City Journal

Jerry Zremski
Down-and-Out Upstate
While the rest of the rust belt prospers, upstate New York withers. Reasons: toxic taxes and ruinous regulation.
Autumn 1999

Normally, New York City residents and the rest of the nation don't pay much attention to upstate New York, a 52-county swath of rolling farmland, forested mountains, and decaying industrial towns that almost 7 million people call home. But when Senate hopeful Hillary Clinton's campaign "listening tour" recently swept through the region, upstate New York's woes suddenly became front-page news.

With the spotlight on, it's a perfect moment to gauge the magnitude of upstate's economic and political failure. Though other rust-belt cities—Cleveland, say, or Grand Rapids, Michigan—are flourishing in the national boom, upstate cities such as Buffalo and Syracuse, like them in almost every demographic and topographical particular, are drooping. The upstate region as a whole, were it a separate state, would rank last in the continental United States in job creation between 1990 and 1998. One key reason: despite his happy talk about massive tax cuts and economic recovery, New York governor George Pataki hasn't been able to break sufficiently with 35 years of business-killing state taxation and regulation.

During the 1980s, a tremendous wave of global economic competition rolled over the rust belt, the seven old industrial states, from Michigan to New York, that border the Great Lakes. Aging factories had to shape up—slashing bloated payrolls and updating technology—or shut down. Many factories closed: during the 1982 recession, rust-belt unemployment rates rocketed toward 13 percent, and economists warned about the hollowing out of American industry. From Green Bay to Buffalo, boarded-up factories and vacant lots became drearily familiar sights. Michael Moore's left-wing 1989 documentary Roger and Me captures the era's pessimism, depicting Flint, Michigan, once a powerhouse auto-producing town, as a post-apocalyptic wasteland, where one desperate resident cooks her pet rabbits to stave off hunger. Hordes of laid-off workers deserted dying cities like Flint—and the depressed rust-belt states as a whole—seeking opportunities elsewhere. As Wisconsin governor Tommy Thompson recalls, "Things were so bad that the Illinois people put up a billboard on the highway near the border, saying: 'Will the last company to leave Wisconsin please turn out the lights?' "

Now flash forward to 1999. The rust belt—except for its eastern extremity, upstate New York—today explodes with economic opportunity and hums with new plants boasting up-to-the-minute manufacturing technology. The contrast with upstate couldn't be more vivid. Steve Silino, a former Syracuse businessman, whose electrical-contracting firm died in upstate's frigid economic climate, was stunned as he drove through Ohio a couple of years ago. "There were all these new factories along the highways," Silino says, amazement still in his voice. "I thought other parts of the country were just like Syracuse."

Thankfully not: job growth in the revived rust belt has been vigorous during the 1990s. Illinois boasts a 12.9 percent employment increase, Ohio a 13 percent jump, Michigan a 15 percent upswing, prompting Governor John Engler to nickname it "Jobzilla." In Thompson's Wisconsin, employment has grown 20.2 percent—the highest percentage increase of any rust-belt state. Even Pennsylvania, whose antiquated steel industry took the fiercest hits from global competition during the eighties, has increased its job base by nearly 7 percent. Overall, the rust-belt (again excluding upstate) can claim 3,148,300 more jobs at the end of the decade than at the start—a hefty 13.1 percent improvement. The region's recovery is one of the most remarkable economic turnarounds in U.S. history.

Economic renewal has brought people streaming back. Rust-belt states can't match the double-digit population growth of sun-belt states like Nevada or Arizona, but for a region that was supposed to be dying, it's doing fine. As of 1998, Wisconsin's population was up 7 percent, and Indiana's up 6.4 percent since 1990. The rest of the rust belt grew in population, too, though not quite as briskly. The population growth has in turn produced some nice gains for homeowners. Three Michigan metro areas—Flint, Detroit, and Kalamazoo—led the rust belt in housing appreciation during the 1990s, with dramatic gains of more than 70 percent; throughout the region homes went up in value by more than 20 percent on average.

The rust belt's once-sickly cities surge with new vitality. In Ohio, a revitalized downtown Cleveland, an emblem of urban decay a decade ago, today teems with tourists visiting the popular Rock ‘n’ Roll Hall of Fame, while once-desolate Columbus leads the state with 21 percent job growth. In Michigan, Flint added thousands of jobs, and Detroit, long considered dead, has come back to life, creating an extraordinary 241,850 new jobs during the 1990s. Kenosha, Wisconsin—where American Motors expired in the mid-1980s—gleams with new industrial parks. Across the rust belt, the whole picture is one of rebirth and renewed energy.

