Now, more than ever, prospects for “green jobs” are being treated as a red flag in partisan debate.

Media Matters, a nonprofit watchdog group, has documented a Fox News report proclaiming that the costs of green jobs exceed the benefits. A recent New York Times article, pointing to lackluster programs in California, concluded that “public efforts to stimulate creation of green jobs have largely failed.” A column by David Brooks in The New York Times was pointedly titled “Where the Jobs Aren’t.”

In reaching for bipartisan support in his jobs speech on Thursday, President Obama avoided the word “green” altogether, though his proposed increase in infrastructure spending could involve investments in improved energy efficiency.

But green jobs still hold considerable promise. While it’s not hard to find examples of programs that haven’t lived up to expectations, considerable evidence demonstrates the actual and potential employment impact of efforts to improve environmental sustainability.
Not that green jobs are easy to define. The Bureau of Labor Statistics is currently in the process of developing an official measure, but employment that either saves energy or increases use of energy generated from renewable sources clearly falls into the category.

In February, the Economic Policy Institute and the Blue-Green Alliance released a comprehensive analysis of the employment impact of American Recovery and Reinvestment Act expenditures aimed in this direction, dominated by efforts to improve energy efficiency in buildings and to promote low-carbon transportation.

The study estimates an increase in direct employment of about 367,000 jobs, while indirect employment effects came to about one million – not a cure-all for an economy with more than 14 million unemployed, but a significant contribution.

The cost per job created varied considerably, and not all programs have moved forward as quickly as they should have. But as a report from Think Progress carefully documents, sensationalized assertions of a million dollars or more spent per job are misleading. Overall, the costs of green jobs creation, whether funded with public or private dollars, are lower than those in most other sectors of the economy, at an average of about $60,000 each. These jobs are likely to last for years, generating private cost-savings and important public benefits.

Retrofits to improve the energy efficiency of our existing building stock offer a particularly high rate of return.

A recent Brookings Institution report calls for broader attention to “clean jobs,” defined as those in establishments that produce or add value to goods and services with an environmental benefit, such as reducing pollution or natural resource depletion.

By this definition, the clean economy is a pretty small slice of the United States economy, accounting for only about 2 percent of all jobs. But it’s now bigger than the dirtiest slice, related to production of fossil-fuel based energy.

The analysis by Brookings of employment trends on the county level between 2003 and 2010 shows that jobs in wind energy and solar photovoltaics represent a small but rapidly expanding part of the larger clean economy.

The report also points to a growing share of private venture capital moving in this direction: 16 percent in 2010, from 2 percent in 1995.

So why not rely entirely on the private sector? The biggest gains from investments in new renewable-energy technologies are not easily captured in private transactions, because they produce environmental services that are largely unpriced. Companies can sell consumers with a conscience a “share” in global greenhouse gas reduction – that’s what the growing business of carbon offsets is all about. But consumers who don’t pay also get the benefits, creating a strong temptation to free ride.

Companies can’t market to the consumers likely to benefit most, because they haven’t yet been born. Conventional fossil fuels are cost-effective now only because the environmental costs are dumped into a global commons that imposes costs on other people and future generations.

Public policies could remedy this problem, by imposing a tax on carbon emissions so that their market price better approximates their social cost. Adopting clean-energy standards would also increase demand for clean and green production, giving private companies greater incentive to invest.

The Brookings report explains that Germany, carrying out such policies, attracted investments from major American corporations including Google, First Solar and Good Energies. Between 2004 and 2009, German employment in renewable energy increased to more than 300,000 from 160,000.

Globally, the green jobs numbers look pretty strong. Unfortunately, in the United States, the possibilities for bipartisan collaboration still look very weak. Flag-waving is so much easier.

via NYTimes
By NANCY FOLBRE
Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

The United States government offers tax incentives to companies pursuing medical breakthroughs, urban redevelopment and alternatives to fossil fuels. It also provides tax breaks for a company whose hit video game this year was the gory Dead Space 2, which challenges players to advance through an apocalyptic battlefield by killing space zombies.

Those tax incentives — a collection of deductions, write-offs and credits mostly devised for other industries in other eras — now make video game production one of the most highly subsidized businesses in the United States, says Calvin H. Johnson, who has worked at the Treasury Department and is now a tax professor at the University of Texas at Austin.

Because video game makers straddle the lines between software development, the entertainment industry and online retailing, they can combine tax breaks in ways that companies like Netflix and Adobe cannot. Video game developers receive such a rich assortment of incentives that even oil companies have questioned why the government should subsidize such a mature and profitable industry whose main contribution is to create amusing and sometimes antisocial entertainment.

For example, Electronic Arts of Redwood City, Calif., shipped more than two million copies of Dead Space 2 in the game’s first week on the market this year. It shows a total of $1.2 billion in global profits the last five years using an accounting method that management says captures its operating profits.

But largely because of deferred revenue, deductions for executive stock options and a variety of accounting requirements, the company officially reports a net loss for the period. And the company reports that it paid out $98 million in cash for taxes worldwide in those years.

Neither corporations nor the government make tax returns public, and the information most companies disclose in their regulatory filings is insufficient to determine how much they pay in federal taxes and how that compares to the official United States corporate rate of 35 percent.

All told, the federal government gave $123 billion in tax incentives to corporations in 2010, according to the Joint Committee on Taxation, with breaks for groups and people as diverse as Nascar track owners, mohair producers, hedge fund managers, chicken farmers, automakers and oil companies.

Many tax policy analysts say the breaks for the video game industry — whose domestic sales of $15 billion a year now exceed those of the music business — are a vivid example of a tax system that defies common sense. Most times, subsidies begin as a way to nurture a fledgling industry that will not be profitable for years or to encourage a business activity deemed to have a broad benefit to society, like reducing pollution or improving public health.

But it’s a lot easier to create a tax break than to eliminate it. That leaves a generous assortment of tax incentives available to all types of companies, like Electronic Arts, with skilled accounting departments.

Electronic Arts has also lobbied successfully for more tax assistance. The architect of the company’s strategies in recent years was Glen A. Kohl, a tax lawyer colorful enough to publicly compare himself to Bruce Springsteen and to joke in the pages of The Wall Street Journal that his dog, Rubin, shared the name of the Treasury secretary under whom he served (Robert E. Rubin).

After working in the Treasury Department during the Clinton administration, Mr. Kohl entered the private sector and became head of E.A.’s tax department in 2004, leading the company as it aggressively lobbied for a federal tax break on domestic production and set up a matrix of offshore subsidiaries, many in low-tax countries.

As a result, the company with the defiant sales slogan, “Your Mom Hates Dead Space 2,” in effect gets financial help from moms and other United States taxpayers to reduce its federal tax bill.

Company officials say they have no qualms about taking all the tax breaks legally available to them. To do otherwise would be like a consumer “insisting on paying full price during a store sale,” wrote Jeff Brown, a company spokesman. Even E.A.’s competitors acknowledge that its tax strategies aren’t particularly aggressive compared with others in the industry.

