Tuesday, November 17th, 2009

Replay: Mega-Skepticism

[ This post inaugurates a three part series on “megaregions” and the applicability of this concept to the Midwest. It is a repeat of something I wrote on the subject a bit over a year ago. That should lay the ground work. Part two of the series will be a review of the book “Megaregions”, edited by Catherine L. Ross. The third part will be some thinking on ways the Midwest might be able to apply megaregional thinking to its problems. As you will see, I come to this subject as a skeptic.

This post originally ran on July 11, 2008]

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, particularly 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 intriguing evidence here. Cincinnati seems to have benefited 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.

[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)]

10 Comments
Topics: Regionalism
Cities: Cincinnati, Indianapolis, Louisville

10 Responses to “Replay: Mega-Skepticism”

  1. Wad says:

    This suggests that it would be time for regions to rethink jurisdictional regimes. If not boundaries, then for finding the right level of administration for certain tasks.

    Speaking broadly, this post also shows why a high-speed rail program is crucial to the regional economies described. It would be the 21st century equivalent of what the Interstate Highway System was for the 20th century. It would not only provide a means of getting around, but would be key factor in changing the economic landscape.

    Jane Jacobs has great theories on how cities grow and their economies take shape. She outlines them in “The Economy of Cities” and “Cities and the Wealth of Nations.” In both, she said the process of economic health takes place when cities can replace imports and add value to them, in turn making an export economy. As this process grows, what happens next is a transformation of land uses. As economies expand, lower-value functions get shifted out to the cities’ hinterlands, and former small towns and villages become connected to the major city’s economy.

    (The first step was how productive technologies were introduced into agricultural areas. The second step was industrial uses being moved to the agricultural hinterlands as costs rose. A third step was suburbanization leapfrogging over industrial transformation to hinterlands around cities, or suburbs overtaking industrial areas.)

    The Midwest is in a unique situation, and I notice the high-speed rail advocates seem to understand this. You have a world-beating dynamo in Chicago, a few healthy smaller city regions, and several struggling cities that have seen their best days behind them.

    Fortunately, many of them are within 500 miles of Chicago.

    Now imagine if these large cities all became a city region of Chicago.

    It might wound the pride of smaller cities to be thought of as a “suburb” of the Windy City, but becoming part of a city region would help place them on better footing.

    Coincidentally, 500 miles is also the optimum distance for end-to-end high-speed rail service.

    It might not necessarily mean an expanded labor market, as you’ve said, in terms of St. Louis or Indianapolis becoming outright suburbs of Chicago. What it would likely mean is an exchange of industrial functions, rather than explicit labor or commute sheds.

    What the cities have to offer in relation to Chicago is comparative advantage. The declining cities have the advantage of “decline” that should translate into discounts on transaction costs.

    Say you are the decision maker in a global firm headquartered in Chicago. You are entrusted to manage the growth in two key areas of your business: customer sales and market research.

    These are both businesses that require the capital, labor and other tangible and intangible resources found in Chicago. You’ve gotten sweetheart deals from other close and declining Midwestern cities who desperately need the tax base and the jobs, yet the deals are contingent in moving all operations to the cities. Your clients, funders and employees find this unacceptable.

    So what is there to do? Split the difference.

    You’ve determined that the sales division is more location-dependent than the research division. While theoretically the research division can be placed anywhere, you decide to put it in a big city along the Midwestern High-Speed Rail Network. It would be costly to expand both facilties in Chicago, but other big cities have made previous investments in civic amenities that can be rejuvenated and all have an educated work force. They also have close ties to the Chicago area without having to sever them altogether.

    So, in this case, you decide that the “winning” city in the research competition is St. Louis.

    It’s a winner for all parties. Your company has saved on expansion costs, Chicago still keeps a high-value task, and St. Louis has new business that it hasn’t seen before.

    With a high-speed rail network in place, Chicago will see it shedding job functions to the “hinterlands” of cities like Milwaukee, St. Louis and Indianapolis.

    Chicago, though, can afford this. There’s already an abundance of monetary and social capital that it is bound to fill that void quickly with new upstart businesses or other growing businesses ready to make the leap to the major leagues.

