The New Geography of Jobs (Enrico Moretti)
Enrico Moretti’s, The New Geography of Jobs (Houghton Mifflin Harcourt, Boston, 2012). has been exceptionally well received by many of the economic development literati. Some commentators have described New Geography as the best economic development book of 2012. And if you don’t read New Geography, you would also miss reading the best, most readable explanation and defense of innovation, knowledge-based economics and their effects on the location of jobs in the United States. There is a lot going on in New Geography.
You should read on because what lies below the thematic visible tip of New Geography and innovation economics is its frank and realistic understanding of what innovation economics can do and not do. Perhaps more importantly, the linkage of innovation economics with American culture and society will be acknowledged and its implications made clear. In the Curmudgeon’s enfeebled mind, this linkage needs to be understood–and dealt with by economic developers.
Our organization of this review is startling in its simplicity. First, we shall try faithfully, with minimal Curmudgeon digression and distortion, to describe and outline Moretti’s important message and the key concepts used in its construction and defense. You can stop there if you like. The Curmudgeon hopes you will also consider the implications of the Curmudgeon’s blather which shall be injected from time to time in the Moretti’s review. Between Moretti and the Curmudgeon blather that should be enuf and we will shut up when we run out of the latter.
The book, itself, is quite an easy read; it is well-written and deserves to be read. The consequences of Moretti’s message are disturbing, at least to the Curmudgeon. His explanation of the current American geography of jobs is the best application of innovation economics found in the economic development literature. But, sadly, the methodology and proof for much of his theme and message is at least limited, if not faulty. Despite the many tables and statistics upon which Moretti relies heavily, the bulk of his position rests on mere assertion which he uses to connect the many internal forces and dynamics critical to his message.
MORE THAN YOU EVER WANTED TO KNOW
First, the Curmudgeon will steal Moretti’s words in this review. The reader can safely assume, unless she is told differently [often expressed in brackets], that she is reading the words of Moretti. Page numbers will be provided. All this is meant to be faithful to Moretti and to improve readability–the Curmudgeon will speak up, usually, but not always in brackets, but much of the verbiage in this review is directly taken from the book. In many ways, much of this review is a precis using Moretti’s words.
For Moretti, the knowledge economy has an inherent tendency toward geographical agglomeration (i.e. those with knowledge tend to live and work in knowledge-based communities, or [(Curmudgeon here) they avoid dumb communities]
So, America’s new geographical map shows growing differences, not just between people, but between communities (p.3). A handful of cities with ‘right’ industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the ‘wrong’ industries and a limited human capital base, are struck with dead-end jobs and low average wages. This ‘Great Divergence’ has its origins in the 1980’s when American cities started to be defined by their resident’s level of education (p.4).
This Great Divergence in educational levels is causing an equally large divergence in labor productivity and salaries (p.4). But a worker’s education affects not only his own salary, but the also affects the entire community in which he resides by altering the kinds of jobs available (in the community) and the productivity of those who live in the community. This ensures that high wages for skilled workers also results in higher wages for all workers in the community (pp. 4-5). The Curmudgeon’s PhD raises the wages of the deli worker who made his lunch. (Once you know this, there is no need to tip)
“The sorting of highly educated Americans into some communities, and less educated Americans into others tends to magnify and exacerbate all other socioeconomic differences (life expectancy, divorce rates, crime and politics and electoral behavior)
For Moretti, the knowledge economy has an inherent tendency toward geographical agglomeration (i.e. those with knowledge tend to live and work in knowledge-based communities, or [(Curmudgeon here) they avoid dumb communities]. The success of a city attracting knowledge-based workers fosters more success “as communities that can attract skilled workers and good jobs tend to attract even more. Communities that fail to attract skilled workers lose further ground” (p.5). [At this point the Curmudgeon injects that this agglomeration or cluster tendency reminds him of Gunnar Myrdal (circular cumulative causation) and lately Nouriel Roubini both of whom describe vicious and virtuous cycles and are card-carrying members of a field of economics called ‘non equilibrium economics’].
While this Great Divergence is first and foremost economic, it carries over into an individual’s and community’s cultural identity, health, family stability and even its politics. “The sorting of highly educated Americans into some communities, and less educated Americans into others tends to magnify and exacerbate all other socioeconomic differences (life expectancy, divorce rates, crime and politics and electoral behavior) [please refer to our review on the Big Sort located in the Journal’s “culture” theme; it also seems to reflect some of Charles Murray’s argument in “Coming Apart: the State of White America 1960-2010, (Crown Forum, 2012) although I suspect Moretti and Murray are on opposite sides of the ideological spectrum].” (p. 5)
For Moretti, America’s labor market is undergoing a momentous shift. While some sectors and occupations are dying, others are growing stronger, and still others, just born, promise to alter the landscape. These labor market changes profoundly and irreversibly affect the new geography of jobs. (p.6) They favor the residents of some cities and hurt the residents of others. In particular, as manufacturing declines, new ‘innovation hubs’ are rising and the latter will become the new engines of prosperity causing and creating a redistribution of jobs, population and wealth in America (p.6). [In this sense, Moretti seems to argue that so-called occupational and sectoral gazelles will create city/community or geographic gazelles. To the Curmudgeon, it also seems to imply a sort of Schumpeterian creative destruction as well]
Who are these sectoral and occupational gazelles? Over the past half-century, the USA has shifted from an economy centered on producing physical goods to one centered on innovation and knowledge (p.10). These sectors and occupations he labels as the ‘innovation sector’. The key ingredient in these knowledge-based jobs is human capital which Moretti defines as (1) people’s skills and (2) ingenuity or [what others would call, creativity]. (p. 10)
Attracting a scientist or a software engineer triggers a multiplier effect, increasing employment and salaries for those who provide local services. (p.13) The innovation sector has the largest multiplier of all the economic sectors: about three times larger than that of manufacturing.
