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Published: Sunday, 9/17/2006

Ohio economy sputters as innovation declines

BY JIM TANKERSLEY
AND JOSHUA BOAK
BLADE STAFF WRITERS

First in a series

CELINA, Ohio They don t build Huffys here anymore. These days you can buy one, made in China, for $34.88 at the Wal-Mart Supercenter a field and a fence away from the old plant.

George Huffman s Ohio-born company popularized BMX racing, powered U.S. Olympic teams to gold, and once led the world in bicycle sales. Huffy Corp. also axed 1,000 factory jobs in Celina, a two-hour drive southwest of Toledo near the Indiana line, in 1998. It went bankrupt in 2004.

Public officials, union leaders, and news reporters insisted for years that Huffy embodied Ohio s turn-of-the-millennium economic slide. They blamed a manufacturing exodus by household names such as Rubbermaid, Hoover, and Mr. Coffee on the search for cheap foreign labor to satisfy discount stores such as Wal-Mart.

Ohio s slide is real. Its economy, which once paced the country, has trailed national averages in job creation and income growth for more than a decade. Politicians note frequently that the state lost more than 200,000 manufacturing jobs during the last five years.

Both major candidates for governor this fall know economic struggle personally, and both say they know what ails the state today.

Republican Ken Blackwell grew up in a housing project in Cincinnati, one of the nation s 10 poorest cities. Democrat Ted Strickland is the son of a steelworker in Scioto County, where residents are paid less on average than almost any county in America.

Ohio has found itself in a difficult place because there was not the anticipation or planning for what was coming, Mr. Strickland says. We have been too largely reliant upon industries that have been dramatically affected by outsourcing or other foreign competition.

Mr. Blackwell blames taxes and government regulation. We re driving folks with high net worth out of our state, he says.

But Ohio voters should consider this in November: New research suggests neither Mr. Strickland nor Mr. Blackwell is fully addressing Ohio s real economic problems.

Factory layoffs, the research shows, did not cause the state s crash into mediocrity.

The story of Huffy is indeed the story of Ohio. It is not about vanishing jobs. It is about ideas and products that never appeared.

It s about the bike.

Pinpointing the problem

Even on wind-chilled winter mornings, Mark Schweitzer and Paul Bauer pedal 15 miles each from opposite ends of the Cleveland suburbs to their downtown offices at the Federal Reserve Bank.

The Fed has 12 branches and controls the nation s money supply by raising and lowering interest rates. The Cleveland branch boasts pink marble walls and a central machine-gun turret, a holdover from the days of John Dillinger.

A study by Paul Bauer, left, and Mark Schweitzer of the Cleveland Federal Reserve Bank concluded that patents per-capita were the source of Ohio's wealth. They cited a decrease in patents as the cause of the state's economic slump. A study by Paul Bauer, left, and Mark Schweitzer of the Cleveland Federal Reserve Bank concluded that patents per-capita were the source of Ohio's wealth. They cited a decrease in patents as the cause of the state's economic slump.
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Mr. Schweitzer and Mr. Bauer are economists in the bank s nonpartisan research division, which tourists rarely see. They hedge their words, since an unexpected comment by a Fed official at a congressional hearing or cocktail party can cause global markets to swing violently.

Bicycling is one of the few topics the men discuss freely. Mr. Schweitzer once joined 8,000 other amateur cyclists on a former Tour de France stage. Mr. Bauer finished a 250-mile trip from Cincinnati to Cleveland in two days. Mr. Bauer s favorite bike is his Trek Fuel 90, which Mr. Schweitzer covets.

When the economic boom that carried Ohio through the 1990s sputtered, Mr. Bauer and Mr. Schweitzer noticed the ensuing recession hit Ohio harder than the rest of the country. When the nation recovered, Ohio fell further behind other states.

Manufacturing job loss doesn t explain why. Ohio and its neighbors hold a disproportionate share of the country s manufacturing, yet America shed factory jobs at roughly the same percentage as the Great Lakes states.

The United States lost nearly 18 percent of its manufacturing jobs, more than 3 million solid paychecks, between 2000 and 2006, according to the Bureau of Labor Statistics. It still managed a net gain of 3.4 million jobs during that period, meaning that the country actually generated 6.4 million new jobs.

This is what economists call creative destruction nimbler companies replace older ones, unleashing growth. Since 2000, Ohio witnessed more destruction than creativity. Its businesses eliminated 216,100 manufacturing jobs, 21 percent of its base. But they hatched a mere 40,000 jobs for a net loss of 176,100.

Mr. Schweitzer and Mr. Bauer wanted to know what was really wrong in Ohio. So they built what they call the most comprehensive analysis they ve ever seen of why some states economies outperform others.

Going back 75 years, Mr. Schweitzer and Mr. Bauer crossed average state incomes with key statistics in several areas, including tax rates, government spending, education levels, and climate. The long timeline ensured a random blip in the business cycle wouldn t skew the analysis.

The effort took nearly three years. An intern typed records scrawled on onion paper into databases. Mr. Bauer often sent new figures to Mr. Schweitzer past 10 p.m., knowing his colleague would respond before morning.

