July 2009 Archives

07/28/09 10:30 AM

Business

Housing and the Crisis, Part IV

Yesterday, we looked at the relationship between housing prices and income. Today, we turn to the relationship between housing prices and wages. Wages are a useful way to gauge regional housing prices because they only count money that is earned by doing work. Income, on the other hand, counts any and all earnings from investments, interest, dividends transfers, and other sources.

The graph below plots housing prices in 2009 against wage levels for 2008 (the most recent data available).

There is a clear, positive, linear, and significant relationship between wages and housing values - the correlation is 0.71 and the R2 0.51. Metros above the fitted line had higher housing prices than wages relative to national levels, while those beneath the line had lower than expected housing prices.*

Near the top are many of the same regions from yesterday's analysis. Honolulu is once again the greatest outlier, with housing prices exceeding wage levels by a differential of $384,290. Metros in California once again play a prominent role at the top of the list, including San Diego ($87,365), Los Angeles ($63,340), and San Francisco ($60,148). New York also registers a substantial differential of $76,896 as well as Miami ($46,128).

On the other hand, there are metros where housing prices were less than their incomes would predict based on the national trend. In Decatur, IL, for example, housing prices were $131,344 less than what its wage level could support based on the national trend. In Michigan, both Saginaw ($123,140) and Lansing ($119,334) had differentials over $100,000, as did two Ohio cities, Akron ($105,447) and Cleveland ($105,386). Atlanta ($86,079), Washington, D.C. ($65,446), and Dallas ($51,896) all had differentials of greater than $50,000, while Houston ($48,874), Chicago ($48,794), and Boston ($42,834) all had differentials of greater than $40,000. The difference was more modest in Philadelphia ($20,520).


* Detroit is not included: It's 2009 housing price data was not available.

07/27/09 10:30 AM

Business

Housing and the Crisis, Part III

Last week, we looked at the relationship between past and current housing prices. We saw that there are some regions where housing prices have fallen more than what might be expected based on national trends, while prices have declined considerably less than expected in others.

Today, we shift gears looking at the relationship between housing price and incomes. The graph below compares median housing prices in 2009 to income per capita levels in 2007 (the most recent figures available).

Housing prices and incomes are closely associated with one another: The correlation coefficient is 0.68 and the R2, 0.46. Metros above the fitted line have housing prices that are higher than their incomes relative to the national trend, while those below the line have housing values that are less than what their incomes would predict relative to the national trend.*

In Honolulu, for example, the differential was a whopping $371,777. Almost half of the top 10 regions are in California. In San Jose the differential is $120,134, San Diego ($106,625), Los Angeles ($103,278), and San Francisco ($59,633). The differential was also significant in the Pacific Northwest - Portland ($74,490) and Seattle ($60,848), as well as Salt Lake City ($77,526), and New York ($93,900).

On the other hand, there are metros where housing prices were significantly less than their incomes would predict based on the national trend. In Bridgeport, CT, for example, housing prices were $151,460 less than what its income level could support based on the national trend. In Cape Coral, FL, the figure was $110,460. This was also true in Rustbelt regions like Akron ($106,692) and Cleveland ($105,130) which had differentials greater than $100,000. There were also considerable differentials in two Texas cities, Houston ($93,586) and Dallas ($58,602). In addition to this, Atlanta ($50,166), Chicago ($30,337), Philadelphia ($18,699), and Washington, D.C. ($17,280) all had housing prices that are less than their incomes would predict based on the national trend. 


* Detroit is not covered: Its 2009 housing price data was not available.

07/24/09 10:30 AM

Business

Failed States and Development

Earlier this week, Foreign Policy released the latest edition of its Failed States Index (via Daily Dish's Patrick Appel). It's based on a database of 12 indicators of state cohesion and performance for 177 nations. So my colleague Charlotta Mellander decided to compare it to our Prosperity Institute economic development database which has a wide range of indicators for output, productivity, human capital innovation, life satisfaction, human development, and economic structure. The findings, while not particularly surprising, are nonetheless interesting. FP asks:

"[W]ho (or what) is to blame when things go bad--corrupt leaders, dysfunctional societies, bad neighbors, a global recession, unfortunate history, or simply geography itself? "

The simple answer that comes from our analysis is development - or lack of it. Failed states not only fail on state cohesion and performance, they also fail on measures of economic development -  from output or GNP per capita and total factor productivity to human capital, life satisfaction, and more. And failed states apparently lag badly on the transition to knowledge-driven, creative economies.


07/23/09 10:30 AM

Business

Chart of the Day

The U.S. economy has shed 7.2 million jobs since the onset of the recession. But the economic pain of unemployment has not been spread equally, according to a new analysis by my colleagues at the Martin Prosperity Institute.

The graph below, compiled by Ulrich Atz, tracks the unemployment rate for three broad groups or classes of employment - the working class, the service class, and the creative class - from 1971 to May 2009.


The report finds that:

Unemployment for all three groups has spiked since the onset of the recession.  But the downturn has hit hardest on working class. . .The working class has been hard hit by every downturn since 1971. Working class unemployment spiked from 6.2 percent in 1973 to 14.5 percent in the 1975 downturn. It spiked again from 7.7 percent in 1979 to 16.8 percent in 1983.  It reached 12.0 percent in 1992.

In contrast, the unemployment rate for the creative class has hardly ever reached the 4 percent mark.  Unemployment rates among the working and service class are typically about 3-4 and 2-3 times respectively the rate of those in the creative class.

A closer look at monthly data (available starting in 2000) reveals that unemployment rates among the working and service classes typically move together while creative class unemployment lags the other two by several months.

The full analysis is here.

07/22/09 10:30 AM

Business

Housing and the Crisis, Part II

Yesterday, I compared 2009 housing prices to their 2006 baseline. Today, I turn to the change in housing prices. The graph below plots the percentage units change in housing prices between 2006 and 2009 against the 2006 baseline price.

There is a significant relationship between the two. The slope is steep, with a correlation of  -0.42 and the R2 of 0.19. Metros above the line have seen drops which are less than would be expected based on national trends, while those below the line have seen drops in excess of the national trend. The numbers in parentheses are the percentage difference between the actual and predicted values.

Under-performers: These are regions where the decline in housing prices has been greater than predicted based on the national trend. The biggest losers are metros in the Sunbelt and Rustbelt. In Cape Coral-Fort Myers, FL, for example, housing prices have declined 47.3 percent more than expected based on the national trend. For Akron, OH, the figure is 44.9 percent; Lansing, MI (-39.6 percent); Cleveland, OH (-35.4 percent); Grand Rapids, MI (-33.9 percent); Phoenix, AZ (-31.7 percent); Sarasota, FL (-29.7 percent); Riverside, CA (-29.3 percent); Toledo, OH (-29.3 percent); Palm Bay-Melbourne, FL (-29.1 percent); Sacramento, CA (-28.8 percent); Canton, OH (-28.3 percent); and Las Vegas, NV (-28.2 percent). Miami (-18.56 percent), Atlanta (-18.05 percent), Chicago (-11.72 percent), Los Angeles (-10.07 percent), and Washington, D.C. also performed worse than expected.

