January 26, 2009
Foreign Born, Educational Attainment, and Entrepreneurship
By Britton Lombardi and Bill Testa
Attracting immigrants to the Midwest may be an especially lucrative objective from a regional economic development standpoint. As discussed in previous blog entries, the growth performance of metropolitan regions has been strongly linked with the educational attainment of its work force, especially college level attainment.
Educational attainment of the immigrant population in the U.S. tends to be skewed toward the high end (though it is also bifurcated—skewing toward the lower end as well). The high educational attainment of immigrants owes much to the top-notch university system found in both the Midwest and the nation, which brings many of the world’s brightest to our doors. Afterward, our market-based economy provides ample opportunities and rewards to talent, hard work, and new ideas of immigrant workers and entrepreneurs.
So far, even as the nation has experienced an upswing in immigration, the foreign born population in the Midwest lags well behind that of the nation. As the chart below suggests, the region’s large metropolitan areas host a much smaller share of foreign born, with the exception of Chicago.
A closer look below reveals that the Chicago metropolitan area has attracted both the highly educated and the less educated. The share of Chicago’s foreign born who hold a college degree is below the U.S. average. In contrast, in the remaining metropolitan areas of the Midwest, the foreign born population includes a greater share holding at least a bachelor’s degree in 2007. According to sample data from the U.S. Census Bureau, an incredible 50 percent of Pittsburgh’s working age population who were foreign born hold at least bachelor’s degree. Detroit, Cincinnati, St. Louis, and Columbus are not far behind.
Overall, however, the foreign born tend to lift Chicago’s average college attainment due to the city’s high overall propensity to attract immigrants. The Detroit area also rates highly in this regard, coming close to the national average.
Metropolitan areas in the region may also prize the foreign born for their tendency to start new businesses. The foreign born are, on average, business owners and self-employed at about the same rate as native born, though their experiences and bahaviors are quite varied. In a recent study, Maude Toussaint-Comeau finds that self-employment of immigrants varies by country of origin and by differences in personal and human capital characteristics. Immigrant-owned small businesses often contribute importantly to urban revitalization and community development.
Many more of the (immigrant) college educated concentrate their studies in technical and scientific fields than their native-born counterparts. A report estimates that in 2005, 41 percent of science PhD workers in computer, mathematical, architectural, engineering, and science occupations were foreign born. As a result, many fast-growing scientific and technical firms in IT and software have been founded by foreign born (and often U.S. educated) entrepreneurs. Another study estimated that between 1995 and 2005, 52.4 percent of the engineering and technology start-ups in Silicon Valley had one or more foreign born key founders. For our region’s foundering metropolitan economies, such firms would be truly welcome.
Our reading of the same data source above shows that entrepreneurship of the foreign born in the region’s metropolitan areas lies close to national averages. This is true of both college-educated foreign born and overall foreign born. Again, these tendencies vary across metropolitan areas.
However, the overall paucity of foreign born in the region tends to depress their importance as entrepreneurs. As the chart below suggests, again only Chicago manages to climb above the national average in this regard. The Detroit metropolitan area comes in a respectable second place.
Competition in attracting technical and educated immigrants can be fierce. At a time when skilled and educated workers are most in demand in the U.S., our immigration policy focuses heavily on family re-unification rather than criteria related to occupation or skill. And, to the extent that we do allow immigration based on applicants’ job skills, we cap such visas at levels far below what employers require. In the past two years, the quota for H-1B (skill-based) visas was met quite quickly. For fiscal year 2007, the H-1B cap was met two months after the application process opened, and for fiscal 2008, the cap was met in just under one day.
Metropolitan areas in the region differ in their overt recruitment of the foreign born. One way involves enhancing the process of assimilation into the fabric of the area for recent immigrants and foreign born residents. Pittsburgh has created the Welcome Center for Immigrants and Internationals to create a welcoming environment and to provide necessary resources and information, such as advice for small business owners and career counseling services. Indianapolis organized the International Center of Indianapolis to provide relocation and training services to both attract and retain well-educated immigrants. Indianapolis, too, has developed a Welcoming Center that connects recent immigrants with well-established immigrants to facilitate community integration. In the Chicago area, the Chicago Council on Global Affairs organizes events, speakers, and task forces to raise international awareness and to expand Chicago’s perception as a top tier global city. One such program in the past included a Mexican American Task Force that provided recommendations to businesses, governments, and other interested parties of ways to utilize the strong Mexican community as an economic asset.
Metropolitan areas have also taken to outwardly promoting their international diversity and available opportunities. Many cities participate in “Sister Cities” programs to build relationships with foreign cities to increase their international profile and potentially attract foreign investment, as well as visitors. Just to list a few: Chicago has 27 sister cities spread out across the world, while Detroit has 7, Columbus 8, St. Louis 14, and Milwaukee 5. Additionally, metropolitan areas promote their diversity and opportunities through cultural festivals and events. For example, Pittsburgh held “Global Pittsburgh Celebration,” a month-long celebration that worked to raise awareness about Pittsburgh’s global assets and technology, as well as showcasing the abundant opportunities for foreign-born entrepreneurship and innovation in the area.
January 8, 2009
Growth and Great Lakes Cities
For half a century or more, the industrial belt of the Great Lakes and Midwest has lagged counterpart regions in much of the South and West. Large midwestern metropolitan areas arguably offer the best prospects for relief from this historical pattern. The reasons are rooted in a fundamental restructuring of the global economy that favors cities. In underdeveloped countries, rapid urbanization and the emergence of large cities have gone hand in hand with economic growth and progress. And in developed countries on all continents, two factors have lifted growth opportunities for large cities. Foremost, technological gains in transmission of information have intensified the productivity of cities because of their role as meeting places. Face-to-face communication complements digital information flows. As business people can more easily transmit and receive information via electronic devices, their time has been freed so that they can engage more intensely and broadly in in-person dialog and social interaction. In other words, carrying one’s office in the palm of one’s hand allows one to leave the physical office to better explore opportunities and ideas. Cities tend to maximize these encounters in person. Enhanced and cheaper air travel lends a helping hand.
A second factor, the opening of global trade and capital markets, has increased the possible scale and opportunities for large cities. Cities tend to function best in managing and administering far-flung markets. More open and intensive global trade has tended to broaden the reach and scale by which successful cities can perform such functions in finance, advertising, research and development, law, and company management. For this reason, some analysts believe that they can identify the emergence of “global cities” that have succeeded in such opportunities.
