincinnati, Columbus's in-,
roots, But , -like Pittsburgh , ,Cleveland
dustrial base.remains much more diverca,n boast that' a few service org;miza- -.
sified than thal of Cleveland or Pitts·tions, such as health-care centers, are
burgh , Publfc and private service-related'
• moVing _into1ts top. ranks·, Cincinnatl's
·ins~itutions predominate, including re- .•local economy, thgugh changing , is
search centers and a major university,
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Trie veil of macroecQnomic _aggregates 'conceals ... all the draina of
the events - the rise and fall ,of products, ·technologies, and . ·, , ,
industries, and the accompapyfog transformation of the spatial.and
., ~ccupational d'lstrib'ution of the population.' "
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W/(ll,m.Nordha11.s and James Tobin, l972 ' ·
'j ha Data;mlnants of Growth-
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The economic h1stories.,of the four cities
. - •Ai:thoug)l differences in the tradition, reveal that, ih the early stages oJ devel- • , al -components of cost :. wages, unions, -!
• opment, each city foitered many of the .~ . capital costs - help to -explain location
same industries. However, over time , -.: • decisions on a national, scale, they do.
many of these indtJstries tended ·to ·
no! lend as much insight into w_
hat goes
concentrate in just one -or two of the
on within regions. In particular, cost
four-cities.'
,
differences do not explain;th~ divergent'
IAdustries naturally took hold in •reemployment trends among the four tit- gio□_s where they haa cost advantages • •ies coosidered. Cost differences aiso do
resulting frorn various locatioAal chars " ·not explain why regions lose .their com:
acteristic's . T"oday , cost a_
dv'ant,,ges
parative advantage in the production of
are still important in the location decicertain goods and services. •• ••
sions,.of fitms. •
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Unexplaln_ed Emp[oyment Changes_There
Location Deter~lnants According' to
are two problems with relying solely on •
recent 'surveys, 11'ie--factors businesses
cost differences to explain the emploi '
consider most in deciding where to iacate •
ment . patterns _among the fo~r cities.
plants are low lab~r costs, p~oductivity
First', there is simply not enough_variaof workers, favorable labor climate, proxtion ,among the p~oduction costs to
• imity to ma_rkets and-suppliers, and effiaccount for the large differen.c;es in em- . :cient transportation facilities .2 .
•
ployment·growth rates . The magnitude
These survey response~ are,supported
of ' these cost differenc~s among the
by r.e¢ent statistical an~Jysis ot location
four ci11es is ·small compared to thedeterminants of ·both small businesse~ _. . variation across the.country. For examand bran,ch plants of large firms done by , . • •pie : in 1983, )ator cos_ts afllong -Jhe
·' • Randall W. Eberi s· aAd Joe A. Stone Jn
four c_
ities . ranged: from 5.1 , percent _
"Labor Cost Differentials: Cause~• and
above the national average for Cleve- , .Consequ,ences." 3 'They find that open:
• land to 2.2·percenf .be!ow the-national .
• ings of manufacturing firms in a.nation- ·
-average for Columbus . In contrast: la- '
.al sample-of 50 metropolitan areas reveal
bor cost differentials for \a: sample· pf
that three factors dominate the lo.cation
the 43 latgest metropo!it~Hl areas
.. decision: labor cost~. the concentration
throughout the country ranged f_rom 18~1_
of union representation ,· and the user- •
percent above the national average for
cost of c~pital. Factors.that d_g,n.Qt sigNew _
York .to 10.7 percen·t below -the
nificantly affect firm location include "' nationai average for Tampa.
local tax rates, metr9politan population :
' ·and energy prices .4
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tegrated into a firm's location decision
The second problem is that the differ- •
would include broader range of conences in costs between· cities do not
correspond to expected differences in .. ·siderations, such as the skill level of
the . labor force 'and local amenities.
employment chan,9es. B~cause •Iabor
While these locational determinants are
costs make up a large share q_f tptal
very dffficult to mea~ure, it appears that .
costs, neoclassiqal . economics would
the relationship between thes_e factors
suggest that employment growth would
and employment change is often not
• be greatest where labor cpsts are lowwhat we would expect. ·For instance :
est. This, however, doe$ not appear to
highly skilled labor is considered a posibe the case within the District. For examtive factor in firm location _decisions.
pie, among .. our. four cities, Columbus
But, despite. Pittsburgh's high percent:
. showed -the largest employment growth ·
age of scientists and engineers, it still
between 1964 an:d 1985~but it also had
has the lowest-employment growth rate
the second-highest labor costs !n 1974.
among the 'four _District cities.
Pittsburgh, on the other hand,-had
Overall . attractiveness of the area,
the lowest labor costs of the four cities
which may include nof only favorable
and had the lowest employment growth.
climate, but als~ amenities such. as culBy 1983, some of these anomal,ies betural attractions, affordable housing,
tween costs and employment growth
and ,good medical facilities, is also imwere corrected, presumably .due-to the
•portant to locat.ion decisions. According
market forces that created them: wages
to a recent edition
of Places Rated
ih Pittsburgh increased,' while_those in
.
A'imanac, which ta~es into account
Columbus fell. Nevertheless: the correthese attributes and others, Pittsburgb
lations are still inconclusive, and. it is
is r~ted first_in the country, Clevel~nd
unclear whether cost differences are
. seventeenth : Cincinnati thirty-first , and
causing employment changes ·or wheth~
Columbus seventy-fifth. 5 If we accept
er el)1ployment changes are · qausing •
this ranking system, the cyrrent employ· cost differences.
ment growth- rat~s .of these cities run. ·
Other Locational Determinants . A com- ·
counter to their relative attractiveness. '
plete Iist· of characteri~\ics that are· irJ,-
a
,
--
)
(
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••And,wheil giant new lndu~tries 'hav~ spent their force, fr may take •
a"lo.ng time before·something else of -,qual magnitude emerges:·
I
Alvin Hans~n. 1949
_.The Long Wav, of Change
I.
