The Bluegrass and Beyond

At the Kentucky Long-Term Policy Research Center’s conference last month, people talked about how much more economic progress this state could make if cities and their surrounding counties worked together.

Jim Host thinks they’re right — but that they’re thinking too small. That’s no surprise; few Kentuckians think as big as Host.

The Ashland native turned college sports marketing into a business empire and headed the Commerce Cabinet and state parks system. Host, 71, was the first chairman of the Alltech FEI 2010 World Equestrian Games before stepping down to focus on building a new sports arena in downtown Louisville.

Host is a longtime Lexington resident who spends much of his time in Louisville. He said his experience has convinced him Kentucky will never achieve its full potential until its two biggest cities get beyond their rivalries and develop a close economic partnership with each other and the counties between them.

“Kentucky’s (economic) capital is between Lexington and Louisville,” Host said. “The limited resources of this state can’t afford for there not to be cooperation.”

America’s economy is experiencing fundamental change, with such longtime engines as California and Florida losing their luster. Host thinks that could be an opportunity for Kentucky.

Kentucky’s central location makes it ideal for companies such as Amazon.com, which has huge warehouses in Lexington and Campbellsville, and United Parcel Service, whose air freight hub is in Louisville.

Other industries — including Toyota, at Georgetown — have grown up between the two largest cities. Harley Davidson is considering Shelby County as the site for a 1,000-employee plant.

Many people whose jobs give them the flexibility to live anywhere have come to or stayed in Kentucky because it has a mix of city amenities, picturesque small towns and rural areas with natural beauty and recreation opportunities.

“How many people do you know who could afford to live anywhere, but they choose to live here?” Host asked.

States such as North Carolina, California and Minnesota have spurred economic development by forging close ties among their cities and universities.

Kentucky is catching on.

Commerce Lexington and Greater Louisville Inc. will make their first joint city visit in May, to Pittsburgh. Officials have said they see the trip as a step toward closer economic cooperation.

The 2010 World Equestrian Games are a great opportunity for Lexington to work with Louisville to showcase the larger region’s assets and potential. “Many top CEOs will come to the Games, and we won’t even know they’re here,” Host said.

Universities have huge potential to spur economic development, and Kentucky can no longer afford for the universities of Kentucky and Louisville to not be joined at the hip, Host said.

“There’s a lot more going on than people realize,” University of Kentucky President Lee T. Todd Jr. said when asked about that. A UK spokesman said there are 54 joint research projects, worth $24.4 million, between UK and U of L faculty.

But Host thinks there could be much more coordination and sharing of resources. He noted the two universities’ boards of trustees have never met together — at least not in anyone’s memory.

Part of the challenge, Host said, will be for Lexington and Louisville to convince the rest of the state that what’s good for them is good for everyone. That’s because infrastructure investment and economic development in the cities benefits the entire state through commuter jobs, spinoff industries and shared tax revenues.

“This is not to be in competition with the rest of the state, but to provide revenue for the rest of the state,” Host said.

Fayette and Jefferson counties together accounted for 22.5 percent of state real and tangible personal property tax receipts during fiscal 2009, according to the Revenue Cabinet, which doesn’t track sales tax collections by county.

The cultural and psychological distance between Lexington and Louisville has always been much greater than the 75 miles that separate them. A lot of that comes down to Wildcat blue and Cardinal red.

“It’s part of what we grew up with here — we don’t mess with U of L because they’re our arch-enemy,” said Host, a huge sports fan who once played baseball for UK and admits to bleeding blue. “That can be the case in athletics, but it can’t be the case any longer in academics.”

The bottom line is that Lexington and Louisville must become partners instead of rivals, and the rest of Kentucky must realize that as the economies of those cities go, so goes the rest of the state.

“Sometimes a bad economy causes things to be thought through better,” Host said. “Kentucky is a state with limited resources; we have to focus on how we can make one plus one equal four.”

LONDON — Rex McDonald was born and raised in Corbin, went to Eastern Kentucky University and the University of Tennessee, worked for the U.S. State Department and lived for a time in the former Soviet Union.

But when it was time to settle down, McDonald wanted to come home. He started a company that provided a comfortable living for his family. But Bob Wilson, an entrepreneurship coach for Kentucky Highlands Investment Corp., thought the company could be more than it was.

