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Thursday, August 22nd, 2013

How Cities Grow, Slump, and Recover

Urbanist economist Ryan Avent, who writes as part of the FreeExchange team at the Economist, is out with a video where he talked about growth and decline in cities. It’s definitely worth a watch. If it doesn’t display for you, click here, and note that it’s an auto-play link:

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.

Thursday, November 19th, 2009

Ryan Avent: Disruptive Technologies

[ For those who don’t already read him, Ryan Avent is an editor at The Economist magazine who also writes for Streetsblog Capitol Hill and at his own blog The Bellows. Ryan is also an honest to goodness real economist too. He’s great for getting a more progressivist take on urban issues from the perspective of an economist, and you’ll often find him jousting with the likes of Ed Glaeser. I’ve been reading Ryan a while and he’s great. It was also great to get to meet him and person and be part of a panel with him at Rail~Volution 2009. I recommend checking his blog out.

This post ran on his blog back in August. Though I subscribe, I somehow missed it until reminded of it by Jim Russell. I thought you all would find it interesting so I am reprinting it here with permission. ]

Disruptive Technologies by Ryan Avent

I’ve been enjoying Tim Lee’s posts discussing the introduction and impact of a disruptive technology. Let me quote some (a lot) of what he’s been writing:

The key characteristic of a disruptive technology is that at its introduction, it is markedly inferior to the then-dominant technology, as judged by the existing base of customers. A classic example is the microcomputer. When the first microcomputers were released in the late 1970s by Apple, Commodore, and others, they were inferior in almost every respect to the minicomputers and mainframes that then dominated the computer market. People bought microcomputers for one of two reasons: they couldn’t afford a minicomputer, or they had an application where the microcomputer’s unique advantages (i.e. smaller size) were a particular advantage.

It’s important to understand that the innovator’s dilemma is not that disruptive technologies are “so innovative” that incumbent firms can’t keep up with them. To the contrary, disruptive technologies are often relatively pedestrian from an engineering point of view. Minicomputer manufacturers would have had no difficulty entering the microcomputer market if they’d wanted to. Rather, the innovator’s dilemma is that incumbents find it extremely difficult to make disruptive technologies profitably.

He quotes Clayton Christensen:

A characteristic of each value network is a particular cost structure that firms within it must create if they are to provide the products and services in the priority their customers demand. Thus, as the disk drive makers became large and successful within their “home” value network, they developed a very specific economic character: tuning their levels of effort and expenses in research, development, sales, marketing, and administration to the needs of their customers and the challenges of their competitors. Gross margins tended to evolve in each value network to levels that enabled better disk drive makers to make money, given these costs of doing business.

In turn, this gave these companies a very specific model for improving profitability. Generally, they found it difficult to improve profitability by hacking out cost while steadfastly standing in their mainstream market: The research, development, marketing, and administrative costs they were incurring were critical to remaining competitive in their mainstream business. Moving upmarket toward higher-performance products that promised higher gross margins was usually a more straightforward path to profit improvement. Moving downmarket was anathema to that objective…

Four times between 1983 and 1995, DEC introduced lines of personal computers targeted at consumers, products that were technologically much simpler than DEC’s minicomputers. But four times it failed to build businesses in this value network that were perceived within the company as profitable. Four times it withdrew from the personal computer market. Why? DEC launched all four forays from within the mainstream company. For all the reasons so far recounted, even though executive-level decisions lay behind the move into the PC business, those who made the day-to-day resource allocation decisions in the company never saw the sense in investing the necessary money, time, and energy in low-margin products that their customers didn’t want. Higher-performance initiatives that promised upscale margins, such as DEC’s super-fast Alpha microprocessor and its adventure into mainframe computers, captured the resources instead.

Now, here’s Lee again:

But companies aren’t big people, and it’s a mistake to think of them that way. In 1983, any given engineer at DEC could have easily quit his job making minicomputers and taken a job at Apple or IBM making microcomputers. But it would have been much harder for DEC as an institution to make that same transition. Turning DEC into a microcomputer company would have required a wrenching, years-long struggle to essentially build a new company from the ground up. Indeed, as Christensen documents, the few firms that have successfully pulled off such a transition have done it by essentially growing a new company inside the existing one: senior management would start a subsidiary devoted to the disruptive technology and keep it insulated from the parent company’s managerial structure. The hope was that by the time the parent company fell on hard times, the subsidiary would hopefully have grown enough to sustain the overal company’s profitability. There are a few examples of this strategy working, but it’s an extremely risky and difficult process.

