rebuilding america’s productive economy · a great opportunity for 21st century america lies in...

Rebuilding America’s Productive EconomyA Heartland Development Strategy

A Report by the Economic Growth Program, New America FoundationSupported by the Bernard and Irene Schwartz Foundation

Joel KotkinSenior Fellow,

New America Foundation

Delore ZimmermanPresident, CEO

Praxis, Inc.

Rebuilding America’s Productive EconomyA Heartland Development Strategy

Joel KotkinSenior Fellow, New America Foundation

Delore ZimmermanPresident, CEO Praxis, Inc.

Washington, DC

ContentsForeword.............................................................................................................................................................i

I. The Heartland Opportunity.........................................................................................1

Demographic Trends ........................................................................................................................................................2

Identifying the “Growth Nodes”.................................................................................................................................2Aging Boomers, Housing Pressures, and Immigrants

Economic De-clustering and the Heartland .........................................................................................................7Prospects in High-Value-Added SectorsGrowth Nodes Lead the Way

II. The Agri/Energy Challenge....................................................................................13

Rethinking Agriculture’s Future ...............................................................................................................................13

The Farm Economy Today and Tomorrow............................................................................................................14The Rise of Organic and Niche FoodsDirect-to-Consumer Agriculture

Agriculture and Energy ................................................................................................................................................16The Next Energy Revolution?Tapping the Heartland’s Fossil Fuels

III. The Rise of On-shoring .................................................................................................21

The Brain Belt: An Underemployed Resource...................................................................................................22

The On-shore Revolution .............................................................................................................................................22

IV. Policy Recommendations..........................................................................................25

Building the Heartland’s Talent Pool .............................................................................................................25

A New Homestead Act.........................................................................................................................................26Building Off the “Brain Belt”

The Federal Role .....................................................................................................................................................27

Energizing Agriculture and Encouraging Innovation in Small and Medium-Sized Farms..........28

A Heartland Development Bank ......................................................................................................................29

V. Conclusion: The Heartland Opportunity ............................................31

A Heartland Development Strategy Policy Agenda ................33

Notes....................................................................................................................................................................35

i

The term “Heartland” is commonly used to describe the region west of the MississippiRiver and east of the Rocky Mountains. This region constitutes the primary focus of thisreport, although we believe our policy prescriptions also apply to other parts of the coun-try that are culturally similar to the Great Plains and the Midwest, including the inlandvalleys of the Pacific Northwest and California, as well as parts of central Florida and Pennsylvania.

Historically, and with some exceptions—notably the South—the Heartland was domi-nated by capitalist principles and shaped by the forces of innovation, competition, and acontinuous search for maximum economic return. The Heartland contributed signifi-cantly to America’s development as a global economic power. Over the past century, how-ever, the role of the Heartland declined, as the United States evolved from a primarilyagricultural to an industrial and finally an information-based economy. With the movetoward manufactured goods and high-end services, the focus of economic developmentshifted from the agricultural interior toward the great metropolitan regions.

In the early 1900s, Americans began leaving rural areas for cities and suburbs. Farmswere consolidated, some were abandoned. The country’s interior landscape—from therural West to the Great Plains to the Eastern Seaboard—was littered with shrinking townsand villages.

In the 1970s, however, this dynamic began to change. For the first time in decades, thenumber of Americans moving to nonmetropolitan areas began to grow. People movedfirst to the areas closest to the big cities, then increasingly to small towns and cities farfrom the metropolitan core regions. Small towns, from the Great Plains to New England,began to display new signs of life.

From its inception as a nation, America’s great advantage over its global rivals hasstemmed largely from the successful development of its vast interior. The Heartlandhas been both the incubator of national identity and an outlet for the entrepreneurial

energies of both immigrants and those living in dense urban areas.

Foreword

ii

Foreword

Several factors appear to have contributed to this phenomenon. Perhaps the most important hasbeen the rising cost of living, particularly the cost of housing, in the coastal regions of the country,making lower-cost locales more attractive to both business and individuals. Another has been thetechnological revolution that allows companies in traditionally urban-centered fields—from high-technology services to manufacturing and warehousing—to consider locating far from the majormetropolitan areas.

As the nation’s population grows from roughly 300 million today to some 400 million in 2050,these factors will become even more important. High-speed communications, the development ofregional airports, and the availability of urban amenities in once remote places will make theHeartland increasingly attractive to immigrants, skilled workers, and entrepreneurs.

The recent development of the Heartland has been sporadic, however, and so long as the regionlags behind the rest of the country economically, America’s national productive capacity will remainfar below its potential.

A great opportunity for 21st Century America lies in the Heartland’s vast acreage and abundantnatural resources. However, we envision the Heartland as far more than an agricultural zone.Certainly, food production—particularly in high-value products—will remain an important compo-nent of the Heartland economy. But we also see a future in which high-technology services and com-munications, energy production, and manufacturing and warehousing will become critical levers fornew employment and wealth creation in the Heartland.

We believe this new vision of the Heartland is already taking shape. In contrast to the picture ofemptying towns and embattled farmers so often conveyed in the media, we see the Heartland as apotential hotbed of capitalist creation and innovation. It is a reality already taking shape in the“technology corridors” in the Dakotas, the “hidden tech” belt of western Massachusetts, and therevived communities along the eastern Cascades, and with the growth of ethanol and biomass facil-ities across the country.

Realizing the Heartland’s full potential will require intelligent public policy. From the earliestdays of the Republic, government has played a role in the region’s development, whetherthrough the building of roads, canals, railroads, and airports, or the establishment of land grantcolleges, conservation programs, and export markets.

According to the American Society of Civil Engineers, the United States needs to invest $1.6 tril-lion in infrastructure improvements over the next five years. The need for such improvements is par-ticularly acute in the Heartland, especially with respect to transportation and telecommunications.

There is also a need for sizeable investment in highly specialized infrastructure, such as high-speed optical networks, university research and laboratory facilities, technology training centers,and research parks. New facilities to distribute the region’s energy resources to the rest of thecountry—including pipelines to supply the water necessary to propel both energy production andmanufacturing—will also be needed.

America’s economy may well be on the verge of a great resurgence largely unacknowledged bypundits, academics, and the media. The Heartland will play a critical role in that resurgence—ifwe develop the right policies. n

I. The Heartland Opportunity

Over the past two years, NorthDakota has in fact gained population,while Massachusetts, which few woulddescribe as “forsaken,” was the onlystate to lose people. More to the point,

A recent article in the The NewYork Times described NorthDakota as “not far from for-

saken.” The image conveyed by thearticle was of a state in “irresistibledecline”—of dying towns and agingpopulations, a place to visit before itturned to dust.1 This is how the mediaall too often portrays the Heartland,and it is a view shared by many academ-ics and policymakers. But the picture isout of date and out of focus.

although some parts of the Great Plainsare experiencing a decline in popula-tion, other parts are seeing an increasein jobs, population, and income—insome cases exhibiting higher growthrates than urban coastal America.Fargo, North Dakota, for example,grew by over 20 percent between 1990and 2000.2

Increasingly, skilled individuals andbusinesses are recognizing that theHeartland possesses many underutilizedassets. These include low housing costs,a relatively good business climate, qual-ity schools, a reasonably educated andproductive workforce, and available landand other resources for expansion.

1

ARABLE LAND IN THE UNITED STATES COMPARED TO OTHER COUNTRIES

Source: World Resources Institute.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000Arable Land (Thousand Hectares)

U.S. Canada Australia Germany U.K. China India S. Korea

The United States has the greatest expanse ofarable land among developed and developing coun-tries. On a per capita basis, its endowment is fargreater than its prime industrial competitors,including the European Union, India, China, andJapan. Although there have been some losses offarmland over the past 30 years (mostly to pastureand timberland, and recreational use) the amountof cropland has remained stable.3

Yet the potential future contribution of theregion to the U.S. economy goes well beyond theproduction of food and biomass for fuel and fiber.Technological advances—most notably in telecom-munications and transportation—have helpedbreak down the sense of isolation, both intellectualand cultural, that historically has kept nonmetro-politan areas backward and unattractive to skilled,educated workers. The development of theInternet has diminished the near-monopoly ofinformation that throughout history has belongedto the metropolis. Today, a Heartland-basedfarmer, securities dealer, machine shop operator, orsoftware writer enjoys the same access to the latestmarket and technical information as someonelocated in midtown Manhattan or Silicon Valley.

Demographic TrendsIn the 1970s, demographers began to notice aslowdown—and in some cases a reversal—of thelong-standing pattern of outmigration from ruralareas. In the 1980s, the population of nonmetrocounties grew by 1.3 million, or 2.7 percent. In the1990s, nonmetro counties witnessed a populationincrease of 5.3 million, or 10.3 percent.

