For sustainable growth, state needs to diversify

Here's the thing about economic history. Those who forget it are doomed to repeat it.

Let me explain.

In the years leading up to the Great Recession, the state of Florida, and Southwest Florida, were booming. The GDP growth in 2005 was through the roof, with percentage measures of growth of 10.4, 10.5, 8.4, and 5.1 in Collier, Lee, Sarasota, and Tampa-St. Pete, respectively. Florida's GDP measure of 6.7% doubled that of the 3.3% reported for the country as a whole.

It was not to last. By 2009, the Great Recession's low point, Collier, Lee, Sarasota, and Tampa-St. Pete's GDP percentage measures were -8.3, -11.3, -6.4, and -4.4, while the state's -6.2% exceeded the country's -2.8%.

The U.S. economy hasn't reported a GDP measure of greater than 3% since then. Given that lifetime earnings are often explained by the quality of the labor market experienced by first-time entrants, the recession had brutal aftereffects on millennials that linger for them even today.

What does this tell you about our state and regional economies? They tend to overheat during inflationary booms, when income earning opportunities seem ubiquitous, but to overcorrect during the bust, when malinvestments are being corrected and income earning opportunities seem rare.

Our problem is a lack of economic diversification leading to economies characterized by few industries that happen to be especially responsive to the low interest rate, cheap money policies of the Fed.

In an effort to highlight this problem, FGCU's Regional Economic Research Institute established the Industry Diversification Project earlier this year, and in particular, the Industry Diversification Index. The IDI gauges diversification between 0 and 10, with 0 being the least diverse and 10 being the most, on a quarterly basis going back to 2000, for Florida's MSAs, workforce regions, and the state. (See the IDP's interactive web site at lutgert.fgcu.edu/IDP.)

Looking at Southwest Florida's IDIs from the early 2000s to more recent years, the IDI shows a marked decrease in diversification of about 6%, far outpacing the 3.5% decrease measured for the state as a whole.

To be sure, part of the lack of diversification can be explained by basic economics. Our state and region's comparative advantages are in retirement and tourism, leading to industries that support the demand for both. Then there is the ongoing migration of equity-rich baby boomers retiring to our region.

Nonetheless, these issues are exacerbated by mainstream monetary policies that introduce cheap money and low interest rates into the economy. Such policies assume new money is distributed evenly across the economy, but this is clearly not the case. When the Fed injects new money into the economy out of thin air, some regions receive hardly any of it, while others receive higher proportions.

These policies become problematic for regions where industries are especially responsive to low interest rates. This is surely the case for Southwest Florida. It explains why almost 40% of Lee County's employment, to give one example, was composed of retail sales and hospitality and tourism workers in a recent month.

It also explains why Florida in general tends to overheat during inflationary booms but then overcorrect during the inevitable busts that follow them.
But there is a way out. In the mid-1980s, Texas also suffered from an undiversified economy that reacted to oil prices in a similar manner that Florida reacts to Fed policy today.

In response, the state enacted policies that lowered the cost and control of labor and capital, kept taxes, regulations and public spending low, and rejuvenated its non-oil sectors.

Its diversification measures consistently exceed national averages (while Florida's consistently lag them). It's no surprise that the Lone Star State weathered this decade's crash in global oil prices in ways that would have been unfathomable 30 years ago.

Florida should look to Texas as a model, and 2017 is a good time to start. Because you know what they say about those who forget economic history.

Christopher Westley directs the Regional Economic Research Institute at Florida Gulf Coast University.