Creative Class

The past couple of days, I’ve looked at the trends in overall patents and nationality of inventor. Today I turn to the regional distribution of innovation across U.S. regions.

It’s well-known that high-tech industries are concentrated and clustered in areas like Silicon Valley, Greater Boston, Seattle, Austin, and North Carolina’s Research Triangle. Paul Krugman won a Nobel Prize for his pioneering work on the relationships between urbanization, trade, and economies of scale. And Michael Porter has shown how and why innovative firms cluster.

The graph below, compiled by Scott Pennington of the Martin Prosperity Institute, shows patent trends from 1976 to 2007 for the top 10 U.S. regions. The graph identifies a clear shift in the geography of patenting. The level of innovation has fallen off considerably in older industrial regions like Pittsburgh and Detroit. It has also fallen off in Sunbelt regions like Dallas with a large presence in computers and communications and Houston with its strong concentration of resource and energy industries. On the other hand, innovation has increased substantially in high-tech regions like Silicon Valley, San Francisco, and Seattle and also in Los Angeles. Two other large regions – New York and Chicago – more or less conform to Mandel’s thesis: Both saw dramatic growth in the late 1990s followed by precipitous drops in the 2000s which erased those gains. Overall, American innovation has become more geographically concentrated and spikier.

The decline of industrial regions as centers of invention reinforces the point made by Henry Ergas two decades ago: The U.S. innovation system is skewed heavily toward “shifting” (the creation of new breakthrough technologies and products) and away from “deepening” (the application of new inventions and technologies to the continuous, incremental upgrading of older industries). The decline of GM and Chrysler – and in particular the latter’s acquisition by Fiat to gain access to new technology – stand as testimony to that. The decline of innovation and commercialization in older industrial regions means that in certain key areas of technology, the U.S. has essentially ceded the potential to develop new industrial goods and consumer products to other countries – from established competitors Germany and Japan to emerging ones like India and China – which possess the industrial infrastructures to embed them in commercial products.

Paul Krugman reflects on the demonization of cities and the people who live in them.

Basically, the accusation is that anyone with a good word for urbanism must just hate the American lifestyle.

[T]he same thing is true about pro-sprawl commentary … Conservatives really, really hate on Portland; examples here and here. Aside from the tendency to engage in factual errors, the hate seems disproportionate to the cause. But it’s an aesthetic thing: conservatives seem deeply offended by anything that challenges the image of Americans as big men driving big cars.

Me, I like dense urban areas. But I’m a pointy-headed intellectual. And bearded, too.

This trend is not new.

A disdain for cities and the diverse, open-minded people (like Krugman) who gravitate to them has long been a rallying point on parts of the right. Long before their forays into foreign policy, neoconservatives were railing against cities. Edward Banfield’s tellingly titled The Unheavenly City offered an incredulous chapter on “Rioting for Fun and Profit.” Early essays in the Public Interest sported snappy titles like “The City as  Reservation” and “The City as Sandbox.” Not to mention so-called “benign neglect” which argued that cities should be left to rot and run down so that land could become cheap enough to entice large-scale suburban-style retrofitting.

The anti-urban strain continues today, as Krugman notes. Ironically, its persistence is what’s really anti-American – anti-American economy that is – making it ever more difficult to leverage the powerful role played by cities and urban areas in innovation and economic growth for long-run economic prosperity.

Here’s a quick run down of some 2009 economic forecasts. I am sort of amazed at how gloomy they are.

Paul Krugman on the second Great Depression:

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression. …

Tim Duy titles his recent Fed Watch, “Starting on an Ugly Note”:

The only certainty for the New Year is that policymakers will continue to pull out all the stops to keep a floor under the US economy. And recent data highlights the difficulty they will face. Hope is high that the incoming Obama Administration can provide the stimulus necessary to generate economic growth by the second half of 2009. The numbers being floated look sufficient to do the job. But will the package provide little more than short term relief or a lasting fix?

