Chapter 6: Poverty Traps and Sexy Cities

 What can be done in cities with the wrong mix of jobs and skills?  Can we reproduce the experience of innovation clusters elsewhere?

 Biotech labs popped up inthe1970s in many locations  Today, the industry is concentrated in just three areas: San Diego, San Francisco, and Cambridge-Boston

 Presence of an academic star explains emergence of biotech clusters  Power of stars: ◦ Start-up companies need to be close to cutting edge researchers ◦ Stars are personally engaged in start ups  Once started, the cluster attracts more firms and workers  Impact of stars fades as the cluster matures

 Successful city ◦ Innovative companies come because of the skilled labor ◦ Skilled workers come because of the jobs available  Struggling city ◦ Skilled workers stay away because of lack of demand ◦ Innovative companies don’t come because they know they can’t hire the needed labor  Catch-22

 Demand side ◦ Attract employers, hope skilled workers will follow ◦ Use traditional incentives and tax breaks  Supply side ◦ Attract workers, hope employers will follow ◦ Improve city amenities to lure talented workers  Bottom line: bribe businesses or bribe workers

 Richard Florida ◦ Argues that cities with the best amenities will attract skilled workers  Berlin – great culture, no jobs  Amenities are the effect, not the cause, of development

 Presence of a university does increase both the supply and demand for skilled workers  Supply: graduates and attraction  Demand: ◦ Research related new businesses ◦ Knowledge spillovers building up the innovation sector ◦ Medical school and associated hospital

 Necessary, but not sufficient, condition for the development of an innovation cluster  Many more cities have universities than have innovation clusters ◦ St Louis ◦ New Haven

 Government support for research centers does not make sense unless the ecosystem is right: ◦ Thick market for specialized labor and ◦ Thick market for specialized services

 Poverty trap – weak areas tend to become weaker ◦ Good companies flee due to lack of skilled labor ◦ Skilled labor flees owing to lack of good jobs  Need a Big Push to break out of the trap

 Successful cluster becomes stronger ◦ Labor markets become thicker ◦ Specialized service markets become thicker ◦ Knowledge spillovers become larger

 Jump start the innovation cluster  Use targeted policies to simultaneously attract skilled workers, employers, and service providers.  Only the government can accomplish this  Goal: government provides the initial push, then the cluster becomes self-sustaining. Subsidies diminish.

 Track record of subsidizing promising industries is not great (solar panels) ◦ Too difficult to pick winners ◦ Is there a sound economic rationale for the subsidy?

 Bribing businesses – subsidies can be large ◦ Panasonic – $125,00 per job (Newark) ◦ Electrolux - $150,00 per job (Memphis) ◦ Mercedes - $165,000 per job (Alabama)  Total state spending on subsidies: $40 billion annually  Are they worth it? Should be equal to the benefits.

 Focus on investments that result in agglomeration and specialization  Focus on development of innovation and ideas, not production of goods  Result: sustainable success of tradable goods and services that cannot easily be duplicated elsewhere

 Role state and local governments can play in economic development is limited.  Community fate frequently determined by history (path dependence)  Path dependence and the forces of agglomeration are very strong headwinds for areas with few skilled workers and an established innovation sector.  Local governments can lay the foundation for future development, but nothing is guaranteed.

 Innovation is local; determine the comparative advantage and build on it  Reserve public funds for market failures and when there is a good chance of a self- sustaining cluster