ID
.Cost\differences and amenity differences
) _explain some of the variation in employ, ment change across regions, but they do
not help much in explaihing the diver• gent paths 'of our four, cities. The ques~on _remains, why _are. regions that
were once attractive to 'youflg , innovative f-irms less attracijve today? _
The theory of industrial life cycles,
or industrial aging, picks up wh~re the
locational·advantage theory leaves off
by explaining why a region's comparative advantage may change over time.
The ·driving force of change, according
to this theory, is an industry's natural
evoluti,on from invention to innovation
to mass production. Each stage of development is chara~terized by different
growth rates, diffe·rent levels of innova-
-
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tion , and different· labor requirements
' and organizational structures. _, •
The· Aging of. An Industry ' There are
three ways i~ which the aging of a
•region's dominant industry may lead to
a region's economic decline. First, as
'an industry ages, it tends to lose its
entrepreneurial energy arid imagination.
• Studies have shown that the number of
innovations per empl_!> yee is larger for
small, and usually younger firms, than,
for larger firrns. 6
.
One reason .for this is the changing
character of a firm's management as it
Joi lows the aging .proces$. Early stages
of development <!re marked by innovations and by trial and error ~ thus, the
need for a flexible management stru~
ture ~nd attitude. Later stages of oevel. opm~nt i_nvolve mass production and the
·sta~daraization of the production pro-
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1964 - Services
■
1985 -, Services ,,
■
1964 - Manufacturing
■ 1985 - Manufacturing
' Figure 4
,
Shani,of Employment
U'. S.
40 .
Cincinnati 40
Cleveland
Columbus 40
Pittsburgh 40
.
(PercJnt of total)
I
, cess . At this point, management may
During its initial development; the steel
become less concerne9 with creation of
industry did-riot have a primary location ;
. , new products and t~h-nologies and more _
instead , steel firms could be found oper-.
col')cerned with the successful largeating throughout the cquntry.
scale production of existing products . .
Probably the lirst blast furnace to be
In-addition to management's change
put in operation in the American coloin emphasis, there is a change in organnie.s was at Saugus,-Massachusetts, in
izational structure of the firm . Douglas
'1645 .10 This was followed within a_very
E. Booth , in "Long Waves and Uneven
few years by several oth,er furnaces and
·. -Regional Growth ," argues that some orforges built in ,various par,ts of New
ganizational str.uctures, prevalent in ma. England . In 1675, the first iron works
•ture firms, keep managers and workers
-outside New England was erected in
ignorant of how various aspects of the
New Jersey.
production process fit together. 7 With~
- Pennsylvan_
ia, which would ' eventuout this involvement, they have no·inall1y becorne the.lea.ding iron and steel.
1
centive oc ability to take the necessary
manufacturing state in the nation, did
risks involved in adopting innovations.
not have its first iron enterprise untit
A second way in which the industrial
1716. The ore deposits found in eastern_
_. life cycle may hamper a region's growth . - Pennsylvania and New Jersey w~r'e much
is that a few inpustries may dominate
richer
and inore extensive
than those of
.
.\
the local marke-tplace. Dominant indusNew England, and :provided the basis
tries may keep .skilled labor and entrefor the expansion of the colonial iron
preneurial motivation .in short supply.
industry -after 1730. Between 1716and
As long as these, industries offer suffi1776, ,60 bla$t furnaces and forges were
ciently 'high-paying, ·secure job oppor-, · - built in .the colony of Pennsylvania. •
tunities to area workers, there is little
After 1800, the industry expanded
unemployed talent and little inpentive
substantially. It spread westward and
to start up new-venture~.8
- to some southern. states· so that by,
A third effect of dominant industries_
1860, there were ,-iron works of one
on a region's economy invglves the protype or another in almost ·every·state ..
1ifer.a tion of local special-interest
Hpwever, as f.irms 'began expanding .
- groups. These groups, which inclu~e latheir operations, competition increased,
bor unions, trade associations, and poland the pressure to find cheap raw
itical coalitions, have an- interest in
materials and labor gave producers in
preserving the t5ehefits they derive frQm
and around Pennsylvania a clear adthe mature ·industries ..
vantage . This advantage iasted until
Mancur Olson points out in his thesis
the 1960s, when foreign imports from
developing countries began to enter the
of "institutional sclerosis''. -that these
groups can contribute to th~ 'decline of United States:
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their region. 9• One way they d<;> this i,s B~ause New England did not concentrate -its ·resources in steel production , ••
to lobby for favorable legislative ~nd
administrative rules, or to act in colluthe movement of steel out of the region
sion to influence- prices· and wages. appears not to have had such a devas_Resultant higher costs reduce thNomtating effect on its local economy. In
petitiveness of existing firms and dis- -' contrast, as the steel industry came to _
courage the entrance of new firms. • . d6!Tlinate the economy of western PennMuch of the evidehce lo support this
, syl.vania, labor, capital, and public retheory is rooted in the economic histosources yvere all geared toward producing
ries of regions. Amorig nations,· Great-.
steel. During steel's ~eyday, workers,
Britain relinquished its lead in -manu- managers, and government officials _
facturing around the turn of the century 1
posf tioned themselves to e~tract as ',
to rapidly developing. Germany and the
-much as possible from the industry. As
Uni.ted States .'NoW the manufacturing
_ the industry declined, resources were
sector in the United States and ot~er
slpw to move away from what had been
- . developecj countries is facing intense
,a stab_le source of income and support.
competition from East Asian countries.
The Staal lpdustry Example •The evolution of steel production offers an interestfng ~xample of the effec·t of product
-cycles on various f egional economies.
f,
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• Fourth Federal
Reserve District
employment Is
s~lftlng from
manufacturing to
services .
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Industrial Cycles •• Long waves- of de- ;
city: For Pitts.burgh, the zenith came in
velopment for ~ach of the✓Fourth District
1~47; for Cleveland, it came in 1969;
, ·cities under discussion provide ' insight , •_and for Cincinnati . and Columbus, the
-years were 1974 and 1973,' respectively.
into the present economic conditions of
these areas. Comparing each city's manIt-is.possible that employment changes
ufacturing employment .growth . rates ' . within the District may offer too pessiwith the nation1s from 1899 to the pres~. mistic view of manufacturlng. Over .
time, . technological. improvements in _•
. ,_ _
ent reveals industrial cycles that char,
acterize each city's development:
production processes are expected to
reduce the amount of labor required to _ :·For example, throughout this period ,
produce a unit ot'output. A better indi 2
the growth rate of P1ttsburgh's manu- ~
cator of rpanufacturing activity is value
facturing sector consistently trailed the ,
nation's growth rate, except for a briet' ' added - the value -of the goqds produced, minus· the cost of materials.
spurt in the 1920s and the mid-1950s.
