Which states are likely to have strong economic growth during the next 10 years? Many of us would usually guess the “powerhouse” states on the coasts – California and New York.
Not necessarily, says Meredith Whitney. According to Ms. Whitney, the collapse of the housing and mortgage markets left the central corridor states in a great position to surpass the coastal states in growth. Now CEO of her own investment firm, Merdith Whitney Advisor Group, LLC, Ms. Whitney was previously a managing director and senior analyst at Oppenheimer & Co. She was one of the voices warning of the collapse of the mortgage market that happened in 2008.
The reason is related to the Great Recession that we’re still recovering from. During the hot real estate market, individuals who lived in the coastal states used their highly appreciated homes as ATMs. Banks were anxious to extend equity lines of credit and refinanced mortgages to them. Equity loans became a ready source of capital for new businesses. The securitization of mortgages created a huge marketplace for subprime mortgages, which means mortgages were offered at low rates to individuals who previously couldn’t qualify for loans.
Coastal state and municipal governments also spent money freely, counting on increasing property taxes from rising real estate values and taxing gains from the exhuberent stock market. A particularly difficult promise made during these go-go times was unfunded pensions for government workers. This “off the books” liability became public under new government financial reporting standards. Government bonds for redevelopment projects and pension liabilities must be paid before other operating costs, such as maintaining parks, public libraries and educating children.
Meanwhile, banks didn’t cater to individuals and businesses in the central corridor states. The values of real estate didn’t balloon nearly as much as in the coastal states. The state and local governments were forced to live within their means, because the prospects of future revenue weren’t nearly as optimistic as on the coasts.
The central corridor is also benefiting from the expansion of U.S. energy production. Those states haven’t been as concerned with blocking energy development, such as fracking, as environmentally concerned states like California.
So now the tables are turned. The central corridor states have money to offer to businesses to relocate there and have money to invest in their local infrastructure, such as education, while the coastal states have their hands tied with debt. With the internet and air and rail transportation, businesses have the flexibility to operate in almost any location. The central corridor states are even attracting manufacturing that was formerly done in China!
In Silicon Valley, I can see our economy improving and the housing market recovering. I also know about companies that have moved their operations to other places with a lower cost of living, lower taxes, and less regulation. Meredith Whitney makes a compelling case for investing in the central corridor states.
Buy it on Amazon: Fate of the States: The New Geography of American Prosperity.
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