Furthermore, Electronic Arts officials say that in recent years the company has paid a substantial portion of its profits in taxes, but declined to discuss details of its financial reports.

Several tax experts noted that one of the company’s biggest tax advantages is a tool available to all companies, a deduction related to the stock gains on options exercised by its executives. (Tax practitioners also said that the company’s losses, under generally accepted accounting principles, provided the most meaningful picture and reflected the standard approach used by other companies.)

Industry advocates say that without these incentives the United States would forfeit its technological edge — and the 32,000 direct jobs in the gaming industry — to countries like Canada, which offers video game developers even greater tax subsidies.

“Software and high-tech industries are the brain trust of the U.S.,” said Shane T. Frank, chief operating officer of Alliantgroup, a consulting firm that helps video game companies and other businesses take advantage of the tax credit for research and development. “We can’t afford to lose that knowledge and those high-paying jobs to India or anywhere else.”

Trying to Lure Jobs
One reason Electronic Arts and other video game companies have a bounty of tax incentives that other industries envy is that elected officials from across the political spectrum find it hard to resist offering incentives to encourage technological research — and jobs.

When the tax code was rewritten in 1954 — nearly 20 years before the first commercially successful video game was released — Congress included a new break allowing companies to deduct all laboratory-based research and experimentation costs immediately. Part of the intention was to simplify the tax code. But with the cold war and nuclear arms race making Americans fearful that the country’s technological edge was eroding, Daniel Reed, chairman of the House Ways and Means committee, also promised the tax break would indirectly bolster national security by stimulating “the search for new products and new inventions upon which the future economic and military strength of our nation depends.”

In 1969, the I.R.S. expanded that tax break to allow companies to deduct the cost of software development, which was a small part of a business that was then dominated by bulky mainframe computers. When the video game industry sprouted in the early 1970s, game developers reaped substantial tax savings because most of their costs were for software development.

Electronic Arts, founded in 1982, has since become one of the world’s dominant video game companies — producing popular titles like SimCity, FIFA soccer, Harry Potter and Madden NFL — and has benefited mightily from that tax incentive.

The company’s software development costs — including salaries for the designers — have totaled nearly $6 billion over the last five years, and the company says it deducted all but a small amount of those expenses immediately. Companies that produce movies or compact discs, by contrast, face tighter restrictions which often require them to spread out the deduction on most production costs over a number of years. While video game makers have often compared themselves to movie companies when seeking tax incentives, the game developers’ ability to write off the vast majority of their development costs immediately gives them a substantial financial advantage over other entertainment companies in taxes and cash flow.

Video game companies also get other research-related breaks. In 1981, as Americans worried that Japan’s growing dominance in the auto business would be followed by a decline of the high-tech industry in the United States, Congress added another research and development credit, this time specifically for companies that increased their R.& D. spending from the previous year. The hope was that by encouraging companies to invest more in research, the private sector might create the next Bell Laboratories and inspire the kind of technological breakthroughs that benefit society as a whole.

Within a few years, the credit was being claimed by businesses with little technological background — fast-food restaurants, hair stylists and fashion designers. So Congress tried to restrict what research would qualify. The credit was denied for social science research and marketing. The narrowest definition, proposed by the Clinton administration, was to allow the credit only for research that produced an actual innovation, but that measure met determined opposition from business lobbyists. By the time the Treasury Department ruled in 2002, an appointee of President George W. Bush decided to drop it.

“It seemed as though it would be impossible to enforce,” said Pamela F. Olson, then the assistant secretary for tax policy, and now a tax lawyer at Skadden, Arps, Slate, Meagher & Flom. “Because you couldn’t be certain that someone wouldn’t come back later and challenge things, by saying that what seemed like an innovation at the time had actually been discovered before.”

The failed attempts to restrict the R.& D. credit to basic research have been a boon for video game companies. Even when companies are merely creating new versions of existing games — conducting research that would have little value to anyone but themselves — their development processes usually involve enough experimental uncertainty to qualify for the tax break.

During the last five years, Electronic Arts has claimed tens of millions in tax savings from research and development credits for its various games, according to the company’s regulatory filings. (Company officials declined to specify how much of that total came from the federal government.)

At the same time, the I.R.S. and the United States Tax Court have denied the credit for some projects that would have benefited the community as well as the companies receiving it. In 2009, for instance, the federal tax court denied Union Carbide’s attempt to claim a research and development credit for its project to reduce the pollutants released from the smokestacks of a refinery in Louisiana. Union Carbide failed to meet the experimental threshold for the credit, though video game makers often seem to have little trouble meeting the requirement.

Video game industry officials say that by improving technology, they are indirectly helping society at large.

Dean Zerbe, national managing director at Alliantgroup, said that the military had used some video game technology to train soldiers and pilots. Electronic Arts said it donated some games to the military, schools and charities.

Even those who support subsidies for technological research complain that the current research and development credit is woefully designed — favoring big companies over start-ups and often subsidizing businesses for research they would have done anyway.

Michael D. Rashkin, author of “Practical Guide to Research and Development Tax Incentives,” said that the video game industry had failed to name a technological breakthrough that had helped anyone beyond its shareholders, employees or customers.

“The research credit benefits the wrong companies and encourages the wrong kind of research,” said Mr. Rashkin, a tax expert and executive at Marvell Technology, a company based in Santa Clara, Calif. “By diverting funding and attention from where it could be most useful, the credit is hobbling American innovation.”

Yet, given the sharp decline in American manufacturing jobs over the last half century, subsidies for research and development still have wide support. The Obama administration has proposed making the research and development tax credit permanent (it has been renewed every two years since 1981), and expanding it, at a cost of more than $100 billion over the next decade.

Looking for More
Electronic Arts has not been content to merely collect the many benefits from existing tax breaks. Mr. Kohl, who had an extensive background in mergers and acquisitions law, arrived at the company in 2004, the same year Congress passed a domestic production deduction that was intended to cut taxes on companies that export. When President George W. Bush signed the law in October, it listed an assortment of industries eligible for the break, including sound recordings and computer software, but did not specify video games.

Electronic Arts paid $60,000 early the next year to hire a prominent Washington tax lobbying firm. Soon after the law was signed, its lobbyist, Jonathan Talisman of Capitol Tax Partners, was granted a meeting with the Treasury Department’s deputy assistant secretary of tax policy — the same office Mr. Kohl once held — to ask that the deduction be extended to video game companies and the revenues they earned from online subscriptions. When the I.R.S. issued its final regulations, video games and their online revenues were specifically cited as qualifying for the deduction. That deduction last year equaled 9 percent of its production costs, offering E.A. significant tax savings.

Company officials point out that the deduction is available to a wide range of industries. “The credit is not specific to video games,” said Mr. Brown, the spokesman. “It’s designed to encourage any domestic manufacturing in the United States — from soft drinks to steel, to movies, music and newspapers.” During Mr. Kohl’s seven years at the company, Electronic Arts also became more aggressive about assigning its intellectual property offshore, a move that often reduces a company’s tax bill. Mr. Kohl, who declined to be interviewed, is now running the tax department at Amazon, which is leading the legal battle by Internet retailers who want to avoid collecting state sales taxes from customers.