This rebound was the product of migrationalshifts from metropolitan to nonmetropolitan areas.In the 1990s, the population of nonmetro countiesincreased by 348,000 on average annually.4

However, changes in the classification of countiesover time have obscured the scale of this new out-ward movement. Between 1973 and 2004, 442nonmetro counties were reclassified as metro, andmany of these counties were assigned to metropol-itan areas. This reclassification masked the size ofthe population shift to rural areas. During this

period, some smaller cities achieved metro status.Thus, areas defined as nonmetro in the 1970sactually grew by 50 percent between 1970 and2004, with an overall increase in population of 77.8 million.5

Up until 2003, “nonmetropolitan” served as aresidual category representing whatever areas wereleft over after “metropolitan” areas were defined.At this time, the Office of Management andBudget introduced a new classification system,dividing previously undifferentiated nonmetro territory into two distinct types of counties—“micropolitan” (micro) and “noncore” (rural).6

Micro areas include one or more urban clusters ofbetween 10,000 and 50,000 people; noncore coun-ties are those without a single high-density clusterof at least 10,000 people. Micro counties nowaccount for three-fifths of the total nonmetro pop-ulation. Today, roughly one in ten Americans livesin a micropolitan area.

This trend appears to have accelerated since2000. According to the demographer Wendell Cox,between 2000 and 2005 over 2.7 million Americansmoved out of the largest cities with populations of5 million or more.7 A significant number of thesemigrants—around 939,000 people—moved tosmaller and mid-sized places with a population ofbetween 50,000 and 500,000.

Identifying the “Growth Nodes”It is important to note that this migration has nothad an impact on all rural areas or small towns.Certain smaller cities and towns in the Heartlandappear to be absorbing much of the outmigrationfrom metropolitan areas. These “growth nodes”have enjoyed rapid growth even as other, moreremote, communities have continued to shrink.

Some of these communities—the RapidCity/Black Hills region of South Dakota,Wenatchee, Washington, Bozeman, Montana, andSt. George, Utah—have grown largely due to their“high-amenity” appeal to migrants from urbanareas. As we will see, many of these communitiesare evolving from tourist destinations into sophisti-cated, technology-based economies.

2

The Heartland Opportunity

Rebuilding America’s Productive Economy: A Heartland Development Strategy

3

DOMESTIC MIGRATION BY SIZE OF PLACE, 2000–05

Source: Demographia.com by Wendell Cox.

(3,000,000)

(2,500,000)

(2,000,000)

(1,500,000)

(1,000,000)

(500,000)

0

500,000

1,000,000

1,500,000

5 million +2.5 to 5 million

1 million to 2.5 million500K to 1 million

250K to 500K100K to 250K

50K to 100K25K to 50K

10K to 25KNon-metro

REGIONAL GROWTH NODES COMPARED TO SELECTED LARGE METRO AREAS: PERCENT POPULATION CHANGE, 2000–05

Source: U.S. Census Bureau data analysis by Wendell Cox.

St. George

Boise

Bozeman

Sioux Falls

Des Moines

Fargo

Wenatchee

Rapid City

Chicago

New York

Boston

San Francisco

-5 0 5 10 15 20 25 30 35

Another type of growth node in the Heartland isthe “reemerging hub.” These are usually small andmidsized cities that grew up during the period ofagricultural expansion in the late 19th and early20th centuries, and then began to decline orplateau economically in midcentury.

Today, such cities—among them, Fargo, NorthDakota, Sioux Falls, South Dakota, Des Moines,Iowa, and Boise, Idaho—are making what manymight find surprising headway in the informationage. They are exploiting their advantages, whichinclude a lower cost of living, good public schoolsand universities, and quality-of-life attractions formiddle class families, to lure high-end businessand professional service firms, information ser-vice companies, and diversified, innovative small manufacturers.

Aging Boomers, Housing Pressures, and ImmigrantsIn the immediate future, several factors are likely to influence the development of the Heartland’sgrowth nodes. The first is the projected rapidgrowth of the U.S. population over the next 45years, which will inevitably lead to metropolitanareas, especially those along the coasts, becomingeven more congested and expensive than at present.

The recent run-up in housing costs on bothcoasts, particularly in metropolitan areas, has hitthe working and middle classes particularly hard.In contrast, housing prices in most of theHeartland have remained remarkably reasonable.

4


HOUSING AFFORDABILITY FOR SELECTED HEARTLAND CITIES COMPARED TO LARGER METROS, 2005

Note: Median House Price to Median Household Income Ratio. Affordable = 3.0 or less.

Source: Demographia.com by Wendell Cox.

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Affordability Ratio

Los Angeles, CASeattle, WA

Chicago, ILPhoenix, AZ

Omaha, NEDes Moines, IA

Wichita, KSBoise, ID

Lower housing costs in the Heartland, as well asquality-of-life considerations, could serve as a pow-erful magnet for young families. As a rule, ruralresidents pay a smaller portion of their incomes forhousing than people living in metropolitan areas.In 2003, even before the peak of the current hous-ing boom, roughly 15 percent of all metropolitanhouseholds spent over half their income on hous-ing; only 10 percent of nonmetro householdsshouldered a similar burden.

Recent surveys of adults in the United Statesreveal that as many as one in three would prefer tolive in a rural area—compared to the 20 percentwho already do so. Most Americans perceive ofrural America as a place where traditional familyand religious values are honored. Rural residentsare admired for their self-sufficiency, and ruralareas are thought to be more attractive, friendlier,and safer for children than metropolitan areas.Interestingly, this picture is shared by a majority ofsuburbanites polled, as well as by a slightly larger


proportion of rural residents. However exaggeratedthe image, it does suggest that there is a large,untapped market of Americans who might considera move to a smaller community in the Heartland.8

There also seems to be a strong movementamong baby boomers toward the Heartland, par-ticularly to the high-amenity areas of the RockyMountains, the Upper Great Lakes, and theOzarks (as well as to the rural Northeast), accord-ing to the 2000 census. Increasingly, baby boomer“equity migrants” are choosing to relocate to suchplaces rather than head out to traditional Sunbeltareas—many of which are becoming more expen-sive and congested. As one demographer suggests,“America’s love affair with suburban life may bewinding down in favor of the countryside.”9

5

HOUSEHOLDS WHERE HOUSING EXPENSES EXCEED HALF OF THEIR INCOME, 2003

Source: “Rural America at a Glance, 2005,” U.S. Department of Agriculture, Economic Information Bulletin, No. 4, September 2005.

0%

5%

10%

15%

20%

25%

30%

All Renters Owners Elderly Hispanic Black

Nonmetro Metro

6


FASTEST IMMIGRANT GROWTH STATES: PERCENT GROWTH 2000–05

Source: William H. Frey, “America’s Emerging Demography: Immigration, Migration and the Aging of the Population,” The Brookings Institution and the University of Michigan, 2006.

0% 20% 40% 60% 80% 100% 120% 140%

Tennessee

Alabama

Kentucky

North Dakota

North Carolina

Delaware

Mississippi

Iowa

District of Columbia

South Dakota

AVERAGE PERCENT CHANGE IN NONMETRO POPULATION BY RACE & ETHNICITY, 2001–04

Source: “Rural America at a Glance, 2005,” U.S. Department of Agriculture, Economic Information Bulletin No. 4, September 2005.

–8

–6

–4

–2

0

2

4

6

8

10

12

Average Change

Non–Hispanic White

Hispanic Black Native American

Asian

The other promising element in the demo-graphic makeup of the Heartland may be immi-grants. States such as Iowa, North and SouthDakota, and Kentucky were among those experi-encing the fastest growth in the influx of immi-grants during the 1990s. Like many other new-comers to the Heartland, immigrants may beattracted by lower housing costs, job opportunities,and a good environment in which to raise children.Moreover, the Heartland is not only attractinglow-wage immigrant workers. In some states, theinflux of educated immigrant (and minority) pro-fessionals has started to balance out the long-termloss of native-born youth. Although still predomi-nately white, the Heartland is becoming less so,and it is beginning to share in the demographicvitality that hitherto has been seen predominatelyin more urbanized areas.10


Economic De-clustering and the Heartland These demographic patterns are also mirrored inthe economy. “Whether people follow jobs or jobsfollow people is the subject of much debate,” saysHarvard’s Nancy McArdle, “but, over the long run,they move together.”11

This follows a long-standing pattern of the de-concentration of employment that has been devel-oping over several generations. In contrast to theold industrial paradigm, where jobs were clusteredin the most densely populated areas, economicgrowth now tends to move toward less dense areas.Between 1961 and 1996, the portion of Americanjobs located in the densest areas declined from 84to 66 percent. While the strongest growth was inareas between 10 and 20 miles from the center, it isworth noting that the rate of growth in the leastdensely populated areas was far higher than in theurban core.12

7

EMPLOYMENT GROWTH BY DENSITY OF COUNTY, 1990–98

Source: Joint Center Tabulations of the Regional Economic Information Systems (REIS) database.

0%

5%

10%

15%

20%

25%

Low County Population Density High

It now appears that this pattern of economic de-clustering may be heading even further outwardfrom the urban core. Many areas in the peripheryare creating jobs much faster than larger metropol-itan areas. This is true not only for such amenity-rich growth nodes as St. George, Rapid City, andWenatchee, but also for more traditional Heartlandcities like Sioux Falls, and Fargo.

Prospects in High-Value-Added SectorsPerhaps a more pressing question is whether ruraland micropolitan areas are gaining jobs in thefaster-growing high-wage sectors such as businessservices and finance. Although rural areas overallhave lagged in this respect, sector growth appearsto be dispersing to selected smaller locales such asDes Moines, Boise, and Reno, Nevada.

This suggests that even more radical de-con-centrations of employment may be in the offing.

