Creative Class

My new Globe and Mail column is out:

Less than a month after taking office, the Obama administration unveiled its massive stimulus package aimed at recharging the lagging American economy – a staggering three-quarters of a trillion dollars. As the Harper administration rushes to dole out a $40-billion stimulus of its own, it’s high time to ask a simple question: Are we stimulating the right things?

Confusion was nowhere more evident than in the debate on the U.S. Senate floor, where a relatively small amount marked for the National Endowment for the Arts was derided as nothing but pork-barrel spending and waste. The stimulus, such thinking goes, ought to focus on infrastructure only.

As Jack Kingston, a Georgia Republican, put it: “We have real people out of work right now and putting $50-million in the NEA and pretending that’s going to save jobs as opposed to putting $50-million in a road project is disingenuous.”

However, the facts are that the locus of economic growth has shifted dramatically and a stimulus that focuses on traditional infrastructure cannot succeed. What drives the economy today is not the old mix of highways and single-family homes but new, idea-driven industries. They range from software, communication devices and biotechnologies to culture and entertainment – and importantly the convergence of the two.

The familiar kind of stimulus – the “shovel-ready” kind that built highways and roads, and worked so well during the Great Depression and its aftermath – worked precisely because it didn’t stimulate that period’s aging agriculture economy. Instead, it accelerated the transition to a new economy based on housing, autos and all the products of the industrial assembly line, from refrigerators and washing machines to air conditioners and television sets.

The Keynes-derived notion of pouring money into public works built the roads and infrastructure that spurred postwar demand and primed North America for postwar global economic dominance, because the consumption embedded in our suburban way of life stimulated just the right kind of industrial production.

But eventually the system got out of whack. The housing and credit bubbles of the past decade ultimately biased and distorted our economy, channelling money and investment toward older industries, real estate and construction and away from more productive, innovative and creative ones.

For a stimulus to work today it has to stimulate the emerging creative economy, the engines of regional economic growth and higher incomes across Canada and the U.S.

Companies and workers in these fields also have “spillover effects.” Computer scientists and designers – unlike, say, lawyers and doctors – foster productivity in others, beyond the services they provide themselves. Creative industries also benefit from considerable synergy as arts and design combine with technology, from iPods to video games.

But it’s not enough merely to produce more scientists, engineers and artists or even high-tech entrepreneurs and entertainment moguls. We must also build an infrastructure and an economy that can sustain a demand for their creative efforts. In his book The Venturesome Economy, Columbia University business professor Amar Bhide shows how sophisticated, risk-taking consumers who demand new things and buy new products are the key to technological innovation in places such as Austin, Tex., and Silicon Valley.

It’s unlikely that the BlackBerry would have succeeded if it had come from Eastern Europe, for example, because consumers there would not have appreciated its security, convenience and systems integration the way that the Western world did.

The creative economy already includes roughly 30 per cent of Canada’s work force and about a third in the U.S. It accounts for more than half of all wages and salaries paid in each country. So, if the stimulus were allocated proportionately, between $250-billion and $375-billion should have gone to the U.S. creative economy; in Canada, the figure would be $12-billion to $20-billion.

Stimulus funds could be used to strengthen Canada’s science and technology infrastructure and its music, film and art scenes; it would provide entrepreneurial assistance and garage-like incubation spaces for innovators the Bloomberg administration is doing in New York City.

It would make far greater sense to invest precious infrastructure dollars in high-speed rail and broadband Internet lines to connect our communities than in roads and highways.

We will begin to move toward a durable recovery only when we stop unnecessarily propping up the old economy. Indeed, we have to make housing and transportation cheaper, as we did with agriculture during the New Deal, in order to free up the demand that will provide enduring stimulus for the creative-economy businesses and jobs of the future.

Fortunately, in the U.S., the $50-million for the NEA was reinstated at the very last minute. But it still aimed a huge amount of its stimulus at the old economy. Canada has the chance to do much better.

Las Vegas housing market sure has taken a big hit, down by roughly 30 percent according to the Case-Shiller Index. But Robert Lang and Mark Muro argue it may be more than just a city of sand and sprawl.

Las Vegas, best known for its gambling and entertainment, has also emerged as a deal-making center of world importance. Because Las Vegas is such a “fun” place and has a large tourist capacity in terms of hotel rooms and meeting space, it attracts the nation’s largest trade shows.