Me being me, I read this and instantly began thinking about cities. One of the things I’ve been puzzling over recently is the implosion of formerly successful metropolitan areas. In theory, there’s no reason why the decline of one of a city’s principle industries should lead to the decline of the city itself; cities have useful infrastructure, institutions, and human capital, and the decline of one industry should free up space that can be utilized by a new, growing industry.

In practice, things tend not to work out this way. Cities that face the loss of one of their main industries tend to suffer through a long period of decline before recovering, if in fact they manage to recover at all. Why is this? Why should all of the many things that go into the making of city come undone in one place just because one particular business failed, while all of the things that go into the making of a city are rebuilt from nothing elsewhere in the country? It makes no sense.

I have tended to focus on negative feedback loops as a primary explanation for this dynamic, and I feel certain they play an important role. Loss of part of a city’s tax base will lead to reductions in the quality of services and increasing tax rates, which will lead richer households to leave, further shrinking the tax base. Declining services lead to failing schools and high crime rates which accelerate depopulation and so on. A city’s most talented workers will have the most opportunity available elsewhere, and so they’ll be the first to leave, sharply reducing an area’s competitive attraction, thereby encouraging further talent to leave, and so on.

Ed Glaeser has argued that it’s very difficult to recover from depopulation because of the durability of the housing stock. Falling population alongside steady housing supply leads to falling home prices. This, in turn, attracts those who require cheap housing — the poor — which will further degrade housing values and attract more poverty. An increasing population of poor residents will also tax city services which will further imperil budgets, and so on.

That certainly seems like enough to destroy a city, but it isn’t. In real life, cities experience negative shocks all the time, but they don’t always enter into a major downward spiral. And some cities which do face a downward spiral manage to pull themselves out of it and enjoy an economic renaissance. Why?

I think Lee’s disruptive technology post offers us a glimpse at an explanation. When a metropolitan area has an old, successful, established industry as its economic driver, that area builds its infrastructure and institutions around that industry. These institutions are likely to be unwilling and unable to accomodate and support growth industries. We can think about legislators in a Rust Belt state who fight to protect old industries even when the protections they seek would undermine growth industries. Or banks in old manufacturing centers that are reluctant to invest in start-ups with sharply different practices from the old giants.

If you have a daring new idea, you don’t take it to someone who’s living fat off something which has worked for decades. You take it to someone who is hungry. Many of the Sunbelt boom towns which have sprung up over the past half century grew at the start by accepting what investment they could. I’m reminded of my hometown, where leaders were anxious to attract high-tech investments to their new Research Triangle Park. It was lack of better options that gave them the idea in the first place — something which might not have occured to leaders in a city where hundreds of thousands of people earned good union wages in manufacturing plants. And while leaders definitely wanted to craft a research environment, they took the investments they could get. Not having recently been on top of the world, they had the benefit of not suffering from wounded pride when less-than-glamorous operations came to invest.

And I think there’s something to the idea that new growth cities aren’t inherently superior to older, richer metropolitan areas. Rather, their advantages are fairly mundane — they’re cheap, accommodating, and ready to please. On the other hand, older, richer cities don’t realize that they have a problem until it’s clear their bread and butter industry won’t ever be the same, at which point they’re faced with serious problems and have few resources to attract new industries. At that point, there are few routes to recovery. A city might get lucky (by, say, enjoying proximity to another metropolitan area which enjoys a booming economy). It might manage to retain enough in the way of resources from niche industries, like tourism, to maintain a framework capable to supporting a new growth industry. Or it might find that one of its older and smaller industries is capable of growing large enough to fill in the missing economic strength.

There are tricky implications to this. It suggests, for instance, that the availability of new metropolitan areas is crucial in maintaining a flexible, growing economy. That creative destruction doesn’t just mean the scrapping of once-proud firms but of whole cities. It also suggests that my previous prescription for fighting urban decline — a program of temporary fiscal support — could be counterproductive. It might delay inevitable economic adjustments.

I don’t know that I accept that it’s necessary to destroy old cities and create new ones to keep an economy fresh. Revolutionary geography could be interchangeable with institutional or political revolution. That is, places that are less flexible geographically might instead face increased pressure to change institutions or otherwise accommodate disruptive economic change. Still, this seems to be an important part of the story of urban decline.

Related on The Urbanophile

Creative Destruction is Real
On Innovation
Resolving the Paradox of Success

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