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New Growth Theory, Globalization, and the Economic Prosperity of U.S. Cities

New Growth Theory, Globalization, and the Economic Prosperity of U.S. Cities. Barry Bluestone Dean, School of Social Science, Urban Affairs, and Public Policy Northeastern University Prepared for the Institute for Local Governance and Regional Growth University of Buffalo (SUNY)

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New Growth Theory, Globalization, and the Economic Prosperity of U.S. Cities

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  1. New Growth Theory, Globalization, and the Economic Prosperity of U.S. Cities Barry Bluestone Dean, School of Social Science, Urban Affairs, and Public Policy Northeastern University Prepared for the Institute for Local Governance and Regional Growth University of Buffalo (SUNY) February 13, 2008

  2. What is Responsible for the Economic Success of U.S. Cities • Key Factors • Physical Capital • Technology • Human Capital • Transportation & Communication Revolution • Globalization • Neoclassical Growth Theory vs. New Growth Theory

  3. Changing Fortunes of U.S. Cities • Twenty (20) Metro Areas under study • Measure of Metro Prosperity: Median Household Income • Compare 1969 and 2005 data (in 2005 dollars)

  4. Map 1 Tacoma Buffalo Hartford St. Louis Raleigh Austin Tucson

  5. Most Prosperous Metro Areas: 1969 • #1 Detroit, Michigan • #2 Hartford, Connecticut • #3 Chicago, Illinois • #4 Milwaukee, Wisconsin • #5 New York, New York

  6. Least Prosperous Metro Areas: 1969 • #1 Austin, Texas • #2 Raleigh-Durham,Chapel Hill, North Carolina • #3 Jacksonville, Florida • #4 Tucson, Arizona • #5 Phoenix, Arizona

  7. Largest Percentage Change in Median Household Income (1969-2005) (in 2005 Dollars) • #1 Austin, Texas (+84%) • #2 Raleigh, North Carolina (+57%) • #3 San Francisco, California (+40%) • #4 Jacksonville, Florida (+34%) • #5 Boston, Massachusetts (+32%)

  8. Smallest Percentage Change in Median Household Income (1969-2005) (in 2005 Dollars) • #1 Buffalo, New York (-10%) • #2 Detroit, Michigan (- 7%) • #3 Milwaukee, Wisconsin (-7%) • #4 Chicago, Illinois (+5%) • #5 St. Louis, Missouri (+6%)

  9. Prospering Metro Areas: 2005 • #1 San Francisco, California • (Up from #10) • #2 Boston, Massachusetts • (Up from #8) • #9 Raleigh, North Carolina • (Up from #19) • #12 Austin, Texas • (Up from #20)

  10. Declining Metro Areas: 2005 • #20 Buffalo, New York • (Down from #9) • #17 Milwaukee, Wisconsin • (Down from #4) • #11 Detroit, Michigan • (Down from #1)

  11. Neoclassical Growth Theory • Robert Solow: Capital Formation and Technological Change responsible for productivity growth • Technological Progress: “Advances in Knowledge” • But technology is a “black box”: impact measured as a residual

  12. Neoclassical Theory • Dale Jorgenson: • Growth in capital input (tangible assets like factories, machinery) is the most important source of economic growth • Growth in labor input is the next most important source of economic growth • Technological progress is the least important • Law of Diminishing Returns dominates

  13. New Growth Theory • Paul Romer, Richard Nelson, Sidney Winter • Technological Progress is at the center of economic growth

  14. New Growth Theory – 4 Premises • Technological change provides the incentive for capital investment • Technological change is subject to various complementarities and feed-back loops • Technological change occurs as a result of intentional actions responding to profit incentives • Technology innovation provides increasing returns to scale

  15. Evidence for New Growth Theory • Great Britain vs. U.S. (1870-1929) • In 1870, U.S. per capita income only ¾ of Great Britain • In both countries, education per worker increased about the same and savings rates were comparable • But by 1929, U.S. income levels were 30% higher than in Great Britain • Why?

  16. U.S. vs. U.K. “Investments” • British investors took their saving and invested abroad • U.S. became technology innovator with Henry Ford, Thomas Edison, the Wright Brothers … and Americans invested at home • By the 1920s, these technological advances provided a booming economy in the U.S.

  17. Decline in Transportation and Communication Costs • Jumbo jet, supertanker, the container ship reduced cost of transportation dramatically • Satellites, high-speed internet, fiber optics, teleconferencing, mobile phones reduced the cost of communications dramatically • The result: Thomas Friedman’s “Flat World” – Globalization of Production

  18. The Key to 21st Century Prosperity? • Need to be a leader in technological innovation in order to survive and prosper in a global economy where workers and goods can move nearly at the speed of sound …. and information moves nearly at the speed of light.

