Nick Schulz: Your book highlights how high concentrations of skilled workers can generate wealth and economic growth in metropolitan areas and how this redounds to the benefit of the unskilled in those areas. Obviously policymakers are interested in developing these kinds of clusters, but you point out that most explicit efforts to do so fail or are not worth the cost and that plain-old luck plays a big part in cluster success. Is there anything policymakers can or should do to improve their metros and push them toward innovation?
Enrico Moretti: People often have unrealistic expectations of their governments. The role that local governments can play in revitalizing struggling communities is less extensive than most voters realize and most mayors would like to admit. The reality is that a city’s economic fate is in no small part determined by historical factors. In the book, I argue that 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, including a business climate friendly to job creation, but there is no magic formula for redevelopment. Like politics, all innovation is local: Each community has its own comparative advantage. Local governments must build on their existing capabilities by leveraging local strengths and expertise. The use of public funds to create jobs must be reserved for cases where there are important market failures and a community has a credible chance of building a self-sustaining cluster. Ultimately, though, local policymakers should realize that when it comes to local development, there is no free lunch.
One rare example of a revitalization program that has been successful at helping struggling communities create jobs and raise salaries is the Empowerment Zone Program. Created in 1993, the program provided a package of employment tax subsidies and redevelopment funds to “distressed” urban areas. Instead of targeting entire regions, the program zeroed in on impoverished neighborhoods in Atlanta, Baltimore, Chicago, Detroit, New York City, Philadelphia, Los Angeles, and Cleveland. The subsidies paid for jobs and training programs for individuals who lived and worked in these poor communities, as well as business assistance, infrastructure investment, and neighborhood development. There is solid research that shows that the program was effective, because it stimulated a large amount of private investment in these communities.
NS: While much of the public discussion of late has been about the problems of income inequality, you place much more emphasis on mobility inequality. Explain.
If the rest of the labor market had grown like the Internet sector, not only would there be no unemployment, there would be two new job openings for each citizen, including babies and the elderly.EM: The United States is a large and diverse nation. Economic differences across American cities (for example, unemployment rates and salary levels) are very large and keep growing. These growing differences mean that the economic returns to economic mobility have never been higher. But not all American workers are equally mobile. College graduates have the highest mobility of all, workers with a community college education are less mobile, high school graduates are even less, and high school dropouts come at the bottom of the list. (In total, almost half of college graduates move out of their birth states by age 30. Only 27 percent of high school graduates and 17 percent of high school dropouts do so.)
This fact matters enormously for inequality, as the relative lack of mobility of less educated Americans has large economic costs. Differences in geographical mobility, coupled with increasing polarization among American cities, exacerbate income differences across education groups. Indeed, if the less educated people were more able and willing to move to cities with better job opportunities, the gap between college graduates and high school graduates would shrink.
Government policies are part of the problem. The unemployment insurance system does not provide any incentive for unemployed workers to look for jobs in places with better labor markets. If anything, it discourages mobility from high-unemployment areas to low-unemployment ones, because it does not compensate for the difference in cost of living. If you are living off an unemployment check in Flint, you do not have a lot of incentives to move to San Francisco to look for a new job, because your housing expenses would triple, but your check would still reflect the cost of living in Flint. The unemployment insurance system should be adjusted to reflect the vast and growing differences in economic fortunes among American cities. Unemployed people living in areas with above-average unemployment rates should receive part of their unemployment insurance check in the form of a mobility voucher that would cover some of the costs of moving to a different area. In other words, instead of encouraging out-of-work residents to remain in Flint, the federal government could help them relocate to Texas (or wherever they might choose to go) with financial support that covers a portion of their moving expenses. This would help those who would like to move but are stuck because they lack cash.
NS: You mention Tyler Cowen’s thesis in The New Geography of Jobs. My sense is that your research prompts you to conclude that Cowen is half right and half wrong: Right with respect to those areas unable to remain a brain hub (like Detroit) but wrong for those areas that have attracted and developed human capital and innovation. Is this correct?
Unemployed people living in areas with above-average unemployment rates should receive part of their unemployment insurance check in the form of a mobility voucher that would cover some of the costs of moving to a different area.EM: A growing number of skeptics are questioning the importance of the innovation sector for the American economy, arguing that its job creation is not large enough to offset the losses in manufacturing. Intel’s former CEO Andy Grove has famously criticized America’s “misplaced faith in the power of startups to create U.S. jobs.” Tyler Cowen’s influential book argued that companies like Facebook or Twitter do not have many employees because they rely on their users for most of the content and are simply too small to replace the titans of the past, like Ford and General Motors. During the Facebook IPO, several pundits argued that there must be something wrong with an economy in which a company with such an outsized market capitalization has fewer than 3,000 employees. A series of articles in the New York Times and several others have criticized Apple’s labor practices, especially the fact that most of its products are manufactured and assembled outside the United States.
