More on the Urban Economy

Alec MacGillis has responded to my post on his Prospect piece in a blog post, and I think he’s misread me in a few ways. He says I have endorsed Richard Florida’s view that “that many parts of the country have been hit so hard by the recession that they’re no longer worth trying to prop up.” That’s not accurate. My argument about struggling cities has nothing to do with the recession and everything to do with the agglomeration economics that generated their rise in the first place. What’s more, I explicitly call for countercyclical and adjustment aid to failing cities.

MacGillis returns to his criticism of Florida and my defense of him, saying:

I can see where Avent is coming from, though I don’t think his points ultimately hold up. But what really caught my attention is that he leaves unaddressed my main argument: Florida has been delivering his pricey sales pitch to the very towns he now declares hopeless. There’s a case to be made for helping people move from depressed areas to more prosperous ones — it is one side of a long-running debate over whether it’s better to invest in people or places. But it’s a bit rich for that argument to come from Florida, who got wealthy telling these places that they could be saved if they only followed his advice on attracting the all-hallowed young creatives. Many people in these places took Florida at his word and have been spending a great deal of money and time on following through with marketing campaigns, bike paths, loft development — you name it. Now that same person, the best-known urban development guru in North America, declares them goners. I find it curious that Avent doesn’t seem troubled by this…

Florida’s successful sales pitch alone was not my main concern, since “it’s a free market and the cities were willing buyers.” It was the pitch in conjunction with his latest declarations. That said, Avent seems a bit blithe here. For one thing, many of the cities shelling out money to him were not “major American cities” but smaller ones like Elmira, N.Y., featured at the top of the article. And in many cases, Florida didn’t simply leave cities to make their own judgments: He did all he could to turn his $35,000 speeches into $250,000 consultancies, in which he and his assistants spent months working with the cities, giving out specific advice such as to “identify and amplify organically evolving nodes of creative energy.” Finally, it seems to me that there are other occasions in which we find reason to object to salesmen taking cities for a ride, even if the cities are willing buyers — say, when investment firms sweep in to promise bigger gains for the local pension fund. Last time I checked, it’s journalists’ job to help inform cities and their residents what they’re getting for their money.

I don’t disagree in the least that it’s journalists’ job to inform people about things. It’s city leaders’ job to decide whether or not available evidence supports decisions they’re making about the future of their city. And I don’t see anything “rich” about the change of heart coming from Florida, or anything dastardly about it at all. As far as I can tell, he’s changed his mind — perhaps based on the trouble some of his clients have had getting his ideas to work — which is a perfectly reasonable thing to do. I don’t think there’s any evidence that Florida was deliberately scamming anyone or peddling ideas in which he didn’t believe. What’s more, just because investments in struggling towns didn’t necessarily generate a wholesale turnaround doesn’t mean that the investments didn’t yield any return at all. Cities may be disappointed that they’re not a new Portland, but are they really filled with deep regret about their decision to become more tolerant, and artist- and bike-friendly?

MacGillis continues:

Cities are essentially being told that to be successful they need to be successful. Avent edges toward the implications of this closed circuit: “[T]he result is an urban geography that’s very lumpy” that will “decay into a world with haves and have nots.” But he stops short of fully grappling with this winner-take-all landscape. He does not engage the many Florida skeptics that argue that we don’t necessarily need to breezily accept this outcome. He also does not address the obvious fact that Florida, by calling for us to give up on whole swaths of the country and instead redouble our investments in the prospering creative hubs, is only exacerbating the disequilibrium.

No, I’ve grappled with it, and I think he’s misunderstanding the dynamic I’m describing. When I say haves and have-nots, I’m referring to concentrations of economic activity, not people or places. Not every city can be a San Jose or a New York — that equilibrium is not sustainable because it’s advantageous for certain kinds of activity to group together. If we try to force economic activity to spread evenly over the landscape, we’ll be saddling ourselves with some significant economic costs.

Think about the innovative cluster in Silicon Valley. Workers there move between firms all the time, spreading ideas and knowledge. They bump into each other while out and about, creating opportunities for moments of serendipity. They develop relationships with venture capitalists and other firms, boosting entrepreneurship. We know that these things are important because people and businesses are willing to pay very high land costs to be in Silicon Valley. In one sense, this concentration may not seem fair; why not try to get half of the agglomeration to move to Detroit? But on the other hand, the innovations that have come out of Silicon Valley have enriched people all over the world.