Over-performers: There were again a series of regions that performed better than the national trend. These are places where housing prices have held up better than expected based on the national pattern. In Honolulu, HI, for example, housing prices remain 31.1 percent above what could be expected based on the national pattern. Cumberland, MD, a suburb of Washington, D.C., has held up 30.4 percent better than expected. In Salt Lake City, UT, the figure is 29.8 percent; Bismarck, ND (26.2 percent); Beaumont-Port Arthur, TX (25.9 percent); Farmington, NM (25.7 percent); Binghamton, NY (24.2 percent); Columbia, MO (22.4 percent); Raleigh, NC (21.3 percent); and Austin, TX (19.7 percent). New York (11.3 percent), Philadelphia (7.4 percent), Houston (6.37 percent), and Dallas (+4.2 percent) also performed better than expected.

07/21/09 10:30 AM

Business

Housing and the Crisis, Part I

Housing prices continue to fall nationally but the economic impacts of the crisis are being felt unevenly across the country. Housing values are off roughly a third from their peak in mid-2006, according to the Case-Shiller Home Price Index. Phoenix and Las Vegas have taken the biggest hits, suffering declines of more than 50 percent in the past year. Miami, San Diego, L.A., and Tampa have also been hard hit. Detroit has seen housing prices sink to mid-90s levels. Housing prices have declined less significantly in greater D.C., Chicago, Seattle, Atlanta, New York, Portland, Boston, Denver, Dallas, and Charlotte. But the Case-Shiller data only covers 20 large metro regions.

This week, I take a look at how housing prices have fared across the full set of more than 300 American metropolitan areas. The posts are based on statistical analysis by my colleague Charlotta Mellander. Today and tomorrow, I'll look at how housing prices have fared since their 2006 peak. Later in the week, I'll look at the relationship between housing prices and incomes and wages.

The graph below compares housing prices in 2009 to their 2006 baseline price. It's based on "residual analysis," comparing the change in housing prices between 2006 and 2009.


Clearly, the two are related - the correlation is 0.903 and the R2 is 0.815. But the slope of the fitted line suggests that, on average, housing values in these regions have dropped by approximately 15 percent. Metros above the line have lost less value than their 2006 worth would predict, while those below the line have lost more.

Under-performers: These are regions where housing values have slipped even more than predicted. Among large metros, the under-performers include: Los Angeles (where values are off $79,789 more than expected based on the national trend), San Francisco (-$79,029), Las Vegas ($-72,421), Phoenix (-$69,897), and Miami (-$53,021). Cape Coral, FL saw the biggest relative decline (- $111,797), followed by Riverside, CA (-$103,683), Sacramento, CA (-$91,640), and Sarasota, FL (-$82,353). Akron, OH (-$59,635) and Lansing, MI (-$57,574) also saw significant declines. Housing values were down slightly more than would have been expected in Atlanta (-$27,413), Chicago (-$16,580), and greater D.C. (-$14,411). 2009 data for Detroit were not available.

Over-performers: The analysis turned up a number of over-performing regions. By that I mean regions with housing values performed better than expected relative to the national trend. Over-performers include: Honolulu (where housing values remain $160,414 more than expected), Boulder ($72,172), Salt Lake City ($68,935), Seattle ($61,997), New York ($58,407), Raleigh, NC ($57,552), Portland, OR ($42,173), Baltimore ($39,896), Austin ($38,181), Philadelphia ($29,011), Boston ($13,644), Houston ($8,693), and Dallas ($5,661).

Stay tuned for more tomorrow.

07/20/09 10:30 AM

Business

Where Unemployment is Worse than Expected

The impacts of the economic crisis continue to be felt unevenly across the country. I've previously looked at the factors associated with higher rates of regional unemployment. But which places have seen the biggest jumps in unemployment since the crisis hit?

To get at this, my colleague Charlotta Mellander conducted a straightforward statistical exercise called a "residual analysis." It's a simple way to track how a location performs relative to the performance of all other locations. Basically, the analysis examines to what extent the initial unemployment rate in May 2008 seems to have had an impact on the change in unemployment over the last year. Technically speaking,  Mellander ran a regression analysis predicting change in unemployment over this last year (May 2008 to May 2009) as a function of the initial level of unemployment at the beginning of the period (May 2008). She then compared the predicted values to the actual values.

The first graph shows the pattern for U.S. states.

The hardest hit states are ones that were doing badly even before the crisis hit. The fitted line is steep; the correlation between the two is 0.59 and significant; and the R2, 0.345. States below the line experienced a smaller than predicted increase in unemployment levels, while those above the line saw a larger than predicted increase.

Michigan has the highest unemployment rate, but Oregon (+3.0) has taken the biggest relative hit. Alabama (+1.8), Indiana (+1.6), South Carolina (+1.6), and Wisconsin (+1.4) have also taken bigger than expected hits. North Dakota has the lowest rate of unemployment but Alaska (-2.8), Mississippi (-2.1), Arkansas (-1.2), Connecticut (-1.2), Iowa (-1.1), and Nebraska (-1.2) have done better than expected.

The second graph repeats the analysis for U.S. metropolitan regions. It excludes two extreme outliers in California - Yuma and El Centro - which started the period with 20 percent plus rates of unemployment.

The hardest hit metros are also those that were doing badly before the crisis. The fitted line is again steep; the correlation coefficient is high, 0.59; and the R2, 0.351.

The crisis has hit hardest at smaller Rustbelt metros, especially those in Indiana: Elkhart-Goshen, IN; (+7.3); Kokomo, IN (+7.2); Decatur, GA (+3.2); Sheboygan, WI (+2.7); Fort Wayne, IN  (+2.3); and Youngstown, OH (+2.2).

While Detroit has faced staggering unemployment, the difference between its actual and predicted unemployment is +1.6. Among large metros, Portland (+3.1), Charlotte (+2.2), and, San Jose (+1.9) experienced even bigger than expected increases in unemployment. Las Vegas (1.5), Boise (1.29), and Orlando (+1.29) have also been hard hit. San Francisco (+.93), Miami (+.49), L.A., Chicago (+.31), Atlanta, and San Diego (+.21) also performed worse than their May 2008 unemployment levels predicted.

Several Oregon metros took worse than expected hits: Bend-(+4.6), Eugene-Springfield (+3.8), Portland (+3.0), Salem (+2.5), Medford (+2.4), Corvallis(+1.9). Metros that border Oregon like Spokane, Washington (+0.8) and Boise, Idaho (+1.3) also have high differentials.

