New Economy Recedes in Pacific Northwest

When President Bill Clinton came to Seattle 10 years ago as the host of a Pacific Rim economic summit, this city was his stage and his symbol. Looking to the next century, he held Seattle up as a New Economy role model for the rest of the country.

By TIMOTHY EGAN NY Times

After all, coffee, music, apples, wine, software, airplanes, even potential cancer cures, were sailing out of the Puget Sound area — the most trade-dependent part of the country, with particularly close ties to Asia. Microsoft, the hometown company, was minting fresh millionaires by the month, and the entire region was pulsing with creative energy from technology spinoffs.

At the same time, Seattle was still holding onto some of the highest-paying factory jobs in the world.

For much of the 1990’s, national magazines touted Seattle as the best place for business, and Portland, Ore., as the most livable city in the United States. The Puget Sound area economy was growing at twice the national rate, and per capita income was 20 percent above the national average.

But now the very attributes that made the Pacific Northwest look like the vanguard of the new-century economy have come back to haunt this region. A staggering Asian economy, the worldwide downturn in the airline industry and the dot-com bust dealt a triple blow to the area.

"The upside of getting ever more connected to the global economy is you can really ride that wave when things are going well," said Eric Liu, who was a domestic policy adviser to President Clinton and who now lives in Seattle. "The downside is that the ripple effects tend to get magnified."

Over the last year, no place in the country has had higher unemployment than this region. Washington, Oregon and Alaska have all posted unemployment rates of about 7 percent. While only a few years ago the Northwest was the nation’s top new job producer, it now ranks among the leaders in job losses. The Seattle area alone stands to lose about 80,000 jobs before the economy here turns up, projected for late next year.

And in Oregon, which had almost no unemployment at the height of its mid-1990’s transition to a "silicon forest" of computer chip factories, state revenues are so anemic that the school year has been cut by three weeks to five weeks in places and prisons are releasing some felons early.

Those who flocked to Seattle in the high-flying 90’s cannot believe the turnaround.

"When I moved here four years ago from Los Angeles, I had no trouble getting a job, just like that," said Lashawn Baldwin, 33, a mother of three. She took a maternity leave from her health care clerical job, which paid $13 an hour, and then the job disappeared. She has not been able to find a job nearly as good since trying to return to the work force.

"I’ve had resumes out for two months, but no one’s called," Ms. Baldwin said. "I’m thinking of moving back to L.A."

The entire picture is certainly not grim. Some of the area stalwarts are still going strong and have managed to ride out the storm. Starbucks, started in the early 1970’s in Seattle’s Pike Place Market, last month reported the most profitable quarter in its history, selling more than a $1 billion of lattes and other coffee confections.

The world’s biggest software company, Microsoft, is still hiring new employees while sitting on nearly $40 billion in cash at its global headquarters just across Lake Washington. And the airplane company born in a barn along the Duwamish River, Boeing, is still turning out planes, although its world dominance is gone.

`That Mid-1990’s Frenzy’
Starbucks attributes its good fortune in a time of economic sickliness to being ingrained in the daily routine of millions of people. A $3 latte, Starbucks says, is "an affordable luxury." Microsoft, though still looking for the next golden goose on a par with its money-making operating system, generates enough sales of software for personal computers and games so that it weathered a storm that reduced many other software companies to a fraction of their value.

But most other smaller New Economy companies — and even some former giants — are floundering. The dream of a world hooked to a virtual market by a computer click persists, but it no longer generates thousands of new jobs or Wall Street investment capital.

"Seattle did get caught up in that mid-1990’s frenzy," said Susannah Malarkey, executive director of the Technology Alliance, a private group that promotes New Economy companies. "The fundamentals are still there. We’ve got an awful lot of talent and smart people in the area. But perhaps we now need the rest of the world economy to lead us out of the hole we’re in."

The economic drop-off has left state governments reeling. Washington has no state income tax, Oregon has no sales tax and Alaska no statewide general tax at all. But these tax structures, which have been so attractive to companies that could locate anywhere in the world, are now a drag on these states, as it does not give them a way to make up their deficits quickly.