Overall, nonmetropolitan areas have been gainingjobs faster than metropolitan areas in all regionsoutside the South, which has few dense, transit-ori-ented cities. Indeed, looking at the fastest jobgrowth in the country, micropolitan areas are fairlydominant. A recent analysis by Inc. magazine of the393 fastest-growing areas in the country identified15 micropolitan centers among the top 20. Onlyone large metropolitan region—the sprawling cityof Las Vegas—ranked in the top 20.13

The fastest-growth boomtowns tend to be eitherin the more rural parts of the intermountain Westand or in Florida. This shift of job growth to thefurther periphery suggests a broader opportunity.Since 1970, the employment growth rates in smallmetro areas with fewer than 1 million people haveremained considerably higher than in the cores ofthe nation’s largest cities and were about on a parwith their suburbs.

8


CHANGING ECONOMIC ORDER: JOB GROWTH, 2000–05

Source: Adapted from Michael A. Shires, Inc., May 2006.

–20% –15% –10% –5% 0% 5% 10% 15%

San Francisco

New York

Orlando

Boise

Reno

Sioux Falls

Fargo

Phoenix

Chicago

Bismarck

Los Angeles

Boston

San Jose/Silicon Valley

Austin


9

METROPOLITAN AND NONMETRO EMPLOYMENT GROWTH, 2003–04

Source: “Rural America at a Glance, 2005,” U.S. Department of Agriculture, Economic Information Bulletin No. 4, September 2005.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Northeast Midwest South West

Nonmetro Metro

BUSINESS AND PROFESSIONAL SERVICES GROWTH, 1999–2004

Source: U.S. Bureau of Labor Statistics Census of Employment and Wages.

–40 –20 0 20 40 60 80

Los Angeles, CA

New York, NY

San Francisco, CA

Chicago, IL

Des Moines, IA

Boise, ID

Fargo, ND

Sioux Falls, SD

Coeur d'Alene, ID

Idaho Falls, ID

Billings, MT

Bozeman, MT

Wenatchee, WA

St. George, UT

Rapid City, SD

Reno, NV

% Total Growth

% Local Competitve Factors

10


On a sectoral basis, the strongest gains tended totake place in manufacturing and wholesale trade,which expanded more rapidly in rural areas than incities between 1970 and 2000. In fact as manufac-turing jobs in big cities and their suburbs declinedover this period, small towns, and even the smallestrural areas, showed annual increases rangingupward from over 0.5 percent. Large metropolitanareas have dominated the service sector exports, butin tangible goods, the globally competitive econ-omy seems to be shifting to the far periphery.14

Growth Nodes Lead the WayThe Heartland’s growth nodes show some charac-teristics distinct from the general run of nonmetroand micropolitan communities. We analyzed U.S.Bureau of Labor Statistics data from 1999 to 2004to discover what factors had propelled communi-ties to the top of the Inc. rankings, and which fac-tors anchored others to the bottom. The analysispinpointed the competitive-share component ofindustrial sector growth, reflecting employmentchange in a particular industry due to local condi-tions and efforts. The shift-share analysis removedthe influence of overall national economic growthas well as the national growth rate, positive or neg-ative, of a particular industrial sector.

In general, small communities (with fewer than150,000 in nonfarm employment) had a significantlocal advantage in the manufacturing and the natu-ral resources and mining industries, and a more

modest growth advantage in public administration.Both medium-sized and small communities per-formed well compared to large cities in the profes-sional and business services, financial activities, andinformation sectors.

It is the movement into higher-value-addedactivities that most distinguishes the small city andrural growth nodes from the general nonmetroeconomy. The small communities in the top 40 onthe Inc. list were propelled mostly by their profes-sional and business services, manufacturing, andinformation sectors, with comparative rates ofgrowth in these sectors in both “amenity” and“revived rural area” regions.

Where these developments lead will depend onboth the development of technology and futuremigration trends. One critical factor may be thefuture evolution of what the management expertAmy Zuckerman has called “hidden tech.” This isreflected in the growth of concentrations of technol-ogy workers in various nonmetropolitan andmicropolitan regions from Wenatchee, Washington,to the Pioneer Valley of western Massachusetts.15

Thus there is good reason to expect the contin-ued rise of “hidden tech” as well as the expansionof high-value-added activities in the Heartland.The economic “miracle” now occurring in placeslike Fargo, Sioux Falls, Boise, and St. George couldwell be extended to a host of new Heartland localesover the next decade. n


11

INDUSTRY SECTOR GROWTH GENERATED BY LOCAL COMPETITIVENESS FACTORS: BY SIZE OF

PLACE FOR 40 TOP PLACES—Inc. BEST PLACES RANKINGS, 2006

Source: U.S. Bureau of Labor Statistics Census of Employment and Wages.

–18 –13 –8 –3 2 7 12 17 22 27

Trade, Transportation, and Utilities

Education and Health Services

Leisure and Hospitality

Professional and Business Services

Construction

Manufacturing

Public Administration

Financial Activities

Other Services

Information

Natural Resources and Mining

Small

Medium

Large

II. The Agri/Energy Challenge

Yet no successful Heartland develop-ment strategy can ignore the more tra-ditional sectors of the rural economy.For the foreseeable future, agricultureand, increasingly, energy productionwill play a leading role in the Heartland’srevival. Indeed, in a world where cer-tain commodities—particularlyenergy—are in increasingly short supply, the role of the land in theHeartland’s future is already far greaterthan most analysts would have pre-dicted even a few years ago.

But a successful resource-based strat-egy must be innovative, applying tothese traditional industries the latestmarketing methods, technology, andinformation systems. On the agriculturalfront, the Heartland needs to moveaway from its reliance on highly regu-lated, and often unreliable, commoditymarkets and move decisively up thevalue-added chain. This suggests notonly a greater emphasis on food pro-cessing and specialty products, but also agreater reliance on direct marketing to

We have focused on theHeartland’s growth nodesbecause they epitomize the

ability of America’s rural, nonmetropol-itan regions to transcend their tradi-tional reliance on agriculture and otherresource-based industries and attractmanufacturing, professional and busi-ness services, and financial and informa-tion services.

urban customers, both in the UnitedStates and abroad.

The opportunities in the energy sec-tor may be transformative for agricul-ture and the Heartland economy as awhole. The recent boom in biomass, orcrop-based, fuels such as ethanol willlikely lead not only to new markets andhigher prices for farmers but to newuses for vast tracts of now largely under-utilized land. At the same time, higherenergy prices have excited new interestin fossil fuel resources found throughoutthe Heartland whose recovery costswere previously uneconomic.

The potential growth in the energysector bodes well for the creation of newhigher-wage jobs in the constructionand maintenance of energy facilities. Acollaborative effort between the region’sland grant colleges and industry seekinginnovative solutions to the energycrunch could lead to unprecedentedeconomic growth.

Rethinking Agriculture’s FutureAgriculture is a highly productive sectorof the U.S. economy. American farmsyield abundant crops with a small frac-tion of the domestic labor force, lever-aging technology to considerable advan-tage. The American economy benefitsfrom relatively low-cost commodities,with the average consumer spendingonly about 10 percent of disposableincome on food.

13

Predicting the future of American agriculture,however, is complicated. The farm sector facesboth opportunity and challenge. Although only 14percent of the rural workforce is employeddirectly in farming, there is considerable anxietyabout the future among families and communitiesdependent on agriculture. This apprehensionstems in no small measure from international pres-sure to end agricultural subsidies in the UnitedStates and other developed nations. The WorldTrade Organization (WTO) Agreement onAgriculture calls for developed countries to signifi-cantly reduce farm subsidies because they are seenas impeding Third World development. Althoughthe Geneva talks of the Doha DevelopmentRound, which ended last July, failed to produce anagreement on agricultural subsidies and importtaxes on agricultural products, international pres-sure to reduce subsidies and lower tariffs can beexpected to continue.

U.S. direct payments to farmers are projected tofall from $23 billion in 2005 to $11.5 billion in2015.16 The eventual discontinuation of subsidiesand lower tariffs will jeopardize the livelihoods ofbulk commodity producers, both here and in theEuropean Union.

At the same time, competition from lower-costproducers in developing countries has put down-ward pressure on prices. U.S. Department ofAgriculture projections show that American farm-ers will face stiff competition not only from tradi-tional exporters such as Australia, Canada, andArgentina, but also from developing countries suchas Brazil, Russia, Ukraine, and Kazakhstan.

The Farm Economy Today and TomorrowTraditional “big iron” commodity agriculture willcertainly not fade away. It is extremely efficient,capital intensive, and will constitute a critical ele-ment in helping meet North America’s growingdemand for energy. But if American agriculture isto rise to the challenge of increased competition,there will need to be greater emphasis on high-value products (HVPs), including specialty cropsand livestock, and organic products, and an

increased emphasis on direct-to-the consumerproduction.17

There were an estimated 2.1 million farms in theUnited States in 2005, 0.6 percent fewer than in2004. Total land in farms stands at 933.4 millionacres, a decrease of 2.9 million acres, or 0.3 percent,from 2004. The average farm size in 2005 was 444acres, an increase of one acre over the previous year.

The decline in the number of farms and agricul-tural acreage reflects both the trend towardagribusiness and the diversion of agricultural landto nonagricultural uses, particularly tourism, recre-ation, and housing development.