McDonald and his partner, Hank Gevedon, moved their operation into Kentucky Highlands’ business incubator, took business-development classes and got hands-on coaching from Wilson and others. Kentucky Highlands also provided equity and debt financing to the company, PD3 Inc., which helps inventors bring their products to market.

Rex McDonald of PD3 Inc. shows U.S. Rep. Hal Rogers, R-Somerset, this company's emergency underground mine rescue chamber. At right is his entrepreneur coach, Bob Wilson. Photo by Tom Eblen

Now, 14 months later, PD3 has its own plant in nearby Rockcastle County. It has grown from six employees to 26. Thanks in part to a new product the company has designed and will soon manufacture — a portable emergency shelter for underground miners — McDonald expects to hire an additional 29 workers early next year.

PD3 is performing at a level McDonald never thought possible. It pays employees better-than-average wages and provides insurance benefits and a retirement plan. “We’ve built the foundation for a sustainable company that will survive beyond the founders,” he said.

PD3 is the latest success story to come out of Kentucky Highlands, a non-profit agency set up in 1968 to create badly needed jobs in southern and Eastern Kentucky by training and investing in local entrepreneurs. Over the past 40 years, Kentucky Highlands says it has created more than 10,000 jobs in its 22-county service area.

Business incubation is one of Kentucky Highlands’ many ventures, and the agency announced plans last week to expand that role by building a 9,600-square-foot center next to its London headquarters to mentor start-up companies.

Kentucky Highlands has created for-profit subsidiaries to supplement the private and government grants it receives. It has started two venture capital funds, a tax-credit program, and an agriculture loan fund. It has formed partnerships with a variety of schools and other organizations. It also has worked with local companies to build affordable housing in the region.

“We’re a catalyst,” said Jerry Rickett, a Corbin native who has been president of Kentucky Highlands since 1989. “We’re trying to find ways to facilitate the creation and retention of jobs.”

Economic development has always been a challenge in Appalachia. The region has a history of failed efforts and squandered resources, from empty industrial parks to millions of dollars in tax breaks and incentives given to companies that came to the region for a few years, then left when cheaper labor could be found elsewhere.

Kentucky Highlands has succeeded by doing things differently and by playing to its region’s strengths. The agency invests relatively small amounts of money in local people and businesses that can gradually create sustainable jobs.

Rickett points to census data that show there are 40,000 “micro-enterprises” in the 22-county region, which has a population of about 550,000. Nearly 87 percent of those enterprises have no employees except the owner.

“If over the next few years we could get 10 percent of them to hire only one employee — through training or micro-lending — that would be 4,000 additional jobs,” Rickett said. “And if one of those companies goes out of business, a community loses a job or two, not 200 jobs.”

Kentucky Highlands focuses on home-grown companies that can bring new revenue into the region. One example, Rickett said, is an electrical engineer in Harlan who likes to fly airplanes. His small business installs runway lights at airports around the country.

“His pickup truck is a twin-engine aircraft, and each week he loads up a bunch of Harlan County electricians and they go wherever it is in the United States they’re putting in runway lights,” Rickett said. “Then, on Friday night, they come back to Harlan. It’s not a big employer; maybe 12 people. But that money comes back to Harlan.”

For generations, Appalachia’s best and brightest have often had to leave to find work and opportunity. A theme of Harriette Arnow’s classic novel The Dollmaker was the anguish people felt when they had to leave the mountains after World War II to find work in Northern factories.

Thanks to digital technology and high-speed communication, a lot of work can now come to the workers, wherever they are. Rickett knows a mechanical engineer who designs heating and cooling systems for big retail developments. He lives in Eastern Kentucky, but does work all over the country via the Internet.

“He’s getting to raise his children in a rural community that has the values he wants his family to have,” he said.

“The best thing we have to market here is the creativity of our people,” Rickett said. “Appalachian people have always been resourceful.”

It’s a strength Kentucky could exploit in the 21st-century economy, along with a low cost of living, improving schools and strong vocational training programs.

“If we could just add a little bit of entrepreneurship to that curriculum,” Rickett said. “If you’re going to be an electrician, why not start your own business and hire the three best guys in your class to work for you?”