  19. Prosperous Cities • Technology Leaders in the U.S.: • Boston, Massachusetts • Austin, Texas • Raleigh-Durham-Chapel Hill, North Carolina • San Francisco, California • Jacksonville, Florida • Atlanta, Georgia • Chicago, Illinois • Cities with a concentration of universities and medical centers • Cities with powerful international & domestic transportation hubs

  20. The 21st Century City • Centers for Business Services • Face-to-face contact opportunities supplemented by high-speed communications attract business • Centers for Consumption • Cities that are good places to live with lots of cultural amenities and recreational opportunities attract workers

  21. The “Eco-System” for Urban Prosperity • Incubators of innovation and technology • Attractive locations for the “creative class” of scientists, engineers, architects & designers, writers, artists, musicians, and alike • Transportation and communication hubs

  22. A Taxonomy of 21st Century Cities • Innovation Centers • Austin, Boston, San Diego, Seattle, Raleigh, Washington, D.C. • Finance Centers • New York, Chicago; Charlotte, North Carolina; San Francisco • Transportation Hubs • New York; Chicago; Denver; Atlanta; Memphis, Tennessee; Louisville, Kentucky

  23. A Taxonomy, con’t • Cultural/Tourism/Recreation Centers • Las Vegas, Nevada; Orlando, Florida; Philadelphia, Pennsylvania • New Manufacturing Centers • Evansville, Indiana (Toyota); Greensville, South Carolina (BMW; Michelin) • Natural Resource Centers • Aspen, Colorado (Skiing); Tampa, Florida (Beaches) • Retirement Centers • Phoenix, Arizona; San Diego, California; Miami, Florida

  24. A Note of Caution: Cost of Living • Those metro areas that have attracted creative industries and creative workers are now in danger of “pricing themselves out of the market” • The high cost of living in many of these cities (Boston, San Francisco, San Jose) is beginning to discourage working families and businesses from settling in these regions

  25. CURP Study of Housing, Employment and Population • Metro areas with highest cost of living are suffering slow employment growth or outright job loss • Metro areas with the highest cost of living are suffering net out-migration of domestic population • Paradox: The shortage of housing supply can lead to a future sharp decline in housing prices … as jobs and workers leave the state

  26. Boston Monthly Housing $1,266 Monthly Food $ 587 Monthly Child Care $1,298 Monthly Transportation $ 321 Monthly Health Care $ 592 Monthly Other Necessity $ 500 Monthly Taxes $ 824 Monthly Total $5,388 Annual Total $64,656 Raleigh-Durham-Chapel Hill Monthly Housing $ 779 Monthly Food $ 587 Monthly Child Care $ 866 Monthly Transportation $ 358 Monthly Health Care $ 368 Monthly Other Necessity $ 369 Monthly Taxes $ 350 Monthly Total $3,677 Annual Total $44,124 A Tale of Two CitiesBasic Budget2 Parents, 2 Children A Tale of Two Cities Source: Economic Policy Institute, “Family Budget Calculator, 2005”

  27. Boston Monthly Housing $1,266 Monthly Food $ 587 Monthly Child Care $1,298 Monthly Transportation $ 321 Monthly Health Care $ 592 Monthly Other Necessity $ 500 Monthly Taxes $ 824 Monthly Total $5,388 Annual Total $64,656 Buffalo-Niagara Monthly Housing $ 648 Monthly Food $ 587 Monthly Child Care $1,195 Monthly Transportation $ 358 Monthly Health Care $ 514 Monthly Other Necessity $ 333 Monthly Taxes $ 326 Monthly Total $3,961 Annual Total $47,532 A Tale of Two CitiesBasic Budget2 Parents, 2 Children A Tale of Two Cities Source: Economic Policy Institute, “Family Budget Calculator, 2005”

  28. Cost of Living – 4-Person Family • #1 Boston • #2 Washington, D.C. • #3 Nassau-Suffolk Country, NY • #4 Stamford-Norwalk, CT • #33 Buffalo-Niagara, NY • #71 Raleigh-Durham, NC • #127 Detroit, MI • #159 Milwaukee, WI

  29. 2.91% 2.29% 1.49% 1.53% 0.95% 0.86% 0.68% 0.12% -0.62% -0.68% Low Price High Price Universe: 245 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics

  30. Boston MSA (-4.9%) Universe: 245 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics

  31. Monthly Housing Cost Employment Change (%) (2000-2004) %∆Emp(2000-2004) = -.1466 +.0000396 Housing Cost (4.07) -2.291E-007 Housing Cost SQ (4.04) N = 245 Adj. R Square = .056 Boston MSA

  32. 2.53% 1.98% 1.09% 1.06% 0.84% 0.93% 0.62% 0.50% -0.02% -0.21% Low Cost High Cost Universe: 245 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics

  33. Boston MSA (-5.2%) Universe: 304 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census

  34. Internal Migration (% Change) %∆Internal Migration = - .146 + .000399 Housing Costs (7.03) - 2.475E-007 Housing Costs SQ (7.39) N = 304 Adj. R Square = .153 Boston MSA Monthly Housing Cost

  35. Internal Migration (% Change) %∆Internal Migration = - .146 + .000399 Housing Costs (7.03) - 2.475E-007 Housing Costs SQ (7.39) N = 304 Adj. R Square = .153 Boston MSA San Francisco Stamford-Norwalk San Jose Boston Oakland Nassau-Suffolk Monthly Housing Cost

  36. 2.19% 1.54% 1.40% 1.04% 0.60% 0.41% 0.39% 0.16% 0.19% -2.12% Universe: 304 U.S. Metro Areas Boston Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census

  37. Conclusion • A new hierarchy of metro areas is arising as a result of technological innovation and globalization • Urban prosperity depends to a great extent on being a leader in technology and a transportation hub • But, those cities where the cost of living rises sharply are in danger of pricing themselves out of the market for new firms and working families

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