Now, it’s not impossible to create such agglomerations where they didn’t exist before. Silicon Valley itself is a product of government funding for education and research. Raleigh — a successful imitator and my hometown — began developing its technology concentration on the strength of two public universities and a public-private partnership to recruit high-tech firms. But where Raleigh and Austin have been successful in developing human capital concentrations, many other cities have failed, not because they didn’t want it bad enough or because Raleigh and Austin have splendid climates, but because not every place can sustain such concentrations. As tech workers and tech firms have come to Raleigh, Raleigh has become more attractive for other workers and firms. Other imitators can’t compete.

These concentrations generate increases in societal wealth, and they needn’t at all manifest themselves as general income inequality. Meanwhile, I don’t think MacGillis has grappled with the implications of his complaint that investing in prosperous hubs “exacerbat[es] the disequilibrium”. Investments in prosperous places yield high returns, providing governments with more resources to use in other ways. And no one is suggesting we abandon whole swathes of the country. I don’t think I could have been more explicit in saying that both countercyclical aid and adjustment assistance for struggling cities are justified. Investments in growing cities also help struggling areas by increasing the overall size of the national economy, and by creating more opporunities for migrants. And MacGillis needs to recognize that if you pour a ton of money into places that lack an underlying economic justification, you’re attracting a lot of people into cities that represent economic dead ends.

MacGillis goes on:

Florida rationalizes regional shifts precisely because they are “a healthy part of economic adjustment.” Florida writes, “Different eras favor different places, along with the industries and lifestyles those places embody.” Avent goes on to say that investment in the left-behind places is still justified, since many will stay in them, and since it is possible that in the natural course of things, a few of them could rebound. What should be avoided, Avent seems to suggest, are top-down, paternalistic investments that aren’t in sync with the natural economic flow, since “it’s never clear what transition is going to look like and what the right distribution of people and capital is going to be.”

But here’s the thing: Florida’s sorting of the country into winners and losers along with his declaration that the former should get the bulk of our investments is, in its own right, an assumption that we know “what the transition is going to look like.” This means making a judgment call about who will and won’t turn the corner, which history has shown to be a foolhardy endeavor. As Karl Stauber, head of the Danville Regional Foundation, said to me in a remark I had to trim from my piece, comeback success stories like Asheville and Chattanooga are not recognized as such until after the shift has happened. Where does one draw the line now? Does Upstate New York, for instance, make the cut? It’s been in decline for years, but Buffalo and Syracuse have weathered the recession better than many other cities. So, do they get to be part of the “new geography”?

I think the above argument quickly falls apart when one thinks about the details. A declining city suffers from a sinking tax base. This will lead to tax increases and service cuts, which are likely to chase away remaining residents, further shrinking the tax base and leading to a fiscal death spiral. This dynamic is painful for the people who remain, it may lead to them being trapped in the area thanks to plummeting housing costs and deteriorating educational standards, and it significantly reduces the likelihood that they’ll recover thanks to the natural economic ebb and flow. The solution to this is easy — you use federal money to make sure that the police force and schools are amply funded, you make sure money is available to care for or dispose of vacant properties, and you make sure the streets don’t fall apart and the pipes don’t bust.

Growing cities, on the other hand, need new infrastructure. New York’s infrastructure strains to accommodate its current population. This acts as a limiting factor on growth; choked subway trains and streets limit the extent to which the city can absorb new workers and create new wealth. Remove those constraints, and the city will employ more people at high salaries. There’s no picking of winners involved; you simply make the investments that make sense.

But what about something like high-speed rail for Detroit? Again, I don’t think these questions are particularly hard, or that they involve the picking of winners. Given a limited pool of money, you start with the highest yielding investments, because that will give you more future revenue with which to tackle other problems. So high-speed rail to Detroit would not be as high a priority to me as high-speed rail on the east or west coast, or indeed elsewhere in the Midwest. At the same time, I think it makes sense to acknowledge the disadvantage that relative remoteness has had for Detroit. Improved connections between Detroit and more successful cities like Chicago and Toronto are likely to pay dividends. Essentially, you’d be shrinking the distance between Detroit and other large metropolitan economies, thereby increasing Detroit’s economic potential.

