Frank Giarratani is a professor of economics and the director of the Center for Industry Studies at the University of Pittsburgh–a group comprised of a variety of researchers focused on acquiring “deep knowledge” of a particular industry by engaging directly with people and firms. For much of his career, Giarratani has studied the steel industry–not only through academic study but also by visiting steel plants and institutions to gain first-hand knowledge of the industry. Having lived and worked as an economist in Pittsburgh since 1979, he is also something of an expert on the regional economy. So we took some time to ask him about how Pittsburgh is adapting to new economic realities.
Keystone Edge: In general, it seems Pittsburgh is faring better than other cities its size in terms of adapting to new conditions and changing industries. Is that accurate, and if so, what’s the key to Pittsburgh’s success?
Frank Giarratani: There’s quite a lot of truth to the general idea that Pittsburgh is doing relatively well at the moment, and that it’s doing relatively well because its economic base has been transformed since the closure of the steel mills. What really happened was that after the mills closed, Pittsburgh’s population continued to decline… Although the economy has grown in terms of the value of the goods and services being produced, and employment has grown for most of that period, it’s been growing much, much slower than other metropolitan regions in the United States. So, in many respects, people weren’t surprised at that. People said, you know, Pittsburgh was an industrial city, it lost its manufacturing base, of course it’s going to be growing slowly. But what was happening was that in fact it was growing slowly, but the underlying basic characteristics of the economy were also evolving. We didn’t have the housing boom that everybody else had, for example, so there was no reason for us to experience the housing bust. But while we were on that steady path, several sectors of the economy were doing quite well. In particular, biomedical research and healthcare. Pittsburgh became a national center of some prominence in that area. Also, universities here have been a very, very important presence and economic engine in the region. There’s also the high tech side of it that has a substantial presence, too. So it has in fact moved away from manufacturing, and now a very small percentage of the local economy is based on manufacturing. But having said that, steel itself has had a very important legacy in the modern Pittsburgh economy.
KE: How so? What is big steel’s legacy to the region?
FG: If a region has a steel industry, one might think of that industry as having several characteristics. One of them is the plants that actually make the steel–the people who are processing iron ore. But the other thing you would expect it to have are firms that service the steel industry. Some are providing equipment, some are offering services at the mills, providing steel engineering services, creating new process controls, et cetera. So all of these firms are sending raw materials, equipment and services to the steel industry. Now, those firms are not in the steel industry; they are business service providers or engineering firms or in the scrap metal industry–but not steel. And what one might expect is that when the region loses the steel-making plants, it would also lose all of those service providers. And the really unusual thing about Pittsburgh is that it lost almost all of the steel manufacturing, but it remains the national center for firms that service the steel industry. That’s a very, very important finding because what it means is that a region can lose its major manufacturing base but retain the related service base. And that happened in Pittsburgh, and it was a significant source of stability for the region in the face of the loss of its manufacturing.
KE: And when you realized this phenomenon, was it a surprise? This is not an intuitive thing, is it?
FG: Oh, absolutely it was not intuitive. It was, and still is, a surprise to everybody in Pittsburgh except the people who are involved in the steel industry. Public policy officials were unaware of it; the economic development community was unaware of it. The people who were aware of it were the firms themselves. And it was not an easy thing to discover. Because you can’t go to the federal statistics–there’s no category that says “suppliers to the steel industry.” The way that I uncovered this was that I was doing some research concerning plant locations in steel. Turns out that ten new steel mills were created in the United States in the 1990s and early 2000s, and I went to visit all of those mills to find out more about them. And when I would go to the mills the people I would speak to would say, ‘by the way, when we built this plant last year or two years ago, the following firm from Pittsburgh helped us out with this problem or that problem.’ And after awhile I said, my gosh what’s going on here? Pittsburgh is exporting–in a regional sense, exporting from the region to other regions in the United States–engineering services. So I went back to try to find out how important that was. Was it just a one-off thing I was hearing about or was it systematic? Turns out, not only was it systematic but when you do identify all of these service providers in Pittsburgh, almost a third of them say that their primary market is global, not regional or national. So it was a very important finding that goes to this core issue of what makes a region resilient in the face of economic adversity.
KE: So in a sense, the Pittsburgh region now has a commodity that it exports in the form of expertise in the steel industry…
FG: It crosses a broad spectrum. Some of these people are, in fact, exporting commodities–like scrap metal. In fact, let me use the scrap metal example to show how complex this is. If we were starting our conversation with a clean slate and I said, ‘I want to talk about the scrap metal industry.’ I wouldn’t be at all surprised if what came to mind for you was a junkyard; someone collecting old junk cars and putting them in a heap and this is the industry. Well, it’s part of the industry. But really, what modern scrap brokers and dealers do is they solve incredibly complex logistics problems. They’ve got to collect up junk cars and lots of other forms of scrap metal from a very wide area, bring them together in one or several places, sort the different kinds of scrap according to the metallurgical properties–do they have a lot of copper in them or not? What’s the size and shape of them?–and then they’ve got to take all those assorted piles and deliver them to many different steel mills over a very large region in order to get exactly the right kind of scrap metal to the right steel mill for the particular kind of steel produced by that mill. That’s complex stuff. Twenty years ago, scrap producers in Pittsburgh and the rest of the country thought of themselves as junk dealers. Now, they think of themselves as service providers–providing the logistics as well as the commodity. And so, yeah, the region exports commodities–scrap–but it also exports mill services in the form of transportation and other services that are required to get that scrap to the right places at the right time.
KE: So what does all this say about what the industries of the future are for the Pittsburgh region?
FG: Well, I think the industries of the future include, in some small way, relative to the other things, are those kinds of steel-related phenomena. But Pittsburgh’s huge presence now is in things like biomedical research and medical services, educational services, and many other engineering-based industries. You know, Westinghouse had a huge legacy here just like steel had a huge legacy here. So going forward, I think Pittsburgh is reasonably well positioned to come out of the nation’s economic recovery in a relatively strong position because it’s major restructuring is behind it.