Three Texas cities - Dallas (-1.0), Houston (-0.9), and Austin (-1.0) - performed considerably better than expected. Minneapolis-St. Paul (-0.4) did too. Cities along the Bos-Wash mega-region - Boston (-0.4), D.C. (-0.3), New York (-0.1), and even Philadelphia (-0.3) - also did better than predicted. Surprisingly, Phoenix also outperformed expectations (-.2), albeit modestly.

College towns number among the best performers, doing much better than predicted: Champaign-Urbana, Illinois, home to University of Illinois (-2.2); Iowa City, University of Iowa (-1.81); Manhattan Kansas, Kansas State University (-1.82); College Station, Texas, Texas A&M (-1.74); New Haven, Connecticut, Yale University (-1.54); State College, Pennsylvania, Penn State University (-1.47); Boulder, Colorado, University of Colorado (-.93); Austin, Texas, University of Texas (-1.0); Ann Arbor, Michigan, University of Michigan (-.94); and Ithaca, New York, Cornell University (-.97), among others.

07/17/09 10:30 AM

Science / Technology

Innovation and Economic Crises

This past week, I've look at the trends in U.S. innovation, commenting on Michael Mandel's powerful and compelling thesis about the deceleration and interruption of American innovation. With the help of my MPI team, I've tracked patent data since 1980, examined patent trends for U.S resident and foreign, non-resident inventors, and looked at the geographic distribution of patenting.

Overall, the trend in patenting is up - both in absolute numbers and controlling for population. Innovation has increased over the past decade, but not at the breakneck pace of the 1980s and 1990s. There have been two dips in patenting over the past decade - the first in the wake of the tech crisis of 2001 and the second, more recently, concurrent with the onset of the housing and financial bubbles and the subsequent economic crisis.

American innovation has shifted and become more geographically concentrated. Places like Silicon Valley and Seattle have seen a steady increase in innovation while older, industrial centers like Pittsburgh and Detroit have declined significantly. Innovation in large cities like New York and Chicago has stagnated. And American innovation has grown increasingly dependent on non-resident, foreign inventors.

Today, I focus on a broader historical question: How do economic crises affect American innovation? Does innovation slow down or speed up during periods of crisis?

Joseph Schumpeter long ago argued that crises were seedbeds of innovation and entrepreneurship. Innovations developed during crises generate the gales of creative destruction that launch new technologies, remake existing industries, and give birth to entirely new ones - setting in motion new rounds of economic growth. Economists Gerhard Mensch and Christopher Freeman have examined the historical timing of innovations, with Freeman famously arguing that the pace of innovation is actually relatively constant: Innovations bunch up during crises, only to be unleashed as economic conditions are restored.

The graph above is reproduced by economist Alfred Kleinknecht. It shows patent activity from 1750 to 1970. It tracks actual patents granted from 1901 to 2005. There are clear spikes in innovative activity during the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s.

The historical literature also suggests that crises are periods of significant innovation. Joel Mokyr and Naomi Lamoreaux have documented the rise of important innovations like the incandescent light, the steam turbine, and the transformer during the Long Depression. Economic historian Alexander Field finds the 1930s to be the "most technologically progressive" decade of the 20th century.

The chart below, compiled by the MPI's Patrick Adler based upon a reading of the historical literature, identifies some of the major innovations of the Long Depression and the Great Depression. If the past is any guide, we should expect some acceleration of innovation - and particularly of the dramatic innovation Mandel wants to see - in the coming decade.

The graph below, compiled by my colleague Charlotta Mellander, updates the story, charting patents granted per 10,000 people from the 1890s to 2007. The rate of innovation rose significantly after the Long Depression. It then dipped during the Great Depression before trailing off considerably during the World War II period. American innovation rebounded remarkably in the post-war period before trailing off in the 1970s. Since the early 1980s, however, American innovation has surged to record highs. There have been two dips in innovation in the 2000s. But as of 2007, innovation has fallen only slightly from its record pace.

So what's happened to U.S. innovation?

Like virtually every other facet of the economy, it has been - and continues to be - reshaped by globalization. As we saw on Wednesday, foreign non-resident inventors have become a key element growing U.S. patenting and a big piece of the American innovation system. Beginning around 1980, non-resident inventors essentially closed the gap with U.S. inventors. By the late 1990s, they had pulled even and were at times outpacing U.S. inventors. This is part and parcel of the globalization of the economy and the fact that the U.S. is the biggest market and most innovative nation on the planet.

This has altered the American system of innovation in a deep and fundamental way - changing it from a system that for the better part of a century was based on producing and commercializing innovations to one that is more attuned to attracting inventors and innovation globally. This shift is also reflected in the changing geography and regional concentration of U.S. innovation - the decline of old, integrated, regional innovations systems in locations like Pittsburgh and Detroit and the rise of new, globally focused clusters like Silicon Valley.

Innovation is no longer an American game - or, for that matter, a game of any one nation. The countries of the world are now all part of a much more global innovation system. Strategically, this shift means from organizing to generate new breakthrough innovations to organizing to absorb innovations coming from many different sources worldwide.

The U.S. is uniquely positioned because of its size, scale, universities, and venture capital system; its sophisticated end-users and customers; and its ability to attract global talent - to harness and reap the benefits of this global system. Its major innovation clusters reinforce this advantage and they will be hard to displace. That said, for the first time, the overall rate of American innovation has come to depend on foreign inventors. Anything that might slow the immigration or inflow of foreign inventors - or redirect their inventions and patents - would undoubtedly damage the rate of American innovation.

The key question for the future is less about the slowdown in innovation and more about which people and places will prosper in this new age of accelerating global innovation.

07/16/09 10:30 AM

Science / Technology

The New Geography of American Innovation

The past couple of days, I've looked at the trends in overall patents and nationality of inventor. Today I turn to the regional distribution of innovation across U.S. regions.

It's well-known that high-tech industries are concentrated and clustered in areas like Silicon Valley, Greater Boston, Seattle, Austin, and North Carolina's Research Triangle. Paul Krugman won a Nobel Prize for his pioneering work on the relationships between urbanization, trade, and economies of scale. And Michael Porter has shown how and why innovative firms cluster.

The graph below, compiled by Scott Pennington of the Martin Prosperity Institute, shows patent trends from 1976 to 2007 for the top 10 U.S. regions. The graph identifies a clear shift in the geography of patenting.

The level of innovation has fallen off considerably in older industrial regions like Pittsburgh and Detroit. It has also fallen off in Sunbelt regions like Dallas with a large presence in computers and communications and Houston with its strong concentration of resource and energy industries.

On the other hand, innovation has increased substantially in high-tech regions like Silicon Valley, San Francisco, and Seattle and also in Los Angeles.