In 2003, before joining Electronic Arts, Mr. Kohl co-authored a widely-cited proposal urging the federal government to crack down on corporate tax avoidance, warning that “the tax shelter problem is simply too detrimental to the tax system not to act.” As head of tax at Electronic Arts, he became a noted expert in using foreign subsidiaries to legally, and sharply, cut a corporation’s United States tax bill. As a co-chairman of the Silicon Valley Tax Directors Group, he also moderated a seminar in 2010 that showed technology companies how to use offshore subsidiaries to reassign the licensing of their intellectual property and, in some cases, reduce their effective federal tax rate substantially from 35 percent.

Electronic Arts has more than 50 overseas subsidiaries, according to its recent regulatory filings, many in low-tax countries like Bermuda, Singapore and Mauritius. The company has also accumulated more than $1.3 billion in profits offshore, where it will not be taxed by the United States unless it is brought back into the country.

Company officials say its overseas activities are not an attempt to avoid United States taxes and instead reflect how much of its business takes place in other countries. “E.A. is a global company with a majority of our customers and roughly 50 percent of our revenue generated outside of the United States,” Mr. Brown said. “Naturally we hire, build facilities, copyright our trademarks, invest and pay taxes in countries outside of the U.S.”

Jockeying for Developers
As Congress and the Obama administration wrestle with the next round of budget cuts this fall, and a possible overhaul of the tax code, they will determine whether the types of subsidies offered to E.A. and other corporations are worth the billions in forgone revenue annually to the Treasury. While Britain and some nations in the European Union have been paring back their tax subsidies for game developers, Canada has been trying to lure them and their jobs from below the border. In 2008, Ontario paid one game company a subsidy of more than $321,000 for each job to relocate from the United States. More recently, Montreal persuaded the game company THQ to relocate 800 production jobs there, closing studios in New York and Phoenix, with a rich package of incentives.

E.A. has 750 employees in Montreal, where all video game companies receive a tax credit equal to 37.5 percent of their payroll, and has announced plans to hire more there. Over all, 4,500 of Electronic Arts’ 7,600 employees are in the United States.

There are signs that more tax breaks may be in store for game manufacturers. States have been offering an escalating collection of incentives to try to attract the companies — more than 20 states now offer video game developers tax breaks to cover their wages, development and manufacturing costs.

Several recent studies have raised doubts about the effectiveness of subsidies offered by state and local governments, and Michigan this year reduced its breaks for game developers. But Texas officials say its tax breaks for game developers are more beneficial than those given other businesses, in part because the average salaries in the industry exceed $80,000 a year.

Game developers are pushing for more. John S. Riccitiello, the chief executive of Electronic Arts, was among the business leaders who successfully lobbied the City of San Francisco to drop its payroll tax last year to help retain social media companies like Zynga, maker of FarmVille and other games. The video game industry’s trade group, the Entertainment Software Association, this year recruited 39 members of Congress to form the E-caucus, which will advocate for legislation to benefit game developers. Representative Kevin Brady, a Republican from Texas who sits on the tax-writing Ways and Means Committee, said that the caucus has not asked for tax breaks.

But industry officials say they eventually hope to persuade Congress to make video game companies eligible for the federal tax breaks now available to film and television producers. Michael D. Gallagher, chief executive of the software group, said that the industry would not push for the breaks now, given the nation’s budget problems, but might do so later.

“It certainly is a worthwhile policy goal,” Mr. Gallagher said.

via NYTimes

August 30, 2011 from WAMU

The Walter Reed Army Medical Center has a storied past. It has been the country’s leading Army hospital for more than 100 years, sitting on a complex that includes a Civil War battlefield. There was a time when 16,000 patients a year sought treatment for wounds of war or illness.

By the end of August, all of the patients and doctors will have left, moved to Bethesda and Fort Belvoir as the Army consolidates its bases. But as one era closes, another opens: Washington, D.C., may be left with nearly 70 acres of prime real estate.

Neighborhood Businesses Face Change
Just after the midday rush at Ledo’s Pizza on Georgia Avenue in Northwest D.C., Tim and Kelly Shuy sit down at a table.

“We get a lot of military families, people who are visiting, folks who are in the hospital. We get a lot of contractors,” Kelly says.

Their pizzeria is across the street from the sprawling Walter Reed campus. Lush with trees and a hilly landscape, the campus includes several iconic 100-year-old buildings with red tile roofs where patients, their families and staff were able to wander and just look out on the rest of the neighborhood from a distance.

Many in the neighborhood call the medical center a fortress. But for the Shuys, it was a mainstay. Doctors and patients alike have supported their business for years.

“Some of them come in uniforms. We have patients who come in who haven’t been out of Walter Reed,” Kelly says. “I’ve had dozens of people tell me this is their first meal out of the hospital.”

But those days are just about over.

“We’ve been saying goodbye to people for a long time. We say goodbye to people every day,” Kelly Shuy said. “But it’s horrible — we’ve had tears over saying goodbye to people who are regulars.”

Of course the Shuys are losing more than just familiar faces.

“As far as the business goes, obviously it’s a huge hit for us,” Kelly says. As Walter Reed closes down, it leaves behind questions. What is going to take its place? There is no shortage of opinion among interested residents:

“We are looking for quality space for our students,” says Christine Encinas.

“We’d like to use part of it to develop affordable family housing,” says Troy Swanda.

“We’d like to see a bit of parkland right along here,” says Ellen McBarnett. “Many of the neighbors have been talking about dog-walk parks or places for children to play.”

City Eyes Retail Development
And that’s just the beginning. The State Department will take a chunk of Walter Reed’s 113 acres, possibly for embassies. But that leaves almost 70 acres for D.C. In a city where a quarter of the land is owned by the federal government, demand for land is high.

“This is a uniquely vocal community, let me just put it that way,” says Victor Hoskins, deputy mayor of Planning and Economic Development. He co-chairs the committee that is going to figure out just what the District of Columbia is going to do with all of this land.

“Actually, the interest we’ve gotten from a number of retailers already has been, really, quite astounding. What’s going to happen is when that fence comes down [and] we develop the retail along there, it will become a place to go,” Hoskins says. “And there’s a chance now to revive a Main Street, which is Georgia Avenue, which has for years been suffering from decay.”

D.C.’s government has a major interest, as well. For 100 years, this property has been federal and untaxable. The city estimates it could get $20 million a year in tax revenue. And the people who worked at Walter Reed mostly drove in and drove out, not spending as much in the neighborhood as destination consumers might. Plus, if retail takes off, it might supply local jobs. Of course, that’s assuming the city gets it right.



This satellite image shows how the Walter Reed Campus will be divided between the District of Columbia (purple) and the State Department (yellow). The District’s 67-acre portion includes both the old and new hospital buildings.

Coming Up With A Plan
Faith Wheeler is a neighborhood representative who lives near Walter Reed. Standing about a mile away from the hospital, she points to a block where new development didn’t work out so well.