To date, large cities of the Great Lakes have not fully benefitted from these “new economy” trends. Migration to regions with warmer climates has slowed these cities’ work force and population growth—a trend also reflected throughout the remainder of the region. But more fundamentally, many if not most of the region’s large urban economies were built not on the service industries that benefit from the ongoing global changes, but rather on the manufacture of goods and associated freight transportation. These cities’ transition to services and knowledge-based economies has proven difficult because manufacturing-oriented places must overcome and replace larger portions of their economic base. Manufacturing-oriented income in the region has withered because of global competition, falling real prices for manufactured goods, and technical advances that have allowed goods to be produced with less labor. To these obstacles, technical changes in the production processes themselves may be added: Such changes have made the more-densely populated parts of large cities especially difficult places in which to manufacture, compared with those far suburban and rural places, where land is cheap and the transportation of materials is more convenient. The growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Edward Glaeser.
Have the relative growth rates of midwestern metro areas coincided with the degree of their original manufacturing orientation? The charts below display employment concentration in manufacturing for the eleven largest metropolitan areas in the industrial belt on the vertical axis. The horizontal axis displays each metropolitan area’s total job growth on the first chart and real per capita income growth on the second chart. The inverse correlation of economic well-being with initial manufacturing concentration is quite evident. A simple correlation between job growth from 1969 through 2006 and the manufacturing orientation in 1969 is a strongly negative 0.8. Similarly, the correlation between manufacturing and per capita income growth is -0.7.
What might be some other reasons behind varying performance of these metropolitan areas? For one, even within the manufacturing sector, industry mix (and related performance) varies markedly. For example, the Twin Cities’ manufacturing base included emerging medical instruments and computer equipment during this time period, while Detroit hosted sagging domestic auto production.
Other observers wonder about the role that the metro core or central city has played in its relative growth and development. Due to marked suburbanization within metropolitan areas, and fixed central city boundaries, some cities such as Cleveland and St. Louis became relatively small islands of population; today, the city population accounts respectively for only 20.9% and 12.5% of these two metropolitan areas. As such, cities such as these were left largely alone to provide public services to low-income populations—and to do so with a rapidly diminishing tax base. Accordingly, some researchers speculate whether growth and development suffered as a result of this trend—not only in the city but in the entire metropolitan area. In contrast, central city Columbus and Indianapolis began with a broader geography and richer tax base with which to provide public services and development-oriented infrastructure.
While Midwest cities have many challenges to overcome, there are also assets on which to build. As widely shown and increasingly recognized, the most important overall determinant of regional growth performance has been the educational attainment of its population and work force. This is not surprising given the structural changes that have taken place in the emerging economy—changes which place a greater emphasis on information exchange and the development of creative ideas. For Midwest metro areas, and as discussed by Timothy Dunne in a recent Economic Commentary, educational attainment may be more important than for other regions. To succeed in overcoming the shocks that rocked their industrial bases, educational attainment in Midwest metro areas may have been most helpful in adaptation and re-invention. Tim Dunne displays charts similar to those above which indicate a weaker correlation between educational attainment and growth in warm weather metro areas as compared to cold weather climes. In considering educational attainment of the populations, the table below displays the ranks of Great Lakes metropolitan areas among 118 metropolitan areas in 1970 and 2006. The two local leaders in 1970 college attainment, Columbus, Ohio, and the Twin Cities also experienced the fastest employment growth. While Pittsburgh ranked low in college attainment in 1970, its gains in this metric since then have been the most rapid. Perhaps not accidentally, Pittsburgh’s growth in per capita income also outpaced other cities in the region.
As for policy, while the region’s goods-producing industry mix has left behind a legacy of a slow-growing industrial base, the region also boasts top-notch colleges and universities. With regard to elementary and secondary education, the region maintains a healthy income base with which to support its schools. Similar to most other parts of the country, the region’s educational challenges are to have its students to perform much better, especially in central cities and lower-income communities.
Note: Vanessa Haleco-Meyer contributed to this weblog.
October 16, 2008
Fresh Water Issues and Conference
Sometimes when I am out speaking to groups about the Midwest’s economic future, someone in the audience will assert that the Great Lakes Region’s past glories will ultimately be restored because “they (other U.S. regions) will run out of water and we have plenty of it.” This assertion may be only partly true, and its fulfillment may require deliberate action and hard work rather than passive waiting.
It is true that the Great Lakes states border one of the world’s largest bodies of fresh water. With regard to surface fresh water, the Lakes are estimated to contain 18% of the world’s supply, and 90% of the U.S. supply (though we share these shorelines with Canada’s Ontario and Quebec provinces).
However, in replying to the “water revival” assertion, I am always careful to temper the sanguine outlook with several “the glass is half empty” caveats.
First, while it is true that water is becoming increasingly scarce in much of the West and even, more recently, in the Southeastern United States, the problem there mostly lies with poor allocation of water among competing uses rather than with sudden scarcity. Especially in the West, most fresh water is used for agricultural irrigation rather than for residential purposes. Since agricultural use of water hardly begins to approach its value for use in human living, it is difficult to imagine that the scarcity will soon present a significant obstacle to growth. Rather than in agriculture, most economic growth in the West is taking place in the service-oriented economies of its large metropolitan areas. Since water requirements for urban households and their typical jobs are light, rising water demands need not be onerous. Indeed, much of the difficulty with scarcity in metropolitan areas arises because available water is not properly priced. When water is underpriced, or priced poorly among different types of users, the resource is invariably wasted. In the case of water, legal and governmental arrangements compound the waste and misallocation. That is because many water users in agriculture can by law only use available water for immediate purposes (e.g., irrigation) and cannot sell it to others for a higher value use such as residential use.
While the water shortages that emerge from such arrangements do present some drag on growth, fast-growing metropolitan areas of the West do ultimately manage to wrest water away from existing uses. And so, looking to the future, it is more likely that existing water will be allocated to its higher value use for residential purposes in the West and will not (much) constrain growth there.
Still, the history of water allocation in many parts of the world is littered with tragic outcomes, as water is diverted by mammoth diversion projects and overused by those zealous users who draw on the “free” resource while imposing scarcity on others. Recently, in documenting historical water diversions into and out of the Great Lakes Basin, author Peter Annin also chronicled the devastation of the Aral Sea in Kazakhstan and Turkemistan. A Soviet program of the 1950s diverted much of the water from the Aral River Basin into agricultural uses. As a result, the Aral Sea has shrunk by 75%, with catastrophic consequences for the environment and the people who lived along its shores. Annin believes that clean water scarcity is on the rise in many regions of the world and throughout the United States. Accordingly, we can expect that tensions and conflicts will increasingly emerge over fresh water use and ownership.
We already have seen such conflicts here. Uncontrolled or ill-conceived withdrawals threaten to expunge water resources from underground aquifers of the American West. According to Mark Reisner, federal government-sponsored water diversion projects have contributed to today’s depletion and water misallocations there. Water resources in the West have been historically commandeered through federal government actions such as the construction of dams and the re-channeling and transport of vast quantities of fresh water.
