Tuesday, April 13th, 2010

Ryan Avent: The Urban Economy

[ I’ll say it again, Ryan Avent is the best urbanist economics blogger out there. Be sure to check him out at his personal blog, The Bellows, and on the Economist’s Free Exchange blog. In the meantime, enjoy this piece he graciously allowed me to reprint. – Aaron ]

I am generally a fan of the American Prospect and a very big fan of the people who work there, but the magazine’s latest issue, which highlights “The Post-Boom City” on the cover strikes me as a whiff all the way around. I discuss the Special Report on manufacturing here, but I also want to say a few things about Alec MacGillis’ piece on Richard Florida and urban development.

I don’t have much time for the quasi-accusations of hucksterism leveled at Florida. He’s never been shy about self-promoting, and he’s certainly done well for himself publicizing and evangelizing about his ideas, but major American cities aren’t exactly naive old grannies being suckered in by Florida the conman. Florida has a view on urban development. He’s accepted thousands of dollars to come talk about it with city leaders around the country. If those cities can’t make a good judgment about what they ought to do next, that’s not Florida’s fault.

The criticism of his actual ideas is a trickier topic. MacGillis makes some reasonable points, to which I’ll get in a minute. But I think that he, and many others, haven’t really begun to wrestle with the nature of urban economics and the way it relates to broader policy issues like inequality. MacGillis writes:

A tautology lies at the heart of Florida’s theory that has limited its instructive value all along: Creative people seek out places that draw a lot of creative people. Florida has now taken this closed-loop argument to another level by declaring that hence-forth, the winners’ club is closed to new entrants.

That tautology doesn’t just lie at the heart of Florida’s theory; it describes the actual functioning of urban economies. The value in economically dynamic cities is the people that populate them. Where once, firms would pay high land prices to be near coal deposits or harbors, based on the economic advantages those amenities conferred, they now pay high land prices to be near talent. This yen to concentrate in particular areas has a number of dynamics. Firms want to be near customers and clients. Workers want to be near firms. Firms want to be near workers. Where there are lots of firms and workers, there will also be businesses serving those workers — in business and in the provision of consumption opportunities — and those services attract additional firms and workers. Everyone wants to be where everyone is, and it’s tough for anyone to go somewhere else because somewhere else is where people aren’t.

The result is an urban geography that’s very lumpy. People clump together, because there are gains to doing so.

But what makes a successful clump changes over time. The economics that underpinned the older manufacturing economy supported clumps that don’t necessarily make economic sense today. With declines in transportation and communication costs, it became affordable to move plants away from expensive city land, and that’s precisely what many businesses did. In cities that were also home to a substantial knowledge economy sector, this ultimately proved to be a boon. By outsourcing their manufacturing (and later, their back office) components, firms could reduce the overhead on the offices of those who still needed to be in the city, improving margins (and making more room in the city for others who needed to be there, thus increasing the return to everyone of being in the city).

The result is a world where the key to urban success is a critical mass of workers with high levels of what economists like to call human capital. And because there are returns to scale at work, there is an element of the zero sum here. Or to put it another way, the world where every big city has its own fair share of talent is not a stable equilibrium; it will decay into a world with haves and have nots. And indeed, that’s what we have seen in recent decades. Educational levels in cities one hundred years ago strongly predict educational levels in cities today. And cities with high shares of college graduates have absorbed more than their share of new college graduates in recent decades.

These dynamics have important implications for the way we think about policy, and I wish more people appreciated them.

Now, the above is not a death sentence for a city that’s not one of the main metropolitan dynamos. It takes all kinds, and there will be smaller regional talent centers that prosper. Proximity to a dynamic economy is also a means to success. Location in the northeastern corridor, for instance, is quite lucrative, and a number of decaying industrial towns that might otherwise have met a Detroit-like fate are enjoying economic revivals thanks to the strength of the broader NEC economy.

But what do you do if you are in a town that is a long way from generating a self-sustaining concentration of human capital, and which is relatively remote from bigger urban economies? The options are not pretty. Cities in that situation will tend to find that the better a job they do educating their local residents, the faster their towns depopulate; a good education is a ticket out.