We find that growth rates of manuCleveland's manufa'cturing-emplcryment
grew faster thao the nation's throughfacturing value added for the four cities .
(adjusted by the GNP prj ce deflator) _
out the first third of the ce.ntury, and
,
then
lagged
behind
thereafter.
On
the
show
trends simi lar to those found. in
•
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•
-employment
changes. These trends / •
_ other hand_. Columbus showed higher. than-average growth between .1909
supporJ the conclusion that the d~cline
, and 1970, with only a slight setback , in Pittsburgh's manufacturing- sector
occurred bet'ore the other cities' de- '
during the Great Depression.
cl ine. Furthermore, it suggests that · •
. Another indication of differences in inColumbus's
industrial cycle may_not
J dustrial cycfes is the date in which man"
yet have reached the _mature stage.
ufacturing employment peaked in each •
a
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' Pr~gress in industry depends very largely on the enterprise of '
deep~thinking-men, who ar__e ah~ad of the .times in thei~ ideas.,.
William Ellis, 1818
Future Growth Prospects
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nsi dering a regioo 's future
• growth prospects, one usually rattles
. off a litany of comparative advantages_
and disa~vantages of do1ng business,in
•the area. However, we have fo-und that
focus1ng on a_checkli~tof pros and cons.
of the four Fourth District cities under
·, consideration .does not . satisfactorily
explain their different growth paths. . •' ,
• The ootiori that an industry's life
cycle affect_s a region's ecorromy offers
an interesting point of depart ure from
the usuaJ way ~f thinking about a region's future. One· lesson drawn from
this view is that if a region ties its fate .
, too closely to, a particular industry, ·
then it. will follow the cycle -of_that
industry. Tflis inference can be .stated
in ·a different way~ a region may nfed .
to ,se~er its past dependence on a few
matu"re 'industries i-n order to~position
itself for future development.
There. .is some historical prec_edent
for this .view. Boston's economy had to
be virtually purged of its reliance..on
, th_e textile industry before it was ready
to nurture new, _innovative firms. If
..
1
s~ch a decli~e of a ~egi9n's base.ind~stries is a. neces_sary ]recondition for
advahcing to another wave of development, then the erosion of Pittsburgh's manufacturing base {primarily
in basic steel production) is set_ting t he
_stage for Pittsburgh's renaissance.
There are· already - signs ' of , Pittsburgh's rebirth. As ,we ·pointed out ear- •
lier, Pittsburgh's economy is looking
more and more like Columbus's, with the .nonmanufacturing. sectors, especially .
services, increasingly dominating the ·'
economy. As Pittsburgh's share of these_
·hi_gher-growth:sectors increases, its entire economy may begin to turn around.
Of the fou·r· cities-considered- in this
region, Columbus has been ,the least
_dominated by a few indu~trfe~. Although
this may have ~I.owed its growth in the
pasr,. now Columbus is ·free to devote
its resources to high:growth iodustries.;
'This is already apparent' in'its successful spawning of business services.
lhe Emergence of Services / As ser·.
services, appear to benefit from econvices and ,other_service-producing ir· '
omies of scale or scope. As tt,ese ser'v·i_ce provider's expand, the prices fdr
dustries (wholesale and retail trade;
transpQrtation and public utilities; fi· _ • • their services may fall, which may fur- ,
1 'nance, insurance, and real estate; and
•ther boost the demand for their products_.
go','ernment) continue to increase in imService Sector Productivity Contrary
•• to the common perception th_at there is
portance, there is some ·questioo wh~ther
these activities can sustain lqcal econlittle ~oom for productivity growth withomy. Sonie of the major concerns are: •
in the service sector, som~ervices appear to be experiencing sizeable produc1. Can the service sector maintain its
_ growth . unaffected by manufacturtivity gains. For example, a study done
ing's decline?
by James Brian Quinn and Christopher
. 2, Can the service sector increase its
E. Gagnon, "Will Services Follow Manuproductivity?
facturing into Decline?" finds that ~ub3: Can the servi~e sector pull ·"new"
stitutions of services for manufacturing
-dollars into the local economy, in
. goods may increase productivity and
"the .same way the manufacturing
- value added in real terms. 11 According
sector' has· traditionally done? / ,to their findings, measured value added·
\
Service Sector Growth There are
in some service sector industries is at
least as high as in manufacturing. ,
several reasons to expect growth in the
• service-pro9ucing sector - despite de- _ • ~·1t is l ikely that the use of high-tech
manufacturing produc,ts in services has ·
•clines in manufacturing: Much of the
led to productivity gains in the service
growth in services is occurring as busi•sector. Recent studies show that sernesses increase their outside purchases
of services, such as accountrng,"adver- vice firms are heavy users of sophisti·
tising, engineering, and la"".. If a non.cated manufae-turtng goods. Some 80
percent of th_e computing, communica- ,
service business, such as a manufac-,
tions, and related information Jechnol- , '
.turing plant or a construction firm, contracts out its service jobs instead of .- • ogies equipment sold in ,the United
providing them in-house, the jobs move·
States in 1982 wen,t to the service sec, tor, ·and in Great Brftain 70 percent of
, from being:classified -as nonservice jobs
• '_. to service jobs. Also, the. difficulty bf
all . computer systems sold in 1984
went to the service sector. 12 •
operating sophistic'ated,new information
Large servlce firms (e.g., insurance
, and production facilities has made- it
companies, aij"lines, utilities, commun- •
-more economical for many businesses fo
ications companies, banks, -h_ospitals,
contract out,services rather than train
and retail, chains) may also eric;ourage
. workers or hire highly skilled workers
to provide these services internally. In
tfie development of new manufacturing
technology. Many service industries
other instances, services are direct subhave ' the resources and the rationale
stitutes for manufacturing products. For
. not only to pu,rchase ·technology, but
example, some firms have found that it
makes more financial sense to rent equipalso to help manage its conception,
•design, and development. 13 •
ment than to buy it.
