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December 07, 2008

Cleveland: Too Big To Fail?

As Cleveland Goes, So Goes America

Cleveland is the story of America in the 21st Century.

After the Obama Stimulation Plan of 2009 works, we will have 2.5 million new jobs. If they are to be jobs that will position America to compete in the 21st century, we will need to transition from an analog economy and largely fragmented and disconnected education system. The 21st century belongs to those who fully embrace the knowledge economy and one that is informed by a more fully connected and integrated education system. It is all about focus on the transitions. If the stimulus is to work it must have enough dry powder to enable the necessary investments to transition us forward into the 21st century. We have seen the first wave of legacy interests lining up to extract public largesse to support the 20th century.

Catching transitions is the secret to success. Just ask folks in Cleveland. We haven’t had much luck in the past fifty years. Want to get a preview of the next twenty-five years in our country, take a journey down Greater Cleveland’s lived experience this past twenty-five years. Getting a helping hand to support a graceful fall or serving as a catalyst for new opportunity is the art of politics. We have already seen the captains of finance and the automotive industry attempt to frame the need for a multi-trillion dollar stimulus and bailout as a bridge to tomorrow. Cleveland’s recent loss of National City Bank and further job losses in the anemic automotive economy reflect forces of the global economy and a march of historic dynamics that will not stop at the shores of Lake Erie. Two other major industries are now poised to line up in Washington to argue that that they too are too important to fail. Next up will be the airline industry. Not too far behind will be our telecommunications industry. The biggest problem for each of these industries, and one could add steel as well, is catching market transitions. In almost every case, catching a market transition requires vision and risk. More often than not both are in short supply. The dead weight of unsustainable and recurring short-term demands for investor profits, myopic leadership, and deeply structured organizational culture makes it very difficult to plan and execute these transitions. In each of these industries the rhetoric of the past 25 years has almost always been tinged with the language of the remarkable and sustainable opportunities occasioned by unregulated markets. Government and regulation were the enemies of the invisible hand of the market. If only the government, regulators, and citizen interest groups would stand down, our banks, automotive, steel, and airlines, and telecommunications industries could be expected to function and deliver wealth and opportunity with the confidence of a Madison Avenue pitchman. We are long overdue for a correction in the language and discourse in the United States and the attended policies that must follow.

Catching transitions is the most important quality of leadership. Knowing that a structural transition in an economy is underway is the easy part. There remains a deep-seeded human need to believe that resurrection is a matter of will, grit, and determination. This is as true of the leadership and the broad masses in our country as it is Greater Cleveland, and for that matter in any of a number of marquee institutions in our region. Given the growing sense of powerlessness, leadership in our communities needs to find the unchartered path between a peoples’ collective resilience (whose flip side is collective fear) and the visioning and development of a complex blueprint to serve as a map to the future (the flip side of which is being trapped in the mythical picture of the unending American Century as a rainbow without an end presented through the rear view mirror). The march of history continues and the future belongs to those who embrace the transition. The role of leadership is to enable people to look in the mirror and see in it a person with the personal attributes, skills, and beliefs to meaningfully and directly contribute to the re-making of our future. Knowing that a structural transition in the economy is underway is much easier to internalize than helping to architect and build the scaffolding required to get us from the here and now to the next arc of generative economic, social, education, and creative opportunities.

The too big to fail argument is the story of Cleveland. Today, most people in Cleveland are not so sure anymore. We have been in transition for nearly 50 years. The bedrock of our sense of invisibility through much of the late 19th and 20th century is based on our contribution to inventing, sustaining, and leading five core industries that define Cleveland the American Century. Today, one by one, the leadership of each of these industries will be sitting in front of benches of elected officials looking for bailouts, bridge loans, and the largesse of economic stimulus packages. The most difficult decision a leader can make is to find the courage and strategy for shifting scarce human, financial, technical and political capital towards transition. This is the stuff of the making and re-making of historical epochs that later historians will render fully intelligible.