Reading the Prospect, you’d think that the key to saving these old industrial towns is to find ways to support American manufacturing. All that’s been standing in the way of their continued success, it seems, is the decline of unions and a cheap renminbi. This just isn’t so. Different policy choices might have slowed the decline of manufacturing employment in America, but they would not have stopped it — or the consequent decline of manufacturing-dependent cities.

I’ll tell you what I think MacGillis gets right, and what makes these issues very difficult to address. People are not simply cold, rational calculators who will make a determination about where in the US they can maximize the return to their skillset and move there. Even as cities experience serious decline, some — millions of — people will stay behind because that’s where friends, family, and other connections are. And that’s why dismissing the problem of urban decline as just a healthy part of economic adjustment is an unsatisfactory answer.

But the solution here is not to hope that we can restore the industrial days of yore. I’ll tell you what I think we ought to be focusing on. First, I think it’s inappropriate to dismiss the importance of increased investment in education. Noam Scheiber recently wrote about manufacturing, saying:

Now it would be great if everyone would go to college and be able to thrive in the post-industrial economy. But, in reality, there’s always going to be a significant portion of the population that doesn’t get beyond high school. Which means that an economy with almost no manufacturing is probably an economy with much greater income inequality.

True, not everyone is going to go to college, but that’s not necessary. Marginal increases in the supply of college educated workers will increase competition for high skill jobs — slowing wage growth for such positions — and reduce competition for low wage jobs — boosting wage growth for those positions and thereby narrowing inequality. The bottom lines is — we are not anywhere near the point at which the capacity of young Americans to increase their skill level has been reached. Lots of kids get too little education, and that’s a bad thing for the economy, for inequality, and for American cities.

Secondly, it’s worth thinking about how infrastructure can boost the quality of life for everybody, including workers who can barely afford to live in the most dynamic cities and workers who have decided to live in declining cities. Better housing and transportation policies can slow growth in costs that consume over half of household budgets. Rules that make it easier to build homes within easy traveling distance of jobs centers reduce housing costs. Building retail and jobs within walking distance of homes allows families to opt for living situations with low transportation cost levels (and low transportation cost variability). Investments in things like broadband significantly expand consumption possibilities for those living in areas without many entertainment amenities. And better communication and information infrastructure may help struggling cities to leverage up the talent they do have by enhancing connections within the cities and within broader regions.

Third, we should do a better job treating ailing cities. Economically speaking, investments in a doomed city will only retard that city’s decline, meaning that more people suffer in its economic doldrums for longer. But the case for aid to distressed cities is like the case for unemployment insurance — the aid prevents a damaging decline which outweighs the negative incentive effects.

MacGillis quotes David Lewis saying:

What [Florida] ignores is that places have sunken infrastructure — not just in roads and buildings and sewers but the stuff that matters…

There are two ways to look at this. One is that all of these amenities are just temporarily underused. Eventually, the price of things like vacant homes and buildings will fall enough to attract new tenants and everything will work out. In that case, temporary aid might be in order — countercyclical aid — to prevent the decline from feeding on itself and getting out of hand.

Another view is that the decline is permanent — those buildings will never again be filled. In that case, aid is still justified. Why? Well, we’d like to avoid a fiscal death spiral that leads to serious declines in public services. Cities don’t disappear over night, and residents shouldn’t be subject to infrastructure that’s falling apart and a police force that can’t stop crime. Aid may also prevent residents from becoming trapped in the failing city. Rapid declines in property values will make selling homes — and migrating — difficult. Deterioration in local schools will likewise limit migration opportunities for younger residents.

But so long as declining cities are still there, there will be cries to try and rejuvenate them with various public programs — tax incentives to lure new companies, public funding for stadiums or convention centers, bail-outs for failing firms. These kinds of things are simply not helpful. The issue is this: it’s never clear what transition is going to look like and what the right distribution of people and capital is going to be. In providing aid to struggling cities, then, we want to facilitate that transition, not impede it. We want to make people more mobile, even as we work to generate a high quality of life in growing cities and declining cities. We don’t want to lock up resources in declining cities, either by propping up failing companies or by trapping people in hopeless situations.

These topics are complicated. And counterintuitive; no one likes thinking that the right thing may be for one of America’s largest cities to shrink until it disappears. But it’s worth remembering that the industrial revolution swept away whole occupations and completely redrew the urban geography of America and Europe. Cities which had been major regional capitals for centuries were suddenly backwaters, while major metropolises exploded out of nothing.

