Governing: The Economic Reality That’s Splitting the Country Apart

Growth is increasingly concentrated in a small number of cities. That creates problems within those metro areas and threatens to deprive most of the country of prosperity.

ALAN GREENBLATT, SENIOR STAFF WRITER   |   JANUARY 29, 2020   |  ANALYSIS

How much money do you make? Increasingly, the answer to that question depends on where you live.

The nation's economic activity is increasingly concentrated in a tiny fraction of major metropolitan areas. By nearly every measure that matters — job growth, income growth, share of business creation and investment — there are about two dozen metros capturing the lion's share of the wealth.

"Since the Great Recession, there's an even greater concentration of net growth in businesses and human capital," says John Lettieri, president and CEO of the Economic Innovation Group (EIG), a research and advocacy group. "The winners of the longest economic boom in our nation's history are places that were already relatively well off."

According to EIG, in the years following the recession fully half of net new business creation occurred in just 20 counties. More than three-quarters of total venture capital now flows to just three states: California, Massachusetts and New York.

While the economy in the Bay Area, Boston and Seattle is booming, most places are losing workers. More than a third of the jobs in America's most innovative industries — technology, computer manufacturing, biotech, telecommunications and the like — are located in just 16 counties, according to a recent report from the Brookings Institution. More than half of those jobs are in 41 counties. All told, just 31 counties — out of more than 3,000 nationwide — account for a third of the nation's GDP.

We've all become familiar with the idea that the nation's wealth is heavily concentrated in the hands of 1 percent of individuals. It's now clear that geographic inequality is creating another 1 percent problem, with just that fraction of superstar cities outpacing the rest of the country. Brookings hosted a conference today on ways to address this growing gap.

As things stand, everyone's a loser as a result of the diverging economy. The boom cities are experiencing skyrocketing housing costs, homelessness and traffic congestion, while other places suffer from stagnating economies and all the social ills that follow.

The gap between rich and poor areas, between thriving urban centers and struggling rural communities, has also had political effects. While the nation's largest metros support Democrats, small cities and rural areas are becoming increasingly Republican.

"This particular transition is taking faster than prior transitions — agricultural changes that took thousands of years, or the Industrial Revolution, which played out over a century," says Eric Schnurer, president of Public Works, a policy consulting firm. "People and institutions that come out on the short stick of this change, that are in a less secure position, are reacting against it."

As a center of innovation and economic activity, Boston is thriving while much of the country is not.

Geographic inequality is a major reason Donald Trump was elected president in 2016, promising to bring back older industries such as steel and coal and to revive the manufacturing economy. "We're splitting up, economically speaking, and that tends to show itself in political terms," says Roberto Gallardo, assistant director of the Purdue University Center for Regional Development.

Now the problem is starting to draw attention from a broader range of policymakers, academics and investors. Former New York Mayor Michael Bloomberg recently released a proposal as part of his Democratic presidential campaign to invest in "place-based policies" designed to boost economic growth in mid-sized cities. Los Angeles Mayor Eric Garcetti helped found Accelerator for America, a nonprofit aimed at helping more communities build wealth and opportunity.

AOL cofounder Steve Case and Hillbilly Elegy author J.D. Vance have each launched investment funds that are devoting millions of dollars to promoting economic growth and startup ecosystems in heartland communities. And on Monday, Silicon Valley investor David Roux announced a $100 million donation to Northeastern University for a research center in Portland, Maine, with the long-term aim of transforming that city into an innovation hub. "There's no reason we shouldn't be to Boston what San Jose is to San Francisco," Roux said at the announcement in Portland. "We live today in an innovation economy."

There's no silver bullet that will solve a problem that's been growing for decades and is global in nature. Still, new investments and proposals that are moving out of think tanks and onto the political stage represent a welcome change from policies that have only served to exacerbate regional inequality.

The Geography of Jobs Has Changed

Throughout most of the 20th century, the economic fortunes of most of the country were converging. There were always areas that were richer, but those that were poor were catching up.

It was a different economy back then, however. The automobile industry might have been headquartered in Detroit, but its supply chain stretched across multiple states and hundreds of miles. Mining and manufacturing in general had large indirect effects, putting lots of people to work in ancillary industries.

American manufacturing is far from dead, but large numbers of factories that created well paying blue-collar jobs have shut down. Extractive industries have become highly mechanized, while agriculture is heavily consolidated. Farming and ranching were once dominant sources of employment in this country, but now direct farm employment makes up just over 1 percent of the national workforce.

In the industrial era, companies located in places that worked to their advantage, offering access to natural resources such as coal or timber that were essential to their products, as well as proximity to distribution nodes such as rivers and ports. But the rise of the service economy made such physical attributes much less important. "The advantage of natural resources peaked long ago," says Chris Briem, an economist at the University of Pittsburgh. "Fewer regions can rely on any geographic advantage."

