UB Partners Day, University of Buffalo

Delivering the Next Economy in the Buffalo-Niagara Region

Thank you, [University of Buffalo president] Satish [Tripathi], for that introduction and for the invitation to speak at UB Partners Day.

As many of you know, Governor Cuomo made an unprecedented $1 billion commitment to Buffalo in his annual State of the State address on January 4, saying: “Buffalo has the workforce, the talent, the resources, and the will to succeed. We believe in Buffalo. And we’ll put our money where our mouth is.”

The governor’s commitment to Buffalo, and last year’s award to Western New York following the regional economic development competition, illustrates new thinking in this state. Economic development, long dictated top down by Albany and its myriad bureaucracies, is now being driven bottom-up by the cities and the metropolitan areas and the regions where the economy actually concentrates and agglomerates.

A clear signal is being sent to the market—consumers, companies, investors—New York state is “open for business” and Buffalo is “back in business.”

Bold investment at this scale necessitates purposeful design and deliberate action.

To this end, Governor Cuomo asked me and my colleagues at Brookings to work with a group of local institutions to assess your market position, identify your distinctive assets and advantages, and consider your investment options in light of the best innovations underway in the U.S. and around the world.     

For the past few months, it has been a pleasure to work closely with a remarkable set of partners—the UB Regional Institute and Buffalo-Niagara Enterprise—and the Western New York Regional Council and Empire State Development. I want to particularly thank Howard Zemsky, Laura Fulton, Bob Shipley, and Christina Orsi for their invaluable management, research, and guidance throughout this process.  

Over the past three months, our institutions have held dozens of meetings to hear from the experts—the men and women who actually own firms, take risks, finance transactions, train workers and build wealth—in other words, co-produce the economy in this city and metropolis.   

This is the first step in a longer process that is intended to yield strategic investments that are likely to have high return, create jobs in the near term, and retool your economy for the long haul. 

Today I want to give a status report to the community on progress to date and next steps in the process.

My presentation will be divided into three parts:

First, I want to describe the economic vision and practice we are using to guide this investment and our recommendations.  In the aftermath of the Great Recession, the U.S. economy is undergoing a slow, painful transition toward an economy fueled by innovation, powered by low carbon, driven by exports, rich with opportunity and led by cities and metropolitan areas.  The shift to the next economy is being matched by a new kind of metropolitan economic development, building on the distinctive assets of disparate places and geared to strengthening an ecosystem as much as engaging in one-off transactions with individual firms.

Second, I want to unveil our initial findings about the state of your economy.  After decades of depopulation, deindustrialization, and decentralization, Buffalo faces challenges that are well known and well studied.  Yet we have found some remarkable assets “hidden in plain sight,” ranging from advanced research & development at your universities to the disproportionate presence of advanced manufacturing and clean economy firms to your enviable location on the border with America’s largest trading partner to the promising development underway in the downtown and nearby to the historic legacy of world class architecture and landscape.

Bottom line: There is a base to build on here that is special and holds real market potential. 

Finally, I want to lay out a series of goals for the “Buffalo Billion” that build on your distinctive assets and advantages and then provide examples of best innovations in the U.S. and abroad that could be tailored and adapted to this community. There is absolutely no reason to reinvent the wheel.  Communities similarly situated to Buffalo in the U.S., Europe, and elsewhere have successfully retooled their economies and remade their places to great benefit.

You can, and you will, do the same.

So let me start with the broader context for this effort.

At the most basic level, the U.S. needs more jobs—11.3 million by one estimate—to recover the jobs lost during the downturn and keep pace with population growth and labor market dynamics.

Beyond pure job growth, we need better jobs to grow wages and incomes for lower and middle class workers and reverse the troubling decades-long rise in inequality.   

There is no easy fix to achieve these twin goals.  But one thing is clear: We will need to purposefully restructure our economy from one focused inward and characterized by excessive consumption and debt to one globally engaged and driven by production and innovation.

Or, as I have said before, we must move to a “next economy” that is fueled by innovation, powered by low carbon, driven by exports, and rich with opportunity.  Let’s unpack that a little, so we both understand the broader growth model and the special moment we find ourselves in.

The vision begins with innovation—to spur growth through the interplay of invention, commercialization, manufacturing, and skilled workers.   

Over the past two decades, the discussion of innovation in the U.S. narrowed, positioning it as something only conducted in the ivory tower or among exceptional entrepreneurs like Steve Jobs.

We forgot something early generations intuitively understood: the inextricable link and virtuous cycle between innovation and manufacturing.