Agricultural production has been steadily shift-ing toward larger farms. Farms in the largest salesclass (at least $500,000 in 2002 dollars) accountedfor 43.9 percent of production in 2002, up from28.9 percent in 1989. There were 64,000 farms inthat class in 2002, an increase from 32,000 in 1989.The trend to larger farms cuts across the board,with production of poultry, livestock, and crops allshifting to larger operations. The reasons arestraightforward. Large farms have lower costs ofproduction on average, and they are more likely torealize higher commodity prices as well.18

American agricultural producers have also cometo depend increasingly on export markets, even asthe American demand for foreign foods is rising.U.S. food imports are expected to increase from$61.5 billion today to $84 billion in 2015.Processed foods are projected to rise from 27 per-cent to 41 percent of all food imports during thesame period. Likewise U.S. agricultural exports areprojected to rise from $64.5 billion in 2006 to $84billion in 2015, with HVPs growing from 41 per-cent of exports in 2006 to 55 percent in 2015.19

The Rise of Organic and Niche FoodsOn-farm quality protocols, many of them devel-oped over the past decade in Europe, will acceleratethe integration of American farmers into a globallyharmonized and integrated farm and food system.20

These protocols emerged out of an alarming num-ber of deaths from contaminated food in Europe inthe 1990s, were further facilitated by the growing

14

The Agri/Energy Challenge

sophistication and convenience of computerizedinformation systems, and legitimized by the organ-ized demands of consumers.

Changes in the global food market coincide withchanging production practices and consumerdemands here at home. Burgeoning consumerinterest in organically grown foods, primarilybecause of consumer preferences for quality safefood, has opened new market opportunities forproducers; today organic farming is one of thefastest-growing segments of U.S. agriculture.During the 1990s, the growth in retail sales oforganic foods equaled 20 percent or more annually.Organic products are now available in nearly20,000 natural foods stores and are sold in 73 per-cent of all conventional grocery stores.21

Certified organic cropland doubled between1992 and 1997, to 1.3 million acres. Farmers in 49states had put 2.2 million acres of cropland andpasture into organic production as of 2003, with


nearly 1.5 million acres dedicated to growingcrops. California, North Dakota, Minnesota,Montana, Wisconsin, Colorado, and Iowa had themost organic cropland. Texas, Alaska, andCalifornia had the largest amount of organic pas-ture and rangeland.

Fresh produce is the top-selling organic category,followed by nondairy beverages, breads, and grains,packaged foods (frozen and dried prepared foods,baby food, soups, and desserts), and dairy products.During the 1990s, organic dairy was the most rap-idly growing segment of the organic sector, withsales up over 500 percent between 1994 and 1999.

15

U.S. AGRICULTURAL IMPORTS AND EXPORTS AND THE TRADE BALANCE, 2004—25

Source: U.S. Department of Agriculture, Office of the Chief Economist, USDA Agricultural Baseline Projections to 2015, World Agricultural Outlook Board, Baseline Report OCE-2006-1, February 2006.

Ag TradeBalance

0%

10%

20%

30%

40%

50%

60%

2004 2006 2008 2010 2012 2014

Bulk Commodity Exports

High-value Product Exports

Processed Food Imports

Non-processed Imports

Direct-to-Consumer AgricultureThe growth of farmers markets and other direct-market venues, especially popular among organicproducers, has taken off over the last decade.Organic farmers are also finding ways to capture alarger segment of the consumer food dollarthrough on-farm processing, producer marketingcooperatives, and new forms of direct marketing,including agricultural subscription services.

Community-supported agriculture (CSA) hasemerged as a new model of food production, sales,and distribution aimed at increasing both the qual-ity of food and the stewardship of the land. TheCSA approach provides small-scale commercialfarmers access to successful, small-scale markets.The system is built on the weekly delivery to orpickup by the consumer of vegetables, flowers,fruits, herbs, and even milk or meat products.Community-supported agriculture can keep morefood dollars in the local community and con-tributes to the establishment of regional marketsfor food producers.

With its emphasis on growing high-quality foodsusing organic or biodynamic farming methods,such farm production operates with a much greaterthan usual degree of involvement of consumers,creating a stronger than usual consumer-producerrelationship. CSA and other local/regional foodsystems initiatives are likely to exhibit stronggrowth in the future. This may be due to a factormentioned above—rising consumer demand forfresh, quality foods—as well as the need to reduceenergy consumption, since locally produced foodsusing natural fertilizers are often far less costly interms of fossil fuel use.

Agriculture and EnergyThis brings us to the increasingly complex rela-tionship between food and fuel. Modern agricul-ture, it has been said, turns oil into food. As thecrude menu for a bowl of oatmeal with fruit illus-trates, a lot of oil goes into growing, packaging,and shipping the food we eat.

Skyrocketing energy prices are now adding anew twist to this message. The ethanol boom is

showing that the agricultural sector can mobilize to take on a new and increasingly important role infueling our economy. We know that a significantpercentage of our national energy appetite could besatisfied with biofuels produced in the Heartland. A national policy to promote the development ofthe biofuel industry would be wise and is notunprecedented: during the Second World War,farmers responded to government incentives tocreate fats and oils that were indispensable formaking such key war materials as explosives, tinplate, paints, and soaps.

In the future, agricultural policy may be trans-formed from the management of surplus to themanagement of competing demands for food andfuel. At around $60 for a barrel of oil, it becomesprofitable to convert agricultural commodities intoautomotive fuels. In this sense, the price of oilbecomes a support price for agricultural commodi-ties, and therefore food prices. In the future, com-modity farmers are as likely to pay as much atten-

16


A CRUDE MENU

Source: Chad Heeter, San Francisco Chronicle, March 26, 2006.

Bowl of Oatmeal

Serving of Red Raspberries

Butter, Milk and Salt

Cup of Java

Ounces of Oil

8 Ounces of Oil for Breakfastfor Producing, Packaging & Shipping

tion to the energy bill as to the farm bill. In fact,the future may already be here, as Lester Brown,the founder and president of the Earth PolicyInstitute, notes, “Today on any given day there aretwo groups of buyers in commodity markets: onerepresenting food processors and another repre-senting biofuel producers.”22

The Next Energy Revolution?There are many reasons to encourage this trend.The production and distribution of biofuels willcreate new jobs, increase commodity prices andfarm income, improve America’s trade balance, and reduce our dependence on imported fuel and chemicals.

Substituting domestically produced sources ofenergy made from biomass for petroleum willaddresses many economic, environmental, andnational security problems as well. However, withonly about 3.4 percent of our current energy con-


sumption coming from alternative sources, includ-ing geothermal, solar, wind, and biomass, we havea considerable way to go before we can achieveenergy independence.

Increasingly, crops like corn and soybeans nowmostly used as animal feed and ingredients in hun-dreds of food products will be used to makeethanol and biodiesel. Between 2000 and 2005,worldwide ethanol production grew from 4.6 bil-lion to 12.2 billion gallons, representing a 165 per-cent increase. The production of biodiesel tripledduring this period, from 251 million to an esti-mated 790 million gallons.

Contrary to what many biofuels detractors say,recent evidence shows that producing ethanol fromcorn reduces petroleum use by about 95 percent onan energetic or net energy basis—when the energyreplaced to make co-products such as animal feedis factored in—and reduces greenhouse gas emis-sions by about 13 percent.23

17

U.S. ETHANOL REFINERIES: IN PRODUCTION AND UNDER CONSTRUCTION, 2006

Source: Renewable Fuels Association.

Refineries in Production

Refineries underConstruction

American agriculture is well positioned to play agreatly expanded role in the development andimplementation of new energy solutions. A 2005joint report of the Department of Agriculture andthe Department of Energy concluded that theUnited States has the land base to produce over 1.3billion dry tons of biomass a year—enough to sat-isfy 30 percent or more of the current nationaldemand for transportation fuels.24 This amount ofbiomass could be produced now, with only modestchanges in land use and agricultural and forestmanagement practices, without a negative impacton the production of food and fiber.

Brazil now generates almost 44 percent of itspower from renewable energy sources and is theworld’s largest producer of ethanol. Brazil requiresall gasoline to contain a minimum of 25 percentalcohol, and by 2007, all new cars manufactured inthat country may be able to run on 100 percentethanol. Brazil’s ethanol program has displaced$120 billion worth of imported oil, comparable toa savings of almost $2 trillion to the U.S. economy.Brazil also intends to substitute biodiesel for 20percent of its conventional diesel within 15 years.

The move toward biofuels will depend largelyon national, state, and local resolve, particularly indriving improvements in cellulose-based technolo-

gies and distribution. If biofuels are to be competi-tive in the long run, more efficient transportationinfrastructure, including pipelines, will have to bedeveloped.25 From a national policy standpoint, itmay make sense to redirect existing agriculturalsubsidies toward sustaining demand for biofuelseven if the price of oil and gas collapses.

Annual U.S. biofuel production now stands at 4 billion gallons. The Renewable Fuels Standard(RFS) established by the Energy Policy Act of 2005requires incremental increases every year, almostdoubling the requirement by 2012. Several stateshave set ambitious goals for the production and useof renewables. Minnesota has set the bar higherthan most by adopting a 20 percent ethanolrequirement, to take effect in 2013.

