Friday, January 31, 2020

Re-seeding America's Economic and Technological Future

Back in September 2017, Amazon announced that it was planning to build two new headquarters, and solicited proposals from cities. After due consideration of several hundred proposals, Amazon announced that the two winning locations just happened to be an easy commute from two homes of Amazon CEO Jeff Bezos: in Washington, DC, and New York City. It's easy to be cynical Amazon's process, and I have been. But here's an awkward question: What if in a pure business sense, Amazon made the right decision?

After all, we know that technology companies like to have a large available pool of local talent, and New York City and Washington, DC, rank at the top of all metro areas in terms of total number of tech workers. In fact, when you look at the patterns of the US economy in the last couple of decades, there is a growing concentration of tech companies in a few cities. Here's an explanation from Enrico Moretti:
I have just finished a new project where I study how locating in a high-tech cluster improves the productivity and creativity of inventors. If you look at the major fields — computer science, semiconductor, biology, and chemistry — you see a concentration of inventors that is staggering. In computer science, the top 10 cities account for 70 percent of all the innovation, as measured by patents. For semiconductors, it's 79 percent. For biology and chemistry, it's 59 percent. This means that the top 10 cities generate the vast majority of innovation in each field. Importantly, the share of the top 10 cities has been increasing since 1971, indicating increased agglomeration. ...
Companies in industries that are very advanced and very specialized find it difficult to locate in areas where they would be isolated. Nobody wants to be the first to move to a city because they're going to have a hard time in finding the right type of specialized workers. And it's hard for workers with specialized skills to be first because they're going to have a hard time finding the right job. It's an equilibrium in which areas that have a large share of innovative employers and highly specialized workers tend to attract more of both. It is difficult for areas that don't have a large share of innovative employers and highly specialized workers to jump-start that process. Ultimately, that is what generates the divergence across cities. ...
This pattern also helps to explain several of the main political and economic divisions of our time. The economies of US regions are no longer converging as they once did. In political terms, one of the most salient divisions of our time is between those who live and work in those cities where new technology companies and economic growth are concentrated, who often see the global economy as a place of opportunity, and those who live in the other cities where tech companies like Amazon and others are choosing not to locate, and who often see the global economy as a threat. 

The obvious policy prescription here looks something like this: Boost national research and development spending substantially: after all, a variety of estimates suggest that the social return from more R&D spending is 60%, or that the US should be aiming over time to double its R&D spending.  However, when determining the locations for that R&D spending, hold a version of Amazon's contest for a new headquarters. The ultimate goal is to increase dramatically the number of US cities that are hubs for the development and commercialization of new technology.  

Perhaps the most prominent, detailed, and thoughtful example of a proposal to address these issues is the book Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, by Jonathan Gruber and Simon Johnson (published in April 2019). They review the Amazon HQ2 process at the start, and write: 
The lesson from the [Amazon] HQ2 bidding experience is clear. Established big tech companies, left to their own devices, will bring a significant number of good jobs--along with congestion, high house prices, and perhaps even more inequality--to a small set of already successful cities, most of which are located on the East or West Coast. This book is for everyone else. 
They suggest taking steps with the goal of boosting US R&D by $100 billion per year. (For comparison, total US R&D spending is now about $580 billion, with $404 billion from companies,  $127 billion from the federal government, and the rest from higher ed, nonprofits, and other sources.) They would then hold an Amazon-like competition to spread this funding across the US and to create new innovation hubs.

To govern the process so that politicians don't just hand out the money to all their favorite constituencies, they propose a Technology Hub Index System (THIS). They focus on cities with a population of at least 100,000 workers from age 25-64, where the college-educated share of such workers is at least 25%, and where the mean home price is less that $265,000, and the commute is less than 30 minutes. They would also include measures of patents/worker in that area, as well as whether the area already has highly-ranked graduate school programs in science and tech areas. The top city in these rankings is Rochester, New York.

Their idea is to combine the THIS index with an application process, where metro areas could apply to receive R&D funds and other kinds of assistance. The metro areas would need to put together a package of how they would spur business growth in their area, including not just technology support but also support for local education, land, and infrastructure. Decisions about who gets the money would be made by an Innovation Committee, structured after the Base Realignment and Closure Commission process that has led to the closure of over 350 military installations. The commission recommends a list of winners, and if the president approves the list, it goes into effect--unless the entire list is rejected by Congress. The idea here is to recognize that any plan like this needs political approval, but to limit the ability of politicians to tinker and micromanage.

Similar ideas have come up in other forums. For example, on January 29 the Brookings Institution held a conference on the subject "Boosting growth across more of America:  Pushing back against the winner-take-most economy" (audio and transcript available here). In the lead-up to the conference, Mark Muro and Andre Perry wrote:
Can the United States truly prosper when 90% of its R&D- and STEM-intensive “innovation sector” employment growth takes place in just five “superstar” tech hubs? More voices are beginning to doubt it. ... [T]ens of millions of Americans are seriously disadvantaged in job opportunities, income mobility, and health and happiness levels simply by virtue of living in a place other than a `superstar' hub.
The Brookings panel focused on a report by Robert D. Atkinson, Mark Muro, and d Jacob Whiton called "The Case for Growth Centers: How to spread tech innovation across America" (December 2019, published by Brookings and the Information Technology & Innovation Foundation).

The political prospects for this kind of proposal may not be very robust. Although everyone talks a good game about the importance of technology and science to the future of the US economy, US R&D spending as a share of GDP hasn't budged much for decades. If we could agree on how to attain a big boost in R&D spending (presumably through some combination of direct spending and indirect incentives), political representatives of the already tech-successful cities are unlikely to support a focusing that additional funding to other geographical areas. After all, they are more likely to see new tech hubs as potential competitors in a zero-sum game, rather than as ways of deepening the national pool of ideas and talent in a way that will redound to their benefit.

But for the US economy and polity as a whole, policies that set the stage for tech-successful cities can be distributed across the country--something that is just not happening now--may be worthwhile. The goal is to trigger the benefits of agglomeration economies in areas where the costs of agglomeration (congestion, high housing prices, crime) are lower.