Midwestern Metropolitan Areas: Performance and Policy First in a Series of Workshops to Be Held at the Federal Reserve Bank of Chicago

Number 1 ASSESSING THE MIDWEST ECONOMY Looking Back for the Future ’88 ’92 ’96 ’90 ’94 Midwestern Metropolitan Areas: Performance and Policy First in a series of workshops to be held at the Federal Reserve Bank of Chicago. The Federal Reserve Bank of Chicago recently initiated a comprehensive, long-term study of the regional economy, Assessing the Midwest Economy: Looking Back for the Future (see page 15). The study is intended to foster a better understanding of the Midwest’s prospects by examin- ing the turnaround in the region’s economy since the early 1980s. On November 28, 1995, the Bank held its first project workshop as part of the year-long study. The workshop focused on the economies of the region’s metropolitan areas. This is the first in a series of reports which will summarize the findings/directions identified at project workshops. Federal Reserve Bank of Chicago Conference Summary In the Seventh District, Why approach the changing Midwest economy from the perspective of metropolitan 76 percent of the popula- areas? Most fundamentally, we have become a nation of metropolitan areas. In the Seventh tion resides in the region’s District and throughout the U.S., population and jobs continue to become concentrated 41 metropolitan areas and, into metropolitan areas. Over the course of this century, metropolitan population has similar to the nation, 46 increased from 30 to 40 percent of the nation to almost 80 percent today. In the Seventh percent of the region’s popu- District, 76 percent of the population resides in the region’s 41 metropolitan areas and, lation resides in metropoli- similar to the nation, 46 percent of the region’s population resides in metropolitan areas tan areas that have one that have one million or more residents—Chicago, Indianapolis, Detroit, and Milwaukee million or more residents— (figure 1, table 1). Chicago, Indianapolis, Detroit, and Milwaukee. Figure 1 Geography of Metro Areas, Seventh Federal Reserve District Green Bay Oshkosh Saginaw Sheboygan Grand Rapids Flint Milwaukee Lansing Madison Racine Sioux City Dubuque Janesville Cedar Falls/ Kenosha Waterloo Rockford Benton Detroit Cedar Rapids Harbor Kalamazoo Iowa City Elkhart Chicago Jackson Des Moines Davenport/ South Ann Arbor Moline Bend Gary Fort Wayne Kankakee Peoria Normal/ Lafayette Kokomo Bloomington Muncie Te r r e Urbana- Haute Springfield Champaign Indianapolis Decatur Bloomington Note: Heavy black line indicates border of the Seventh District. Source: U.S. Office of Management and Budget. Table 1 Metro/Nonmetro Population, 1993 (000s) Non- % Non- Metro metro % Metro metro U.S. 205,489.0 52,294.0 79.7 20.3 Illinois 9,817.6 1,868.3 84.0 16.0 Indiana 4,088.0 1,617.5 71.7 28.3 Iowa 1,238.5 1,582.8 43.9 56.1 Michigan 7,813.3 1,646.4 82.6 17.4 Wisconsin 3,431.2 1,312.8 72.3 27.7 Seventh 26,388.6 8,027.8 76.7 23.3 District Source: U.S. Department of Commerce, Bureau of Economic Analysis (BEA), Regional Economic Information System (REIS). 2 It is not surprising, therefore, that the Midwest’s current economic turnaround has been manifested in metro-area performance (figure 2). Metro and nonmetro counties alike have rebounded from the late 1970s through the first half of the 1980s when income and production fell sharply in both manufacturing and agriculture. The common direction of income growth experienced by metro areas (irrespective of size) and nonmetro counties suggests that the Midwest often experiences a common economic fate, either because of market links with other regions or because of tight economic links within the region. Despite the region’s aggregate fate, individual metropolitan areas of the Seventh District experienced sharp disparities in income growth from 1977 to 1993 (figure 3). An understanding of these disparities could provide important insight into the region’s performance. Many analysts assert that the metropolitan area has become the fundamental and cohesive geographic unit. Any individual metropolitan economy relies on a common labor force, federal and state government (typically), location, climate, and infrastructure. Over time, barriers to world trade and investment have fallen, and the typical metro area’s specialization in production has increased. Consequently, metropolitan areas have become more distinct as their trading relationships with the world economy have grown. Figure 2 Change in Real Personal Income by MSA Size, 1977–93 percent 45 MSAs Nonmetro Large Medium Small areas 30 15 0 -15 1969-77 1977-85 1985-93 1969-93 Source: U.S. Department of Commerce, Bureau of Economic Analysis (BEA), Regional Economic Information System (REIS). Figure 3 Change in Real Personal Income by MSA, 1977–93 percent 60 30 Kankakee, IL Detroit, MI Kokomo, IN Kenosha, WI Benton MI Harbor, Jackson, MI MI Saginaw, Davenport, IA/Moline, IL IL Decatur, IA Dubuque, Peoria, IL Cedar Falls, IA IN Gary, MI Flint, 0 Muncie, IN IN Haute, Terre Racine, WI Rockford, IL WI Janesville, IL Urbana-Champaign, Lansing, MI