A Wal-Mart Supercenter stands next to the former Huffy Corp. factory into Celina. Some observers blamed Huffy's departure on its quest for cheap foreign labor to satisfy discount retailers. A Wal-Mart Supercenter stands next to the former Huffy Corp. factory into Celina. Some observers blamed Huffy's departure on its quest for cheap foreign labor to satisfy discount retailers.
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Their analysis, the main feature in the Cleveland Fed s 2006 annual report, challenges much of the campaign rhetoric of Ohio s gubernatorial candidates.

Tax levels and highway spending, two planks of Mr. Blackwell s economic platform, did not affect state income growth significantly. A state s concentration of industry, such as Ohio s reliance on manufacturing that Mr. Strickland decries, mattered only a little.

What mattered most, Mr. Bauer and Mr. Schweitzer discovered, were states patents per-capita. A wealth of patents drove Ohio s economy in the 20th century. But in the past two decades, other states sprinted past.

The Birthplace of Aviation, the cradle of the cash register and Play-Doh, Ohio ranked sixth in the nation in per-capita patent generation in 1954. It fell to 11th in 1988. By 2001, Ohio slipped to 20th, passed by such nontraditional tech hubs as Wisconsin, Utah, and Idaho.

The Harvard University school of business found that Toledo churned out 4.81 patents per 10,000 employees in 2003, compared to a 7.81 average nationwide.

Ohio also struggles in what Mr. Bauer and Mr. Schweitzer identified as the second-strongest predictor of income: the percent of high school and college graduates in a state.

When 100 people walk down a street in Ohio, 23 have college degrees. In Toledo, it s 17. The concentration is higher in 37 other states, including Minnesota, where 30 percent of the population have at least a bachelor s degree. The average family income in Minnesota is $63,998 $10,000 more than in Ohio.

Emerging research supports the Fed s methods and analysis. Per-capita income growth is the best proxy for the local policy maker s true goal, which is to improve the economic welfare of current constituents, Rutgers University professor Paul Gottlieb wrote in a 2002 study of urban economic development.

The nonprofit W.E. Upjohn Institute for Employment Research concluded this year that a skilled work force, a combination of education levels and patent generation, was the biggest factor in regional economic growth. Cleveland State University professor Ned Hill found in 2001 that patent-fueled productivity is more important than raw job numbers.

The experts all point to a glaring problem Ohio s leaders should have seen decades ago: The state needs more and better ideas.

I don t think Ohio should need a wake-up call, Mr. Schweitzer said.

It s somewhat disturbing, Mr. Bauer added.

The business of ideas

Patents are a government-licensed monopoly on an idea. They improve existing products and spawn new ones that attract investors, profits, and ultimately jobs.

That s what happened in Waterloo, Wis., home of Trek Bicycles.

With annual revenues approaching $500 million and 1,700 stateside employees, Trek is now America s largest bike company. Its research and development division sits beside its assembly lines.

In 2002, Trek patented a method of weaving weapons-grade carbon fibers into a lightweight tube and changed the culture of a 120-year-old sport.

Molded together, the tubes form a bike frame weighing less than two pounds. Lance Armstrong climbed treacherous Alpine grades on Trek frames to win the Tour de France a record seven times.

It s about doing it more comfortably, faster than ever before, said Eric Bjorling, Trek s marketing coordinator.

Huffy Corp. took a different route, which led to Ohio layoffs and bankruptcy. It focused on price rather than performance.

Beginning in 1998, Huffy shipped bike production from Celina to a nonunion factory in Missouri, then to Mexico, then to China, where it reportedly paid workers 4 percent of what it paid Ohioans. Profits didn t follow the jobs.

That strategy still riles John Mariotti, who stepped down as Huffy s president in 1992. He favored patenting the styling and ornamental design of bike frames, giving the company a legally protected edge against imitators in the children s market.

Twenty years ago, we made bikes in pink and argyle, Mr. Mariotti said. Eight-year-old girls loved them.

Huffy declined comment for this story. Before filing for bankruptcy, the company told investors the expiration of its patents would not hurt its $430 million in annual revenues. The only valuable trademark, patent, or license listed in its 2003 annual report is its company name.

Other once-pioneering Ohio companies watched competitors beat them to key advancements.

NCR Corp., of Dayton, patented carbon paper and electric cash registers but surrendered in the personal computing revolution. It has laid off 270 Ohio workers since 2000.

Mr. Coffee pioneered the drip coffee-maker market in the 1970s. But sales trickled during the late 1990s, when Starbucks made the store-bought espresso a daily ritual. Mr. Coffee eliminated 470 Ohio manufacturing jobs in the last decade.

Some of the nation s dominant industries sprouted far from Ohio. Idaho is enjoying a record streak of low unemployment, thanks to a computer industry that blossomed around Micron Technology Inc. s memory chips. The company and a partner broke ground last month on a $150 million semiconductor plant in Boise that will add 125 jobs.

Ohio public officials tried for years to lure expanding companies. Lucas County s Regional Growth Partnership recently hired consultants from IBM, America s single-largest patent producer, to study the Toledo area and recommend which firms it should target.