The lessons for the Great Lakes Basin are plain. As water grows scarcer in faster-growing regions of the U.S., and as political representation of the Midwest wanes with lagging population growth, wholesale water diversions from the Great Lakes Basin may become more likely.
Anticipating such a scenario, ten years ago policy leaders of the Great Lakes began working on an agreement to protect the waters from diversion and depletion. After much wrangling in and among individual states, the agreement was signed by President Bush last week on October 3. The Great Lakes–St. Lawrence River Basin Water Resources Compact arrived on the President’s desk following ratification by the eight states bordering the Lakes and subsequent approval by both houses of Congress. (Ontario and Quebec have adopted parallel agreements).
What does the compact mean for the region’s prospects? The compact does not guarantee that these waters will never be diverted for broader national purposes. However, it does give the region some assurance that it can plan to preserve and develop its natural advantages of abundant water in ways that secure a brighter future. In fact, the compact imposes uniform and stringent conditions on further water withdrawals even within the Great Lakes states and requires the states themselves to implement new management and conservation programs.
With its inland fresh waters now more secure, and as the region must rethink its own water management policies, there is perhaps no better time to consider how the region’s fresh water legacy can best serve its residents. For this reason, on November 10, 2008, the Federal Reserve Bank of Chicago will host a conference on “Fresh Water and the Great Lakes Future” in Detroit. This will be an opportunity for regional leaders to explore the increasing value that these assets hold for our residents for residential, aesthetic and recreational purposes.
As U.S. income and population rise, the recreational and scenic value of open waters, wetlands and other open spaces also rises. But how will these assets be used and what will be the level of demand? And how will this be manifested in migration and growth in income? What sustainable and responsible policies should the region undertake to cultivate its own fresh water legacy and related assets?
Investment in preservation and clean-up of Great Lakes waters presents one set of policy options, as do related decisions concerning regulation, land use policies, and consumptive uses of the waters. So too, both rural and urban communities are moving forward with infrastructure and other economic development programs that promote the recreational and residential advantages of lakes and rivers. These include lively riverfront and lakefront mixed-use developments in downtown areas of big cities, as well as the promotion and development of more rural recreational assets.
Our conference will also investigate the region’s legacy of fresh water treatment technology. During its rapid industrialization and urbanization, much water degradation took place. In some instances, the region’s subsequent adoption of stringent water quality regulation has spawned the growth of associated firms, university research, and associated water treatment technologies. Can our water treatment firms and university researchers grow more prominent, perhaps serving communities in other parts of the world where clean fresh water is less readily available?
June 17, 2008
Manufacturing's role in the Midwest future?
Across the Midwest, perhaps no economic development issue looms as large as the diminishing role of manufacturing. The Midwest’s once rapid population growth and lofty standard of living largely evolved from the industrialization that took place over the past 150 years. Yet, in recent years, job levels in manufacturing have declined. And as a share of overall payroll employment in the region, manufacturing has fallen from 29% in 1969 to 12% in 2007.
Additional debate has broken out because of dramatic declines in specific industries, such as the automotive industry, which is concentrated in Michigan and scattered throughout many parts of the region. In the face of such stark declines, the question arises as to whether the region must look beyond manufacturing and toward new industries. As the U.S. economy evolves toward advanced services, should the Midwest be following suit at an accelerated pace? And if so, how should the region go about it? For example, should the region’s policy focus on improving the quality of life features to attract highly skilled workers for business services and related industries? Or should the region cultivate new technology and entrepreneurial behavior in an effort to grow new industries?
Arguably, policymakers in the region should pursue all such avenues toward redevelopment and reinvention that are within the bounds of reason and with careful cost–benefit consideration. But there are also reasons to believe that traditional manufacturing can continue to play an important role in the Midwest economy. Significant opportunities remain for manufacturing enterprises that are both extant and emerging here.
In disparaging manufacturing's prospects, an analogy to production agriculture can sometimes be misleading. In terms of long term productivity gains, some observers are only partly correct in drawing close parallels between the U.S. production agriculture sector and manufacturing. Rapid productivity growth in each sector has pushed down prices of products and lessened attendant labor demands. The world over, rising national income per capita has gone hand in hand with declining shares of a nation’s employment in agriculture, followed by declines in manufacturing. Eventually, such trends lead to a wealthy economy steeped in services. In the typical experience for a developed nation, the share of national employment in production agriculture drops because of startling labor saving productivity on the farm, coupled with unresponsive household demand for raw food products as incomes climb. In the U.S., for example, as our standard of living has progressed, agricultural labor as a share of the work force has declined from 41% around year 1900 to only 2% today.
Some of these same processes are also at work in the manufacturing sector. And so, some analysts reason that manufacturing jobs will similarly disappear; that is, eventually, only a slim manufacturing presence will remain across the nation as whole, leaving us an economically diminished Midwest region.
However, in contrast to agriculture, manufacturing continues to give rise to a significant share of income among the most developed countries in the world. This occurs in spite of the trends toward generating more services production in developed countries and offshoring manufacturing to low-cost countries. Manufacturing’s continuing importance to developed countries’ economies can be seen clearly in an exhibit within the Federal Reserve Bank of Dallas’ 2007 annual report. The report’s exhibit 8 observes nations both by the percentage of their workforce engaged in manufacturing and agriculture and by their average per capita income. Manufacturing resembles agriculture to only a modest extent with respect to these measures. As a nation’s income rises, the share of the workforce engaged in manufacturing does tend to decline; the same applies to agriculture. However, whereas the share of employment in agriculture drops off precipitously as countries grow wealthier, the share of employment in manufacturing declines only modestly and gradually. For even the wealthiest nations, such as the U.S., manufacturing remains a large and vibrant sector.
Manufacturing’s continued strength has much to do with the fact that manufacturing companies need to be knowledge-intensive and highly creative to develop new products. Strong productivity tends to reduce the amount of low-skilled labor required for manufactured goods, and intense global competition for such labor drives down the prices of manufactured goods. That said, as a counterweight manufacturing companies continue to come up with new products. These include consumer products, such as improved electronic appliances, pharmaceuticals, and packaged/processed foods, as well as tools for businesses, such as more advanced computing equipment, mining/construction machinery, and telecommunications.
Some inkling of manufacturing’s high level of knowledge intensity can be seen from figures reported annually on research and development (R&D) of manufacturing companies. Manufacturing companies account for $123 billion of the nation’s $278 billion spent on R&D in year 2003—a 45% national share (see blue bars in chart below). This compares to a 13% share of manufacturing sector output in overall gross domestic product, or GDP (red bars below).
