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 BluestoneDean, School of Social Science, Urban Affairs, and Public PolicyNortheastern University

Prepared for the Institute for Local Governance and Regional GrowthUniversity 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)

Austin

Tucson

Tacoma

St. Louis

Hartford

Raleigh

Buffalo

Map 1

Median Household Income 1969 Metro Areas ($2005 Dollars)

$27,369

$46,845

$54,892

$20,000

$30,000

$40,000

$50,000

$60,000

Most Prosperous Metro Areas: 1969

#1 Detroit, Michigan #2 Hartford, Connecticut #3 Chicago, Illinois #4 Milwaukee, Wisconsin #5 New York, New York

Least Prosperous Metro Areas: 1969

#1 Austin, Texas #2 Raleigh-Durham,Chapel Hill, North Carolina #3 Jacksonville, Florida #4 Tucson, Arizona #5 Phoenix, Arizona

Percentage Change in Median Household Income Metro Areas 1969-2005 ($2005 Dollars)

57%

40%

34%32%

23%

17% 16% 16% 14%12% 11% 11% 11%

6% 5%

-7% -7%-10%

13%

84%

-20%

0%

20%

40%

60%

80%

100%

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%)

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%)

Median Household Income 2005 Metro Areas ($2005 Dollars)

$41,521

$53,216

$65,382

$30,000

$40,000

$50,000

$60,000

$70,000

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)

Declining Metro Areas: 2005

#20 Buffalo, New York (Down from #9)

#17 Milwaukee, Wisconsin (Down from #4)

#11 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 CitiesBasic Budget2 Parents, 2 Children

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 Taxes $ 350



A Tale of Two Cities

Source: Economic Policy Institute, “Family Budget Calculator, 2005”

A Tale of Two CitiesBasic Budget2 Parents, 2 Children

Boston

Monthly Housing $1,266

Monthly Food $ 587





Monthly Taxes $ 824



Buffalo-Niagara

Monthly Housing $ 648

Monthly Food $ 587





Monthly Taxes $ 326



A Tale of Two Cities

Source: Economic Policy Institute, “Family Budget Calculator, 2005”

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

Employment Growth (%) (2000-2004)

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

1 2 3 4 5 6 7 8 9 10

Housing Price Decile

Per

cent

Cha

nge

Low Price High Price

Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics

Universe: 245 U.S. Metro Areas

0.95%

2.91%

2.29%

0.86%

1.53%

0.68%

-0.68%

0.12%

-0.62%

1.49%


-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

1 2 3 4 5 6 7 8 9 10

Housing Price Decile

Per

cent

Cha

nge

Boston MSA (-4.9%)



0.20

0.10

0.00

-0.10

-0.20

$1,600$1,400$1,200$1,000$800$600$400

Quadratic

Observed

Monthly Housing Cost

Employment Change (%) (2000-2004)

Boston MSA

%∆Emp(2000-2004) =

-.1466 +.0000396 Housing Cost (4.07) -2.291E-007 Housing Cost SQ (4.04)

N = 245 Adj. R Square = .056


-1%

0%

1%

2%

3%

1 2 3 4 5 6 7 8 9 10

Cost of Living Decile

Per

cent

Cha

nge

Low Cost High Cost


-0.21%

0.93%

-0.02%

0.84%1.06%

0.50%

1.09%

1.98%

0.62%

2.53%


Internal Net Migration (%) (2000-2004)

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

1 2 3 4 5 6 7 8 9 10

Housing Cost Decile

Decil

e P

erc

en

t

Boston MSA (-5.2%)

Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census


0.1500

0.1000

0.0500

0.0000

-0.0500

-0.1000

-0.1500

$1,600$1,400$1,200$1,000$800$600$400

Monthly Housing Costs

Quadratic

Observed

Internal Migration (% Change)



Boston MSA

%∆Internal Migration =

- .146 + .000399 Housing Costs (7.03) - 2.475E-007 Housing Costs SQ (7.39)

N = 304 Adj. R Square = .153

0.1500

0.1000

0.0500

0.0000

-0.0500

-0.1000

-0.1500

$1,600$1,400$1,200$1,000$800$600$400

Monthly Housing Costs

Quadratic

Observed




Boston MSA

%∆Internal Migration =

- .146 + .000399 Housing Costs (7.03) - 2.475E-007 Housing Costs SQ (7.39)

N = 304 Adj. R Square = .153

San FranciscoStamford-NorwalkSan JoseBostonOaklandNassau-Suffolk

Internal Net Migration (2000-2004)

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

1 2 3 4 5 6 7 8 9 10

Cost of Living Decile

Dec

ile

Per

cen

t

-2.12%

0.16%

1.54%1.40%

2.19%

1.04%

0.60%0.41%

0.19%

0.39%

Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census

Universe: 304 U.S. Metro Areas Boston

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

Documents

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