There is some coocern that the recent
Service Sactor ·ExportabllLty Finally,
1
increases in the demand for services by
the conventional view of the servicebusinesses may be only a temporary ad·producing sector (particularly the ser,,justment phenomenon. But many ofthe
vice and _retail _industry) was that it
grew only .as a result o'f a healthy
forces causi.ng the increased demand for
services are unlikely to disappear in the
manufacturing sector, and did not generate wealth for an area. This percep~
near future. Many firms are finding it., too diffi~ult or expensive to provide the
tion of the service sector has ahariged
necessary services themselves. In addi·
·recently. The, service-producing sector • •
i's an exporting sector, · and therefore
tion, many types of services: such as
does have the potential to directly spur
me-dical, . financial, and transportation
local economic expansion . .There are
basically twci ways to ,exporf services:
activities may be transported)and sold
• to persons outside the area {e.g., an
jnsurance carrier)-, or individua\s may·
a
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• this reflects t_he 6eginning of a trend to-.
travel tcr the city to purchase services
.
fy)
ward the exportation of these industries.
facili
medical
regional
(e.g.; a
Thi Future of Manufacturing The serservices
mahy
of
exportability
The
,
in
sector's dramatic rise does not
vice
~evelopments
by
enhanced
has been
necessarily mark the deindustrialitacom'munication, informaHon, and transtion of the nation or of the Fourth Disportation Jechnologies. For exa~ple,
with the relative d,ecrease in the costs • trict. In fac( as mentioned previously,
the relationship ~etween· manufactur-.
of tbese technologies, it is no longer
ing growth and service sector growth is
necessary for essential components of
of_ten complementary. The two se·ctors _
< management t_o be -located near the
may work together to create a healthy,
scene of production.
,
vibrant economy.
Technological innovations and j he in· ,.
Manufacturing will continue to be -a
creasing integra!ion of the world econobasic c;omp~onent of the nation's econ~
my have caused many types of services
omy and the Fourt_h District's .. ln fact ,
to be traded not only across the counit still-~laims roughly the same percentry, but' across the world, International
t~ge of GNP t,hat •i~ did after World War
trade in services (excluding returns from
II, even though its empl.oyment share
foreign investment) reachect more than
has plunged sharply. Fy_rthermore, the
20_ percent. of merchandise , trade 6y
four cities' share of national .manufac1980 and has contihued to go up .14 ,
turing output has fallen only' 1.5 per- ·
There remains, however, the guestion'
certtage points between 1947 and1982 ,
concerning the export potential of service- )
from 5.8 perc_ent to 4.3 percent.
producing firms in tnis District . One
future manufacturing will more than ·
•. way to Qet a sense of the export potenlikely take two divergent paths, simultial of .the servi,ce producers )n this area.·
taneously. The two paths for future manis to look at how successfuL we have
been in the past . A way of measuring _ ufacturing involve the increased mechanization of prQduction processes and an
whether services are exported from or
increased use of highly skilled labor. •
imported into a region is. to determine
The first path 1s toward'more mechthe. location quotient for an_ area's
anized processes, which rely on robot-.
service-producing industries,. The loca-,
ics .and other ~high-tech, labor-savin'g
tion quotient is tlie share of employment
devices. In this field, the Fourth Dis, in an ·industry in'a speci,fic region dividtrict enjoys two major advantages.
ed by the national share of employn:rent
First, the Fourth District has been a
irl"that industry. Barring major differpioneer in the development and manuences in demand for services among citfacturing of robotic equipment. Second ,'
j es, cities with la~ger lo~ation quotients
its industries, in particular steel and
are probably exporting that industry's
' automobile manufacturing, are ·heavy.
services to cities with smaller quotients .
users of robotics, and will increase their
Accordiog to a recent study, the
dependence on mechanization as they
service-producing sectors within the
attempt to streamlin.e production costs.'
Fourth District'cities appear to be conAs a result, even thoug~ steel and autocentrated in slightly to moderately exmobile manufacturing may be considered
portable services.1 5 One striking excepmature industries from the point ot'view
·tion is:Pittsburgh, with its concentration
of engineering services - a 'moderately • of products, they may be advancing to
' to highly exportable service. Tile ex- - another generation of production tech, niques that place them OIJ the innovaporting of engineering services generated an estimated ·13,000 jobs for the . - tipn pha~e of the industrial cycle.
,
,
Pittsburgh economy in 1982,
J n some Fourth District cit'ies, there ....also appears to be a concentration of
industries that have not been characterized by•export activity.' 111 particular,
CleV!Jland sho~ evidence of having a coo- •
centration of account(ng, audit, and book.keeping services - industries that are
ranked the lowest of all of the 53 industries examined.in _export activity. Perhaps
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The second path for future manufaconly' 334 jobs. · In percenfageterms,
. turirig development involves very laborthis·w~s a loss of 31 percent for Cleve, intensive prQcesses that require _the - .
land, ~ompared with only 2 percent _for
craftsmanship of skilled technicians.
Columbus. Employment losses due to
Ttiis type -of activity is.also related t9
_contractions, . ori the ,other hand~. are
the inhov_ation phase·of product and proroughly the same for the two cities. •
,cess development. For example, highColumbus and Cleveland also differ
tech products, such ,as satellites, airsignifi~antly in,the performance of
craft ,- and even robotics, are not
small versus large high-tech firms .,For
assembled on an assembly line, but by
. example, .9uring the 1980-1982 period,
teams of high)y s~illed technicians.
s~veral l~rge, high~tech firms headAlthough the Fourth -District engages in·
quartered outside Ohto ·pulled their.
some of this type ,of manufacturing'
operations out of Cleveland, resulting·.
these industries are still concentrated •
in a 56' percent decline in the city's
in the Northeai;t and Southwest.
employment in large, high-tech firms . • . '
, . Experience with High Tecfi _Even in
In contrast, Columbus, had virtually ho
areas that have a higlJ concentration of
change in employ_
rpent by-large, out-of. ·mature industries, there.are new, highstate, 1 high-tech lirrns . .
tech firms emerging . The opening of .
