Among economists, there is fairly wide agreement that this hyperconcentration is holding back economic growth and threatens to undermine American competitiveness, even as it poisons and polarizes our politics. There is no agreement, however, on what to do about it.
On one side of this argument are academic economists and millennial bloggers who think the solution is for New York, San Francisco, Los Angeles, Seattle and Boston to repeal overly restrictive zoning laws and build enough housing for millions of new workers who would instantly become more productive just by working and living among so many other high-skilled and creative people. According to one oft-cited estimate by economists Chang-Tai Hsieh and Enrico Moretti, the U.S. economy would be nearly 10 percent bigger as a result of such a mass migration to economic opportunity and high-rise living.
On the other side are political and business leaders, economic development experts and at least one newspaper columnist who think that is economic and political nonsense. Rather than move workers to opportunity, their strategy would be to move opportunity closer to underemployed workers, underutilized infrastructure, cheap land and plentiful housing — in places such as Detroit, Cleveland, St. Louis, Baltimore and other large “legacy cities” from the industrial era.
The first is essentially a deregulation strategy, allowing market forces to make the economy more productive and efficient by concentrating economic activity. Some of the benefit would presumably then trickle down to the productivity laggards in the rest of the country.
The second strategy is based on the realization that markets, left on their own, can produce outcomes so unequal that they become socially and politically unacceptable and economically self-defeating. In those instances, government is required to take a more active role, using public investment to steer economic growth to where private markets have been reluctant to go.
“There’s a particular kind of market failure in the rise of the superstar cities,” said Bruce Katz, the founding director of the Nowak Metro Finance Lab at Drexel University. “When you see 80 percent of the venture capital goes to just three states, that represents a rather narrow vision of where innovation can occur. There is a herd instinct to do what is safe, what everyone else is doing — no one was ever criticized for investing in San Francisco. But there are much bigger rewards — bigger for themselves and bigger for the economy — for those who take bigger risks.”
And it’s not just venture capitalists — lenders, money managers and corporate executives have also run with the herd. Together they have created a geographic polarization that now poses serious challenges to both the winners and the losers. In the winning cities, it has resulted in transportation gridlock, spiraling home prices and inflated costs for households and businesses. The surfeit of investment capital has also misallocated capital to companies with too little chance of success, while creating bubbles in company valuations.
Meanwhile, in once-thriving industrial cities, declining populations, job loss, falling home prices, rising crime and inadequate public services all feed on one another, creating a vicious downward spiral that is difficult to reverse. For decades, any company looking for land, office or factory space could have had them free in these cities, along with tax breaks and government sponsored training for workers desperate for a new beginning. Yet few if any companies were interested. In a paper last December, Mark Muro of the Brookings Institution and Robert Atkinson of the Information Technology and Innovation Foundation explain that the market forces that created and sustained these winner-take-all dynamics cannot be relied on to correct them.
The only way to revive these legacy cities and create new engines of innovation and growth for the U.S. economy, they argue, is through significant intervention and investment by the federal government.
It’s been 40 years since industrial policy — “picking winners and losers” as critics like to denigrate it — fell out of fashion in the United States. Despite the huge economic benefits that flowed from public investments like the Tennessee Valley Authority, the national highway system and government research labs, there were also embarrassing examples of misguided attempts to save dying industries with subsidies and trade protection, or revive dying downtowns with convention centers and pedestrian malls.
Faith in government and planning gave way to faith in free markets and “creative destruction.” Unfortunately, the creativity and destruction wound up happening in very different places.
The good news is that through trial and error, economic development officials have learned quite a bit about what works and what doesn’t to stabilize and revive urban areas, and some of these initiatives have begun to bear fruit.
Pittsburgh was among the first to begin to turn things around by leveraging its universities and hospitals to develop a globally competitive cluster in medicine and medical engineering. In Detroit, the decision by Quicken Loans founder Dan Gilbert to move his company’s headquarters downtown, and invest billions of dollars of his own money in nearby developments, sparked a revival that prompted Ford Motor Co. to move downtown to a rehabilitated train station. And in midtown St. Louis, investments by local corporations, universities and the federal government have created research centers and entrepreneurial clusters around agricultural technology and geospatial intelligence.
Meanwhile, in those expensive and congested superstar cities, there has recently been an outflow of people and investment as companies have begun to disperse to secondary tech centers like Austin, Denver, Nashville and Portland, Ore. The HQ2 sweepstakes that eventually led Amazon to the D.C. area has been the most visible example, but companies such as Google, Facebook and Microsoft have also discovered that they can find plenty of young talent in secondary hubs at significantly lower cost.
None of this would have happened, of course, if millennials and empty nesters had not rediscovered the joys of urban living. In cities large and small, long-neglected neighborhoods have suddenly become hip and cool and are teeming with new condos, coffee bars, restaurants, fashion boutiques and farmers markets. And the people who live in them are demanding that their employers locate offices nearby so they can walk or ride a bike or take a streetcar rather than drive out to some sterile office park in the suburbs.