“Well, I don’t want to see all those for-lease signs; look at that,” she says. “If that happened on Georgia Avenue’s Walter Reed campus, it would be awful, horrible. According to textbook ideas, this is the place where retail ought to be booming. It’s not.”
This is what Wheeler does not want to see: a street that’s a commuter corridor, lined by sterile and vacant office buildings. One thing she does want is some sort of tribute to the place’s history. And that is likely; many of the historic building facades will be kept. But Wheeler’s voice is one of many.

Public Meetings, And Many Rules
“It’s kind of the new realities of urban planning in the 21st century,” says Lisa Benton-Short, a professor of geography at George Washington University who has written about previous base closings. She says the Walter Reed campus will take awhile to sort out.

“I think for much of the 20th century, planners were quite top-down in their planning,” she says. “They told us what we needed in our spaces. Sometimes they were right, and sometimes they weren’t. In the last 25 years or so, the planning profession has really changed. And one of the most important ways it’s changed is to bring in public participation and planning.”

That means public workshops, public forums and many public meetings. Benton-Short says it will be messy. And the military has its rules, as well.

There will have to be services for the homeless, there will have to be organizations that serve the community, such as schools. And there’s an entire bureaucratic process that will probably take two years before a deal is finalized, let alone anything getting built. The U.S. Department of Housing and Urban Development will have to approve the plan, and there will have to be an environmental impact assessment, as well.

“We’re talking 10 years, 15 years before these visions are actually transformed into reality,” Benton-Short says.

That only heightens the fear of area businesses who will have to wait that long. There’s also radioactive waste from X-ray machines and cancer treatments that needs cleaning up. And there’s asbestos to be removed. That’s all possible — but it will take time. It’s also one reason that the amount D.C. will have to pay the Army for the land hasn’t been nailed down yet. But when all is said and done, one thing everyone agrees on is that the site holds real potential.

A Positive Legacy
“This is something that I hope will be a positive,” says Ethelbert Dawson, 77, who attended Walter Reed’s official closing ceremony last month. He lives around the corner, and for 25 years, he worked at Walter Reed as a research chemist.

“When I was here, I never thought that this day would ever come. We used to call it Walter Wonderful, because that’s what it was.”

He says he can’t really predict what this new space will mean for Washington, D.C.

“But for Walter Reed and all of the positiveness that hospital has given this community,” Dawson says, “I don’t know if they can ever reduplicate that.”

All eyes are on this space, to see whether the disappearance of a 100-year-old place of healing will usher in an urban rebirth — or leave a scar.

A new study shows how the decisions made today by goods producers and policymakers will shape U.S. competitiveness tomorrow.

A debate over the future of U.S. manufacturing is intensifying. Optimists point to the relatively cheap dollar and the shrinking wage gap between China and the U.S. as reasons the manufacturing sector could come back to life, boosting U.S. competitiveness and reviving the fortunes of the American middle class. Whenever production statistics in the U.S. surge, it seems to bolster that hope; as New York Times columnist and Nobel laureate Paul Krugman put it in May 2011, “Manufacturing is one of the bright spots of a generally disappointing recovery.”

But then when disappointing economic growth indicators are released, the pessimists weigh in. They argue that the U.S. has permanently lost its manufacturing competitiveness in many sectors to China and other countries, that the sector is still declining after years of offshoring and neglect, and that it might never return to its role as the linchpin of the U.S. economy.

Both the optimists and the pessimists are partially correct. U.S. manufacturing is at a moment of truth. Currently, U.S. factories competitively produce about 75 percent of the products that the nation consumes. A series of identifiable smart actions and choices by business leaders, educators, and policymakers could lead to a robust, manufacturing-driven economic future and push that figure up to 95 percent. Alternatively, if the U.S. manufacturing sector remains neglected, its output could fall by half, meeting less than 40 percent of the nation’s demand, and U.S. manufacturing capabilities could then erode past the point of no return.

Those findings emerge from a recent sector-by-sector analysis of U.S. industrial competitiveness, along with a survey of 200 manufacturing executives and experts, conducted by Booz & Company and the University of Michigan’s Tauber Institute for Global Operations. (So researchers could best analyze the relationship between U.S. employment and the future of manufacturing, plants located in the United States were counted as American, regardless of where the company that owned them is headquartered.) The studies — which included comparisons to similar Booz & Company studies of China and Switzerland — found that the U.S. has a much more productive manufacturing base than many people think. But no single country, not even China or the U.S., can claim to be the factory of the world, in the way the United States was after World War II.

Instead, for the foreseeable future, manufacturing will largely be regional. To be sure, exports play a critical role in any strong economy, and as we’ll see, a global play (including offshoring) can be viable, especially when there are challenges at home. But for many manufacturers, economics and market dynamics increasingly suggest that they locate factories close to their major markets, including the United States. This type of region-oriented footprint is a clear way to provide adequate scale and volume, minimize transportation and logistics costs, increase market responsiveness and innovation, and customize products for the unique preferences of different regions and cultures.

If factory labor costs and currency rates were the sole enablers of manufacturing success, then the West could not compete with emerging nations or offshoring. More and more, though, these factors play a smaller part in manufacturing decisions. Four other considerations, all more complex, drive manufacturers’ choices about where to place and expand factories:

1. The skill level and quality of factory employees, especially for high-tech facilities.

2. The presence of high-impact clusters, in which many companies can learn from one another and innovate more readily.

3. Access to nearby countries with emerging consumer markets and lower-cost labor (for the U.S., this means building a future with Mexico).

4. A reasonably competitive regulatory and tax environment (for the U.S., this means simplifying and streamlining the current tax and regulatory structure).

Will U.S. business leaders and policymakers rise to the challenge and create the conditions that would support manufacturing? Or will they fritter away the opportunity now being presented to them?

Why Manufacturing Matters

As trade policy expert and author Clyde Prestowitz points out, manufacturing is critical to prosperity for several reasons: its economies of scale, impact on innovation, and multiplier effect on the rest of the economy. (See “The Case for Intelligent Industrial Policy,” by Art Kleiner, Arvind Kaushal, and Thomas Mayor, s+b, Autumn 2011.) In the United States, manufacturing directly accounts for 11 percent of the nation’s GDP: an absolute figure of US$1.47 trillion, larger than Spain’s entire domestic product. When all economic activity expressly linked to manufacturing is accounted for — including equipment maintenance, transportation, scientific and technical services, and construction — the share of GDP attributable to manufacturing grows to 15 percent. That means one in seven U.S. private-sector jobs, or 13.5 percent, is directly linked to manufacturing. The sector’s share of GDP increases to as much as 25 percent when second-order linkages such as retail sales near plants, systems development, and legal services are included.

Historically, manufactured goods are more tradeable than other categories. Thus, a strong manufacturing base is essential to reducing the U.S. trade deficit, which hit $497 billion in 2010 and is an unnerving drag on GDP. Unless steps are taken to revitalize manufacturing, up to 50 percent of the “value add” of the U.S. economy — the value of manufactured goods beyond their raw material costs — is at risk of disappearing. If that happened, the U.S. trade deficit would top $1 trillion, a troubling level for any country seeking economic growth.