It seems clear, however, that the economic conditions that generated the Detroit of old no longer prevail. Trying to recover that Detroit would be hugely costly. Sometimes cities need to shrink, and many times workers and other resources need to be reallocated across the economy. Perhaps the problem here is that MacGillis is viewing a decline in population totals as a decline outright. I think it’s important to try and preserve a certain quality of life in shrinking cities. It is not important or noble or good to try and ensure that a city never has any fewer jobs or people than it had 50 years ago. Cities are many things, but one of their functions is similar to that of the firm — they bring together people, ideas, and resources to produce valuable outputs. Sometimes a firm’s business model no longer makes sense. To use federal money to preserve the old shape of the firm would be hugely wasteful and costly, and unfair to the people the firm employed (and everyone else).

Should Florida apologize? Or be forced to pay back the money? Meh. Again, the man went from city to city encouraging leaders to be gay-friendly, to support artists, to encourage creativity, and to build amenities like bike lanes. Perhaps he was wrong to suggest that these measures would deliver an economic turnaround. I’d say he was less wrong about the secret to urban success than those urging cities to throw tax incentives at potential employers, or those suggesting that we ought to adopt an industrial policy aimed at returning Midwestern cities to manufacturing glory.

Moreover, I certainly hope that if I ever see that my ideas aren’t working quite as I thought they would that I have the courage to say so.

Comments

  1. I agree with most of what you say, but the concept of investing for ROI is a private sector one. Governments have many other legitimate goals such as equity, in addition to the raw reality of politics. That’s why gov’t investment is irrational in some regards.

    My view is that if people want to stay in a place so badly (like the people in the TAP article), that’s their choice and more power to them. But it doesn’t entitle them to an unlimited stream of money from the rest of it to try to make their turnaround dreams a reality.

    I support counter-cyclical aid as well, which again is a legitimate government function. The problem is that too many levers of the state become repurposed as effectively welfare programs, which hurts us overall.

    Transport is a great example. I can’t tell you how many states build highways to struggling parts of the state as “economic development” tools we know have a very limited impact. This starves the places that could really use the investment of funds.

  2. Rob says:

    One aspect of this discussion that seems lacking is the role of high-skilled legal immigrants. In a closed system (one without immigration) the relationship between cities seems more zero-sum; in an open system, that dynamic changes.

    I don’t love the use of Detroit as the typical ‘declining city’ because it isn’t a typical declining city. Perhaps Buffalo or Cincinnati or Cleveland would better fit the bill. Could cities like those attract high-skilled and highly-educated individuals from abroad, even if high-skilled and educated Americans want to move away from them to the more ‘creative’ cities?

  3. I think a good contemporary example for Detroit is Las Vegas. Tremendous population growth focused around one booming world-dominating industry fueled by multiple firms.

    Now imagine if something huge happened to make Las Vegas economically unsustainable – maybe gambling is made legal in every state, or the Colorado dried up and water had to be shipped in, etc. Vegas would still be a good vacation getaway but over time it would lose its advantage and dwindle.

    How much would it be worth to subsidize a region of 2 million that lost its economic raison d’etre? Would politicians argue about prohibiting or taxing international vacation travel? Unlike Silicon Valley or LA that can constantly reinvent themselves because they’re attractive places that people would want to live anyway, or like New York and London that have a critical mass of population and wealth and economically useful natural features, places like Detroit or Las Vegas that grow quickly along with industry will someday revert to the mean for their location.

    Short of easier air or high speed rail to connect Detroit to Chicago and Toronto, a city of 250,000-500,000 is probably more appropriate.

  4. Peter, Buffalo is the perfect example here. That’s the one Glaeser was talking about when he took a people centered vs. place centered approach. Buffalo existed for the era of water transport alone. Once that passed, it’s economic raison d’etre was gone. And its weather is terrible unless you are a huge fan of snow.

  5. Ziggy says:

    Well, if the issue is where public funds for “market making” investments are best employed to leverage economically sustainable development and redevelopment, I think one has to look no further than the sorry state of most cities’ “institutional infrastructure.” Especially the medium and small sized Midwest / Rustbelt cities that have been, basically, pantsed by the global economy.