The innovation sector includes advanced manufacturing, information technology, life sciences,medical devices, robotics, composites and nanotechnology – but also includes “any job that generates new ideas and new products”, “What they all have in common is that they create things the world has never seen before” (p.11). [this last, after the hyphen, add-on is way too open-ended for the Curmudgeon. Also the first part of his definition is also way too time-bound. What might be on the list ten years from now? Gazelles fade fast and new ones constantly take their place. Where does all this gazelle-stuff begin and end? How does a geography grab onto one of these and how long can it hold onto it? will all be dealt with shortly]
Moretti asks why should the majority of Americans care about increasing innovation? Most will never work in a innovative firm? He answers his question by observing that a majority of Americans work in the local service sector. The local service sector does not engage in global competition but are, in effect, living off of those knowledge-based jobs which do compete globally. “Jobs in the local service sector … are the effect, not the cause, of economic growth. (p.12) Attracting a scientist or a software engineer triggers a multiplier effect, increasing employment and salaries for those who provide local services. (p.13) The innovation sector has the largest multiplier of all the economic sectors: about three times larger than that of manufacturing. (p.13) [there is no footnote nor methodology which explains or supports what is a pure assertion] Nevertheless, the best economic development strategy for a city or state to generate jobs for less skilled workers “is to attract high-tech companies that hire highly skilled” workers. (p.13)
Great Divergence is that America today is really THREE DIFFERENT Americas (p.13). First, the ‘brain hubs’ (cities with a well-educated labor force and a strong innovation sector which constantly add good jobs and skilled workers. Second, “are cities once dominated by traditional manufacturing which are declining rapidly, losing jobs and residents”. Third, are cities that could go either way.
The reality of all this innovation-knowledge economy and its [Schumpeterian creative destruction] current manifestation, the Great Divergence is that America today is really THREE DIFFERENT Americas (p.13). First, the ‘brain hubs’ (cities with a well-educated labor force and a strong innovation sector which constantly add good jobs and skilled workers. Second, “are cities once dominated by traditional manufacturing which are declining rapidly, losing jobs and residents”. Third, are cities that could go either way. (p. 14)
The three Americas are growing apart at an accelerating rate. The paradox is that the very success of the country’s engine of growth is generating a deep and growing inequality among American communities. (p. 14)
[To the Curmudgeon this is very important, very insightful, and very, very disturbing. Innovation (probably productivity) creates jobs and kills communities. To his credit, Moretti is providing a very real touchable, real life context to creative destruction]
It wasn’t supposed to be this way, Moretti asserts. When we first studied innovation and clusters and the emergence of a new knowledge-based economy we were told that “Distance was dead. Geography didn’t matter” (p.14) Citing Thomas Friedman, The World is Flat cell phones, e-mail, and the Internet lowered communication costs so much that location was irrelevant. This meant that good, high paying, occupations, jobs and sectors “will quickly disperse to low-cost locations” and out-sourcing (P.14). Innovation jobs and sectors will disperse [more or less] evenly across the county and result in a convergence of American communities. [in this sense, brain hubs would ooze into dying manufacturing cities and everywhere else]
ACCORDING TO MORETTI, THIS SCENARIO JUST FLAT OUT HAS NOT HAPPENED. “The data don’t support this view” (p.15)
Once a city attracts some innovative workers, innovators and innovative companies, its economy changes in ways that make it more attractive to other innovators. Once attracted by these changes in the economy growth continues to spiral and the city leaps into the knowledge-based world and becomes a “winner”.
Instead what happened is that in the innovation economy, a company’s success depends on more than just the quality of its workers— it also depends on the entire ecosystem that surrounds it. Cities are not just a collection of individuals but complex, interrelated environments that foster the generation of new ideas and new ways of doing business. For example, “being around smart people makes us smarter and more innovative” (p.15) Thus once a city attracts some innovative workers, innovators and innovative companies, its economy changes in ways that make it more attractive to other innovators. Once attracted by these changes in the economy growth continues to spiral and the city leaps into the knowledge-based world and becomes a “winner”. (p.15) This is the fundamental cause of the Great Divergence. [Not all cities can or at least have been able to attract some innovative workers to begin the process of growth]
[For those that have read our review on the theory on innovation economics, one now appreciate the importance of economic convergence and the rejection by innovation economists of the need for convergence. (See Journal theme of Innovation & Knowledge-Based Economies)] Next, Moretti tackles the issue of economic convergence. He does not reject the notion that low-cost and undeveloped communities and nations can catch up— [in effect, that some of what Friedman called for could occur] but Moretti does argue that the convergence, or catch up if it occurs is quite uneven (p. 16). Not all parts of a region, nation, state converges. Only some of its geography catches up. The rest languishes and continues an unabated decline. Don’t count on convergence!
[The next five chapters of his book delve deeper into explaining, supporting and fleshing out the dynamics of the Great Divergence. His concluding chapter suggest some programs and strategies to reduce the Great Divergence. In the following section we shall focus on a few key concepts which in the Curmudgeon’s opinion are important to the approach. We shall also present his assessment of what will not reduce the Great Divergence and what will not. The Curmudgeon will be more in evidence as we go forward]
American Rust: The Decline of Manufacturing-based Cities
The growth of manufacturing (and the cities associated with manufacturing) was an “unprecedented rise in the productivity of workers” (p.21) This productivity fueled substantial wage increases and also enabled manufacturers to cut costs and produce cheaper goods. This factors, combined with the rise of consumerism (mass marketing and consumption) caused manufacturing employment to peak in 1978 at almost twenty million (p.21) Today half this amount are employed in manufacturing. Since 1978, the “big manufacturing centers” are “pale ghosts of what they used to be and many are at risk of disappearing from the economic map entirely. Their names are now synonymous with urban blight and irreversible decline (p.23). For each manufacturing job lost, Moretti says his research indicates that 1.6 additional jobs were also lost [no footnote or methodology to support this multiplier] (p.2). Why?
Job opportunities in USA labor market have been concentrated, since 1978, in high-skill, high wage professional, technical, and managerial jobs AND low-skill, low wage jobs mostly in the service and personal care sectors. Moretti calls this the “Hollowing Out of the American Labor Market”. This hollowing out is not a passing trend
“History” killed manufacturing (p.26). “What happened was an enormous shift in the production of physical goods away from rich countries with high labor costs to poorer countries with low labor costs” (p.28) [This is pretty conventional micro economic stuff which has been the foundation of traditional economic development attraction and retention programs. The trick for Moretti is that he is at some point going to have to explain why high costs will not exert the same result on his innovation sector which, after all is great because of its higher wages (costs). Moretti, no dummy to be sure, knows he must deal with this problem and so….]
