Economic outlook - February 2007

Jim Fain became commerce secretary as forces mobbed up to rob jobs from the state. Here’s how it replaced them.

By Frank Maley

Jim Fain, a former banker, became the state's secretary of commerce in 2001 — just as the economy was heading south. After nine years of gains, the state's private sector lost jobs and continued losing them until 2004. Last November, North Carolina had about 3.3 million private-sector jobs, up slightly from the November before he became secretary. What follows is an edited transcript of his discussion of the economy with Senior Editor Frank Maley at the end of last year.

BNC:How has the state economy evolved since you became commerce secretary?

Fain: It has continued to shift from manufacturing to service jobs. In the process, it has turned in a remarkable performance — replacing a net loss of 194,000 jobs in manufacturing. Since January 2001, our economy has added a net 28,000 jobs.

How do the wages of the new jobs compare with those lost?

In the segments where we’re adding many of our jobs — financial services, business and professional services, and health and education services — wages are as attractive or more attractive than manufacturing.

Not all of those jobs gained were in higher-paying sectors.

Right. But more of the new jobs are in those areas I mentioned.

What other changes have you noticed?

We’ve seen job gains and substantial investment in sectors of manufacturing that are sustainable in today’s highly competitive global marketplace — manufacturing that is capital- and technology-intensive. Because of the fundamental soundness and diversification of our economy, we’ve been able to overcome the simultaneous effects of the dot-com bust, September 11, a manufacturing-led recession and changes in trade policy that disproportionately impacted our industrial state. Other states similarly impacted have not recovered as successfully as North Carolina.

“Make sure you meet the needs of folks in transition or coming into the education system.”

How was North Carolina able to do it?

In 2001, Gov. Mike Easley asked the General Assembly to continue to invest in education and work-force development in the face of a large budget shortfall so we’d be prepared to grow when the economy improved. It worked out that way.

How has it paid off?

It does two things. No. 1, you make sure you meet the needs of folks who are in transition or who are coming into the education system. The other piece of it is, our value proposition is that this state for 200-plus years has realized the importance of education and has consistently invested in education. If you took the path we took back in 2001, then it’s easy to point to that choice and say, ‘We really walk the talk.’

Given the rapid shrinkage of industries that had sustained North Carolina for a long time, how long can we expect ‘sustainable’ manufacturing jobs to last?

I don’t think you can put a time frame on something like that. This is a dynamic process, and so continuing to have the best and the brightest workers and thinkers is important. So is a commitment to innovation, because you’ve got to continually innovate to extend product life or to create products or services that make sense in our economy. Because it’s a dynamic process, it’s kind of hard to say, well, our industries will last for 17.3 years before they’re stale or eaten up by another geography.

What kinds of jobs make sense here?

They’re higher-skill jobs where we have some differentiation. For example, strategic military manufacturing is not going overseas. There have been additions to our work force that make high-end kitchen cabinets. And you’d say, ‘Well, shoot. That sounds like the kind of thing you could make in Asia.’ But because of the bulk and the shipping implications of that and the need to preserve quality and, in many cases, the need to get those things to clients quickly, that’s something that does make sense.

Any other examples?

Jobs that need to be close to research universities — biomanufacturing is an example. Companies that make automotive components, and there are a lot of them. We have a strong automotive-component presence.

Compare North Carolina with its rivals.

We’ve enjoyed three years of strong recruiting and expansion. In addition to the location of a number of major projects in the state, we have seen many businesses electing to expand in North Carolina. In 2004 and 2005, we announced Commerce-assisted projects that created about 20,000 jobs and $3 billion in investment in each of those years, and we’ll top that job mark this year. This level of activity seems to affirm Site Selection magazine’s ranking of North Carolina as the state with the nation’s best business climate in five of the last six years. And Southern Business and Development has named North Carolina ‘State of the Year’ in economic development in the South for the past two years.

What about rivals?

Our counterpart agencies in the Southeastern states are strong, competent competitors. And we regularly compete with Ireland, Singapore and Eastern Europe, not to mention China and India. Gov. Easley’s focus on continuing investment in education, work-force development, infrastructure and innovation has been valuable and essential in differentiating our state from our competitors. The governor has also supported our development of performance-based incentives.

Where do recent company expansions fit into the larger scheme of things?

Companies such as Fidelity, Quintiles, Credit Suisse, Volvo Construction Equipment and Maersk all have global options for expansion. Their decisions to expand here are affirmations that we are doing the right things to encourage their growth. The heart of the governor’s economic-development strategy is to differentiate our state based on the quality of our work force. When companies like these announce an expansion, they regularly talk about the quality of our work force and ease of doing business in North Carolina as factors in their decisions.

“The heart of the strategy is to differentiate our state based onthe quality of our work force.”

Every state says it has a strong work force. How do you prove it?

For people who are thinking about locating an installation here, we find it very valu-able to have them talk with people who are in business here. And they want to do that. They want to find out the breadth and the depth of the labor force. Are workers trained to do what they need to do? What kind of support is available from our workplace training programs? People find that to be a good experience historically.

What has changed in the state’s rural areas since you became secretary?