It's Likely to Get Worse

The Internet was supposed to free the economy and workers from the tyranny of place. People were supposed to be able to take their laptops and work remotely from the mountaintops or beach locations of their dreams.

It hasn't worked out that way. Tech and other advanced industries, it turns out, benefit from what economists call agglomeration effects.

Every industry tends to cluster. As innovation occurs, the gravity of successful enterprises pulls in entrepreneurs and workers from other places. That's proven to be especially true when it comes to information technology and biotech.

In the tech economy, the need to be near highly skilled workers has supplanted the need to be near rivers and ports, notes Mark Muro, policy director for the Brooking Metropolitan Policy Program. "In a tech economy focused on talent, intellectual property and networks, things like agglomeration and clustering are much more important," he says.

People planning a career in tech want to know they'll have options. In past decades, a worker who signed on at a manufacturing plant might be able to count on employment not just for the remainder of his own career but for his children as well. Today's workers, by contrast, assume they'll have to change jobs multiple times.

So just as most aspiring actors move to New York or Los Angeles, tech workers tend to move to a small number of cities where they can be confident of plentiful job opportunities over the long haul. "You're not being attracted by a particular job," says Briem, the Pitt economist. "You're looking for that job and the next job. It's more important for there to be a concentration of jobs available for when you move on."

The income disparity between thriving city centers and struggling rural communities is a worldwide trend.

Either a Virtuous or Vicious Cycle

The areas that pioneered the creation of the new economy have enjoyed so-called first-mover advantages. Their head starts have allowed them to build ecosystems where success bred further success.

There's long been an assumption among economists that tech, like earlier industries, would inevitably spread out its operations and wealth. As people and firms are priced out of Boston and the Bay Area, so this thinking goes, they'll move to cheaper places such as Pittsburgh or Salt Lake City.

There are certainly examples of that happening. On the whole, however, the areas rich in opportunity are continuing to get richer. According to the Brookings study, just five innovation clusters — Boston, San Diego, San Francisco, San Jose and Seattle — enjoyed more than 90 percent of the job growth in advanced sectors between 2005 and 2017. "If you're a tech worker, you'll go to one of those five places," Muro says.

The result is an ongoing sorting of talent. If there's not a mass migration of tech companies out of Boston and Silicon Valley, the cost of living in such places is driving out the people who lack the skill or education to land top-paying jobs. Meanwhile, areas that are less vibrant are losing their most talented workers to larger cities.

The share of the population in metro areas with at least a bachelor's degree jumped by 22 percentage points between 1970 and 2018, according to Purdue's Gallardo. Small cities and rural counties lagged behind, and now the share of college graduates among their populations is half that of metropolitan areas. "We've reached a level of sorting where the talented make the move but the others don't, because it doesn't make sense for them economically," Muro says.

While many people are priced out of the innovation centers, struggling areas are seeing their populations age or drain. Consider the 207 counties — mostly economically stressed counties in the Midwest — that voted for Barack Obama in 2008 and 2012 but switched their support to Trump four years later in 2016. More than half of them lost population in the two years following Trump's election, according to the Economic Innovation Group. Nearly all of them — 94 percent — have experienced declines in their populations of people in prime working ages over the past decade.

A booming urban economy comes with its own problems including skyrocketing housing costs and homelessness.

Where the Money Goes

Less than 10 percent of Americans moved last year — the lowest share since the Census Bureau began collecting that data back in the 1940s.

Many people feel priced out of the places where job growth is most rapid. In San Francisco, the average rent for a one-bedroom apartment has topped $3,500. Zoning and land use policies in such places have put de facto limits on housing, making it harder for people to move where the jobs are. In March, San Francisco residents will vote on a ballot measure that would cap new office-space construction unless the city meets affordable-housing goals.

Back in the industrial age, people moved where the jobs were. That makes less sense for people who lack the skills and education to command a top salary at Apple or Amazon.

Millions of Americans are shackled by other policies that discourage them from reinventing themselves. Roughly 20 percent of jobs now require some form of occupational licensing, up from 5 percent back in the 1950s. More than 30 million Americans are covered by non-compete agreements. "An enormous share of our workers are blocked from doing the rational thing — stop being here and go somewhere else and do something else," says Lettieri, the Economic Innovation Group's president.

Buy while many workers are boxed out of the job creation centers, capital is still flooding in. Even as foundations and philanthropists are trying to revive places such as Cleveland and Detroit, large portions of their wealth are actually being invested in the booming tech cities. University endowments, public employee pension funds, insurance companies, rich individuals — all of them are shipping money out of their own hometowns. "It's not just an economic restructuring," says Bruce Katz, co-founder and director of the Nowak Metro Finance Lab at Drexel University. "It's also magnified by investment distortions."

