How the Midwest Kicked Some Coastal A$$.

September 16, 2013

"Honestly, in the beginning, it was really tough. Coming from Cincinnati, Ohio, I was just a girl who had a dream, which was to go to Los Angeles, have a career and be able to support my family."
-Carmen Electra

. . .
Spent the weekend in San Francisco. Left my wallet. Not my heart.
San Francisco is the center of cool. Like New York, with a feminine, eastern mystique.
Great restaurants. Smart people. America's Cup in the Bay. Big crowds with big money. But, appearances can be deceiving.
California is as broke as the homeless denizens of Golden Gate Park.
The average California resident owes a $73,000 in consumer debt per capita. Add another $11,000 in state obligations.
California isn't alone.
New York, Connecticut, Illinois and Massachusetts are struggling. High debt. Low GDP. In fact, it seems a number of the coastal states, with their big, metropolitan cores, business centers and dynamic cultural offerings are barely staying ahead of their obligations.
If its solvency you seek, a fiscally dynamic, debt-free zone, look no further than the Midwest. The Rust Belt. Those boring flyover states.
Minus Illinois and its big government, unions and problems, many of the flyover states are, well, kicking ass and taking names.
The U.S. is on the road to economic recovery. Slow and grinding. But improving, nonetheless. The recovery, however, is uneven and inward facing. The states participating are not those you'd immediately guess.
The story is analogous to that of many families. Dressed to the nines. Nice cars. Big homes. Lots of flash. Then, bam! No home. No nice cars. No flash. Buried under a debt tsunami.
You can act rich, or you can be rich. It's difficult to do both.
Many states spent the last 20 years acting rich. Today, they're being decimated by high unemployment, mounting debt loads and low GDP growth. When times were artificially good, politicians promised the moon and stars. Then reality set in.
Consider Detroit. In the 1960s, Detroit was a world class city. A beacon of progress and productivity. Its population swelled to 1.8 million. Motown vibrated. Four professional sports franchises and an auto industry that was the envy of the world.
Michigan's politicians figured they had a bottomless ATM. They committed to public salaries and pension benefits that trumped private sector benefits. They frivolously spent on infrastructure. Lavish, aesthetic structures and tourist attractions. They promised lifetime safety nets.
The train wreck was visible for nearly two decades. Yet, Motown's politicians did nothing. Until, poof. All gone. Population withered to a third its former size. The nation's largest bankruptcy, ever.
Detroit may be the precedent. But it's not unique.
Illinois. New York. California. New Jersey. Connecticut. Each share similarities to those recently seen in Michigan and Detroit.
Meanwhile, the 17 flyover states are thriving.
The U.S. economy may be growing at 2 percent per year, but the disparity between the coastal and flyover states is startling.
From 2008 to 2011, North Dakota's economy grew by 27 percent. Louisiana's rose by 16 percent. Iowa and Nebraska each incurred 11 percent growth. The coastal areas? Barely positive. Except for Connecticut. Which was negative.
According to debt analyst Meredith Whitney, the 17 states comprising the nation's inner corridor grew by a collective 8 percent from 2008 to 2011. The nation grew its economy by 6 percent. The coasts, having lived like Gatsby prior to 2008, grew by 2 percent.
Last year, Indiana, Ohio, Missouri, Colorado, Oklahoma Kentucky, Iowa, Kansas, Nebraska, North Dakota, Texas and Wisconsin all posted better economic growth than New England, New Jersey, New York and Connecticut.
In her book, Fate of the States, Whitney explains that the housing boom concealed structural weaknesses within California, New York, New Jersey and Arizona, among others. The housing bubble encouraged state and local governments to spend recklessly. To make big, unsustainable promises to wide population swaths.
Meanwhile, the nation's central corridor, having missed out on much of the boom, now holds the upper hand. Lacking large debt and pension obligations, the flyover states have resources to attract new businesses and residents. All of whom might also find the lower tax rates appealing.
Accordingly, whereas cities like Detroit have seen city services gutted, cities like Indianapolis have invested in schools, infrastructure and jobs. As the economy becomes digitized and less dependent on geographic constraints, Fortune 500 firms may no longer tether themselves to New York or Los Angeles. Preferring to relocate to more tax and family friendly locations. Lured by economic incentives that struggling coastal states cannot afford.
Consider a company headquartered in Silicon Valley. California's corporate tax rate is 8.8 percent. The sales tax is 7.25 percent. The cost of living is astronomical. Social services are diminishing.
The same company could relocate to Nevada. Incur zero corporate taxes. Lower sales taxes, and lower costs of living.
Corporations are taking notice.
Indiana recently ran a print advertising campaign in California showing a coffee-shop napkin with the message, "Admit it, you find me fiscally attractive."
You've got to appreciate the Hoosier state's moxy. And it's paying off.
In 2012, Toyota announced a factory expansion in Indiana. The auto manufacturer will spend nearly half a billion dollars to move its Highlander production facility from Japan.
Boeing is moving its production operations to Oklahoma and Texas. Tech giants like Amazon, Google and eBay are investing hundreds of millions to build facilities in business-friendly Texas, as opposed to California.
And it gets more interesting.
Financial infusions are arriving in former rust-belt states via the natural gas renaissance. Texas, Colorado, North Dakota, Ohio, Pennsylvania and Louisiana. Welcome to Saudi America.
Domestic oil and gas production is increasing for the first time in 20 years. In May of this year, the U.S. became the number one petroleum producer in the world. And America produced 90 percent of the energy it consumed. All thanks to huge shale deposits in the business friendly, fiscally responsible flyover states.
The shale gas revolution will continue to attract businesses to rust-belt states. Corporations cannot overlook the logistical and fiscal rationale of such relocations. As employees get a taste of the lower costs of living, they will applaud such decisions. And affirm similar future decisions.
Soon, Cincinnati will displace The Big Apple as the business and cultural center of America...
Just kidding. New York isn't going anywhere. Better hot dogs. Restaurants. Jazz. Sports. Broadway. Wall Street. Madison Avenue. Etc.
Yet, a geographic sea change is transpiring. Economic power is shifting away from the traditional coastal centers, still recovering from their credit-bust hangovers. The fiscally attractive inner corridor is bringing its A Game. Tax breaks. Financial incentives. Low costs of living. Family friendly atmosphere. Safe, affordable schools. Goetta. And cheese coneys.
We may never be as hip. But, we've changed. Stepped up our game. Lost the dark socks, the white tennis shoes. Gave up fried baloney. Chewing tobacco. We're even wearing shirts with sleeves and collars. We're playing hardball.
We're the fiscally conservative, debt-free, family friendly, under-the-radar rain maker that worked beside you for years. Then, one day you looked up and found his cube was empty. Because he was in the corner office, running the company.
How ya' like me now?

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