Research

Arizona sets sights to become a player in the global economy

Arizona is at a crossroads, looking back at 25 years of spectacular growth and forward to a future that, while promising, is also uncertain. As one of 10 identified "megapolitan" areas in the U.S., Arizona faces the choice of creating high-quality jobs or ignoring that need. Since ignoring it isn't an option, leaders in business, education and government throughout the state are joining forces to create a region where the biotech and nanotech industries can thrive. These and other relevant topics were discussed today at the annual forecast lunch hosted by the Economic Club of Phoenix: "Arizona in the Global Economy: Ready or Not?"

2006-05-10

Arizona is at a crossroads, looking back at 25 years of spectacular growth and forward to a future that, while promising, is also uncertain. What next? The Economic Club of Phoenix at its annual forecast lunch focused on "Arizona in the Global Economy: Ready or Not?"

Speakers included Robert Mittelstaedt, dean of the W. P. Carey School of Business; Lee McPheters, senior associate dean and director of the Bank One Economic Outlook Center; and Jerry Bisgrove, chairman of the Stardust Companies Real Estate Group, which has plans to donate $100 million to create Science Foundation Arizona, a new nonprofit group aimed at sparking biomedical research and industry growth.

Adding jobs faster than people

For more than two decades, the state's main economic engine has been population growth. Between 1980 and 2005, Arizona added 3.2 million more residents, putting it behind only California, Texas, Florida and Georgia in population growth. In fact, the state's population more than doubled while the U.S. population grew by just 30 percent.

On average, Arizona's annual rate of population increase was 3.2 percent, with the most rapid growth taking place in 1994 and 1995, when the population rose by 4.4 percent. In the 25 years from 1980 to 2005, Arizona moved from the 29th to the 17th most populous state. "Then you come to job growth, and again Arizona is one of the leading states; 2005 was the best year we have ever had in the absolute number of jobs created," McPheters said. "Phoenix alone created more jobs than Ireland, and Ireland has always been used as an example of a nation that has really gotten economic growth down to a science.

There are incentives, there is emphasis on education. They have been working on this for a long time. But if you compare Phoenix and Ireland, Phoenix — which is actually a little bit smaller than Ireland in terms of population — created over 100,000 jobs and Ireland created nearly 100,000 jobs."

Between 1980 and 2005, Arizona added 1.4 million nonfarm jobs. Even more impressive, job creation was more rapid than population growth, increasing at an average annual rate of 3.7 percent. The greatest rate of job growth came in 1994, when employment was up by 6.8 percent, but in absolute numbers, 2005 set the bar, when 125,000 jobs were added. But, not everything is grand in the Grand Canyon State.

PCPI: the rat in the punchbowl

"When you look at per capita personal income, that has actually decreased as a percent of the national average," McPheters said. "We are gaining ground in population and employment, but when it comes to personal income per person compared to the national average, we're actually worse off than we were in 1980. That's basically the rat in the punch bowl. How can that be? What does that mean for the well being of people in Arizona?"

According to McPheters, between 1980 and 2005, per capita personal income (PCPI) rose from $9,524 to $30,267. However, during this same period, the nation's PCPI increased from $10,114 to $34,586, not adjusting for inflation. And relative to the national average, the state's PCPI has actually declined since 1980. That year, Arizona's PCPI was 94.2 percent of the U.S. figure. But by 2005, despite more than two decades of record job and population growth, the state's PCPI was 87.5 percent of the national average.

"Wages industry by industry are lower in Arizona than they are nationally. We have a lower average wage for the entire state, and on top of that, the high-wage industries in Arizona also have a lower wage than you would expect to find in other parts of the country," McPheters said.

"Interestingly, the percent of high-wage jobs here in Arizona is about the same as it is nationally, so it's not like we have a shortage of high-wage jobs. They just don't pay high enough wages to put us up in the ranks of states like Massachusetts, New Jersey, Delaware, Connecticut, even California."

The cloud in sunny Arizona

In the past, Arizona used the "sunshine factor" to explain away lower wages. The great weather, coupled with lower prices — particularly in housing — added up to a viable trade off for many new residents. Then the housing market boomed and now the average cost of a home in Arizona is above the national average.

Lower wages, higher housing prices and rising fuel costs are creating a challenge that the state could not have foreseen in 1980: How will Arizona handle the next phase of its economic growth? Meeting the challenge will require attracting well-paying jobs from the high tech and biomedical fields.

"The IT sector is one that has been good historically and is actually hot again right now. That's one we clearly need to push," Mittelstaedt said. The region lags in the health-care sector, he added, but addition of a medical school in downtown Phoenix — under development by the University of Arizona (UA) and ASU — combined with ASU's biodesign initiative could create momentum.

"Winning Google was pretty much luck. I don't think anyone recruited them — they just kind of showed up," he added. "But, they are exactly the kind of industry we want here. The bottom line for me is the extent to which we put money into making sure that the tax structure is competitive and that the infrastructure is among the best in the world.

The good weather, the lack of earthquakes and tornadoes, the quality of life, the ability to find highly educated people — this all bodes well for the future of the region as long as costs don't get too out of control." Mittelstaedt said there are steps the state can take to minimize the impact on individual budgets of uncontrollable costs such as rising fuel prices. For example, developing a comprehensive, high-density mass transit system could go a long way toward helping combat higher gas prices for commuters; another would be to develop a downtown core.

