A cows plus strategy, and clustering

Some thoughts prompted by ‘The New Geography of Jobs‘, by Enrico Moretti

This book is a great description of the economic geography of the modern United States and an explanation of how it got that way. It is also a primer for policy-makers interested in how to ensure more good “innovation sector” jobs. Mr Moretti talks about how the “brain hubs”, like San Francisco, Seattle or Boston, came about, and what to do if you find yourself (like New Zealand and most United States cities), wanting to transform your local economy over time while avoiding the cul-de-sacs and mistakes that others have fallen into along the way.

Headlines

Mr Moretti divides cities into places with good jobs, those without, and the places that could go either way. “Good” jobs are involved in the innovation sector, which is loosely defined as high-tech plus any other occupation that makes intensive use of human capital and ingenuity. Places without good jobs are mostly declining or declined manufacturing centres in the Rust Belt where the book starts.

Wider economic benefits from innovation sector jobs are very big. Mr Moretti reports that for every innovation sector job, e.g., a new software engineer at the Googleplex, there are an additional five jobs created, two professional jobs (e.g., doctors, lawyers, teachers, nurses) and three non-professional jobs (e.g., waiters, carpenters, taxi drivers, shop workers). Most sectors in the economy have these multiplier effects but those in the innovation sector are particularly big. So while employment in the innovation sector will never account for the majority of jobs (at the moment it accounts for around 10%), it has a disproportionate and positive impact on the economy overall. Although Boeing employs twice as many people in Seattle as Microsoft, it ultimately creates fewer local jobs.

There is not just a jobs effect but also a big income effect. Everybody earns more in a brain hub than s/he does doing the same job in a Rust Belt city. Your neighbour’s skill level affects how much you earn, regardless of your own skill level. This result is not necessarily intuitive, but Mr Moretti (on page 99) says there are three reasons for it. First, skilled and unskilled workers complement each other: an increase in the former raises the productivity of the latter. Second, a better educated labour force encourages the deployment of new and better technologies, raising productivity. And third, the economic magic of human capital externalities, i.e., when people interact they learn from each other, and those who interact with better educated peers ultimately become more productive and creative.

The result holds for employees of all skill levels. So a college graduate in Boston, where 47% of residents have a college degree earns $20k a year more on average than a college graduate in Yuma Arizona, where 11% of residents have a college degree. But the biggest impact is for the least skilled. A high-school graduate in Boston earns 34k more a year than a high-school graduate in Yuma. Part of this difference, says Mr Moretti, is compensating for the higher cost of living in Boston. But using a nifty longitudinal dataset that follows the same individuals over time, he finds that the same individual can make a very different salary depending on how many skilled workers s/he has around.

Learning from history

The early part of the book charts the decline of American manufacturing jobs and the rise of jobs in innovation economy. It explains the hollowing out of the American labour market, as new technologies favour high-skilled workers, reduce the need for many occupations that call for medium-level skills, and have little effect on occupations at the low end of the skill spectrum: jobs that involve non-routine tasks have not been particularly hurt by computers.

Since every city, of course, wants to be a brain hub, the book also explains how brain hubs developed, by way of sketches of the development of Seattle, Silicon Valley and Hollywood. This part is particularly interesting because it goes back far enough in time to show what Seattle was like in 1979 when Bill Gates and Paul Allen moved their then fledging business there. They did this not for professional reasons but for personal ones. Indeed Seattle seemed like a terrible place at the time: The Economist had recently labelled it the “city of despair”. And especially compared with Abuquerque, New Mexico where Microsoft was founded and which already had the beginnings of what might have become a tech hub. Nevertheless, they moved to Seattle and the rest, together with the decisions of many others to set up shop there over time, is history. Jeff Bezos started his new firm, Amazon, in Seattle in 1994 because by then Seattle had the engineers, programmers and venture capitalists that he needed to get started.

The new picture of economic geography

I saw this picture recently on Twitter (created by Reddit user atrubetskoy). The blue areas are responsible for 50% of US GDP. So are the orange areas. Twenty three successful cities.

