Thursday, July 31st, 2008
The Indianapolis Star ran an interesting story Sunday on the explosion in for profit hospital facilities [dead link] owned by the big local hospital chains. This raises questions in my mind. There may have been some research on the topic, so if anyone has pointers, I’d appreciate it.
Regulation of hospital facilities varies by state. Some states, such as Kentucky, require a “certificate of public necessity” from the state before new or expanded hospitals can be built. This sort of rations facilities like cab medallions. Others, such as Indiana, seem to take a laissez-faire approach, letting hospitals build where ever they want. The question is: which of these is better from a consumer standpoint? And beyond that, does one model or another help a region build a life science business.
Typically I would just reflexively say that more free markets are generally better for consumers. But in the case of medical care, with its exceptionally complex collection of players including patients, doctors, hospitals and other facilities, insurance companies, and employers, figuring out who the customer actually is and how he is affected can be difficult. It might be obvious that the patient is the customer, but if the patient isn’t footing the bill, he certainly doesn’t have the incentives of a normal consumer.
Then there is the question I raised a while back on whether the accessibility of health care in a community is a sign of good health or poor health. It could mean people have access to better care. It could mean there are more sick and unhealthy people who need more facilities.
The one that intrigues me is the matter of the local life sciences industry. Hospitals, particularly academically affiliated ones, are often the linchpin of a local life sciences effort. Does a lightly regulated market make it easier the research/business community or harder? I don’t have the leisure to construct a study on this, and I’m sure it would be complex to model, but this might be something to look into.
I can see a couple of hypotheses to test. One is that more competition between rival hospitals leads to more rapid innovation and deployment of newer technologies first as each tries to outdo the other. The other hypothesis is that new facilities in the burbs let some hospitals skim off the highly profitable work that funds the research and specialized care at other facilities.
I was thinking about one example in particular. St. Vincent’s Hospital recently opened their own children’s hospital facility (Peyton Manning Children’s Hospital) to compete with Riley Hospital. What the impact on Riley Hospital of this? I guess time will tell.
Interestingly, the local hospitals in Indianapolis don’t appear to score that highly on prominent surveys such as the US News best hospitals report. Riley Hospital doesn’t make the top 30 chilren’s hospitals. By contrast, four children’s hospitals in Ohio are on the list, led by Cincinnati Children’s Hospital at #3 in the country. The other Clarian hospitals scored ok in some specialties, but nothing to write home about. They didn’t crack the top 10 on anything, peaking at #13 for gastrointestinal disorders. No other local hospitals are even rated, which, to be fair, isn’t surprising since you basically have to be affiliated with a medical school to make the list.
How does hospital regulation schemes help or hurt health care and/or life sciences efforts? Discussion welcome.
Tuesday, July 29th, 2008
Someone over at SSC took a four day trip to Cleveland and posted a pretty great series of dozens of photos about that city. You can see them here:
If you have time to peruse these, you’ll see another city with a sparkling urban history and built environment. But as with Cincinnati, these haven’t translated into a positive demographic or economic climate. Included are pictures of Cleveland’s transit system, which includes high quality rapid rail transit lines. If transit will revitalize our decaying cities, how does one explain away the Cleveland example?
Here is an interesting study. Called the Measure of America, it applies UN standards for human development to US states and congressional districts. I haven’t digested it in full detail, but here are some money maps of the nation at a glance by congressional district. As you’ll see, it is typically big city suburban districts that are doing ok in the Midwest. The rest of the place is suffering.
The mayor of Louisville was in Tampa, Florida last week trying to lure expats back home to Kentucky. I’m sure the free Maker’s helped attract them to that meeting at least. The city even has its own MySpace page. The concept isn’t a bad one, but I think overly focusing on trying to lure former residents back misses the broader opportunity for engaging them as an alumni network.
Houston is the cities urbanites love to hate. The NYT attacks them for not recycling. Ed Glaeser of Harvard defends them versus New York. Someone else takes offense at that notion. I’ve written about Houston before. That city, along with other sun belt boomtowns like Atlanta and Dallas, have to somehow be explained away by the sophisticates who say that the ultimate successful city has to look something like San Francisco.
USA Today writes about a new book called Traffic, by a guy named Tom Vanderbilt. It is all about driving in America today, and appears to have all sorts of interesting facts, including a discussion of roundabouts. It may be worth checking out.
Indianapolis has its own streetcar web page now. Welcome to the club. If the experience of other cities is any guide, it is probably $100-150 million for a downtown circulator line. I wonder how much of this would overlap the Cultural Trail? Oh, and Columbus just approved a streetcar study.
Kansas City is planning to put light rail on the ballot in November.
A Republican state senator in Indiana advocates privatizing the lottery.
Jam Productions buys the historic but decrepit Uptown Theater in Chicago for $3.23 million. I took a tour of this some years back when it was open for a rare visit from the public. It’s a magnificent building, but has suffered a lot of damage. Incredible as it might seem, almost all of the interior damage was caused during a single winter when the heat wasn’t turned on and the pipes burst – that was within the last 15 years.
Thanks to Jeff over at Daytonology for pointing out this NYT Magazine article about desegregation by class instead of race in the wake of recent Supreme Court rulings. Louisville, Kentucky is a big case study.
Apparently the Swedes are coming – to Columbus, Ohio.
An article about I-469 in Fort Wayne, Indiana. “After 20 years, Interstate 469 remains a lightly traveled loop”
Sunday, July 27th, 2008
Paul Graham is a noted technologist, venture capitalist, and writer. He may be best known for his essay “A Plan for Spam” which popularized Bayesian spam filtering.
His web site contains a collection of his essays, many of which are well worth reading, particularly if you are interested in starting a software business. One recent entry called “Cities and Ambition” caught my attention. Here is the opening:
“Great cities attract ambitious people. You can sense it when you walk around one. In a hundred subtle ways, the city sends you a message: you could do more; you should try harder. The surprising thing is how different these messages can be.”
Continuing, “How much does it matter what message a city sends? Empirically, the answer seems to be: a lot. You might think that if you had enough strength of mind to do great things, you’d be able to transcend your environment. Where you live should make at most a couple percent difference. But if you look at the historical evidence, it seems to matter more than that. Most people who did great things were clumped together in a few places where that sort of thing was done at the time.”