Perhaps the least understood benefit of manufacturing is how closely it is related to innovation in design, product development, quality control, and factory processes. In 2008, 67 percent of all private-sector R&D was conducted by manufacturing companies, according to the National Science Foundation. And from 2006 to 2008, 22 percent of U.S. manufacturing companies reported a new or significantly improved product, service, or process, compared with 8 percent of nonmanufacturing companies. Innovation propels improvements in worker output, capital flow, usage of materials and energy, energy conservation, and other components of productivity. Increased productivity, in turn, leads to faster economic growth and a higher standard of living. Between 1987 and 2008, productivity grew in the U.S. manufacturing sector 65 percent faster than in business as a whole. (See Exhibit 1.)



Many U.S. manufacturing leaders are well aware of the role that innovation plays in a nation’s economy, and in their own performance. “The labor component — the need to choose where to set up manufacturing facilities based primarily on where the wages are cheapest — is not the major driver anymore,” says Eric Spiegel, president and CEO of Siemens Corporation. “Instead, other factors — access to skilled labor, modern infrastructure, the ability to drive innovation with world-class R&D, and capabilities like new manufacturing technologies or innovative lean production systems — propel decisions about new factories. These play well to the U.S.’s strengths. So we’re adding new manufacturing in the U.S.”

America’s Lost Decade

The conventional wisdom says that the decline of U.S. manufacturing began in the late 1970s, when Japanese automakers and electronics companies outpaced their U.S. rivals in design, quality, efficiency, and costs. But a closer examination of the historical data covering 1980 through 2010 presents a somewhat different picture.

During the 1980s and 1990s, although there were high-profile problems in specific sectors such as autos and textiles, U.S. factories as a whole held their own. Even manufacturing employment held steady. Between 1980 and 2000, production jobs fell by only 0.5 percent annually; in fact, the U.S. outperformed both Germany and Japan in the value of manufacturing output as a percentage of global production. (See Exhibit 2.)



However, in the 2000s, U.S. manufacturing output as a percentage of global production fell dramatically. The ratio of exports to imports, a critical sign of manufacturing viability, also fell. The number of manufacturing jobs dropped as well, by 4.3 percent per year, and 3.4 percent of non-production jobs were eliminated annually. (See Exhibit 3.) Many factors contributed to a relentlessly troubling decade for U.S. manufacturing. Capital investment in new and old plants slowed, dropping below replacement levels. In some industries, innovation lagged, and some U.S. companies faced a shortage of critical skills. The rapid pace of globalization and competition from emerging economies exacerbated these effects.



Still, the data shows clearly that U.S. manufacturing as a whole has great potential to rebound. When considered sector by sector, many U.S. companies can and should be the supplier of choice for the vast majority of goods sold in North America — and some can still be a primary source of production for global markets. This resilience was evident in the survey of manufacturing professionals; more than 65 percent of respondents said that it was unlikely they would stop investing in new U.S. manufacturing assets and technologies by 2025. Many of them are shifting manufacturing activities back to North America from Asia and other offshore locations.

Four Kinds of Industries

With unit labor costs playing a smaller part in manufacturing decisions, other factors — including talent availability, market accessibility, innovation, regulations, intellectual property protections, barriers to entry and exit, and scale of operations — increasingly drive decisions about where to place and expand factories. Based on the relative economics for each segment, we charted which U.S. industries can compete as exporters, which can be dominant in the regional North American market, which can survive but are threatened by foreign competitors, and which are already mostly overseas but can still manufacture in the U.S. to serve niche markets. (See Exhibits 4 and 5.)





Global leaders: aerospace, chemicals, machinery, medical equipment, and semiconductors. Companies in these industries have a critical worldwide advantage stemming from their high investment scale, established intellectual property, skilled workforces, and close ties with customers. For example, the U.S. commercial aerospace segment (primarily Boeing Company and its suppliers) benefits because aircraft development is so costly and knowledge-intensive that few new companies can compete. In addition, aerospace manufacturing requires uniquely qualified labor, substantial participation from corporate R&D, and proprietary technology efforts, often with national security implications. Thus, much overseas production is ruled out. However, even this sector could lose manufacturing to overseas sites if demand in emerging markets skyrockets, providing a sound economic rationale for some global leaders to establish manufacturing bases in China or elsewhere.

Regional powers: food, beverages and tobacco, nonmetallic mineral products, wood products, and petroleum/coal. Focusing on North American demand will continue to be a lucrative strategy for many U.S. manufacturers. The United States is the world’s largest market — wealthy and still growing (albeit not as fast as emerging economies) — and Mexico and Canada offer additional opportunities. For food, beverages, tobacco, and many other consumer products companies, the incremental disadvantages of importing (for example, the cost of transporting products to the U.S., plus long shipment lead times and product safety concerns) outweigh pro-offshoring factors such as the higher cost of U.S. production. For nonmetallic mineral and wood products segments, product transportability requirements and proximity to the supply base give U.S. factories a leg up.

Sectors on the edge: paper, plastics, electrical equipment and components, fabricated metal products, pharmaceuticals, automotive vehicle parts, other transportation equipment, final assembly of motor vehicles, printing, and electronics. These manufacturing segments feel the presence of low-cost overseas rivals nipping at their heels. To compete effectively, they need simplified government regulations and permitting processes, as well as more certainty and speed in gaining approval to expand old plants and build new facilities. In addition to better government support, many companies in these sectors must rethink their strategies, investing in the specific U.S. markets where they are best suited to compete. Some industries, such as printing, can maintain a foothold in the U.S. for specialized or customized products targeted at the North American market. Meanwhile, they can produce mass-quantity products with less stringent delivery schedules in lower-cost countries.

Niche players: textiles, apparel, furniture, computer equipment, and appliances. Most companies in these sectors have moved production outside the United States. The remaining activity generally serves small-scale, highly specialized niche markets. For example, the small company Timbuk2 Designs Inc. allows customers to design their own briefcases, backpacks, and totes; it has a strong customer community among cyclists on the West Coast. The furniture segment is similarly bifurcated. Flat-pack furniture for the U.S. market is mostly made in China, whereas preassembled furniture is more likely to be made domestically.

In short, nearly 50 percent of the value added by U.S. manufacturing and more than 50 percent of U.S. manufacturing jobs are at risk. (See Exhibit 6.) In these sectors, on the basis of labor and logistics trade-offs, many U.S. manufacturers have opted to build plants in emerging markets such as the BRIC countries (Brazil, Russia, India, and China). They also feel pressure from investors and other influential internal players to be proactive in the fastest-developing regions, where billions of people are joining the consumer economy. (See “Competing for the Global Middle Class,” by Edward Tse, Bill Russo, and Ronald Haddock, s+b, Autumn 2011.)



This strategy has paid off for global players and for those who target specific emerging markets in a well-planned way. But it hasn’t worked out for all manufacturing businesses; for example, it can leave them more exposed to competition in the United States, which is still their largest market. Nonetheless, if the trend continues unabated — that is, if U.S. companies rush toward emerging economies without continuing to invest in their own country — then U.S. manufacturing could fall woefully behind in new plant and production technologies, losing important links to high-value innovation and making revival more difficult.