Technology is producing and will continue to produce a similar shift. Whole sectors will vanish, and take millions of jobs with them. Cities dependent on those old sectors will struggle to survive, and for some places this will be a losing struggle. This is not the kind of thing that progressives should want to stand athwart yelling stop. Instead, they need to find away to promote progressive ends — mobility, opportunity, and security — while embracing economic shifts that are, on the whole, empowering and a source of great prosperity.

This post originally appeared at The Bellows. Reprinted with permission of the author.

10 Comments
Topics: Demographic Analysis, Economic Development, Education, Globalization, Public Policy, Strategic Planning, Talent Attraction, Technology

10 Responses to “Ryan Avent: The Urban Economy”

  1. Alon Levy says:

    It’s strange that you’re reproducing this post, which is one of Avent’s weakest. He’s defending Florida here by bringing up beneficial policies that Florida’s never had much to say about and that have nothing to do with the policies Florida boosts. Giving tax breaks to gay bars and thinking in terms of megaregions is not going to make housing more affordable and is not going to improve educational attainment rates.

  2. I actually liked the piece. The Florida bit is sort of a preamble in my view. The more relevant piece to my audience is what to do about smaller manufacturing cities and such in a new economy.

  3. wendy says:

    Aaron, I have questions about this article that I hope you will answer for me. This is not meant to be critical. I’m truly curious.

    It seems to me that many urban ecomonists suffer from a kind of group think mentality. Their theories depend on a a faulty premise that people want to escape areas like Michigan and move to megopolis/coastal cities. Having lived in both, I say that is not necessarily true. I know of many young, well-educated people who would love to move back to Detroit if there were jobs. But they are “stuck” in cities like NY and San Francisco with overly-expensive housing, toiling away at work, unable to spend quality time with friends and family because all of the “good jobs” are concentrated in these areas. Is it possible that the premise is wrong, that people may want to move to places like Detroit or Nashville, or Indianapolis for a higher quality of life, but are unable to do so? That the people who are really stuck are those in the major cities? Just look at satisfaction rates, which are lowest in NY. Is it ideal to perpetuate the current trends. Isn’t productivity connected to satisfaction? Is it possible that we would be better off spreading talent a bit, rather than overly concentrating it? Maybe I misunderstand the author’s position.

    Being from Detroit, I also have a problem with the author singling the city out. I guess I also assume he is talking about Detroit when he says no one likes to think of an American city shrinking until it disappears. Comments like that are usually directed toward us. My question is this. The author seems to assumes that there is no significant concentration of talent in this area. He must, considering he believes high concentration of skilled workers = sucessful city. But what about the fact that this area has the second highest concentration of engineers in the country. I’ve read accounts of out-of-state companies simply blown away by the quality of resumes they see here. The common conception of Detroit is that it is entirely blue-collar. But many of the people whose jobs were auto-dependant are highly skilled, technical professionals. Why is it presumed that Detroit is a lost cause based on an artificial belief that we are all high school drop-outs who have no skills other than the assembly line? Any suggestions on what we can do to change that image, and leverage the talent that we do have?

  4. Jim Russell says:

    Avent is a huge influence on my thinking about talent migration. Whatever your views on Florida and the MacGillis piece, the above post is an excellent summary of US urban economic geography. Rereading it reminds me how much I’ve internalized a number of Avent’s ideas.

    “But what do you do if you are in a town that is a long way from generating a self-sustaining concentration of human capital, and which is relatively remote from bigger urban economies?”

    You throw a lot of money at Next Generation Consulting and hope your constituents think doing so is a good idea. As Avent indicates, that’s better than facing up to the economic reality.

  5. wendy, I didn’t write the piece, but will take a cut at answering your question.

    First, don’t assume he’s talking about Detroit. The backstory the American Prospect and with Florida is more around smaller industrial cities, I believe.

    There’s an old saying, “nothing succeeds like success”. I think the points you are making are not that different from Avent. Do people follow jobs or jobs follow people? Both. Growth and success are positive reinforcement cycles.