There. a(e at , least three· possible
new firms in citjes within the Fourth
explanations for . the ,high number' of
• District.may indicate the imn:iinent •
high-tech employm!lnt losses in Cleve--replacement of the, more tra~itional,
land. The first is that Cleveland's busimaturing indusfries.
ness environmenr is not. co11'ducive' tp ,
- Columbtis and Clevelan9 are _contrasb
sustaining new-business.es~ The secQnd
ing examples of higlt-tech employment
is that the new ventures are tied to old ·
change. am·ong; our four cities., At the
. product lines that have- run their
low e'nd, Cleveland lost 22-percent of _ •course. The third, .which is less region- : •
its high-tech .workers between 1980
•ally· sP,ecific, is that the new firms 'are
and;-1982, . _while-Columbus gaiii~ 12
:engaged in untried products and tech: .
.. percent· over the -same period. These
nologies with_high failure rates. All ..
• ag_gregaJe numbers ;d_o not _tell the full
tnree illus_trate -the ~ffect of .produ~t
story, however:
cycle apd industrial aging on a region's ·
•Fiest, Cleveland's high-t,ech employ• future growth potential.
- ment is still much higher than Colu_m_. The Benefits of Diversity. It is a Jact
·bus's. Clevel_arid boasted 37,000 highof in9ustrial life that as industries age
tech jobs.in 1982, while Columbus had,
and strvggle to remain competitive, they.
25,000. :second, the percentage . in- ,
cut costs by-shedding workers. Fo~ a· crease in high-tech employment due to
region to experience steaoy or increas- .. '
•.. the openings of new firms w.as not that
ing e/nploy_ment growth , either-new, indifferent between tne two cities from
novative firms must be nurtured while
·•1980 to 1982. Cleveland experienced ~n
older, larger-scale firms are sustained;
, 11 percent increase;.Qofum.bus had a 14 - _ or prnduct ··a~d process .innovations .
-percent incre~se: The increase i~ e01ploymust be continually,developed by older
ment due to the exp~nsion of -existing
firms. But not all regions can easily
firms was· approximately the same for
: fost~r this type 'Of-economic diversity.
t.he two ·cities, at around 4percent
• A .concentration of older firms may Where Cleveland loses out ls-in tt,e
develop; which would have a tendency
, closings of high-tech firms. Cleveland
to reduce innovative activities.
Jost 15,000 jobs irom closings during .
Diversity, either within a region or
the 1980-1982 period; Columbus lost
among regions, has several benejits for .
promoting fut~re eeonomic growth. For
ex.ample, growing industries in .one
/,
area can absorb the resources released
•from declining industries ·in other are~s.
As companies within one part of the
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Products,
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-- .
Industries rise and
fall In relative
Importance as
economle_s change
over time .
•
'
'
•
region grow and d,emand more products,
the Cleveland ·area between 1975 and
suppliers fr,om neighboring areas may
1980. The growing Columbus-economy
also grow.
may later serve as a major market for
For instance ; the decline of the steel - Cleveland's companies - and engender
, industry in Cleveland and, Pittsburgh,
future employment growth in Cleveland .
, and the move tg make it more efficient,
Finally, the entry Qf new firms into a ,
have left many workers without jobs.
closely knit economy creates a competAt t~e same time, Co~umbus's expan• itive environment. This may induce the
sion has absorbed some · of the dismore entrenched firms to adopt costplaced workers. Migration statistics
saving innovations at a faster rate than.
show that Columbus was one of,' the
• if they remained isolated, by aist-ance
largest recipients of individuals Jeaving
from, their near~st competitors. ,
'
.
)
.
, ,"There is nothing ~or, dangerous to, manage Iha~ the qreation· of:
a new order ~f t~ings .. : the Initiator hrs_the enmity of all who
would proflf by the preservation of the old Institution, and·inere
lukewarm defenders of those who would ·gain by the new ones." ·
Niccolo Machlavs/11, c. 1520
'
The Leston of Risk
In this essay, we highlighted the diversilooked at the second theory, the natu• ty within the Fourth District and considral aging process of industries. This '
ered some explanations for the diver- ' industrial life c;,ycle explanation sug/
gent employment growth paths of its
gests that, as industries mature, they
four largest cities. We found that at •
shift their energies from deve_lopi,ng
this, po.int in •the reg'ion's economic
new products ana techno_logies to cut- .
development, Columbus is gro'wing
ting costs. At the same time, they
' ••
most quickly; and has replaced Cleve-''
mo~opolize resources
that otherwise
tan? and . Pittsburgh af the region's
would be directed to more innovative,
growth leader. ,
. •but riskier, ventures.
•
'
Columbus's growth is buoyed primar- .
·· One tesson from this exploration into
ily by business se"ryices; while -Cincinthe economic developnient of ttie$_e four.
nati and Cleveland continue to rely to a
cities is that a prerequi.site for future
large extent on their traditional indus- growth is the aoilitV to break with the
tries~ Pittsburgh ,. on the other hand, is
apparent security of the past and a will·expe,riencing a dramatic transformation - - ingn~ss 'to assume the risks of the futu~e . ,
from a.manufacturing-dominated econ·Too many regions have·leamed this les·omy to_ a service'-oriented one._
son the hard way by tying their future
We presented1wo complementary exto fam,iliar _
but declining industries.
planations of the observed differences
• Perhaps the success 6f the United
\n 1he employment growth rate~ of -the
State~ in genera\ing more than 30 mil· •
four •Fourth bistrict cities. The first
lion new jobs since .1970 rests with its
, explanation is based on locational ad- ·,
regional diversity. This diversity offers
, vantages, wit~ specific references to
ample opportunities for the kind of in·
differences in factor costs and locationdustrial restructuring necessary to pro·
al arrienitres. This exp.lanation ·provides
mot,e}uture grow'th. One of the bright /
. - insight into Why various industries origpoints on th~ Fourth District's. horizon ,
inally concentrated in certain areas. •
is' that it", too ,, has this diversity.
To explain why cities appear to lose
Whether this will lead to future .growth
their comparaHve advantage ,_·'!'e
,depends, in part, on the willingness of
I·
its managers and work force to rekindle
an entrepreneurial spirit and to 'be .,
'I
receptivaJo change.