Facing a $2.4 billion shortfall, Gov. Gary Locke of Washington, a Democrat, has called for slashing of state services while deferring raises for teachers, which voters approved in the boom years.

Oregon has been the hardest hit because of budget shortfalls, in large because of a series of voter-approved measures that cut taxes and required surpluses to be returned to taxpayers. Now, to make up a $740 million deficit, Oregon plans to cut up to a third of all state police employees. The state already has the shortest school year in the nation because of cuts.

The first warning sign of ripples from Asia hit the shores of Puget Sound in 1998 at a moment when money seemed to come out of thin air. Boeing was so desperate for workers it was flying them in from around the country, and an economist calculated that one in every five workers at Microsoft was a millionaire, on paper.

Even Boise, Idaho, long known as sleepy burg run by potato magnates, became a New Economy darling, attracting thousands of educated workers to its tech companies like Micron. Amazon.com, selling books at first, and then nearly everything else from a virtual market with a real headquarters in Seattle, made old-shoe economists believe that many brick-and-mortar stores would follow Hula Hoops into the retail museum.

"It was hard to imagine a better time for any place," said Dick Conway, an economic consultant in Seattle who puts together a regional forecast for business and political leaders.

But even as starter castles proliferated on Lake Washington, as Amazon clerks counted down the days until they could cash out stock options, the roaring economies of Asia retreated. Japan, South Korea, even parts of China, paused, stumbled and crashed.

For Seattle, it meant that orders for airplanes built in factories around Puget Sound were canceled. For farmers, it meant markets that were supposed to be their salvation turned cold. By 2000, Washington apple growers, once proudly independent, were accepting government handouts and subsidies, like so many other American farmers.

For fishermen in Alaska, who had flourished with global sales while the fishing industry all but disappeared elsewhere in the country, it was the same story. Japan still wanted wild Alaskan king salmon. But once trade barriers fell, the Japanese market was flooded with Alaskan salmon and prices plunged.

Timber Takes a Hit
Even timber, a Northwest trading staple since 19th century railroad barons laid eyes on the carpet of green west of the Cascade Mountains, slumped because of a worldwide glut in wood. The biggest complaint from Northwest timber owners these days is not about the spotted owl, a tiny bird whose imperiled status forced a major retreat from logging of public lands, but Canada, which is flooding the market with competitively priced wood — even with a stiff tariff on top of it.

The second major blow was the worldwide bust in high tech and all its peripheral bubbles. With that burst, many companies disappeared, selling back office furniture for 10 cents on the dollar. The companies that survived, like Amazon.com, saw their net worth reduced to a fraction of what it had been. Only Microsoft, whose stock was cut in half from its high, has survived relatively intact, and has continued to hire, with a job base of about 25,000 workers in the Seattle area. Finally, the attacks of Sept. 11, while particularly brutal to the New York economy, also hit this region hard, hammering the airplane industry.

And nobody is predicting a quick recovery. If anything, the Northwest is projected to lag behind the rest of the country, said Chang Mook Sohn, the chief economist for Washington State.

While other states can recover as the normal economic cycle becomes more robust, the trade-dependent Northwest will have to wait for the rest of the international economy — particularly that in Asia — to rebound in order to see a big upturn, economists say.

The prolonged downturn may be causing lasting damage, especially at Boeing, which is still the region’s largest single employer, with about 60,000 workers. The concern is that so many jobs have been lost that the skills needed to make airplanes are disappearing.

"The average Boeing machinist is 47 years old," said Connie Kelliher, a spokeswoman for the International Association of Machinists, which represents airplane assemblers. "They’ve literally skipped a generation. And that’s a huge concern to us."

The machinists’ local here has gone from a high of 39,000 members in 1999 to 17,000 now, said Ms. Kelliher. The average wage is $26.50 an hour. Increasingly, Boeing contracts out large portions of its airplane assembly jobs to cheaper sources overseas.

At the same time, the company that once called itself "plane maker to the world" has suffered a steep loss in market share to its European rival, Airbus, and now books barely 50 percent of new airplane orders. This year, for the first time, Airbus could deliver more planes than Boeing.