    Many do not have human, financial and physical resources to compete nationally, let alone globally. They have dated marketplace analysis, moldy land use plans and few resources to use as incentives to attract the interest and attention of investors.

    Absent effective planning and public investments that promote investor confidence, investors (including talent) with economic options do what they are suppose to do in a market economy — they vote with their wallets and their feet.

    It appears that if they have to choose between living in sprawling suburb with a long commute in the frostbelt or a sprawling suburb with a long commute in the sunbelt, they’ve overwhelmingly chosen the later.

    What this means to me is that former industrial powerhouses – Detroit, Cleveland, St. Louis – that lack compelling natural resources and attractive climates have to try harder – much harder – to become attractive places to live and work. Most of these cities, on average, are ugly, depressing places. If they were stores, they would be out of biz in a heartbeat.

    And so, if you want to know where dying industrial cities need to invest precious public funds, its in the features that will make them look better, sound better, taste better, smell better and feel better to prospective residents and investors. In short, they have to become the kinds of places that are attractive to a marketplace that has many options from which to choose.

  6. BP Beckley says:

    And so, if you want to know where dying industrial cities need to invest precious public funds, its in the features that will make them look better, sound better, taste better, smell better and feel better to prospective residents and investors. In short, they have to become the kinds of places that are attractive to a marketplace that has many options from which to choose.

    That’s a restatement of Richard Florida’s basic Creative Class thesis, nd the basic assumption of the article here is that that assumption has been proven wrong by events.

  7. May says:

    You say that your points are based on agglomeration economics. I think you have a point there;but, the problem about US is that that now means a regional context. Silicon valley and Raleigh are really regional economies. They are in states that happen to be malgoverned and well governed;and NC has a an antisprawl system. I thin that helped it to develop the region quickly and the location being an education hub, which Boston has also taken advantage of.
    America lags the world in applying agglomeration econimcs. You can grow regional economies quickly if you seriously apply this as China has revealed since the 1980s.

  8. Ziggy says:

    Not exactly. Florida’s original creative class thesis focussed on the “3 Ts” – talent, technology and tolerance. He did address the physical qualities of place more directly in the “Place and Happiness” survey that he conducted with Gallup, which he described in “Who’s Your City,” and the results of which I think have been largely overlooked. Most of the buzz generated by the book focussed on his discussions of megaregions.

    My own observations were formed by own research on place performance, where I discovered the work that Mehrabian and Russell did in the 1960s. Basically, they determined that people had two responses to a given place — they feel comfortable approaching it or they don’t. Sounds like a no brainer, but it’s actually quite profound when you think about.

    I recall that decisions regarding the decision to approach were formed through either cognitive processes (“I heard that place was dangerous, therefore I think it’s dangerous”) or they were affective via emotions created by sensory information gathered directly from the source (“I like this place because it looks / tastes / smells / sounds / feels good”).

    A fair amount of research has been done since that time, and has largely been utilized by retailers trying to figure out how to attract more customers, get them to stay in stores longer, spend more money and return again and again.

    I could not find significant research specifically devoted to larger outdoor environments, but it’s not much of stretch to figure that people like certain places like downtown commercial districts for the same reasons they find certain retailers especially appealing. I would argue that Starbucks, (love em or hate em) owes a great deal of its success to their ability to create environments that customers find enormously appealing on an emotional level.

    I agree with a lot of Florida’s work, and it does inform my thoughts about places. But there’s other research out there that aligns with what I think is really the key — that places (cities) function like products in a marketplace. There are certain qualities that the marketplace finds attractive. In our globalizing economy, quality jobs are following talent, and talent is attracted to places with certain features — in our country these include compelling natural features, good climate, attractive physical qualities and other quality of life amenities. Many Rustbelt cities lack these qualities, and, as result, have to try harder than the places that do. Many central cities, like those in Detroit, Cleveland, and St. Louis, are exemplars of the “broken windows” theory, on steroids.

    In our contemporary, market savvy global economy, image and identity are critical. Being an physically attractive city doesn’t guarantee success. But Rustbelt cities are going to have a difficult time attracting talent with their existing levels of public investment in their physical appearance.