Two other large regions - New York and Chicago - more or less conform to Mandel's thesis: Both saw dramatic growth in the late 1990s followed by precipitous drops in the 2000s which erased those gains.

Overall, American innovation has become more geographically concentrated and spikier.

The decline of industrial regions as centers of invention reinforces the point made by Henry Ergas two decades ago: The U.S. innovation system is skewed heavily toward "shifting" (the creation of new breakthrough technologies and products) and away from "deepening" (the application of new inventions and technologies to the continuous, incremental upgrading of older industries). The decline of GM and Chrysler - and in particular the latter's acquisition by Fiat to gain access to new technology - stand as testimony to that.

The decline of innovation and commercialization in older industrial regions means that in certain key areas of technology, the U.S. has essentially ceded the potential to develop new industrial goods and consumer products to other countries - from established competitors Germany and Japan to emerging ones like India and China - which possess the industrial infrastructures to embed them in commercial products.

07/15/09 1:00 PM

Business

Map of the Day

Here's a map of job postings by metro area (h/t: Steven Pedigo).

The map controls for population. D.C. has the most openings and Baltimore is second. San Jose, Austin, Hartford, Seattle, Salt Lake City, Denver, Boston, Las Vegas, Charlotte, and San Francisco all are doing reasonably well, relatively speaking.

Detroit has the fewest openings and comes in dead last, again. Miami. Buffalo, Rochester, L.A., and Chicago are doing poorly.

The full list of cities is here.

07/15/09 10:30 AM

Science / Technology

Global Sources of American Innovation

Yesterday, we looked at overall trends in U.S. innovation measured by patents. Today, we break out U.S. patents between U.S.-resident and non-resident or foreign inventors patenting in the U.S.

Numerous studies have shown that, over the past two or three decades, the role of foreign scientists, technologists, and entrepreneurs in U.S. innovation has increased. Recent research by AnnaLee Saxenian and Vivek Wadhwa and others finds that anywhere between a third and half of all Silicon Valley start-ups during the 1990s had a foreign entrepreneur or scientist on their core founding team. As I have previously argued, foreign-born scientists currently make up 17 percent of all bachelor's degree holders, 29 percent of master's degree holders, 38 percent of PhDs, and nearly 25 percent of American scientists and engineers. My earlier research shows that Japanese companies - and some European companies as well - chose to locate research labs in the U.S. to access a diverse mix of scientific talent they cannot attract in their home countries.

The graph below shows the overall trend in patenting for U.S.-resident and non-resident foreign inventors between 1980 and 2005. Non-resident (foreign) inventors have just about pulled even with U.S. inventors in patenting, and their rate of inventive activity more or less tracks that of U.S.-based inventors. But here again, even with two dips since 2000, the rate and level of innovation over the past decade remains up.

Clearly, foreign inventors have become a key feature of the U.S. innovation system. Without them the level of innovation would be much lower. Another way of saying this is that the American system of innovation has become increasingly dependent upon non-resident inventors. Foreign inventors patent in the U.S. to secure intellectual property protection in the large U.S. market. Clusters of sophisticated and demanding consumers and end-users help make the U.S. the place to be for high-end innovation, as Amir Bhidé points out in The Venturesome Economy.

While foreign patenting boosts the overall rate of innovation in the U.S., there is a considerable chance that these patented innovations are commercialized and produced off-shore, and thus that the U.S. economy will accrue less overall economic benefit from those technologies. While this is not direct evidence for Mandel's innovation interrupted thesis, it provides a possible mechanism that might limit the commercialization and overall economic impact of innovation in the U.S.

07/14/09 10:30 AM

Science / Technology

What's Happening to American Innovation?

As we saw yesterday, Michael Mandel argues that commercial innovation in the U.S. has slowed in recent years. To shed light on this, my team and I tracked U.S. patent data since 1980.

The first graph above tracks patent applications and patents granted from 1980 to 2005. Overall, the trend-lines are up. The line is steeper for patent applications, but it also tracks consistently upward for actual patents granted. There are significant dips after the tech-crunch of 2001 and in the wake of the financial bubble, even before the economic crisis of 2008. But those dips do little to throw off the basic upward trajectory of American innovation. In 2007, the overall level of patents granted was significantly higher than a decade earlier.

The second graph below controls for population, tracking the trend in patents per 10,000 residents. The trend-lines tell much the same story. Despite two recent dips, the overall trend in patenting is up considerably over the past decade.

The evidence here does not appear to indicate a significant innovation shortfall. The most we can say is that the rate of innovation has leveled off in recent years when we control for population. Nonetheless, the overall trajectory of American innovation remains consistently up.

As we will see tomorrow, the picture gets a bit more complicated when we parse patents by U.S.-born (resident) and foreign (non-resident) inventors.

07/13/09 10:30 AM

Science / Technology

Innovation Interrupted?

In a widely read cover story published earlier this month, Business Week's chief economist Michael Mandel asks, "To what degree has American innovation been 'interrupted'?" Mandel argues that the economic crisis is partly the result of America's failure to generate high-impact commercial innovations.

What if, outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted?

The crux of his argument is that many, if not most, of the big breakthrough innovations that were supposed to occur over the past decade or so have failed to materialize. His article provides a raft of compelling examples of once-heralded innovations - in areas from biotech to micro-machines - that have simply not panned out. This failure to commercialize and diffuse these new breakthrough innovations - America's inability to set in motion the great gales of "creative destruction" identified long ago by Joseph Schumpeter as key to capitalist growth - he argues, is a key contributor to both the financial bubble and the economic crisis.

But since there is compelling evidence that the figures are overstated by the credit bubble and statistical problems, we can construct a plausible narrative for the financial bust that gives a starring role to innovation-or rather, to the lack of it. It goes something like this: In the late 1990s most economists and CEOs agreed that the U.S. was embarking on a once-in-a-century innovation wave-not just in info tech but also in biotech and many other technologies. Forecasters upped their long-run growth estimates for the U.S. economy. Consumers borrowed against their home equity, assuming their future incomes would rise. And foreign investors lent America money by buying up U.S. securities, assuming the country would come up with enough new products to pay off the accumulated trade deficit.

Mandel lists four areas in which America's recent performance has been lackluster: stock market performance in the pharmaceutical, biotech, and life-science sectors; declining real wages for highly educated workers; a mounting trade deficit in high-tech sectors (which grew from $30 billion U.S. surplus in 1998, turning into a $53 billion deficit by 2008); and little improvement in the death rate (which he sees as a measure of the failure of breakthrough medical technologies to materialize) as evidence for the failure of American innovation.

It's no secret that I'm a big fan of Mandel and I find his general thesis about lagging U.S. productivity and job growth over the past decade or so to be both intriguing and plausible. And since so much of my own work focused on the relationship between innovation and American competitiveness was flagging, I find myself particularly drawn to his most recent "innovation-interrupted" thesis.