These shows form ad hoc market exchanges that gather whole industries to a common space to make deals. The irony is that what happens in Las Vegas arguably reaches well beyond the city in terms of business activity. The city’s reputation for discretion in personal matters has enhanced its attractiveness as a public space.

As a place for business networking, Las Vegas is, in this sense, a leading world city of great importance to the American economy. The city has not reached this status by traditional means, and conventional data measuring economic activity do not easily capture its form of exchange.

In a world where face-to-face interaction still matters — and may be even more important than ever — Las Vegas offers world-class venues for people to meet and do business. To get a sense of this, consider the variety and size of some of the trade shows that have recently convened in Las Vegas, including the National Association of Broadcasters (110,000 attendees), the World of Concrete Exposition (85,000 attendees), and International Consumer Electronics Show (150,000 attendees).

Some organizations now have annual meetings that have grown so large that Las Vegas is the only venue big enough to hold their major annual trade shows. A good example is CTIA — The Wireless Association. This Washington, D.C.-based trade group could hold its largest exhibition in Orange County, Calif., as recently as 2007.

But as the cell phone industry took off, attendance shot up and future annual conventions are now scheduled for Las Vegas. Although to outsiders a trade show can seem trivial for a rapidly evolving technology such as wireless, these are make-or-break events for many start-up firms. Their ability to have access to the entire industry — if just for several days a year — can provide the basis for key contacts that lead to everything from patent licensing to venture capital deals.

Ironically, wireless is one of the most space-liberating technologies ever devised. Give many high-end white collar workers a 3G iPhone or BlackBerry and they can pretty much do their entire job from anywhere in the world. But in the end, business is all about trust, and that still requires face-to-face encounters.

Las Vegas now plays the highly critical role of gathering all the firms in key industries in one place where they can exchange ideas in person. The fact that Las Vegas is especially fun and frivolous — an adult Disneyland — creates even more incentive for people to attend its conferences, which is how it became the nation’s preeminent convention destination in the first place.

To all the killjoys who now want to shame people out of a Las Vegas convention visit, we say that a major stimulus for the country remains the social lubricant that Sin City provides business contacts.

Las Vegas’s fate now hangs in the balance between its failing real estate industry and more resilient convening/entertainment industries (also, throw in water shortages for good measure). The trick is for Las Vegas to find ways to exploit its advantages in temporary face-to-face exchanges that really only generate hospitality dollars into a more fixed regional-advantage in emerging sectors. There are some promising areas such as the furniture mart (a kind of permanent trade show for the interior design/building industry), which could attract architectural and design firms and even lead to industrial design with the right investments. Las Vegas is really a lab to see how major “convening regions” may leverage their now ephemeral advantages as world cities by capturing these exchanges in their year-round economy. Orlando fall in the same category.

Like many people, I was uplifted by President Obama’s speech Tuesday night. But, today it’s back to the real world. I find myself in total agreement with this assessment from Seeking Alpha.

You have undoubtedly heard of the Case-Shiller Index. It is a commonly cited index for tracking housing prices. The December read is now out showing a YoY drop of 18.5%, worse than predicted. That is not what is scaring me … He has an index of American home prices going back to 1890. According to this index, the housing bubble we just experienced was by orders of magnitude worse than any other we have ever seen in this country. Moreover (you better be sitting) housing prices have a lot further to drop … He believes we are only halfway back to fair value and usually during a correction we overshoot fair value. You add into this equation the effects of a global downturn, job losses, reduced wages and the like and one can easily imagine us overshooting the trend line significantly.

I firmly believe we will not find a bottom on the economy until we find a bottom on housing. From this data, that bottom is still a long way off, as in 3-5+ years off, and it is a lot lower than most have predicted. That is far worse than this doom-and-gloomer was thinking.

So that puts recovery out to say 2012 or 2014. From where I sit, that may even be too optimistic. Both the Long Depression and the Great Depression lasted some two decades before real recovery came about. I could be in my 70s before this thing turns around. And unless he has four terms or so, Obama will not preside over recovery. My heart may feel differently, but my head tells me there is a long, long road ahead of us.

Declining housing prices combined with (artificially) low mortgage interests rates are combining to bring the costs of owning more in line with renting, according to the Wall Street Journal (h/t: Alison Kemper):

The relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices. At the height of the housing boom, as home prices surged, demand for rentals started to rise as the gap between owning and renting widened significantly. Even after the housing market soured, apartment demand grew as former homeowners became renters, allowing landlords to push healthy rent increases.  Now, after two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

True, when you factor in massive government incentives for homeownership, and that is only in certain markets. But this kind of thinking misses the bigger issue of the long run. In addition to the issue of month-to-month housing affordability, homeownership carries with it a second, longer-run cost – the cost of exit. In a mobile society, people need to be able to sell their homes. Take the example of homeowners in say Pittsburgh or Detroit or just about any market these days. They got a great deal on a wonderful, affordable home, but then their employment dries up. They’re offered a job say in Seattle or Washington, D.C. and need to move. But they’re locked into a house they can’t sell. If they were renters they could easily up and move.

