Monday, February 22, 2010

Economist's Notebook: Agglomeration Externalities

Agglomeration Externalities is the technical term of art economists use to describe the benefits non-participants get from other economic activities taking place nearby.  I have talked about them a lot in this blog, especially in conjunction with my advocacy for increased support for public education.  In the education example, an educated population not only increases individual productivity but also gives an extra boost to group productivity.  The empirical evidence has shown that, for example, cities with higher proportions of college graduates have higher productivity firms and pay higher real wages to those without a college education.  In other words, public investments in things like higher education benefit more than just the students themselves, but benefit the community as a whole.

Given the sorry state of Oregon's public investment in education then, it is interesting to read Mike Rogoway's article in The Oregonian on the flight of some high-tech start-ups from Portland.  Though not specifically tied to education, the theme is the lack of a critical mass of human capital - an example of agglomeration externalities.  Firms benefit from having that human capital surrounding them, not just from those they hire.  This contradicts those that think we don't need to invest in education because we can just import high productivity people.  But firms, especially small start-ups, find this difficult to do.  Young, talented and productive people in this fluid job market look for a community not just a single firm, as the likelihood that they will stay in one form for an extended period is small.  Add in things like the proximity of venture capital and the problem becomes even more acute.

The question then is what do you do?  Well, trying to manufacture a high-tech or a bio-tech sector is a fool's errand when you don't have the fundamentals in place, and one could argue (and I do) that the current paucity of high-tech human capital in Portland is a result of decades of underinvestment in education.  Unfortunately, those in government rarely think beyond dots that they can connect in four years or less, and so the emphasis is on new bio-tech districts, business energy tax credits and the like.  And voters, who gleefully pass measures like 5, 50 and the kicker need to accept that with limited government size can also come limited economic vitality. Sure government can be too big and can cause inefficiency, but we are no where near size that in Oregon.  Economic research has shown that government investments in human capital are vital for future economic prosperity and in Oregon we are no where near that size of investment either.

One final note, I think it is really time to stop talking about K-12 education and higher education in separate discussions.  In today's world the expectation should be that everyone should have access and be expected to complete a college degree.  Perhaps it is time to start talking about K-16.

1 comment:

Dann Cutter said...

Yet, K-16 is a HUGE mistake under our current system.

Witness the number of students who flounder in HS, and need years to come into themselves... what we need is an effective way to get those students who escape HS, thinking that they are done, into a positive way to come back into higher education later in life.

Until schools are empowered to enforce real discipline in requirements and study, we need a track for those not headed to higher ed.