While these are all encouraging developments, in most legacy cities they have involved only a fraction of the land and have improved the lives of only a fraction of the people who were already living there. In Baltimore, for example, there are pockets of revival near the Inner Harbor and around Patterson Park and the train station. An Innovation Village is rising from the industrial ashes in the city’s west end, while the chief executive of Under Armour is spearheading a $5 billion mixed-use development project on an abandoned industrial site along the Patapsco River.
At the same time, however, huge swaths of the city are deteriorating and losing ground, with the city now actively demolishing blocks of dilapidated and abandoned rowhouses. Alan Mallach, who has been studying legacy cities for decades, says turning these early successes into self-sustaining growth will require a more muscular and sustained effort by government. Otherwise, he writes in his book, “The Divided City,” rather than regaining their historical role as engines of economic growth and opportunity, these cities will become “polarized places where the bustling, glittering enclaves of prosperity are ringed by largely abandoned areas where millions are relegated to lives of poverty and despair.”
According to Mallach and other experts, reviving a legacy city requires a regional strategy involving both the city and surrounding suburbs. It also requires the active involvement of governors, the support of state legislatures and the creation of a regional planning and development agency with broad, flexible powers.
Any successful strategy must leverage the region’s strengths — infrastructure, businesses, institutions and know-how — to create globally competitive industry clusters, while also developing an entrepreneurial ecosystem that can generate and nurture innovative new companies.
Success will require competent and courageous leadership by government officials who are willing to make unpopular choices and can persuade voters and local institutions to make short-term sacrifices to achieve long-term success.
And it requires significant financial investment from federal and state governments in the form of tax-free opportunity zones, research funding, low-cost loans, seed capital for new businesses, worker training and infrastructure. Alongside that public investment, there must be significant investment by local companies, universities, banks and pension funds.
Perhaps most important, at every stage, success must be shared with longtime residents by creating new mid-skilled jobs, training for those jobs, and stabilizing neighborhoods with better schools, less crime and improved government services. Without that, political support evaporates.
Amy Liu, director of the Metropolitan Policy Program at the Brookings Institution, said the case for significant federal involvement in this kind of place-based industrial policy is not simply that it is needed to keep the U.S. economy competitive. History, she said, shows that smaller cities and rural counties are likely to be more economically stable if they are close to thriving big cities that can provide jobs and education for their residents and ready customers for what they produce. For a high school graduate living in Johnstown, Pa., the move to Pittsburgh 90 minutes away looks a lot less daunting than moving across the country to Los Angeles or San Francisco.
That’s not to say all declining cities and towns will, or should, survive. The competitive dynamic driving economic activity to larger urban centers is real and powerful. At the same time, that doesn’t mean we have to all wind up living in five or six megacities. At some point, there is not only a diminishing economic return to urban agglomeration but also a diminishing satisfaction with a physical environment that has lost its human scale. The optimal economic geography is not one based on ever-bigger Seattles and San Franciscos, but more of them spread more evenly across the country.
The obvious candidates are those places that already have the infrastructure, talent and scale. Some legacy cities such as Denver, Chicago and Philadelphia are well on their way. But in others — Detroit, St. Louis, Cleveland, Baltimore, Indianapolis and Birmingham, Ala., come to mind — the national government still has a crucial role to play in further catalyzing private investment and creating self-sustaining growth.
Last fall, AOL founder Steve Case announced that he had raised $150 million from wealthy executives and investors — on top of an initial $150 million two years earlier — for his Rise of the Rest Seed Fund. Case has become something of a pied piper for American entrepreneurship and innovation. Several times a year, he heads out in a bus with his partner, “Hillbilly Elegy” author J.D. Vance, to tour the heartland in search of worthy companies in need of early-stage capital. So far they have invested in 130 companies in 70 cities.
At a recent conference at Brookings, Case warned that the United States “won’t remain the leader of the pack unless we are winning the innovation battle, and cannot win the innovation battle if it’s just a few people in a few places.” It’s too risky, he said, for the United States to put so many of its economic eggs in so few baskets.
What I find so curious is that here is an issue — helping workers and regions that have been left behind — that holds enormous appeal to supporters of President Trump and Sen. Bernie Sanders (I-Vt.), and just about everyone in between. Not coincidentally, it involves regions that are most likely to decide the coming election. Yet none of the presidential candidates — not Democrats, not Trump — is even talking about legacy cities, or industrial policy or regional economic development.
I’d put the case for a more muscular urban and industrial policy this way: If Case and a few billionaire friends are willing to commit hundreds of millions of dollars to redirect investment and growth from a handful of cities with too much to those with too little, shouldn’t the federal government be willing to commit hundreds of billions alongside?