In today’s economy, many people are better off paying a considerable premium to rent, if they think they might need to move for career or family or lifestyle reasons.

And I continue to believe that we need to put in place a new housing system which can and should make renting easier, more flexible, and even more affordable.

Now we’re talking …

A creative economy that values brains over brawn must include Ontario’s manufacturers and steelmakers, says the chief executive of Hamilton’s ArcelorMittal Dofasco.

Alluding to a recent report from urban thinker Richard Florida – who called on Ontario to nurture creativity and knowledge rather than bail out struggling factories – Juergen Schachler cited creativity as a key element of successful steelmaking and manufacturing.

And he insisted that despite the challenges it faces, Ontario’s manufacturing sector will continue to play a leading role in strengthening the economy.

He’s nailed it. As I’ve frequently said, the entire theory of creative work and production is built on my earlier research on manufacturing industry – particulary autos and steel - and my studies with Martin Kenney of how foreign companies like Dofasco and others completely reinvented industrial production by instilling new management models based on harnessing the knowledge and intelligence of their workers.

The dichotomy between industrial and post-industrial service and manufacturing economies is a false one. As our report says, the distinction is between creative and routine work. The key to recovery and prosperity is to harness the full talents and capabilities of our people wherever they work – manufacturing technology, arts and culture, service, and agriculture.

I’m more than pleased to see there are others – especially leaders of manufacturing – who think the same way.

How do you watch TV? If you’re over 30, it may go something like this:

It’s Thursday night, and your favorite show is on at 9:00 p.m.

8:55 PM: You open your fridge, grab a beer. Open the cupboard, grab a bag of chips. (For the “creative” among you: Open your wine fridge, pull out a bottle of cabernet sauvignon, and grab some organic crackers from your pantry.)

8:57 PM: Yay! Only three minutes. Turn on your TV, watch the credits from the last show. Check your watch… only two more minutes. Watch promotions for the new upcoming “cop drama.” You would flick to something else, but you wouldn’t want to miss those crucial first few minutes of your show.

9:00 PM: Your show starts. You’re happy. Take a sip of wine, eat some cheese.

9:12 PM: Damn! Commercials. OK, well if you’re between 30 and 50, you probably flip aimlessly through other channels. Or if you’re super-savvy you pause your Tivo and grab a refill. If you’re over 50, you sit patiently and watch commercials.

9:16 PM: OK, back in business. Boy, that cliffhanger kept me guessing.

9:23 PM: Commercials again. Repeat routine.

9:30 PM: That was fun. Steve Carrell is so talented. I wonder what’s going to happen next week. Guess I’ll have to wait until then!

Sound familiar? It should. OK, well here is how people under the age of 30 watch TV. Now, some of them tune in like you do every Wednesday night because they just can’t wait another minute to see who’s next to get utterly humiliated on Project Runway/Biggest Loser (take your pick). Most, however, choose to tailor their TV schedule around their lives, not the other way around. That means using the Internet. Sites like Hulu.com and NBC.com actually allow you to watch many of your favorite shows on demand, for free, legally, with the blessing of the networks that air the shows in primetime.

This method has its drawbacks, most obviously that many of these online video options are unavailable outside of the U.S. I went to school in the States and was shocked to discover, upon my return to Toronto, that I was blocked from viewing my favorite shows (the Canadian distributors of American shows are none too keen to have their ad revenues siphoned off by the internet). There are, and have been for years, unauthorized ways to watch your favorite TV online – but they’re dubious at best, unreliable in quality, and are ultimately destined for obsolescence once TV goes online legitimately.

There are obviously still bumps in the road.  As Caroline McCarthy writes on “The Social”:

If the content providers finally work things out with the set-top box makers and Web video hubs, it could be terrific for me and other people who’ve gotten totally fed up with Stone Age TV offerings. For now, however, it’s just a dramatic mess and recent signs are indicating that it (the debate) is taking steps backward as opposed to forward.

