Delivering the Next American Economy

Editor’s Note: During an event in Buffalo, New York, Bruce Katz delivered remarks on how the metropolitan area can increase its competitiveness and move toward a new economic model. Audio from the event is available at wbfo.org.

Introduction

It is a great pleasure and privilege to be back in Buffalo, one of America’s, and the world’s, most distinctive cities and metropolitan areas.

Today, I will lay out a vision for how the U.S. moves forward in the aftermath of the Great Recession, led by the cities and metropolitan areas that drive the national economy.

At the most basic level, the U.S. needs more jobs 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 American workers and reverse the troubling decades-long rise in inequality.

There is no easy fix to achieve these twin goals. Our economy must be purposefully restructured from one focused inward and characterized by excessive consumption and debt to one globally engaged and driven by production and innovation. 

Here is my proposition.

First, we must move to a “next economy,” one that is driven by exports and global engagement, powered by low carbon and advanced energy, fueled by innovation (both ideas and manufacturing) and rich with opportunity. This is a vision where we export more and waste less, innovate in what matters, produce and deploy more of what we invent, and ensure that the economy actually works for working families. 

Second, the next economy will largely be metropolitan, in form and function. Our major metros already generate more than three quarters of our gross domestic product. Despite nostalgia over small town America, it is metropolitan America that drives our national economy and determines our national prosperity. 

As our nation’s 50th largest metropolis, Buffalo is a charter member of the elite club of metropolitan engines. You are a special economy with an enviable trading location, rich natural and architectural history, and distinctive competitive assets, attributes and advantages. Where others see deficits, I see possibilities, particularly as the broader U.S. economy restructures and retools.

Finally, it is time to build the next economy by unleashing the entrepreneurial energies and dynamism of America’s metropolitan regions. In an ideal world, the federal government would set a strong platform for metro growth: embracing trade, pricing carbon, investing in advanced R&D, transforming infrastructure and overhauling immigration. But the United States circa 2012 is not an ideal world. Ideologues rule our airwaves. Washington is fundamentally broken. 

So we must build the next economy the hard way through a pragmatic caucus of public, business and nonprofit leaders who spur economic recovery and renewal from the ground up despite political odds and fiscal obstacles. That is happening … in city after city, metro after metro and state after state where pragmatic leaders are collaborating to compete and following a new economic playbook to spur productive, sustainable and inclusive growth. 

I fundamentally believe that Buffalo and New York state can lead this innovative wave. Governor Cuomo is charting a new course for economic growth in this state. And regions like Buffalo and Western New York are responding with imaginative strategies. The governor’s $1 billion challenge is exactly the kind of inspirational, gutsy, and transformative intervention you need at this point to leverage private sector innovation and capital and spur smart and strategic growth.

So let me begin by offering a vision for the next American economy.

And let’s begin with exports and our need to fully engage the world.

Visualize an economy where more firms in more sectors trade more goods and services seamlessly with the world, particularly with nations that are rapidly urbanizing and industrializing.

Why exports? 

Because we have crossed an economic Rubicon. 

Together, Brazil, India, and China … the BICs … are expected to account for about one fifth of the global GDP in 2010, surpassing the United States for the first time. By 2015, the BIC share will grow to more than 25 percent. The rise of the BICs reflects the rise of metros.  For the first time in recorded history, more than half of the world’s population lives in cities and metropolitan areas. By 2030, the metro share will surpass 60 percent. Rising nations and their rapidly growing metros now power the world economy and drive global demand.

The locus of economic power in the world is shifting. 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. 

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, 30 percent in Canada, 30 percent in Mexico, and higher levels in India, Japan, and the entire EU. The movement of freight in the United States is compromised, undermined by transport networks that are clogged and congested and an infrastructure that is third class. And, culturally, Americans don’t get out much.  Only 28 percent of our population has a passport. 

Can we get back into the export game?  The answer is decidedly “yes.”

We still manufacture a range of advanced goods that the rest of the world wants including air craft, space craft, electrical machinery, precision surgical instruments, and high quality pharmaceutical products. And we already have a trade surplus in services — $153 billion in 2010 — and are poised for a quantum leap in the export of high-value services. America’s potential for exports is hidden in plain sight. President Obama’s challenge to double exports in five years is exactly the kind of ambitious, far reaching goal we need at this moment.

Low carbon is the second hallmark of the next U.S. economy. Let’s imagine a world where America is the vanguard of the clean, green revolution.

Everything … is about to change.

The energy we use will migrate from an almost exclusive focus on carbon based fuels to a more sustainable mix. The infrastructure we build will shift from outmoded transport and energy to systems that are smarter, faster, and technologically enabled. The products we buy will move from high carbon gas guzzlers to an eclectic basket of green, sustainable goods. And the homes we live in and the office and retail buildings we frequent will be more sustainable in design, more efficient in their use of water and energy, and better arrayed so that people can spend less, walk more and live a higher quality of life.

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

Can the U.S. even play in the low carbon revolution?

Our research shows that we already have a strong base of 2.7 million clean economy jobs, in sectors ranging from renewable energy to pollution reduction. The clean economy is a critical driver of innovation, manufacturing and exports, so it is time for us to fully engage the shift to low carbon … and embrace a market transformation as profound as the information revolution.

So this leads naturally to a discussion of innovation. The U.S. must be the world’s Innovation Nation, a hot house of invention and the platform for advanced production. 