Manufacturing Momentum

Our analysis translates into clear recommendations for improving the competitiveness of U.S. manufacturing. The following strategies can provide the greatest momentum in both the public and private spheres:

1. Attract the best workers. Qualified manufacturing employees are surprisingly scarce in the United States. As companies transform their plants from hubs of manual work to automated facilities with complex control systems and sophisticated processes, they struggle to fill multiple holes in their workforce: technical (programmers, IT developers, designers), professional (engineers, scientists, functional support), and skilled (equipment operators, specialized maintenance experts, craftsmen). A contributing factor to this employee scarcity is traditional manufacturing’s lack of appeal to students. A recent Booz & Company survey of more than 200 engineering, science, and math undergraduates found that although 80 percent of the engineering students had some exposure to manufacturing— through either firsthand experience, college courses, or conversations with factory workers — only 50 percent regarded it as an attractive career. That number dropped to 20 percent among the science and math students. Around the same time, Siemens reported having nearly 3,500 open manufacturing positions in the U.S. requiring high-level science, technology, engineering, and math skills, with low expectations of filling many of them.

The talent issue is particularly pronounced in the pharmaceutical and high-tech sectors, where science and engineering graduates are needed for many operations positions. Manufacturing recruiters must compete with R&D for qualified individuals, and some have relocated to higher-cost cities because such places attract people.

Many companies — especially those in electronics, medical equipment, pharmaceuticals, and other sectors requiring high levels of knowledge on the factory floor — find that the shortage of qualified employees in the U.S. leaves them no choice but to shift some operations to other countries. This is particularly disturbing because these job categories often involve innovation and are thus essential catalysts for productivity increases and economic growth. The shortage of technical, professional, and skilled labor also contributes to substantially higher wages in U.S. manufacturing than in other countries, including other developed economies.

Educational initiatives that promote engineering can increase the talent pool. China already graduates more engineers each year than the U.S., and a number of other countries graduate a higher proportion of their population as engineers. It would also be helpful to relax federal immigration regulations for trained knowledge workers: for example, liberalizing H-1B visa restrictions to allow foreign national students in science, technology, engineering, and math programs to remain in the U.S. more easily after finishing their education, rather than returning to their home countries. State governments are well positioned to abet manufacturing education with scholarships and programs such as South Carolina’s ReadySC program, which establishes partnerships with businesses to provide customized training in colleges. (See “Revitalizing Education for Manufacturing,” by Wally Hopp and Roman Kapuscinski.) “The philosophy [here] has been that if you invest in South Carolina, South Carolina will invest in its people to prepare them to work in your plant,” says Bobby Hitt, South Carolina’s secretary of commerce and a former BMW executive, who was a leading figure in the automaker’s 1994 decision to build its only U.S. factory in Greenville.

Manufacturing companies must also offer a more collaborative workplace experience, engaging workers and giving them opportunities to continuously improve and seek productivity gains. They can also attract workers by showcasing their latest technology at campus recruitment events and industry job fairs, increasing college internships, forming partnerships with local colleges and universities to identify and sponsor talent, inviting students of all ages on factory tours to show that manufacturing can be a rewarding career, and partnering with other manufacturers to jointly support specialized training programs or attend faraway recruitment events.

2. Invest in high-impact clusters. Since Michael Porter coined the term in his 1990 book, The Competitive Advantage of Nations (Free Press), clusters have been a widely recognized way to spur economic growth and development. In the context of manufacturing, clusters are essentially geographic concentrations of interconnected companies, suppliers, service providers, and associated institutions (such as university research labs). Silicon Valley; the collection of life sciences companies in eastern Massachusetts; and the aerospace cluster in Wichita, Kan., are good examples.

Clusters have several benefits. They increase productivity and efficiency because they bring together suppliers with customers, designers with engineers, and university researchers with corporate production managers to better share information and new ideas. This collaborative ecosystem helps new companies and innovative business models emerge. Because they represent strong, self-supporting communities — where interactions among employees inspire enthusiasm for their work and help them gain more diverse skills — companies located in manufacturing clusters tend to have lower turnover and attract better talent than non-clustered companies.

State and local governments can encourage clusters by investing in infrastructure — roads, ports, rail lines, and communication links — for centers that have begun to form organically. Policymakers can also provide up-front tax incentives or other inducements to attract companies. Both the state and federal governments can fund research institutes and university programs, but studies have shown that governments should not seek to micromanage cluster creation. They are better suited to supporting and promoting these industrial networks while allowing them to develop naturally.

Individual companies (or trade groups associated with clusters) can also take steps to fashion clusters and attract businesses and talent. They can set up improved connections between suppliers and buyers, and maintain up-to-date standards and innovative practices in infrastructure, renewable energy, and plant processes and technology.

3. Build a future with Mexico. For many companies on the edge, Mexico offers a cost-conscious and attractive alternative to China and other distant offshoring sites. By developing production facilities there, manufacturers can tap a relatively low-cost labor pool and maintain tight links with R&D talent and facilities in the United States. A Mexican footprint also helps companies tailor their supply chains: shifting less-demanding, high-labor products or components with relatively stable designs to Mexico while keeping highly skilled work or rapidly evolving technology in the U.S., where the workforce is generally more educated. Then products can be shipped around the Western hemisphere at relatively low expense.

“When you combine the U.S. and Mexico as a manufacturing partnership, for the most part it wins over [a combination of] the U.S. and China, especially in terms of economics, demand proximity, and responsiveness of the supply chain,” says Ron Weller, vice president of global operations and power solutions at Johnson Controls Inc. (JCI), a maker of vehicle electronics, batteries, and interiors.

Of course, to build a viable U.S.-Mexico manufacturing base, substantial obstacles must be addressed by the public and private sectors of both countries. Narcotics-related violence along the border has hurt manufacturing companies’ ability to produce and ship without disruption. Mexico’s rail and road infrastructure is subpar, the country produces few basic raw materials and needs better access to inexpensive commodities (which might be supplied from the southern U.S.), and Mexican workers need further training and skills development. It may take concerted collaborative effort by government and business leaders in both countries to address these problems, but the payoff could be immense.

4. Simplify and streamline the tax and regulatory structure. At 39 percent, the official U.S. statutory corporate tax rate is the second-highest of all countries in the Organisation for Economic Co-operation and Development; only Japan has a higher rate. Because of tax credits, deductions, and tax law complexities, the federal government collects only about 28 percent. But manufacturers spend much of the difference on compliance costs and sophisticated tax minimization strategies. Unfortunately, many companies use the 39 percent figure for evaluating investment options, because it is too risky otherwise; in cost-benefit calculations, they can’t assume that deductions will be available in the future. This often dissuades them from opening or expanding factories in the U.S.

Reducing taxation levels and tax code complexity would be a revenue-neutral way to put U.S. manufacturing on a more level playing field with other leading economies. This step alone would encourage new investments in manufacturing assets, which in turn would expand the tax base, potentially resulting in higher government income. Another step would be changing tax rules to allow manufacturers to move dollars from overseas back without a tax penalty. This would make many companies more likely to reinvest foreign profits in U.S. manufacturing.