Willem Buiter at the Financial Times:

The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally. Even the most hard-nosed, Guantanamo-bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed. Key wholesale markets are frozen; the internationally active part of its financial system has either been nationalised or underwritten and guaranteed by the Federal government in other ways. Most market-mediated financial intermediation has ground to a halt, and the Fed is desperately trying to replace private markets and financial institutions to intermediate between households and non-financial operations … The legal framework for the regulation of financial markets and institutions is a complete shambles. Even given the dismal state of the legal framework, the actual performance of key regulators like the Fed and the SEC has been appalling, with astonishing examples of incompetence and regulatory capture.

There is no chance that a nation as reputationally scarred and maimed as the US is today could extract any true “alpha” from foreign investors for the next 25 years or so. So the US will have to start to pay a normal market price for the net resources it borrows from abroad. It will therefore have to start to generate primary surpluses, on average, for the indefinite future…

There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place. The notion that the US Federal government will be able to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of “dark matter” or “American alpha” is not credible.

And, Jim Kuntsler:

We’ll turn around early in 2009 and discover that we are a much poorer nation than we thought because from now on credit will be extremely hard to get for anyone for anything. The businesses that survive will have to keep going on the basis of accounts receivable. This is the area where the crash of giants will be heard. I’ve been saying since publication of The long Emergency that comprehensive downscaling in all our activities, from farming to business to schooling to governance, will be the categorical imperative of the years ahead. Giant enterprises requiring giant loans to get from quarter to quarter will tend to not make it. Borrowing from the future will become a practical impossibility as past bad debts from previous borrowings continue to unwind, cease performing, and get written off. This argument implies that the federal government will tend to flounder just as General Motors, Citicorp, Target Stores and other gigantic enterprises will tend to flounder. It would be sad to see a President Obama so hamstrung and helpless, and it is largely why I see his role as largely symbolic — as a reassuring presence encouraging the distressed public to bravely bear their hardships, and to be kind and helpful among their neighbors.

Households, like businesses, will have to pay as they go from earned income. The house as ATM is over. Credit cards are maxed out and credit ceilings are lowering like the ceiling in “The Pit and the Pendulum,” preparing to slice-and-dice the old “normal” of family life in America. Bankruptcy will be the new Nascar. A lot of families will lose everything. They will sift and disperse into the housing owned by other family members — parents, siblings — and a strange new not-altogether comfortable kind of togetherness will become common. Over time, a lot of people will go looking for casual work “under-the-table”( and probably low-paying). To some degree, these workers will begin to look and act like a new servant class, and before too long they may be absorbed into the households of people who employ them. There will be plenty of room for them there.

Counties, municipalities, and states will join in the bankruptcy fiesta. It would be reasonable to expect collapsing services as a result. This would be a situation fraught with danger — of rising crime, of public health emergencies as water systems are not kept up and sewage treatment becomes unaffordable. I don’t imagine the federal government stepping into every Podunk or Metropolis from sea to shining sea and propping up these services. People will have to cope with danger and deprivation.

While part of me is drawn to the “going-to-hell-in-a-handboat” perspective, I am also amazed at how the economy is holding up in light of 2008’s multiple body blows. Have we managed the worst and been able to turn the corner, or is this just the beginning of the Great Reset?

The newest Nobelist explains his work on economic geography:

In the world of the old trade theory, “factor mobility” was a substitute for trade: if factories and industrial workers can move freely, they’ll spread out to be close to the farmers, and neither food nor manufactured goods will have to be shipped long distances. But in the economies-of-scale world I had been studying, the “centrifugal” effect of widely dispersed resources, which tends to push economic activity into spreading out, would be opposed by the “centripetal” pull of access to large markets, which tend to promote concentration of economic activity.

Think of Henry Ford and his Model T. He could have established many factories, spread across the country, to be close to his customers. Instead, however, he found that it was worth incurring extra shipping costs to achieve the economies of scale of one big factory in Michigan.

And once you’re concentrating production in a limited number of locations, which locations will you choose? Locations where there’s a large market – which will be locations where lots of other producers have also chosen to concentrate their production. If the centripetal forces are strong enough, you’ll get a cumulative process: regions that for historical reason have a head start as centers of production will attract even more producers, becoming the economic “core” while other areas become the “periphery.” Thus for about a century, until the rise of the Sunbelt, the great bulk of U.S. manufacturing was crammed into a fairly narrow belt from New England to the inner Midwest; today, 60 million people live along a narrow stretch of the East Coast. Those 60 million people aren’t there because of the scenery; each of them is there because the other 60 million people are also there.

