Consumer Versus Producer Economic Growth

A recent Wall Street Journal article celebrates Utah's booming labor force. More workers translate into more wages demanding more goods and services. The consumption of more goods and services increases the need for more employees so supply can meet the demand. The expert take on Utah's exceptional virtuous circle reads more like a tautology:

“Without people, you can’t have jobs, and without jobs, you can’t have an economy,” said Mark Zandi, chief economist at Moody’s Analytics.

In this country, you gotta attract the people first. Then when you get the people, you get the jobs. Then when you get the jobs, then you get the economy. All hail the Scarface approach to economic development.

This population pyramid scheme built the Sun Belt. As long as fools rush in, all is well. But when the people stop coming, the tide goes out and reveals a bunch of metros swimming naked. Consumer city has no clothes.

In the realm of Bizarro Scarface, you gotta attract the economy first. Then when you get the economy, you get the jobs. Then when you get the jobs, then you get the people. "Without economic restructuring, you can't have jobs, and without jobs, you can't have people," said Tony Montana, chief economist at Producer Cities.

In developed and developing countries, demographic trends point towards quality over quantity. The part of the world where consumer city works is shrinking with producer city replacing it. The places where less residents produce and consume greater goods and services thrive. The Sun Belt grows to consume what the Rust Belt produces.

The Vitality of Dying Cities

The headline is dire: "Facing The Scenario Of Demographic Deserts In The EU." A desert connotes a void, the absence of life. Global cities, on the other hand, would be demographic rainforests. While geographic metaphors as heuristics abound, deserts can and do support a wealth of biodiversity. The same is true of places dealing with the shame of demographic decline.

At the scale of the nation-state, prosperity drives demographic desertification. Better educated women have fewer children. Smarter people tend to be more geographically mobile. Stuck in place is a symptom of socioeconomic malaise. Without immigration, many of the world's richest countries would be shrinking.

Demographic norms are currently caught between two economic eras. The industrial revolution pulled workers off of the farms and into the cities. The need for a large brood faded into the past. Both blue and white collars benefited from an income boost. In the knowledge economy, only the skilled get a lift and fortune favors a two-income household. While the number of people living within one home drops, the money earned (in real terms) grows. More people in Pittsburgh have jobs now than did during its population peak.

During the height of US manufacturing employment (as a % of the workforce) in the 1950s, the bulk of dependents were kids and women. Over the last few decades, more women have jobs as the number of retirees has exploded. Thus far, the typical answer to this policy problem amounts to a "Leave It to Beaver" approach. Have more children and attract more new residents. Educating children and immigrants is expensive as well as inefficient. Demographer Sarah Harper identifies the low-hanging fruit:

This idea that you need lots and lots of people to defend your country and to grow your country economically, that is really old thinking...It is much easier to enable older adults to stay upskilled and healthy and in the labour market than it is to say to women ‘oh you have got to have children’.

This idea that the 65+ can't work is really old thinking, too. Able-minded succeeds able-bodied, as the march of women into work demonstrates so well. We can't do much about unproductive toddlers. We haven't done enough for unproductive adults.

Geographic Heuristics: Rust Belt Is Rural

An Appalachian city is an oxymoron. Welcome to hillbilly urbanism. What about the cities of rural Iowa? Does not compute. There is rural. There is urban. Never the twain shall meet.

The US Department of Agriculture uses a similar dichotomy, metro and nonmetro. However, not all metro counties are alike. Some are large. Some are small. The same applies to nonmetro areas, many sporting urban areas of varying population size. Understanding the geographic variance within urban and rural results in a continuum of a "nine-part county classification":

Metro counties are straightforward, broken up into three population categories (large, medium, and small). Size matters for nonmetro, too. But there are six types, not three. The distinction concerns proximity to metro counties. Why would that matter? At some point, sprawl might graduate a nonmetro county to a metro one. In fact, a critical mass of commuters to a nearby metro area is part of the definition of adjacent counties.

The same could be said for smaller metro counties. Proximity to the largest metro counties confers similar spillovers, somewhat like the Census definition of combined statistical areas. The United States harbors a few urban galaxies such as Chicagoland. The end-all-be-all is the New York City agglomeration of agglomerations. Introducing the cosmopolitan Rust Belt:

“Allentown is the third-largest city in Pennsylvania and one of the youngest [in terms of population] in the state,” [Becky A. Bradley, executive director of the Lehigh Valley Planning Commission in Allentown] adds. “The whole downtown has been transformed within the past three years. We’re having an amazing renaissance. But the Lehigh Valley didn’t lose industries because we were never part of the Rust Belt. We were always linked to Philadelphia and New York because of our easy access, whether it was canals, roads, rails, or air.”