'
r
Footnotes
References
1. The ilegree of manufacturing concentratio~
is measured by the perce(\tage of total employment iri the-four largest two-digit S!C categories of manufacturing industries, divided by
total employment. •
Ba~che,. James R. "~liminating _
Bar;i:iers to
lntematio.nal Trade and Investment in Services,"
The Conference Board Research Bulletin, no.
: 200 (1986).
'
2. Fortune Market Research Survey, Why Cor-.
• porate America Moves Where (Tirne Inc. ,: .
1982). p, 9;_Joint Economic Committee, Location of High Technology Firms and Regional
Economic Development (Government 'Printing
_Office, 198.2), P;. 25.
•
. 3. Randall W. Eberts <1nd Joe A. Stone, "Labor
Cosi Differentials: Causes and Consequences,"
Federal Reserve Bank of Cleveland, Economic
Commentary, December 1, 1986.
. ,,
4. Labor costs.in this analysis-include the
hourly wage paid to workers within a metropolitan labor market. The user cost of eapital is a
composite measure of interest costs, 'depreciation, and local taxes arid is best described as
the current'dollar price of renting a unit of capital for a single·per1od.
••
5. Richard Boyer and David Savageau, Places
'
. RateiAlmanac (Rand, McNally,
. , 1985).
~
Booth, Douglas E. "Long Waves and Uneven
Regional Growth," Southern Economic Journal,
vol. 53, no. 2 (Octobet 1986), pp. 448-460.
"
,
Boyer, Richard, and Savageau, .David. Places
Rated Almanac. Chicago: Rand McNally, 1985.
Eberts, Randall W., and Stone, Joe A. "_Labor
Cost Differentials: -Causes and Consequences,"
Federal Reserve Bank.of Cleveland, Economic
·Commentary(Decernber 1, 1986). -·
Fortune Market Research Survey. Why Corporate America Moves -Where. N.ew York: Time
'Inc., 1982.
'
"-,
,
• Hogan , William T. Economic History of the Iron
and Steel lngustry in the United States; vol. 1,
parts I ahd IL Lexington: Lexington Books, 1971"
.
\
Kamien, Mort I., and Schwartz, NaJlCY L.
Market Structure and Innovation. Cambridge, '
Mass. : Cambridge University PJ_ess, 1982.
McLaughlin, Gleno E. Growth of American
Manufacturing Areas. Pittsburgh i University of
• Pittsburgh, Bureau of Business Research, 1938.-,
6! Mort L Kamien and ·Nancy L. Schwartz,
Market Structure and Innovation (Cambridge
University Pre$$, 1982). •
7. Douglas E. Booth, "Long Waves and Uneven ,
Regional Growth ," Southern Economic Journal, -vol. 53 , no. 2 (October 1986), pp. 448-460.
a
8. For example, number of 'tack-alley"
entrepreneurs sprang up in theaPittsburgh area
after long layoffs of steelworkers prompted
. • them to find other ways qi _making a living
without le<!ving the area.
9. Mancur Olson, The Rise and Decline of·
Nations: Economic Growth, Stagflaiion, and
Social Rigidities (Y~le University Press, 1982).
'10. William T. Hoga·n, Economic History ol the
Iron and Steel Industry in the United States,
, . vol. 1, parts I and II (Lexington Books, 1971 ).
', '
11. James Brian Quinn and Christopher E.< Gag- .
non, "Will Services Follow Manufacturirtg into
• Decline?," ·Harvard Business Review, no! 6
'(November-December 1986), p. 96.
12. Richard Kirkland, "Are Service Jobs Good Jobs?" Fortune (June JO, 1985), p. 38; and
"lnformatioD Makes the Money Go Round ," City
of London survey, The -Economist (July 6,
1985), p. 5.
fa. Quinn and Gagnon, "Will Services Follow
Manufacturing fnto Decline? ," p. 97.
14. U.S. National Study on Tra~e iQ 'services: ·
A Submission by the United States Government
to the General Agreement on Tariffs and Trade,
1984 '(Gov.er_nment Printing Office, 1984).
15. Erica Groshen, "Service Industry Employ_ment : Is the Fourth District Becoming ServiceIntensive?" Federal Reserve Bank of Cleveland,
EcQnomic Commentary (forthcoming).
, 1 19
0lson, Mancur. TheRise and Decline of Nations:
Economic Gfqwth, Stagflation, and Social Rigidities. New Haven: Yale University Press, 1982.
"Pittsburgh Regiona( Planning Association.
Region ,with a Future: Economic Study of the
Pittsburgh· Region. Pittsburgh: ·university of .
Pittsburgh Press, 1963 .
Quinn, James Brian,- and -'Gagno'ri, Chri$topher E.
"Will Services Follow Manutacturing into
·Decline?" Harvard Business Revi~W. no. 6
(November-December 1986), pp. 95-103.
U.S : Congress. Joint Economic Committee.
Location of High Technology Firms and
Regional Economic Development. Washington :Govemment Printing Office, 1982.
U.S. N{Jtional Study on Trade_ in Services: A Sub- ,
mission by the' United States ·Government to the
General ·Agreement on Tariffs and Trade, 1984·. •
Washington: Government Printing Office, 1984.
- i
• Comparative,,. financial_Statement
_For yl:lars ended pecember 31
•
'.
f' • .
.
I
(
• •Statement of
,Condition
J.
Assets
1985 • -
/
-
.Gold certificate account . . . . . . . . . . . . . . . . . . . . . . $
'special drawing rights certificate account : ..... , ..
Coin .. ·.: .•.. . -.". : ·•r • •• ,- .:-• •••• ·.: -: -~ • • ••••• : • •
Loans and securities:
Loans to depository institutioris -•... . .. -.•....... • - ' - 205', 9~0 ,000 )
,Federal agency obligations bought outrigh_
t .. •.... . 1 , 459,763,588
U.S. government securities:
. Bills ............. , .. . ..... . . ._. . .' . . . . . '. 6,094-,013,060
t-lot~s ,• ..... : . . : . ... ; . ... .-. :'.... . _'. ... - 4;009,564,83~ ,
• • Bonds ...-.. 1 . . . . . . . . .. . . . . . . . . . . . . . : . --o 1,510,589,056·
.
