Although America's spectacular export recovery in the past decade has bolstered economic growth, the Mid-atlantic states--particularly New York--have lagged behind, whereas the Midwest has come on strong (chart). Many observers assume that New York's export mix and high labor costs have held it back, and that the Midwest has benefited from the dollar's sharp depreciation since the mid-1980s.
As new studies by the Federal Reserve banks of New York and Chicago suggest, however, both assumptions are wrong. In each of the two areas, other factors appear to have played key roles in determing its current competitiveness and export performance.
The New York Fed, for example, finds that New York ships about as much of its goods to fast-growing markets abroad, including high-growth Asian economies, as does the nation as a whole. And the state's export mix is close to that of the U.S., with over half made up of capital equipment. The study also finds that New York's unit labor costs in manufacturing have declined markedly and are now more than 10% below the national average.
Thus, bank economists conclude that New York's export woes stem from its harsh business climate, rather than from high wages or a poor mix of products or customers. Infrastructure problems and the state's extraordinarily high tax burden and energy and urban housing costs (much above the Midwest's) appear to have discouraged industrial expansion.
Meanwhile, economists at the Chicago Fed find no positive impact at all of dollar depreciation on the Midwest's export growth. Indeed, because the Midwest ships a large share of its manufactured exports to Canada and Mexico, Midwest exporters have actually faced an appreciating dollar since 1988. Thus, the researchers theorize that industrial restructuring, technological expertise, and high-quality products are the real factors responsible for the Midwest's competitive revival.