Our rural areas have felt the impact of changes in agriculture and the loss of employment in traditional manufacturing. Many counties have small or declining populations, which exacerbates the challenges of running schools, providing public services and investing in economic-development programs. It is harder to provide amenities that are more affordable in larger urban areas. There are substantial scale-related challenges.

What should we do?

Ideas we need to consider are providing the financial resources for a good education in every part of the state, providing a financing mechanism for shell buildings and greenfield-site preparation, wiring all parts of our state, developing industrial parks jointly owned by several counties, maintaining regional road connectivity to facilitate commuting to jobs and using place-based economic-development strategies.

Are you concerned about being involved with China, a communist country?

There are 1.3 billion consumers there. One hears that maybe 10% of them are affluent. That’s the size of Japan, 130 million. There’s a vast market there that’s available to this country and its producers of goods and services. Plus there’s a strong movement to globalism, to reduction of trade barriers and so forth. So as we are opening our markets to others, we also need to have the opportunity for fair trade and to sell into offshore markets. That’s one important reason why you have to pay attention to China.

Any others?

A number of U.S. and North Carolina companies realize that the best way to sustain employment in North Carolina is for certain parts of their operations to take advantage of labor rates in other economies offshore.

There has been some talk about changing the state’s tax structure. Are there problems with the corporate-income tax?

There are various assessments of the business tax. Often we’re in the middle of the pack or slightly better than the middle of the pack, in terms of the overall tax burden. There’s also a study underwritten by the Council on State Taxation, which I think is largely a group of corporate entities. It shows that we have the lowest tax burden on a normalized basis.

What does that mean?

They take all those taxes paid in a state by businesses, and then they normalize those numbers by looking at that as a percentage of the private gross state product. And in that kind of a normalized measure, it shows that our taxes paid as a percentage of the gross state product is among the lowest, if not the lowest, in the country.

So everything is fine?

I’d like it if our nominal rates were lower, but we’ve also got to make sure we can pay for things that really differentiate our state.

How can the state stop companies leaving Charlotte and moving over the South Carolina line?

A study done by Ticknor & Associates noted that it is inevitable that some firms may move to more-suburban locations in the Charlotte area as the central city becomes built up. Our job is to make sure they choose other locations in Mecklenburg or in surrounding North Carolina counties. We do that by being attentive to our companies’ business needs and by making the investments that make this a great place to do business?

Global rip currents are taking low-skill factory jobs. “We’regoing to lose most of those.”

What about using incentives?

I don’t believe it’s appropriate for North Carolina to use incentive programs to induce companies not to move existing jobs several miles away and over the border.

How will recent changes in state incentives affect businesses?

New legislation, passed in the 2006 session, replaces the William S. Lee Act with what we now refer to as Article 3J credits for the creation of jobs, investment in business property and for large investments in real property in Tier I counties.

What’s the main goal?

To make more of our counties eligible for the higher level of credits available to Tier I, or least economically prosperous, counties. The new law reduces the number of tiers from five to three and raises the number of Tier I counties to 41, thereby better leveling the playing field to encourage investment and job creation in all parts of the state. It also promotes the concept that counties in similar economic situations should be treated similarly. Businesses are motivated to consider locations with potentially lower land and operating costs and available, hardworking labor.

What else does the new law do?

It expands the types of industry eligible to take the credits, reflecting changes in our economy. For example, it adds research-and-development companies, aircraft-maintenance and -repair operations and motor-sports organizations, and it broadens eligibility within the information-technology sector.

What about the state’s infrastructure is attractive to businesses?

We have the second-largest state-maintained highway system, and Gov. Easley’s Moving Ahead program modernized a number of roads important to commerce. The Ecosystem Enhancement Program is a creative way to preserve our environment and to expedite road construction. Our international airports offer economically important flights to Europe and nonstop service to many points in the U.S., and we’ve invested in our secondary airports, supporting the business activities of North Carolina companies.

What else?

We’ve continued to invest in our ports, which have seen a significant increase in volume in the past two years and are planning and evaluating the construction of a new, large container facility. Perhaps most importantly, the state has invested in our electronic infrastructure. Examples would include NC-REN, an advanced network supporting education, research and economic development. Through the activities of e-NC, we’ve made high-speed Internet access available to 82% of our households.

What needs to change?

We need to explore mass transit. Air service is essential in today’s global operating environment, and we must be alert to opportunities and creative ways to expand oversees flights and domestic service.

Secondary airports have struggled to attract and keep scheduled passenger service. What, if anything, can be done?

We need to work hard to make sure we have service in all parts of the state and in the less populous parts of the state. And I have suggested on occasion that thinking regionally about that is a wise thing, because you want to make sure you have the volume necessary so that flights make sense.

Do we have too many airports?

When I say we need to think regionally about air service, that’s sort of what I mean. It’s sort of a diplomatic way of saying we need to think practically about air service and work together on it.

Are gains in imports and the other benefits of globalization worth the loss of manufacturing jobs?

We can’t swim against the economics that are driving our loss of low-skill, labor-intensive manufacturing jobs. We are going to lose most of those. The key is to understand the changes in our global economy and identify opportunities for North Carolina. Positioning ourselves, for example, to attract logistics and distribution employment and investment is a logical response to the shift of labor-intensive manufacturing to low-cost geographies. As Gov. Easley has said, we can’t compete with cheap labor — we can compete with smart labor.