Creative Class

With the U.S. economic recovery apparently stalling and perhaps headed for a double dip, the debate among economic policy makers about what to do is heating up.  The right says it’s time to embrace fiscal prudence, to cut spending and pay off debt.  On the left, there are calls for continued spending to offset reduced private investment.

A new study by Tulane’s James Alm and Janet Rogers of Nevada’s Department of Budget and Planning (h/t Ryan Avent, whose deadpan tweet noted that it was likely to spark a “lively discussion”) takes a close look at the effects of tax and spending policies at the state level.  Entitled  “Do State Fiscal Policies Affect State Economic Growth?”, it examines  fifty years of data  (from 1947 to 1997),  tracking  the effects of state tax policies, spending policies, and political orientation on economic growth. Looking at the different policy approaches and strategies that have been pursued at the level of states and cities and comparing their results provides a useful lens through which to examine pressing national issues. Alm’s and Rogers’ main findings are certainly interesting; “lively” is quite likely an understatement for the sort of debate their findings should inspire.

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The conventional wisdom presumes that growing populations bring economic growth. But what drives wealth isn’t how many people a place is adding, but how much more productive its workers are becoming.  Yesterday, I showed that population growth and productivity growth are unrelated on the level of states. Today, drawing on my ongoing research with Kevin Stolarick of the Martin Prosperity Institute and Jose Lobo of Arizona State University, I’ll take a look at the pattern for 350 plus U.S. metro areas. The disconnect is even more pronounced.

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This past weekend, I had an oped in the New York Daily News about the widespread fallacy that population growth and prosperity go hand in hand.

Yes, the Sunbelt is growing and the Frostbelt declining.  That decades old meme was confirmed by the earliest releases of the new 2010 Census. “The quest for mild winters remains the great constant of American demographics,” wrote Walter Shapiro in a piece headlined “The Census Ratifies the Sunbelt’s Supremacy and Buoys the GOP.  “For the first time in history, more than half of the nation’s population (308,745,538) resides either in the South or in the warm-weather states of California, Arizona and New Mexico.”

But are those states that are adding people also growing economically?   Not so much, actually.

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We know a great deal about the clustering of human capital and of creative class jobs and how they drive regional economic growth. But only recently have economists and economic geographers begun to explore the skills that underpin the clustering of talent and creative-knowledge jobs.

A brand new paper with my MPI colleagues Charlotta Mellander, Kevin Stolarick, and Adrienne Ross examines the distribution of three key skills across U.S. metropolitan areas: physical skills, cognitive skills, and social skills.

Here’s the abstract:

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Jane Jacobs and Robert Lucas long ago argued that the clustering and density of talented people is a key driver of innovation and economic growth. A new study, “Productivity and the Density of Human Capital,” by Jaison Abel of the NY Fed, Ishita Dey of the University at Buffalo, and Todd M. Gabe of the University of Maine, provides clear evidence of density’s effects on regional economic output (pointer from Kevin Stolarick).

We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Using new measures of output per worker for U.S. metropolitan areas along with two measures of density that account for different aspects of the spatial distribution of population, we find that a doubling of density increases productivity by 10 to 20 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock that is one standard deviation below the mean level realize around half of the average productivity gain, while doubling density in metropolitan areas with a human capital stock that is one standard deviation above the mean level yields productivity benefits that are about 1.5 times larger than average.

To download the study click here.

Wendell Cox writes (pointer via Planetizen):

Most suburban growth is not the result of declining core city populations, but is rather a consequence of people moving from rural areas and small towns to the major metropolitan areas. It is the appeal of large metropolitan places that drives suburban growth.

Larger metropolitan areas have more lucrative employment opportunities and generally have higher incomes than smaller metropolitan areas. This is particularly the case in developing countries. As a result, the big urban areas attract people seeking to escape what are often the stagnant or even declining economies in smaller areas.

A very Jane Jacobs insight, and one I find compelling.

In The Economy of Cities, Jacobs controversially argued that virtually all of economic growth traces back to cities: In her view, cities actually precede agriculture. Early cities, according to Jacobs, spurred agricultural development by providing trading centers for agricultural products.

While it’s common to think of suburbs as draining off city assets, today’s metropolitan areas with their urban cores and suburban and ex-urban rings, are really expanded cities. Up until the early-to-mid 20th century, cities were able to capture peripheral growth by annexing new development, until suburbs figured out they could prosper by becoming independent municipal entities – thus the now famous concentric-ring, or, in some cases, the hole-in-the-donut pattern of our metro regions. The growth of gargantuan mega-regions like the Boston-New York-Washington corridor is essentially the next phase of this process of geographic development.

It’s important to understand how these two interrelated geographic processes – outward geographic expansion and the more intensive use of existing urban space – combine to shape economic progress.

Measurement abounds! Stocks are down around the world over 50 percent from a year ago, GNP growth is down a little, unemployment has doubled but from a very low base, bank stocks are in the toilet. But how can we get a handle on what is actually happening around the world that represents a real number and not just financial.?

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. The index provides “an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron, ore, and grain.”

The index is a good measure of future manufacturing output since many of the inputs that go into manufacturing are dry goods. Over the past year the index has fallen from 10,000 to just over 1,500! This sudden collapse in shipping prices and increase in capacity is one indicator of the depth of this crisis. It more than other indicators suggests that the economic recession is far from over and will most likely deepen.

What to do about this is clearly expressed in the major concerns today about trade protraction and bigger than thy neighbour policies that bought on the Great Depression of the 1930s.  We world needs to keep trade routes open and avoid protectionism as much as possible. For if we are not able to keep trade going the world will no longer be flat, or spiky. It will be chopped up.

Many economic development experts continue to insist that jobs are the key to economic growth. Attract the companies and the jobs and the people will follow? Consider this from a recent study by Harvard economist Edward Glaeser and collaborators.

[W]hich way does the causality run? Are skilled industries moving into an area because there are an abundance of skilled workers, or are skilled workers moving to areas because of skill-oriented industries?

While surely both phenomena occur, we think that the evidence supports the view that industries are responding to the area’s skill distribution more than the view that the skill distribution is responding to the area’s industries mix. For example, the share of the population with college degrees in 1940 can explain 35 percent of the variation in the skill mix of industries today. By contrast, the skill composition of the industries in the metropolitan area in 1980 can only explain seven percent of the variation in growth of the population with college degrees since that date. The complex two-sided nature of this relationship makes it difficult to accurately assess the direction of causality, but there are reasons to think that much of the industrial mix in the area is actually responding to the skill distribution.