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
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 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
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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
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#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
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-7%
-10%
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-7%
Largest Percentage Change in Median
Household Income (1969-2005) (in 2005
Dollars)
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#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)
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#1
#2
#3
#4
#5
Buffalo, New York (-10%)
Detroit, Michigan (- 7%)
Milwaukee, Wisconsin (-7%)
Chicago, Illinois (+5%)
St. Louis, Missouri (+6%)
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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
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 #2
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 #9
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 #12
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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
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 #17
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 #11
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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.:
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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
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#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