The example he gives is Florence during the Renaissance. Presumably there were lots of talented painters in other cities, but it seems that all the best and most famous work was done in Florence. In the modern day, Graham believes in New York the message you get is to be rich, in Cambridge, MA to be smart, in Paris to be stylish, etc. The message a city sends is incredibly powerful and shapes so much of how people behave there. Continuing:
“A city speaks to you mostly by accident—in things you see through windows, in conversations you overhear. It’s not something you have to seek out, but something you can’t turn off….No matter how determined you are, it’s hard not to be influenced by the people around you. It’s not so much that you do whatever a city expects of you, but that you get discouraged when no one around you cares about the same things you do.”
Perhaps this goes to my idea of the brand promise of a city. What is it you are all about? Why would anyone care to live there? Why would anyone put a stake in the ground there and say, “This is where I’ll make my fortune“?
In a 21st century economy where it seems that there are increasing returns to talent, and where there appears to be a great bifurcation of people, cities, regions, etc. into the haves and have-nots, ensuring a supply to smart, talented, ambitious people is fundamental to civic success. As I’ve noted before, those types of people want to live with others who share their own values, and indeed in a city that shares them. They want to live in a place where the civic aspiration matches their personal aspirations. A city where good enough is good enough is going to attract residents who feel the same way. And in an ever more competitive, globalized world, good enough just isn’t going to cut it anymore. It certainly isn’t going to be what it takes to build competitive entries in businesses like high technology or life sciences, where the quality of talent is one of the absolute most critical success factors.
But as Graham notes, cities can have different ambitions. Being a great city doesn’t mean being like New York or Cambridge. It means finding your own message, your own ambition. Alas, back to Graham, “Not all cities send a message. Only those that are centers for some type of ambition do.” Right. And not all cities are going to prosper in the 21st century either.
There are a lot of other thought provoking essays on Graham’s site. You could easily kill a few hours there. I’ll leave most of them for your own perusal, or perhaps a future blog posting, but will note one other essay here, one called “Why Move to a Startup Hub” This is a pretty harsh and direct essay that basically says that if you want to start a software company, you’d best get yourself to Silicon Valley.
“You can easily reduce the opposing argument ad what most people would agree was absurdum. Few would be willing to claim that it doesn’t matter at all where a startup is—that a startup operating out of a small agricultural town wouldn’t benefit from moving to a startup hub. Most people could see how it might be helpful to be in a place where there was infrastructure for startups, accumulated knowledge about how to make them work, and other people trying to do it. And yet whatever argument you use to prove that startups don’t need to move from London to Silicon Valley could equally well be used to prove startups don’t need to move from smaller towns to London. The difference between cities is a matter of degree. And if, as nearly everyone who knows agrees, startups are better off in Silicon Valley than Boston, then they’re better off in Silicon Valley than everywhere else too….I’m not claiming of course that every startup has to go to Silicon Valley to succeed. Just that all other things being equal, the more of a startup hub a place is, the better startups will do there.”
Note that like AnnaLee Saxenian, Graham compares not struggling places to Silicon Valley but top flight, successful cities in their own right such as Boston and London. If those places can’t compete, why would any Midwestern city believe it can? Even Chicago, the new economy success story of the Midwest, has largely failed to penetrate this industry. It has had a few startups and such, but how many top software companies of today can you name that are based in Chicago? I can only name one decently successful startup there: Orbitz, and it isn’t a startup in the traditional sense. I’m sure that there are others, but this is clearly not the Silicon Prairie local officials had hoped for.
When Jack Welch ran GE, he famously would only stay in a business if he could be number one or number two. Similarly with cities, the top handful of industry cluster locations seem to reap a disproportionate share of the rewards. Of course, there are plenty of counter-examples of how large, seemingly unstoppable industry leaders stumbled in the face of more nimble competitors. Microsoft seems to be having a rough spot making the transition to web computing, for example. But this is usually as a result of some fundamental revolution in technology or business models. For the Midwest to find a way to truly have a high technology breakthrough, it needs not just to beat Silicon Valley at its own game, but rather to figure out where the hockey puck is going and leapfrog to the next big thing, getting the jump on the competition.
Obviously this is easier said that done. If I knew the next major disruptive technology out there, I’d be starting a company to go build it right now. Not to brag (ok, I guess I will) but Yours Truly is a world class technologist in Real Life.
Another possible alternative is to find a unique market niche and figure out how to take over that corner of the technology world. Warsaw, Indiana basically did just that with implantable orthopedic devices. They don’t want to own life sciences, just their little piece of it. Of course, this renders a town vulnerable to niche exhaustion. What’s more, it’s again difficult to do consciously. We operate in a free market world where local officials can’t just decide what industries will magically appear. They can only decide where to focus their economic development resources, and try to create the conditions in which targeted industries can thrive. The rest is up to entrepreneurs.
I know I often come across as skeptical of high tech and life sciences. I want to be clear again that I am not opposed to it and think that these industries are so ubiquitious today, that it is simply not possible to ignore them. However, given the roulette wheel nature of these industries, and the huge amount of competition from every other city out there, I don’t believe these industries alone constitute a sufficient target base for a metropolitan economy outside of a handful of places. And any city that plans to attract them must figure out how to address the problem Graham highlights in his essay.
PS: I’m awarding an Urbanophile gold star to the first person to correctly identify the source reference of the title of this post.
Sunday, July 27th, 2008
I didn’t originally intend it as such, but this is the third in a series of postings highlighting good economic development strategies. (The first covered Indianapolis’ amateur sports strategy and the second its motorsports strategy). Today I’ll discuss something I mentioned in passing before, the MusicCrossroads initiative.
MusicCrossroads is an organization whose mission is to advance the quality of life for all through the attraction, support and collaboration of leading performing art entrepreneurs and organizations. It is operated by the Indianapolis Convention and Visitors Association. It was conceived to boost a fledgling local industry group that consisted of the International Violin Competition of Indianapolis, the American Pianists Association, and the Heartland Film Festival. Yes, I know, that last one seems odd to me too. MusicCrossroads has successfully lured several organizations to the city including Music For All (formerly Bands of America) and Drum Corps International. It is also working to lure others to the city. Not only are these organizations re-locating, they are bringing their major events with them. Hence the ICVA’s interest.
There have been several major articles covering MusicCrossroads recently.
- The ICVA’s Matthew Carter has an op-ed in the Indianapolis Star.
- In March, the Indianapolis Business Journal profiled the organization.