There really is no technical barrier preventing anyone, anywhere with a broadband connection from viewing ALL their favorite shows on demand – regardless of jurisdiction. It’s just the leaders of the old paradigm are fighting the currents of the new – it’s the cable vs. online slug-fest. This won’t last forever – the method for distributing content will move, more and more, onto the Internet, and it will be driven by the Net generation and the unassailable appeal of customizing TV.

So, is the old model dead? Will TV go online on for good? I welcome responses.

David Crane says innovation, not creativity, is the key to the future:

The big question in looking to Ontario’s future has to be: How do we create the climate for innovation that will lead to new industries and jobs based on new goods and services we can sell the rest of the world? This is where the report falls short.

Its focus on expanding the size of the so-called “creative class” runs into the law of diminishing returns, the same law that spells out the limits on physical capital accumulation.

While computers represented a big gain initially for the economy when they were first introduced, at some point additional computers had no value unless they were much better than the original computers.

Likewise, growth in the number of people with university degrees can bolster the economy, but at some point there is little need for an additional graduate if there is no job for him or her.

Unless there are new or expanding industries to hire these new graduates, simply increasing the supply doesn’t do much.

First off, let me say that while I am a big admirer of Crane’s writing, he’s dead wrong here. We are not just calling for more creative class jobs, but for increasing the creativity content of all jobs – service as well as manufacturing and agriculture too.  And that creativity does not spring from anywhere, but from real places that engender it and create the ecosystem to utilize it and put it to work.

A core focus of our work at the MPI is about why and how it is not enough to increase supply of creative work, but to build demand for it.  That too occurs in places. That is why we have to build new infrastructure and break with the old housing-auto-industrial complex (making housing and cars cheaper) to free up demand for the products and services of more creative work.  Our colleague Chris Kennedy and his collaborators have made a fundamental contribution here, and my recent Atlantic essay and a good portion of our ongoing MPI work picks up this challenge.

Crane then brings in a big gun, Stanford economist Paul Romer, to bolster his argument

In other words, as economist Paul Romer has emphasized in his work on innovation and economic growth, an economy cannot grow simply by accumulating more of the same.

Romer, who was a key figure in the economic growth program of the Canadian Institute for Advanced Research, argued many years ago that “the increases in standards of living that we achieved in the last century were possible only because of the discoveries and innovation that let new physical capital and new human capital be put to work in high return activities.” So for him, “the most important job for economic policy is to create an institutional environment that supports technological change.”

In fact, Romer has argued, the nations that “are most successful in creating institutions that foster discovery and innovation will be the worldwide technological leaders.”

Innovation has to include greater investment by both government and business. A recent study by the Information Technology and Innovation Foundation in Washington found that there has been a dramatic increase in the number of innovations in the U.S. that are federally funded.

In other words, government plays a crucial role in fostering and facilitating innovation. The Ontario report fails to address innovation policy.

I’m a big fan of Romer. But on this score Crane is again wrong. Innovation, as I point out in Rise of the Creative Class, is not an end-in-itself, but a piece of a much larger and more fundamental category of human existence – creativity. It’s not government that fosters innovation, it’s the place itself. That is the shift our report urges and Ontario needs to make.

By way of background, the entire first part of my academic career was as a student of technological innovation. In 1990, I wrote a book on the limits of an innovation-oriented strategy, called The Breakthrough Illusion. My experience in Pittsburgh showed me once and for all how incredibly advanced and technologically innovative regions can fall behind. And not just Pittsburgh, places like Rochester and even Detroit continue to lead in terms of conventional measure of innovation like patents. Innovative, high-tech industries account for less than 10 percent of GDP – it’s pretty hard to build a robust, balanced, and prosperous economy around those.

That’s why we have come to focus on the 3Ts of economic development. Technology is the first T. It is a necessary but, in itself, insufficient condition for regional prosperity. To achieve sustainable prosperity a region needs two other Ts – talent as Romer’s work points out and tolerance – or openness to new people and new ideas.

Our report also points out that while Ontario does well as the third T, it does not do a good enough job of investing in or leveraging its first two Ts, especially technology. It points this out explicitly and challenges the province to do more.

But a classic 1990s innovation strategy of the kind Crane advocates is too limited – and experience shows it simply will not work.

We’ve run the data – over and over again. We’ve looked closely at measures of technological innovation, of  high-tech industry and the share of scientists and engineers. They are an important part of the economic prosperity equation but not all of it. Without a place that is open, that has an ecosystem that invests in and harnesses talent, that attracts and energizes new people, that creates demand for creative effort, technology and talent simply flow away.   Does Crane really believe that if we somehow build the world’s best innovation policy that would put us on the path to sustained and balanced prosperity? Real, enduring prosperity requires much, much more.