Total U.S. government securities ......... • -1 1,605,166,955
Total loans and securities ...... .. : ~-..... 12,270,890,543
. Cash items in process of collection ....... . , . . . . . .
375.,305,015
Bank premises .. :.· ....; ...... .•....... : ....... :.
31,540,886
bther assets .... ·.-. .................. .'. .....
, 7'2_1,968,876- ·lnterdistrict settlement ace.aunt • ..... : ... , . . . . . .
·247,216,0.13
$ - 6_35,000,000
270,000,000 ,
32,8?6:806 .
• • TOTAL ASSETS .... , : ......... ·.. : -~-: . . ·. . $14,694,169,532 -
~13,301,969,739
,
\.
1986
.
65_0/000,000
314,000,000
33,248,199
(.
,
• 4,993,731 ;997
3195.4,442,018
1A,45,438,895
10,393,612,910
11,027,943,848 .
431'.748, 745
• 28,367,930° I
660,983;4.18 • 21,5,0~8,992 .
I
Llabllltles
Federal ~eserve notes .... . . ... ...... ,.-.. . . .- . . $12,482,060,679
Deposits;
..
. Depository
institutions
..
:
.
.
. . . . . . . I.· . . . . . . . . . 1,-527,,564,394
'
Forei_gn ; .......... .,:: . ........ . . : ... ; . . 9,000,000
\
.
Other deposits .. •. ~ .... , .......... •...•.... .- • . 26,903,549
Total deposits- ....... : . .'. .. : : .- . .' . . . . . . .
1,563,467,~43
Deferred availability cash items · ,. ...... : . .'. ;. ·; . .'~
-297,722,195
Other liabilities . . :. . : . ......... . ........ .'....
. 128,290,115
;
. _153,376,400:
4?0,954,53.8 _
.
I
'
I
'
I
1,125,625,7'.95
• 9,600,000
43,575 ,-363
1,17~.801,158
.• 434,129;847
133,~161285
. -
TOTAL LIABILIT1ES ...... : . . ...._....-.~ ... ' $14,471,540,932
, Capltalaccounfs
Capital paid i_
n ~ .-...... . .. .-. . .-.. : : . ...... -.. . $
Surplu~ ... : . ... .-.. .- . : ~ ...... ._: .. ;, . .... : ..
$11,341 ,.421,849
111,314,300
111,314,300:
$13,087,969,139 • •
(
107,000,300
107,000,300 ,,. '
, TOTAL CAPITAL ACCOUNTS .... : ...... . ,. . . $. 222;6?8,600 -: $ 214;000,600
TOTAL .l:.I ABILITIES AND CAPITAL ACCOUNTS ~ : • $14,6~4.169,532 . . $13,301,969,739 ~
·,
\
-
I
•-
'
I.
'
I
\
I
\ .
-
_I
Income and
~xpenses
Currant Income ,
1986
/
$'
67§~ 80 ,;·
Interest on foans
941,194,643.
Interest ori government securities .... I •• · '· •• ,• •• •
Earnings on foreign currency . -:.-. .......... ~ .. , .
23,594,141
Income from .SeliViCes ... '. ............... . .· .. .
38,173,955
All othe~i_
ncome ......... : ..... : ....... : ... ...
. 415,209
Total current income . / . ......... : . : . .. . .. -. - $1,004,052,128
Current operating expe~ses ... .• : . ... .- . . . . . . . . . . .
'61,?98,377
Cost <if earnings credits ..... .' . ... _- . ..... •.. : '. .
• ~.581,389
• • • • • • • • • ••
,
• • • • : •• • • • • • • :.
·CURRENT NET. INCOME ..... ... ... : .,...
ro
• • •
• ••
,,
Deductions from current net income •
Loss on foreign exchange transactions . . ........ .
-All other deductions ... , . : . •... •........... : .
Total deductions ...... ~ ... ._.. ,.. _.__. ....... ~
Net additions or deductions . : .......... : ..... .
I
Assessments by Board ol Governors
Board of G·overnors expenditures ............... .
Federal Reserve -currency costs .. : .. , ........ : ..
Total asse..ssments by Board of Governors · : ..... .
.-
1
•
,
'
-05,032,520
$
5;032,520
$ 117,132,998 $
$
$
0
'5 ,865,800
1r ,299.418
11,165,218
I
2,106,227
96,4,682,089 _
.14,566,789
36,425,345
' 498,194 '
$1,018,278,604
58,961,748
8,534,049
$ . 77,442,770
5,627,610·
/
5,239
$ 83,075,619
. ~o- , ,
434,824
$"/ , 4~4,824
$ &2,640,795
'$
~
$
$
-
·NET INCOME AVAllABLE FOR DISTRIBUTION -. ... - $1,'Q33;140,142
• /
$
$ '950,782,807
$ . 933,172,362
Profit and loss
Additions to current net income
-Profit on foreign exchange fr~nsactions . : .. .. . , . ., . $ 118,237, 824
Profit qn sales of government securities -'. : .. : ... .
. 3,918 ;5_60
All other additions .. •............... , ..... -:
9,13~ ·
Total additions ... ; ........... : . .'. , . . . . . $ .122,165,518
,
1985
1
4,902,500
10,450,559
15;353,059
Dlstr.lbullon; of net Income . =
.
Dividends paid ......... . .................. .- $. 6,590,413
Payments tci u·.s . Treasury
.
'(interest on .Federal Reserv·e notes) . . ..... : .. • 1,022;,235,729 - - 4,314,000
Transferred to surplus ... : ; ...• ............ . .. .
Total _distributed .- : -. .......... ; ........ •.... . : $1,033,140,142
'-
$ __ 6,349;649..;
1,008,680;244
·, 3;040,650
$1,018,070,543
I
·_(.
'.
-r
·'
$1,018,070,543
~.
.
Federal
Reserve
Bank of.
·c1eveland
Dfrectors •
I
As of December 31, 1986
I
)
,
'
\
/
Cincinnati .
