Diversifying Arizona’s Economy

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According to an ASU study, Arizona has lost 334,000 jobs during the current recession. About a third of those jobs are in construction.
The author of the study, ASU economist Dennis Hoffman, says Arizona must diversify its economy to avoid another economic meltdown.

Ted Simons: Arizona has lost 334,000 jobs during the current recession. That's according to an ASU study. About a third of those lost jobs were in construction. The report says Arizona must diversify its economy to prepare for future economic disasters. Joining me now is the author of the study, ASU economist Dennis Hoffman. Good to see you again. Thanks for joining us.

Dennis Hoffman: Good to see you, Ted.

Ted Simons: Arizona needs a more diversified economy. Does anyone disagree with that?

Dennis Hoffman: It would be shocking at this point in the cycle if anybody disagreed with that. And, you know, when you said we needed more diversified economy, I almost said, duh. Of course we do.

Ted Simons: OK. When you say a more diversified economy, does that mean less reliance on construction, real estate, growth for growth sake?

Dennis Hoffman: Here's my perspective on that. There's a number of voices around this issue. I hear voices disparaging construction and real estate. I'm not one of those, and Lee and I worked on this piece. Neither one of us are out to disparage or dump on the real estate and construction business. Think of it this way -- Arizona is a people magnet. We attract growth, we attract population growth into this state. We are then inherently going to be reliant more than the average state, on construction-based businesses. We have to build homes for these people to live in. What we've got to be figuring out, though, is that we've got to build an economy, then, that is not overly reliant on construction. So we're inherently reliant on construction, and hence exposed to the boom and bust cycles.

Ted Simons: How do you do that? Do you use tax incentives? Tax credits? These sorts of things? Do you play winners and losers? How do you do this?

Dennis Hoffman: Very good question. Very good question. The challenge that, say, government has, economic development folks have, the folks at GPEC, the folks at trio down in Tuscon, how do you craft a strategy that will help buffer this particular issue that we confront? And really, rather than trying to pick a particular industry, I think what we need are industries that are more reliant on skill-based jobs, jobs that require education and skills, that will attract more skilled people in our in-migration population, and it's lacking in our in-migration population, and unfortunately it's very much lacking in our native born population as well. If we had a job base that was more demanding of knowledge and skills, it would create the incentives to attract more knowledge and skilled workers from afar, and the incentives to build knowledge and skills in our indigenous work force. So then the issue is, how do we begin this process? And I would say you look at your strategic assets, just like you don't turn your back on construction or real estate completely, you think about aerospace defense. It is a strategic asset that we have. We have high-quality, high-technology jobs in that area. We ought to be encouraging that area, and if there's transitions away from defense investments from Washington, we ought to be helping those businesses transition a little bit into other pursuits. But the aerospace business is a vast business, both commercial and defense related. We have a base in electronics manufacturing, we have a potential base in the sciences here, in care. Think about this -- we're a people magnet, right? And some of those folks are in their early retirement stages, they're baby boomer generation, we demand -- we're going to demand a lot of health care over the next few years. We could serve that industry.

Ted Simons: Folks will say, though, that Arizona historically, yes, has attracted a lot of people. They come out here. But they're not coming out here for manufacturing, like they go to the upper Midwest. They're not coming out for banking, like they might in certain parts of the East coast and West coast. They're coming out here for the most part because the winter is good, and a lot of these folks have retired. Can you make for a high-tech environment for job growth and protection against meltdowns when so many folks are coming out not necessarily for the jobs?

Dennis Hoffman: Great question again. But we have the allure. There's a lot of people that come to Arizona in all age groups. What we need to do is do a better job at attracting our share of educated workers. We don't do very well in the young single college educated cohorts, a lot of those folks do go to urban environments, Chicago, LA, New York. So we've got to create an environment that attracts those people. That's when you hear this buzz around the urban lifestyle issues, and those are important. They are an attractor to those kinds of folks. And if you don't have amenities for people like that, it is a detractor. But what we've got to do is craft an environment, some of this is public relations, is it a campaign, it is a communication issue, to get out the message that we want to be known more for our -- the quality of our education -- let me back up here. We want to be known as well as we are for climate and attractive lifestyle, we've got to be known for the knowledge and skills in our work force. And we're not there yet. We've got to continue to invest, and it's not just a government deliverable, it's an individual deliverable as well. You've got to have both of those.

Ted Simons: Can you force that? Can you get -- again, using my other analogy, can you get people to move to Michigan because of the sunshine? Can you get people to move to Arizona because of the education high-tech environment? How much can you push this? You're an economist, you know about human will and desires and the needs of the marketplace. How do we get that marketplace going?

Dennis Hoffman: Tough, tough challenge. But I'm glad you brought up Michigan. They're in an analogous problem. They've been overly reliant on a single industry for a number of years. They've had it easy. They've been complacent. They've been so reliant on that particular industry. Now they're trying to diversify. And they've been trying to diversify. It's our turn. We've been overly reliant, growth just happened, prosperity regionally just kind of fell in our laps. We're all going to have to buckle down and work on this. Can we do it? Can we afford to do it? Do we have the time to do it? The inclination? What's the alternative? Can we afford not to do this? Are we going to sit back and be whip sawed yet again? I've been here 31 years. This is my second big downer on real estate. It's no fun. And working in state government during a big downer in real estate, that's really no fun.

Ted Simons: The idea, though, that Arizona perhaps because it was one of the quickest and the first to fall, because of our reliance, overreliance on real estate, might be among the first to recover because of a continued reliance on certain aspects of the economy. Are you seeing that, or are we in a rough spot for a while because we haven't diversified?

Dennis Hoffman: Little bits of good news are coming out. The issue study just released on prices show some firming, at least -- certainly not gone back to anywhere near where they were. Some firming on prices. I think we're approaching bottom in a lot of areas, maybe a bit of a mucky bottom. You take a step and you find some ground to take the next step, you slip down, come back up. That kind of thing. I do not see this rapid acceleration in growth off this bottom. Some of my colleagues in the profession see continued -- pretty dark stories, and they keep saying that. But I'm seeing some resilience, some bottoming here, slow, but steady growth from here on -- maybe from a few months from now and here on out.

Ted Simons: Last question -- does Arizona have the political will to lure the high-tech jobs? To do the things, go the -- take the three steps in order to gain two? Do we have that political will?

Dennis Hoffman: I'm not sure that we had it a couple of years ago because of this complacency. The question I think in front of us is, has this one been enough of a wake-up call that people can rally around it? I've heard some very encouraging discussions from people across the political spectrum on this particular issue. So like always, Ted, I'm optimistic on this point.

Ted Simons: All right. Very good. Thanks for joining us.

Dennis Hoffman: Thank you.

Dennis Hoffman:ASU Economist;

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