Mr Moretti talks about why this clustering happens, and why is it that new software firms, which might be just two guys in their garage, decide to locate in San Francisco or Silicon Valley or Seattle despite the fact that these are amongst the most expensive places to live in the United States. The contrast with industrial economy firms is stark: they go where resources plus transport are cheapest, so paper mills are near forests, milk factories are near farms, and steel mills are near coal mines. The lobster industry is in Maine, because that is where the lobsters live, and the oil industry is in Texas, because that is where the oil is.

There are three factors that create clusters First, firms go where they think they will find good employees, which happens to be where all the other employers are. Second, they also want to find good suppliers, and customers for their products,hence the ecosystem. The venture capitalists of Silicon Valley are far more helpful to a growing firm looking for funding than the venture capitalists of other places with less developed ecosystems. And third, it turns out that innovation, collaboration and the creation of new ideas are highly influenced by proximity. Even small physical distances are enough to deter collaboration and information sharing. This is seen from networks of patent citations: inventors are significantly more likely to cite other inventors living nearby than inventors living far away. Similarly, I recall a study from Google some years back of information flows in the workplace that said that what you know is determined largely by where you sit (sorry I can’t find the reference just now). Mr Moretti says (p141), “being around smart people tends to make us smarter, more creative and ultimately more productive”. These cluster effects are intensifying because they are self-reinforcing, and because, once a cluster is established, the costs of moving it are overwhelming.

The policy of inevitability

The question for policy-makers, especially local economic development agencies, is therefore how to turn their city into a brain hub.

Mr Moretti explores a few options. Basically it is hard. The best bet is to have already got lucky and have had some innovation sector businesses set up shop. If that has not happened, then you could look at supply side ideas or at demand-side ideas to get things started (this is from the perspective of the labour market, so “supply side” means increases the number of workers, and “demand side” means increasing the supply of jobs).

On the supply side, the basic strategy is to attract highly skilled, young, creative types, and then expect that high-tech employers will follow, hoping to take advantage of the ready local labour supply. Mr Moretti is down on this approach, arguing that Berlin is the best example of this strategy but that Berlin continues to have amongst Germany’s worst unemployment problem and weak economic growth. That said, Berlin is widely considered to be one of the most interesting and vibrant places in Europe at present. Conclusion: there may still upsides for residents in adopting the supply side strategy, but it is far from a slam dunk case from an economic point of view.

In some industries, and Mr Moretti says biotechnology might be one, attracting stars is also important to encourage both other workers and to encourage employers. Qatar does this. So does Singapore. And probably other places with which I am even less familiar. New Zealand’s efforts to attract over-achievers from other countries to come and live here might also be an example, so when James Cameron or Julian Robertson come live here, they can help attract other people and establish an ecosystem. Mr Moretti talks about the cautionary tale of the University of Washington, whose efforts to build a classy economics department foundered when resources ran scarce before the star attraction programme was completed.

The demand side idea is basically about attracting high-tech employers to come set up shop. The main tool is subsidies or tax breaks as part of so-called “place-based policies”. Mr Moretti says around $60 billion a year is spent on them in the United States. The idea is to provide subsidies for the first firms to come along, and then stop the subsidies after enough firms have arrived that economic development is self-sustaining: the “big push” strategy aims to break the impasse that keeps high-tech firms from locating outside of existing high-tech areas.

Mr Moretti says the push needs to be really big, decisive and sustained, and it has to target the right people. And the big problem is this last point: local government needs to be in the business of picking some winners.

The track record of these types of policies is mixed, to put it nicely. Many hubs have nothing to do with government action: Silicon Valley, the biotech cluster in San Diego, and the movie cluster in Hollywood are examples. Even in smaller places, Portland Oregon being one that I am familiar with and that seems actively to encourage the inward migration of young, skilled people, the heart of the high-tech hub is a private employer: Intel’s semi-conductor facility in 1976 was the start of things there. More locally, it is not obvious that government had much to do with Weta, nor with Xero, both of which have substantial local ecosystems around them.