My first book, The Breakthrough Illusion, written with Martin Kenney in 1990, argued that the U.S. system of venture capital-backed breakthrough innovation was skewed to encourage short-term super-returns from new breakthrough innovations, and was structurally ill-suited to capturing the longer-term wealth derived from developing these innovations into successful products and industries. That work drew upon the intriguing thesis of innovation theorist Henry Ergas, who argued that the U.S. had developed a shifting system of innovation geared to near-constant development of new products through new firms, as opposed to a deepening system (think of German cars) which continuously adds technology to upgrade existing industries. According to Ergas, the key to long-run prosperity lies in synthesizing both strategies - cultivating an economy which could deploy new technologies in new sectors while at the same time deploying them to upgrade and revolutionize old ones.

I opened my 2002 book, Rise of the Creative Class, with a time-traveler experiment. Someone traveling from 1900 to 1950 would be blown away by the varied technical marvels that surrounded them from televisions to airplanes. But while someone who time-traveled from 1950 to the 2000 would see a few new technologies, like the personal computer and the cell phone, he or she would likely be much more amazed by sweeping social changes. And in my 2004 book, Flight of the Creative Class, I argued that America's innovative edge in the late 20th century was inextricably tied to its ability to attract foreign scientists, technologists, and engineers. The combination of mounting U.S. immigration restrictions and growing efforts by foreign countries to retain their own best and brightest (and attract others from around the world), I suggested, was an under-appreciated threat to U.S. competitiveness and prosperity.

In fact, I found Mandel's essay so compelling that I decided to take a look at the actual data. Mandel rightly says that we currently lack a comprehensive "innovation index" that tracks commercial innovation: "There's no government-constructed "innovation index" that would allow us to conclude unambiguously that we've been experiencing an innovation shortfall. Still, plenty of clues point in that direction."

True enough. But research into the economics of innovation has discovered at least one reasonable measure of innovation - patents. There are problems and biases with using patents as a measure of innovation, as economists who specialize in the subject have pointed out. Patents measure certain areas of technology more than others. In some areas of commercially important R&D, patents are rarely used. Other areas, including less commercially relevant ones, are awash in patents for minutiae. And patents are not synonymous with commercially relevant innovations. That said, patents do provide a consistent, broad-gauge indicator of the level and rate of innovation - one that can be tracked over long periods of time and be broken out by nation, city, and region, and by U.S. resident versus non-resident or foreign inventors.

With my Prosperity Institute team - Charlotte Mellander, Scott Pennington, Dieter Kogler, and Patrick Adler - I've taken a look at the trends in U.S.-patented innovations. In a series of posts this week, I will report our findings. Tomorrow we'll look at the trends in U.S. patents over time. Wednesday we'll explore patenting by U.S. resident versus non-resident (foreign) inventors. Thursday we'll examine the geographic distribution of innovation - tracking the rise of some innovative regions and the fall of others. And Friday we'll discuss the longer-run historical relationship between innovation and economic crises.

07/11/09 12:17 PM

Culture / Media

Prius Effect

Why do people buy green products? A new study (h/t: Charlotta Mellander) finds that green purchases are less about energy savings or cost savings and more about image. Prius owners pay a significant premium over many conventional fuel-efficient cars. When asked about the top motivating factors behind their purchase, the comment, "makes a statement about me" was at the top of the list, while "higher fuel economy" came in third, and "lower emissions," fifth. The authors argue that status plays a big role in green purchases.

Because biologists have observed that altruism might function as a "costly signal" associated with status, we examined in three experiments how status motives influenced desire for green products. Activating status motives led people to choose green products over more luxurious non-green products. Supporting the notion that altruism signals one's willingness and ability to incur costs for others' benefit, status motives increased desire for green products when shopping in public (but not private), and when green products cost more (but not less) than nongreen products.

07/08/09 12:45 PM

Business

Global Gridlock

Most people think the biggest threat to globalization is mounting economic nationalism and trade protectionism. That may well be true. But in a thoughtful and provocative article in the Harvard Business Review, George Stalk argues that globalization faces another threat - a looming infrastructure crisis that is creating huge bottlenecks in the flow of global products and services.

As supply and distribution chains have become longer and more complex, companies have begun to realize that increased logistics costs can reduce or even eliminate the benefits of manufacturing where labor is cheap. The congestion and bottlenecks of a transportation system strained beyond capacity compound the problem, making supply chains seem even longer and more unpredictable.

There's a lot of talk about improving transport times for people, but at this time of rapidly falling imports and exports, there's not much talk of increasing capacity for goods. High fuel prices are not the only issue here. It's also the other costs of congestion: higher cost of inventory for goods that are locked up longer in transit; the costs of uncertain, more variable transport times; and the inability to react to changes in consumer demand.

Stalk argues that while the crisis provides a temporary reprieve, the stimulus is not addressing this looming longer-run economic threat.

If pre-recession trends reappear when the economy recovers, lack of infrastructure capacity, in combination with rising oil prices, will constrain global trade and drive up costs. The U.S. stimulus package, with its focus on "shovel-ready" projects that quickly create jobs, will produce newly painted bridges and newly paved roads but is unlikely to address the capacity problem.

07/07/09 1:00 PM

Culture / Media

The End of Celebrity?

In the wake of Michael Jackson's death, there's been no shortage of predictions about how his passing represents the end of the "age of celebrity." The Wall Street Journal's Daniel Henniger writes:

The Age of Celebrity died with Michael Jackson's heart. Those of us dedicated to the zoology of celebrity should have known it was over when the death of next-to-nobody Anna Nicole Smith filled the airwaves in 2007 for a week. Celebrity had lost its meaning. We will bury its golden age in Jacko's tomb.

Marketing runs the world now. Because of marketing the world is overflowing with people who are famous, or anyway familiar. These people aren't celebrities. Not real celebrities.

Henniger ties Jackson's celebrity to a major technological shift - the rise of cable television and MTV:

Michael is the last celebrity because he rose to fame in the 1980s, and in the 1980s there was no World Wide Web. We didn't have 1,000 cable TV stations. But we did have MTV. MTV broadcast Michael Jackson's "Billy Jean" video in 1983. Music videos helped make him a megastar, but Michael Jackson was the last one across the bridge from the world of celebrity to the media galaxy of bargain-basement fame.

And he argues the shift to digital technology works against the rise of another mega-celebrity:

It has taken some time to see how modern media squashed the life out of genuine celebrity. Web sites, TV and magazines shot Michael Jackson and his white glove into the sky like a Roman candle. But in the nature of fireworks, modern media then fired thousands of other people into the same sky - singers, actors, athletes, talk-show hosts, psychologists, comedians, models - and turned them all into . . . familiar faces...