While only about 9 percent of all U.S. jobs are in manufacturing, about 35 percent of all engineers work in manufacturing.

Although the manufacturing sector comprises only 11 percent of GDP, manufacturers account for 68 percent of the spending on R&D that is performed by companies in the United States and are responsible for 90 percent of all patents in the United States.

Going forward, we will innovate less if we do not produce more.  We must make things again.

The discussion of innovation naturally leads to the notion that the next economy should be powered by “low carbon” and advanced energy.

Everything is changing.

The energy we use, the infrastructure we build, the homes we live in and the office and retail buildings we frequent, and the products we buy are all shifting from modes that are outdated to systems that are smarter, faster, more technologically enabled and more environmentally sound.

Our competitors—China, Germany, Brazil—have embraced the clean economy, creating markets, growing jobs, and stimulating investment.

The U.S., on the other hand, treats the clean economy as a political and ideological football, undermining our potential to position the U.S. at the vanguard of the next innovation-led industrial revolution. 

An economy that innovates, particularly around clean energy and products, is an economy that can take advantage of rising global demand for quality U.S. products and services.

That is more important than ever. The locus of economic power in the world is shifting. 

Together, Brazil, India and China—the BICs—accounted for about a fifth of the global GDP in 2009, surpassing the United States for the first time.  By 2015, the BIC share will grow to more than 25 percent.

The top 30 metro performers today are almost exclusively located in Asia and Latin America. The 30 worst metro performers are nearly all located in Europe, the United States and earthquake-ravaged Japan.  

This is not a rocket science.  The U.S. needs to reorient our economy to take advantage of this new demand. In 2010, exports made up only 13 percent of the GDP of the U.S. compared to 30 percent in China, 29 percent in Canada, and higher levels in India, Japan, and the entire EU.

Finally, the next economy should be opportunity rich, so that working families can earn wages sufficient to attain a middle class life.

Building the next economy is essential here: research shows that firms in export-intense industries, for example, pay workers more and are more likely to provide health and retirement benefits. 

Yet building the next economy will require the United States to get real smart, real fast.

Over the next several decades, African Americans and Hispanics will grow from about 25 percent to nearly 40 percent of the working-age population.

Yet the U.S. and this region have sharp racial and ethnic disparities on education.  Upgrading the education and skills of the next, more diverse American workforce is a competitive imperative.

This macro growth model is a sharp departure from the one that dominated American thinking pre-recession—one that extolled consumption and excessive financial risk and raised the absurd prospect that the U.S. would somehow become a post industrial economy.

We need to change our mental map.  Market dynamics are changing radically. 

Labor costs are now rising in China, and concerns persist about the protection of intellectual property. 

Energy can be cheaper here, and more reliable. 

The tsunami in Japan, the world's main supplier of many high tech components, revealed the fragility of far flung supply chains for many U.S. companies.

And, the best news, manufacturing is coming back, fueling 38 percent of the recovery.

We must innovate again.  We must make things again.  We must embrace clean and green as an environmental imperative and market proposition.  We must embrace the world.

This macro model comes to ground in the major cities and metropolitan areas that shape, determine, and deliver the economy.

The real heart of the American economy consists of 100 metropolitan areas that after decades of growth take up only 12 percent of our land mass, but harbor 2/3 of our population, generate 75 percent of our gross domestic product and, on every single indicator that matters—innovation, human capital, infrastructure—punch above their weight at dizzying levels.

This is the power of concentration and agglomeration: the network effect of firms, universities, institutions fertilizing ideas, sharing workers, extending innovation, enhancing competitiveness, and catalyzing growth.

Bottom line: There is no national American economy.  Rather, the U.S. economy is a network of powerful metropolitan economies.

One last contextual piece that we have considered during this process.

Across the nation, in the absence of federal leadership, cities and metros are taking control of their own destinies, becoming deliberate and intentional about their economic growth, moving beyond affecting their form to shaping their function.

A new wave of economic development is taking shape, replacing the broken, low road model of Starbucks, Stadia, and Stealing Business.

It can be found in grand, economy shaping gestures: an Applied Sciences District in NYC, an Infrastructure Bank in Chicago, a metro encompassing transit system in Denver

It can also be discovered in smart structural interventions:  creative technology software in Detroit to match interns to companies, a new intermediary in northeast Ohio to help small and medium-sized manufacturing firms retool their factory plants, a new facility in Seattle to test and verify new energy-efficient building technologies.   