“We operate in a lot of places outside the United States, and if you’re in our position you might want to repatriate money to invest in an asset or to fund an expansion,” says Michael Rajkovic, chief operating officer of auto supplier Tower International Inc. “So if you need money in the United States and you already paid taxes on that money in another country, you have to pay taxes on it again before you can invest in your business in the U.S. What kind of sense does that make?”

The U.S. regulatory system also contributes unnecessarily to complexity and uncertainty. In 2008, federal regulations — including economic, workplace, environmental, and tax rules — cost companies an estimated $1.75 trillion, or 14 percent of national income, according to the U.S. Small Business Administration Office of Advocacy. In the Booz & Company survey, 61 percent of respondents cited government regulations and policies as having a negative impact on their companies’ U.S. manufacturing output. This was, by far, the survey respondents’ most frequently cited risk. In general, many executives complain that the regulatory process has become paperwork-driven rather than outcome-driven, requiring companies to navigate an expensive labyrinth just to gain approval for, say, a plant expansion. The associated delays make opening up facilities overseas much more desirable. “If your market window is 18 months and it takes you 18 months to get a permit in the U.S. and eight weeks to get one in Taiwan, where are you going to go?” asks Jack McDougle, senior vice president of the U.S. Council on Competitiveness.

To move forward, current and new regulations should undergo a regulatory process analysis to ensure that they are necessary to deliver health, safety, environmental, or other benefits to the community. A number of manufacturing leaders have commented that other countries have even higher environmental and regulatory standards than the U.S., but with fewer bureaucratic hurdles.

Creating Competitive Capabilities

Within companies, manufacturers can make the most of their U.S. footprint by building up their company’s bedrock capabilities. Basic manufacturing capabilities are needed in many sectors just to stay in business. However, in each company, some capabilities will deserve extra investment, to help ensure that manufacturing prowess is tightly aligned with the company’s competitive strategy and helps to set its line of products apart from the crowd.

The capabilities that manufacturers need are captured in the “ISSR” framework developed by Booz & Company. (See Exhibit 7.) Inherent capabilities involve technological excellence and market understanding. Structural capabilities cover the makeup of a company’s manufacturing footprint, the structure of its supply chain, and the efficiency of its distribution network. Systemic capabilities address manufacturing and cross-functional processes, including lean production systems. Realized capabilities focus primarily on aligning employees with the overall strategic thrust of the organization and driving efficiency improvements.



Supporting these four pillars of manufacturing prowess are other capabilities that both the private sector and federal and state governments have a hand in developing. Among them: finding and developing the right human and natural resources at the right cost, as well as ensuring that the business environment — taxes, regulations, and labor and trade rules, for starters — enhances manufacturing innovation and growth.

To be truly distinctive and to sustain a competitive advantage, manufacturers must go beyond basic operational capabilities; they must develop specific and unique capabilities that match their strategic goals. “You’d better focus on reinventing manufacturing and process technology and on finding the next breakthrough process that’s going to be leaving everyone behind, a process that the rest of the world can chase,” notes JCI’s Weller.

For example, a Tier One auto supplier that was a firm believer in a “small plant philosophy” was losing its competitive position as product designs standardized and more rivals with advantaged cost positions emerged. The company went through a “no constraints” strategy process to focus its effort on the winning technology and build a footprint that leveraged global scale. This dual strategy — enhancing the company’s capabilities in both the inherent and structural pillars — differentiated the supplier from its closest competitors and turned around its fortunes.

Toyota is well known for its attention to the systemic pillar; its acclaimed lean production system has led to substantial quality and productivity gains and a leadership role in the industry. Many other auto manufacturers have followed suit, building their quality and reliability. But lean initiatives are hard to sustain unless the realized pillar is well developed. One global diversified manufacturer learned this when its attempt to build efficiency and eliminate waste fell flat at first. Then, by segmenting its products into “stable and predictable” and “variable and customizable” buckets, the company created two production streams, simplifying the assembly line for its workers. The employees’ motivation rose as supervisors gave them more freedom and responsibility. The result was significant inventory reduction and substantially improved worker productivity.

In general, designing production systems that align employees’ activities with the company’s overall strategy and that empower employees to improve manufacturing processes can unlock the productivity and innovation potential of the well-educated U.S. workforce. For at least a generation to come, this in itself could provide a competitive advantage for manufacturing in the United States.

Chief Manufacturing Optimists

This is a defining moment for U.S. manufacturers — and, indeed, for the U.S. economy. Although the challenges may seem daunting, the executives who responded to the Booz & Company survey are generally optimistic. In stacking U.S. manufacturing facilities against plants in other countries, only 5 percent viewed offshore plants as better in quality, and only 14 percent said that other countries’ facilities would respond more effectively to volatile demand.

Every country needs creative, engaged, and profitable manufacturers if it hopes to have a healthy economy that supports the aspirations of all of its citizens. If you are a manufacturing leader in the United States, you shouldn’t have to go it alone. You should have support at all levels of government and culture — from Washington to the local cluster. Like all businesspeople, you must come to terms with the fact that the world has changed. But as the data shows, the U.S. has a strong base to build on. The future of U.S. manufacturing in general, and of your company in particular, can be extremely bright. The current wake-up call represents an opportunity for you to clarify your strengths, channel your investment, and create your own distinctive direction.



Published: August 23, 2011 / Autumn 2011 / Issue 64
by Arvind Kaushal, Thomas Mayor, and Patricia Riedl
via strategy + business

NPR: All Things Considered
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Illinois lawmakers are re-examining the state’s business tax climate, just six months after raising the corporate income tax rate. The move comes as some corporate giants threaten to move out of Illinois. Some wonder how far the state should go to keep them.

Doug Whitley, president and CEO of the Illinois Chamber of Commerce, says his members aren’t happy with the state’s approach toward businesses.

“Big-name, household-name companies that are long-standing Illinois businesses have begun to rattle the cage and say, you know, this isn’t the best environment,” he says. Construction equipment manufacturer Caterpillar was among the first corporate giants to complain in January, when Illinois raised the corporate income tax rate from 4.8 percent to 7 percent. The latest complaint comes from an iconic company along the Chicago River: CME Group, the parent of the Chicago Mercantile Exchange and Chicago Board of Trade.

CME Group Chairman Terry Duffy spoke to NBC about moving the company’s headquarters out of Illinois.
“All our transactions are taxed in Illinois. Whether they’re coming from Mumbai or some other part of the world, they’re being taxed here in Illinois. That’s absolutely unjust,” he said. Retail giant Sears is also making noise about leaving, as the tax incentives that kept the company in Illinois almost 25 years ago are set to expire.

Illinois’ Democratic governor, Pat Quinn, says he’ll do whatever it takes to keep Sears and CME Group. That could mean more incentives, similar to those that recently kept Motorola Mobility and Navistar in the state. Some of the biggest corporate headquarters in the country are located along the Chicago River. Some suggest the big-name companies are just posturing to get larger tax breaks, a strategy some smaller employers complain they can’t use.