The Renewable Fuels Association, in its 2006industry outlook, “From Niche to Nation” is quickto point out the RFS baseline should be viewed asa floor, not a ceiling.26 Even so, the associationestimates that the impact of the baseline by 2012will be substantial, reducing oil imports by 2 billionbarrels and the monetary outflow by $64 billion ayear, creating 234,840 new jobs, increasing house-hold income by $43 billion, adding $200 billion toGDP, and creating $6 billion in new investment inrenewable fuel production facilities.

18


U.S. ETHANOL PRODUCTION: ACTUAL (1997–2005) & RENEWABLE FUEL STANDARD USE BASELINE (2006–12)

Source: Renewable Fuels Association.

0

1

2

3

4

5

6

7

8

Billions of Gallons

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

A 2005 study by the Center for AgriculturalPolicy and Trade Studies at North Dakota StateUniversity estimates that the RFS guidelines willalso result in a rise in the price of corn.27 The pro-duction of 7 billion gallons of ethanol from cornwould result in a 6 percent increase, the productionof 14 billion gallons in a 29 percent increase.Increasing the use of corn for energy would alsohave a positive affect on the prices of other crops.Wheat growers would receive $26.1 million more ingross revenues and soybean growers an additional$179.1 million at the 7 billion gallon threshold. At14 billion gallons, the increased revenues wouldamount to $183.2 million and $1.79 billion, respec-tively. At both the 7 billion and 14 billion gallon lev-els, government subsidies to producers will decreasesignificantly because corn prices would be above thecurrent target price.

The 25 x’ 25 Coalition is a partnership betweensome of America’s most prominent agricultural andbusiness interests that is supported by formerSpeaker of the House Newt Gingrich and formerSenate Majority Leader Tom Daschle, amongother prominent political figures. The coalitionwants to see foreign oil replaced with energy “fromAmerica’s working lands” in the form of ethanoland biodiesel. It is working toward the productionof 25 percent of the total energy consumed in theUnited States from these sources by 2025, alongwith the continued production of abundant, safe,and affordable food and fiber.28


The current strategy is to roll out “25 x’ 25” inthree phases. The first phase, already underway, isto get 50 percent of the members of Congress toagree, in principle, to the coalition’s goal. The sec-ond phase, also underway, is to get state legislaturesto endorse the principles of the plan. The thirdphase will be to draft federal legislation that wouldput the “25 x’ 25” plan into action.

Tapping the Heartland’s Fossil FuelsThere are many parts of the Heartland—such asthe Dakotas, Wyoming, and Montana—wherethere are significant fossil fuel resources, includingoil and coal. High oil prices have stimulated a newwave of exploration led, not by major oil compa-nies, but by small “wildcat” operators. Althoughthese entrepreneurs sell their product to the majors,they are often locally based. Such micropolitan cen-ters as Midland, Texas, Casper, Wyoming, andWilliston, North Dakota are reaping the benefits.The impact of this renewed production may alreadybe reflected in the rising per capita income num-bers in Heartland states since 2000. Energy-richWyoming, Montana, North Dakota, New Mexico,and West Virginia were the top five states in percapita income growth between 2000 and 2005. Ifthe production of ethanol and other cellulose-basedfuels also grows as expected, this pattern may wellcontinue in the years ahead.29 n

19

TOP TEN STATES PER CAPITA INCOME GROWTH: 2000–05

Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics.

WyomingMontana

North DakotaNew Mexico

West VirginiaRhode Island

VirginiaSouth Dakota

AlabamaArkansas

MarylandIowa

NebraskaUSA

0%

2%

4%

6%

8%

10%

12%

III. The Rise of On-shoring

A s noted above, in rural areastoday only 10 percent of thepopulation lives on farms and

only 14 percent of the rural workforce isemployed in farming.30 Slightly morethan 10 percent of all earnings in rural

21

PERCENT OF TOTAL EARNINGS FOR METROPOLITAN, MICROPOLITAN & RURAL AREAS, 2003

Source: David Lenze, “Local Area Personal Income for 2001–2003, Survey of Current Business,” U.S. Bureau of Economic Analysis, May 2005.

Rural

Micropolitan

Metropolitan

0% 5% 10% 15% 20% 25%

Natural Resources

Construction

Manufacturing

Retail and Wholesale Trade

Transportation,Warehousing and Utilities

Information

Financial Activities

Professional andBusiness Services

Education, Health Careand Social Assistance

Leisure, Hospitalityand Other

Government

areas are attributable to natural resourceindustries, including farming, forestry,fishing, and mining. Manufacturing nowaccounts for about 20 percent of earningsin micropolitan areas, and almost thatmuch in America’s most rural places.31

The Brain Belt: An Underemployed Resource Clearly, rural and micropolitan areas need to findnew ways to employ their skilled workforces.Although these areas are often seen as lacking ineducated workers, in reality the rural regions of thecountry—from New England to the Great Plainsand even parts of the Sierras—can be characterizedas having a “skills surplus,” that is, high levels ofunderemployment of human capital.32

The basis of this surplus lies in the high level of education among young people in manyHeartland states. By virtually every measure-ment—graduation rates, college attendance,enrollment in advanced science programs—stu-dents in key rural states tend to perform betterthan those in more urbanized settings. In addi-tion, the potential of the Heartland’s large, grow-ing Native American population remains largelyuntapped, with unemployment averaging over 20percent on Indian Reservations.33

Historically, the problem has been that many ofthe Heartland’s educated, skilled young peoplehave had to move elsewhere to find suitableemployment. However, there are signs that, inlarge part due to advances in communications,many of these young workers are now findingemployment at home. Indeed, according toresearcher Sean Moore, between 1990 and 2000the number of rural counties with a “skills surplus”dropped by 14 percent. As Moore suggests, thismay well be a result of the shift in the location ofinformation and business services, and other tech-nology-related business to the far periphery.34 Thishas been seen with the rise of such businesses inFargo, Sioux Falls, Des Moines, and to evensmaller towns throughout the Heartland.

The On-shore RevolutionFrom 2002 to 2005, when the nation’s manufactur-ing employment declined by 9.2 percent, a numberof places in the Heartland showed dramatic in-creases. Manufacturing employment increased by28 percent in Norfolk, Nebraska, by 20 percent inBrookings, South Dakota, by 21 percent in GrandForks, North Dakota, by 10 percent in Fargo,

North Dakota, and by 105 percent in Manhattan,Kansas.35 In each of the counties where these com-munities are located well over 500 jobs in manufac-turing were created, suggesting that the UnitedStates can meet international competition by tap-ping qualified workers in places with a reasonablecost structure.

Alien Technology, a nanotechnology firm basedin Morgan Hill, California, has established a majorpresence in Fargo, as has Microsoft BusinessSolutions, which has over 2,000 employees in thearea.36 Both companies were drawn to theHeartland by lower costs and the availability ofskilled labor. In some manufacturing strongholdslike Brookings, South Dakota, Dickinson, NorthDakota, Thief River Falls, Minnesota, andAlexandria, Minnesota, jobs are actually goingunfilled, sometimes in the hundreds, because thereare not enough qualified applicants.

The movement of skilled workers away from thecoastal regions, driven in part by the high cost ofhousing, may also be drawing employers towardthe Heartland. The movement of workers fromCalifornia has been particularly marked; roughlyhalf of the 973,000 tech workers employed inCalifornia had left the industry or the state by2003. A similar movement can be seen in south-western Virginia, which has been attracting compa-nies and skilled workers from congested, high-costnorthern Virginia.37

This movement into the interior has been gen-erally overlooked amid worries about the shift ofU.S. office and technical jobs offshore, which bysome estimates is expected to reach 3.3 millionpositions by 2015.38 But some companies, includ-ing Dell Computers, Lehman Brothers, 1-800-Flowers, and Choice, owner of the Comfort Inn,Quality, US Bank, and Clarion chains, have real-ized that relocating to the Heartland brings manyof the same benefits as a move offshore. Surprisingly,several India-based companies have opened opera-tions in the Heartland.39

At the same time, such homegrown firms asArkansas-based Rural Sourcing, Cross USA inEagan, Minnesota, and SEI Technology in Oak

22

The Rise of On-shoring

Brook, Illinois, have grown rapidly in recentyears.40 In general, these firms report that theadvantages of on-shoring include a greater recep-tiveness by customers as well as greater perceivedsecurity for sensitive personal information.

Although the off-shoring trend can be expectedto continue, there are signs that rural and small-town on-shore employment will continue to grow.The number of call-center jobs, after dropping inthe early part of the decade, has begun pick up.Many of these operations are clustered in ruralcommunities across the country.


Gary Warren, who operates HamiltonCommunications out of Aurora, Nebraska, asmall town 125 miles from Omaha, employs 250workers there, and another 250 throughout therest of the country. With a population of 4,200,Aurora has been growing in large part due toexpanding telecommunications operations. “A lotof people are coming to us and turning away fromIndia,” he suggests. “There is a strong work ethicand it’s very constant. We are not dying here—we are building.”41 n

23

IV. Policy Recommendations

Like the United States as whole, theHeartland has a backlog of publicinvestment needs that are underminingAmerica’s productivity potential. Amongother things, there is a shortage ofrolling stock, fiber-optic capacity, andairports. In some areas, shortages ofhuman capital in the form of skilledworkers and professionals forces firmsto rely more on outsourcing than theywould like.