The effects of globalization, however, are UNEVEN. Low-value-added manufacturing (found in Buffalo, Providence) fled to China. But cities like Washington DC (a notorious manufacturing center?) and Houston with different kinds of manufacturing did not suffer nearly as much. High tech, high innovation manufacturing survived and low tech, low innovation manufacturing didn’t. (p.29). So, much of the USA lost jobs to low cost developing worlds, and got in return cheaper consumer goods (comparative advantage at work). “One of the paradoxes of globalization is that the very people who have been hit the hardest in terms of jobs have gained more as consumers” (p.36). This is the “productivity paradox”.
New machinery, technology and productivity enhancements allow American industry to produce more and cheaper goods BUT with fewer jobs. “increases in productivity lower prices for consumers and raise wages, but they ultimately end up killing jobs” (p.37)
[The inescapable conclusion is that innovation can kill some jobs (our creative destruction) but it doesn’t kill ALL jobs.] Job opportunities in USA labor market have been concentrated, since 1978, in high-skill, high wage professional, technical, and managerial jobs AND low-skill, low wage jobs mostly in the service and personal care sectors (p.40). Moretti calls this the “Hollowing Out of the American Labor Market”. This hollowing out is not a passing trend, nor is it unique to the USA and despite ebbs and flows will continue. Manufacturing employment is doomed by history to continue its decline. [Hence, logically, economic development strategies based on saving or increasing manufacturing employment will fail (p.44). Low skill manufacturing is the new agriculture in that high productivity leads to fewer jobs in the sector, yet a massive leap in output]
What is an Innovation Job?
Chapter two traces the rise of the innovation economy and provides definition as to why it developed and how you can actually locate an innovation job. Innovation jobs, he concedes are not easily defined and are often found in sectors not usually cited as the usual suspects (those listed above). He then moves on and describes the who’s who of innovation. No surprises here. Internet firms, Facebook, Zynga, Cisco, Apple, IBM, Pixar are all discussed but the concluding summary says it all: “What really matters is that American workers produce goods or services that are innovative and unique and not easily reproduced. This is the ONLY way to generate jobs that pay well in the face of stiff global competition (p.55). He estimates that “10 percent of all jobs in the US belong to the innovation sector (p.55) [no footnote or methodology provided]. These innovation jobs are included in “the traded sector” because the good or service can be consumed outside the region where they are produced.
Moretti contrasts the traded sector (quite small) with the non-traded sector (goods and services which cannot be exported outside the region which they are produced) and develops the point that while the non-traded sector is massive, majority of jobs in the USA, “it is NOT the driver of our prosperity (p.57). Instead, the traded sector, the home base of productivity, is the ONLY way to raise worker’s standard of living.
Interestingly, higher productivity of workers in traded sector means higher salaries not just for the workers in that sector but also for workers in other sectors, especially those with similar skills. (p.58)
Also, “With only a fraction of the jobs, the innovation sector generates a disproportionate number of additional local jobs and therefore profoundly shapes the local economy. His research [no footnote or methodology cited] suggests that the multiplier for an innovation job is 5 (p.60): for every one innovation job, five additional jobs are created in the non-traded sector. How does this occur. Because these innovation jobs are so well paid (high disposable income), “they consume more local services than other workers and therefore create more local jobs (p. 61). What’s more, the high-tech firms which employ innovation workers tend to be located near each other.
Bringing more high-tech companies to a city eventually results in having more high-tech companies locate there, as dense high-tech clusters make high-tech firms more innovative and more successful” p.62 [no footnote or support for the assertion is provided]. (p.62)
Hence the extraordinary multiplier effect.
But, at this point, Moretti confronts the creative destruction unleashed by the innovation sector. Recognizing that innovation can also result in the destruction of innovation jobs themselves [logically, how can it not]. So Travelocity and Expedia shut down “countless travel agencies” and Netflix is “disastrous for thousands of neighborhood video stores” (p.65). [He does not mention Amazon, Barnes and Noble, Borders, and Best Buy and mobile smart phones and laptops kill the personal computer]. Perhaps more importantly, creative destruction someday will be visited upon the current innovation sector itself:
Jobs that today look more like art than labor [i.e. innovation workers] will eventually become commodified, standardized and mechanized-they will lose their luster, and their numbers will start to shrink …. This is likely to happen … in most … parts of the innovation sector. [all capitals, underlining are the Curmudgeon’s] WE MUST HOPE THAT WHEN THIS HAPPENS, PROMISING NEW IDEAS AND PRODUCTS WILL APPEAR AND THE CYCLE OF OLD AND NEW JOBS WILL START ALL OVER AGAIN. (p. 64)
But not to worry, “[net] jobs in the innovation sector will keep increasing” (p.65) “Innovation keeps churning out an ever-changing roster of jobs, and yet the net effect is positive” (p.65) [Trees will in fact grow to the sky AND (for those who read our earlier Journal review of innovation economics) no need to worry about convergence; it will not happen. Why will convergence not happen–read on] “The rise of the innovation sector is associated with an increase in the value of talent, for a simple reason: economic value depends on talent as never before (p.64) Innovation industries are fundamentally different from all other industries in how they make their profits [Curmudgeon underlining, this difference will make them more prone to long-lasting dominance].
For innovative industries “the main production costs are the fixed costs of research and development. The variable costs of production are typically low. Having access to global markets (and its increasing middle class) dramatically raises the returns on creating new ideas by increasing sales without increasing costs” (p.67-68). What’s more, innovative products and services can charge higher prices (Apple, Versace by way of example). Moretti (and other economists) call this “economic rent” and the patent provides an innovator some level of “monopoly power” (p.71)[shades of Paul Krugman and Romer]. Who ultimately benefits from the innovation sector’s economic rent? “Consumers benefit in the form of new or cheaper products. Companies benefit in the form of higher profits (p.71).