That said, internationally Israel and Ireland would be held out as examples of success, the former more so than the latter these days, and even there the intention of government spending was not to create a local tech sector but instead to develop innovative defense technologies. Taiwan is another relevant example, transforming from a rural economy to an advanced one courtesy of government-sponsored research in the 1960s and 70s. Policy-makers bet on several failed technologies, but also on semi-conductors, which turned out extremely well. The history of efforts by governments is not studded with success, however. Mr Moretti reviews the experience of Fremont California, where Solyndra, a major employer, maker of solar panels, and recipient of significant federal government support, went broke in 2011. It seems that the industry of making solar panels does not exhibit strong forces of agglomeration, although it is hard to find this sort of thing out without trying.

Smaller scale efforts to attract employers, e.g., Twitter’s recent move to central San Francisco, are very common and, in some cases, seem to pay off for the communities involved, i.e., the benefits from spillovers can be bigger than the cost in tax foregone. That does not make the residents happy necessarily, since they appear to be giving city tax breaks to enormous profitable companies.

A programme that successfully encourages development, that does not try to pick winners too directly, that targets incentives carefully, and that incentivises private investment is more likely to be a winner, says Mr Moretti.

So what to do

Sadly Mr Moretti does not offer too much encouragement. There are no straightforward answers it seems, and you will only know you have succeeded once you have succeeded. His policy agenda is fairly broad, mentioning vouchers to encourage people to move to areas where they are more likely to find a job, a boost to RnD, a major improvement in the quality and quantity of education especially in technical subjects, and a loosening of immigration policy, since immigrants seem to be a lot more inventive than locals in the United States.

What all this means for New Zealand, a place that is not a brain hub in many industries and is far from the world, is not especially clear. The picture is even less clear for regions within New Zealand, which are still further from brain hub status by comparison with the major centres of New Zealand.

But let’s say New Zealand wants to be a brain hub, i.e., we want to adopt some policies that will attract or create high-tech companies that will hire high-tech workers, and this will generate jobs and boost everyone’s income. Assuming we have not got lucky, i.e., we are not a brain hub already, and we have good education, immigration and RnD policies already, some possibilities include the following:

* Understand the situation, i.e., figure out what New Zealand is good at and not good at, what is useful and can be built upon and what is difficult and will need to be worked around. Thinking about how the whole hangs together (“the city of four million people” to quote Shaun Hendy) and how we can compete with much larger Australian cities that attract more people is useful.
* Back some local employers or employment initiatives with public money, and over time expand the ones that seem to be working (i.e., the example of Taiwan, but not of Solyndra). Bear in mind that tech venture capital firms expect only one of every ten investments to succeed, a few to muddle on, and the rest to sink without trace. Politically you are going to have to be resilient to failures with public money. Not easy.
* Connect with educated locals and encourage them not to leave. The experience of Otorohanga might be inspirational as well as educational at the level of the nation.
* Connect with your diaspora, and try to encourage them either to come back with their businesses and networks, or to take an active role in supporting local initiatives from wherever they are in the world.
* At a national level, I think it would really helpful if New Zealanders went to a more diverse set of places (and not just focusing on the UK and Australia). We are not sufficiently well connected to China and the coasts of the USA.
* Make some localised improvements to amenities. Perhaps just giving talented people a place to run into each other could be a useful step forward. ATEED is building an innovation hub to house high-tech firms: a cluster of them is clearly already developing on Viaduct Harbour Avenue, with Vodafone, HP, Microsoft and others already in residence, just to name the brands you can see on the door. Fonterra is moving in next door.

You could also get some useful ideas on talented people and how to attract, retain, develop and connect them from the ever-interesting McGuinness Institute, and their project TalentNZ.

Do not expect speedy miracles. Sustainable economic development takes a long time. You can see New Zealand’s exports and imports broken down by type below, courtesy of the MIT observatory of economic complexity. First is 1990. Second is 2010. See how many colours have changed?

NZ Exports 1990

embed_tree_map_sitc_export_nzl_all_show_1990

NZ Exports 2010

embed_tree_map_sitc_export_nzl_all_show_2010

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Use technology better, New Zealand!

On Monday I had the joy of speaking at an academic Symposium organised by the Productivity Hub, a large group of Crown agencies looking at the challenge of how to boost New Zealand’s productivity.