A real celebrity is beyond reach. Today, to hang out with famous people all one needs is the ability to mouse-click. Constant clicking rubs the shine off anyone's glamour. Beautiful people have become a dime a dozen.

Not so fast.

There's good reason to suspect that, sooner or later, new technology will spawn an even bigger mega-star with even more global reach. That's been the pattern in the past actually and there's little reason to think it will end now.

My colleagues and I have been studying the implications of technological change and musical celebrity as part of the MPI's Music and the Entertainment Economy project. Our work is still ongoing, but our reading of previous studies of music, popular culture, and technology, and our early findings, identify a powerful pattern.

With every new technology - from the rise of film, recorded music, talking pictures, transistor radios, FM radio, cable TV, and now the digital revolution - experts have predicted the death of celebrity. But each advance has generated celebrities bigger than the past. New technologies, as the work of German economist Peter Tschmuck has shown, open up new distribution channels and new markets that give birth to ever bigger stars.

The first big star was Rudy Vallée, whose soft singing voice was amplified by the invention of the electric microphone. He inspired other crooners like Bing Crosby, whose 500 million records sold make him one of the top five selling artists of all time. Next came Frank Sinatra - a true mega-star whose scores of bobby-soxer followers helped solidify the notion of teen pop culture and who was one of the first to capitalize on tie-ins between radio, albums, and feature films. Then came Elvis Presley, the King who took teen culture to a whole new level - his hip-swiveling appearances on Ed Sullivan making national news - and sold more than a billion records over his career.

Noted rock critic David Marsh has said that Elvis ushered in the first major shift in modern popular music culture. The second shift came with the Beatles (who also sold a billion+ records) and the British Invasion, which augured the shift to album-oriented rock featured on FM radio. Michael Jackson defined the third major revolution in popular music, selling some 750 million records and, according to Marsh, giving rise to the heavily produced pop form which is with us to this day. MJ can count everyone from Madonna and Justin Timberlake to Beyoncé, Britney, and Lady Gaga among his disciples.

But it's a mistake to see MJ as the end of the line for celebrity.

The big mistake of most chroniclers of popular culture is that they see only one side of digital technology. It is true that new technology enables niche acts to reach larger markets, giving rise to the Long Tail phenomenon identified by Chris Anderson. But the long tail is only part of the story of the transformation wrought by high-speed digital networks. Anderson's theory is based on a family of statistical distribution curves called the "power law" that are characterized by thick heads and long, trailing tails. All kinds of social and economic phenomena from the distribution of baby names to the distribution of city populations have been found to conform to these basic curves. Now, Harvard's Anita Elberse and PRS's Will Page are finding that, in the digital age, even though the tail is long but thin, the head remains "fat." In fact, if you take power laws seriously, the head of the tail should grow in proportion to the length of the tail - getting fatter as the tail gets longer.

The digital revolution - from Facebook and Twitter to YouTube - creates a powerful platform for instantaneous global reach that goes beyond what radio, TV, and even cable TV can offer.

My hunch is that sooner or later we will see a new mega-star on a truly global scale. Not arising in one country like Elvis from the U.S., or the Beatles coming from the U.K. to "invade" America, or Jackson, an American conquering the world. This will be a celebrity who emerges simultaneously on a global scale - a person less tied to one country of origin who will be seen from the outset as a world mega-star.

Henniger curiously mentions Barack Obama (as well as Mark Sanford, Arnold Schwarzenegger, and Mike Huckabee) as a new kind of celebrity, saying attention has shifted from pop culture to the sordid, hyper-real, sometimes surreal world of politics. Politics lacks the visceral excitement and appeal to launch a mass superstar, but Obama himself provides some contours of a world star. He is a global person - the product of a Kenyan father and white American mother, born in Honolulu, raised in Indonesia and Hawaii, schooled at Columbia and Harvard (among the most global of universities), and a Chicagoan before taking up residence in the White House.

Glimmers of the new age of global celebrity are peeking through. "Jai Ho," the theme song for the mega-hit Slumdog Millionaire, features lyrics in Hindi, Urdu, Punjabi, and Spanish and has been covered by Americans the Pussycat Dolls and Snoop Dogg. Its composer is A.R. Rahman, a star film composer who has already sold over 200 million records in a career that began only in 1992.

My students tell me that the mixed-race (black/Chinese/Jewish) reggae artist Sean Paul is almost as popular in India as he is in his native Jamaica. And Grammy and Academy Award-nominated rapper M.I.A.'s persona is equally rooted in London and Sri Lanka. TIME magazine ranks her as one of the world's 100 most influential people and sums up her global appeal:

She's a Sri Lankan refugee who didn't speak a word of English before she was 10, yet she's also a child of Chuck D and the Pixies and Fight Club and MySpace. There are no borders for her. . . You don't have to be from the West to have a favorite Biggie song. We are all listening to the same music.

These artists hint at the global reach of the new generation, but they're they're just inklings of the much bigger possibility to come.

Maybe celebrity and the power law that defines its mega-stars will end forever with Jackson's passing. But I doubt it. In each previous epoch, the rise of a new technology has led to a celebrity even bigger than the last. Digital networks and social media are platforms with such enormous potential and global reach that they are tailor-made for the Next Big Thing.

07/06/09 10:45 AM

Culture / Media

The Nashville Effect, cont'd

Nashville may be the center of the recorded music industry and, while it has attracted scads of musicians over the past several decades, it remains a narrower kind of music scene compared with say Brooklyn, according to analysis by my U of T colleague Dan Silver. In an earlier post, I explored Jack White's move from Detroit to the Music City. Silver picks up on the Punch Brothers' Nashville-to-Brooklyn relocation, making an important distinction between music industry dynamics and music scenes.

This is not about comparing New York and Nashville in particular. My point is more general: we need to think not only about music industries, but also about music scenes as a factor in attracting musicians to cities and sustaining their creativity once they're in place.

Punch Brothers leader Chris Thile was a bluegrass prodigy in the "progressive bluegrass" trio Nickel Creek. Based in Nashville, the platinum-selling group was famous for mixing bluegrass with diverse genres and covering songs by non-bluegrass artists like Pavement, Elliott Smith, and the Jackson 5. But after Nickel Creek came to an end in 2007, his new act Punch Brothers chose to make its home in Brooklyn.

While Nashville is full of industry opportunities and plays host to a dynamic live scene, it tends to value expertly played country and pop-rock sounds over more unconventional musical risk-taking. In NYC, Thile feels at home incorporating prog rock, chamber music, and klezmer into the Punch Brothers' more adventurous sound.