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Midwestern manufacturing companies have a strong orientation toward knowledge-intensive manufacturing. The region’s manufacturing companies account for 66% of the region’s R&D versus 19% of the region’s total output.
That the manufacturing R&D share of the Midwest economy exceeds that of the nation can be explained by the larger role of manufacturing companies in our region. Moreover, it may surprise some to learn that Midwest manufacturing is no less “high tech” than the national average as well. The sector’s “R&D intensity” also contributes to the dominant role of manufacturing R&D in the region. In both the region and in the nation, R&D spending makes up about nine cents of every dollar of inputs spent by manufacturing companies (per chart below).
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The bulk of the Midwest’s industrial R&D takes place within the region’s hallmark sectors—automotive, food products, electrical equipment, machinery, and chemicals. By our estimates, these sectors make up 42% of the region’s $42 billion of industrial R&D reported for 2003. The chart below characterizes the concentration of R&D by industry sector in the Midwest. Highly concentrated R&D expenditures are denoted by deeper shades. These concentrations are constructed for a state, for example, as an index of R&D taking place in a particular sector relative to the state’s national share of total output. For instance, the state of Michigan scores a deep shade in “Motor vehicles, trailers & parts” because its share of the nation’s R&D in this sector far exceeds the state’s share of overall GDP. Indeed, company activity in motor vehicle R&D in Michigan registered $10.7billion—a national share representing a concentration over 17 times the state’s share of overall economic output in 2003.
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Other Midwest states can also be seen to be domiciles of R&D in particular industries. The final column above displays R&D concentrations (as an index number) for the entire seven-state region. In addition to intensive R&D activity in the region’s hallmark industries, the region also scores highly in pharmaceuticals, computer equipment and its design, and aerospace.
And so, if a high degree of ongoing R&D intensity is any indication, manufacturing will continue to play a strong role in U.S. production. Despite its current challenges in automotive production, the Midwest is no exception in this regard. To be sure, the region’s overall population and work force growth have lagged those of the nation. In some part, this reflects the region’s greater concentration in manufacturing—a sector that has experienced outsized impacts from labor-saving productivity and, to some degree, offshoring of activity. Nonetheless, there remains a sizable future to be built by the region’s manufacturing companies.
One public policy effort to further the strength of the manufacturing sector in the region has been initiated as the Great Lakes Manufacturing Council. This coalition will meet this summer “to discuss the image of the Great Lakes region, innovation in manufacturing, the work force and skills needed for manufacturing today and tomorrow as well as the borders and logistics requirements to effectively move goods and services in today’s global economy.” I hope to see many gather at the meeting to discuss (and act) on these issues further.
Note: Thanks for assistance from Graham McKee.
April 29, 2008
Someone Call the Doctor—Regions Without Borders?
Two fine studies have been released this year that can guide the slow-growing Midwest in finding its “way forward.” At a time when national sentiment has been running high to tighten national borders between the U.S. and other nations, both reports strongly argue for lowering restrictions on nearby borders—namely those between Midwest states and between the U.S. and Canada along the Great Lakes border. So too, cooperative strategies across local borders are urged to address the Midwest’s economic challenges.
Accomplished journalist R.C. Longworth recently published an insightful and accessible book containing lucid explanations and gripping Midwest stories that bring to life how global upheaval and technological changes have affected the Midwest economy. From farm to factory, from small town to metropolis, Longworth tells stories of the region, its places, and its people. To gather his observations, he spent months traveling around the region. And, having been born and raised in small-town Iowa and covered the region and the world for a major Chicago newspaper, Longworth knows where to look!
More importantly, Longworth understands today’s basic mechanisms of economic change—and their impacts on places and people. To be sure, owing largely to technological advances in communication and transportation, the world has “gone flat” in one sense. Goods and services can be produced anywhere and delivered right here, thereby exposing Midwest workers to competition and upheaval.
However, these same changes have concurrently made the economic landscape “more spikey” than ever. Those places that have succeeded in the new environment are well-advantaged mountains of economic specialization and formidable scale. Such places include large metropolitan areas and mega-cities composed of several proximate cities that draw the best and brightest talents together and that produce advanced services in high-valued legal, consulting, technology, administration and the arts. They also include emerging manufacturing regions such as the mid-South—home of foreign-domiciled auto production.
What holds back the Midwest from such invention and re-invention? Longworth believes many Midwesterners still do not understand globalization and instead cling to ideas and strategies that attempt to bring back the region’s glorious form and past. Looking at its reflection in today’s global looking glass can help the region to find new directions—to imagine a new Midwest economic landscape.
In searching for the correct policy framework to re-work the region, Longworth also believes that national governments are too “clumsy … to cope with a post-national world. … But that the smaller building blocks—cities, counties and states—are too weak and isolated to swing much weight by themselves in an economy that spans the globe.” Accordingly, the Midwest must put aside some long-standing boundaries and competitive behaviors such as inter-state tax competition and balkanized transportation systems. Instead, Longworth calls for extensive regionwide dialogue to achieve creative and cooperative policies.
The region has common interests and goals, but fails to recognize and act effectively. To move forward, regionwide conversations must take place, perhaps assisted by a region-wide publication—electronic or print or both. To be a wellspring of new ideas and policies, the Midwest must have at least one think tank of its own to see the region’s greater possibility for growth and re-invention. Longworth calls on regional foundations, research universities, public leaders, and Reserve Banks to move quickly and boldly in this direction. The Southern Growth Policies Board —founded in 1971—may be one model to draw on as the region fashions its own organization to serve as the fountain for cooperative development.
Not all of Longworth’s immediate prescriptions are intangible. The region is rich in the assets of wealth creation such as highly skilled professionals, cultural and recreational draws, and global company centers. But in observing successful regions in the age of globalization, Longworth sees that proximity and scale count for much in marshalling diverse assets into globally meaningful centers. He proposes that the region consider bold interpersonal transportation systems such as high speed rail.
Another recent study—this one from the Brookings Metropolitan Policy Program—also analyzes the new global economic paradigm and how the Midwest must adapt to its challenges. John Austin and his co-authors take the regional approach to global economic adaptation one step further by recognizing that, for the Midwest, the lowering of national border barriers is acutely important. Along the Great Lakes, Canada’s people and resources closely hug the border and are closely integrated with the Midwest economy. Over two-thirds of cross-border trade between Canada and the U.S. takes place among Great Lakes states and the Provinces of Ontario and Quebec. The region shares many industries that span the border. Automotive, steel, biotechnology, and recreation/tourism are closely linked in their supply chains, transportation infrastructure, and work force. Such industries and their region could benefit from something more like the European Common Market approach.