Banking and consumer lending and mortgages has much to thank Cleveland. National City Bank may have been among the very first financial institutions in the country to offer a consumer home mortgage service line shortly after it was founded by Misters Sheldon and Severance in 1845. Once, Cleveland was a top banking center in the country and too big to fail. Today, the creative destruction of the home lending industry has contributed to the crippling of the global economy and brought National City Bank to its knees. Through the transition that has been underway for at least 40 years, the center of gravity of global finance continues to shift from cities like Cleveland and even America’s banking capital in New York to oil cities and sovereign national funds in the Middle East and Asia. America will continue to be an important linchpin in global finance as the transition continues to unfold. Former financial capitals like Cleveland are less relevant than ever before.
When the steel economy in this country defined our national status as a true global economic superpower, Cleveland was the Silicon Valley of the golden period from 1930 to 1960. Legendary captains of industry like Eaton and Mather looked down over the bellowing smoke stacks in the Cleveland Flats supporting hundreds of thousands of jobs at the mills and serving as a catalyst for the feverish maritime traffic through the Great Lakes and around the world.
Cleveland’s steel mills inspired industrialists from around the world who visited the banks of Lake Erie and who imagined a gleaming future for countries like India, Russia, Poland, and Japan. Today, Cleveland has fewer than 1500 steel mill jobs and of the global production of over 1.4 billion tons of steel, the United State will produce less than 100 million tons. Too big to fail? The transition is almost complete. It has been anything but painless. In Cleveland, the echoes of the steel economy remain with us as a haunted voice from the past representing both strength and weakness at once.

The automotive corridor in the United States goes from Detroit through Cleveland/Akron and to Pittsburgh. Cleveland had it all. It was home to the origins of the automotive industry. When Alexander Winton, who first introduced the steering wheel to the fledgling automotive industry, drove his 1899 Winton car from Cleveland to New York, it made headlines news all across the nation and perhaps a million persons in New York came out to see this novelty vehicle. Cleveland had the key inputs required including steel, rubber, and glass. Cleveland had skilled and unskilled labor. When the industry grew from its start up phase around 1913 and transitioned to a mass industry, it was Detroit and not Cleveland’s business leaders who took the risks to invest in massive production facilities and made the big bets. Given the nexus of geography and raw inputs, Cleveland remains a city whose future is closely linked with the destiny of MotorCity and the automotive industry. At its zenith, around 1963, census data suggest that there were 59 motor vehicle assembly and equipment parts manufacturing facilities in Greater Cleveland supporting more than 37,000 jobs in the manufacturing workforce. Cleveland’s automotive sector has been in a secular decline and transition since the mid-60s. Within a decade, America found itself in what is now recognized as the beginning of the end of its once uncontested dominance in the auto-industry. Too big to fail? Japan, China, and Germany all produce more cars than the United States. In the next year or two, South Korea, Brazil, and perhaps India (all with double digit production increases) will eclipse US car production. After loosing first to market advantage to Toyota on the decade of the hybrid, the future is being bet on the plug-in electric car. Nissan and Renault are ahead of the United States on that front, after we surrendered first position on the recall and demolition of the EV1 more than a decade ago. Today, fewer than 20,000 persons are employed in the automotive-related industry in Greater Cleveland. Given the nature and anatomy of the supply chain, Cleveland’s short term prospects are precarious and tied to the mess facing the big three automakers.

Next in the too big to fail list will be the airline industry. In the 1990s, California’s aerospace industry was devastated and restructured. Cleveland’s long romance with the aerospace industry going back to the pioneering days of the industry petered out with the closing of TRW in the 1990s leaving only NASA Glenn to carry the mantle of that bygone era. As competition arose in Europe and in then niche manufacturing locations like Canada (Bombardier) and Brazil (Embraer), manufacturing in the United States went through predicable consolidation. Today, the flagship carriers are likely to experience an acceleration of the consolidation that has been underway for the past 10 years. CEOs of the remaining carriers are poised to make the case for the need for bridge financing to support the needs of the American flying public. The biggest risk regions like NEOhio face is that the likely further restructuring in the airline industry will leave our region even more vulnerable to the vicissitudes of the unregulated market going through a radical restructuring. Local and regional markets will almost certainly face a major reduction in service and increase in fares. Any future bailout of the airlines should be tied to regulations to assure regional service and competitive pricing. Moreover, it is critical for regions such as NEOhio to invest in skills for next generation aviation and transportation systems. New investments in the emergent advance transportation industries of the 21st century will need skilled labor, science, technology, manufacturing know how, software and logistics, along with new technology-based services platform that the next generation of the flying public will find available to them.