    Second-tier cities, though, may lose functions but never regain anything in their place. Factory towns, particularly, seek to rejuvenate themselves with factories to keep their work forces busy. It has proven to be a losing strategy.

    Becoming a big-city hinterland may be a step up for all the cities concerned.

  2. Wad says:

    Also, using the Jacobsean theories, specialization of city regions is a bad thing in the long run.

    The healthiest cities are the ones constantly adding imports, adding value to them to create export industries, and growing this process by attracting new imports and new export processes.

    Specialization is what led to the downfall of Detroit and Pittsburgh, particularly because they were leaders of a single industrial function (autos and steel, respectively). All the capital and intellectual energy was focused on efficiency and improved output. In macroeconomic theory, a slang term for this phenomenon is “Dutch disease.” A singular function crowded out the possibility of several other import-replacement cycles.

    The auto and steel industries became efficient to the point of transcending location. Automakers and steel refiners could plop down a factory virtually anywhere without an appreciable loss of efficiency. Detroit needed its Big Three more than the Big Three needed Detroit. Pittsburgh needed steel more than steel needed Pittsburgh.

  3. cdc guy says:

    One could easily substitute “high-speed, high-capacity teleconferencing” for “high-speed rail” in the above comment.

    Only it’s far cheaper and more efficient to move electrons than people. Why build an updated version of 19th-century technology when there is 21st-century technology available?

    It seems to be my contemporaries (baby boomers) who are hung up on in-person face time. Is it truly necessary with today’s video links and collaboration software?

  4. Wad says:

    cdc guy wrote:

    One could easily substitute “high-speed, high-capacity teleconferencing” for “high-speed rail” in the above comment.

    You forgot one thing.

    If a company could do everything by teleconferencing, it will move it to the half of the world that can eke out an existence on $2 a day.

    It seems to be my contemporaries (baby boomers) who are hung up on in-person face time. Is it truly necessary with today’s video links and collaboration software?

    Yes, because video conferencing is a practical substitute for just a tiny sample of jobs.

    The service sector will still need interpersonal interaction. Sales forces will need to communicate directly with their clients. New products or techniques will still need to be demonstrated and taught face-to-face.

    The only hang-up we have is the necessity of person-to-person communication for much of the working world. Not every job is well-suited to rearranging molecules.

  5. Wad says:

    I wrote:

    rearranging molecules

    Should read “rearranging electrons”.

  6. Rod Stevens says:

    I’ve had the same reaction to Florida’s “mega region” that you have: what’s holding these areas together besides sprawl?

    I have to admit I am writing from a West Coast perspective, where the unifying themes, at least from Northern California on north, are lifestyle factors. People move between the cities here because they can enjoy the same leisure pursuits and improve the quality of life. Thus Portland and Seattle are somewhat similar, Portland offering somewhat better access to the outdoors, while Seattle has better job opportunities and a more outgoing style. The tradeoffs are essentially personality differences, while the values are somewhat the same. The same difference between California and the Northwest, the rain being a differentiator here, along with career opportunities, but leisure pursuits still being a driver. Oddly, those leisure pursuits drive entrepreneurial outlooks, and so the talent flows back and forth within the larger mega region”.

    Beyond these kind of lifestyle reasons, though, I don’t see what holds the mega regions together except for family ties and old industry ties. Chicago and Minneapolis/ St. Paul were long the packaged goods centers of the country, with Quaker Oats and other companies like that there because of the old grain basket. Now those companies are largely spread to the winds. So I would rather come back to a more local outlook. I’m just not sure what the mega region concept does for anyone. I would prefer to think about my own place and city and how to make it strong. As you write, I don’t see too many opportunities to cooperate between cities when those travel times are more than an hour. Perhaps high speed rail could offer that, but for the time being, count me a profound “localist”.

  7. Alon Levy says:

    Wad, Jacobs also explained why infrastructure investments can’t save cities from decline. Her example is the Tennessee Valley Authority, which failed to lift Southern Appalachia from joblessness; forty years later, a new coal plant had 40,000 people applying for 1,400 jobs, and today, the region’s GDP per capita as a percentage of the national average is as low as ever.