Silver, who plays a key role in our MPI Music and Entertainment Economy Project, explains why Nashville, despite its widespread opportunities, is not always the best home for musical omnivores like Thile:

There is likely a symbiotic relationship between recording industry infrastructure and music scenes, as scene members work session gigs by day and clubs by night. And yet, on the other hand, there may be a negative influence whereby heavy industry concentration creates an over-professionalized environment that is not open to some kinds of musical innovation. The grunge sound of '90s Seattle and Olympia grew up where there were few recording studios, and the scene made a virtue out of the unprofessional sound that emerged.

Check out Silver's analysis here - an analysis with which, interestingly enough, the alt weekly Nashville Scene appears to generally agree.

07/04/09 10:30 AM

Culture / Media

You Get What You Pay For

Even with the bursting of the housing bubble, it still costs a whole lot more to live in some places than others. New York City, Washington, D.C., L.A., and San Francisco, for example, remain much more expensive than most other U.S. cities and regions. But why?

There's the old real estate adage: location, location, location - people pay more to be in more central and better places. But that still begs the question of what makes certain places better?

The clustering of people and firms in cities, as Jane Jacobs and Robert Lucas famously have written, surely plays a role. And successful cities seem to speed up productivity and innovation benefiting from faster rates of urban metabolism: New Yorkers, it's often said, talk faster and walk faster than others. Some cities also benefit from higher quality of life - warm, sunny climates, great coastlines, greater scenery - and amenities like great cultural institutions and restaurants - which enable them to attract affluent, ambitious, and talented people. How to parse the relative effects of productivity and quality of life?

Fascinating new research by David Albouy of the University of Michigan does just that, creating new measures of quality of life and looking closely at the relationship between productivity and amenities. He finds that amenities really matter to the location decisions of people, and that there is a relationship between productivity and quality of life. San Francisco, L.A., New York, and Boston are some of the cities that sit atop his list of high quality of life, high productivity places.

US News and World Report has a nice summary of his research. A paper on measuring quality of life is here; another examining the relationship between quality of life and productivity, here.

07/03/09 10:00 AM

Business

Worsening Unemployment

The new unemployment figures were released yesterday. The news isn't good. My fellow Atlantic correspondent, Conor Clarke, has already put the new figures in context and points to David Leonhardt's perspective. The AP's Christopher Rugaber has a particularly nice take.

The past year has put more than six million workers on the unemployment roles. 6.4 million Americans "want a job," and the total ranks of the unemployed have swelled to more than 15 million people, according to the Bureau of Labor Statistics.  9.7 percent of Americans over age 16 are out of work, up from 5.7 percent last year. And the broader U-6 rate of unemployment which includes "marginally attached workers" inched higher to 16.5 percent in June up from 10.1 percent last year.

The crisis has wiped out nearly a decade of jobs gains. Rugaber cites a startling statistic: There are currently 131.7 million American jobs, slightly less than the 131.9 million figure for May 2000. "It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle," writes Rugaber,citing Economic Policy Institute economist, Heidi Shierholz. Business Week's, Michael Mandel shows that private sector job creation was anemic over the boom - dubbing it "a lost decade for jobs" - noting that virtually all job creation came from government, education, and health care.

Unemployment's impact remains extremely uneven by gender, race, class, and occupation.

Race: The unemployment rate for whites is now 8.7 percent, up slightly from last month's 8.6 percent. The rate for blacks is down slightly from 14.9 percent last month to 14.7 percent.

Gender: Men continue to experience higher rates of unemployment than women - 10.6 percent, up from 10.5 percent), vs. 8.3 percent, up from eight percent, for women. This reflects the concentration of men in manufacturing jobs. 

Human Capital/Education: Unemployment remains considerably uneven by education or human capital level. The unemployment rate for college graduates is 4.7 percent, down slightly from 4.8 percent last month. It remains half that for high school (only) graduates, 9.8 percent, and a third of 15.5 percent rate for those without a high school diploma.

Occupation and Class: And there remain huge differences in unemployment by occupation or class.

Blue Collar Jobs: The highest rates of unemployment remain concentrated in working class occupations. Over the past year, more than 2.2 million members blue collar workers (production, maintenance, transportation, construction, and natural resource workers) joined the ranks of the unemployed; and 3.6 million working class jobs have been eliminated. The unemployment rate for production, transportation, and moving occupations is 13.9 percent. For production workers it's 16.3 percent, up from 15.6 percent last month and 7.3 percent last year; movers and transportation workers, 11.6 percent, up from 7.2 percent last year; and construction and extraction jobs, 17.8 percent, up from 9.1 percent a year ago.

Service Jobs: The unemployment rate for service workers is 10.2 percent, up from 9.4 percent last month and 6.5 percent last year. More than 1.1 million service workers have joined the ranks of the unemployed over the past year.

Professional, Technical, and Creative: Unemployment is up for professional, technical, and creative workers, but remains far lower than for working class or service jobs. For management and business occupations - including hard-fit financial jobs - the unemployment rate is 4.8 percent, up from 2.5 percent last year; and for professional and technical occupations it is up 5.1 percent from 2.9 percent a year ago. This is the first time in recent memory the unemployment rate for professional and technical workers has exceeded 5 percent. 1.2 million professional, technical, and creative workers joined the ranks of the unemployed this past year.

07/02/09 10:30 AM

Business

Homeownership's Downsides

One consequence of the economic crisis is that the rate of home ownership has been slipping, as the chart below shows (via Calculated Risk).


A growing number of economists and urbanists question whether the United States has put too much emphasis on homeownership and over-invested in housing. Ever since the Great Depression, America has generously subsidized homeownership through the tax code and by other means. Housing does take up  a significant share of U.S. investment comparatively speaking; and, in some regions, real estate, housing, and construction made up a huge share of the local economy, as high as 25 to 30 percent at the height of the bubble, bigger than education, health-care, government, or manufacturing. I've argued elsewhere that the two American dreams - of homeownership and of unfettered economic mobility - may be in conflict, as homeownership, especially in downturns like today, impedes mobility and makes it harder for individuals to move to work and the labor market on the whole to adjust.  

The benefits versus costs of homeownership is an important debate. On the pro-side, Joel Kotkin makes the case for homeownership in his recent Forbes column. Stephen Slivinski provides a thorough review (via Tyler Cowen) of the downsides of what he calls America's homeownership bias.

Simply put, Americans may have overinvested in housing. This has been a worry of economists for a while. It's a concern based on what they see when they compare the rates of return - profit per dollar invested - for a variety of capital types ...  "When you observe that the measurable rates of return are different across the sectors," said the Dallas Fed study author, Lori Taylor of Texas A&M University, "you either have to conclude that there are substantial unmeasured returns across the sectors or you have to conclude that society would be better off with a reallocation of resources." These unmeasured benefits would have to be very large - at least $3,600 per homeowner in America - for the investment imbalance to be explained ...

