Issue #20, Spring 2011

Metro Connection

With Washington paralyzed by gridlock, states—and the metropolitan areas that power them—need to take the lead in rebuilding the economy.

The Great Recession and the sluggish recovery have been a wake-up call for the nation. Americans, both policy-makers and voters alike, believed that we could build a sustainable economy on consumption, on endless acres of condos and starter mansions, and on financial products conjured from mathematical models and wishful thinking.

Clearly, it is time to chart a different path. We need to rebalance the American economy and cultivate the fundamentals that can bring prosperity back: robust exports, low-carbon technology, continuous innovation, and opportunity for all. And the path to a different and better American economy runs directly through our metropolitan areas.

The largest 100 metropolitan areas in the country are home to about two-thirds of the U.S. population and generate 74 percent of our GDP. In fact, metro areas generate the majority of economic output in 47 of the 50 states, including such “rural” states as Nebraska, Iowa, Kansas, and Arkansas. Metros are anchored by cities, but they aren’t synonymous with them. Metros include suburbs, edge cities, boomburbs, exurbs, exit-ramp office parks, strip-mall zones, and even rural areas. They aren’t defined by the number of skyscrapers, Starbucks, or iPads per capita, but are united by a shared economy.

Metros will lead the United States into the next economy because they possess the assets that modern economies need. Metros dominate U.S. trade and logistics. They concentrate the innovative firms, advanced research institutions, venture capital, breakthrough technologies, and skilled workers that will drive the next economy. And they are where networks of universities and community colleges stand ready to educate the next generation of U.S. workers. In short, metros bring together ideas, people, and technology in a virtuous cycle that generates more innovation and attracts still more people.

There is a lot that the federal government could do to lay the groundwork for the flourishing of metropolitan America: Set a price on carbon, invest intelligently in advanced research and development, make transformative investments in infrastructure, and overhaul our immigration laws. (We proposed some of these ideas in a Democracy essay, “Miracle Mets.” [Issue #12]) But no one believes that the federal government will do these things this year or the next. At best, it can attempt some targeted policy interventions around trade, maybe infrastructure, possibly tax reform. While Washington is strangled by partisanship and polarization, states will have to take up the burden of invigorating metropolitan areas and kick-starting the economy. Indeed, rebalancing the economy will require reorienting—radically—the focus of state government.

The role of states as “laboratories of democracy” is a mainstay of American federalist lore and study. States have broad powers over such market-shaping policy areas as infrastructure, energy, innovation, education, and skills training. Successful state leaders, whatever their partisan commitments, are usually forced to get extremely practical extremely fast because they have to balance their budgets and adhere to deadlines. They are also more easily held accountable for those budget decisions, especially when those involve program and personnel cuts. Many state leaders (and their local elected, business, and civic counterparts) are members of what we call a “pragmatic caucus,” in sharp contrast to ideologically driven federal lawmakers.

Yet the traditional assessments of state innovation fail to capture the real economy-building secret of states—namely, their special relationship with metropolitan areas. In the American system, metropolitan areas (and their component parts: cities, counties, suburban municipalities, and rural towns) are all creatures of state law. The state determines everything: the boundaries of cities and municipalities, the extent of their powers, the flexibility or rigidity of powers and borders. In other words, the state government decides who does what, where, and with whom.

States, though, are not accustomed to using their broad powers to unleash fully the entrepreneurial energies and dynamism of their metropolitan areas. In fact, states have often taken the opposite approach, constricting their metros fiscally and governmentally. State leaders need a profound shift in mindset. In the global economy, metros matter more than states, and states will succeed to the extent they can bolster their metro economies. An unintended legacy of the Great Recession may be the most significant restructuring of the mission and focus of state government since the progressive movement a hundred years ago.

The Next Economy

The next economy must have four characteristics: higher exports, to take advantage of rising global demand; low-carbon technology, to lead the clean-energy revolution; innovation, to spur growth through ideas and their deployment; and greater opportunity, to reverse the troubling, decades-long rise in inequality. Metros will take the lead on all four fronts.