- And the July/August 2008 edition of Halftime Magazine has a lengthy, glowing report on MusicCrossroads and Indianapolis as the center for music arts.
When you look at the Midwest, you’ll see Indianapolis as one of the handful of success stories. It is leading all major metros in population growth, actually exceeding the national average by 50%, it is one of only a handful of places with net domestic in-migration, it is creating jobs, it exceeds the national average for college degree attainment, etc. It is tempting to view success or failure as resulting from outside forces or accidents of geography. For example, Indy is the state’s only large city, is the state capital, is centrally located in the state with a one state metro area, etc. All true and all positives of the city.
But while some degree of luck can’t be discounted, the reality is that most successful cities made smart decisions along the way. Indianapolis certainly did. A sleepy state capital in the early 1970’s, it merged city county government and used sports to transform its economy and make it a national success story. There were a lot of other smart decisions and actions along the way too. One very recent one is the creation of MusicCrossoads.
This initiative is still in its early stages, but has all the hallmarks of being a winner for the city. Let’s examine some of the reasons why, and see the strong similarities between this and the amateur sports approach.
- It is strategically positioned to target an under-served market niche. Indy is not trying to dislodge Nashville as the center of the professional music recording business. It isn’t trying to take on New York City as the capital of fine arts in America. Rather, by focusing on non-profit music associations as the core, it is trying to get first mover advantage and capture a white space opportunity. (Just like amateur sports).
- It is targeting an industry that, while it does not employ a huge number of people at high salaries and features largely tax-exempt organizations, does stage many large annual events, the type of events the city would love to have utilizing the newly expanded convention center and Lucas Oil Stadium. For example, Drum Corps International has agreed to host its annual world championships in Lucas Oil Stadium for the next ten years. This of course has the tourism boost – in fact, I personally know people coming into town for the event and plan to show them around, assuming they aren’t in Bloomington the whole time – and lets the city start earning the return on the LOS investment. It is maximizing leverage for the city’s large investment in capital stock around events. (Just like amateur sports).
- Unlike, say, a typical trade show, music events like the DCI world championship are activities that locals might be interested in attending. It is creating a community amenity, not just filling hotel rooms. It also is a culturally related item that raises the quality and quantity of what is on offer locally. This can be key in helping to lure more traditional businesses and “creative class” people who are interested in things like music. (Just like amateur sports).
- It is an area where the city can built a true cluster or, as Warren Buffett would call it, a “wide moat” business. That is, it is something where the city can create something with a lasting, sustainable advantage. Success always attracts competition. Wide moat businesses have a sustainable competitive advantage that enables them to stay ahead of that competition. In this case, potential sources of a wide moat include the facilities and event capabilities of Indianapolis; an emerging cluster of related industries that can lead to a base of skilled labor, idea sharing, resource sharing etc. (though notably spatial co-location alone is not a sufficient condition for cluster formation); and the holistic value added support coming to the organizations through the ICVA, the IU School of Informatics, etc. (Just like amateur sports).
- It is a difficult to offshore business, making it largely immune from competition from low cost foreign competitors, at least in some regards. (Just like segments of amateur sports).
The future of this remains to be seen. Execution is obviously critical. There has already been one stumble in that Lucas Oil Stadium is not going to be ready for the drum corps inaugural event, a big disappointment to all I am sure. And they picked a name whose domain was already registered (musiccrossroads.org is owned by some Christian music group). Plus there will surely be other cities that become aware of this and start to copy it, just as every city now pretty much has some type of sports event program office. If another city attacks hard before Indy gets its business fully established, Indianapolis could lose out. Obviously the MusicCrossroads backers have made the calculated decision to go public with a big marketing campaign about this, judging the marketing value of the exposure worth more than the risk of forfeiting their trade secrets. Time will tell if that was the right gamble.
Again, let’s recap what makes a successful economic development strategy. It is combination of the right strategic positioning with a set of unique capabilities that create sustainable competitive advantage. This of course as to be paired with superior execution. The contrast of the Indianapolis case studies with what I see far too often, namely undifferentiated me-too strategies chasing the hot sector du jour, is amazing.
Places like Silicon Valley with high tech hardware and software, Chicago with financial services, and San Diego with bioscience imply a model where cities strike gold with one industry specific home run. That works in some places, but it can be a disaster as well, as Detroit is finding out. And it can be very hard to dislodge the top players in industries that everyone wants a piece of. Again, it’s not that I think cities should ignore life sciences or high tech. But except for a very few places, I don’t see them as the only places a city should be hanging its hat. Looking to complement that with a portfolio of smaller industries where a city can be the Silicon Valley of that industry, and where the Jack Welch test of being number one or two in an industry is met, creates a more durable, sustainable, balanced economic growth platform.
Tuesday, July 22nd, 2008
This small posting is the first in a series related to the impact of globalization on the Midwestern city. Globalization is here, it is real, and it isn’t going away soon. It affects, or should affect, every consequential decision a city or company makes. It should even affect a lot of the decisions we make as individuals, such as what education or careers to pursue.
It’s hard to know how to react to globalization if you don’t know what it’s doing. If you don’t know what’s going on in the world and what it means, you are at a huge disadvantage. A lot of American media is, as we know, very parochial. So you’ve got to choose your reading material wisely to make sure you are getting what you need to stay abreast of what’s going on. Here are some suggestions I have in that regard.
First, it is essential to have a proper international news source. In my opinion, there are only two choices you have: the Financial Times, which I’ve often touted here, or The Economist. I personally take the FT. It has excellent global news, business, and commentary, as well as targeted but quality arts and culture coverage. Their FT Weekend edition on Saturday is a must.
For magazines, there are many choices, but one that comes to mind is Monocle. This newish title is published by Tyler Brûlé, who also founded Wallpaper magazine and writes a weekly column called The Fast Lane for the FT Weekend that appears on the back page of the Life and Arts section.
Monocle is really a lifestyle magazine focused on travel, culture, fashion, and design, aimed at the transnational elite that globalism has spawned. I recommend it above other similar magazines because it also has good business and political affairs coverage, often profiling cities and locations that are overlooked. Its coverage is truly global in scope. What’s more, understanding what the international hipster elite is up to is important, because their desires form, right or wrong, the benchmark against which “world cities” or “creative class cities” are measured. It should come as no surprise that Richard Florida is working with the title. You don’t have to be megarich to read, though it helps if you actually want to buy anything it profiles, nor do you have to agree with its tone, but the understanding of the benchmark for what the transnational winners of globalization have is invaluable.