What unites these disparate efforts are a general set of principles that are relevant for Buffalo in setting priorities for investing the $1 billion.

Intentionality and purpose. After decades of pursuing fanciful illusions (becoming the next Silicon Valley) or engaging in copy cat strategies, metros are deliberately building on their special assets, attributes and advantages using business planning techniques honed in the private sector.

The ecosystem and the enterprise. These efforts do not just focus on the one transaction, attracting the one firm. They focus on building, structures, institutions, and platforms to give firms, dozens of firms, what they need: talent, capital, market intelligence, strategic advice, branding, and marketing.

Collaborate to compete. What also unites these efforts is collaboration across sectors, disciplines, jurisdictions, artificial political borders, and, yes, even political parties. As Colorado Governor John Hickenlooper likes to say “collaboration is the new competition.” Neighboring cities and metros, long divided by petty differences, now realize they need to come together to engage forcibly in the global market, with and against cities and metros five or ten times their size.   

With this context in mind, I’d like to now turn to the second part of my presentation and discuss our findings on Buffalo’s general economic and social performance, and particular assets and advantages.

The initial findings here will not be a surprise to anyone in this room.

Frankly, the last 30 years have been a brutal period for the Buffalo region. In areas of unemployment, population, and GDP growth, Buffalo’s economy has lagged well behind the growth rates for the United States as a whole.

That’s a general top line observation.  The most important insight has been the radical decline in the traded sectors of the Buffalo economy.

Between 1980 and 2010, Buffalo’s traded sector contracted by 30 percent, while its non-traded sector grew by 32 percent.

We all know the difference between the traded and non-traded sectors of the economy.

The tradable sector consists of goods and services that are produced in one area and consumed in another, including manufactured products, business and technical services, and energy sources.

By contrast, the non-tradable sector consists of goods and services that must be produced and consumed within the same local or regional economy, including sectors like retail, health care, government, construction, hotels, and restaurants.

The traded sectors build wealth and demands innovation. The non-traded sectors recycle income.

In 1980, Buffalo’s traded sector accounted for 37.2 percent of the metro’s total jobs, but, by 2010, traded sector jobs comprised only 23.8 percent of jobs in the Buffalo-Niagara Falls metropolitan area.

Additionally, Buffalo has experienced significant sprawl even while its population has only slightly grown. Between 1950 and 2000, the Buffalo metro’s population grew by only 4.2 percent, but the developed land area has grown by an astounding 209 percent.

It is frankly difficult to understand and impossible to defend sprawl without growth. You are dissipating your energies, increasing your fiscal costs, and failing to realize the tangible benefits of density. How a place grows physically affects how you grow economically.

Buffalo’s lagging economic growth has been accompanied by poor social outcomes. In the last decade, Buffalo’s poverty rate has grown faster than the U.S., and its median household income is lower than the U.S. average.

The poverty and employment disparities are even greater when you look at them by race.  In a span of 40 years, the employment rate among African-American males in Buffalo fell by 23.6 percentage points, leaving Buffalo with the second worst employment rate among African American males in large metro areas in 2010.

Despite these market challenges, the Buffalo-Niagara Falls region has real opportunities in the next economy which have not been fully leveraged.

Buffalo’s economy is rebounding from the Great Recession, and has had the third best overall performance in the recession and recovery among the top 100 metros in the country, which is measured on performance of indicators such as employment, GDP growth, and housing foreclosures.

Buffalo’s economic productivity growth between 2000 and 2011 was higher than the U.S., and its unemployment rate remains better than the overall unemployment rate for the United States.

In terms of innovation, Buffalo has particular traction around research and development and production.

SUNY Buffalo is a research and development powerhouse, receiving $348 million in public R&D in 2009 — trailing Cleveland, but much higher than other peer metros like Syracuse and Worcester. The majority of UB’s R&D expenditures are in life sciences, while engineering comprises another 17.3 percent.

In manufacturing itself, the region has 1,300 firms with 50,000 workers with concentration in several advanced industry clusters.

So Buffalo is an innovation hub.  But what we heard time and time again, is that the region does not commercialize the ideas you generate nor scale the innovation through entrepreneurial start-ups, perhaps due to capital deficiencies, perhaps due to the lack of managerial talent.

On low carbon, Buffalo performs well, 16th among the top 100 metros on its carbon footprint. In 2005, the average resident in metropolitan Buffalo emitted less carbon from highway transportation and residential energy than the top 100 and U.S. averages.  And your per capita footprint has decreased while the average per capita footprint of the 100 largest metro areas and of the nation has increased.