My basic point was that I think that smart use of the internet by New Zealand businesses can help boost the productivity of our businesses and ultimately lift the prosperity of the nation.

We are big on connectivity and are major users of technology, but we do not use it in the most productive ways in our businesses.

You can read the slides, look at the paper, or even read about it in the newspaper.

Bible woman

Another day, another plane. But here is something newish. The woman to my right (aside from being black, which is unusual to see in New Zealand) is reading a Bible. I can’t tell the version, so I can’t assess religion (aside from Christianity, that is), but I can see she has passages marked in it, so she is clearly not just playing around.

Since I am at the airport, it starts me to wondering. I mean, is it risky to be getting on the same plane as her? Does she have some kind of death wish? Would I be more worried if she were reading the Koran? Maybe she just finds it helpful to read the Bible to get her through the day. Maybe it is just what she needs to kick start the engine at 7 in the morning on a bleary humid day. It has got to be better than the dubious schmaltz that I am reading before I get on the plane.

Oh look, she is not on my flight after all. Or perhaps the Lord told her not to take this plane. Oh dear. Imagination is so much better than reality, after all

Sameness

Before a big event (like getting home after almost six months overseas, just to take an example entirely at random), time seems to go so slowly. As you get closer to the event, things speed up. Like travelling towards a black hole, I suppose, not that I ever have. And suddenly, wham, bam, there you are. Everyone is excited to see you, to touch you, to make sure that you are really there. You need a haircut, a shave, a change of clothes. You are excited to see all the things you have missed, and amazed to see all the things you had forgotten. Time races by.

And then, a few days later, when you have a quiet moment to yourself and maybe a cup of tea, you realise that time is going slowly again. The distance between ten and twelve seems like far more than two hours. And the length of time that, only two days before, would not have been enough to even figure out what to do next stretches out before you: an empty diary to be filled in. It is kind of like after a party: the expectation, the guests, and now just the clean up to go.

Of course, this is a well planned clean up. I have many things to do. I have had a lot of spare moments (some with cups of tea (Central Asia, Russia), some without (Mongolia – tea undrinkable – Laos – coffee superior)) to draw up a list.

But it is funny how when I get home I am struck by how little has actually changed. I think in part this is the purpose of home. So I don’t know why I always notice it. I mean home is the place where everything stays pretty much as it always was, where everything is expected and normal, and if something dramatic happens (something as exciting as new carpet, or someone new joining your friend base), even that is not all that dramatic, or at least not for very long. Inertia, and the ability to absorb changes and act as if everything has always been that way. These are the characteristics of home.

I have spent the last day or so cleaning up my parents’ house. I figure the time has finally come to move out. A new phase of maturity? Or just enough room to store my junk? And, of course, when faced with the costs of moving it and storing it, I choose to throw a lot of stuff out. Goodbye notes from university. Goodbye schoolbooks from long, long ago.

Goodbye random gifts that were never used but not never appreciated (the value of a gift, after all, lies primarily in the process that goes into its choosing).

Along the way I found a whole box of love letters. The process slowed down at that point. Parenthetically, who would tidy up their previous life if they could not sneak a peek at it from time to time as they went along? I threw away a whole bunch of my love letters. (Fear not, I threw away old bank statements too). I found myself unable to recognise my own handwriting and my own turns of phrase. Endearments, so strongly felt in the past, seem remote and even irrational in my present. I guess that is how you know it is time to throw them away.

Fortunately, perhaps, one thing I did not find in the course of my cleanup was the desire to go travelling some more. Maybe I have satiated that particular part of my personality for a while. Or maybe not. Time will tell, I guess. Perhaps it is just the type of places I have been going that I am done with. A cruise or a luxury lie-on-the-beach-in-a-beautiful-warm-but-cheap-country sounds good to me right now.

Receipts seem to be crucially important in communist (even if only nominally) countries. In China and Laos without the receipt you were lost. Even if you had only been in 10 minutes before and the person behind the counter recognised you. Here you get receipts all the time, and the person behind the counter considers it a part of their service to offer to throw them away for you. Strange how you see the differences.

