The New Map of Economic Growth

Jobs growth during the recovery from EIG

by James A. Bacon

Not only has job creation and new business formation been weak in the current business cycle, it has been more concentrated geographically than in the past. Unfortunately for the Old Dominion, between 2010 and 2014 that concentration did not occur here.

This analysis points to very different futures for American communities, suggesting that the gains from growth have and will continue to consolidate in the largest and most dynamic counties and leave other areas searching for their place in the new economy,” writes the Economic Innovation Group in a new publication, “The New Map of Economic Growth and Recovery.”

The report buttresses an argument familiar to Bacon’s Rebellion readers: that larger metropolitan areas enjoy a significant competitive advantage in the Knowledge Economy. Skilled and educated employees seek large labor markets that provide a diversity of employment opportunities, while corporations seek larger, deeper labor markets that provide access to a diversity of skilled and educated employees. The dynamics of labor markets outweigh factors that confer competitive advantage in the old industrial economy such as access to transportation and natural resources, lower labor costs, low taxes and a low cost of doing business.

In summary: Large metros enjoy a major competitive advantage, smaller metros are teetering on a knife’s edge, and rural areas and small towns are hosed.

“The U.S. economy is becoming far more reliant on a small number of super-performing counties to generate new businesses,” EIG says. “A mere 20 counties accounting for only 17 percent of the U.S. population were responsible for half of the net national increase in business establishments from 2010 to 2014.”

The report does not speculate whether the trend is the result of temporary economic or political factors or is an irreversible long-term trend.

Graphic credit: EGI

Graphic credit: EGI

Two trends contribute to the sharp decline in the number of businesses: a higher rate of firm deaths (more companies getting acquired or going out of business) and a collapse in new business formation, as can be seen below.

births_deaths

What could account for these trends? One logical possibility: In a blast of creative destruction associated with the digital economy, a relatively small number of new companies are displacing many established businesses. Another possibility: A wave of economic regulation in recent years has hobbled large swaths of the economy — the banking industry, the Internet, health care, energy, and so on — and has created new economies of scale that favor large, established corporations, encourages mergers and consolidations, and throws up barriers to entry to new firms. Most likely, both are at work.

Weakness in the national economy means that everyone is swimming upstream. Only a small number of metropolitan areas are strong enough to make any progress swimming against the current. Mega-trends favor the mega-metros.

But mega-trends won’t tell the whole story. Some large metros bungle their opportunities though corruption, business-hostile policies and mal-investment of public resources. Some smaller communities buck the broader trends by building defensible economic niches. The news from the EIG report is discouraging, but short-term trends need not dictate our long-term destiny.

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12 responses to “The New Map of Economic Growth

  1. As I’ve written before…this state keeps wasting money on rural areas. This study should be a huge blinking signal that we need greater investment in our urban areas.

    Ultimately, Virginia’s politics come down to this: If you believe in economic growth, vote Democratic. Their policies are geared towards bolstering the Commonwealth’s urban areas with investments in transportation and education. If you want slow to no growth, vote Republican. They continuously redistribute wealth to Southside and Southwest Virginia.

    There was a time when “low taxes and minimal regulation” was an effective formula. But those days are long gone…when you go to the Bay Area or the Research Triangle or Austin, as DonR has documented many times, you see the future of economic growth. In the end, you invest the public funds into amenities that attract brains. That’s where economic growth is going to take place. When I have talked with young professionals who have moved to Charlotte and Austin in the last year, I can tell you, they don’t give a damn about taxes. They want good schools, walkable communities with excellent infrastructure, tons of eclectic restaurants and bars, and plenty of public events in public spaces/parks. And guess what, these people are making 100K or more, so yes, they ARE paying the taxes that are needed to fund these goods, they’re not hypocritical. They’ll tell you, “I will gladly pay more taxes for better schools and more parks.”

    • You are right. Farming has become vastly more efficient. Through the use of technology, each farmer is able to feed 155 people today, compared to 1940, when one farmer could feed only 19 people (Prax, 2010).

      As farming became more automated fewer people were needed on farms.

      For a while manufacturing took up the slack from declining farm – based employment. Then came Al Gore’s cherished NAFTA and out went the lights.