This month, July/August 2008, is a particularly good read because it is dedicated to the question of what makes a livable city. Indeed, they pick their 25 most livable cities, get perspectives from mayors around the world, and create their own checklist of must have items. It’s a must read.
One caution, subscribing to this magazine is not recommended because the subscription price is far higher than the newsstand one.
Moving on from periodicals, there are a few books I’d highlight. One is of course Tom Friedman’s The World is Flat. I’ve also mentioned many times before Richard Longworth’s Caught in the Middle, which deals specifically with the affect of globalization on the Midwest. These two tomes should get your started. As I identify them, I will pass along additional must-reads.
As the saying goes, without awareness, there is no choice. Educating ourselves and being aware of what is going on in the world and with the process of globalization is the first step in being able to make intelligent choices about how to react to it.
Monday, July 21st, 2008
Matthew Tully had an interesting column [dead link] in last week’s Indy Star. Following onto reports of the complaints people had filed about the Indiana Toll Road in the wake of its privatization, he traveled in the entire length of it, spending time sampling the facilities and service areas, finding little to nothing wrong. He chalked up the complaints to continuing sour grapes from the lease itself.
If Gov. Mitch Daniels loses his re-election bid this year, you can probably chalk it up to two of his signature initiatives: observing daylight savings time and Major Moves. I’ll leave DST for another day, but I am amazed at the continuing gripes about Major Moves and leasing the Toll Road to “foreigners”. If you ask me, this program was a huge home run for the state of Indiana.
First consider the projects it allows the state to get done. Previously, INDOT had operated on the promise everything to everybody principle. The result was that there were far more projects that had been promised than there were dollars to deliver them. Some projects had been on the books since the 1980’s if not earlier, promised, but with no movement. I think of the East Washington St. widening in Indianapolis, for example. When Daniels took over he blew the whistle on this and went through a prioritization process that was scary in its implications. Now certainly some of this was exaggerated for effect in order to drum up support for Major Moves, but here is what was going to happen in the project version pre-Toll Road lease:
- Zero money for US 31 in Hamilton County, and the plug was going to be pulled on the entire idea of making it a freeway
- Zero money for the I-465 northeast corridor, where traffic literally sits dead stopped every day today
- Zero money to improve I-65 in Boone County
- Zero money to improve I-70 in Hancock County
- No money to improve SR 135 in Johnson County, SR 14 in Allen County, US 41 in Vanderburgh County, etc.
I think you get the picture. Now we’ll see how many of these actually do get built, but at least there seems to be chance of them making it now.
Next, by leasing the Toll Road now, Indiana is getting way more for its money. Inflation in road construction projects is out of control, running in the double digits per year. I noted recently how cost estimates for SR 32 in Hamilton County ballooned from $40 million to $112 million. The head of the Cincinnati transportation planning authority recently complained bitterly that regulatory delays alone were adding inflation cost of $1 billion to plans to replace the Brent Spence Bridge. Hendricks County rues the fact that they didn’t issue bonds to finish the Ronald Reagan Parkway 15 years ago, now that they are staring a $150 million bill in the face.
If all these projects were delayed 10-20 more years into the future, they’d probably double or triple in cost, making the likelihood of ever being able to afford many of them remote. Indiana got something like $3.9 billion on the Toll Road lease. It is probably effectively getting another $2-3 billion worth of project throughput just from avoiding the additional inflation.
Beyond the benefits of beating inflation by pouring concrete more quickly, Indiana also leased the Toll Road at an almost ideal time. In 2006 there was historically low inflation. Today inflation is much higher. A high inflation rate implies a high discount rate, so that the present value of the revenue stream from the tolls was much higher in 2006 than it is today. In plain English, you’re willing to pay more when inflation is low than when it is high. What’s more, one of the key drivers of inflation is gasoline. Gas was half the price two years ago. Higher gas costs depress travel volumes, which reduces the revenue the consortium is getting. Ohio, for example, just saw a systemwide decrease in vehicle miles traveled for the first time ever. And it raises their cost of maintaing the road. You can bet anyone looking to lease a toll road today is getting a less attractive proposition.
For those of you who’ve been reading since the beginning, you may recall how I showed that Gov. Daniels also had Macquarie over a barrel because they had already paid big money to lease the Chicago Skyway and Indiana was in a position to choke off their revenue stream anytime it wanted just by increasing the border crossing toll.
For those who think the state sold off an asset, think again. If you look at the skyrocketing cost of road maintenance, you’ll see that the state really got a private consortium to pay big money to take a liability off the state’s books. Normally if INDOT wants to get somebody else to take a road over, they have to pay big money to find someone willing. For example, they had to pay Carmel $90 million to take over Keystone Ave. In this case, the person taking over the road is actually paying money for the privilege. You can’t beat that.
Now all the exposure is to the concessionaires. They are paying the diesel fuel bills for the maintenance vehicles. They have to pay the high cost of asphalt (principal ingredient: oil) and steel. They are the ones who have to widen a big chunk of the road, fill the potholes, etc. for the next 75 years. They are the ones that installed electronic toll collection, something that, years after EZ Pass was available elsewhere, Indiana still had no concrete plans to deploy. They’ve got an incentive to make the road user-friendly because without users, they aren’t getting paid anything.
So what if “foreigners” paid Indiana $3.9 billion for a 75 year lease? It’s not like they can disassemble it and take it back to Australia with them. What’s more, when their lease is up, Indiana gets it back, along with all the improvements they made. The Toll Road was a breakeven operation at best for the state and there was no prospect of it ever becoming a cash cow. The politics just wouldn’t work. Now it is a huge boon to the state.
And if history is any guide, foreign money is often dumb money. Remember when the Japanese bought Rockefeller Center? People thought the world was coming to an end. But Mitsubishi Estate ended up losing a billion dollars on the deal. The sovereign wealth funds who provided capital injections to Citibank and others recently are sitting on huge paper losses.