Until you reach upstate New York. There, it's a much grimmer picture. In three key indicators of economic vitality—job growth, population, and housing prices—upstate communities are floundering.

During the past four decades, upstate has added new employment at barely a third of the national rate, and more than a quarter of its new jobs were in government. During the nineties, while the nation's overall employment grew 15 percent, upstate's ticked up an abysmal 1.2 percent, thanks largely to a 0.9 percent gain in the first half of 1999. But the jobs that upstate has managed to create are concentrated in the lowest-paying sectors of the economy, such as retailing or telemarketing, rather than in high-paying sectors. Moreover, the upstate region is laggard within New York as a whole: with tourism and the stock market surging, the New York metro area and Long Island reported twice upstate's job-growth rate for the first half of this year. Only one upstate area—Poughkeepsie—exceeds the national 2.2 percent job-growth average in 1999, and that's simply because its biggest employer, IBM, has rebounded from its troubles earlier in the decade.

Six upstate cities—Buffalo, Elmira, Newburgh, Syracuse, Rochester, and Utica—are so hard up for job growth that they'd actually receive federal aid under the Clinton administration's proposed "New Markets Initiative" to bring enterprise to devastated areas like Appalachia and inner-city Los Angeles. To qualify, a census tract must show a poverty rate of 25 percent or higher, or have wage levels of less than 80 percent of the national average. "There are very few regions of the country that are as depressed as upstate New York," observes Mark Zandi, president of Regional Financial Associates, an economics consulting firm.

Given this weak performance, it's not surprising that upstate's population is shrinking. Last year, upstate lost more population than any state did, with 0.4 percent of its nearly 7 million residents leaving the region. Metro Buffalo has lost 36,000 people during the nineties; Utica is down 22,000. Worse, it is the young who are going. During the past decade, Oneida County lost 26.4 percent of its 18-24 year-old-population; Erie County lost 23 percent; Onondaga County 21 percent; and Monroe County 19.3 percent. Laments Irwin Davis, head of the Metropolitan Development Association of Syracuse: "That's the workforce you want—that's your future."

Needless to say, upstate is having a hard time attracting new people. As Anthony Kumiega, staffing and employment manager at defense contractor Lockheed-Martin's Syracuse operation, glumly puts it: "When mobile people think of going somewhere, New York isn't even on their list. We seem to have the reputation for people leaving rather than people coming." The population loss is the principal reason that the upstate unemployment rate runs slightly lower than the national average—fewer people are around to look for jobs.

The loss of the young and ambitious, combined with the failure of the region to attract talent from other states, may itself be limiting job growth, especially in knowledge-based sectors like high tech. Though Kodak, Rochester's biggest employer, is mired in economic difficulties, it is still desperate for highly skilled engineers, says company spokesman Paul Allen. But it can't find any in the area. In Syracuse, the high-skilled manpower shortage is so bad that a group of high-tech companies have banded together to form "the DaVinci Project," a website touting the benefits of life and work in upstate New York.

A shrinking population has spelled trouble for upstate homeowners, too. In Binghamton, Syracuse, and Utica, for example, home prices fell during the nationally prosperous 1990s, with the average Binghamton home price shrinking by almost a quarter of its value—to $70,700—between 1990 and 1998. Other upstate metro areas have seen small increases in the worth of homes: in Albany, a negligible 0.2 percent increase and in Rochester an 8.9 percent increase—far below the rust-belt average of more than 20 percent. Collapsing demand has hurt homebuilders: "I can't make money here anymore," grumbles Robert Deforest, who runs his business out of Syracuse. Earlier in the decade, he built 30 homes a year upstate; now he builds ten.

It adds up to some bleak scenes in a region that, from Niagara Falls to the Catskills, teems with natural beauty. Much of the Lake Erie waterfront south of Buffalo consists of derelict buildings and empty lots. In Rochester, the streets around Kodak Park appear hauntingly deserted in the wake of the corporation's thousands of job cuts. for sale signs linger long on the lawns of the tiny wood-frame houses that line Utica's streets. All over upstate, you can't help feeling that things are falling apart and shriveling up. Accordingly, Michael Margolis's New Buffalo Graphics, a store championing Buffalo's supposed comeback and selling T-shirts promoting the city, closed its doors in 1998.

Why does upstate sag while the rest of the rust belt thrives? A small part of the answer is bad luck. As the eighties' painful industrial restructuring revolutionized the rust belt, upstate New York found itself with plants owned by companies, such as Bethlehem Steel, that couldn't adapt and eventually perished.