Robert Shiller, an economist at Yale University and an expert on national housing markets, has estimated that "from 1890 through 1990, the return on residential real estate was just about zero after inflation." Throw in the costs of maintenance of the property and it's easy to see how renting could certainly be cheaper than owning, even if you include the tax advantages. Yet the opportunity cost of those home investments - the foregone investment opportunities elsewhere - go largely unseen ...

Being tied down to a house tends to make people less likely to leave an area in which employment prospects are deteriorating ...A seminal study by British economist Andrew Oswald of the University of Warwick traced the link between unemployment and homeownership. Oswald looked at the United States, the United Kingdom, France, Italy, and Sweden between 1960 and 1996 and discovered that, on average, a 10 percentage point increase in homeownership tended to correlate with a 2 percentage point increase in the unemployment rate.

Recent studies of European data discover that you don't see these sorts of correlations in areas with higher concentrations of renters. Renters are simply more able and willing to move away when their community hits the economic skids. In addition, workers who aren't likely to move from a specific location might create frictions in the markets for labor skills. It's a cost to the economy when people live in an area in which their skills are no longer valued. But there is a potential personal cost too: The overall welfare of that worker may suffer. Homeownership also tends to contribute to adverse political incentives. Incumbent homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations. These restrictions limit the number of houses that can be built in any geographic area and, consequently, keep housing inventory low and property values artificially inflated.

It appears that the crisis is causing a shift from homeownership to rental, as the graph below (also from Calculated Risk) shows. This trend may end up being a good thing for certain homeowners and for the flexibility of the U.S. economy as a whole.


One thing we know about crises is they frequently bring about significant changes in the system of housing tenure. The Great Depression and New Deal innovations in housing finance and housing policy, plus the post-war boom and infrastructure building, brought a massive shift toward single family homeownership. My hunch is it's time for new hybrid forms of housing tenure which mix the benefits of ownership with the flexibility of renting.

07/01/09 6:00 PM

Culture / Media

Do You Want to Know a Secret?

Were you - like me - ever amazed at how so many people could afford bigger and bigger homes, New England beach houses and Florida condos, expensive cars? The answer, according to a terrific article by Ben Funnell in the Financial Times, is simple: cheap, available credit.

Debt, he says, is "capitalism's dirty little secret." Cheap mortgages, cheap car leases, and the use of home as veritable ATM's created fictitious living standards for the middle class and the bulk of the population at a time of low productivity and paltry growth in incomes, and where the bulk of the gains in wealth were scooped up by the top fraction of households.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn't earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

Many of those houses have now been lost - "owners" turned into renters. The new Bimmers and Benzes traded in for used Toyotas. It will be a long and painful readjustment for much of America as we head toward a new normal.


07/01/09 2:00 PM

Business

The Reshaping of America, cont'd

The economic crisis appears to be causing a slight but noticeable shift from the suburbs to the cities, according to an analysis of recent Census data by Brookings demographer William Frey, reported in the Wall Street Journal.

"The central-city population in U.S. metropolitan areas with more than one million people (excluding New Orleans ...) grew at an annual rate of 0.97% between July 2007 and July 2008 ...That compared with a growth rate of 0.90% in 2006-2007, and growth rates around 0.5% in the years between 2002 and 2005, when the robust real-estate market led to new jobs and new housing developments outside the cities, where open land is more plentiful ... Population growth in the cities has translated to slower growth in the suburbs. U.S. suburbs in metro areas greater than 1 million people grew at a 1.11% annual rate in 2007-2008, the same as a year earlier and down from growth rates between 1.29% and 1.48% between 2002 and 2005."

The combined effects of the recession, job loss, and the housing crisis have made it more difficult for many to sell their houses, in effect locking them in place and slowing rates of residential and geographic mobility. Frey points out that:

"This shows cities were reviving at the end of this decade, and they are also surviving a recession that has been a lot harsher for other parts of our landscape ...Cities are big enough and diverse enough that they are able to survive these ups and downs in the economy a lot better."

And this is especially true of the biggest and most diverse cities, like New York and Chicago, which are hubs of large mega-regions, as well as magnets like greater D.C. and Silicon Valley which continue to draw in highly skilled and ambitious people from the U.S. and the world. Large Rustbelt cities, like Detroit, continue to lose people, and rates of growth in housing-driven Sunbelt cities have slowed considerably.

07/01/09 10:30 AM

Business

How the Crash Continues to Reshape America

Writing in this magazine, I argued that the economic crisis was reshaping America's economic geography, with big city centers and mega-region hubs like New York City, talent-rich regions like greater D.C., and college towns weathering the storm relatively well, while Rustbelt cities and shallow-rooted Sunbelt economies being much harder hit. 

Take a look at the graph below from the newly released SP/Case-Shiller Home Price Index for April.

Case-Shiller.jpgPhoenix and Las Vegas have taken the biggest hits: Housing prices there have declined more than 50 percent in the past year. Miami is next, then Detroit where housing prices have sunk to mid-90s levels. San Francisco is the only significant talent region to be pummeled. Part of this is to be expected given the tremendous run-up in housing prices there, but still prices remain higher than 2000 levels. San Diego, L.A., and Tampa have all seen declines in excess of 40 percent. 

Housing prices have declined less significantly in greater D.C., Chicago (hub of the great Chi-Pitts mega-region and a magnet for regional talent), Seattle (a high-tech, high human capital center), Atlanta (a talent hub for the southeast), New York, Portland, Boston, Denver - (talent hub for the Rockies), Dallas (a mega-region hub), and Charlotte (which along with Atlanta hubs the great Char-lanta mega-region). Cleveland breaks the pattern, but like Detroit its absolute housing values have fallen. Prices in greater D.C., along with Denver, Dallas, and Cleveland, were actually up in April.

The Index also tracks prices in terms of their 2000 baseline. Nationally, it's at 140, meaning housing prices remain 40 percent higher than in 2000, more or less in line with 2003 prices. Looked at it this way, the geographic pattern could not be more striking.

Rustbelt cities have seen, by far, the biggest declines relative to 2000 prices. Detroit and Cleveland are the only two cities where housing values have slipped below 2000 values - Detroit at 69 percent and Cleveland at 98 percent. 

Prices have just about fallen back to 2000 levels in Sunbelt cities like Phoenix (105), Atlanta (105), Las Vegas (112), Dallas (115) and Charlotte (118). Miami (145) and Tampa (140) break the pattern; their prices remain significantly above 2000 levels. My guess is that prices will continue to fall and sharply in these two markets in the coming months.

But prices in prices in Boston (146), L.A. (149), greater D.C. (167), and New York (170) remain significantly above - 50 to 70 percent above - 2000 levels. While these prices may dip some, my hunch is these markets will not be devastated and will remain substantially above 2000 levels.

The SP/Case-Shiller Index suggests that housing prices are still falling and have another 30 or more to go before they hit bottom. One thing you can be sure of, it will continue to be felt  unequally across regions.
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