IN Bend, South WIMilwaukee, Kalamazoo/Battle Creek, MI Cedar Rapids, IA Wayne,Fort IN Springfield, IL Chicago, IL Sheyboygan, MI Elkhart, IN IA Moines, Des Indianapolis, IN Lafayette, IN MI Ann Arbor, Grand Rapids. MI WI Oshkosh, IL Bloomington, IN Bloomington, Green Bay, WI Madison, WI Iowa City, IA -30 3 Source: See figure 2. One example of the increasing economic specialization of the metropolitan area was offered by Geoff Hewings, director of the Regional Economics Applications Laboratory (REAL) at the University of Illinois at Urbana-Champaign, and Phil Israilevich, senior economist and research officer at the Federal Reserve Bank of Chicago. In their innovative approach to modeling and analyzing the Chicago-area economy, they found that many of the factory-to-factory trading linkages within the Chicago-area economy have disappeared dur- ing recent decades as the region has lost 300,000 manufacturing jobs. Overall, this indus- trial transition, in which the Chicago-area economy has been “hollowed out,” has been less harsh than expected. Israilevich suggested that economic transformation is often a less difficult process than may be thought. As jobs relating to outdated or unproductive func- tions are eliminated, new jobs tend to be created. To understand the labor force implica- tions of economic change, it is increasingly important to view labor growth relative to output. Israilevich stressed that increases in final demand for products were critical in deter- mining trends in manufacturing employment. Chicago’s estimated exports Hewings stressed that productivity and output growth have been sustained as the to Mexico amount to approx- Chicago metro area has replaced its internal trading linkages with external partners— imately $1 billion per year not necessarily with foreign trading partners, but rather with other large U.S. metro areas. and Canada $7 billion per Chicago’s estimated exports to Mexico amount to approximately $1 billion per year and year, while the region’s trade Canada $7 billion per year, while the region’s trade with the rest of the U.S. is gauged at with the rest of the U.S. is $140 billion. gauged at $140 billion. As metropolitan areas become more linked and competitive with external economies, what characteristics will determine their economic fortunes (and those of their regions)? Richard Mattoon, senior economist at the Federal Reserve Bank of Chicago, suggested that the arrangements by which metropolitan areas are governed in the U.S. vary greatly. Our highly decentralized system of local government has yielded a highly fragmented system in many of our metropolitan areas, with much variance from region to region and from state to state (table 2). Table 2 Number of Governments Municipal Special Districts Metropolitan Area* 1957 1992 1957 1992 Chicago 248 315 333 605 Des Moines 42 41 21 38 Detroit 106 120 23 46 Indianapolis 70 62 28 136 Milwaukee 59 65 15 39 *Defined identically for 1957 and 1992. Source: U.S. Department of Commerce, Bureau of the Census, Census of Governments (various years). Accordingly, it has been suggested that regionwide governance policies might pro- mote the health of the metropolitan area by redressing the inefficiencies associated with a fragmented system of government. There are only a few regional institutions available to serve as case studies for evaluating this thesis. Still, some midwestern models do exist, and Mattoon suggested that their experiences may encourage some metro areas to adopt more 4 cooperative or even unified government structures. For some time now, Indianapolis and Minneapolis-St. Paul have operated various forms of metropolitan government in an effort to channel growth while fostering more efficient delivery of government services. Much discussion of regional metropolitan governance centers on the relationship of central cities to their suburbs, perhaps because lagging performance is evident in many older central cities of the Northeast and Midwest. Some have suggested that the changing needs of the economy in the 1990s has rendered these older, high-density central cities obso- lete. Businesses and people have spread out across metropolitan areas because doing so is rational and efficient. However, recent empirical and anecdotal evidence also suggests that healthy suburbs may stagnate without healthy central cities. Others assert that the decline of central cities has been unduly subsidized—perhaps deliberately—through an array of government tax policies and expenditure programs which have encouraged expansion toward the urban fringe. A corollary of these findings might suggest that entire metropolitan areas—both city and suburbs—should be optimally configured. Some cite evidence that the current pattern of economic and population deconcentration may not be beneficial to the prospects for the entire metro area, as suggested by increasing congestion on suburban roads, income inequality among communities, and towns entering into unproductive bidding wars to cap- ture commercial development.

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