    People want to be near jobs, jobs want to be near a skilled workforce. Think about the companies for a minute. How many companies in NYC wouldn’t rather relocate to a lower cost climate? But many don’t because they need access to the human capital. The key is that high value human capital and high value jobs cluster because there are benefits to doing so. In a sense, if you want to be successful – as a firm or employee – you have to be where the action is.

    These clusters tend to be stable. Think about Detroit. How would someone go about undermining its dominance as the capital of the auto industry in the US? It would be extremely difficult.

    Avent also notes that many people would prefer to live in a locale like their hometown, and some do even without any economic prospects.

    The part that infuriates some is that this seems like a closed system where the winners are chosen and there’s nothing anyone can do about it. I don’t think Avent, Gleaser, or Florida would say that if you look at the totality of their work. There are new cities all the time. Many of them are in the Sunbelt like Charlotte.

    In cold weather cities, Glaeser more or less correlated success to talent over a long period of time. Indeed, the top cities a hundred years ago – Boston, NYC, Chicago – are still tops in many regards. But even Glaeser admitted he couldn’t figure out the Sunbelt cities.

    So there are new entrants, but the dynamic that creates them in one place vs. another isn’t fully established. Also, you’ve got to look at whether many of these boomtowns of day will prove any more sustainable than Detroit over the long term.

    Jim Russell might say struggling towns are brownfields while new boomtowns are greenfields. A place like Detroit that gets into a decline cycle with high legacy costs (in the broadest sense of the term), is in a tough spot.

    That doesn’t mean it’s hopeless for Detroit. But like Pittsburgh and other places, it is going to take a long time before it works through the issues and creates an upside opportunity. The roots of Pittsburgh’s turnaround are at times 50 years old. The good news is that Detroit is already a talent hub in some respects and is big enough to have “minimum scale” to operate as a successful city in the right circumstances. Many smaller cities can’t say that.

  6. cdc guy says:

    “These clusters tend to be stable. Think about Detroit. How would someone go about undermining its dominance as the capital of the auto industry in the US? It would be extremely difficult.”

    Well, for starters, one would build multiple factories in states without a history of auto assembly dominance but which have lots of parts factories and surplus blue-collar labor. Places like Kentucky (Toyota), Tennessee (Nissan), Illinois (Mitsubishi), Indiana (Subaru, Honda, and Toyota), and Ohio (Honda).

    (The political value of spreading investment and capital around is not to be discounted: who wouldn’t want ten senators/five governors on your side to Michigan’s two/one?)

    I’d say that’s the recipe to challenge Detroit’s dominance as the “center” of the US auto industry: create a decentralized industry with many nodes.

    Lo and behold…

    [This comment is really a little snarkier than I intended. It does follow on some of the previous Detroit thread’s commentary and the Avent post.]

  7. wendy says:

    @cdc guy,

    Your position is correct if you assume auto manufacturing is simply assembly. But the auto industry is actually a highly reticulated, and complex. Moving it is much harder than simply concentrating factories in other states. Suppliers, designers, engineers, R&D, advertising and marketing, legal departments, etc. all support this industry. The list goes on and on. Assembly has been trickling from Michigan for some time, but the auto capital is still Detroit. Even many foreign manufacturers, tier 1 and otherwise, still have a significant presence in Michigan. It’s similar to trying to recreate the financial industry or the entertainment industry in locations other than NY or LA, respectively. While possible to siphon off portions, a wholesale replacement is not really economically feasible. It’s like Apple assembling I-Pods in China. While they are not assembled in the US, the vast support, and subsequent profit, for that product is still located in California. And the same holds true with autos and Detroit.

    PS–Aaron, thanks for the reply.

  8. Wad says:

    Wendy, your elaboration of CDC guy’s point is correct.

    Jane Jacobs attributed the web of interconnected goods and services as one of five ingredients a city region must have and keep in balance in order to thrive.

    An auto assembly plant is what Jacobs might classify as an “industrial” version of a supply region. It is certainly a transplantable enterprise.

    An auto plant is certainly a producer of wealth, but once a vehicle rolls off the line, there’s more value added to those cars. Salesmen in urban areas make commissions, banks finance loans, and auto parts stores and mechanics help keep the cars in working order. These activities are long-lasting, but the auto plant doesn’t get to collect any of the post-manufacture upside.