But according to Austin, at a time when the Midwest must maximize its advantages to achieve competitive prominence, border restrictions have been rising rather than falling. As border security measures have increased,, border-crossing times have been rising, along with general doubts and uncertainty concerning the openness of the border. So too, cooperative initiatives to clean-up the region’s shared water resources are not moving along fast enough. More generally, the region does not recognize its shared interests—especially the great potential to grow and develop through joint study and policy action.
What might such policy actions be? The report lays out a blueprint for Bi-National Great Lakes economic leadership:
● By 2010, Develop a Bi-National Innovation Fund and Strategy
● By 2010, Redevelop North America’s Freshwater Coast
● By 2015, Define and Implement the “U.S.–Canada Border of the Future”
● By 2025, Realize BiNational Great Lakes Carbon Goals and Renewable Energy Standards
● By 2030, Create a Common Market for Commerce and Human Capital
As a long-time researcher, observer, and policy-discussion participant in this arena, I am encouraged to find these ideas being resurrected. As long ago as the 1980s, during the very troubled economic times in the Midwest, many of these same observations and recommendations were advanced.
Two developments dampened forward momentum. For one, the region’s economy enjoyed a strong rebound during the 1990s as surging U.S. economic growth shook the region from its torpor. The region’s flagship companies learned much from their global competitors coming out of the 1980s. While the rebound was welcome and enjoyable, some of the driving force behind fundamental policy innovation in regional development policy was lost through complacency.
The second reason: No region-wide dialogue was created on a sustained basis, and no organizations took on a leadership role in driving forward such a regionwide agenda. The sole exception might be efforts to restore and clean up the region’s fresh waters in the Great Lakes basin, which have progressed thanks to regional organizations such as the Council of Great Lakes Governors, The Great Lakes Commission, and a strong supporting cast.
This time around, inspired by new work, such as the Longworth book and Austin’s study, I believe that we will (very soon) see at least some exploratory efforts towards an enduring pan-regional policy network.
October 23, 2006
Universities and the Great Lakes Economic Revival
Multi-state U.S. regions are defined in a number of ways. One such grouping is the “Great Lakes Region,” comprising all the states that border the Great Lakes. The states that run east to west are New York, Pennsylvania, Ohio, Indiana, Michigan, Illinois, Wisconsin, and Minnesota (map below). During the nineteenth century, the efficient transportation of materials on the Lakes and connecting canals knitted these state economies together into an agricultural, mining, and manufacturing powerhouse.
As waterways transportation has given way to overland and air transportation, the region’s economic cohesion and linkages have loosened. However, these states continue to share many common and inter-connected manufacturing industries, especially steel, autos, and nonelectrical machinery such as farm and construction equipment. For this reason, as these traditional manufacturing industries account for fewer jobs and less income, these Great Lakes states seem to share a common economic destiny.
The Brookings Institution Metropolitan Policy Program is partnering with many local organizations on a multi-year research and policy initiative to try and boost the economic vitality of the region. During the week of October 23, various Great Lakes cities will host a series of discussions following presentations of a broad “framing paper” called The Vital Center: A Federal-State Compact to Renew the Great Lakes Region.
This initial Brookings paper points out several avenues for the region to pursue, with “Innovative Infrastructure” being the most prominent. With a 33% share of national population, the region is said to generate 32% of the nation’s patents, perform 29% of its R&D, and graduate 36% of the nation’s scientists and engineers. The report calls on public and private research facilities in the Great Lakes to work together to take advantage of these and other “innovation” opportunities.
Further, perhaps because they are mostly fixed in location, highly prominent in stature, and somewhat amenable to public policy, the region’s universities are receiving a lot of attention as potential engines of regional growth. On the plus side, by one ranking, 19 of the world’s top 100 universities are located in Great Lakes states and Ontario, Canada. On the negative side, graduates of the region’s universities are increasingly gravitating to the East and West coasts and other out-of-region locales.
Click to enlarge.
Two important public discussions concerning the ability of colleges and universities to affect regional growth and development will take place at Federal Reserve Banks this fall. In addressing the question this coming October 30 in Chicago Rick Mattoon, senior economist, has put together the broader agenda.
As Rick notes in his recent Chicago Fed Letter, the involvement of universities in promoting economic growth and development can take many forms. For one, the spin-off of new local businesses through the transfer of technology from university labs has been an important mechanism for some local economies such as those of Boston, Austin, TX, and Northern California. But in other locales, especially where university research is not prodigious, the primary growth vehicle remains the traditional mission of local schools in producing workers with the skills and talents that match the needs of local industries. And between these two poles, localities vary so widely in their economies and types of universities that a broad spectrum of strategies and roles may be most appropriate in catalyzing regional growth.
At the October 30 event, Richard Lester of MIT will lay out his typology of university–economy relations and their attendant avenues for economic growth. This will be followed by case study discussions from around the Midwest and a panel of university leaders.
On November 16–17, the Cleveland Fed will follow up with a more intensive and focused examination of universities’ roles in innovation. The first day’s agenda addresses how university research leads to economic innovation, and what role geography and proximity play in the productivity of both university research and in local economic growth.
On the second day, the Cleveland conference will present case studies of the university–local economy linkages, “geared toward people in the business community.” Participants will “hear experiences and insights from high-level executives who have faced head-on the challenges and triumphs collaboration can bring.”
As the collaborative Brookings project to stimulate economic activity in the Great Lakes gets underway, these Federal Reserve System discussions should be very helpful in considering how the region’s universities can contribute.
September 28, 2006
Michigan automotive and white collar jobs
Loss of market share from the traditional Big Three automakers to global competitors has impacted Michigan’s economy, leading to some deep concerns about its future. To date, most attention to this issue has focussed on job loss related to automotive production activity. Auto assembly and parts production continues at a strong (though eroding) clip in the United States, but it is rapidly shifting away from Michigan. So far, the “new domestic” carmakers have avoided siting new production plants in Michigan, preferring to site them in the South, as well as in Ohio and Indiana, such as Honda’s recent announcement to build a plant in Greensburg, Indiana. However, another important employment component for Michigan also relates to the health and sales market share of the Big Three—that is, the nonproduction activities of these auto assembly companies. These activities include research and development (R&D), sales, finance, and management operations, which form an outsized economic engine for the state. In what ways does the survival (and growth) of Big Three companies go hand in hand with the nonproduction jobs located in Michigan?
Nonproduction employment of auto assembly companies typically amounts to a surprising 35%–45% of total employment and an even larger share of payroll. While Michigan is highly concentrated in automotive production—with 15 auto assembly plants—it is also the domicile of the Big Three's headquarters along with significant company R&D and other operations. For this reason, it is not surprising in Michigan to find that nonproduction automotive employment is more concentrated than elsewhere. In counting Big Three nonproduction employment at their production plants, headquarters, R&D centers, and other auxiliary facilities in Michigan, nonproduction employment likely outnumbers production employment, making up a minimum of 55%–60% of total Big Three jobs in the state.