But the deeper reason has to do not with luck, but with politics. During the late eighties and nineties, the rust belt benefited hugely from a group of governors who cut taxes, restrained spending, and promoted smart development policies, helping to transform previously high-cost states into investment-attracting and business-nourishing places. Ohio's governor for most of the nineties, Republican George Voinovich, cut the state's rate of spending growth to its lowest level in 30 years and kept Ohio's taxes well below the national average, for example; he also aggressively lobbied to attract foreign businesses, so that Ohio now leads the nation in luring overseas investment. In neighboring Indiana, Democrat Evan Bayh spent eight years in office without once raising taxes. In Illinois, Republican Jim Edgar used his eight-year term to slash the state government's workforce and left office this year with a gigantic budget surplus.

Most impressive are Wisconsin's Tommy Thompson and Michigan's John Engler, both Republicans. When Thompson first came into office in 1986, he pushed through his state legislature the largest capital-gains tax break in the country—the main reason corporate taxes were 20 percent lower than in New York by 1996. Thompson has also gone out of his way to make sure that growing companies are happy. "He'd come through here and meet the people who work here," says George Dalton, whose Fiserve data-processing firm has grown into a world-spanning corporation with 11,000 employees. "We certainly don't have the unfriendly business climate we once had." Engler, since becoming governor in 1991, has cut Michigan's state taxes by a whopping $11 billion, bringing them below the national average. Both he and Thompson have had to cajole, persuade, or threaten recalcitrant state legislators to pass reforms. At one point, Engler's popularity polls had dropped to 19 percent, as critics charged him with being "mean-spirited"; today, his approval ratings are above 60 percent.

Smart political leadership wasn't the only reason the rust belt came back—it also benefited from some eagle-eyed corporations and energetic business groups. But its political climate is the major difference with its sick sibling, upstate New York.

Upstate New York has long been utterly toxic to business, thanks to high taxes, extensive regulation, and excessive energy costs—all products of New York's uniquely dysfunctional political culture, which, five years into George Pataki's governorship, remains thoroughly entrenched.

How New York came to be a tax-burdened basket case is a well-known story, centering on two profligate governors. Beginning in the late fifties and for nearly two decades thereafter, Nelson Rockefeller transformed New York into a state-capitalist behemoth that furiously set to building public universities, state hospitals, and public housing projects, and to launching countless government programs, including a massive expansion of Medicaid. Mario Cuomo, first elected in the recession year 1982, spent the 12 years of his administration extending the reach of state government even further, firm in his belief that New York was a "family" that had to take care of its own. By the time Cuomo was through, he had increased state spending 200 percent to $60 billion a year, swollen New York's debt to gargantuan size, and boosted taxes to 60 percent above the national average—at the same time that other rust-belt governors were stubbornly holding back spending and ruthlessly cutting taxes.

Pataki was going to rescue New York from all this fiscal intemperance, but he hasn't. Though he has cut $19 billion in taxes, New York as a whole remains second only to Hawaii in total state and local tax burden as a percentage of income, says the Washington, D.C.-based Tax Foundation—25 percent above the U.S. average. Per-capita state and local taxes were 53.5 percent higher than the typical state in 1996. In upstate alone, the M&T Bank observes, state and local taxes per capita were 14.6 percent higher than the U.S. average in 1996—a number that doesn't seem so bad at first. But upstate's profusion of Appalachia-poor residents, who pay taxes at low rates, help keep the percentage down. At the higher end of the scale, according to Kiplinger's Personal Finance magazine, the state and local tax burden for a couple with two children and a $250,000 house would be heaviest in the nation in Buffalo, New York. "By anyone's account, taxes are a major factor that we must continue to deal with," says John Sheffer, director of the Center for Governance and Regional Growth at SUNY Buffalo. "We've made some progress, but it's not nearly enough."

New York's property taxes are nearly 70 percent higher than the average state. One key reason: New York forces localities to pay 50 percent of the non-federal share of Medicaid—a share that zoomed 150 percent higher than the U.S. average as state legislators realized that they could gain votes by offering nonessential services like chiropractic treatment to Medicaid recipients, while using state funds to pay only a quarter of the tab; localities then must tax property owners to pay their portion of the bill. Other state mandates also ratchet up local taxes by increasing local government costs. But while Pataki has sought to restrain Medicaid costs by vetoing some new benefits, he hasn't been willing to push for mandate reform or for a state takeover of nonfederal Medicaid financing, which would encourage legislators to be more responsible and decrease local property taxes.

Even more disappointing, Pataki's 1998 budget boosted state spending by more than 8 percent—worse than most of Cuomo's fat budgets. The yearly cost of state government has reached $74 billion under Pataki, and state debt now approaches $70 billion, a sum that threatens the prosperity of future New Yorkers, who will foot the bill.