The same sort of logic explains why particular industries concentrate in certain locations, except that in such cases the logic involves things like a deep labor market for specialized skills and a good market for suppliers of specialized inputs. What determines which industry locates where? Often, accident: Silicon Valley owes its existence in large part to a couple of guys named Hewlett and Packard, who started some stuff in their garage, New York is New York because of a canal that only pleasure boaters use today.

This is a great day for geography. Krugman’s Prize is a real vindication that geography is important and that the profession also thinks so. Richard still remembers when we met in Ottowa in 1989, almost 20 years ago, to lay out some of the work on cities. For those of us that have contributued to this version of our work, Richard Florida, Maryann Feldman, David Audretsch, Attila Varga, Sam Youl Lee, Catherine Armington, among others, we are all indebted to Paul for his pathbreaking work in this area. Thank you.

Paul Krugman was awarded the Nobel Prize in economics today. The announcement reads simply: “for his analysis of trade patterns and location of economic activity.” The award is very well-deserved and fantastic for our field. My hunch is Paul Romer can’t be far behind.

“[I]n the long run, we are all the Grateful
Dead.” – Paul Krugman.

I wish. More and more of us are like the t-shirts vendors at a Dead concert, actually. A lucky few are the backup band, and fewer and fewer are sound men or roadies. One thing that seems self-evident – artists, musicians, writers, scientists, and creative people generally continue to produce terrific creative material.  It’s the transmitters and publishers of that content that are the bottleneck and the problem. What will become of the book publishers, record companies and scientific journals in this new age of digitization. Seems to me like they are the dinosaurs of the digital age on their way for extinction. More of Krugman’s ruminations on digitization of everything, authors, musicians, and IP, here.

Channeling his inner-Jim Kuntsler, Paul Krugman says rising oil prices spell big trouble for suburbia:

To see what I’m talking about, consider where I am at the moment: in a
pleasant, middle-class neighborhood consisting mainly of four- or
five-story apartment buildings, with easy access to public transit and
plenty of local shopping.

It’s the kind of neighborhood in which people don’t have to drive a lot, but it’s also a kind of
neighborhood that barely exists in America, even in big metropolitan
areas. Greater Atlanta has roughly the same population as Greater
Berlin — but Berlin is a city of trains, buses and bikes, while Atlanta
is a city of cars, cars and cars.

And in the face of rising oil prices, which have left many Americans stranded in suburbia — utterly dependent on their cars, yet having a hard time affording gas — it’s
starting to look as if Berlin had the better idea.

Changing the geography of American metropolitan areas will be hard. For one thing,
houses last a lot longer than cars … Infrastructure
is another problem. Public transit, in particular, faces a
chicken-and-egg problem: it’s hard to justify transit systems unless
there’s sufficient population density, yet it’s hard to persuade people
to live in denser neighborhoods unless they come with the advantage of
transit access …

Still, if we’re heading for a prolonged era of scarce, expensive oil,
Americans will face increasingly strong incentives to start living like
Europeans — maybe not today, and maybe not tomorrow, but soon, and for
the rest of our lives.

Europeans still drive a lot even with way expensive fuel -  the highways are perpetually clogged, worse at times the in the US, around Europe’s major cities.  Sure, the transit is better, people take the train and lots more ride bicycles than in the US.  The same can be said of Toronto.  But it’s not fuel costs that are driving this, it’s the time and networking costs.  Who’s moving back to US super-star cities? Not the middle classes, rather it’s the relatively affluent, who are choosing to trade-off space for time. That said, America’s stretched out spatial structure is a dead-weight cost against future competitiveness especially compared with the relatively compact city-regions in other parts of the globe.  In the creative economy, it is density, velocity, and idea-generation – in tandem with fuel economy or even energy efficiency, which which will be the core of competitive advantage.

The question remains: How to avoid a super-segmented and sorted city, and how to provide affordable housing in light of these growing forces?