People wonder how it is we can run trade deficits year after year. Well, here’s how it so often seems to work. Other countries send us oil, Lexuses, TV’s, toys, etc. And in return, we send them little green pieces of paper. You can’t do much with a little green piece of paper, so they send that back to us and use it to buy things like, let’s see, dot.com stocks, subprime mortgage backed securities, Rockefeller Center, Citibank stock, etc. They might as well have piled all those bills in a heap and burned them. So what if they are taking advantage of the cheap dollar? The way I see it, they’ve got nothing but downside currency risk. Remember when AOL used their overpriced stock to buy Time Warner? I guess we all know how that turned out.
I’m not going to say that Macquarie will end up ruing the day they paid $3.9 billion for a 75 year lease on the Toll Road. They might end up quite happy with the deal. I just want to illustrate that private investments can end up losing money as well as gaining it. Especially with the economic conditions and oil prices being where they are, I’d be much happier to be in Indiana’s shoes than Macquarie’s. And again, it’s not like they can pack the road up and take it with them.
On the whole, when you consider the projects that are getting done, the inflation savings, the offloading of a liability, and the changes in market conditions since the lease, I don’t believe there is any interpretation but that Indiana at a minimum did alright on this deal, and more likely has a huge, huge win on its hands.
Thursday, July 17th, 2008
In follow-up to my recent posting, David Schooling sent me an absolutely astonishing series of Louisville historic transit photos, with permission to reproduce them.
First, a section of elevated rail along the waterfront.
You can see the rail line to the left in the picture. This was built in 1884 and lasted 100 years into the mid-1980’s. I put this first because it belies one of the central claims of the 8664 group. Namely that the construction of the I-64 riverfront parkway cut the city off from the river. The city was long cut off from the river by this rail line. What’s more, back in the day, the river was dirty, industrial, and a sewer – not the place for a nice stroll.
I think we’re too harsh on some aspects of previous civic decisions. The world was a different place when the riverfront rail lines and expressways were built. Today, rather than saying it was a mistake, let’s just acknowledge that we now live in a post-industrial age where the worst of pollution has been cleaned up. This gives us the opportunity to rethink things for the future.
Here’s the 4th St. elevated station, circa 1905
Ok, so now you know that Louisville had an extensive elevated rail system, which at a minimum had both freight and electrified passenger service. But did you know it also had a freight subway system downtown? I knew Chicago had one of these, but was not aware that other cities did too. Who else might have had one? Here’s a picture.
Sunday, July 13th, 2008
There seems to be a popular belief that what it takes to create an industry cluster in bioscience or whatever is to pair research with commerce. That is, to find an academic institution doing cutting edge research, and connect it with venture capital and entrepreneurs to start companies to commercialize it. Soon enough, you have a “cluster” of businesses that takes off like a rocket. This is the perceived Silicon Valley model, and no company epitomizes it more than Google, which was started by two Stanford students to commercialize their graduate research.
But is this true? There are many top flight research universities in this country, but few major startup clusters. When major research institutions fail to generate commercial spinoffs, this is often blamed on a lack of venture capital. But is that really the case, or is something else at work?
Anyone interested in this matter simply must read AnnaLee Saxenian’s seminal book, “Regional Advantage: Culture and Competition in Silicon Valley and Route 128“. A social scientist at UC Berkeley, Saxenian lived and worked in both Silicon Valley and Boston’s Route 128 technology corridor. She wondered why Route 128, which started out with far more of a technology business and economic base than Silicon Valley, eventually lost ground to become a clear number two. She sees this resulting from the different social structures that exist in the various areas.
According to Saxenian, Route 128 suffered from a culture that was oriented towards a traditional maturing industry, not a rapidly changing one like technology. This included more deliberative decision making; vertical integration and self-sufficiency; hierarchical, centralized command structures; focus on economies of scale; a high friction job market; geographically dispersed locations; and low levels of cooperation and sparse networks between firms in the region. In other words, all the standard traits of a typical large corporation. While she doesn’t dwell on this point, it also comes across that Boston, probably due to its New England locale with all the history there, was a much more closed society. The social network and hierarchy was more fixed (the phrase never appeared in the book, but I couldn’t help but think Boston Brahmin) and the process of establishing trust and credibility much slower than California. While famous as one of the bluest states, Massachusetts is socially conservative in many ways, and highly risk averse. This is the land of the suit and tie, and the difference between that environment and California casual was more than just a surface thing.
Silicon Valley, of course, was just the opposite. It adopted social structures that were very focused around innovation and time to market. It was open, with rapid, decentralized decision making. Firms quickly specialized, focusing on their core competency, and established close links with suppliers to fill in the rest of the value chain. These links were often such that it was not clear where one company ended and the other began. The clearly functioned on high degrees of trust. Even direct competitors often talk to exchange ideas and help each other solve problems. Here’s a quote:
“Competitors consulted one another with a frequency unheard of in other areas of the country. According to one executive: ‘I have people call me quite frequently and say, “Hey, have you ever run into this one?” and you say “Yeah, about seven or eight years ago. Why don’t you try this, that or the other thing.” We all get calls like that.'” (33)
Clearly this is quite unique. I’m not even sure if it’s all legal, but hey, it works for them.
The job market in Silicon Valley is extremely fluid, with people constantly changing jobs, starting companies, etc. It is expected that you won’t stay that long with any given employer. Route 128 operated on the “company man” model and to leave was to show disloyalty, often resulting in ostracism. Since Silicon Valley was a new country with almost all immigrants of one type or another, family history and credentials meant little. What mattered was whether you could perform.
Now of course it was almost entirely men, originally white men, who set this up. The tech industry is famous for being one of the most gender imbalanced. What I found particularly interesting was that many of the founders had Midwestern roots. Again quoting:
“This collective identity was strengthened by the homogenety of Silicon Valley’s founders. Virtually all were white men; most were in their early 20’s. Many had studied engineering at Stanford or MIT, and most had no industrial experience. None had roots in the region; a surprising number of the community’s major figures had grown up in small towns in the Midwest and shared a distrust for established East Coast institutions and attitudes. They repeatedly expressed their opposition to ‘established’ or ‘old-line’ industry, and the ‘Eastern establishment.” (30, emphasis added)
“The many examples of engineers with humble origins who became millionaires by starting successful companies had no parallel in the more stable social structures of the East. Jerry Sanders, founder of Advanced Micros Devices … grew up in south Chicago, the son of a traffic light repairman.” (38, emphasis added)
To digress for a moment, remember how I said the contrarian, ornery Hoosier/Midwestern attitude is, in the right context, a huge strength, not a weakness. This shows that in action. These guys didn’t toe the conventional wisdom line. Instead they created a whole new business model. I’ve got to believe the Midwest mindset played a huge role in making this possible. The unfortunate thing is that they had to leave the Midwest to do it. Imagine if they’d stayed home and made it happen around one of the great engineering schools there? Alas, to this day Midwesterners often have to leave to turn things into reality. Famously, Marc Andreessen had to leave Illinois to start Netscape, and in fact had U of I actively hampering him all the way. If the Midwest cracks the code on this piece alone, it would be a huge step in the right direction.