Policymakers must consider how toincrease public investment in educa-tion, research and development, andpublic infrastructure, both to maintaindomestic demand and strengthenAmerica’s productive capacity. In sodoing, they will be following a time-tested formula, in which public invest-ment in, tandem with private capital,acts as a spur to broad-based, entrepre-neurial-led growth.

If the Heartland’s potential is to berealized, the first thing that needs tochange is the mind-set of America’s

policymaking elites. They need to seethe nation’s vast interior as an essentialpart of a national growth strategy pro-pelled by investment in public infra-structure and technological innovationand diffusion, and by the on-shoring ofproduction and services.

Building the Heartland’s Talent PoolSkilled workers drive the knowledgeeconomy, whether in information tech-nology, manufacturing, finance, healthcare, education, or business and profes-sional services. However, many parts ofthe country face labor shortages thatserve as barriers to economic and social development.

The National Association ofManufacturers projects that by 2020 theshortage of professionals and skilledworkers could be as high as 13 million.The U.S. manufacturing sector nowemploys about a quarter of the nation’sscientists and related technicians, andabout 40 percent of all engineers andengineering technicians. Many of theorganization’s 14,000 members arealready struggling to find qualifiedhelp.42 Increasingly, the key challenge inthe manufacturing sector will not be ashortfall of opportunities, but a shortageof qualified applicants.43

The shortage of professionals andskilled technicians is particularly acutein the Heartland. Given this problem, astrategy to increase international immi-gration of professionals and skilledworkers, similar to the points-based sys-tems now operating in New Zealand,Canada, and Great Britain, would makeconsiderable sense.44

25

A New Homestead ActWhile such a policy would help alleviate theshortage in the Heartland’s burgeoning labormarkets, we might also consider policies to stimu-late domestic migration of young, educated peo-ple to where they are most needed—essentiallygetting our labor markets more in line with long-term opportunities.

Under the provisions of the proposed NewHomestead Act, which is being promoted by Sen.Byron Dorgan (D-N.D.) and Sen. Chuck Hagel(R-Neb.), individuals who made a commitment tolive in rural areas that have experienced long-termoutmigration would receive aid to pursue a collegedegree, buy a home, or start a business. New busi-nesses locating in such areas would receive taxcredits. A New Homestead Venture Capital Fundwould be set up to promote business developmentand growth in high-outmigration rural areas. TheNew Homestead Act has been introduced severaltimes, each time attracting new cosponsors.However, it has not yet attracted enough supportto make its way through the legislative process.

Building Off the “Brain Belt”Tapping the skills of the Heartland’s existing pop-ulation represents by far the most efficient meansto spark economic growth. As we have noted, theHeartland produces educated, skilled workers buttends to lose many of them due to a lack ofopportunity. We need to regard these educatedyoung people—and a growing number of well-educated “downshifting boomers”—as the poten-tial basis of Heartland development in manufac-turing, agriculture, energy production, and infor-mation technology.

The renowned “innovation economies” of theSilicon Valley, Boston’s I-128 Corridor, and NorthCarolina’s Research Triangle have histories that goback many decades. It is only recently that similarfruitful regional innovation initiatives have surfacedin parts of the Heartland.

The basic building blocks of regional innovationinitiatives include institutions of higher learning,basic and applied research laboratories, technologytransfer mechanisms, regional public and privategovernance organizations (e.g., trade associations,chambers of commerce, economic developmentorganizations), financial institutions, capital invest-ment programs, and business incubators that helpweave all of these into vigorous networks.45

The Red River Valley Research Corridor inNorth Dakota represents one Heartland model ofsuch an initiative. It links the science and technol-ogy assets of North Dakota State University inFargo and the University of North Dakota inGrand Forks with local companies. According torecent National Science Foundation statistics, theinitiative is reaping significant benefits for thestate.46 North Dakota now ranks second in aca-demic research and development dollars per $1,000of gross state product and fourth in net high-tech-nology business formations as a share of all busi-ness establishments. This is an astonishing feat fora state that has historically performed very poorlyin converting its scientific assets into opportunitiesin the technology business sector.

Other regions in the Heartland are now turningto this model of economic development. In theBlack Hills of South Dakota, Black Hills Vision, apublic-private partnership, is spearheading thedevelopment of a regional technology corridor,anchored by an effort to secure a deep undergroundscience and engineering laboratory for the closedHomestake Gold Mine. Black Hills Vision’s goal isto create 1,000 new technology companies in theregion. To achieve this goal, it is partnering withthe National Network for TechnologyEntrepreneurship and Commercialization. TheN2TEC collaborative, made up of research univer-sities and private companies, will identify, vet, andtransfer viable technologies, commercializationexpertise, and resources to businesses while workingwith the region’s communities to create an environ-ment conducive to tech-based development.

26

Policy Recommendations

Similarly, in the Wenatchee Valley of north cen-tral Washington, the Advanced Vehicle Initiative isunderway to establish the region as a center forresearch and design, production prototype testing,and maintenance and manufacturing activities foradvanced vehicles and fuels. The initiative buildson the region’s publicly owned hydroelectric sys-tem, which provides clean, low-cost renewablepower on a robust grid, and a community collegewith training facilities and the will to develop cur-ricula for this emerging technology. The initiativeis primarily focused on plug-in electric vehicles,but it will also incorporate research in other tech-nologies in the future, with energy independenceas its goal.

Like the Red River Valley Research Corridor,the Wenatchee Valley initiative has successfullyemployed technology “action summits” as a meansto connect with key partners in business, govern-ment, and research facilities from outside theregion whose interests are aligned with its own.Action summits are essentially temporary economicagglomerations that link a local economy with


capabilities and market opportunities not readilyavailable in locations outside the major metropoli-tan areas of the country. They also facilitate rural-urban linkages critical to the growth of rural andmicropolitan regional economies.47

The Federal RoleSuch initiatives usually can and should be fundedlocally. But the federal and state governments canplay a critical role by promoting the developmentof essential infrastructure, such as high-capacitytelecommunications networks and readily accessi-ble connections to travel and transport. Lack ofsuch services today severely limits the opportuni-ties to expand technology-based businesses to ruraland micropolitan areas.

Above all, the integration of the Heartland intothe global economy requires major investments inbroadband telecommunications infrastructure.Where private-sector telecom companies areunable or unwilling to invest in this technology,local business groups or municipal networks shouldbe encouraged to expand broadband service.

27

REGIONAL INNOVATION AND COMPETITIVENESS

Source: Adapted from Global Knowledge Flows and Economic Development, OECD Publishing, 2004.

RegionalAssets

• Knowledge

• Skills

• Technology

• Capital

• Physical Infrastructure

• Business Climate

• Quality of Life

Outcomes

Ideas, research

Development of new products, services, contract R&D capacity

Business establishment,incubation, growth & expansion,new firms attracted to region & new jobs created

New ideas & peopledrawn into region

Capital drawninto region

DeployDevelopDiscover

In the interests of research and education,extending the existing optical networks for high-performance computing to the northern part of thecentral United States should be a priority—muchas rural electrification was in the New Deal era.Currently, this the only region in the country with-out such a network, but Congress has now acted toprovide funding to rectify this gap.

The Heartland’s economic integration alsodepends on national and international access forbusiness travelers. This will require sustaining theregional hubs for commercial air carriers and,equally important, facilitating intraregional busi-ness travel by supporting point-to-point carriersand essential air service.48 It is also essential thatthe intermodal (rail/truck/air) transport network beextended throughout the country so that manufac-turers, farmers, timber producers, and food proces-sors can get their products to national and interna-tional markets quickly and efficiently.

Energizing Agriculture and EncouragingInnovation in Small and Medium-Sized FarmsEnergy crops and higher-value products in cropsand livestock hold significant potential for thefuture of Heartland agriculture. This is particularlythe case for the many small and medium-sizedindependently owned family operations that nowmake up the majority of American farms dottingthe countryside.

Maximizing the production of biomass for theproduction of energy crops will best be accom-plished by establishing a national alternative energyproduction target of at least 25 percent. This couldhelp reduce the nation’s dependence on foreign oilwhile building domestic production capacity forbiodiesel, ethanol, and wind-generated energy. Asnoted above, such a step might also result in thereduction and even the elimination of subsidies formany crops.

Moving from dependence on the Middle East toHeartland self-reliance will require substantialinvestment in research in crops with higher energy

28

Policy Recommendations

HIGH SPEED OPTICAL NETWORKS FOR RESEARCH, EDUCATION, AND BUSINESS

Source: Northern Tier Network Consortium, 2005.

Lambda Rail

Abilene Network

UW

Portland

Sacramento

Sunnyvale Fresno

Los Angeles

San Diego

PhoenixOlga

ISU

WSU

UI

UM

MSU

SDBOR

NDITD

UND

SDSU

USD

NDSU

UMN

Milwaukee

Chicago

Walnut

Nashville

Indianapolis

Atlanta

Jacksonville

Raleigh

Washington

Pittsburg

Cleveland

New York

BostonMadison

ISUUI

Stratford

Dallas

Houston

DenverOgden

yields and lower environmental impact, as well asthe development of new technologies for the pro-duction of cellulosic ethanol and sustainable agri-culture practices.49 The U.S. Department ofEnergy recently announced that it will spend $250million to establish and operate two new bioenergyresearch centers to accelerate basic research on thedevelopment of cellulosic ethanol and other bio-fuels in order to move toward the goal of replac-ing 30 percent of transportation fuels by 2030.