One of the most important risks we face is the debate on stimulus for broadband in the United States. The United States has no national broadband policy. Every country in the OECD (advanced economies), except the United States, has a policy to invest in 21st century broadband infrastructure. Like much else in the past 25 years, our broadband future has been tied to the rhetoric of the free market and resulted in oligopolistic control by the telecom industry. Legacy investments in this quickly changing industry has served as a dead weight to our entire economy and education systems. Telecom and cable companies have no choice but to seek to extract annuity returns from 20 and 30 year old investments. The country as a whole, and regions like NEOhio in particular, are held hostage to actuarial considerations that position short-term returns for private interests against the longer term interests of regions and the country as a whole. Bandwidth is the key transportation investment of the 21st century. Public investment in the inter-state system, our shipping ports, canal systems, and airports are all 19th and 20th century examples of the criticality of investing in transportation systems. Global competitiveness is tightly connected to investments in the broadband economy. There is near certainty that the Obama administration will begin to attend to this deficit in the upcoming stimulus package. To its credit, the Obama shadow administration is keenly attuned to the need to address the major shortcoming of a broadband-free national policy. The biggest risk the country and regions like NEOhio face is the near certainty that the telecos and cable industry will do a 180 degree shift and now line up to receive billions of dollars to build the country’s next generation broadband economy. Long held religious-like conviction regarding government intervention in the broadband economy will turn on a dime as long as the investments are channeled to the telecommunications industry. The arguments are all rather predictable.

The research and education community should quickly mobilize and assert a leadership position in creating and/or joining a national coalition of cities, regions, and community networks to articulate a public alternative to our future broadband policy. Governors should join forces with University Presidents and offer the Obama administration an opportunity to leverage public investments in statewide regional optical networks that can be the platform of our competitive 21st century economy. There are alternatives to connect the regional systems to one another and position the country for a period of unprecedented growth, innovation, and service economy. There is also an opportunity for private interests in the telecommunications and cable industries to compete for using these publically funded transportation system to deliver voice, data, video, and other services to the public. The ‘bottom line’ must be a clarion call and a bright line in the sand that preserves the public interest in investment and opportunity to further invest in the most important transportation system of the 21st century. To do anything less is to render our common future at risk to the market at the very moment that we have ample evidence in finance, automotive, steel, and in the airline industry that market disruptions come at a tremendous costs and dislocation.

Together in NEOhio, we have a regional advantage in the broadband economy of the future. OneCommunity is our regional community network infrastructure project. It has been remarkably successful, mobilizing communities to invest in their own futures. Today, OneCommunity connects more than 1500 locations in what will be 22 counties and nearly 1,000,000 end-users in next generation ultra-broadband. Education, health, government, libraries, museums, and hundreds of other public sector sites are serviced in one of the largest and fastest intranets in the country. More important than the access is the sense that the organizations, institutions, and communities that are involved with OneCommunity are meaningfully engaged in charting their own future in the broadband economy of the 21st century. A wide range of services, including healthcare, government and education are now connecting NEOhio as one large connected community. This advantage is reminiscent of earlier moments in our history. Reading back history, with the advantage of 20:20 vision, we understand how important it is to take calculated risks in big opportunities during moments of transition. We have seen it before in finance, steel, automotive, and aerospace. Our earlier investments (or lack thereof) have shaped our future and the well-being and the destiny of our entire region. The broadband economy is not the only investment opportunity that will help shape our future in NEOhio or the country. The broadband economy is, however, our generation’s challenge. It is at once a challenge that resembles a 21st century version of rural electrification and a moon-shot, at the same time, that will open new vistas of research, scholarship, education, and economic development.

The world we bestow to our children will be much different than the world that most of us inherited from our parents. Our hyper-connected world has rendered the first instantiation of the global village. The transition we are living through is as exciting as it is disconcerting. As the global economy re-invents the global division of labor, there will be continuous change and challenge facing Cleveland. Understanding the anatomy and drivers of this set of new key drivers is vital to the transition that now stands in front of us. This is a leadership challenge that touches every part of our society. Communities need to leverage their relative advantage to frame a bold and exciting future that will connect us to the global economy from a position of evolving and continuous relative advantage. People, strong commitments to education, geography and ecology, ideas and history, and a vision of a vibrant future for the next generation are at the heart of an exciting collaborative future. As Cleveland goes in the 21st century so goes America. We stand ready to focus on the transition. To do anything else would be to place our chapter on the history of the 21st century in the hands of someone other than the school child entering first grade in Cleveland. We owe it to her to help her and us write our own history.

Lev Gonick
December 7, 2008

Posted by lsg8 at December 7, 2008 08:41 AM

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