Chairman
& Federal_ Beserve Agent
Wllllam H. Knoell
Presidf!nt • , • •
& Chief Executive Officer
_,
'
Cyclops CorporMion
Pittsburgh, Pennsylvania .
Chairman
Chairman
-- James t Hm
Dwan B. Butler
Retired chairman of the Board President
• & Chief-Operating Officer ·
The Procter&. Gamble
National Intergroup, Inc.
Company
Cincinnati, Ohio - /
Pit!sburgh, Pennsylvania
. Sherrlll Cleland
Cha_rles L: Fuellgraf, Jr . .
Deputy Chairman • \ •
President
Chief Executive; Officer
E. Mandell de Wlndt
'Marietta College
Fuellgraf Eiectric Company
Retired Chairman' of the Board • Marietta, Ohio
• Butler, Pennsylvania
saton Coli{Jora_tion
Vernon J. Cole
Lawrence F. Klima
Cleveland, Ohio
. Executf ve Vice President
President
& Chief Executive Officer
The First National Bank
d. David Barnes
• Chairman /
Harlan National Bank_
of Pennsy1vania
Erie, Pennsylvania •
H~rla'n, Keritiicky
& Chief Executive Officer
• Mellon Bank
Robert A. Hodson ·:
James S. Pasman, Jr.
Pittsburgh, Pennsylvania
President
Former Vice Chairman
& <;hief Executive-·Officer
. Aluminum Gompany of Ame,:ica
Raymond D. Campbell
1st Security Bank
Pittsburgh, Pennsylvania
Chairman, President
Hillsboro, ~hio
& Chi~f fxecutiv.e Officer
G. R. Rendle
lndependen.t Sta~e
•
Kate Ireland
President
Bank, of OhioNational Chairman
&-Chief Executive Officer
Columbus, Ohio
, Frof}tier Nursing Service
"Gallatin National Bank
Wendover, Kentucky
Daniel M: Galbreath
Uniontown, Pennsylvania
President
Karl M. von der Heyden .
Jerry L. Kirby
•John W. Galbreath Company
Chairman of the Board
•Senidr Vice President -~- Finance
Columbus, Ohio •
& Chief Executive Officer
& Chief Financial,Officer·
John R. Hall •,
Citizens Federal Savings , , • ' . H.J. Heinz Company
• & Loan Association _
• . Pitt$bargh, _Pennsylvania
Chairman of the Board
& ·Chief_-Executive Office(
Dayton, Ohio
'
MIiton A. Washington
Ashland Oil, Inc.
Don•Ross
President ,
Ashland, Kentucky
Owner
& Chief Executive Officer
Dunreath Farm
Richard D. Hannan
Allegheny Housing Rehabilitation
Lexington, Kentucky .
Chairman of the Board
Co[poration
/
•& Chief Executive Officer
Pittsburgh, Pennsylvania
Mercury Instruments, Inc.
,·
I
Cincinnati, Ohio
John R. MIiler
Former President
& Chief Qperating Officer
Standard Oil Company of Ohio
Cleveland,
. , Ohio
/'
Pittsburgh
Cleve Ian~
. William A. Stroud
Chairman & President
First-Knox f-!a'tional Bank
Mount Vernon, Ohio
j
,
Federal
Reserve
Bank of
Cleveland
Officers
As of March 1, 1987
Karen N. Horn
President
William C. Schneider, Jr.
Vice President
William H. He~drlcks
First Vice President
Mark S. Sniderman
Vice President
& Associate Director
of Research
Randolph G. Coleman
Senior Vice President
John M. Davis
Senior Vice President
& Director of Research
John J. Ritchey
Senior Vice President
& General Counsel
Robert Van Valkenburg
Vice President
Andrew W. Watts
Vice President
& Regulatory Counsel
Martin E. Abrams
Assistant Vice President
Lester M. Selby
Senior Vice President
& Secretary
Oscar H. Beach, Jr.
Assistant Vice President
Samuel D. Smith
Senior Vice President
Margret A. Beekel
Assistant Vice President
Donald G. Vincel
Senior Vice President
Terry N. Bennett
Assistant Vice President
Robert F. Ware
Senior Vice President
Thomas J. Callahan
Assistant Vice President
& Assistant Secretary
John J. Wixted, Jr.
Senior Vice President
Andrew J. Bazar
Vice President
Jake D. Breland
Vice President
Andrew C. Burkle, Jr.
Vice President
JIii Goubeaux Clark
Vice President
& Associate
General Counsel
Patrick V. Cost
Vice President
& General Auditor
Randa II W. Eberts
Assistant Vice President
& Economist
John J. Erceg
Assistant Vice President
& Economist
Robert J. Falla
Assistant Vice President
Robert J. Gorius
Assistant Vice President
Norman K. Hagen
Assistant Vice President
David P. Jager
Assistant Vice President
Lawrence Cuy
Vice President
Rayford P. Kalich
Directing Officer
Creighton R. Frlcek
Vice President
Elena M. McCall
Assistant Vice President
John W. Kopnlck
Vice President
R. Chris Moore
Directing Officer
Robe rt W. Price •
Vice President
Sandra Pianalto
Assistant Vice President
Edward E. Richardson
Vice President
James W. Rakowsky
Assistant Vice President
David E. Rich
Assistant Vice President
r
Susan G. Schueller
Assistant Vice President
& Assistant General Auditor
Burton G. Shutack
Assistant Vice President
Peter D. Skaperdas
Assistant 'Vice President
& Assistant Director
of Research
r
William J. Smith
Assistant Vice President
Edward J. Stevens
Assistant Vice President
& Economist
Walker F. Todd
Assistant General Counsel
& Research Officer
DarelJ R. Wittrup
Assistant Vice President
Cincinnati Branch
Charles A. Cerino
Senior Vice President
Roscoe E. Harrison
Assistant Vice President
David F. Weisbrod
Assistant Vice President
Jerry S. Wilson
Assistant Vice President
Pittsburgh Branch
Harold J. Swart
Senior Vice President
Raymond L. Brinkman
Assistant Vice President
\
..
I
Lois A. Riback
Assistant Vice President
Robert B. Schaub
Assistant Vice President
Columbus Office
Charles F. Williams
Vice President
'"
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