[The Curmudgeon feels compelled to step in at this point! Unless the Curmudgeon missed something, Moretti switched gears somewhere in the middle of his assessment on creative destruction’s impact on the current glorious innovation sector. Admitting at first that the current innovation sector would also sooner or later come under essentially the same pressures as have manufacturing and agricultural production, Moretti then points out factors such as talent, monopoly power, price and profitability of firms or economic rent which would seem to permit the “innovation sector”, but no one sub-sector or occupation of current innovation sector, to continue to grow indefinitely into the future. Moretti does NOT state or explicitly acknowledge this last point– rather he switches to another core principal: that innovation jobs will keep on increasing into the future. But he does not specifically confirm the current configuration of innovation, jobs, and even locations is timeless]
[In our view, Moretti leaves open the possibility, perhaps even likelihood, that as innovation proceeds into the future, the current winners too can (shall?) suffer fates similar to Detroit and Buffalo. Specific innovation sector jobs, occupations and firms will come and go, live and die, but the innovation sector itself will grow without abatement into the future. This is a very important point. Today’s winners can become losers in the future. That is almost heresy. But, Moretti leaves open the possibility that, even if the innovation sector continues to grow forever, it is not clear who, what, or which geographies (particular cities or nations), will benefit. Firms, profits, talent and patents are mobile, saleable and fluid. Today’s winners are not etched in stone or even silicon and they too can be tossed into the scrap bin of history. Or perhaps the Curmudgeon once again has gotten off on the wrong track.]
In any case, Moretti, in the Curmudgeon’s view, mutes the above implications. He ends his chapter three quite optimistically. “The supply of skilled and creative workers capable of innovating is increasing worldwide … the demand for skilled and creative workers is rising. The latest recession temporarily slowed this increase … but in the long run, globalization and technological progress mean more jobs and greater rewards for the creative workers” (p.72). But his last few concluding sentences are a bummer, nevertheless. “The creation of new jobs is not spread uniformly over the entire country. It favors some cities and regions while ignoring others (p.72).
The Great Divergence: City Competitiveness, the Big Sort and Coming Apart in White America
Who wins and who loses in this new innovation economy? How does the innovation economy reshape the social fabric of American communities? These are the questions which underscore Moretti’s chapter “The Great Divergence”.
Recounting the movement or evolution of Microsoft from Albuquerque (its first location) to Seattle, Moretti is amazed at how “serendipitous” it was (pp. 74-77), but the impact of Microsoft relocation to Seattle transformed Seattle into a hotbed of the innovation economy and demonstrated the innovation sector’s power “to reshape the economic fates of entire communities, as well as their cultures, urban form, local amenities and political attitudes” (p.77). Albuquerque subsequently “limped along” and Seattle has “one of the largest concentrations of software engineers in the world (he cites that one-fourth of all wages paid in North America to software engineers accrue to Seattle). He transforms Seattle into a laboratory in which he demonstrates in operation those forces which we have described previously-how innovation sector simply transforms the city, the non-trading sector and almost everything else into an innovation winner: the brain hub.
There are at least two similarities which are shared by the winners: (1) their share of workers with a college degree, and the (2) gains in earnings and salaries of such college graduates since 1980.
Innovation requires innovators. Specific entrepreneurs and inventors are the atom, the DNA, of the innovation economy. Patents are their signature. Using patents to demarcate those metropolitan areas that have been generating the most innovation relative to their size, Moretti he discovers that California (the huge winner), New York, Texas and Washington generate almost half of all patents granted in the USA. In terms of metropolitan areas, we were shocked to learn that Silicon Valley and runner up Austin were the national leaders. also Raleigh-Durham-Chapel Hill and Boston-Cambridge. Smaller, but emerging high-tech clusters can be found in Dallas, Minneapolis, Denver, Atlanta, and others. He also cites the losers as well, but we shall spare the reader.
There are at least two similarities which are shared by the winners: (1) their share of workers with a college degree, and the (2) gains in earnings and salaries of such college graduates since 1980.
Of course, the relationship between innovation and salaries (of college graduates) is not perfect. Stamford’s wealth is mostly due to financial services, while salaries in Raleigh, one of the world’s top innovation hubs, are relatively low. Nevertheless, there is a clear tendency for cities with many college-educated residents to have a local economy with a great deal of innovation and good salaries. (p.96)
Possibly, the most remarkable fact shown by these tables (pp.94-95) is that high school graduated in the top group (the winner brain hubs, innovation centers) often make more than college graduates in the bottom group …. wage differences in the United States have as much to do with geography as they have to do with social class. (p.96)
Brain hubs pay high average salaries to NONSKILLED (Moretti’s emphasis) workers too. Thus a worker’s education has an effect not just on her own salary, but also on the entire community around her. (p.97)
[These are incredibly important observations. But there are some issues at play. Moretti acknowledges the compensatory impact of higher costs of living as offsets to these higher wages. But the thought that a computer science degree in Flint Michigan pays less and potentially is less innovative than the same degree in Boston is really upsetting. The reader is urged to pause and think of the implications and consequences that flow from this. In many ways, this is the heart of his Great Divergence]
[The convergence of Moretti with Michael Porter’s cluster agglomeration dynamics is striking. Essentially Moretti’s explanation of how and why college-educated graduates innovate more in brain hubs is pure cluster micro economics. It also relies on Krugman’s old knowledge spillovers (see our innovation economics theme). He also cites Lucas and it all flows from Solow]
A good part of this micro economic cluster dynamic is subsumed by “human capital externalities”. This is Lucas and its core insight is that “sharing knowledge and skills through formal and informal interaction generates significant knowledge spillovers” “… when people interact, they learn from each other, and this process makes those who interact with better-educated peers ultimately more productive and creative” (p. 100).
The Great Divergence is not just a geographic divergence between innovation and non innovating metropolitan areas, but, in Moretti’s words, a “New Geography of Inequality” follows from the Great Divergence. The geographical sorting out of America not only sorts our of economies, and economic classes, but cultures as well.