      Rural areas are beautiful but the jobs are gone and they aren’t coming back.

      Back in the day companies paid pensions. People would work for one company, get their gold watch after 35 years and retire on the company pension. Along came 401(k)’s and there was very little reason to remain loyal to one company (so that you could reach pension age). Corporate executives decided to make that lack of loyalty a two way street and layoffs became the order of the day. If you live in a town with only one or two major employers you are living at economic risk. If you live in a city with hundreds of employers you are more likely to find a new job you like better than the old job or a new employer to hire you after the old employer laid you off.

      Virginia’s problems are two fold:

      1. The state doesn’t create cities. Name a real city in Virginia. Virginia Beach? That’s a county masquerading as a city. Richmond has the population density of a suburb. Alexandria has a real city’s population density but only gets to 150,000 people.

      2. The “Richmond theory” of economic development doesn’t work. Jim Bacon epitomizes the “Richmond theory”. Never use public money for anything that will improve a city. No publicly financed stadiums, no subsidized sports teams, minimize taxes and minimize amenities. Guess what? Nobody moves there. Look at the 20 counties in the cited report. They are all high tax, high amenity places. None of them subscribe to the “Richmond theory”. Even Tennessee figured this out with Nashville.

      If you want economic development in Virginia the first thing to do is rip up the present state constitution and write a new one with home rule autonomy for Virginia’s populous cities. End the hopeless Republican led transfer payments from cities with a future to rural areas with no future. The only thing that will save the rural areas of Virginia is de-population.

  2. but will they pay FICA taxes for social security and Medicare and other taxes to educate the rural and poor inner city kids?

  3. Urban is not inherently better than rural. A lot of our environmental problems and water shortages can be laid at the urban doorstep where population density increases beyond the natural ability of the land to support it. But that’s a discussion for another time.

    The EIG report mentions financial crises, but doesn’t get into the specific number of bank failures.

    Forbes (March 25, 2013) listed bank failures from FDIC records, and using the FDIC failed bank list, I extended the list through May 2016.
    · In 2005 and 2006, there weren’t any bank failures.
    · In 2007, there were 3 bank failures.
    · In 2008, there were 25 bank failures.
    · In 2009, there were 140 bank failures.
    · In 2010, there were 157 bank failures.
    · In 2011, there were 92 bank failures.
    · In 2012, there were 51 bank failures.
    · In 2013, there were 24 bank failures.
    · In 2014, there were 18 bank failures.
    · In 2015, there were 7 bank failures, (plus one in Puerto Rico).
    · In 2016, as of May 6, there were 3 bank failures.
    Of all these failures, 26 were not acquired by another institution. How many branches were closed or consolidated is not stated.

    The GAO (http://www.gao.gov/products/GAO-13-704T) did a study that showed 85 percent of the 2008-2011 failures “were small institutions with less than $1 billion in assets. Small banks often specialize in small business lending and are associated with local community development and philanthropy.”

    Small cities and towns and rural areas would be disproportionately affected by the loss of community banks compared to our largest metropolitan centers. With the real estate markets flat or housing values upside down in the same areas who lost small banks, where would the money come from for business startups in those areas? I can’t see prosperous urban mega-banks reaching out to them.

    • I share your concern that rural/small town America is starved for capital. Dodd Frank has created new regulatory burdens for the banking industry, disproportionately harming community banks (which were not responsible for the financial crisis, by the way) and leading to a consolidation of the banking industry. Also, in the Wall Street Journal today, David Malpass discusses how Federal Reserve Bank policy has the unintended consequence of restricting bank lending to business: The Fed “biases the credit system in favor of bond issuers at the expense of smaller borrowers, notably the small new businesses that are critical to U.S. dynamism.”

      We can always hope that a change in regulatory regimes could increase the supply of capital to rural/small town America and lead to an economic revival.

      • I agree with your statements.