Exports are critical now for several reasons. Foreign nations are where the recovery, and thus demand, is strongest. The 30 metropolitan areas that have recovered most strongly from the Great Recession are almost exclusively located in Asia and Latin America—places like Lima, Shenzhen, Santiago, and Guangzhou. The rising nations and their rising metros are now driving global demand for trade and commerce. Brazil, India, and China accounted for 8.6 percent of the global middle-class consumption in 2009, but could account for 26 percent by 2020, according to a recent Brookings study. These consumers are even now contributing to an export surge in the United States: American exports grew 12.7 percent from the third quarter of 2009 to the third quarter of 2010, outperforming the economy’s 3.2 percent growth rate.

Although the U.S. trade deficit is huge, we still manufacture a range of advanced goods that the rest of the world wants, including aircraft (in 2009, exports accounted for more than half of U.S. general aviation manufacturing industry sales), space craft, electrical machinery, precision surgical instruments, and high-quality pharmaceutical products. And we shine in services: Our trade surplus in that sector was $152 billion in 2008.

The top 100 metros dominate U.S. trade, particularly in the fast-growing services sector, and their expertise in fields like chemical manufacturing, computers, and consulting put them on the front lines of commerce with the fast-growing economies of Brazil, China, and India.

The second hallmark of the next economy is low carbon—low-carbon energy sources; infrastructure that can move people, goods, and ideas with less energy; and products that take little energy to build and operate. The United States has been slow to embrace the low-carbon economy. The Recovery Act devoted about $94 billion to renewable energy and green investments, everything from incentives to develop new battery technology to retrofitting public and assisted housing. China, by contrast, allocated $221 billion of its 2009 stimulus funds to renewable energy and other green investments. And China continues to out-invest the United States in key low-carbon categories: China has built some 4,000 miles of rail for fast trains. By 2020, the nation expects to build 10,000 miles of high-speed rail to connect all its major cities. The United States, by contrast, has one arguably high-speed rail line of 456 miles, the Boston-Washington corridor.

Key sectors of the low-carbon economy, like the export-oriented economy, will be primarily invented, financed, produced, and delivered in the top 100 metros. These large metros concentrate a majority of U.S. jobs in solar energy, wind energy, smart-grid systems, smart metering, energy research, engineering, and consulting services. Some 85 percent of jobs in green architecture, design, and construction are in large metropolitan areas, which makes perfect sense, since that’s where most people and buildings are.

But the United States needs to innovate not just in low-carbon technologies, designs, and land-use patterns. It needs to encourage innovation in just about every sector of the economy. Innovation, the third element of the next economy, has been the source of almost all economic growth in this country since the Industrial Revolution. As economist Paul Romer has written, “No amount of savings and investment, no policy of macroeconomic fine-tuning, no set of tax and spending incentives can generate sustained economic growth unless it is accompanied by the countless large and small discoveries that are required to create more value from a fixed set of natural resources.”

Unfortunately, as a share of GDP, total federal funding for R&D was lower in 2008 than it was in 1993. The Recovery Act’s massive infusion of funds, about $50 billion (including both appropriations and tax expenditures), was better than nothing, but it was not, and wasn’t designed to be, a sustained commitment to raise federal support for R&D activities.

The innovations that are happening are happening mostly in metros. One rough measure of innovation is patent rates, and these are much higher in metropolitan areas than outside them. And within metros, new innovations and patents spur yet more: Patent citations tend to occur within the metro areas in which the patent itself originated. Venture capital investments, another proxy for innovation, are almost exclusively made in metropolitan areas.

The fourth critical piece of the next economy is greater opportunity, especially for people without four-year college degrees. An economy that is innovation-driven, export-oriented, and lower-carbon will require workers who are well educated when they enter the workforce and who continually upgrade their skills. Thus the next economy will drive the United States to narrow our persistent educational attainment gap. African Americans and Hispanics will be nearly 40 percent of the working-age population by 2050, up from about 25 percent now. Yet these groups have lower rates of post-secondary educational attainment, including two-year degrees, than whites or Asians. An innovation-driven economy will demand, and reward, more education and skills. The attainment gap is, more than ever, a competitive hurdle.