These human capital externalities, plus better technology and a complementarity of skilled and less-skilled workers (in which association-interaction of the less skilled with the skilled workers raises the productivity of the former) produces not only the Great Divergence BUT A CORRESPONDING GEOGRAPHIC DIVERGENCE OF INEQUALITY (Curmudgeon’s emphasis). The Great Divergence is not just a geographic divergence between innovation and non innovating metropolitan areas, but, in Moretti’s words, a “New Geography of Inequality” follows from the Great Divergence. The geographical sorting out of America not only sorts our of economies, and economic classes, but cultures as well. There is not only an economic multiplier effect, but also a “social multiplier effect” (p.111)
Moretti asserts our county now is segregating educationally (p.104) and that this educational segregation has social and political implications. Not only does higher wages follow higher educational levels, but longer life, fewer divorces, better and more healthier lifestyles (including less smoking and more exercise, less obesity, better diets) and even “charity inequality and crime rates
“The Great Divergence is among the most significant developments in recent American economic history. As communities grow apart, the U.S. population is becoming more and more segregated … across cities and regions (p.102). Amazingly while we are successfully confronting our past history of racial segregation, Moretti asserts our county now is segregating educationally (p.104) and that this educational segregation has social and political implications. Not only does higher wages follow higher educational levels, but longer life, fewer divorces, better and more healthier lifestyles (including less smoking and more exercise, less obesity, better diets) and even “charity inequality and crime rates (p.118 otherwise pp. 104-114) and most importantly political balkanization and polarization. Educational segregation “is likely to reinforce extreme political attitudes (p. 114) and reflect negatively on civic engagement (p. 116). To this end he cites, Bill Bishop and the Big Sort (see our review of the Big Sort in our Local Cultures theme). Moretti labels these after effects of the Great Divergence as the New Geography of Inequality.
[So ends Chapter 3. But not the Curmudgeon’s need to blather. Moretti takes the argument, made by Bishop in the Big Sort and takes it a few steps further. A few disturbing steps further I might add. Moretti injects into his argument the concept of human capital externalities. The concept of human capital externalities, as Moretti states, was developed from and was based upon “sophisticated mathematical models” (p.99)[ which should scare the bejesus out of anyone with the slightest degree of common sense and humanity]
For Moretti, the internal dynamism of his brain hub (and the Great Divergence) is based human capital externalities defined as, and expressed in, the brilliant interaction of college educated, talented, innovative, high skilled, highest wage, longest living, healthiest, most stable marriage individuals who gravitate to innovative brain hub metropolitan areas. They are the source of innovation, jobs, prosperity, and creativity. To be sure the rest of us not residing in a brain hub languish in human capital externality cesspools characterized by mediocrity, lower wages, sickness, decline and whatever other perversions come to mind. Brain hub human capital externality is better than non-Brain Hub human capital externality!]
[And even if you live and work in a Brain Hub, but are not college educated, and rather are low skill, working in the non-traded sectors than you should realize that My High Skilled Human Capital Externality creates your lower skill job and enhances your lower skilled work outputs, and your paycheck. (say thank you please you lower skilled dolt). This is a world of Traded sector patricians and non-traded sector plebeians]
[To the Curmudgeon, it’s one thing to be economically behind the eight-ball, but to be socially and culturally near-apes or morlocks (H.G. Wells) as well is quite another thought. Does Moretti go this far? No! The Curmudgeon would believe Moretti would resist this extension of his argument and be probably outraged by it. But the implication is there nevertheless. For those familiar with traditional Chinese society, Moretti might be leading us into an innovative Mandarin-driven economy – AND SOCIETY! This is fodder for a future C. Wright Mills (elites and masses). In essence, the Curmudgeon wonders aloud whether there is a “dark side of the force” (i.e. innovation) and that the dark side is a two class society]
[Moretti might counter that we all can become elites if we get college educated and move to these brain hubs (although supply and demand would seem to be mismatched). Or maybe we can transform our declining cities into brain hubs (to be discussed next). Like Lake Wobegon with no average students, the USA would contain only innovative cities. Ah, that such a world could exist!]
Companies Locate in Absolutely the Worst Places (Chapter 4)
Moretti calls attention to the “forces of agglomeration”. The three dynamics (of agglomeration) are (1) thick labor force in which there is a good choice of skilled workers in a specific field; (2) the presence of specialized service providers (especially venture capitalists who require their own ‘ecosystem’) (p. 132ff)), and (3) knowledge spillovers (previously discussed) (p. 124). It is these three dynamics which best explain why we have the Great Divergence in the first place and why we sort ourselves out and create the New Geography of Inequality.
Specifically, why do innovative firms cluster near each other in expensive locations when they could be anywhere? Using Silicon Valley (San Jose) as an example, Moretti points out that other then their very high wages and cost of living, there is nothing special about any of those innovative cities. Rather, in the real world of innovation, productivity and creativity can outweigh labor and real estate costs (p. 124). Including three separate dynamics, Moretti calls attention to the “forces of agglomeration”. The three dynamics are (1) thick labor force in which there is a good choice of skilled workers in a specific field; (2) the presence of specialized service providers (especially venture capitalists who require their own ‘ecosystem’) (p. 132ff)), and (3) knowledge spillovers (previously discussed) (p. 124). It is these three dynamics which best explain why we have the Great Divergence in the first place and why we sort ourselves out and create the New Geography of Inequality.
All this is pure agglomeration economics and no special insight. Still, Moretti does discuss specific cities and specific firms and all that is very interesting. He also wanders off into unintended extensions of each–such as thick markets serving as conduits for romantic partnerships and facilitation of “power couples” (p. 130). He observes that big (size-wise) innovation cities are advantaged over small non innovative cities because these most cherished for highly educated professional couples prefer the big innovative cities. Another cute byproduct of this chapter is Krugman’s apparently famous quote about knowledge spillovers, “knowledge flows are invisible; they leave no paper trail by which they may be measured and tracked, and there is nothing to prevent the theorist from assuming anything about them that she likes.” (p. 139)
A final argument in favor of knowledge spillovers, of which the Curmudgeon is particularly fond (the reader may guess whether there is sarcasm in the offing) is Moretti’s (human capital externality) description of the interactive effects of knowledge spillovers–“Being around smart people tends to make us smarter, more creative, and ultimately more productive. And the smarter the people, the stronger the effect” (p.141) Shades of Best and the Brightest and the Curmudgeon harkens back to his wild demoniacal raving at the end of chapter 3 above. [No, please permit one additional Curmudgeon comment: this is arrogant, narcissist, elitist BS–and, by the way, define smartest (i.e. those with a college degree? or those with a college degree who live in San Jose?)]
“Being around smart people tends to make us smarter, more creative, and ultimately more productive. And the smarter the people, the stronger the effect”
In any case, these three dynamics together create a fourth dynamic called “localized economies of scale” (p. 144). Essentially this is where economies of scale (large companies are more efficient than smaller ones ( ???) ) extends to the entire innovative sector in a given geographical area.