“There are 372,000 companies operating in Illinois. We cannot afford to give hundred-million-dollar deals to all those companies; it’s inefficient and impractical. What we really need to do is talk about creating a level playing field environment that makes Illinois a magnet,” Whitley says. He says he is encouraged that Illinois’ legislative leaders are now creating a joint committee to review Illinois’ business tax structure.
Though he would like to roll back the corporate tax rate, doing so would throw off the state’s budget, State Senate President John Cullerton says. “We still need the $800 million the corporate income tax is bringing in. We need that because we need to have a balanced budget,” he says. Cullerton says that means all of Illinois’ loopholes, exemptions and tax credits will also come under review.

“If we can get that money in some other way, in a fairer way, where it’s more evenly distributed among the corporations, we’re all in favor of that. From what I understand, from the Department of Revenue, about two-thirds of the corporations in Illinois don’t pay any tax,” he says.

Economists say businesses look at much more than taxes when deciding where to locate. They consider such things as markets, transportation infrastructure, the quality of life, available workforce. On those scores, Cullerton and other Illinois officials say the state is hard to beat. Outplacement consultant John Challenger, of the Chicago-based firm Challenger, Gray & Christmas, says Illinois needs to address its business tax structure, because in this economy, competition is real.

“The competition’s getting stiffer because everybody’s fighting for jobs, every city wants to have a vital economy and so they’re outcompeting, trying to woo companies,” he says. Challenger says the big three that threatened to leave — Caterpillar, Sears and CME Group — have a combined workforce of 30,000 people in Illinois. Losing any one of them, he says, could have a substantial impact on the state’s economy.

Austin, Texas, tops the list.

What cities are best positioned to grow and prosper in the coming decade?

To determine the next boom towns in the U.S., Forbes, with the help of Mark Schill at the Praxis Strategy Group, took the 52 largest metro areas in the country (those with populations exceeding 1 million) and ranked them based on various data indicating past, present and future vitality.

We started with job growth, not only looking at performance over the past decade but also focusing on growth in the past two years, to account for the possible long-term effects of the Great Recession. That accounted for roughly one-third of the score. The other two-thirds were made up of a a broad range of demographic factors, all weighted equally. These included rates of family formation (percentage growth in children 5-17), growth in educated migration, population growth and, finally, a broad measurement of attractiveness to immigrants — as places to settle, make money and start businesses.

We focused on these demographic factors because college-educated migrants (who also tend to be under 30), new families and immigrants will be critical in shaping the future. Areas that are rapidly losing young families and low rates of migration among educated migrants are the American equivalents of rapidly aging countries like Japan; those with more sprightly demographics are akin to up and coming countries such as Vietnam.

Many of our top performers are not surprising. No. 1 Austin, Texas, and No. 2 Raleigh, N.C., have it all demographically: high rates of immigration and migration of educated workers and healthy increases in population and number of children. They are also economic superstars, with job-creation records among the best in the nation.

Perhaps less expected is the No. 3 ranking for Nashville, Tenn. The country music capital, with its low housing prices and pro-business environment, has experienced rapid growth in educated migrants, where it ranks an impressive fourth in terms of percentage growth. New ethnic groups, such as Latinos and Asians, have doubled in size over the past decade.

Two advantages Nashville and other rising Southern cities like No. 8 Charlotte, N.C., possess are a mild climate and smaller scale. Even with population growth, they do not suffer the persistent transportation bottlenecks that strangle the older growth hubs. At the same time, these cities are building the infrastructure — roads, cultural institutions and airports — critical to future growth. Charlotte’s bustling airport may never be as big as Atlanta’s Hartsfield, but it serves both major national and international routes.

Of course, Texas metropolitan areas feature prominently on our list of future boom towns, including No. 4 San Antonio, No. 5 Houston and No. 7 Dallas, which over the past years boasted the biggest jump in new jobs, over 83,000. Aided by relatively low housing prices and buoyant economies, these Lone Star cities have become major hubs for jobs and families.

And there’s more growth to come. With its strategically located airport, Dallas is emerging as the ideal place for corporate relocations. And Houston, with its burgeoning port and dominance of the world energy business, seems destined to become ever more influential in the coming decade. Both cities have emerged as major immigrant hubs, attracting on newcomers at a rate far higher than old immigrant hubs like Chicago, Boston and Seattle.

The three other regions in our top 10 represent radically different kinds of places. The Washington, D.C., area (No. 6) sprawls from the District of Columbia through parts of Virginia, Maryland and West Virginia. Its great competitive advantage lies in proximity to the federal government, which has helped it enjoy an almost shockingly ”good recession,” with continuing job growth, including in high-wage science- and technology-related fields, and an improving real estate market.

Our other two top ten, No. 9 Phoenix, Ariz., and No. 10 Orlando, Fla., have not done well in the recession, but both still have more jobs now than in 2000. Their demographics remain surprisingly robust. Despite some anti-immigrant agitation by local politicians, immigrants still seem to be flocking to both of these states. Known better s as retirement havens, their ranks of children and families have surged over the past decade. Warm weather, pro-business environments and, most critically, a large supply of affordable housing should allow these regions to grow, if not in the overheated fashion of the past, at rates both steadier and more sustainable.

Sadly, several of the nation’s premier economic regions sit toward the bottom of the list, notably former boom town Los Angeles (No. 47). Los Angeles’ once huge and vibrant industrial sector has shrunk rapidly, in large part the consequence of ever-tightening regulatory burdens. Its once magnetic appeal to educated migrants faded and families are fleeing from persistently high housing prices, poor educational choices and weak employment opportunities. Los Angeles lost over 180,000 children 5 to 17, the largest such drop in the nation.

Many of L.A.’s traditional rivals — such as Chicago (with which is tied at No. 47), New York City (No. 35) and San Francisco (No. 42) — also did poorly on our prospective list. To be sure, they will continue to reap the benefits of existing resources — financial institutions, universities and the presence of leading companies — but their future prospects will be limited by their generally sluggish job creation and aging demographics.

Of course, even the most exhaustive research cannot fully predict the future. A significant downsizing of the federal government, for example, would slow the D.C. region’s growth. A big fall in energy prices, or tough restrictions of carbon emissions, could hit the Texas cities, particularly Houston, hard. If housing prices stabilize in the Northeast or West Coast, less people will flock to places like Phoenix, Orlando or even Indianapolis (No.11) , Salt Lake City (No. 12) and Columbus (No. 13). One or more of our now lower ranked locales, like Los Angeles, San Francisco and New York, might also decide to reform in order to become more attractive to small businesses and middle class families.

What is clear is that well-established patterns of job creation and vital demographics will drive future regional growth, not only in the next year, but over the coming decade. People create economies and they tend to vote with their feet when they choose to locate their families as well as their businesses. This will prove more decisive in shaping future growth than the hip imagery and big city-oriented PR flackery that dominate media coverage of America’s changing regions.

by Joel Kotkin, New Geographer
see the list at Forbes