Manufacturing remains the key component of the upstate economy, and state economic policies must continue to reflect the priorities and realities of manufacturing, Governor Pataki's chief economist told The Business Council this week.

Addressing The Council's Government Affairs Council (GAC) March 20, Stephen Kagann said it is wrong to assume that some decline in manufacturers' job share upstate means that manufacturing is losing importance upstate.

"The percentage of jobs that are actual manufacturers' jobs obscures the ongoing importance of manufacturing to the upstate economy," Kagann said. Upstate manufacturers' jobs have declined in recent years, which is the result of productivity gains and the contracting out of services, both of which have been going on for decades, both upstate and nationwide, he added.

But to measure the importance of manufacturing, economists and policymakers must consider not only manufacturers' jobs themselves, but also jobs created by their suppliers, distributors, and other companies that depend directly on manufacturers, as well as the spending of employees of all of these companies in the local consumer economy, Kagann said.

Considered this way, manufacturing still accounts for about half of the upstate economy, including about two-thirds of the economy of Rochester and about 53 percent of the economy in Buffalo, he added.

Kagann flatly rejected arguments by some public figures that reductions in direct manufacturing jobs mean that manufacturing industries are part of New York's economic past.

"Manufacturing still has a huge impact on an economy," he said. "Its ups and downs will lift or drag an economy more than any other sector. This is because manufacturing is large to begin with, and because the multiplier effects of those manufacturing dollars is large."

"Manufacturing still matters. It matters a lot, and it needs to be treated well," he added.

Manufacturing began to decline nationally in 1989-90 as the nation's economy began to weaken; in New York State, the decline became a free-fall. New York's harder fall was mostly due to unwise taxes created and/or raised in the 1980s, especially energy taxes and the state's alternative minimum tax, which reduces the benefit of many of New York's job-creation incentives, Kagann said.

"Manufacturing is the most susceptible of all industries to differences in costs, especially taxes," he said.

The downstate, mostly commercial economy began turning around in 1996, and the upstate economy began recovering in 1997, he said. That the upstate recovered more slowly should be no surprise, he added. That's to be expected of a manufacturing economy, largely because capital investment that increases during recovery will produce benefits faster in a commercial economy than in a manufacturing one.

"Industrial investment is larger and more complex and tends to take longer to produce expansion and other benefits," Kagann said. "A manufacturing base is harder to rebuild."

Most upstate regions are now growing at or above national rates and above rates registered by the other American industrial states of the Northeast and Midwest, he said.

The recovery has been driven largely by New York's historic tax cuts since the mid 1990s, Kagann said. New York's taxes are now lower, by $13.6 billion a year, than what they would be if tax rates in effect in 1994 were still in effect today, he said, and 27 percent of the dollar-value of all states' tax cuts enacted since then are in New York State.

The alternative minimum tax has been reduced from its high of 5 percent to a current rate of 2.5 percent, and Governor Pataki this year has proposed eliminating it, which is a long-time Business Council priority.

These tax cuts, and continuing efforts to bolster New York's economy, will serve New York well of the nation undergoes a significant economic slowdown, Kagann said. "If the national economy weakens, our job growth will be less robust, but we should continue to outperform the nation. This is a dramatic change from the early 1990 when national weakness translated into a New York collapse."

He also said that the broad tax cut advocated by President George W. Bush would boost the New York economy even more than most other states'.