The head of IBM s domestic location strategies group, Gene DePrez, says top businesses want a pool of skilled workers, like-minded companies nearby, solid infrastructure, and a high quality of life. But nothing matters more than political and business leadership.

If leadership is not on top of [innovation] , Mr. DePrez said, is not pursuing it actively, not understanding what trends are going on, where investment is being made, where innovation is taking place and how they can capitalize and support innovation, then you re doomed to failure.

Words vs. action

Talking about innovation was never a problem for Ohio politicians. Encouraging it was.

Gov. Richard Celeste created a technology-boosting grant fund in 1983. His economic development department bragged of underwriting a better raspberry plant and a quick test for herpes. It dubbed the efforts unqualified successes and said Ohio s know-how was advancing America s tomorrows, even as the state slipped in patent production.

Gov. George Voinovich pledged to put a little sizzle in economic development. When Mr. Voinovich prepared to leave office in 1998 for the U.S. Senate, his science adviser warned that the state invested too little in technology.

Gov. Bob Taft launched a Third Frontier plan to spend $1.1 billion on new technology jobs and research. Even if it exceeds analysts projections over the next 10 years, the program will replace less than half of the manufacturing jobs Ohio lost in the last recession.

It s a long-term process, Mr. Taft said in a recent interview. You re talking about transitioning an economy.

The main candidates to replace Mr. Taft talk a lot about economic transition. Mr. Strickland, a Democratic congressman and the front-runner in the race, often echoes his political predecessors.

In interviews, Mr. Strickland says it is essential to support entrepreneurship. His Turnaround Ohio plan makes education and worker training the engine for economic growth. (In 1990, Mr. Voinovich pledged to make education our No. 1 economic development tool .)

The Strickland plan continues Mr. Taft s Third Frontier initiative. It proposes $250 million for alternative energy research. (Governors starting with Mr. Celeste invested hundreds of millions of dollars in alternative energy and focused heavily on clean coal, a favorite project of Mr. Strickland and his GOP opponent.)

Mr. Strickland admits the rhetoric may sound the same as previous candidates. The difference is, he says, I m serious about this.

Mr. Strickland claims existing state revenues would pay for his plan, but he said in a recent interview that transforming the economy will take resources that I think currently are not there.

Mr. Blackwell, the Republican secretary of state, says Ohio can rebound by becoming friendlier to business.

Ohio s confiscatory tax code and costly regulatory environment push the wealthy individuals who could finance those companies to leave the state, he contends. To entice investors, Mr. Blackwell would cut taxes and ease regulations. He rejects the Cleveland Fed s conclusion that tax rates don t affect income growth.

I ve spent a total of about 30 years working with the best economic minds, looking at tax reform and trends in the national and global capital markets, he says. I ve worked with the Federal Reserve bank, not just the regional bank, over the years... I don t need a think tank to answer these questions for me.

The wealthiest, most patent-producing states in the nation include low-tax New Hampshire and high-tax Massachusetts. Asked what states he looks to as a model of low-regulation economic growth, Mr. Blackwell cites Indiana. Its average income is slightly less than Ohio s. The Fed study ranks it 26th in patent generation.

Mr. Blackwell also proposes leasing the Ohio Turnpike to private investors for an estimated $6 billion. He would split most of the money between road construction, which the Fed found did not influence economic growth, and business assistance administered by the Ohio Department of Development.

Both Mr. Blackwell and Mr. Strickland acknowledge the development department has not stopped the state s free-fall in ideas. But neither candidate has proposed substantial changes to how the department targets hundreds of millions of dollars in economic incentives annually.

The search for solutions

Mr. Schweitzer and Mr. Bauer s research does not conclude, exactly, what policies would put Ohio back on the right track. They re still working on that. But they suggest a few broad principles: Identify the state s economic problems accurately, prioritize higher education, and emulate programs from more successful states.

Politicians might also learn from Celina, which found a way to survive after Huffy closed and left one-fifth of the town unemployed. Some plant workers ended up at Wal-Mart, which pays less. But others landed with new manufacturers, or they studied nursing at the local college, or they opened their own businesses.

The unemployment rate in Mercer County is 3.9 percent, the second lowest of Ohio s 88 counties and 2 percentage points below the state s average. The county s average annual wage grew by 23 percent since 1998 to more than $29,000. That still falls below the state average of $37,000, as it did eight years ago.

For 20 years, Huffy employed Pam Buschur s husband, while she ran a pair of travel agencies. After the layoffs, Neil Buschur joined Fleetwood, a tractor-trailer company in nearby Decatur, Ind.

It s kind of funny because my husband and I run into people he worked with and 95 percent have jobs that are better than when they were with Huffy, said Mrs. Buschur, now the executive director of the Celina-Mercer County Chamber of Commerce. Everyone s just kind of bounced back and moved on.

Down Main Street from the Chamber of Commerce, the Celina police maintain a bicycle patrol. One of the officers recently grew unhappy with his standard-issue ride, a customized Huffy.

He replaced it with a Trek.

Contact Jim Tankersley at: jtankersley@theblade.com or 419-724-6134.



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