Critics raise good points, but miss two key facts. First, for all the talk about outsourcing, employment in innovation is growing, and it is growing much faster than the rest of the labor market. This growth largely benefits highly educated workers. Just to give you a sense of magnitudes, I estimate that the number of jobs in the Internet sector alone has grown by 634 percent over the past decade, or more than 200 times the growth rate of the overall number of jobs in the rest of the economy during the same period. If the rest of the labor market had grown like the Internet sector, not only would there be no unemployment, there would be two new job openings for each citizen, including babies and the elderly. The growth of total salary earned in this sector has been even more dramatic—712 percent over a ten-year period in today’s dollars.
The second point that is missing from our debate is that Apple, Facebook, and other high-tech companies support a growing number of jobs outside high tech in the communities where they are located, and many of these jobs are for workers with a high school education or less. Attracting a scientist or a software engineer to a city triggers a multiplier effect, increasing employment and salaries for those who provide local services. My research, based on data for 8 million workers in 320 metropolitan areas, shows that for each new high-tech job in a city, five additional jobs are ultimately created in local services, both in professional occupations (lawyers, architects, and nurses) and in non-professional ones (waiters, hairdressers, carpenters, and security guards).
NS: What do you make of ?
The use of public funds to create jobs must be reserved for cases where there are important market failures and a community has a credible chance of building a self-sustaining cluster.EM: Paul is a remarkable individual. He is one of the smartest and most creative economists around, and one of the very few with a serious entrepreneurial drive and real accomplishments in the private sector. His plan to start a major economic cluster in Honduras is intellectually valid, but it is also a long shot. The idea of a charter city is an extension of the idea of “special economic zones,” areas that China opened up to foreign investment in the 1970s and 1980s and that later became the country’s most important economic engines. But unlike the typical special economic zone, the political and legal institutions in Paul’s charter cities are not the ones of the host country, which is often corrupt and inefficient. Rather, they are the institutions of some external, well-functioning country.
If Paul succeeds in Honduras, he could change the way we approach regional economic development forever. But it will be hard to realize his vision, as the practical obstacles are enormous. Realistically, I put the odds at less than 25 percent.
NS: Tell us how you got interested in labor economics and agglomeration.
EM: One of the most striking facts about our society is how different the economic fortunes of cities can be. In the United States, for example, the wage of workers varies enormously depending on the city. The hourly wage of workers in a city like San Jose is more than double the hourly wage of workers in a city like Visalia. These cities are in the same state, are just 200 miles apart, and they share the same legal system, language, and culture—and yet from the point of view of their economies, they look like they belong to different continents. And the gap is not going away—it has been increasing for 30 years. It is not that San Jose has better natural resources or better transportation infrastructure than Visalia, or that its workers work longer hours. The entire productive ecosystem is different. It is hard to understand the reasons that make local economies so different, unless you start thinking about forces of agglomeration.
The relative lack of mobility of less educated Americans has large economic costs.Understanding why different cities perform differently is important because it is the first step in understanding why some countries are rich while others are poor. Ever since Adam Smith wrote The Wealth of Nations, economists have sought to understand the underlying causes of income disparities across regions of the world. While economists have historically focused on understanding the causes of differences across countries, the question of differences across cities is even more fundamental. It is difficult to understand why some countries are poor and other countries are rich without first understanding why some cities within a country are poor and others are rich.
The issue of cities is a central one for economists, and much remains to be done to fully understand it.
NS: Who are your intellectual influences?
EM: I am a pragmatist and an empiricist, and trust economic policies that are guided by data analysis more than policies that are guided by ideology and ambitious theories on how the world works. At the same time, I have a limited view of the appropriate role of government in the economy. My view is that in most cases people respond to economic incentives, and the government should intervene in the economy mainly when there are important market failures. I grew up in a country—Italy—where misguided government intervention in all sectors of the economy (high taxes, heavy labor market and product regulations, inefficient redistribution) has been for decades a major drag on the development of the country, and I saw firsthand the social costs of poor economic policies.
Nick Schulz is the editor of THE AMERICAN.