But if workers can build their skills, the next economy may also create more opportunities for workers to move into well-paying jobs with secure benefits. For example, exporting firms pay workers more and are more likely to provide health and retirement benefits. Alexandre Mas, former chief economist at the Department of Labor, last year told Congress that an increase in U.S. export intensity “has the potential to create hundreds of thousands of new, good-paying jobs” and reduce income inequality by raising the income of many working-class and middle-class employees.

Metropolitan areas also have the potential to speed workers’ wage growth. One study from the Federal Reserve Bank of St. Louis suggests a worker in the Chicago metro area would enjoy wage gains about 15 percent greater over the course of a decade than a comparable worker in the Cheyenne, Wyoming metro area, simply because Chicago is so much larger. Metropolitan areas also seem to increase workers’ productivity levels and earnings, even after they leave the metro, according to research by economists Edward Glaeser and David Maré. All this is not to dismiss the discouraging condition of many school districts in metropolitan areas (usually in their urban cores), nor high unemployment rates in many central cities. But if a person has a job, he or she will probably be better off if that job is in a metro area.

A Metro Agenda for States

Metros, for all their economic power and next-economy advantages, are largely unrecognized in law and politics. Local governments are creatures of the states, and states have rarely seen fit to create metropolitan governments that would link up the constituent elements of metros, or to enable localities to do it themselves. In state legislatures, metro representatives tend to fragment along geographic and party lines, with suburban legislators often siding with rural representatives against city concerns. Executives and legislators feel pressure to spread state largesse thinly and evenly across the state, rather than concentrating big investments in infrastructure and innovation in their metros. Political discourse, driven by micro-targeting (and insufferable labels: NASCAR dads, Mama Grizzlies), further chops up metropolitan populations and undermines a sense of shared interests among both voters and their representatives.

Yet metros matter. States (and the federal government) may not be required to tend to their metros’ needs by law or custom, but economic reality dictates that states must do a better job of supporting the places where most of their citizens live, work, learn, and create.

Germany shows how this should be done. The German state of Bavaria has spent some €4 billion to build up its innovation and high-tech strengths, and a huge share of that money has gone to greater Munich, in the form of funds for university R&D, new technical universities, support for tech transfer (which is how ideas move from university labs to marketable products), venture capital money, a high-tech manufacturing center, and three business incubators. The state sold stock it held in a variety of companies to raise the money for this ambitious agenda, so the funding mechanism isn’t transferrable to the United States, but the principle of economy-shaping, metro-focused investments is. Even in more fiscally constrained times, Bavaria continues to support its leading metro. One of its more recent initiatives brings together venture capitalists, researchers, and businesses to support particular industry clusters.

Along similar lines, the German state of Baden-Württemberg allowed its major metropolitan area, Stuttgart, to create an elected regional assembly, so that the 179 municipalities in the Stuttgart region can work together on business development, including support for regional industry clusters like biotechnology, energy, and auto. Stuttgart’s fortunes roughly track that of the worldwide auto industry, so the recession hit it hard. But as autos bounced back, it did as well: It had the highest income growth of any Western European metro between 2009 and 2010.

An intense focus on metros is not only the appropriate response to the political realities of the moment. It is also fundamentally consonant with the demands of the next economy. The consumption economy minimized the differences between metros. Communities followed a uniform “Starbucks and stadia” recipe, irrespective of market location or condition, using a mostly uniform set of tools allowed by their states. The next economy, by contrast, accentuates what is unique about different metros, even those located in the same regions of the country: Raleigh specializes in life sciences; Charlotte, finance; Atlanta, transport production. States are better positioned than the federal government to appreciate and govern for their metros’ distinctive strengths.

Issue #20, Spring 2011
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Jim Richman:

America's states are the outcome of our historical development. As political and economic institutions, they made sense back then. Do they still make in today's world? Is it time to consider replacing our current 'states' with new political and economic entities centered on today's political and economic drivers, the largest metropolitan centers?

Mar 17, 2011, 2:57 PM

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