I also think the trend of making new nouns has taken great strides in the last six months. We are now accustomed to ‘a coffee’ without the cup. ‘A tea’ still sounds strange, but ‘a water’ has entered the lexicon as standard usage. As in, “would you like a water?” on the plane. The change in part of speech does not seem to prevent me from spilling it on myself, of course. So some things have stayed the same.

The road goes ever onwards (day 310)

dear all,

almost five months has elapsed since my last update (i feel like i am at church ‘it has been 5 months since my last confession’). and, after a summer back in new zealand i am preparing to travel the world again. starting tomorrow morning actually.

for those of you who left me in russia in mid-september and are kind of perplexed about what i am doing in my home town, here is a very quick update on events since then:

* i travelled about northern russia (brrr) for a couple of weeks. back in st petersburg before heading south across russia to ukraine i contracted pneumonia and spent two weeks in hospital descarring my lungs and scaring my parents. in the meantime, some parts of the world went to war with some other parts, the temperature in the middle east went up, and i struggled to find a slightly cooler place to spend christmas. eventually i decided that discretion was the better part of valour and, after an insurance company sponsored visit to the uk to see some more doctors, i made my way back to new zealand for the summer.

* since early november i have got a sun tan, returned my lungs to normalcy, learned to drive, swum a lot, seen lots of new zealand, tramped in the rain, played tons of ultimate, checked on the progress of my neice and nephew, spent christmas with my family, kayaked, hitch-hiked, walked on glaciers, swum in lakes, checked out where i used to live, slept in my old bed, remet some travelling companions, driven thousands of miles, scanned my photos, ignored my diary, sorted my plane tickets, made some travel plans, looked for a job (not too hard), and said hellos and goodbyes (again). i even had another farewell party for myself.

and now i leave tomorrow morning. before dawn. to hawaii (till february 25), then to vancouver (till march 21) and then to italy via london (till mid-April). and then, sad though i am to say it, i need to find a job. or an effective way to hide from my creditors. advice on either is welcome. i have more leads on the first than the second, i am pleased to report.

so expect another message or two from me before too long. and if you wanted to check out my photos (let me apologise in advance for the lack of order or captions – both are in hand), go visit http://www.whereishayden.org’

h

Home again (day 195)

First things first. Here I am safely back in Christchurch. While I still have some scars on my lungs (so they tell me), they are healing by themselves and I don’t notice them at all.

With the benefit of hindsight (and more information on how pneumonia works), the key reason I am in New Zealand for the summer seems to me to be that I couldn’t find anywhere else to go. My plans involved the Middle East. Enough said really.

Perhaps if I had known how things would work out with the pneumonia, I might not have come home. Or at least not as quickly. I could have wandered through Ukraine for a couple of weeks, and then taken a boat to Turkey and flown back from Istanbul. Certainly I could not have stayed in Western Europe. Too cold and too expensive.

In a strange kind of way I have picked up threads from various periods of my life again. I am back at home with mother and father (and sister – although she seems to have caught the same travel bug that I have and is away overseas for three months). I am sleeping in my childhood (and adolescent and young adult) bed (but with a lower bed-end so that my feet have room to move), in my old room, which is just as much of a bomb site as it ever was when I was younger.

I have renovated my bicycle (the legally required lights and helmet cost six times more than the parts I needed to make my bike go), got back into Christchurch Ultimate with lots of my old friends, and am about to take repossession of my computer and some other things that I lent out when I left.

I even have a list of things to do. I can report that, after an initial burst of energy, I have settled down to working through this list at about the same rate that anyone works through any list of things to do. That is, slowly.

You will be pleased to know that it is sunny and warm here. I am just waiting for it to be about 10 degrees warmer. Then it will be really summer. Oh, and I have black hair. It was part of a hallowe’n party costume. But it seems like it is going to stick around for a while yet.

The current plan is to head back to Europe next April. In between times I think I will wander about New Zealand in December and January, and travel to the UK via Canada (for snowboarding in February) and Italy (for Ultimate in March). To complete the circle, I hope to arrive in the UK on April 11 2002, the 365th day since I originally left. I haven’t yet unpacked, but doubtless that will happen at some point.