Moreover, additional Michigan personal income and jobs are generated from local services purchased by headquarters-type operations. As Chicago Fed economist Yukako Ono has found in recent studies, headquarters operations often purchase key services for the entire company network. These purchases may include financial services, R&D, information technology (IT) products and services, strategic management consulting, and many more. From the regional economy’s standpoint, these purchases are often sourced locally to a large extent. In fact, Ono discusses the possibility that the choice of location by headquarters may be influenced by the cost and availability of such business services.
Similar behavior of automotive headquarters makes Detroit and its surrounding environs much more than just a factory economy. Specifically, much of the value of Big Three automobiles derives from product development and design, and most of that R&D activity is conducted in Michigan. As derived demand from the domestic automotive industry, key business services are largely produced in Detroit. My blog entry from August 16 shows that the Detroit metropolitan area far and away tops other midwestern metropolitan areas in its concentration of professional and technical services employment. Among Detroit’s top sectors are engineering services (employment at 51,594 jobs in 2002) and scientific research and development (18,126 jobs in 2002).
Nationally, much R&D is funded and performed by automotive companies and their affiliates. According to the most recent survey of industry funds for research and development, which is conducted by the National Science Foundation, the automotive industry accounts for $14–$15 billion in annual R&D funding in the U.S. To be sure, in recent years, as auto assemblers have increasingly relied on their first-tier suppliers for entire components and automotive modules, some significant R&D responsibilities have been shifting away from assembly companies and toward automotive parts companies. Still, today, the lion’s share of this R&D is performed in-house, that is, largely by auto assembly companies themselves.
These practices have kept Ford, General Motors (GM), and Daimler-Chrysler among the largest R&D performers in the U.S., with Michigan at the hub of such activity. For this reason, Michigan ranks second only to California in funds for industrial R&D. And for 2003 as the figure below shows, the motor vehicle assembly and parts industries in Michigan accounted for $10.7 billion of the $15.2 billion industry-performed R&D in the state. The ties between these expenditures and local employment is apparent. According to a parallel survey by the National Science Foundation, the Detroit metropolitan area employed 102,500 research scientists and engineers in 2003—a concentration of 5.2% of the work force as compared to 3.9% nationally.
Would Michigan retain this important function in the event that Big Three sales shares continued to decline? On the positive side, there are some indications that the Detroit area’s role in automotive research is in the process of growing beyond its historic roots. For example, the “new domestic” automakers have all sited research, development, and design facilities in the Detroit region, such as Toyota’s recently announced $150 million R&D center investment in Ann Arbor. Others, such as Hyundai and Nissan, have also recently expanded their facilities or announced plans for similar expansions.
So, too, Detroit’s attractiveness to automotive company headquarters operations displays some sparks of growth. Major automotive parts producer Borg Warner moved its headquarters from Chicago to the Detroit area last year. More generally, Chicago Fed economist Thomas Klier has documented an upswing in auto parts company headquarters moving to Michigan. The presence and growth of automotive parts headquarters in Michigan probably bodes well for company-sponsored R&D activity as well.
Still, competitive challenges are at play both here and abroad. Domestically, figures from the U.S. Bureau of Economic Analysis show that the annual R&D funding in the U.S. by Asia-domiciled automotive companies, at $125 million, makes up a very small share of automotive R&D in the U.S., amounting to less than 2 percent. And while the Detroit metropolitan area has so far attracted many of these transplant R&D activities, historically, it is not uncommon to find that attendant service activities eventually follow production in manufacturing. In this direction, the movement of U.S. automotive production from the Midwest toward the South is drawing the attention of those seeking R&D activities as well. For example, Clemson University in South Carolina has launched a research program and industrial park to foster technology development and transfer in cooperation with companies such as BMW and others.
And so, Michigan has several important economic activities at stake amidst the current upheaval among automotive companies.
August 30, 2006
Are U.S. and Seventh District business cycles alike?
This question is posed by Michael Kouparitsas and Daisuke Nakajima (K-N) in a current Economic Perspectives article. The answer, in general, is “yes,” and, in their analysis, many additional insights are gained about the structure and behavior of the Seventh District regional economy and its five component states of Illinois, Indiana, Michigan, Iowa and Wisconsin.
The so-called business cycle refers to the way that cyclical fluctuations of aggregate income relate to cyclical fluctuations of individual economic components, such as consumer spending, business investment, and job creation, and the ways that these components relate to each other. In this regard, academic economists have found that national economies around the world behave similarly, and a lesser body of evidence now suggests that sub-national or regional economies do, too.
The K-N article gathers some long time series of data on the overall Seventh District economy along with component parts that are analogs to U.S. economic series. The figure below from K-N juxtaposes the aggregate business cycle of the Seventh District and each state with the overall U.S. economic cycle.
In their analyses, K-N show that the timing of swings in Seventh District state economies is very similar to the nation. Most likely, this is explained by the fact that the economies of the U.S. and the District are affected by common “shocks” such as energy price surges. One exception is a weak tendency for Michigan and Indiana economies to lead the direction of the overall Seventh District by one quarter of a year, perhaps because of those states’ sharp concentrations in durable goods production.
Behaviors of various components of the District economy also mimic their counterparts in the U.S. and world economies. Residential investment and consumption in general tend to lead business cycles. As a leading indicator, average weekly hours of workers in the manufacturing sector also tend to precede swings in aggregate income, as does initial claims for unemployment insurance. Total employment often is a coincident or lagging indicator.
Such information can be further used to construct economic indexes that lead, lag or are coincident with a region’s business cycle. These indexes can be useful for short-term planning and forecasting, especially because there is no timely measure of aggregate economic activity for states and regions that is akin to GDP for the nation.
While the timing of the swings in District state economies are similar to those of the nation’s, there are some differences in the behavior of the states. Iowa’s overall economy is less synchronous with the nation than other District states. Presumably, Iowa’s much larger economic concentration in agriculture means that its economy fluctuates with commodity prices to a greater extent. For Indiana and Michigan, the amplitude of their economic swings are more profound—something that Michiganders, for example, have long tried to consider in their mechanisms to fund state government.
Michael Kouparitsas has previously researched the relative coincidence of business cycles among regions of the U.S (EP article). From a policy perspective, such studies reveal those instances, such as in the U.S., where adjacent regional economies are closely aligned. This alignment indicates that there are gains to having a common currency for our national economy (which we do, the U.S. dollar) as well as gains to conducting a common monetary policy for the overall economy (which we do through the Federal Reserve System). In addition to these policy implications, such research is helpful in understanding particular regional economies such as the Seventh District.
August 24, 2006
How should we gauge manufacturing's importance?