New York's welfare state has also spawned a gigantic regulatory apparatus that tangles businesses in red tape. From over-generous workers' compensation rules to environmental mandates to the hefty fees and bureaucratic foot-dragging new businesses have to endure just to open, New York's regulatory environment makes it, in the words of Jonathan Lesser of POV magazine, "one of the worst places to start a business" in the nation—and makes it inhospitable to existing businesses, too. Pataki has made few inroads against such intrusive regulation. His biggest victory, a reform of workers' comp, leaves the program still the rust belt's most expensive, with costs nearly 50 percent higher than Wisconsin's in 1998.

The state's regulatory morass discourages entrepreneurs, who often throw their hands up and leave the state. Jeffrey Evershad is sadly typical. A former Albany banker, Evershad left upstate after a rude encounter with state officials while trying to start his own company in 1994. "After two long sessions at the state capitol, I still couldn't get incorporated," he remembers. Frustrated, Evershad called the business licensing office in Oregon, and presto: an official faxed him a form, asked for his Visa number, and vowed to get him a license that day for $50—a tenth of what New York charged. He was off to Oregon. George Phelps, a former Syracuse-based homebuilder who now runs his business out of North Carolina, says that it took him three times as long to get a new subdivision approved by government agencies in New York as it does in his new state.

State regulations helped obliterate one of New York's traditional assets—cheap electricity. In 1981, the State Legislature passed a law forcing public utilities to buy power from new "independent power producers"—small companies that would help ward off any future 1970s—like energy crises. To protect the independent producers, the state required the big utilities to contract with them to pay 6 cents a kilowatt-hour for their electricity, though power cost less than half that at the time. Big utilities wound up with pricey contracts for power they didn't need, and they passed the cost on to consumers. New York's state legislature has also used the utilities as tax collectors, so that roughly one-fifth of an upstate firm's monthly power bill goes to government. As of 1996, New York's utility taxes were twice the national average.

The Empire State's industrial and commercial power rates were double those of Wisconsin in 1998. The rate increases wreak havoc with businesses. Ask Shirley Rogan, who owned a suburban Buffalo convenience store that went under in 1997. "Nobody told us to expect the electric bills we were getting—$3,800 to $4,200 every month," Rogan says. It's yet another reason for upstate firms to leave the state and another disincentive for businesses to come. Here, too, Pataki has accomplished little.

Governor Pataki's response to upstate New York's continuing economic blight is basically to pretend that it doesn't exist. He tends to discuss New York's economy as a whole, thereby using New York City's boom to hide upstate's troubles. "In 1999, our challenge is to manage prosperity," the governor has contended. Similarly, the governor's chief economist, Stephen Kagann, churns out reports accenting whatever positive scraps he can find in upstate's miserable economic statistics.

But there's not much to accent. The Massachusetts forecasting firm Cognetics publishes lists of the "best places in America to start and grow a company." The latest look at the nation's 50 largest metro areas shows Buffalo ranking 43rd, Albany 48th, and Rochester 50th. Regional Financial Associates of Philadelphia issues job-growth projections for 316 metro areas. Its July 1999 projections for growth through the year 2003 show Poughkeepsie ranking 202nd—and no other major upstate metro area ranking higher than 291st. In 1998, Fortune ranked Buffalo dead last of 75 U.S. and Canadian cities for economic development and employment growth potential.

So what does all this mean for a Senator Hillary Clinton or Senator Rudy Giuliani? A senator can do certain things to help his or her home state. To his credit, New York Senator Charles Schumer has zeroed in on two: he has pushed to bring more airline competition to a region that suffers from some of the highest fares in the U.S., and he's lobbying for federal electric-utility deregulation. But a Senator Clinton or Giuliani could best help upstate by shouting about the region's economic difficulties and shaming state politicians into doing what needs to be done: cutting taxes deeply, restraining spending, and freeing New York businesses from red tape.

State government is where upstate's future will really play out—which means New York needs a governor willing to sacrifice political capital and to take chances, as Engler did in Michigan. By contrast, Pataki has been cautious to the extreme. Perhaps he is just acknowledging political realities: the majority of the state's greedy legislators have no desire to restrain spending or cut taxes. Perhaps he thinks there's only so much he can do when all major policy changes must pass muster with Democratic Assembly Speaker Sheldon Silver, who, amazingly, blames upstate's economic difficulties on lack of government action.

But leadership involves much more than just counting votes. It requires vision, energy, will, and guts. New York voters should look to the rest of the rust belt. There, they'll see something foreign to the Empire State: real state leadership, working wonders.

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