(By the way, for a wonderful look at how these Midwesterners invented Silicon Valley and the “elder days” of semiconductor business, see Tom Wolfe’s 1983 Esquire essay, “The Tinkerings of Robert Noyce“.)
These extremely fluid job markets, open social institutions, high trust customer and supplier interactions, and competitor information exchange create an environment of so-called “dense networks”. In a period of rapid change and innovation, these networks, by efficiently distributing information and dispersing risk, create an environment with very rapid speed to market and high levels of adaptability. A traditional Route 128 do it all yourself model simply can’t keep up with the power of this vast network.
It was this network, more than anything, that created the Silicon Valley we know today. The “cluster” we see in Silicon Valley is not an artifact of spatial co-location. It comes from the network. According to Saxenian,
“Spatial clustering alone does not create mutually beneficial interdependencies. An industrial system many be geographically agglomerated and yet have limited capacity for adaptation. This is overwhelmingly a function of organizational structure, not of technology or firm size … The current difficulties of Route 128 are to a great extent a product of its history. The region’s technology firms inherited a business model and social and institutional setting from an earlier industrial area.” (161-162).
Sound familiar? It describes the Midwest perfectly. What I find interesting is how Saxenian illustrates her thesis not using a struggling Midwestern burg as a case study, but rather Boston’s Route 128, the second largest technology hub in America, home to possibly the greatest collection of universities in the country, with massive access to capital, etc. If this town had its problems, how much more so places without those advantages? It certainly shows the scale of the challenge in building industry clusters.
Obviously, changing the social structure, culture, and institutions of a region is difficult to do. Even positive articles highlight the scale of the challenge. I’ll refer a recent article on Milwaukee startups that I linked that quotes a local businessman saying, with some pride I gather, “Milwaukee is a one-strike-you’re-out town.” That’s not a good thing. Silicon Valley shows that failure and risk taking are good. The way to innovate is to figure out how to try lots of things and to fail quickly and cheaply. If you are overly concerned that you’ll be permanently ruined if your business goes bankrupt, you’re not that likely to take a chance.
It reminds me of a discussion I once had with a friend from Germany. He told me, “We’re the children of the people who stayed” and bemoaned the highly conservative outlook of his countrymen. He noted the extreme reluctance to take risks because in Germany, if you go bankrupt, you’re stigmatized for life. Obvious some of that carried over to heavily German Milwaukee.
I should note that one should not over-internalize Saxenian’s case studies into some sort of cookbook solution. Every city and region needs to find its own unique path to success based on its own culture, institutions, history, etc.
I would be remiss I did not point out a few areas where I was skeptical of the Silicon Valley model. One intriguing factoid from the book was that in 1962 federal government purchases, principally defense related, accounted for over half of Route 128’s sales. Indeed, the area got its start in technology through defense related research during World War II. Could it be that dependency on government contracts is really what caused the dysfunctional culture there? Government largesse encourages rent seeking behavior at the expense of building a competitive business.
Also, Saxenian highlights how the non-business social networks in Boston substitute for the type of technology networks in Silicon Valley. But is this a bad thing? The books paints a portrait of Silicon Valley as a bunch of geeky guys who toil away long hours on tech projects and even talk about technology at the bar when they do go out. It’s like a community of idiot savants. Some might say “get a life!”
What’s more, there is some research that suggests dense networks themselves aren’t a recipe for success. In an thought provoking paper called “Why the Garden Club Couldn’t Save Youngstown” Sean Safford contrasts the experiences of Youngstown and Allentown, both small steelmaking cities. Despite similar dense networks, Youngstown failed while Allentown fared much better. His conclusion that was the dense networks in Youngstown only reinforced an already closed leadership circle who were economically aligned, while Allentown’s served to bridge otherwise non-overlapping groups.
Perhaps to a great extent, the key attribute is less the networks themselves, than the ability of outsiders and new thinking to penetrate them. Silicon Valley’s social structure was open, Route 128’s wasn’t exactly closed, but there were barriers to entry. In a globalized world of ever faster change, the ability to respond and adapt, to process new ideas and react to rapidly shifting global forces, is critical. This puts a bit premium on dense social networks that are also open and flexible.
This is somewhat the thesis also of Richard Florida. He has a somewhat different spin, saying that the economy is now powered by the creative class, and they want to live in places that are open, tolerant, etc. This is his “three T’s” model: talent, technology, and tolerance. The last appears not to be so much valuable in its own right, but for what it says about the openness of social networks. Thus a large number of gays in a community isn’t what drives economic growth per se. Rather, a thriving gay community is a signaling mechanism that lets people know that diverse ideas and people are welcome.
I think we all know places where the social network is impenetrable. This isn’t necessarily a function of size, prosperity level, etc. I mentioned the Boston old money, social register concept. In any number of southern cities, who your daddy is, or what sorority you went to in college is a huge determinant of your place in a social hierarchy. If you don’t come from the right family, the right schools, etc., you can forget it.
Perhaps this explains my Cincinnati conundrum. Here’s a city with better assets than almost any in America, but it is one of the all time relative decline stories in US history and to this day is on a moderately stagant, slow growth path. Why is that? There was an intriguing study I saw recently called “Who Rules Cincinnati?” This is by an independent researcher named Dan La Botz, who I get the impression is some sort of activist, so keep that in mind. Nevertheless, he uses a similar approach to the Garden Club study to track social networks in the city, coming to the conclusion that officers of seven major corporations basically run Cincinnati, mostly to that city’s detriment. Another person I know offered the interesting insight that when he meets someone in a bar in Cincinnati, the first question they ask him is where he went to high school. This both indicates a highly inbred culture as evidenced by the assumption one must have gone to high school in Cincinnati, and shows that the school you attended is an important social marker. (It perhaps also shows a lack of regard for higher education).
