Thursday, February 11, 2010

Economics of Growth and Location

Jack Roberts has a rather odd op-ed in The Oregonian today. I suppose I found it odd because it was about two economists written by a non-economist, but more so because it seemed to try and carve out a gulf where one doesn't really exist.

It was trying, I think, to make the distinction about how activist governments can be to try and create economic activity around a central theme. Roberts singled out Joe Cortright for his support of the 'creative class' idea that robust economies need creative individuals to drive and support them. I am skeptical of this notion but I doubt Cortright himself really pushes the link with economic growth that far. He may work closely with governments who, by their nature, like to do things - especially clearly identifiable things to 'drive economic growth,' but he is no yes man. He was a very public critic of the idea that Portland could successfully create a bio-tech sector, for example.

On the other had, Tim Duy I doubt very much would deny the existence of agglomeration externalities - what economists call the benefit like people and businesses get from locating close to each other. One only has to look at Silicon Valley to see how important these are. I think he is a pretty typical economist, however, in his skepticism of the ability to engineer the existence of such hubs of economic activity, as I am.

In the end we don't really get much out of this piece except for some vague statement about land availability and infrastructure from Duy. This surprises me as good empirical evidence about things like restrictive policies on land development and growth does not exist as far as I am aware and theoretically you can make the case either way. Infrastructure is important but the state of the state's infrastructure is far better than the public education system which has a much stronger empirical link to economic growth.

And by the way, the evidence against focusing on making Portland livable is a comparison of average wages? You have to be kidding. This is an equilibrium outcome that is affected by: peoples choices about where to live, how much to work and what kind of work to do; firms decisions about where to locate, how much they have to pay to attract qualified people (which is negatively correlated with livability by the way - it is called the compensating wage differential); and the overall level of human capital, physical capital and technology in the state - how productive we are. This is not evidence of a poor business climate, full stop.

The lesson I take from all of this is - hey guess what? - human capital. The extent to which we have to import high productivity people is an impediment to economic growth, to the ability to create agglomeration externalities, and to the business climate in Oregon in general.

So the answer to why Portland gets to be green but Seattle gets to be green and wealthy is long and complicated but probably has a lot to do with human capital. According to a quick check of some figures from 2007: Washington spends about $6,700 per student in higher ed, while Oregon spends $4,600. Not surprisingly, out net tuition is almost twice as high at $4,300 versus $2,200 for Washington. Is it any wonder our average wages are lower?


ethan1066 said...

hi.. that is an excellent post.. can you please let me know the blooming business locations in UK. i need to know an ideal business location in UK.

Patrick Emerson said...

Easy: Slough, Berkshire.

ABC said...

I've always been skeptical about linking education in a region with economic vitality. It seems like these arguments always leave out the effects of a mobile society.

Admittedly, I'm working from anecdotal accounts and personal experience, but it's my perception that most of our growth over the last 20 years has come from in migration to the Portland metro region. While bad schools would certainly discourage such in migration, I'm less certain that making education a top priority would actually yield greater economic activity.

(This is not to say that good schools aren't valuable in their own right, of course.)