    Aaron, one of the problems with talking of megaregions as substitutes for nations is that outside the US, China, and Japan, megaregions as Florida thinks about them don’t exist. And even in Japan, the actual megaregion – the Taiheiyo Belt, extending from Tokyo to Fukuoka – is different from what Florida believes are the megaregions. In Europe they have the Rhine-Ruhr area and Randstad, which are very tightly bound megaregions, even more so than the Northeastern US, but other cities come in their own metro areas. London and Paris have no megaregions; they are as separate from their national hinterlands as San Francisco is from the Interior West. Frankfurt and Munich have no megaregions, either, and still they are the most successful cities in Germany, more so than the Rhine-Ruhr area.

  8. Wad says:

    You’re right, Alon, about the TVA example.

    The TVA region was what Jacobs had described as an economically passive region. It wasn’t moving anywhere in the first place, so it didn’t really decline in the way that Birmingham, Alabama — once called the Pittsburgh of the South — had retracted.

    Jacobs stressed five factors that a city region had to balance in order to thrive. Unbalanced regions, such as Appalachia, are dependent on single-purpose economics.

    I stress “would” in my response, not “will”. Cities within 500 miles of Chicago, the likely center of Midwest high-speed rail, stand more to gain as junior partners in a rail-bound mega-region than envious upstart competitors.

    The rest is up to the cities to respond to the opportunities. Conservative-leaning cities could always resist the plans, believing it is in their interest to play the role of value position. Cities whose glory days were in the industrial era are likely to have working classes who are hostile to high-value industries that provide higher-paying but few jobs. In other words, they fear gentrification. Some regions may have a toxic political and racial climate. Some cities have fallen into decline so deeply that their civic assets cannot be reactivated.

    It all depends on the people and their representatives.

  9. Wad says:

    Rod Stevens wrote:

    I’ve had the same reaction to Florida’s “mega region” that you have: what’s holding these areas together besides sprawl?

    Dynamic economic transactions that affect every class from executives to the lumpen.

    Let us overeducated types reading this understand that there are many people out there who make choices not by lifestyle, but by necessity.

    Where do you go if you have limited job skills? In a place that needs plenty of people to hire. Where do you go if you’re an immigrant? Very likely, to neighborhoods of people of a common nationality or language. Why do people of the least means paradoxically go to the most expensive cities? Because they likely won’t die of starvation.

    Of course, there are some areas that will try to build an economic region around lifestyle choices. Florida — the state, not the author — has been organized around large “theme” communities geared to affluent retirees or northern snowbirds. Yet apart from a large population and the need for a servant class in these areas, Florida still has only one dynamic metropolitan region in Miami-Dade, Broward and Palm Beach counties.

    You’d immediately associate the Miami region with sprawl, but unlike the rest of Florida, Miami had the economic demand to support sprawl. In the process, it helped to raise the profile of Broward County, which is located between Miami and Palm Beach. Had the area not been a continuous blob, the areas north of Miami would have been much smaller and economically weaker.

    That’s tiny in comparison to what happened in coastal California. Sprawl “helped” link together much of Northern California, where the Bay Area now encompasses the Wine Country, the Sacramento Valley, the northern San Joaquin Valley and Santa Cruz.

    Southern California is effectively everything from Santa Barbara to the Mexican border, save for Imperial County and the eastern desert communities.

    These were all formerly small independent cities that now share a common economic fortune. Each area can maintain a local “character” but not a local function.

    The economic output of the larger cities helped to maintain this character that would have otherwised stagnated. It’s much worse for really local cities that are near the edges of the mega-regions yet still isolated from them.

    Mendocino County, the northern Sierras and Merced are on the edges of the Northern California mega-region. All are relatively poor regions yet still stare at the metaphorical wall of the mega-region.

    A place like Barstow has a relatively large population for what is one of the most economically backward cities in Southern California. Almost all of the economic activity is because of a nearby Army base and being the junction of two national interstates. The workers are too far to drive to more lucrative economic opportunities, and are essentially trapped in a service station economy.

  10. Thanks for the great comments. Sorry I wasn’t able to engage much previously, but I was out of town.

    Wad, stay tuned, I’m going to talk more about some of this in my future article. I’d agree that mega-regions as such currently don’t have much relevance in the USA right now.

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