Manufacturing jobs and income are shrinking as a share of the national economy as well as the Midwest economy. Some representatives of manufacturers raise this fact in alarm, worrying that the shrinkage leaves the nation unable to support its needs and wants. But at the same time, some manufacturing advocates sometimes claim that the sector’s is mis-measured and undercounted. Meanwhile, economists mostly applaud diminishing manufacturing jobs as a harbinger of continued enhancements to productivity and standards of living for the average household, pointing instead to rising real output of manufactured goods available at ever-lower prices. How, then, should we think about and measure the economic importance of manufacturing?
To use an agricultural metaphor, manufacturing is no small potatoes for many Midwest communities. In the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin, personal income directly coming from manufacturing activity, on average, is more than 50 percent more concentrated than in the nation as a whole. Much of this personal income reflects wage and salary income attendant to jobs in the sector, as shown below. What’s more, such income and jobs are augmented by services related to manufacturing, such as transportation and warehousing, as well as white-collar business services that are purchased locally by manufacturing operations. All of this, of course, means jobs and income to Midwest residents, firms, and households.
It is no small concern to manufacturing workers and communities, then, that income and jobs derived from manufacturing have been shrinking as a share of the economy. However, along with other economists, Senior Business Economist Bill Strauss of the Chicago Fed has pointedly illustrated that what is troubling to those who are discomfited is the very same phenomenon that brings about rapidly rising standards of living across a broad spectrum of households. The perpetual innovation and advances in productivity by manufacturers, accompanied by sharp competition among manufacturing firms, have delivered, on average, cheaper, more customized, more durable, and higher quality manufactured goods to households.
Government statisticians at the U.S. Bureau of Economic Analysis (BEA) calculate prices for manufactured goods purchased in the U.S., and they also do so for a standardized unit of a “real good” including autos, frozen foods, appliances, etc. Qualitative advancements in such manufactured goods are folded into counts of “real goods output,” meaning the total amount—both quantity and quality—of what we buy with our household income.
Over time, such measures show that real output growth by manufacturers in the U.S. and Midwest economies has kept pace with output or total gross domestic product (GDP) growth. Accordingly, if we measure real output produced by the manufacturing sector as a share of the overall economy, the manufacturing share would be virtually constant rather than declining. This is in apparent contradiction to the falling share of income and jobs derived from manufacturing activity.
Yet, in this there is really no paradox when we take into account the fact that the prices of manufacturing goods have fallen even while output has risen. That is, households and businesses are buying a greater “real” quantity of goods, but they are spending less on them overall because falling prices have more than offset the growing quantities being purchased. As illustrated and discussed in the 2004 Economic Report of the President, household and business purchases of manufactured goods have swelled in response to bargain prices, but not enough to sustain the manufacturing sector’s share of total revenue (and income).
A much lesser reason for manufacturing’s falling share is that a greater portion of domestic goods are produced abroad. As the Report illustrates, if the U.S. trade deficit had been hypothetically held to zero while U.S. manufacturing productivity were allowed to improve at its historic rate from 1970 to 2000, the U.S. proportion of employment in manufacturing would be only 14 percent in year 2000 rather than its actual 13 percent. Accordingly, rising productivity in domestic manufacturing accounts for the lion’s share of the decline in manufacturing share of employment from 25 percent in 1970. And yes, even that part of the shift from manufacturing to services related to the rise in imports has helped to buoy U.S. living standards because some goods can be produced abroad more cheaply, thereby allowing U.S. workers to instead produce greater services for domestic consumption.
Manufacturing representatives sometimes claim that manufacturing is not shrinking as share of current economic activity or at least that the shrinkage is being greatly overstated. Rather, the sector is being undercounted because some functions previously performed by manufacturing companies have now been outsourced to service companies. A consistent accounting of manufacturing activity would show it to be more sizable.
This latter assertion is partly true and but it does little to alter the long-term reality that the proportion of income and jobs derived from the manufacturing sector has fallen dramatically over many years. For one, it is true that U.S. manufacturers are increasingly relying on temporary workers rather than on their own employees. In official tallies, these temp workers are attributed to the services sector rather than to manufacturing. Yet, while their numbers expanded by roughly one-half million in the U.S. during the 1990s, according to a study by Estavao and Lach, they still made up only 5 percent of the manufacturing work force.
The outsourcing of functions by manufacturing companies is perhaps more important in mismeasuring manufacturing activity. Greater specialization of business functions, including accounting, marketing, payroll, information technology (IT), human resource management, research and development (R&D), strategic management, and public relations, has taken place such that most businesses—not only manufacturing— have come to outsource an increasing share of such activities. The snapshot below is drawn from data from U.S. Input-Output tables that are estimated by the BEA. In particular, manufacturing companies are shown below to be purchasing increasing amounts of business services in relation to each dollar of their own output since 1982. Not all of this service growth derives from outsourcing from manufacturing companies. Manufacturers are also using more services to deliver goods than in the past. In other words, the knowledge content of final goods delivered to households and businesse is higher than before. For example, pharmaceutical production may require an increasing amount of both R&D and testing services purchased by pharmaceutical companies, as well as legal, advertising and public relations services.
I have constructed a rough accounting of total purchased services by U.S. manufacturing companies from 1958 onward. The construction subtracts the BEA’s measure of manufacturing from the U.S. Census Bureau’s measure of value added in manufacturing. Since the U.S. Census’s value added includes services purchased by manufacturing companies, the difference provides an estimate of purchased services. For the U.S., I find that in the late 1950s, manufacturing companies purchased approximately 16 cents of services for every one dollar of their own output. This had climbed to 30 cents in recent years.
The figure below illustrates the generous and comprehensive measure of “manufacturing activity” for both the U.S. and for the Great Lakes region from 1977 to 2001. The color additions represent purchased services, which are shown to considerably inflate the share of manufacturing in total economic activity—be it GDP or its state equivalent, gross state product (GSP). However, regardless of the inclusion of purchased services, manufacturing activity is shown to be steadily declining as share of output.
To return to the agricultural metaphor, is it appropriate to think of U.S. manufacturing as we do production agriculture? The parallels are often drawn. Production agriculture employed close to one-half of the U.S. workforce prior to the dawn of the twentieth century. Subsequently, tremendous gains in productivity provided magnificent improvements to the American diet while shrinking the size of the sector to 3 percent of the work force. In broad perspective, the remainder of the work force have now been freed to deliver to us a great array of services and goods, even as we eat better.
Although the parallel to manfacturing is instructive in some ways, not all observers would be satisfied in relegating manufacturing to the backwaters of economic history along with agriculture. For one, some argue that the sector continues to be the chief engine of innovation in overall U.S. productivity and innovation growth. While the manufacturing sector has diminished in size, it continues to be responsible for a greatly outsized share of the nation’s R&D. As of 2001, manufacturing funded 44 percent of the nation’s R&D, or $199 billion. This amounts to an innovative intensity that is roughly four times the size of the sector’s own activity.