It could be that the Midwestern cities that have the best potential for future growth are those with the most open social networks, as well as exhibiting other of the characteristics Saxenian cites. I think this would be fertile ground for social science research. It also makes me wonder if perhaps that goes part of the way to explaining the relative success of the Midwest’s larger state capitals. State capitals constantly have people traveling and doing business there from all corners of the state. This flow in and out might potentially prevent a social structure from completely congealing into a small, inpenetrable elite. I sense another potential dissertation topic here.
The key takeway is not to focus on purely the institutional infrastructure (universities, venture capital funds, labor force, etc.) when trying to set out an economic strategy. The local culture, norms, and social practices, and in particular the density and openness of the social networks is critical. Clearly, as anyone who has found themselves mired in a corporate or governmental bureaucratic organization, changing a culture is an extremely difficult thing to do. But it is something that clearly warrants an examination.
As one post-script, I should note that Route 128 style autarky is making a comeback. The self-sufficiency doctrine and vertical integration did not help Route 128, but it is still advocated by many people. The “sustainability” movement is, to a great extent, one that tells us we should do our production at home, grow our own food, etc. I don’t want to totally pooh-pooh this idea. I’m all in favor of local agriculture, for example. But we have to be cautious not to let this turn cities and regions too far inward. Trade, openness to new ideas, etc. are all critical to economic success in the globalized age. We should not be tricked into believing any one place can do it all itself.
Friday, July 11th, 2008
[Update 7/12: For a 1990's take on the concept of a super-region from the perspective of Cincinnati, refer to the Gallis Report (9MB PDF)]
There seems to be a lot of talk lately about an expanded concept of regionalism. Perhaps the best known exponent of this view is creative class guru Richard Florida, who published his thesis in a paper called “The Rise of the Mega-Region“. In Florida’s view, the mega-region is the logical unit of economic activity, superseding nation-states, US states, or metro areas. He defines mega-regions as basically a conglomeration of metros and their surroundings with more or less continuous development as indicated by light emitted and tracked from space. In this logic, much of the Midwest is in what he dubs the “Chi-Pitts” mega region, a collection of 46 million people creating $1.6 trillion in economic output (GDP equivalent) per year. This rates that mega-region third in world based on economic output. His map incapsulates the northern arc of the Midwest around the Great Lakes, extending from Minneapolis to Pittsburgh. Florida believes that thinking mega-regional is one way for struggling cities to boost their fortunes.
Author Richard Longworth has a similar view. He sees Midwest state boundaries as historical anachronisms unsuited to the modern economy. His travels while researching his book brought to light that few people in Midwest even know what’s going on in the next state, much less around the world. In his view the Midwest has great assets, but significant challenges, and the best way to deal with the latter is through a self-consciously Midwestern strategy developed through new regional institutions.
Academic institutions appear to be getting in on the game as well. The Committee on Institutional Cooperation (CIC), an organization of Big Ten universities plus the University of Chicago, recently held a summit on the regional future of the Midwest in Minneapolis, co-sponsored by the Federal Reserve.
It is easy to see the surface logic and appeal of this. The Midwest is collectively struggling, so it makes intuitive sense to pool resources and tackle the problems together. Who could be against regional cooperation?
What I can’t help noticing, however, is how few concrete proposals are out there that would appear to show any material uptick from regional cooperation. Other than holding conferences, what is it that cites and states in the Midwest are actually supposed to do to implement this strategy? What does a mega-regional solution allow a city to do that it couldn’t do on its own?
I have struggled to think of operationalizable actions, but can’t come up with many. In fact, most of benefits of thinking bigger appear to be elusive. Let’s think about why size and scale works in a business environment. There are a few reasons.
One is economies of scale. Typical scale economics comes from capital efficiency. That is, a large producer can substitute fixed costs for variable costs, and with large volumes produce a unit cost that can’t be beat by smaller producers that can’t absorb the fixed costs.
Two is purchasing power. This exploits economic inefficiency from being a dominant purchaser of inputs or producer of outputs such that a company can trade on favorable terms. We see just such a battle playing out for iron ore, featuring a large customer (China) haggling back and forth between a handful of large producers (Vale, Rio Tinto, etc).
Three is additional specialization and the division of labor. With more people, you can have greater specialization. This enables ever more division of labor which creates a more efficient production environment a la Adam Smith’s pin factory.
Four is diversification. This is the logic of the conglomerate like General Electric. Being in diverse businesses, it is better able to weather the storms that hit any particular one of its units. It should be noted that conglomerate thinking is definitely out of favor.
Do any of these apply in the case of the Midwest? It is hard for me to identify specific scenarios. To give a real example, I think of the triangle of cities formed by Cincinnati, Indianapolis, and Louisville. These are all smallish major metros separated by about 100 miles. While none would be mistaken for Sunbelt boomtowns, none of them are Cleveland or Detroit either. They are also a good example since they are in different states. How might these cities cooperate to take advantage of mega-regional thinking?
I can already name some small scale things that have been done. One is mutual aid. The electric utilities in the three cities have long sent crews to help out the others after major storm related outages. And the cities formalized a disaster assistance pact. This is sort of the diversification argument and seems to create something tangible.
Beyond this, are the cities able to take advantage of scale economics? I don’t see how. I could see some level of capital efficiency that could be achieved if, for example, the three cities shared an airport located somewhere between them. But they seem far enough apart not to be able to do that for anything I could think of.
Is specialization an option. In theory, yes. In practice, I’m dubious. Thinking about how this might work, I use the example that Cincinnati could be the headquarters city, Indianapolis the life sciences city, and Louisville the tourism city. Each city would specialize and the others would agree not to compete but support the chosen city for each individual segment. This would eliminate costly duplication of effort and allow more muscle to be put behind each individual item. But would this happen? Highly unlikely. None of these cities is giving up an inch in fighting for all three items. That’s just not gonna happen.
Now, we do see around the country some degrees of specialization in cities that are nearby such that one could argue they form an extended region. NYC specializes in finance, DC in government, for example, and there is a lot of travel back and forth. In Texas, Dallas, Houston, and Austin seem to have specialized in complementary niches. But I don’t see a great opportunity for this in the Midwest, at least not in a pratical sense.
Ironically, the one area I do it happening in is within those much maligned state boundaries. For example, Indiana University and Purdue University have a great degree of specialization. Purdue has engineering, pharmacy, and agriculture as specialities. Indiana University has law, medicine, etc. They complement each other so well, in fact, that they are able to share major regional campuses in Indianapolis and Ft. Wayne.