The Lehigh Valley was never part of the Rust Belt? “Well, we’re living here in Allentown and they’re closing all the factories down,” I yanked on my bow tie and squawked to my wife, and anyone else in ear shot, “Why does anyone think we want to hear that song here. We’ve spent the last 35 years working to overcome it!” Sure, Allentown was always linked to Philadelphia and New York. Both places were also part of the Rust Belt. Much of Philadelphia, like Baltimore, remains Rust Belt. And as New York has shed its economic malaise and Philadelphia revitalizes, so does Allentown.

The Rust Belt isn't so much spatial as it is temporal. Dig into the past of any city that employed substantial numbers in manufacturing and find at least one decade of Rust Belt. As economic restructuring filled out the five boroughs, globalization diffused to Philadelphia. It starts with a few neighborhoods until the impact shows up in the regional data. Bam! Philly is no longer a left behind place. By then, it's the turn of the Lehigh Valley. Is York next?

Migration Is Real Estate Development

People develop, not places. What does that mean? Economic development concerns a community or a region. Migration models (i.e. rational choice theory) predict that workers will move to areas doing better in terms of prosperity. You go where you grow, a heuristic that obfuscates how the act of moving from one to place to another results in economic development.

Brain drain is economic development. In place-based parlance, that statement looks absurd. But from the perspective of the migrant, it could not be more obvious. The most common rationale for relocation is financial gain. The migrant also benefits from living in a new place, experiencing ideas and perspectives otherwise unavailable in a hometown. Consider the epiphany of Quality Dairy champion Craig Terrill:

Terrill went to Michigan State University and stayed in the area for a few years after college. Then he left.
He worked as a communications point person for the city of Takoma Park in Maryland for six years before returning to Lansing two years ago. A big part of the job was running the social media accounts for the city, which borders Washington, D.C.
"One thing about Takoma Park is it’s really a quirky, crunchy, granola kind of city, like a Berkeley, California vibe, or Portland," Terrill said. "Everyone’s kind of weird, artsy, at least that’s the vibe it gives off.
"When I moved back to Lansing, I wasn’t getting that anymore. I was like, 'What if I did that here, but it was fictional and there was no filter.'".
So after some bar conversations and encouragement from friends, he launched Lansing Facts and it "went nuts."
Terrill says that, in D.C., the economy was surging and everything about the city was really expensive and fancy. It made him nostalgic for QD and places that seemed more down to earth.

Via Terrill, brain drain is economic development for Lansing, Michigan. Upon his return, he brought back a bit of Takoma Park, Maryland. He catalyzed what he liked best about Takoma Park in a place he liked better. It is the best of both worlds. The weird and artsy in the down to earth Rust Belt.

Terrill elevated his social media skills in a globally significant metro. He applied those talents in the left behind part of the country. All of this was made possible because he left Lansing, which needn't be in the orbit of Washington, DC thanks to the miracle of brain drain.

Brain drain is revitalizing urban Lansing one repat at a time. In fact, journalist Nona Willis Aronowitz worries that her own return migration is pushing out tenured residents in Harlem, "A year and a half later, in seemingly direct response, enterprising storeowners are serving salted caramel lattes and selling dry-aged picanha around the corner from us, ignoring the huge chunk of Harlem residents living in subsidized housing and making new residents like us look like jerks."

Global labor commands a global wage. Wherever such migrants end up, housing prices will go up. Goods and services will gentrify. Migration is real estate development.

Irrational Choice Migration: Geographic Heuristics and Superstar Cities

Why does the best talent move to the most expensive cities? One theory posits that the returns to skill are so great that the migration is a rational choice. The large salary justifies the exceptionally high cost of living.

The draw of superstar talent to a superstar city also would seem to overcome distance. Most relocation is to a nearby locale, with massive urban agglomerations acting as the exception to Ravenstein's rule. As a result, a place such as New York City will have stronger relationships outside of the country (e.g. London) than inside it (e.g. Buffalo).

The absolute distance between New York and London is much longer than between NYC and Buffalo. But the cognitive distance, informed by globalization, turns the relationship on its head. From the vantage point of Manhattan, London is much closer.

In psychology, the heuristic of distance is used to understand how humans perceive similarity. Then along came Amos Tversky, who annihilated the theory. As captured in The Undoing Project, human subjects wouldn't conform to the hypothesized symmetry of similarity judgments:

When people compared one thing to another - two people, two places, two numbers, two ideas - they did not pay much attention to symmetry. To [psychologist Amos Tversky] - and to no one else before Amos - it followed from this simple observation that all the theories that intellectuals had dreamed up to explain how people made similarity judgments had to be false. "Amos comes along and says you aren't asking the right question," says University of Michigan psychologist Rich Gonzalez. "What is distance? Distance is symmetric. New York to Los Angeles has to be the same distance as Los Angeles to New York. And Amos said, 'Okay, let's test that.'" If, on some mental map, New York sits a certain distance from Tel Aviv, Tel Aviv must sit precisely the same distance from New York. Yet you needed only to ask people to see that it did not: New York was not as much like Tel Aviv as Tel Aviv was like New York. "What Amos worked out was that whatever is going on is not a distance," says Gonzalez. "In one swoop he basically dismissed all theories that made use of distance. If you have a distance concept in your theory you are automatically wrong."