Boeing moved its corporate headquarters out of Seattle to Chicago in 2001, but still makes most of its commercial airplanes here. Its officials say they are in the airplane business for the long haul, but that they have been developing a new business model, with airplane assembly scattered around the world. Also, Philip M. Condit, the president of Boeing, says that half the company’s revenue now comes from space and defense contracts.

Still, many machinists in Seattle are nervous that the company is phasing out its airplane business altogether.

"Are they going to be making airplanes in 15 years?" Ms. Kelliher asked. "If so, where will that next generation of machinists come from — here in Seattle, or overseas?"

Others are happy that they never went to work for the company, which once seemed so stable it was part of the landscape.

Dave Mayer works a 40-hour, three-day-a-week job as a forklift operator, but has been seeking work during the other four days. At the height of the Boeing boom, he thought of taking training course that would have allowed him get on at the company.

"Now I’m glad I didn’t take the training," said Mr. Mayer, 36. "I have a of friends who did it and got laid off. They made really good money, but now they’re going to have to take these $8- and $9-an-hour jobs."

Still, there is little sign that people are fleeing the way they did in the past. In 1971, for example, after Boeing laid off nearly 70,000 workers, a sign went up in this city reading, "Will the last person leaving Seattle turn out the lights?"

This time around, despite having the highest unemployment rates in the country, the Northwest is not losing population. Economists attribute this to a cushion of wealth left over from the recent boom, and to a belief that the fruits of the global economy will come around again soon.

In December, Alaska posted the highest unemployment rate in the nation, 7.6 percent. Yet its economy is still adding jobs and people. The state has the nation’s highest minimum wage, $7.15 an hour, and residents, rather than being taxed, are paid to live there — about $6,000 a year for a family of four. This money comes from North Slope oil royalties, which drive the state.

Tourism has grown considerably in Alaska, with cruise ships plying coastal waters from May through September. But what was once the healthiest segment of Alaska’s economy, fishing, has taken a dive because of a global glut of farmed fish from places like Chile, which compete with Alaska’s wild product.

"Quite a few people with permits to catch salmon didn’t even fish this year because prices were so low," said Dan Robinson, a state economist. But even with the troubles, he said, more people are moving to Alaska than are leaving it. The population is 634,892.

In Oregon, the timber-driven recession of the 1980’s sent about 20,000 a year out of the state, a time when unemployment reached 12 percent.

Then Oregon restructured its economy. The timber industry shrank, and $13 billion in high-tech investment in the Willamette Valley, from Portland south, brought record prosperity. The state grew by 580,000 over the last decade, to 3.4 million people. But not all the laid-off timber workers became computer chip factory workers. Of the 18,000 who were forced out of the industry, those who found new jobs also found their wages had declined by 1 percent, said Ted Helvoigt, the co-author of a study on what became of Oregon’s former timber workers.

In Idaho, No Turning Back
Idaho, with 1.3 million people, is a similar story. The state went from a resource-based market to one built around high tech and processed agricultural products, all tied to the new global economy. The population grew by 20 percent in the 1990’s, as companies and workers fled Southern California for the cheaper business environment around Boise.

Still, even though Idaho unemployment was the worst in a decade last year, just under 6 percent, and job creation lagged behind the rest of the nation, state officials say there is no turning back to the old economy.

Indeed, Northwesterners have not stopped dreaming, nor is there a sense of panic or retreating from the global economy. About $15 billion in stock options went to Microsoft employees over the last 15 years, and that has provided a cushion for many during the downturn.

"People’s stock portfolios are certainly worth a lot less, but there was such a big pile to begin with," said Paul Sommers, a professor at the University of Washington.

Portland is going after a major league baseball team. Seattle is building a new city hall, a new central library and two transit systems. Alaska still plans to construct a natural gas pipeline to send energy south, while a new governor, Frank H. Murkowski, a Republican, talks of a huge new road-building program, stitching distant outposts of Alaska to its handful of cities. And all of them look west, beyond the sunset, even in the worst economic times in a generation. They say there is no other way.

"We have introduced a generation of people to the idea that the global economy is the future," said John Mitchell, a Western economist for US Bancorp in Portland. "For a while it was all up. Now they see what a down cycle is like. The amazing thing is that people are staying put. They like this part of the country and are not going anywhere."

Copyright 2003 The New York Times Company