The Riverside Press-Enterprise
Can the IE learn from history of Detroit and Atlanta?
In 1970, the Detroit metropolitan statistical area had more than 4 million people. At the time, the Atlanta MSA had less than 1.5 million residents. Fifty years later, the population of Detroit has decreased to 3.8 million. In contrast, there are now more than 6 million people living in Atlanta. One of the most dramatic economic phenomena of our times is the great divergence across cities. This divergence is particularly acute in the United States, where the prospects for thriving cities is perceived so different to the prospects of cities that remain stagnant or are shrinking. What are the explanations for this divergence and increasing gap in a region’s success? And what lessons can the Inland Empire draw from this?
The answer lies partly on two dimensions of a region’s industrial composition. The first dimension is the ability to produce goods and services that are traded nationally or globally, in contrast to goods and services consumed locally.
Economists divide industries into traded and non-traded sectors. Traded industries are those where the output can be shipped anywhere. For example, software can be produced in Silicon Valley, but can be shipped anywhere in the world. Airplanes can be produced in the South Bay, and they can be shipped anywhere, although not as cheaply as software is. Non-traded industries, or local industries, are those where the output is produced and consumed in the same place. Retail trade, leisure and hospitality, inperson health care are local industries. So is construction. What they have in common is that their services are consumed locally. The important difference is that the traded sector can expand markets globally, and thus it’s enhanced regional productivity.
Economist Enrico Moretti argues quite convincingly that there are external benefits from traded industries: not only do they enhance their own productivity, but they also do so for the productivity of all industries (including nontraded) in the region.
The second dimension in which industry composition explains the great regional divergence is the availability of industry clusters. Clusters consist of companies located close to one another to take advantage of proximity. There are three reasons why clusters enhance a firm’s productivity: the first is because companies can share a common labor pool, workers can move from one business to another with considerable industry specific human capital. A common labor pool allows companies to recruit workers quite frictionless. The second reason why clusters enhance productivity is because companies share common infrastructure, a common group of suppliers and a common set of facilities. The third reason is because workers and companies learn from one another. It’s what economists call “learning spillovers,” and in my opinion, it’s the most important trigger of productivity. Not surprisingly, economists Shawn Kantor and Edward Whalley show the presence of a local university is associated with large positive productivity shocks.
If the global reach of our industries and their ability to cluster matters, what fate awaits the Inland Empire?
First of all, note that the Inland Empire overrelies on non-traded or local industries. In fact, 75% of all jobs in the Inland Empire are local, compared with 65% of California’s jobs, or even 61% of Atlanta’s jobs. Further, when one accounts for the most prevalent industry clusters (by income) in the region, those in the Inland Empire are local health services, local real estate and construction, local education and training and distribution and electronic commerce.
The top cluster by income in California? Business services. The top cluster by income for Atlanta? Business services. This cluster involves both traded and non-traded industries, but what is most important is that the global reach of this cluster enhances the productivity of both the traded and non-traded industries within the cluster.
But the most important lesson for our region comes from Detroit, which during the 20th century depended mostly of one industry: automobiles. This is a high productivity, traded industry. Nonetheless, with the competition from foreign car companies, Detroit lost its primacy among this cluster and stagnated economically. Just like the automobile industry fueled growth in Detroit during that time, logistics and distributions have fueled economic growth in the Inland Empire during the 21st century. Yet who will be our “foreign” competitor? Will it be automatization? Will it be another region? At this point, I do not know. The danger lies, nonetheless, right now on placing all our bets in one local industry.