Commentary

By Raimondo, Henry J. | Federal Reserve Bank of New York Economic Policy Review, February 1997 | Go to article overview
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Commentary


Raimondo, Henry J., Federal Reserve Bank of New York Economic Policy Review


My comments are motivated by the research papers of Jonathan McCarthy and Charles Steindel, "National and Regional Factors in the New York Metropolitan Economy," and Kenneth N. Kuttner and Argia M. Sbordone, "Sources of New York Employment Fluctuations." These two papers are generally well conceived, methodologically sound, and thorough. The relationship between the performance of the national economy and that of the regional economy (in this case the New York metropolitian economy) is certainly not a new line of inquiry among regional economists, but it is an enduring and vital one.

More important, understanding the national-regional relationship has implications far beyond the concerns of regional economists. Households, business managers, and public managers do not generally operate in the macroeconomy, but they operate very much in the regional economy. Households depend on how national economic performance translates into regional employment, income, and spending. Business managers who develop corporate financial plans and public managers who craft revenue forecasts and balance public budgets need to predict with some reliability the regional fallout from national economic trends.

THE NATIONAL-REGIONAL ECONOMIC RELATIONSHIP

Like almost every relationship, the national-regional economic relationship is a complex, ever-changing one. The national economy influences the activity of the regional economies in varied and uneven ways. For example, interest rate changes and international trade agreements such as the North American Free Trade Agreement (NAFTA) or the latest round of the General Agreement on Tariffs and Trade (GATT) affect the different economic regions of the United States in different ways. In turn, developments in the regional economies obviously begin at the subnational level and ripple through the macroeconomy, gaining or losing momentum, until they manifest themselves in the national economic performance. For example, corporate restructuring in the banking, the biomedical complex, and the telecommunications industries and the loss of manufacturing jobs can drain a region of its economic vitality. In time, the diminished regional economic activity shows itself in national employment, income, spending, and international trade statistics.

As demonstrated in these two papers, a review of the relevant literature reveals several conditions that shape the national-regional connection. At least two conditions are pertinent to the New York metropolitan area's case: the industrial structure of the region and the contribution of international trade to the region.

The industrial structure of the region refers to the industry mix within the region--for example, the division among manufacturing; services; wholesale and retail trade; finance, insurance, and real estate (FIRE); transportation, communications, and public utilities; and construction--and the stage of the product cycle in which each one of these industrial sectors finds its principal firms. This circumstance is especially important for the New York metropolitian area's economy. The changes and the pace of change in the region's industrial mix put the region at the forefront of the industrial transformation from manufacturing to services.

The New York metropolitan economy is also distinguished by the significant role of international trade. As one of the nation's most globally involved regional economies, with more than $142.2 billion worth of merchandise trade (excluding gold) in 1995, the New York metropolitan economy surges and flags in part as a result of international economic developments. Disappointing growth in Western Europe, a sluggish recovery in Japan, and economic uncertainty in the Middle East may curb U.S. economic growth but will likely harm the New York metropolitan economy far more.

Like the crab in Barbara Kingsolver's High Tide in Tucson, which moves to the tides of the Caribbean even though it now lives in Tucson, Arizona, regional economies in the United States long ago established their own economic identity and pace of economic activity.

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