Intraregional and community models for energyindependence should include investments in con-sumer-supported energy markets and small-scaleenergy production and utilization.

Resources should be applied to empower farmersto participate in high-value-product export markets.The Department of Agriculture has issued regula-tions regarding animal identification systems slatedto take effect in 2009. Supporting the developmentand adoption of information systems that enable thetraceability of crops and livestock is essential.

Finally, fostering the development of local foodsystems, including consumer-supported agriculture,specialty markets for smaller producers, organicproducts, and other high-value products must be akey element of agricultural policy and funding pri-orities. Local food systems have the potential toreduce dependence on national distribution sys-tems, and thus energy consumption, while meetingthe growing consumer demand for stronger ties toproducers and more information about the qualityand safety of food.

A Heartland Development BankInfrastructure is essential to business investment andjob creation, and for linking people and communi-ties with the knowledge and ideas that drive produc-tivity.50 Building the productive capacity of the NewAmerican Heartland will require significant invest-ment by both the public and private sectors.

A development bank, modeled after the Inter-American Development Bank or the CaliforniaInfrastructure and Economic Development Bank,would be a timely and powerful tool for making


infrastructure improvements and fostering the inno-vations that will reshape the Heartland’s economiclandscape. We propose the establishment of theAmerican Heartland Development Bank (AHDB)with $10 billion in funds for financing infrastructuredevelopment projects as well as trade and regionalinnovation and competitiveness programs. Thebank’s capital would be subscribed by memberswithin the Heartland and could include the federaland state governments, national and state-charteredbanks, investment funds, state retirement funds,local and regional development organizations, cor-porations, university alumni foundations, and otherinterested groups. Non-Heartland members couldalso subscribe to the fund and would benefit by hav-ing preferred status as suppliers of goods and serv-ices for AHDB-financed projects.

The bank’s resources would include callable cap-ital and paid-in capital from AHDB members, aswell as reserves and funds borrowed in interna-tional markets. The bank should be structured sothat only 5 percent of the $10 billion is paid-in.The remaining 95 percent would be callable capitalbased on the implementation of approved projectsin need of financing.

The bank would make investment loans intelecommunications and transportation infrastruc-ture, energy production facilities and distributioninfrastructure, water projects, and specialized sci-ence/technology/training facilities and centers.

Unlike earlier periods of infrastructure expan-sion, which were often uniformly national orregional in scope, today’s infrastructure needsrelated to economic development are often tied tothe specific circumstances and aspirations of thelocal economy. It is important, therefore, that localresources be leveraged to the greatest extent pos-sible in making the investments in infrastructurethat will create new economic opportunities.

Evidence from abroad shows that investing ininfrastructure can be profitable. Australia’sMacquarie Bank, for example, has earned an aver-age return of 19 percent on its infrastructureinvestments over 11 years.51 n

29

V. Conclusion: The Heartland Opportunity

It is in the interest of the nation toimplement a strategy that reinvigoratesour Heartland region. Some, of course,will oppose these measures as detrimen-tal to the aesthetics of empty spaces.Paul Ehrlich, among others, has pro-posed a near absolute ban on new roads,which would surely cut the countrysideoff from the rest of the country. Anothercommentator has suggested that extend-ing broadband to the countryside wouldproduce “an environmental disaster ofthe first magnitude” because the move-ment back to the country this wouldpermit would lead to the “massivedestruction of [America’s] remainingforests, open land and wild flora andfauna over the next few decades.” 53

This notion of an endangered rurallandscape is often raised, particularly in

In many ways, the American Heartlandtoday boasts better prospects than atany time since the early 20th century.

We live in a world where high-speedcommunications are telescoping the dis-tance between urban centers and the farperiphery. Demographic factors, such asthe aging of the population, may alsowork to the region’s benefit, as workerstend to move further out from theurban core as they age.52

the Northeast. However, the UnitedStates is likely to remain a nation inwhich an overwhelming portion of itsland mass is devoted to agriculture, pas-turage, or wilderness. Although agricul-tural acreage has dropped somewhat,there is still nearly 15 times as muchland devoted to agricultural use in theUnited States as there is urban space. In fact, open space has grown muchfaster—by a factor roughly of tentimes—than urban areas, which is atrend that should be encouraged for thesake of future generations. We certainlyshould husband our farmland, and natu-ral resources, but the notion of notrepopulating large parts of the countrybased on a perception of “scarcity”seems absurd.54

We should not attempt to freeze non-metropolitan America into some sort ofdemographic and economic still life.Instead, we should embark on the intel-ligent reinvigoration of the Heartland asa critical strategic aspect of a renewedAmerican growth strategy. The Heart-land can provide the nation with an out-let for its expanded population and busi-ness with a locale for the production ofglobally competitive goods and services.

31

32

Conclusion: The Heartland Opportunity

The development of the American Heartlandwill also allow the nation to reconnect with its his-torical strengths as a great, open continentalnation. This has always differentiated us from suchcompetitors as Britain, France, Germany, andJapan. Indeed, even after the frontier “closed,” asthe historian Frederick Jackson Turner pointedout, America’s huge landmass helped define “the

expansive character of American life.” It absorbed“that restless, nervous energy…which comes withfreedom.”55 As we grow to a nation of 400 millionpeople, we will need to tap that spirit more thanever. We should cherish our vast Heartland notonly for its contribution to our past but as a pri-mary source of inspiration, growth, and knowledgein the years that lie ahead. n

Build the Heartland’s Interoperability with the National/International Economyz Build out the broadband telecommunications infrastructure to ensure access anytime

and anywhere for all users and extend the existing optical network for high-perform-ance computing to the only regions where this does not exist—the north central andnorthwestern parts of the United States.

z Ensure national and international access for business travelers by sustaining the regionalhubs for commercial air carriers and, equally important, facilitate intraregional businesstravel by supporting point-to-point carriers and sustaining essential air service.

z Expand the internodal (rail/truck/air) transportation network so that manufacturers,agricultural and forestry producers, and food processors can reach national andinternational markets.

Cultivate the Talent Pool in the Heartlandz Foster technology literacy in K-12 education, with the goal of encouraging more stu-

dents to pursue science, math, and engineering careers.

z Mobilize existing assets by encouraging colleges and universities to develop curriculamore closely aligned with the needs of core regional industries as well as emerging sci-ence and technology-based industries.

z Provide educational and housing incentives to encourage individuals to move to theHeartland—through a New Homestead Act—in order to overcome the shortage ofprofessional, management, and technical talent (business entrepreneurs and managers,medical personnel, teachers) there.

z Encourage the immigration of foreign professionals and skilled workers through 1) thecreation of a new category of skilled immigrants who would enter the country with per-manent residency status based on a points system, and 2) programs to help universitiesrecruit international students.

33

A Heartland Development Strategy Policy Agenda

34

A Heartland Development Strategy Policy Agenda

Energize Heartland Agriculturez Establish a national alternative energy production target of at least 25 percent in order to reduce U.S.

dependence on foreign oil while building the nation’s domestic production capacity of biodiesel, ethanol,and wind power.

z Mobilize a research program for dedicated energy production technologies that will lead to higher yieldsof energy while minimizing the environmental impact of such production. The U.S. Department ofEnergy’s initiative to establish and operate two new bioenergy research centers to accelerate basicresearch on the development of cellulosic ethanol and other biofuels is a step in the right direction.

z Develop new intraregional and community models for energy independence, including consumer-supported energy markets and small-scale energy production and utilization.

Stimulate Innovation in Food Trade Opportunities for Small and Medium-Sized Farmsz Empower farmers to participate in high-value-product (HVP) export markets by supporting the develop-

ment and adoption of information systems that enable the traceability of crops and livestock.

z Foster the production of organic and other high-value products and the development of local food sys-tems and specialty markets for smaller producers, including consumer-supported agriculture (CSA).Local food systems have the potential to reduce dependence on national distribution systems requiringhigher energy consumption for shipping to consumers.

Build Regional Innovation and Competitiveness Initiativesz Support the strategic planning for and development of collaborative regional initiatives involving busi-

ness, institutions of higher learning, financial institutions, workforce training and development agencies,the federal and state governments, and other economic stakeholders.

z Foster integrating mechanisms that facilitate interregional technology transfers to improve innovationand competitiveness, such as the National Network for Technology Entrepreneurship and Commercial-ization (N2TEC), which makes technologies created at major universities and Fortune 1500 companiesavailable to entrepreneurs and companies throughout the nation.

z Develop and capitalize a $10 billion American Heartland Development Bank to provide financing for thedevelopment of infrastructure (telecommunications, water supply, highways, airports, multimodal ship-ping centers) and the construction of specialized science and technology facilities. n

1 Richard Rubin, “Not Far from Forsaken,” New YorkTimes, April 9, 2006.

2 Andrew Haeg, “Farm Towns Look for Ways toSurvive,” Minnesota Public Radio, July 10, 2001.

3 Samuel R. Staley, “The ‘Vanishing Farmland’ Myth andthe Smart Growth Agenda,” Reason Public PolicyInstitute, Los Angeles, January 2000, 4.

4 John Cromartie, “Rural Population and Migration:Rural Population Change and Net Migration, EconomicResearch Service, U.S. Department of Agriculture, 1994; Nancy McArdle, “Outward Bound: TheDecentralization of Population and Employment,”Joint Center for Housing Studies, Harvard University,

July 1999, 8–9.