    My apologies for this long winded response…

  9. Ziggy, very interesting comment. I’d be interested it chatting about it further. If you see this and are up for it, please shoot me an email at arenn@urbanophile.com. Cheers.

  10. BruceMcF says:

    Given massive domestic unemployment of both labor and capital equipment, the Federal government is only resource constrained for investments that have the impact of a net increase in the structural current account deficit.

    Which suggests that it probably does not make sense investing in a new Interstate Highway in Detroit … but investing in 110mph Higher Speed Rail infrastructure between Detroit and Chicago, that investment is not in conflict, in any real terms, with improving subways in New York or building Express HSR to link Southern and Northern California.

    So the question for the investment in Higher Speed Rail in Detroit is the basic investment question: what is the full economic benefit per dollar of capital investment. If its a useful investment, it should go ahead.

  11. Ziggy says:

    Governments, via policies or direct financial investment, create or strengthen markets. They are probably the single most powerful market maker in every country around the world.

    Sometimes in the process of strengthen certain markets, they weaken others. That’s what’s happened in the Midwest.

    Rustbelt cities have been hammered because of policies that favor Wall Street investors and global businesses. Does that mean governments should stop investing in the cities that have been the losers? Or, should they instead rethink policies that have exacerbated the loss of markets, industries, and jobs.

    Globalism and policies that favored Wall Street investors over Midwestern jobs and quality of life were not inevitable. They were conscious decisions by our leaders to favor certain markets over others via direct government investments and policies.

    Instead of saying we should just accept our fate and let places die, shouldn’t someone be trying to secure new government investments and policies that will create new markets to replace those that they helped to destroy?

  12. Ziggy says:

    My apologies… this response to a Paul Krugman blog is more articulate than my post above:

    Dear Professor Krugman:

    Contrary to those who wishfully believe that small businesses will lead our recovery, the root cause and dynamics of the “zero decade” leading to this recession rests in the arms of our global corporations and our federal government.

    Most small businesses are created or developed to support the logistics and/or demographics of large businesses.

    The expedited and continuous “removal” of our large scale manufacturing sector by most of our domestic global corporations with the assistance of our federal government has left many of our small and mid size businesses, local business communities and local and state governments in a constant state of turmoil to source, replace and attempt to rebuild the losses.

    As a result, big business with the assistance, direction and positioning (trade policy) by our federal government WILL HAVE TO LEAD THIS RECOVERY.

    Thank You,

    Mark A. Hall

  13. Geo Loco says:

    “If we try to force economic activity to spread evenly over the landscape, we’ll be saddling ourselves with some significant economic costs.”

    What about the economic costs of agglomeration? congestion, expensive housing, long commutes, etc.

    “They bump into each other while out and about, creating opportunities for moments of serendipity.”

    Most likely bumping into each other while stuck in traffic for their lovely hour plus commutes between the suburban office parks and their overpriced homes in distant exburbs.

  14. ryan says:

    That people continue to move to these agglomerations despite the congestion and high costs is pretty strong evidence for the benefit they must be receiving, wouldn’t you say?

  15. OGT says:

    I am a bit torn on the whole agglomeration idea. Undoubtedly there are pretty strong concrete reasons why a particular industry may work better located in one center along the lines of absolute advantage trading. There are also some interesting correlations as to success breeding success, but economists don’t have any credible explanations for cross industry productivity effects. And one should always be wary in those cases, I find.

    My skepticism is also a bit stoked by the fact that PPP adjusted GDP for the agglomeration cities is much less impressive than the nominal output alone would suggest. This isn’t to say NYC isn’t more productiove than Cleveland, just that we ought look at it from different angles to judge the difference fairly. (Link below, ok it’s SPI but still something that isn’t examined enough IMO).

    Finally, since I’ve been floating a Financial Dutch Disease theory for sometime, I thought this paper by David Beckworth on the appropriateness of natinal monetary policy was quite interesting. It indicates that monetary policy was been too tight for the Rustbelt and suggests regional differences in open market activity along with fiscal transfers and labor mobility.

    In a completely different vein, I think that the aid given to declining metro regions should be leveraged to increase efficiency, regionalization and policy experimentation. They’d likely be the most open to innovative policies and in need of it the most.