Moreover, it is also argued that the much of the payoff or “economic returns” to this innovation accrues outside of the manufacturing sector to a great extent. That is, there are large spillover benefits to R&D performed by manufacturers. In particular, as service firms providing health or personal services or business services learn to use new and innovative capital equipment such as IT equipment, medical equipment, or pharmaceuticals, their own productivity continues to grow or accelerate.
In the end, how should we measure manufacturing’s importance to the U.S. economy? The answer is, of course, “in many ways.” For manufacturing communities and workers, it will be helpful to track the diminishing (sometimes growing) shares of manufacturing jobs and income in the economy. Communities will sometimes need to consider how to best transition to new economic base sectors; workers will sometimes need to transition toward new or enhanced occupational skills or even to different locales.
In continuing to track productivity or “real” output growth of manufacturing, nations and regions will gain a better understanding of the sources of national growth and living standards. In this, there are several important public policy arenas. Which particular public policies with respect to public investment in fundamental scientific research and technical education give rise to productivity innovations? What regulatory environment is most fertile with respect to the protection of intellectual property, promotion of competition among global firms, and the flow of workers and their ideas across international borders? How much should we be investing in public infrastructure of importance to manufacturing such as roadways, ports, and air cargo airports? How much and in what ways do open global markets for investments, services, and manufactured goods lift our standards of living?
If we get such questions right, the size of manufacturing of the manufacturing sector will be just right. That is because, in market economies such as ours, both service and goods-producing firms compete, adjust, evolve, and innovate and, in the process, they provide households with the services that they desire. Whether those services emanate from manufactured goods or whether they are provided directly to households by service workers is not at issue.
November 7, 2005
Can Higher Education Revive the Great Lakes Economy?
In the Midwest and elsewhere, state government financial support for higher education has been eroding. Public colleges and universities are increasingly being left to their own resources; this raises a number of issues for them and for the Midwest economy.
In a major conference held here this week, Chicago Fed President Michael H. Moskow summed up one dilemma. “….universities today are increasingly forced to rely on their own resources to make budgets balance. But this can restrict access, because schools must often dip into endowments and resort to aggressive tuition hikes to close the gap. If the school is concerned with maintaining academic quality, large tuition increases are often the best option, but in doing so access for (lower income) students may be limited. If on the other hand, the university limits tuition increases, it is often forced to economize and offer reduced services, which can jeopardize quality through large classes and the use of part-time faculty.” (link to speech)
However, if state universities had a free hand in shaping the tuition schedule and financial aid, higher tuition need not be borne by lower income families.
Many state universities charge tuition rates well below the cost of education provision. Meanwhile, the returns of the degree to the students are significant in terms of higher wages and salaries throughout their working life. And especially at state flagship universities, which are highly selective, a large share of students come from high-income families.
Mike McPherson, President of the Spencer Foundation, presented evidence on familial background of the available talent pool of highly selective schools, drawing from a recent book by William Bowen et al. Of children born in 1988 in families where neither parent attended college, only 0.9% went on to score 1200 or higher on the Scholastic Aptitude Test (the common admissions test for highly selective schools). This compares with 6.6% of children in families where at least one parent had attended college, and 14.6% from families in the top quartile of U.S. family income.
The point here is that many more families at state flagship colleges and universities could and would pay more for their education. Of course, unlike private colleges and universities, state flagships are often constrained in raising tuition because they must petition their state governing boards to do so, and such requests often fail to garner political support.
Perhaps that is why many representatives at the conference from public flagship schools instead pushed for a renewal of the “social compact” between public education and the public, in which public financial support would be restored and enhanced. To accomplish this, schools need to do a better job of explaining the many benefits that accrue to the general public from subsidizing the education of the few. For example, economists Kevin Murphy and Robert Topel have documented the societal benefits from public medical research in terms of reductions in mortality and morbidity. These benefits have been enormous in relation to public expenditures—and probably should be promoted (link).
But what benefits of this type would be specific to a particular state or region? For a (Midwest) region that has been lagging in growth and development, a benefit of economic renewal would certainly get some attention. James Duderstadt, former president of the University of Michigan, proposed that the region’s major research universities collaborate to increase their impact on regional economic activity. ((link to Millenium Report).
The possibilities are surely worth pursuing but, in my opinion, the specific linkages between such a collaboration and regional revival must be well-articulated and demonstrated.
One argument offered is that the U.S. economy is continuing to shift toward knowledge and knowledge workers. Since the Midwest is lagging in its transition from agriculture and manufacturing to high-level services, perhaps we should subsidize education more to produce more talent locally? However, at least for the highest levels of educational attainment, there is already a net outflow of young adults from the Midwest region. (link to Yolanda K. Kodrzycki at Boston Fed). What are the public benefits of producing more?
Young adults with somewhat lower educational attainment do tend to remain in the region. So, if further educational subsidies are to be entertained, community colleges and regional institutions might be a better target. We should probably not subsidize the higher end further unless we simultaneously create the job and new-firm opportunities to retain these students after graduation.
Can we create such opportunities? Although there was little conference discussion about university spin-outs of new firms and other technology commercialization, there have been some promising movements in that direction. A Midwest Research University Network (MRUN) was established in 2002 as an alliance of university business development professionals to facilitate technology development and commercialization. Eighteen MRUN member institutions exchange information about financing, placement of management talent, and opportunities for collaboration. (see link to current Testa Fedletter )
More promising still, North Dakota apparently offers a fine model to marry regional economic revival with public university excellence (link to conference presentation). Leaders there of all stripes held a summit roundtable in 1998 to reflect on the state’s struggling economy and its detached university system.
The North Dakota Roundtable began by asking business, community, and government leaders what they would like a university system to do for the state. The answer was: to promote expansion and diversification of the state’s economy, enhance quality of life for its citizens, become academically competitive nationally and internationally, and be accessible and responsive to all citizens of the state, both individual and corporate.
One year later, enabling legislation assigned responsibilities for these outcomes to all of the involved stakeholder groups. No initial funding was provided for the university system. Rather, the university was given significant latitude to fashion and conduct its programs.
The results? From 1999 to 2004, annual research expenditures climbed from $44.6 million to $102 million. Graduate and professional enrollment climbed 20%. Doctoral programs offered climbed from 15 to 40; doctoral students from 150 to 500. A new 55-acre research park is now nearly full; new investors there include three Fortune 500 companies and several Silicon Valley companies. Internship programs with these companies are believed to be partly responsible for a significant climb in the percentage of graduates who remain in the state.