"[It's not] just the people, but the jobs, that are really spread out," he said. Efforts to build a downtown core, including the new ASU campus and the medical school, may succeed in drawing jobs together. "But the real potential disaster scenario for us is fuel prices continuing through the roof: People don't have economical ways to get to work," Mittelstaedt added.

"That's very different from how it is on the East Coast. Even in Los Angeles there are mass transit systems that are better than here." If a comprehensive mass transit system and a downtown business core come to fruition, Mittelstaedt said the Valley has a great shot at continuing to grow — although maybe not at the quick pace of the last few decades.

"We look as well or better off than many similar cities of similar size, but for different reasons. Compared to Southern California, people can still get relatively affordable housing here. For IT companies, or almost any company that has seen major disasters lately, [there's] freedom from disaster. Water is obviously an issue. If we continue to have drought and we don't have good water plans, that will scare people off," Mittelstaedt said.

"But all that is in the infrastructure arena. Government needs to be worrying about that to make sure we have a safe and secure supply for water and power."

An Arizona megapolitan area?

Therein lies perhaps the greatest challenge facing Arizona, said Bisgrove: coordinating government, business, academia and philanthropy in order to accomplish the goal of attracting higher-paying jobs and preparing the state for its future as a megapolitan area.

"I think we're starting to see that cooperation," he said. "When you look at business and academia and philanthropy, they have very much come together, and government is on its way." Once the region's governments realize they don't have to carry the entire development/planning burden alone and come to see it as a "team sport," Bisgrove said, trust will grow. "And trust is being built right now," he said.

According to the Lincoln Institute of Land Policy, a Massachusetts nonprofit educational institution founded in 1974 to improve public debate and decisions in the areas of land policy and land-related taxation, the nation will one day be separated into 10 megapolitan areas: Southern California including Los Angeles and southern Nevada; Northern California including San Francisco and northern Nevada; the Pacific Northwest including Oregon and Seattle; the Plains including Dallas and Oklahoma; the Midwest, including Chicago, Indiana, Michigan and Pennsylvania; the Northeast including New York City; the Mid-Atlantic including Atlanta; the Gulf Coast including Houston; Miami and surrounding areas of Florida; and Arizona, combining Phoenix and Tucson.

"These megapolitan areas will control the economic output and jobs of the entire United States," said Bisgrove. "It will happen whether we want it to or not, because the megapolitan areas are developing."

The state now faces the choice of creating high-quality jobs or ignoring that need, Bisgrove said. Since ignoring the need for high-quality jobs really isn't an option, Bisgrove and other members of the Phoenix, Tucson and Flagstaff communities are joining forces to create a region where the biotech and nanotech industries can thrive.

The building blocks already are in place with Translational Genomics Research Institute, or Tgen, which is spawning a biomedical campus that will include the medical school. Arizona State University has its Biodesign Institute, providing a place where scientists from a variety of fields can collaborate. A similar facility called Bio5 is slated for the University of Arizona.

Also in Tucson is the C-Path Institute, which is working to speed up the development and approval of new medications. But perhaps the most inclusive of these types of organizations is the recently formed Science Foundation Arizona. The nonprofit group was created by Greater Phoenix Leadership and business leaders in Tucson and Flagstaff and will tackle the job of nurturing Arizona's biotechnology sector.

Bisgrove's real estate company, Stardust, has offered to donate $100 million to the foundation to build Arizona's biotechnology sector if the state legislature puts up $150 million over the next four years.

"We have the infrastructure to put together a situation in which Arizona becomes a major biotech area," Bisgrove said. "And those jobs will not only be spread in the cities of Phoenix and Tucson, but based on their spin-off, could very well fall into our rural areas, much like the cottage industries in Ireland."

But the state certainly has its work cut out for it. Arizona lags behind such top biotech industry hubs as Massachusetts, Maryland and California. However, Bisgrove says that with leaders such as ASU President Michael Crow and others, the vision of a powerhouse biotech industry in Arizona is attainable. Also helping the state is its philanthropic sector. According to Bisgrove, the top 10 foundations in Arizona right now have about $4.6 billion in assets.

Echoing Mittelstaedt's major concerns, Bisgove said that Arizona's relative lack of infrastructure compared to its competitors is a strike against the state. But that doesn't have to be a bad thing, he added. The existing infrastructure is in good shape and the region can begin building in a proactive rather than reactive fashion to the state's needs, he said.

But state leaders must be aware that infrastructure means more than building new roads or a mass transit system, he warned. It's crucial that the state's education system be further developed in order to educate homegrown talent for the biotech future. "We need education, and we need health care and we need jobs and we need affordable housing," he said. "All four of those pillars have to be formed in equal pieces in order to come up with a first-class state."

Bottom line:

• Between 1980 and 2005, Arizona saw strong and sustained growth in population and job creation, however, per capita income relative to the national average dropped.
• Higher home costs and rising gas prices are darkening the state's "sunshine factor," which had long been a viable trade-off for employees accepting lower wages.
• In order to bring more high-wage jobs to Arizona, the state's infrastructure, from roads to mass-transit to education, needs to be strengthened and expanded.
• In order to develop the state's biotech industry, a key to creating high-wage jobs, business, academia, philanthropy and government need to coordinate their actions and work together.

Economics Faculty