The effect can be amazing: while individual companies in a cluster do not necessarily become more efficient as they grow in size, all companies taken together become more efficient as the cluster grows, (p.144)
[Frankly, the Curmudgeon is now struggling. Despite their centrality to economic theory and to the cluster approach, the Curmudgeon is just plain tired of assertion and assumptions like these which hold together, like glue, the not too-provable threads of all these wonderful interactions flowing from these dynamic agglomerations. He awaits as defense of these assertions, the almost certain footnotes which are based on models of convex geometry which, oh so closely mirror human affairs.]
Anyway, in any case, localized economies of scale create what the Curmudgeon labels as a virtuous circle in the big innovative communities. They “inevitably magnify the differences between winners and losers among American communities…. It is a tipping point dynamic: once a city attracts some innovative workers and companies, its economy changes in ways that make it even more attractive to other innovative workers and companies. This tends to generate a self-sustaining equilibrium … (which) is bound to strengthen over time (p.146).
The Curmudgeon has emboldened and underlined this section because it is the core underlying Moretti’s strategy for economic development in a losing city with the wrong mix of sectors and occupations. It is the strategy to overcome the Geography of Inequality. Attract some innovation workers and companies until they reach a critical mass that they transform your local economy— and all the rest just falls into place. Once the initial cluster is achieved, it is hard to move it away. (P. 147) and without an innovation cluster will find it “difficult” to start one. “It is a chicken-and-egg problem”. “This presents a terrible challenge for communities that have fallen on hard times and are struggling to reinvent themselves” p.147). We shall return to this challenge in the next section: “Poverty Traps and Sexy Cities”.
A market economy is never static. Products that are cutting-edge today will soon be commodified and easy to make. Industries that are on the technological frontier will become mainstream, and later, relics of the past. What is a good job today will inevitably become a bad job in the future…. By its very nature, the innovation sector is the part of a market economy where creative destruction matters the most.
Before leaving this chapter, we must return to an earlier Curmudgeon blather which was injected into this review: how does Moretti deal with the creative destruction inherent in productivity and innovation. Having taken all these chapters to demonstrate how winners become winners and losers become losers, and that once attained either status tends to be self-sustaining, Moretti spontaneously brings up in the final pages of this chapter, whether the current winners can keep their winning status forever.
A market economy is never static. Products that are cutting-edge today will soon be commodified and easy to make. Industries that are on the technological frontier will become mainstream, and later, relics of the past. What is a good job today will inevitably become a bad job in the future…. By its very nature, the innovation sector is the part of a market economy where creative destruction matters the most. (p. 148)
The crucial question for America’s future is therefore whether our innovation clusters CAN ADAPT and REINVENT themselves to maintain their edge. Clusters, unlike diamonds, are not forever. At some point the industry that supports them matures, stops bringing prosperity, and turns into a liability (p. 149)
Clusters can break and San Jose can become Detroit.
The secret of success in a changing world is constant adaptation. “Rather than clinging to one product or one way of doing things, the region must reshape itself every year” (p.150).
Poverty Traps and Sexy Cities
Can communities that are stuck with the wrong mix of jobs and skills create the self-sustaining critical mass, tipping point local ecosystem that starts and propels the virtuous circle we just described? For the Curmudgeon, this is the critical question. Moretti starts his answer, reasonably enough, by looking at several current innovation sectors and communities and see whether that process can be reproduced.
The answers he arrives at after looking at bio tech, Hollywood, Microsoft and some Internet companies really boil down to (1) unusual and extra ordinary entrepreneurs who (2) for one reason or another (none of which is really economic in nature) finally wind up at one place or another, a place with no particularly relevant assets, we might add, of value to the future development of the cluster. In a word it is serendipitous. This does not seem especially helpful to “place-based” revitalization such as Porter’s cluster concept (p. 187).
The history of high-tech clusters indicates that while we understand fairly well what happens after clusters are established, we often have a hard time predicting them. We have an even harder time creating them. (p.186)
The economy of a successful city is based on a(n) … equilibrium between labor supply and demand: innovative companies (the labor demand) want to be there because they know they will find workers with the skills they need, and skilled workers (the labor supply) want to be there because they know they will find the jobs they are looking for. THE ECONOMY OF A STRUGGLING CITY IS THE OPPPOSITE.
Recounting for example the evolution of the Silicon Valley, Moretti observes:
The arrival (in the peninsula south of San Francisco) of William Shockley, the legendary high-tech pioneer who invented the transistor, was the seed that sparked growth of the local innovation industry…. That serendipitous seedling was the starting point of an economic miracle that eventually brought millions of jobs to the region …. If Shockley had decided to locate in, say Providence, which was then an area with a significantly more developed industrial base than Palo Alto, Silicon Valley might today be cluster in Rhode Island (p. 186)
Can place-based revitalization of non innovative communities actually work, Moretti asks. “Understanding when government intervention makes sense and when it doesn’t is a crucial first step in setting sound policies (p.187). “The economy of a successful city is based on a(n) … equilibrium between labor supply and demand: innovative companies (the labor demand) want to be there because they know they will find workers with the skills they need, and skilled workers (the labor supply) want to be there because they know they will find the jobs they are looking for. THE ECONOMY OF A STRUGGLING CITY IS THE OPPPOSITE. (p.188) Neither the firm nor the worker want to be the first into the struggling community.
Logically, economic developers can embrace a demand strategy (attract firms) or a supply strategy (attract, train workers with the right skills). Richard Florida, Moretti comments, fashioned a combination strategy with his Creative Cities and Creative Class. But which comes first? Moretti explains that “The history of successful innovation clusters suggests that in many cases, cities become attractive because they succeeded in building a solid economic base, NOT VICE VERSA” p. 189). People (the creative class) follow jobs! “The United States is dotted with attractive cities … that offer plenty of culture and tolerance but do not generate good jobs in the innovation sector (p. 190). Of course, there are exceptions, he admits–but they are exceptions. “A good quality of life does help cities attract talent and grow economically, but on its own, it is unlikely to be the engine that turns a struggling community into an innovation cluster (p.193).