But success will require some culture change. Generations of Appalachians have grown up with a mind-set that work means working for someone else. “There is a lot of latent entrepreneurial capacity in Eastern Kentucky, but there are not many role models,” Rickett said. “We need to get kids in grade school thinking about being an employer rather than an employee.”

Jeffrey Manber is a New York entrepreneur who works around the world helping develop commercial applications for space and space travel.

In his remarks to the Idea Kentucky conference today, he focused on the need to create an innovation economy rather than a commodity economy.  It’s a concept that resonates in Kentucky, which has long had commodities at its economic core: Coal, timber, tobacco, etc.

Manber said Iceland presents an interesting example. In the early 1980s, it had high unemployment and an old-world economy based on commodity — fishing. Iceland’s leaders decided then to focus on creating an economy for the modern age, so they invested heavily in education, technology and creativity. And they weren’t afraid to take risks.

Now Iceland, with a population a little smaller than metro Lexington’s, has full employment, an exploding consumer market, a hip culture, growing eco-tourism and geothermal energy industries and big technology companies.

“We’re going to have to train our young people to focus on the new economy,” Manber said.

Manber said the United States has a key strength: The freedom of individual decision-making. People succeed in this country based on their ideas and their work ethic, rather than their pedigree or social standing. “They don’t do that in most places in the world,” he said. “We have this flexibility that no one else has.”

However, a key weakness is that Americans are reluctant to travel elsewhere in the world and learn from others. “We don’t mind people coming here, but we don’t think we can go learn from others,” he said.

Manber said the biggest immigration problem facing the United States isn’t what most people think it is — illegal workers coming to take low-wage jobs.  The real problem is that it’s difficult for talented people from other countries to come work legally for high-tech, top-performing American countries.

“The free flow of talent is as important as the free flow of currency has been for the past 20 years,” he said.

Manber said the United States also must get used to the notion that it must be more creative and innovative, because we’re no longer the world’s only superpower.  To keep its economic edge, the United States and Kentucky must invest more in education and innovation.

He noted that India’s focus on education is not only transforming that country, but India is sending talented, well-educated professionals throughout the world. He cited figures that 38 percent of U.S. physicians and 12 percent of U.S. scientists are from India, as are the CEOs of several of this nation’s top companies.

Before Gov. Steve Beshear spoke at the first Idea Kentucky conference today in Louisville, the stage for discussion was set by organizer Kris Kimel of the Kentucky Science & Technology Corp. and Michael Childress of the Kentucky Long Term Policy Research Center.

“I think there’s a palpable sense in Kentucky that we need a different path for this state,” said Kimel, who also is the force behind the international Idea Festival that will follow this conference, Thursday through Friday in downtown Louisville.

“It’s not about the sky falling,” he said. “It’s about finding ways to change the trajectory for the Commonwealth in a lot of different issues. We’re not going anywhere unless we do some things dramatically different. In today’s world, it’s about breakthrough innovation.”

Childress outlined four areas he hoped the afternoon discussions would focus on: Economy, education, healthcare and energy. “We know it’s possible to do better” in all of those areas, he said.

He showed statistics that told how Kentucky’s per-capita income was 65 percent of the national average in 1950. That had grown to 81 percent by 2006. Funny thing is, we were still 46th among the states. In other words, we were not making progress compared to the rest of the country.

Childress noted that because Kentucky’s economy is so tied to manufacturing, the state uses twice as much energy as the national average in overall economic production. And only 3 percent of the energy used in Kentucky is from renewable sources. That could be a liability as energy prices increase and environmental concerns grow more acute.

Kimel noted that incremental improvement is no longer good enough for Kentucky, if, indeed, it ever was. At the current rate of income growth, it would take 154 years for Kentucky to reach the national average, he said.

Technology now allows work to move to people, rather than forcing people to move to where work is. That could be a big advantage to Kentucky if the state can create a more innovative culture and invest more in developing and attracting talented, creative people, Kimel said.

“In today’s world, it’s all about people and talent and creative capacity,” Kimel said. “There is a perception of this state that while we have a lot of things gong for us, we’re not a place of innovation.”