And that’s why Romer’s own thesis advisor, the Nobel-prize winner Robert Lucas, went back to Jane Jacobs. It’s not innovation that drives economic growth, according to Lucas and Jacobs, it is the concentration of creative people using and combining their full talents in real, dense, open places called cities – that, Lucas says, is the real underlying mechanism driving economic growth. And it’s for identifying this fundamental mechanism which he dubs “human capital externalities” or Jane Jacobs externalities that he said Jacobs deserved a Nobel prize of her own.  It’s place that’s the driving force. It’s place that provides the underlying framework and ecosystem for innovation and productivity growth. It does so by attracting people, by enhancing their creative capabilities, by being open to new people and new ideas, and by bringing us together in ways that make us far more innovative and productive than we would otherwise be.

Crane knows better. As someone who cares deeply about urbanism and real places, it’s hard to believe he falls into the trap of believing an absrtact and placeless innovation strategy can somehow bring us the long-run prosperity we need. We can do better than 1980s or 1990s thinking about innovation as the driving force of economic growth. We need to make people and place, not technological artifacts, the center of our dialogue and strategy.

That’s the underlying goal of our work. And it’s a big reason why we decided to set up the MPI in Ontario. Because this is a place which intituitively understands the need to go beyond technology to a broader, fuller approach that understands that enduring prosperity can only come by harnessing the full talent and capabilities of real people in real places. It’s in the very DNA of this province, this city and this place. Our goal at the MPI is to make Toronto a center for the new ideas and new thinking and new empirical research that a fuller understanding of the full gamut of technological, industrial, human, and place-based factors regional prosperity requires.

To do that we must do two things: One, we must tap and harness the full talent capabilities of every single person no matter where they work; and two, we must build a new way of living that breaks with the fordist auto-housing-industrial complex so that we can create large-scale demand for the products and services of the creative age.

That’s the essence of what  we’re up to here.

I did not have to search high and low for these, but here are four good economic signs and one direct observation. You are welcome to use this list to step away from the edge or as a simple reminder that it is people and firms taking action that will turn the economy around, not the government. There is growth to be had and people and firms are making it happen without the government.

5) Oil is so cheap (around $40 a barrel) that it feels free. Don’t believe me? Demand is rising again and inventory is not. We can and are driving and flying again with impunity (see more below).

4) Twitter raised $35 million in venture financing. Txt updates? Micro-blogging? During “depression-like” conditions?

3) Oracle has acquired more than 10 companies in the last 12 months and Cisco raised $4 billion in debt to make acquisitions. Yes, there are firms (and people) that aren’t levered up and are taking advantage of this recession to purchase rivals and innovators and undervalued assets. They are in fact growing their payrolls. They are efficiently deploying capital.

2) Nancy Pelosi’s husband and some of his buddies just put $30 million into a startup, minor-league American Football league. The United Football League (or UFL) is launching this summer and will play its championship game in Las Vegas over Thanksgiving weekend. That is a low-tech, purely domestic entertainment investment. What do they know?

1) I had to wait in line everywhere in Miami Beach last weekend. From our plane’s arrival (which was delayed because they did not have enough runways) to our attempt to snare a cab to our departure flight, where a line of black limos was waiting for beautiful people to head home and blocking taxi access. Yes, prices were down and RE there is getting crushed, but it was crowded and housekeeping, cabana attendants, beach combers, lifeguards, wait staff, and others were working. Which means managers, accountants, lawyers, web programmers, IT staff, and others were also working.

These are just a few small reminders that the world is not yet over. That perhaps we do not need to “rebuild” everything in America, and that people, acting as individuals and in concert as firms, will do the lion’s share of the work if the global economy is to find its way back to a growth trajectory.

I said “stroller-ville”: I think I like this New York Times moniker even better.

Such a baby boomlet might not attract much attention on the Upper West Side of Manhattan or in Park Slope, Brooklyn, but the Financial District is better known as home to hard-charging singles in their 20s than to young parents pushing baby strollers. But the building and its miniature population explosion mirror an overall shift in housing stock in the Financial District and the resulting change in demographics. In less than a decade, the area has evolved from a place dominated by young finance workers in their first rental apartments to one filled with young couples buying their first homes and starting families.

(Via Calculated Risk and  Data 360).