Proximity to a research university is important, but it is not enough on its own to form a sustainable cluster of innovative companies….Once a cluster is established, colleges and universities play an important role in fostering its growth
Next, Moretti asks “Can Universities be an Engine of Growth”? Can a university really change a community’s economy? True the number of college graduates is THE key factor in the innovation sector growth, but college graduates are very, very mobile and to be sure students from elsewhere are attracted to the university. Certainly, university-generated research and patents are proven generators of jobs and unusual and extraordinary entrepreneurs (p. 195). And, if there ever is such a thing as knowledge spillover and human-based externalities, the university has to be a key, central player. But for Moretti and all the governors and mayors who read him, universities are NO GUARANTEE OF ECONOMIC SUCCESS (p. 196). Universities function not to establish clusters, but to sustain and enhance them:
Proximity to a research university is important, but it is not enough on its own to form a sustainable cluster of innovative companies…. Universities are most effective at shaping a local economy when they are part of a larger ecosystem of innovative activity, one that includes a thick market for specialized labor and specialized intermediate services. Once a cluster is established, colleges and universities play an important role in fostering its growth …. (p.197)
What about ATTRACTION and RECRUITMENT of Innovative Firms? Can a community jump-start a cluster? If the key is to acquire a critical mass of innovative firms and jobs so that a sustainable cluster forms and grows, can a community target these firms and bring them in through tax abatement and the like. Can a city make them a deal they can’t refuse? Moretti calls this strategy, “The Big Push”. “The idea is to provide public subsidies for those who are willing to move first but then stop the subsidies after the process becomes self-sustaining….. But the track record of these policies is mixed. To succeed, the push needs to be REALLY (his italics) big (p.199). As a success, Moretti cites the TVA and Taiwan, but in the same paragraph enlists Jane Jacobs, and her intense an profession-shaping critique of urban renewal, as a “scathing critique of big push policies … arguing that it is an unnatural way to foster local economies and concluding that ‘in practice, they work miserably'” p.200).
The issue is not that the big push strategy fails to create jobs. The real issue is whether these starting jobs, “this publicly financed seed can eventually generate a privately supported cluster that is large enough to become self-sustaining” p.201). The killer of big push job creation is that it stimulates a flood of entrants into the community or labor force which overwhelm the fragile job demand which was created. “This increase in the supply of labor effectively offset the increase in demand” (p.201). Secondly, and more critical, for Moretti, “the most important determinant of success for local communities is human capital, and making the right call (to recruit firms OR workers with scarce community resources) is much harder (p.202).
(Curmudgeon emphasis) “NO LOCAL POLITICIAN SET OUT TO CREATE SILICON VALLEY. AND WE HAVE SEEN IN THE CASES OF SEATTLE, BOSTON, SAN DIEGO, AND LOS ANGELES, THE SUCCESS OF AN ORIGINAL ANCHOR COMPANY WAS TYPICIALLY THE SEED THAT GREW INTO A HIGH-TECH CLUSTER (p.202).
Moretti actually discusses a few more strategies, such as Empowerment Zones and Empowering Neighborhoods, which he likes–but the Curmudgeon doesn’t as somewhat effective in assembling the critical mass of innovative firms. The key, he suggests, is NOT to target any particular sector, that government should NOT act as a venture capitalist, but instead should require as a condition of its assistance, significant private investment. Moretti does not think government can “pick winners”. Manufacturing, green jobs, and the socially desirable sectors for investment can make poor economic investments. He comments upon the Federal government’s recent “big push” to create a sector in renewable energy. Moretti believes this was doomed to failure because the industry did not make much economic sense and there was insufficient proof the sector was agglomeration prone. This last point was casually, in the mind of the Curmudgeon, thrown out at the reader–but it is both interesting and crucial.
The reality is that a city’s economic fate is in no small part determined by historical factors. Path dependency and strong forces of agglomeration present serious challenges for communities without a well-educated labor force and an established innovation sector. Local governments can certainly lay a foundation for economic development and create all the necessary conditions for a city’s rebirth …, but THERE IS NO MAGIC FORMULA
If all sectors are not equally agglomeration prone or if the agglomeration dynamics already favor other places, how is the strategy to work at all (p.207). How does one assess the answer to these questions? Is there a methodology?
In summary, how does Moretti answer the question as to whether a struggling city can create an innovation cluster:
The reality is that a city’s economic fate is in no small part determined by historical factors. Path dependency and strong forces of agglomeration present serious challenges for communities without a well-educated labor force and an established innovation sector. Local governments can certainly lay a foundation for economic development and create all the necessary conditions for a city’s rebirth …, but THERE IS NO MAGIC FORMULA (p.213-214)
Haven’t You Had Enough?
The Curmudgeon has considerable sympathy for anyone who has struggled thus far in their reading. Conversely, too much of a good thing is not good (or something like that). Anyway, in this section we will briefly wrap up Moretti and will then offer the opportunity to continue at your leisure with the Curmudgeon’s assessment of lessons to be learned.
Finally, we wrap up Dr. Moretti. His concluding chapter, “The New Human Capital Century” is, in the Curmudgeon’s lame opinion, not Moretti’s strongest chapter. The paucity of prescriptions and the vagueness of its future vision reflects a real troublesome issue with innovation economics itself. Having made the case that the rate and number of college graduates in your community or metropolitan area is what causes the redistribution of jobs and the New Geography and the New Inequality (p. 221) which results, the logical chief prescription for the future of any geography is to increase the number of college graduates in your region. This is, of course, easier said than done, and is certainly not an overnight proposition.
Moreover, the notion that innovation is tied to college education is a bit of a leap. The Curmudgeon is college educated and he is the Gobi Desert of creativity. His Phd dissertation on Soviet Communist Economic Reforms in 1965 created no jobs, not even for him. More importantly, what is it about a college education that injects above averageness and creativity. Skills, knowledge, character, middle class perspective, literacy, tolerance, critical thinking, a future love of reading? All of the above is not an answer. And if we don’t really know, i.e. can prove, which aspects of college education/degree inspire creativity and innovation than why not compel everybody to graduate from college just like we do high school. That should solve the problem?
While all this education stuff sounds so good, and the statistical correlations prove its validity, the Curmudgeon wonders if in reality, education as the path to economic growth is more a dead end street or a cul du sac at best. Knowing that education is so critical, what is it we should do to get it to those who don’t have access to it or who choose not to consume it? How do we make every metro area a brain hub? How do we become Lake Wobegon?
