Thursday, June 23, 2011

The Third Coast

Just in time for my flight back home, here's another great article by Forbes contributor Joel Kotkin on "The Rise of the Third Coast: The Gulf Region's Ascendancy in U.S." Kotkin cites four primary reasons for the vibrant economic growth of the Gulf Coast region: international trade, the energy industry, demographics, and political will. Some excerpts:
For most of the nation’s history, the Atlantic region—primarily New York City—has dominated the nation’s trade. In the last few decades of the 20th Century, the Pacific, led by Los Angeles and Long Beach, gained prominence. Now we may be about to see the ascendancy of a third coast: the Gulf, led primarily by Houston but including New Orleans and a host of smaller ports across the regions.

This reflects a long-term shift of money, power and jobs away from both the North Atlantic and the Pacific to the cities of the Gulf. The Port of Houston, for example, enjoyed a 28.1% jump in foreign trade this year, and trade at Louisiana’s main ports also reached records levels.

This growth stems from a host of factors ranging from politics, demographics and energy to emerging trade patterns and new technologies. One potential game-changer is the scheduled 2014 $5.25 billion widening of the Panama Canal, which will allow the passage to accommodate ships carrying twice as much cargo as they are able to carry currently. This will open the Gulf to megaships from Pacific Basin ports such as Singapore, Shanghai, Busan and Kaohsiung, which have mostly sent their cargos to West Coast ports such as Los Angeles and Long Beach. Some analysts predict that more than 25% of this traffic could shift to Gulf and South Atlantic ports.
As Greater Houston Partnership CEO Jeff Moseley noted this week, this is a "game changer" for the Port of Houston, which sits "at the geographic epicenter of the change." Back to Kotkin:
At the same time, demographic trends suggest these areas will continue to become more attractive to international commerce. Despite a legacy of hurricanes and floods, Houston, with over 5 million people, has emerged as among the fastest-growing large metropolitan regions in the country. The region’s population is expected to double in the next 20 years. Most of the economies its port serves—Dallas-Fort Worth, San Antonio and Austin—also have experienced rapid growth. Recoveries are in place in many other hurricane-devastated areas, including greater New Orleans.

Overall the Gulf is expected to be home to 61.4 million people by 2025, a nearly 50% increase from its 1995 base. This expanding domestic market—along with the possibilities posed by the canal—have already persuaded two larger retailers, Wal-Mart and Home Depot, to establish modern new distribution centers in Houston.
Finally there is the matter of political will. Both the Northeast and the Pacific regions are increasingly dominated by environmental, labor, urban land and other interests often hostile to wide-ranging industrial expansion. A legacy of labor unrest, most notably a big strike of West Coast ports in 2002, convinced some shippers to diversify their operations elsewhere. Growing regulation in California, suggests economist John Husing, a leading expert on port-related issues, makes the prospects for growing warehouse, logistics and manufacturing jobs increasingly “impossible” there.

East Coast ports, subject to some of the same pressures, may be slow to make the “intense capital improvements” required to capture expanding trade. In contrast, the Gulf’s leaders in both parties support broad based economic growth. New Orleans’ Democratic Mayor Mitch Landrieu is no less friendly to industrial and port expansion than Republican Gov. Bobby Jindal. Houston Democratic mayors like Annise Parker, Bill White and Bob Lanier have been as strongly in favor of critical business and infrastructure investment as their Republican counterparts.
Kotkin's piece reminds me of the recent Wall Street Journal article "The Lone Star Jobs Surge," which notes that a remarkable 37% of all net new American jobs since the recovery began were created in Texas.
Texas added 265,300 net jobs, out of the 722,200 nationwide, and by far outpaced every other state. New York was second with 98,200, Pennsylvania added 93,000, and it falls off from there. Nine states created fewer than 10,000 jobs, while Maine, Hawaii, Delaware and Wyoming created fewer than 1,000. Eighteen states have lost jobs since the recovery began.

The data are even more notable because they're calculated on a "sum of states" basis, which the BLS does not use because they can have sampling errors. Using straight nonfarm payroll employment, Texas accounts for 45% of net U.S. job creation.
The article cites two usual suspects—the state's free market and business-friendly climate—as the primary factors behind the robust job growth:
Texas stands out for its free market and business-friendly climate. Capital—both human and investment—is highly mobile, and it migrates all the time to the places where the opportunities are larger and the burdens are lower. Texas has no state income tax. Its regulatory conditions are contained and flexible. It is fiscally responsible and government is small. Its right-to-work law doesn't impose unions on businesses or employees. It is open to global trade and competition: Houston, San Antonio and El Paso are entrepôts for commerce, especially in the wake of the North American Free Trade Agreement.
But another interesting reason cited in the WSJ, and one much less frequently covered in recent articles about Texas's economic recovery, is the state's legal system:
Based on his conversations with CEOs and other business leaders, Mr. Fisher says one of Texas's huge competitive advantages is its ongoing reform of the tort system, which has driven litigation costs to record lows. He also cited a rule in place since 1998 in the backwash of the S&L debacle that limits mortgage borrowing to 80% of the appraised value of a home. Like a minimum down payment, this reduces overleveraging and means Texas wasn't hurt as badly by the housing crash as other states.
Kotkin's analysis ends with an admonition for other regions of the country:
Such differences in attitude have driven power shifts throughout American economic history. In the 19th century New York through a combination of ruthless ambition and greater vision overcame aristocratic Boston and more established Philadelphia. Icy Chicago performed a similar coup over its then far more established and temperate rival, St. Louis, in the mid- and late 1800s.

In the last century, unfashionable Los Angeles, without a great natural port, overcame the grand Pacific dowager San Francisco, blessed by one of the world’s great natural harbors, as the economic center of the West Coast. Los Angeles built a vast new modern and largely artificial port to make up for what nature failed to provide, and also nurtured a host of industries from aerospace, oil and entertainment to garments.

Now history is about to repeat itself as Texas, Louisiana and other Gulf Cities seek to reorder the nation’s economic balance of power. Unless California and the Northeast awaken to the challenge, they will be increasingly supplanted by a region that seems more determined to expand their economic dominion.