There's an entire "wealth export industry," Katz says — private equity firms, wealth management companies and other financial institutions — that are sending money out of the heartland to chase returns in a small number of cities and alpha industries. If their clients could be convinced to invest more locally, it could help combat the problem of the overconcentration of the economy, Katz argues.

"It's leading to over-investment in a few cities and under-investment in dozens of places that have innovations infrastructure in place," he says. "If we have a combination of smart federal policy and some new norms and models in the investor world, we might be able to address this imbalance."

The loss of good-paying manufacturing jobs meant a reduction in the quality of life for much of middle America.

The Beginnings of a Policy Response

The federal tax cut package enacted in 2017 included the creation of an Opportunity Zones program designed to spur economic investment in low-income neighborhoods. There are more than 8,700 qualifying zones scattered across all 50 states.

Some analysts are calling for direct federal investment on a massive scale. In their 2019 book Jump-Starting America, MIT economists Jonathan Gruber and Simon Johnson call for the federal government to invest $100 billion a year in scientific research and development in more than 100 cities they think can be turned into technology hubs.

The Brookings Metropolitan Policy Program is calling for a similar investment that would be more geographically targeted. It recommends that the feds spend $100 billion over 10 years to help build up advanced-industry clusters in eight to 10 metros that already have assets in place, such as research universities, and with them the capacity to be put on a more dynamic trajectory.

The Brookings proposal had a clear influence on Bloomberg's new plan. Meanwhile, research from the Economic Innovation Group suggesting that immigration policy should support growth in metro areas experiencing population decline or economic stagnation has informed proposals from two other Democratic presidential candidates, Joe Biden and Pete Buttigieg.

"One of the things driving this divergence is the demographic landscape," says EIG President Lettieri. "When you have so much of the country seeing a shrinking of their prime age workforce — the vast majority losing prime age workers and most set to lose again in the next decade — that's just a fundamentally different picture than what we've had for the last 100 years."

The percentage of college graduates in small cities and rural counties is now half that of the big cities.

A Problem of Unprecedented Scale

The entire world is urbanizing. More than half the global population now lives in cities, a share projected to rise to above two-thirds by 2050. The same forces that are concentrating economic activity in this country are also creating regional winners and losers everywhere from China to the United Kingdom.

In the U.S., the forces that are pushing jobs and economic growth to a small number of superstar cities are playing out on a smaller scale in practically every state. Cities such as Indianapolis and Omaha, Neb., can't really compete with the Seattles and San Franciscos, but they're certainly outpacing other parts of their states. They're also seeing sizable rent increases, albeit at a less alarming rate than along the coasts. "You see a lot of the national problems in microcosm in regions," Lettieri says. "Every state is spiky, just like the national economy is spiky."

From a purely economic perspective, there are benefits to having innovation clusters. The concentration of the economy, in fact, is based on the reality that there's a bigger national economic boost when thousands of tech companies locate in Silicon Valley, as opposed to having one tech company in each of thousands of different places.

"You wouldn't actually get the innovation if you took the people working on those things and spread them around the country," says Salim Furth, director of the Urbanity project at the Mercatus Center at George Mason University. "We rely on face-to-face contact to come up with great innovation and changes."

But not everything is about economics. People want to stay in their hometowns for a variety of reasons, whether it's family, culture or quality of life. Having a country where most of the new opportunities are opening up in just a few places — places that as a result have become unaffordable to most people — is ultimately not sustainable. "I do worry that these trends are a very good way to undermine consensus in the country," says Muro, the Brookings senior fellow. "It may be that some of this is contributing to greater skepticism about the innovation economy and tech. Most people feel very remote from the coastal hubs in which the millennial bros develop the economy."

Muro concedes that the Brookings proposal — having the federal government try to develop "growth poles" in eight or 10 regions — will be a difficult sell politically. The feds tend to spread economic development investments around pretty thin — creating Opportunity Zones in 8,000 communities, not eight of them.

Even if a consensus develops that the federal government must play an active role in investment in an effort to reverse or ameliorate the trends that are concentrating economic activity, there will be political pressure both to spend less money and to spend it in more places.

The problem isn't going to solve itself. Economic concentration is increasing, not diminishing. We're moving from skepticism that this concentration is a real problem to a recognition that the problem is grave. The growing political divide, between urban areas that are aligned with the global economy and less populated areas that are not, shows that the present course is not sustainable.

"The forces that we've been discussing are so powerful, it really is a serious question about how we can alter them," Muro says. "But we think this country really hasn't tried [to address them] before, and tried on this scale."

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