    An auto plant is comparatively richer than the places where it sources parts, and those areas are far better off than the areas supplying the raw materials.

    Manufacturing turned out to be highly transplantable as it became more automated and nation-states began to encourage globalization. Detroit’s downfall happened because its automakers became so successful that they could plop a factory anywhere they pleased. Then, other countries began to imitate and refine the manufacturing practices. Detroit’s comparative advantage in automobile production quickly eroded.

    Detroit does still maintain a lot of the highest-value goods and services, and despite the diminished presence of the Big Three, it still holds an important place in the geography of the automotive world. (Its auto show is still regarded as one of the world’s most important and influential, as it continues to attract the world’s industrial, financial and media representatives.)

    The highest-value goods and services are often the most difficult to disperse, and at the same time, the people holding these careers are the most mobile and the most entrepreneurial by skill set and temperament. This should lead to jobs, knowledge trees and markets spread evenly, yet they are more concentrated than ever.

  9. cdc guy says:

    Wendy, I do not make the assumption that auto manufacturing is only assembly. My work experience includes a number of years in manufacturing, including automotive.

    Starting in the 1980s, the Big Three pushed their Tier 1 suppliers to design bigger pieces of cars: full instrument panels instead of dashboards, speedometers, and gauges; full sound systems instead of radios and speakers. Some of that was done at tech centers in metro Detroit, but much was done elsewhere too.

    Auto design and legal/finance nodes are now spread throughout the world as a result. (Does anyone really believe that Chrysler product design will be exclusively done in Highland Park now that Fiat is in control? Likewise, Daimler/Nissan/Renault are sharing decentralized product development. GM under Whitacre may finally entrust Opel and Daewoo with worldwide small-car development.)

    Creative collaboration can now be done over long distances through the same economic and technical miracles that allow us all to essentially write and instantly post “letters to the editor” to an international newsmagazine (blog). Decentralization by applied technology on this scale was not possible or even contemplated by Jane Jacobs; to me it seems no coincidence that the San Jose (Silicon Valley) metro lost bunches of jobs in the recession.

    I think the Jacobs orthodoxy has to be recalibrated for a highly-connected and decentralized world: our “neighborhood” is no longer where we can walk in 15 minutes, our retail merchants aren’t storeowners on the corners, and our social interactions and reputations have a far larger footprint than ever before. It is more and more possible to have “face-to-face” meetings with a working group in multiple different sites. All this fundamentally changes the nature of the agglomeration economies present in cities.

  10. wendy says:

    @cdc guy, your position actually is encouraging for smaller cities, like Detroit. If there is no need to concentrate certain jobs in one area, then there should be no strangle hold on talent in places like NY, SF, and elsewhere. Places like Detroit with a high concentration of underemployed highly skilled engineers, for instance, could capitilize on this decentratializtion. And for the highest-value goods and services, like design and engineering (not assembly), I would argue that Detroit is a good value. One can hire a Stanford PhD engineer in Detroit for half the cost of one in Silicon Valley. Trust me, I’ve worked in both areas. Some of the resumes I see in Detroit would make you cry, they are that impressive. But I don’t hold my breath. Industries still seem to find advantages in concentrating in certain “desirable” locations, despite the added expense. I agree with Aaron’s response that many companies would rather locate where costs are lower, but other factors force them to locate elsewhere.

    I cannot disagree with you that the auto idustry has relied more heavily on some of its foreign subs, to both the advantage of the consumer and the company. But, as Aaron suggests, Detroit still holds dominance for the auto industry in the US. I guess my point is that auto really isn’t different than other industries with high concentrations of talent in certain areas. There really is no industry more “high tech” or specialized than the creation of a car, as has become more evident to the lay person with the recent Toyota issues. In my humble opinion, the same factors that play into the concentration of talent for Silicon Valley or Wall Street apply to pre-production and management in auto (though not assembly, as you suggest). My hope, however, is that we can convince other industries to take advantage of this talent, and allow this region to diversify.

    I also think you haven’t been involved in the auto industry for some time. Chrysler left Highland Park for the exurbs almost 15 years ago. (Sorry for being snarky.) Clearly I’m not an urban economist either, or in the auto industry for that matter, so I’m sure there are plenty of flaws in my argument too.

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