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 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 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) Map 1 Tacoma Buffalo Hartford St. Louis Raleigh Austin Tucson et ro i H tin us A t ar tfo rd C hi ca go M ilw au ke e N ew Yo rk N ew ar k Ta co m a B os to n B uf Sa fa n lo Fr an ci sc Lo o s A ng el es St .L ou is Po rt Sa la nd lt La ke C ity A t la nt a Ph oe ni x Tu cs Ja on ck so nv ill e R al ei gh D Median Household Income 1969 Metro Areas ($2005 Dollars) $60,000 $54,892 $50,000 $46,845 $40,000 $30,000 $27,369 $20,000 Most Prosperous Metro Areas: 1969 #1 #2 #3 #4 #5 Detroit, Michigan Hartford, Connecticut Chicago, Illinois Milwaukee, Wisconsin New York, New York Least Prosperous Metro Areas: 1969 #1 #2 #3 #4 #5 Austin, Texas Raleigh-Durham,Chapel Hill, North Carolina Jacksonville, Florida Tucson, Arizona Phoenix, Arizona Percentage Change in Median Household Income Metro Areas 1969-2005 ($2005 Dollars) 100% 80% 84% 60% 57% 40% 40% 34% 32% 20% 23% 17% 16% 16% 14% 13% 12% 11% 11% 11% 6% 5% 0% nt a At la n -7% -10% Ta co m a N ew Yo rk N ew ar k H ar tfo rd Ph oe ni x Tu cs on Po rtl Sa an d lt La ke C Lo ity s An ge le s St .L ou is C hi ca go M ilw au ke e D et ro it Bu ffa lo -20% Bo st o Au st in R al Sa ei gh n Fr an cis co Ja ck so nv ille -7% Largest Percentage Change in Median Household Income (1969-2005) (in 2005 Dollars) #1 #2 #3 #4 #5 Austin, Texas (+84%) Raleigh, North Carolina (+57%) San Francisco, California (+40%) Jacksonville, Florida (+34%) Boston, Massachusetts (+32%) Smallest Percentage Change in Median Household Income (1969-2005) (in 2005 Dollars) #1 #2 #3 #4 #5 Buffalo, New York (-10%) Detroit, Michigan (- 7%) Milwaukee, Wisconsin (-7%) Chicago, Illinois (+5%) St. Louis, Missouri (+6%) au on lo uf fa Tu cs B lle e ix ke en so nv i Ja ck ilw M ui s ity nd C Lo Ph o St . e ak Po rt la tin ro it us A et D le s ng e h nt a ei g al R tla A A tL Sa l to n os o ar tfo rd N ew Yo rk N ew ar k Ta co m a C hi ca go H B sc an ci Fr Lo s Sa n Median Household Income 2005 Metro Areas ($2005 Dollars) $70,000 $65,382 $60,000 $53,216 $50,000 $41,521 $40,000 $30,000 Prospering Metro Areas: 2005 #1 #2 #9 #12 San Francisco, California (Up from #10) Boston, Massachusetts (Up from #8) Raleigh, North Carolina (Up from #19) Austin, Texas (Up from #20) Declining Metro Areas: 2005 #20 #17 #11 Buffalo, New York (Down from #9) Milwaukee, Wisconsin (Down from #4) Detroit, Michigan (Down from #1) 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 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 New Growth Theory Paul Romer, Richard Nelson, Sidney Winter Technological Progress is at the center of economic growth 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 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? 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. 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 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. 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 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 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 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 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 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 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 A Tale of Two Cities Boston A Tale of Two Cities Monthly $1,266 BasicHousing Budget Monthly Food 2 Children $ 587 2 Parents, Monthly Monthly Monthly Monthly Monthly Monthly Child Care Transportation Health Care Other Necessity Taxes Total Annual Total $1,298 $ 321 $ 592 $ 500 $ 824 $5,388 $64,656 Raleigh-DurhamChapel Hill Monthly Monthly Monthly Monthly Monthly Monthly Monthly Monthly Housing Food Child Care Transportation Health Care Other Necessity Taxes Total Annual Total Source: Economic Policy Institute, “Family Budget Calculator, 2005” $ 779 $ 587 $ 866 $ 358 $ 368 $ 369 $ 350 $3,677 $44,124 A Tale of Two Cities Boston Buffalo-Niagara A Tale of Two Cities Monthly $1,266 BasicHousing Budget Monthly Food 2 Children $ 587 2 Parents, Monthly Monthly Monthly Monthly Monthly Monthly Child Care Transportation Health Care Other Necessity Taxes Total Annual Total $1,298 $ 321 $ 592 $ 500 $ 824 $5,388 $64,656 Monthly Monthly Monthly Monthly Monthly Monthly Monthly Monthly Housing Food Child Care Transportation Health Care Other Necessity Taxes Total Annual Total Source: Economic Policy Institute, “Family Budget Calculator, 2005” $ 648 $ 587 $1,195 $ 358 $ 514 $ 333 $ 326 $3,961 $47,532 Cost of Living – 4-Person Family #1 #2 #3 #4 #33 #71 #127 #159 Boston Washington, D.C. Nassau-Suffolk Country, NY Stamford-Norwalk, CT Buffalo-Niagara, NY Raleigh-Durham, NC Detroit, MI Milwaukee, WI Employment Growth (%) (2000-2004) 3.50% 2.91% 3.00% 2.29% Percent Change 2.50% 2.00% 1.49% 1.53% 0.95% 1.50% 0.86% 0.68% 1.00% 0.12% 0.50% 0.00% -0.50% -1.00% 1 2 -0.62% Low Price 3 4 5 6 7 8 9 -0.68% Housing Price Decile High Price Universe: 245 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics 10 Employment Growth (%) (2000-2004) 4.00% 3.00% Percent Change 2.00% 1.00% 0.00% -1.00% 1 2 3 4 5 6 7 8 9 -2.00% -3.00% -4.00% Boston MSA (-4.9%) -5.00% -6.00% Housing Price Decile Universe: 245 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics 10 Employment Change (%) (2000-2004) Observed Quadratic 0.20 %∆Emp(2000-2004) = 0.10 -.1466 +.0000396 Housing Cost (4.07) -2.291E-007 Housing Cost SQ (4.04) 0.00 N = 245 Adj. R Square = .056 Boston MSA -0.10 -0.20 $400 $600 $800 $1,000 $1,200 Monthly Housing Cost $1,400 $1,600 Employment Growth (%) (2000-2004) Percent Change 3% 2.53% 1.98% 2% 1.09% 1% 0.62% 1.06% 0.84% 0.93% 0.50% -0.02% 0% 1 2 3 4 5 6 7 8 9 10 -0.21% -1% Low Cost Cost of Living Decile High Cost Universe: 245 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics Internal Net Migration (%) (2000-2004) 4.00% Decile Percent 2.00% 0.00% 1 2 3 4 5 6 7 8 -2.00% -4.00% Boston MSA (-5.2%) -6.00% Housing Cost Decile Universe: 304 U.S. Metro Areas Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census 9 10 Internal Migration (% Change) Internal Migration (% Change) Observed Quadratic 0.1500 0.1000 %∆Internal Migration = - .146 + .000399 Housing Costs (7.03) - 2.475E-007 Housing Costs SQ (7.39) 0.0500 0.0000 -0.0500 Boston N = 304 Adj. R Square = .153 MSA -0.1000 -0.1500 $400 $600 $800 $1,000 $1,200 Monthly Housing Costs Monthly Housing Cost $1,400 $1,600 Internal Migration (% Change) Internal Migration (% Change) Observed Quadratic 0.1500 0.1000 %∆Internal Migration = - .146 + .000399 Housing Costs (7.03) - 2.475E-007 Housing Costs SQ (7.39) 0.0500 0.0000 -0.0500 Boston N = 304 Adj. R Square = .153 MSA -0.1000 -0.1500 $400 $600 $800 $1,000 $1,200 Monthly Housing Costs Monthly Housing Cost $1,400 $1,600 San Francisco Stamford-Norwalk San Jose Boston Oakland Nassau-Suffolk Internal Net Migration (2000-2004) 2.50% 2.19% 2.00% 1.40% 1.54% Decile Percent 1.50% 1.04% 1.00% 0.50% 0.41% 0.60% 0.39% 0.16% 0.19% 0.00% -0.50% 1 2 3 4 5 6 7 8 9 10 -1.00% -1.50% -2.00% -2.12% -2.50% Cost of Living Decile Universe: 304 U.S. Metro Areas Boston Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census 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