        But, in addition, these demographics, the reported abrupt decline of new start-up businesses coupled with the expansion of large businesses in a select few large urban areas (including interestingly those with high immigrant and/or transient and/or retirement and/or public employee or government related populations, point up a host of pathologies afflicting the nation. Two examples among many include the pernicious influence of rampant crony capitalism today that distorts markets while it throttles growth in certain older more traditional markets, including many second and third tier cities and towns. Places like Lynchburg and Roanoke that should be booming by now for reasons discussed elsewhere on this website.

        • This is one of the finest and most useful studies I have ever read. It helps to explain much, and it breeds insights galore. Stuff like:

          1. What is behind Trump. Where does it come from. And why.
          2. What Trump saw that no else saw. Why?
          3. Why “Make America Great Again” resonates powerfully.
          4. Why America’s Elites are so fundamentally clueless. Corrupt and dangerous.
          4. What our future likely will say about fundamental issues like Federalism. The electoral college. Ballooning executive orders. Crony Capitalism. The Balkanization of America, its people, its regions, its culture, its politics, and their growing corruption? Why Felons and transgendered people now are powerful political constituencies. And ever more varied and new political constituencies live off the government while spending ever more time rioting in the streets, or disrupting those who do not riot and in the streets but work to live.
          5. What are the perverse consequences of crony mongrel business cartels built, fed and controlled by the Federal government – business organizations like Inova – how they stifle growth and innovation, how they replace productively with their skills at political manipulation that concentrates power and wealth in the hands of a few individuals and groups located in ever smaller but denser locales.
          6. How groups think and ideology are becoming ever more concentrated in America.

          That is only for starters. My hat is off to the Economic Innovation Group.

        • Note how the findings of the New Map of Economic Growth study underpins and fuels the problems and concerns raised in a fascinating new article published today in the Federalist, namely:

          http://thefederalist.com/2016/05/26/how-conservatives-should-respond-to-the-trump-riot

      • different views –

        here’s one from the same Wall Street Journal with an opposite take:

        ” It’s a favorite lament of community banks: The 2010 Dodd-Frank law is squeezing small financial firms and crimping access to credit for Main Street, all in the name of protecting the country from another financial crisis.

        A look at the data shows the reality is more complicated, and small banks are proving surprisingly resilient by some measures. Meanwhile, the bigger challenge than weathering compliance costs, say banking consultants and analysts, is generating profits during a period of unusually low interest rates.”

        “Dodd-Frank—that term—became the poster child for every regulatory ill that’s been foisted onto community banks,” said Camden Fine, president of the Independent Community Bankers of America, which represents thousands of small banks. “There are regulatory burdens that community banks face today that are real, but had nothing to do with Dodd-Frank,” he said, adding that in any case, low rates are a bigger issue for small banks.”

        http://www.wsj.com/articles/dodd-franks-effect-on-small-banks-is-muted-1443993212

  4. I think there’s a bit of a conundrum with the “knowledge” economy in that, in theory, in the age of the internet – a “worker” could , be anywhere there was a good internet connection from which he/she could participate in “work” and deliver their part of a work product via internet to wherever else what they “assembled” the final product to market.

    But I think the nature of “work” itself has changed and workers have less prospects of long-term employment with any one company or even an industry per se and it is imperative that they be in a place where other good jobs are readily available to move to if the current job goes away.

    workers today have to be mobile – and living in places where jobs are fewer is problematic so they tend to “herd” where there are lots of the kinds of jobs they are qualified for. Similarly – companies that need highly-educated workers know they are not going to find big pools of them in small town USA.

    so even though, in theory, one could live in a small town and do “work” via the internet – if that job goes away – it may not be that easy to find another one that is “ok” with a worker being “remote” at that location – although I clearly do not know – it’s not the world I am in right now.

    It is informative to hear from folks who actually are living that kind of life today -and can relate their actual experiences … and their views.

    My understanding is that many younger workers today are not supportive of FICA taxes for Social Security and Medicare -and that also could portend big changes –

  5. Uh oh, Jimbo. Have you forgotten the first rule of Virginia governance – “the more bizarre we can be the better we are”?

    Only in Virginia are cities not consistently within counties. Your referenced report was very heavily county oriented.

    I wonder how the report would have looked if Virginia’s cities were within counties.

  6. Pingback: Rule 5 Friday: Cocktails in Alexandria Edition | Red Brick Town

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