What about purchasing power? This is something I do see some logic in. Namely, if the Midwest congressional caucuses pooled their power, they could accomplish something. Again, how likely is this in practice? Most congressman and senators seem primarily concerned with their district, and not that likely to expend clout elsewhere. But if a Midwest caucus were formed in the House and Senate, there could emerge something. Perhaps the forthcoming battle over the Great Lakes Compact would be a good place to start.
There are certainly benefits to an expanded view of the market for state and local level procurement. For example, “home cooking” in terms of favoring in town or in state suppliers probably raises the cost of road construction, etc. Throwing this wide open to Midwestern competition, with common standards would be a financial benefit. But of course, so would opening it up to global competition. And that’s just unlikely to happen due to politics. Not in the Midwest, not anywhere.
Looking again at our three cities, I don’t see them able to reap much advantage from pricing power effects of cooperation. And even if they did, would this really materially change their economic fortunes? Unlikely.
So where are the benefits of mega-regionalism to be found? Jim Russell of Burgh Diaspora views it as less about scale than about critical mass, particulary critical mass of talent. This is a powerful metaphor because it makes us think that once a certain talent level is reached, a chain reaction will set off a powerful economic explosion.
I prefer to think of this as a concept I call “minimum efficient scale”. That is, there is a certain minimum size it takes in order to support certain things or to do them in house. For example, a city needs to be a certain size to support commercial air service, a pro sports team, or a Neiman Marcus. Would cooperation between our three cities enable anything they can’t support today because of inefficient scale?
There is some intruiging evidence here. Cincinnati seems to have benefitted from this. They have a Delta air hub, a major league baseball team, a major amusement park, and an IKEA store. I would argue that most of these only make sense for Cincinnati in the context of exploiting the expanded regional population. However, Cincinnati has favorable geography (being also close to Dayton and Columbus and thus serving as a natural focal point) and was traditionally the more prominent and large city of the three. The benefits to Cincinnati are clear, but are there benefits to anyone else? Not anything significant. What’s more, none of these items required any mega-regional cooperation at all. They happened naturally because of the marketplace. What would the cities specifically cooperate on that would give them something they don’t have today?
When it comes to talent, there are certainly benefits to having more of it. But I don’t see any particular benefits to mega-regionalism here. What would they be? Idea exchange? Possibly, but there is no particular geographic advantage to that. I can exchange ideas with anyone. If I were a struggling Midwestern city, I’d probably be more concerned about building connections to successful places and to the overall global economy than I would be to my failing neighbor next door. Believe me, if a good idea comes up, people will find out about it. The Youngstown shrinkage experiment is a good example of that.
Could there be an expanded labor market? I’m having trouble seeing it. In our example, consider a life sciences company in Indianapolis. Would they be more easily be able to tap into labor in Louisville and Cincinnati if there were some cooperation in place? Perhaps if the respective life sciences communities were intertwined, there would be more awareness of job opportunities, but my experience is that people are either going to stay where they are, or follow the money. In the latter, they probably aren’t moving 100 miles for what are probably similar wages. They are going to go to San Diego and make some real bucks. What’s more, the regional cities I know seem to harbor a special contempt for each other, which would seem to make it doubly unlikely someone would move if they bought into that rhetoric.
I also do not buy into the “chain reaction” analogy. I’ve yet to see a successful example of this that spans metro areas.
Geographic proximity alone can offer some benefits. Philadelphia is certainly benefitting from proximity to New York as NYC prices turn it into the sixth borough. Pittsburgh can’t tap into that. But I view this as less of a mega-region, than just the colossus that is New York City expanding its sphere of influence as it becomes an ever more important world city. There is a similar effect going on with Chicago and Milwaukee, but is that replicable elsewhere?
I think again about this, what would proximity alone bring to our three cities? Well, for some it could mean easier access to professional sports. But other than Reds baseball, which has a very broad fan base for historical reasons, I don’t see it. A local Louisville blog recently noted the lack of inroads the Colts have had in building a fan base in that city, for example. And looking to the bigger city example, what benefit could Indianapolis reap from closer engagement with Chicago that say Kansas City, which is outside the Floridian mega-region, could not?
Florida himself probably offers the best potential explanation. He argues that mega-regional integration will lead to emergent properties that can’t be predicted based on the inputs. This is plausible, but not where I’d be hanging my hat if I were trying to figure out where to invest my time. And emergent properties could be good or bad and Florida doesn’t predict what they might be.
Longworth is also big on mega-regional thinking. He does a great job of diagnosing and describing the Midwest’s problems. But I do not see how the specifics of his proposed solutions will dramatically change the Midwest’s course. And he himself recognizes the political difficulty of making them happen. Among his proposals, he wants to see a Midwest regional think tank and newspaper. He’d like to see reciprocal in-state tuition. He’d like to see a higher degree of academic specialization among Big Ten schools with less competition. And he’d like to see states call a cease-fire in the economic incentives game versus each other. All good ideas, and potentially beneficial. But I don’t believe they are game changers, apart potentially from the academic specialization, which seems to be a daunting proposition.
I’m willing to be convinced. I clearly see the benefits of regional cooperation on a metro or economic area basis. Even there, however, we’ve seen significant challenges operationalizing even that idea. To really justify significant time and effort being spent on mega-regionalism beyond the quick and easy idea exchange variety, I think a specific program of recommended actions and the type of results we should expect to see from them needs to be put forward. Otherwise I’m inclined to view mega-regionalism in the Midwest as dinosaurs mating. Rolling up a bunch of weak players won’t make a strong one.
I welcome any thoughts on this subject, of course.
Friday, July 11th, 2008
The National Endowment for the Arts released a recent study on artists in the workforce. It provides a comprehensive analysis of the census data from 2000 on the number of professional artists by state and metro area.
Now this data is certainly not perfect. Among other things, it only counts people who are employed as artists in eleven specific categories. Part time or non-professionals are not included. Still, for what it is, there is some interesting data. The eleven categories are actors; announcers; architects; fine artists, art directors, and animators; dancers and choreographers; designers; entertainers and performers; musicians and singers; photographers; producers and directors; and writers and authors.
For the metros I track, here are the rankings by total numbers of artists:
And here are the rankings by artists as a percentage of the workforce.
|Rank||City||Artists % of Workforce|