You also have the potential to be a clean economy hub, given concentration of jobs, intensity of jobs and presence in sectors like waste-to-energy, hydropower, and geothermal.

So Buffalo is low carbon on key indicators.  But you haven’t leveraged your position particularly well and your green occupations are not as value add as they could be.

On exports, Greater Buffalo also punches above its weight, ranking 46th out of the top 100 metros by exporting $6.4 billion worth of goods and services in 2010.

Buffalo’s largest export industries are also its largest clusters. In 2010, Buffalos top 5 export sectors were: chemicals, machinery, business services, financial services, and royalties.

Buffalo’s trade with Canada is critical, given its close proximity. In 2010, Buffalo’s exports to Canada accounted for 17.4 percent of its total exports, greater than the shares for upstate peers like Rochester, Albany, and Syracuse.

In fact, you can see Canada from Buffalo!  And what you are seeing is the Golden Horseshoe, North America’s fastest growing global metropolis.

Like many metro areas in the U.S., however, you lack a full operational and integrated strategic partnership with your most significant trading partner, underperforming other border communities, leaving billions off the table. 

Finally, on opportunity, the Buffalo region benefits from a small but relatively high skilled set of immigrants. Buffalo fares significantly better than the top 100 metro average, but trails peers like Worcester, Syracuse, and Cleveland.

The Buffalo region also has a high—and relatively fast-growing—share of mid skilled workers.

But don’t get complacent.  In 10 years, one-fifth of Buffalo’s industrial workforce will retire. At the same time, UB and other colleges and universities in the area graduate 411 production workers and 854 engineers each year, many of whom leave the area on the notion that there are “no jobs.”

It’s time to align skills with jobs.

Finally, the place itself.

Your city has many critical physical assets for economic growth—including along the waterfront, the Central Business District, the Larkin District, the Buffalo-Niagara Medical Campus, Buffalo State, Canisius College, Erie Community College, the Buffalo-Niagara Airport, and, of course, the University of Buffalo.

And you have a legacy of historic buildings, industrial corridors and world renowned architecture and urban amenities that other communities would die for: Frank Lloyd Wright’s Martin House, the Olmsted parks, the H.H. Richardson Complex, the Buffalo Belt Line, iconic industrial facilities, and, of course, the Niagara Falls.

And, last but not least, you have SPoT, literally my favorite community friendly coffee house in the United States.

Given these very real assets, I’d like to identify a series of possible goals for the Buffalo Billion and beyond that build a next economy and then show the cutting edge of practice from elsewhere in NY, the U.S., and abroad that might be brought to bear here.

Let’s start with innovation, the historic catalyst for economic growth and productivity.

The goal here is not hard to articulate: Buffalo should accelerate innovation, commercialization and production in advanced industry sectors of the economy.

We have named your assets.

You continue to have a manufacturing presence and an enviable location for production.

You are innovating on networked health technology in some very interesting ways.

You have ample research in life sciences, though that research has not been a full platform for firm creation and job growth.

You have a Buffalo Niagara Medical Campus, which, if fully realized, could transform not only the health and life sciences cluster but the adjoining neighborhoods as well.

As the Buffalo Billion process goes forward, capturing the full potential of each of these innovation opportunities—for firms, for workers, for the city—needs to be fully explored.

For now, it is worth examining the best practices in advanced manufacturing and innovation districts.

On manufacturing, you don’t need to look far.

SUNY Albany’s Nanotech Complex is a prime example of next generation, public-private support for advanced manufacturing.

In the last 15 years, this complex has grown into a $14 billion, 800,000 square foot nanotechnology research and development center. In the past decade, New York State has provided nearly $1 billion in financial support, and has partnered with over 300 corporations. It provides strategic support through technology acceleration, business incubation, and pilot prototyping for on-site corporate partners, which include IBM, Intel, GlobalFoundaries, and Samsung.

Today, there are more than 2,600 semiconductor-related research and development jobs on the site, and the emerging nanotech cluster in the Albany region played a role in attracting a recent $4.6 billion investment in a research facility from GlobalFoundaries in nearby Saratoga.

The Nanotech Complex reveals how technological innovation can be boosted in the private sector through smart public sector supply of shared infrastructure and equipment.

On low carbon, Buffalo has an unmatched proximity to one of the world’s greatest sources of clean, cheap hydro power.

This enables you, almost alone among U.S. metros, to have a distinctive goal: to be a global hub of innovative clean economy firms.

