Wednesday, April 28, 2010

Economist's Notebook: Agglomeration Externalities and Portland

Ed Glaeser has another in his continuing series of excellent posts on agglomeration externalities in The New York Times' Economix Blog.  Here is an excerpt:

Jed Kolko’s essay in the “Agglomeration Economics” volume reminds us that the delivery of services often involves face-to-face contact, whether in a barber shop or a law office. While the costs of moving goods has declined steadily over time, the cost of moving people has not because time has gotten more valuable and you need time to travel. This explains why business services, which generally rely on face-to-face contact, are disproportionately prone to locate in cities. Mr. Kolko finds that the most skilled service industries are most likely to locate near each other and to locate in dense urban areas.

Mr. Kolko’s paper also shows that customers and suppliers that rely most on information technology are also most likely to locate near one another.

Perhaps unexpectedly, information technology seems to be associated with a greater desire for geographic proximity. After all, Silicon Valley — the home of information technology — is the most famous example of a geographic cluster in the world today. One reason new technologies make face-to-face contact and proximity more valuable is that technological change increases the returns to being smart, and human beings get smart by hanging around other smart people.

Cities, like New York, thrive as places of pleasure as well as work. Urban proximity enables people to connect with one another by creating, among other things, urban marriage markets. Large urban scale can also cover the fixed costs of urban amenities like museums and live music venues and clubs.

The Joel Waldfogel essay in “Agglomeration Economics” emphasizes the benefit that comes from being around people who share your own tastes.

If you live in a county of vegetarians, then your local supermarket is likely to be short on beef. If you live surrounded by voracious (and prosperous) carnivores, then you are much more likely to find U.S.D.A. prime at the butcher counter. The shopping options in Manhattan are tremendous by world standards, because of the vast number of customers on the island, and that is part of New York’s appeal.

Cities are a natural topic for economists because urban density can magnify markets, like the markets for workers and balsamic vinegar and spouses. That urban strength also explains why cities have proved to be so robust, and so fun.

This has direct application to Portland. Portland has gained a reputation for a number of things: progressive politics, urban planning, local food, beer, art and design and outdoor amenities. The fact that prople decide to move here because they are attracted by these things makes these things more prevalent and cheaper. I wrote about a version of this in a beeronomics post on economies of scale: more and more local breweries make it cheaper to brew for all of the breweries in town. [A more specific version of this is the organic beer movement - it used to be very hard to find organic ingredients, especially malts, and choices were limited and often available only from Germany.  But now with Roots, HUB and lots of other breweries brewing at least one organic beer, local suppliers are beginning to provide organic malts in increasing varieties]

Portland also has a tech sector, but it is mostly the lower end production stuff that is cheaper here and doesn't need to be so close to the 'brains.'  This is, in my mind, the key to the continued success of Portland: having enough of the really smart and creative tech types locate here and create new businesses.  So far it hasn't happened in sufficient scale.  It is a hard thing to engineer and trying to specifically target the types, the specific industry, etc. is a mug's game.  Which is why I am generally both optimistic about the future of the city and a little less skeptical than some of otherwise hard-to-defend public investments.  They are hard to defend because the data that establish a causal link between, say, an MLS team or a streetcar and general economic development are simply unobtainable.  But absence of evidence in support is not evidence for the negative and it is hard to believe that these things about Portland that people like so much don't have a long-term economic impact.  It is slow and amorphous, but it is real.  I think Portland is, and will continue to be, a jewel in the American urban landscape and this will, through time, yield real and substantial economic results.

Agglomeration externalities also provide an economic explanation for the observed sorting of people by ideologies as argued in the book "The Big Sort."  Perhaps it is to find more and cheaper things that we value that really determines our location choices and the fact that these are correlated with ideology is accidental.  So we are not seeking the comfort of the people we agree with, but seeking the material things we like and prefer them to be accessible, plentiful and cheap.  The fact that they are things like local organic food, green energy solutions, mass transit, etc., correlate to our political and policy preferences but these non-material political preferences are not what made us self-sort.  Perhaps.

1 comment:

Dylan said...

Good post!

You state that the data to determine if a streetcar or MLS team provide economic development is unobtainable?

What about public investment in higher education? If Portland had a top-tier research university, would we have more economic development?