Are some degrees better than others? Are some disciplines more creative than others? Is a college degree which is forty years old, just as valuable as a brand new one? How do teachers fit into this? Actually, these are not silly questions (the Curmudgeon is trying to reassure himself). Because a given geography has higher rates of college grads in residence, Moretti states, will create a brain hub environment. He tells us how, but the Curmudgeon wants to know “Why”. If we want to take his advice and enhance our local creative environment or to use education to grow jobs and revitalize our cities, all those silly questions could be relevant to a policymaker with limited resources and a need to focus these resources on what counts. Or do we just throw more money into the existing higher education system (after all it seems to be working so very, very well)?
While all this education stuff sounds so good, and the statistical correlations prove its validity, the Curmudgeon wonders if in reality, education is really a dead end street or a cul du sac at best. Knowing that education is so critical, what is it we should do to get it to those who don’t have access to it or who choose not to consume it? How do we make every metro area a brain hub?
And if we can’t make every metro area a brain hub, and every citizen a college graduate then what are the implications that follow?
To be fair, Moretti also highly values increasing the rate of basic and applied research and an all out facilitation of ethnic and international inventors (p. 236). Both are logically prescriptions for the national government and have, we think, more limited applicability to our sub-state readership.
The argument is that net, net more jobs are created by innovation than lost or destroyed. We are not convinced this is necessarily true, at least in the short and intermediate term. We are also very unsure that those whose jobs are destroyed will sooner or later inhabit the creative, innovative jobs which productivity and creative destruction ultimately create.
Moretti’s argument, however, is ultimately based on fostering a creative class of highly educated entrepreneurs who best innovate and prosper from their innovations in an environment in which they are surrounded with others of their ilk. Their innovation and their prosperity is what the rest of us live off of. The Curmudgeon has already expressed his irritation, if not rage, with the implications which he thinks flow from this way of looking at economic growth. No wonder we have a two class society. No wonder the middle class is under pressure and, at best, is stagnating. No wonder the working and underclass seem to be growing (see Charles Murray who presents a case as to what changes have occurred in “white America”). Innovation economics and its sword of productivity is cuts a glorious path to prosperity by simultaneously cutting the legs out from under any who stumble. But let’s put all this aside and approach our critique from another angle.
We could concentrate our focus on the two-edged sword of innovation economics: productivity and creative destruction. The argument is that net, net more jobs are created by innovation than lost or destroyed. We are not convinced this is necessarily true, at least in the short and intermediate term. We are also very unsure that those whose jobs are destroyed will sooner or later inhabit the creative, innovative jobs which productivity and creative destruction ultimately create. Easily, these jobs can be filled by others, leaving in their wake a Geography of Inequality as Moretti describes.
Call it structural unemployment if you must, but it is larger than that. Retraining is not a realistic solution to this issue, however much it is touted, because the inequality involves more than mere skills. The bottom-line reason why the inequality exists is that not everybody can participate in, or even wants to enter the world of the highly skilled and highly educated. A lot of us are just plain average, and we want to live our lives with our families, not our innovations. The world of innovation economics however, has no place for these average people, never mind below average folk. So, let’s just deny these folk exist. Better still, let’s simply assume they all are really above-average and are just waiting for new training programs and college degrees. Lake Wobegon here we come! [In case the reader is wondering what the heck Lake Wobegon is; it is a magical place, the hometown of commentator Garrison Keillor, where everybody is above average]
But let’s try to let go of the Curmudgeon’s obsessions. My mother always said to say good things about people (actually she didn’t, but everybody else’s mother seems to have said it) and thankfully that comes easily. Moretti finally acknowledges that you can’t just create a cluster from nothing but hope, cluster mapping and universities. Thank you Enrico!!!! What’s more he, correctly in the Curmudgeon’s opinion, demonstrates that serendipity, luck, and the good fortune to have a successful innovative, platform company locate in your area is what creates a brain hub–not the other way around. And Moretti logically, again courageously, reminds us that in Dylan’s words “the first shall be last”, the current winners can be losers unless they can adapt–perpetually. All these observations, and the frankness to articulate them, deserve our thanks and make this book worth reading.
Innovation is caused by entrepreneurs. Henry Ford did create the car industry in Detroit. Detroit did little or nothing to get him there–he just got there on his own devices. Moretti also, if only subtlely, calls attention to time. Success/innovation doesn’t happen overnight and it often comes in spasms, not slow, steady growth. Economic developers have to find other means to create jobs for today’s unemployed. And, despite my railing on and on about the consequences of inequality created by all this good innovation, Moretti courageously demonstrates its link with inequality and he is truthful in saying to those communities presently in the unequal category, “hey, you can’t rise above your present situation through conscious governmental effort. You can try, but good luck; it’s not likely to work out well” (these are the Curmudgeon’s words).
It sometimes seems to the Curmudgeon that most of what he reads about in the professional and the academic literature is just the reverse of all this. It is so pleasing to have a dose of reality actually be credibly received. It seems illogical to say it this way, but Moretti puts beautiful, fashionable clothes on the emperor (innovation) and only then does the reader really see that the emperor is naked.
Moretti acknowledges that you can’t just create a cluster from nothing but hope, cluster mapping and universities. Thank you Enrico!!!! What’s more he, correctly in the Curmudgeon’s opinion, demonstrates that serendipity, luck, and the good fortune to have a successful innovative, platform company locate in your area is what creates a brain hub–not the other way around.
And Moretti does offer another idea for how to deal with inequality: relocation. Relocation is not really in the New Geography. In fact, he argues in the book that the Great Divergence and the Geography of Inequality actually set in motion forces which makes it difficult and unlikely for those in the “unequal” geographies to relocate to the prosperous geographies. But since its publication, in a Wall Street Journal essay (May 26, 2o12), Moretti proposed that unemployed in these troubled regions should “receive part of their unemployment check in the form of a relocation voucher”. The Brookings Institute in a report on Buffalo, New York and chronically declining communities also called for a national policy of relocation as well. None of this is music to an economic developer’s ears, but for those individuals and families who are in trouble NOW, that offers a much more realistic chance of success than staying put and waiting for Godot. Unfortunately, a national relocation policy rests upon the unspoken assumption that most passengers in a sinking community will decline a seat in the life boat.
And finally as promised in the opening paragraph, “we’re done now”! See you all shortly in our next issue and thanks so very much for getting to the end of this issue.