One of the best examples of a sustainable, low carbon metropolis in the world is Copenhagen, Denmark.  The metropolis is 1.1 million in size by the way, exactly the scale of Buffalo.

Copenhagen is a beacon of sustainable development.  An incredible 36 percent of all commuting trips to work or school are made by bike, and another 32 percent of city residents either walk or utilize the region’s highly-efficient public transportation network of buses and trains.

This spatial efficiency has obvious fiscal and health effects.  Yet the big effect from sustainable development may be indirect and global. Copenhagen’s clean sector has been a critical contributor to the region’s economy in the past decade, with green exports outpacing all other sectors by growing at an astounding 77 percent. 

Now the metropolis plans to go further, planning to become a carbon-neutral city by 2025.  This is a market proposition as much as an environmental imperative.  The city estimates that an additional investment of $453 million in U.S. dollars would leverage another $3.4 billion in private resources, and create 35,000 new jobs by 2025.

In some respects, your position on exports mimics your position on low carbon.  Location, location, location. Buffalo’s proximity to our nation’s largest trading partner is an asset that has barely been tapped.  

Our goal: Buffalo exploits its unique, bi-national position. 

So how to accomplish this?

A best practice in the area of establishing global linkages is the ChinaSF initiative in San Francisco. Launched in 2008, ChinaSF’s goal is to support increased business exchange between China and the Bay Area for the region’s largest sectors, through providing services to Chinese companies seeking to establish offices in SF, helping Bay Area companies looking to expand overseas, and matching up overseas organizations to reduce transaction costs.

Thus far, ChinaSF has established three offices that offer bilingual services, and it has successfully recruited 15 Chinese firms to establish new offices in the Bay Area.

Our analysis also places Buffalo’s opportunity challenges and opportunities in sharp relief.

Our goal: match supply of skills with demands of industry.

There are models to replicate and emulate for training and retaining the next generation industrial workforce.

A great model for educating students with skills to compete for jobs in the next economy is the Austin Polytechnical Academy on Chicago’s West Side. Founded in 2007 by the Chicago Manufacturing Renaissance Council, the school’s student body is 98 percent African American, and a supermajority of entering students have 3rd grade reading levels and 5th grade math levels. Austin’s curriculum focuses on careers in all aspects of the manufacturing industry, from skilled production and engineering to management and company ownership, plus related sectors such as intellectual property law.

The school has partnered with 65 local firms, who provide students with mentoring, field trips, and internship and job opportunities.

The school boasts a $100,000 state of the art manufacturing technology center, a high-tech facility for both students and adults, and it is the only Illinois high school that has received an accreditation from the National Institute for Metalworking Skills.

A best practice on tackling Buffalo’s talent retention challenge is an initiative called “Intern in Michigan.” Created in 2007, this program connects students and employers through an online matching system that forges connections based on specific job requirements, individual interests, and the skills of the candidates.

Since its inception, 60,548 matches and introductions have been made, more than 850 Michigan employers have registered for the system, and more than 10,500 students from nearly 500 schools, colleges, and universities worldwide are registered on Intern in Michigan.

Last goal: To reshape an economy you need to remake place and fully link physical and economic transformation.

It is obvious that realizing the full potential of the Buffalo Niagara Medical Campus is a major opportunity for the city and metropolis.

One highly relevant best practice for Buffalo is the East Baltimore redevelopment underway around the Johns Hopkins University Medical Center.

In 2002, Johns Hopkins University, the City of Baltimore, the State of Maryland, and other key partners devised a $1.8 billion plan to redevelop 88 acres of East Baltimore just north of the Johns Hopkins Hospital to include new retail, office and housing space, as well as a biotechnology park that would be linked to commercialization of research coming out of Johns Hopkins Hospital.

When finished, the area will have 1,500 to 2,000 new housing units, as well as an additional 1.7 million square feet of commercial, laboratory and retail space.

Conclusion

Let me conclude with these thoughts.

One billion dollars is a lot of money, and it should be invested with care and discipline, through a process that is evidence-driven, performance-measured, and transparent.

If you do this well, you will, in the near term, leverage private sector investment and create jobs.

But this is not just about the immediate; this is about the long-term.

Ideally, the investments today will set a platform for long-term growth; it will be the gift that keeps on giving.

Ideally, the strategies you identify will not just draw down the Buffalo Billion, but drive billions more in public and private sector investments.

So invest for now, but in a way that transforms, leverages, and accelerates the next.

So invest for now, but in a way that enables you to be a 21st century version of yourself.

I am very, very bullish on Buffalo.