From New York, Tel Aviv seems a world away, if even on the horizon. In Tel Aviv, New York is a familiar presence, like a neighboring town or suburb. If you have a distance concept in your migration theory (e.g. distance decay) you are automatically wrong?

For Amazon, Seattle is like New York City and Washington, DC. We go where we know. Proximity matters. The line between the Pacific Northwest and the Northeastern superstars is shorter than the one to Chicago or Dallas. However, for superstars residing in the Big Apple, Seattle is no substitution for London. The migration is an irrational choice.

Consumer University: Winner-Take-All Eds & Meds

In Rust Belt cities such as St. Louis, neighborhoods tied to anchor institutions are doing relatively well. Neighborhoods tied to manufacturing experience terminal decline. Optics at the regional scale will depend upon preponderance of neighborhoods associated with the respective economic eras. This apparent divergence is a wedge between low-skill and high-skill jobs that structures much of the political discourse today:

Figure 2 shows that cross-MSAs wage convergence rates between 1940 and 1980 were the same for high-skill and low-skill workers. But, they differ strongly post 1980. Between 1980 and 2010, wage convergence rate occurs only among low-skill workers not for high-skill workers.

The 1980 rupture only concerns high-skill workers with wealth concentrating in select metros. Over time, more and more regions join Club Divergence. How? There is no theory of change offered, only fear about places left behind.

The granularity of geographic scale is not fine enough. Economic restructuring (the process of deleveraging from the high concentration of manufacturing employment) happens neighborhood by neighborhood, not in certain cities. A toehold of globalization on a few blocks next to a research university is lost in the noise of continuing low-skill economic convergence. To the extent local and state leadership cling to yesterday will serve to prolong the pain and perpetuate the Rust Belt stereotype.

But the embrace of a hospital or a university comes with its own peril. Chasing bodies instead of knowledge enters the arena of superstar cities and winner-take-all divergence. Given the diffusing pressures of demographic decline, how can Flyover Country compete with the likes of Oxford for tuition dollars?

Campus building has become an arms race among top business schools around the world as they seek to beat competition from cheaper online executive education courses with the lure of high-end training facilities in world renowned locations.

A few institutions will scale and gobble up all the inexpensive market for MBAs. While a few other institutions will be able to promote themselves as a luxury good (on the meds side, see Cleveland Clinic). This recipe for success is not one that most places can follow. Esports at the University of Akron won't serve as a catalyst for desperately needed urban revitalization and economic convergence will continue to dominate the landscape there.

Rust Belt Heuristics

A common demographic heuristic is loss aversion. Better to stop one resident from leaving than attract one newcomer. Rust Belt shame is all about loss aversion. If anyone leaves, whether for the suburbs or another state, then something is wrong with a place. A recent article in the Washington Post rekindles the dying cities geographic stereotype:

In America’s Rust Belt and parts of the Northeast, millennials and young professionals are leaving rather than moving in, and populations there are dwindling. Among those who remain, both the residents and the houses are aging.

The journalist (unwittingly) creates a new type of human, the net migrant. Negative migration indicates an exodus, not a lack of people moving into the city. The percentage (or absolute number) of the population actually leaving might be much lower than those exiting cool coastal cities. All that matters is whether or not there is a - or a +. Our loss aversion tendency compels us to fix the neighborhood and seduce the net migrant to stay.

Loss aversion at the regional or municipal scale turns a blind eye to strong neighborhoods in cities with lousy (i.e. Rust Belt) reputations. Quoting research from the St. Louis Fed, "Even in the most distressed older industrial cities some neighborhoods are doing quite well."

Rust Belt St. Louis is the case study. 35 tracts out of 218 total qualify as rebound neighborhoods (see Figure 1 above). With the 1970s (the nadir of urban America) as the baseline, Rust Belt cities have substantial areas of improvement as well as deepening distress. But the latter receives all the coverage and whitewashes a huge part of the United States with one broad brush stroke.

Indeed, in unpacking monolithic Rust Belt St. Louis, the Fed finds use for affordable housing efforts, "Subsidized housing also plays an important role in the continued economic diversity of rebound neighborhoods." Near anchor institutions reside young adults with enough earning power to drive up real estate prices beyond the means of the lowest wages. Regardless, the population drop defines the city. Loss aversion wins again, data be damned.