5 John Cromartie, “Changing Nonmetro DefinitionsAffect Population Counts,” Amber Waves, EconomicResearch Service, U.S. Department of Agriculture,February 2006.

6 “Rural” counties are those without a core city with apopulation of at least 10,000. “Micropolitan” countiesare those with a core city with a population of10,000–50,000. Metropolitan areas have a core city witha population of at least 50,000.

7 Wendell Cox, “United States Metropolitan AreaInternal (Domestic) Migration Report: 2000–2005,”Demographia.com.

8 Belden, Russonello & Stewart, “2004 AmericanCommunity Survey: National Survey of Communities,”October 2004, 3; W. K. Kellogg Foundation,“Perceptions of Rural America,” n.d. 1, 5.

9 “Size Doesn’t Matter,” American Demographics,May 1, 2001.

10 “When State’s Educated Young Adults Move Out,Immigrants Move In,” Associated Press, March 22, 2004;“Rural America at a Glance,” Economic InformationBulletin No. 4., Economic Research Service, U.S.Department of Agriculture, September 2005.

11 Nancy McArdle, “Outward Bound,” 20.

12 Gerald A. Carlino,” From Centralization toDeconcentration: People and Jobs Spread Out,” FederalReserve Bank of Philadelphia, November/December2000, 19.

13 “The New Boomtowns,” Inc., May 2006.

14 Donghwan An, Peter Gordon, and Harry W.Richardson, “The Continued Decentralization of Peopleand Jobs in the United States” (paper presented at the41st annual meeting of the Western Regional ScienceAssociation, Monterey, CA, February 17–20, 2002),50–57; Nancy McArdle, “Outward Bound,” 12–13.

15 Amy Zuckerman, “Hidden Tech: Move Over SiliconValley,” Red Herring, February 5, 2004.

16 USDA Agricultural Baseline Projections to 2015,Baseline Report OCE-2006-1, Office of the ChiefEconomist, World Agricultural Outlook Board, U.S.Department of Agriculture, February 2006.

17 Processed HVPs include meats; canned, dried, andfrozen fruits and vegetables; processed grain products;dairy products; essential oils; juice; and wine. Raw HVPsinclude fresh fruits and vegetables, live animals, nuts, andnursery products. Semiprocessed HVPs include feeds,hides, fats, fibers, and oilseed products.

35

Notes

18 James McDonald, Robert Hoppe, and David Banker,“Growing Farm Size and the Distribution ofCommodity Program Payments,” Amber Waves,Economic Research Service, U.S. Department ofAgriculture, February 2005.

19 Bulk commodity exports include wheat, rice, feedgrains, soybeans, cotton, and tobacco. High-value prod-uct (HVP) exports are calculated as total exports less thebulk commodities. HVPs include semi-processed andprocessed grains and oilseeds, animal products, horticul-tural products, and sugar and tropical products.

20 Jerry Nagel and Eliot Glassheim, “Private SectorProtocols: Threats and Opportunities for AmericanFarmers,” Great Northern Plains, Inc., 2005.

21 Carolyn Dimitri and Catherine Greene, “RecentGrowth Patterns in the U.S. Organic Foods Market,”Agriculture Information Bulletin No. 777, EconomicResearch Service U.S. Department of Agriculture, 2002.

22 Lester Brown, www.theglobalist.com, February 1, 2006.

23 Alexander E. Farrell, Richard J. Plevin, Brian T.Turner, Andrew D. Jones, Michael O’Hare, and DanielM. Kammen, “Ethanol Can Contribute to Energy andEnvironmental Goals,” Science, January 27, 2006.

24 “Biomass as Feedstock for a Bioenergy andBioproducts Industry: The Technical Feasibility of aBillion-ton Annual Supply,” Joint Study by the U.S.Department of Energy and the U.S. Department ofAgriculture, 2005.

25 William R. Morrow, W. Michael Griffin, and H. ScottMatthews, “Modeling Switchgrass Derived CellulosicEthanol Distribution in the United States,” EnvironmentalScience & Technology, May 1, 2006.

26 Renewable Fuels Association, From Niche to Nation:Ethanol Industry Outlook 2006.

27 Won Koo, Richard Taylor, Jeremy Mattson, and JoseAndino, “Ethanol’s Impact on the U.S. Corn Industry,”Center for Agricultural Policy and Trade Studies, NorthDakota State University, 2006.

28 “25 x’ 25 Agriculture’s Role in Ensuring U.S. EnergyIndependence,” AgEnergy Working Group, with sup-port from the Energy Future Coalition.

29 “States Show Sharp Contrasts in Income, EconomicFortunes,” USA Today, May 4, 2006.

30 Leslie Whitener, “Policy Options for a ChangingRural America,” Amber Waves, Economic ResearchService, U.S. Department of Agriculture, April 2005.

31 David Lenze, “Local Area Personal Income for2001–2003,” Survey of Current Business, U.S. Bureau ofEconomic Analysis, May 2005.

32 Sean Moore, “Regional Asset Indicators: Tapping theSkills Surplus in Rural America,” Main Street Economist,February 2005.

33 Douglas Clement, “Tribal Trends: While EconomicConditions Have Improved for American Indians Livingon Reservations, Poverty Remains Prevalent, and TribesFace Deep Challenges in Their Efforts to Develop,”Federal Reserve Bank of Minneapolis, March 2006.

34 Moore, “Regional Asset Indicators.”

35 Based on an analysis using data from Census ofEmployment and Wages, U.S. Bureau of LaborStatistics.

36 Patrick O’Driscoll, “Sioux Falls Powers SouthDakota’s Growth,” USA Today, March 12, 2001; SherruCruz, “Twin Cities Lost Cost Edge as Location for TechFirms,” Minneapolis Star Tribune, January 19, 2001;Candace Stuart, “Making Strides: Forget California,”Small Times, March 2005.

36

Notes

37 Ellen McCarthy, “Mining Coal County for TechWorkers,” Washington Post, January 2, 2006; ScottThurm, “Toll of Tech Bust in California Has BeenSevere, Survey Shows,” Wall Street Journal,October 8, 2004.

38 M. Leanne Lachman, “The New Exports: OfficeJobs,” Paul Millstein Center for Real Estate, UrbanLand Institute, Columbia Business School, n.d.

39 Erin White, “A Cheaper Alternative to Outsourcing,”Wall Street Journal, April 10, 2006; “KempthoneCelebrates the Opening of Dell Computer’s TechSupport Center,” press release, February 21, 2002.

40 “Outsourcing to Arkansas,” CNET News.com,November 11, 2004.

41 “When Staying Put Trumps Off-shoring,” CNETNew.com, December 7, 2004; Mike McPhate, “IndianCall Center Workers Suffer Abuse,” San FranciscoChronicle, November 17, 2005; Adam Geller, “Offshoreto a Small Town,” Associated Press, June 21, 2005; RyanChittum, “Call Centers Phone Home,” Wall StreetJournal, June 9, 2004.

42 Jerry Jasinowksi, “In Search of Skilled Employees forAmerica’s Future,” Center for Workforce Success,National Association of Manufacturers, May 24, 2005.

43 Joel Popkin and Kathryn Kobe, “U.S. Manufactur-ing Innovation at Risk,” Council of ManufacturingAssociations and The Manufacturing Institute, February 2006.

44 Cornelia Butler Flora, “Immigrants as Assets,” RuralDevelopment News, North Central Regional Center forRural Development, vol. 28, no. 3, 2006.

45 Philip Cooke, and Kevin Morgan, The AssociationalEconomy: Firms, Regions and Innovations (Oxford: OxfordUniversity Press, 2000).


46 National Science Board, Science and EngineeringIndicators 2006 (Arlington, VA: National ScienceFoundation, 2006).

47 Karl Stauber, “Why Invest in Rural America—andHow? A Critical Public Policy Question for the 21stCentury,” Exploring Policy Options for a New RuralAmerica, Center for the Study of Rural America, FederalReserve Bank of Kansas City, 2001; Delore Zimmerman,“Rural-Urban Trade Routes Are a Key to EconomicDevelopment,” New England Developments: PolicyIssues Shaping the Regional Economy, NortheastUtilities System, 2003.

48 Jon Newkirk and Ken Casavant, “DeterminingInfrastructure Needs for Rural Mobility: Functions andBenefits of Rural Airports in Washington,” paper pre-pared for the Aviation Division, Washington StateDepartment of Transportation, 2002.

49 Alexander E. Farrell et al., “Ethanol Can Contributeto Energy and Environmental Goals.”

50 “Regional Asset Indicators: Infrastructure,” Center forthe Study of Rural America, Federal Reserve Bank ofKansas City, May 2006.

51 Emily Saarman, “International Investment Could EaseGlobal Infrastructure Woes, Researchers Say,” StanfordReport, June 14, 2006.

52 McArdle, “Outward Bound,” 23.

53 James H. Snider, “The Information Superhighway asEnvironmental Menace,” The Futurist, March/April 2005.

54 “US Domesticated Land: 1950–2000 Urban andAgricultural,” Demographia.com.

55 Frederick Jackson Turner, The Significance of the Frontierin AmericanHistory (New York Frederick Ungar, 1963), 57.

37

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