I believe that we are on the cusp of an historic era of technological progress which will dramatically change how people live, companies operate, communities function. We already see this in the consumer realm. Think electric vehicles. Smart homes. Remote monitoring of health.

Yet the hottest wave in technology today goes beyond the individual consumer to the collective — the “smart city.”

Global companies, having wired people throughout the world, are now on a mission to connect cities, within and without, through the integrated application of advanced technologies like wireless sensors and processors, mobile and video telecommunications, and geographic information systems. With China and other rising nations urbanizing at a frenetic pace, the potential market for the design, production, application and integration of smart technologies is vast; $1.2 trillion by one estimate over the next decade.

Can the U.S. seize the future and realize its potential as an Innovation Nation?

We now place just 45th out of 93 countries in the share that science and engineering degrees make up of bachelor’s degrees. Going forward, we will innovate less if we do not fully embrace science and technology. The U.S. lags on the conversion of innovation into home grown production. We have gone from running a trade surplus in advanced technology products to running a trade deficit over the past decade. 

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

It is time to rediscover our innovation mojo: in our vocational and tech schools, in our research labs, on our factory floors, in the trade-able goods and service sectors that drive wealth creation and sustainable growth. 

Finally, the next economy has the potential to be opportunity rich. 

Research shows that firms in manufacturing, innovative and export-intense industries pay workers more and are more likely to provide health and retirement benefits. The United States can build a next economy if we 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 rates of educational attainment are lowest among these fast-growing groups. In 2009, only 18 percent of Hispanics and 25 percent of African Americans had completed an associate’s degree or higher, contrasting sharply with the rates for whites and Asians. In the decades ahead, upgrading the education and skills of our diverse workforce is no longer just a matter of social equity. It is fundamentally an issue of national competitiveness and national security.

So here is my second proposition: the next economy will be largely metropolitan, in form and function.

This is true abroad, as I mentioned before, but it is also true here in the United States. The top 100 metros form the real real heart of the American economy — taking up only 12 percent of our land mass, but harboring 2/3 of our population and generating 75 percent … 75 percent … of our gross domestic product. These metropolitan areas form a new economic geography that seamlessly envelops cities and suburbs, exurbs and rural towns. And they pack a powerful punch.

Chicagoland is home to 67 percent of the population of Illinois, but contributes 78 percent of that state’s GDP. Greater Seattle houses only 51 percent of residents in the state of Washington, but generates 69 percent of its economic output. And metro areas generate the majority of GDP in 47 of the 50 states, including such “rural” states as Nebraska, Iowa, Kansas, and Arkansas.

Bottom line: There is no national American economy. Rather, the U.S. economy is a network of powerful metropolitan economies. And metropolitan economies are powerful precisely because they bring together networks of large firms, small enterprises, skilled labor, advanced research institutions, schools and colleges, business associations, and, yes, government.

The top 100 metros, in the aggregate, drive state and national exports. In 2010, they produced an estimated 65 percent of U.S. exports, including 63 percent of manufactured goods exports, and 75 percent of services that are sold abroad. The top 100 metros dominate exports for another good reason.  They are our logistical hubs, concentrating the movement of people and goods by air, rail, and sea.

Beyond exports, the top 100 metros also dominate critical sectors of the low carbon economy, concentrating 78 percent of the jobs in solar energy, 80 percent in wind energy, and 83 percent of the jobs in energy research, engineering, and consulting services. They also harbor 90 percent of the jobs in green architecture, design, and construction since making buildings energy efficient will primarily be a metropolitan act, given where most people live and businesses locate. 

On innovation more broadly, our metropolitan areas are the nation’s knowledge centers. The top 100 metros house 74 percent of those with a bachelor’s degree and 75 percent of those with a graduate degree, they produce 78 percent of all patents, receive 82 percent of NIH and NSF research funding and provide 94 percent of the venture capital that turns research ideas into production.

So how does Buffalo perform in this more innovative, productive, and export-oriented economy? You have special assets here … assets that frankly were ignored in the prior housing led, consumption obsessed pre Recession economy.

This two county metro area — Erie and Niagara counties — is home to 1.1 million people, 5.9 percent of New York state’s population. Your metro contains 6.2 percent of all jobs in the state (including 6.1 percent of all science and engineering jobs) and exports 7.1 percent of the state total. Your metro’s unemployment rate (7.9 percent) is lower than the rates for the state of New York (8.2 percent) and the country (8.3 percent).

You perform well on many next economy indicators. On exports, you are the 46th largest exporter among the top 100 metro areas by volume ($4.6 billion in 2010) and rank 44th best on export-intensity — the share that exports comprise of GMP — at 9.9 percent. Three sectors — chemical products, machinery and business services — account for over 40 percent of your exports. Your strategic position on the U.S./Canada border is a location that most metros would kill for … and you already have strong trading ties with a diverse set of nations like Mexico, China and Japan.

On low carbon, you punch above your weight when compared to the top 100 metros. Despite being the 50th largest metro, you are the 37th largest clean economy jobs center in the United States – with 14,500 clean jobs in 2010. Your top sectors are waste-to energy, hydropower, geothermal, fuel cells, and renewable energy. On intensity clean jobs — the share that clean jobs comprise of total metro employment — you also perform better than the U.S. and the top 100 metro average with 2.7 percent of your total jobs in the clean economy — compared to 2.0 percent for the U.S. and 1.9 percent for the top 100 metros. 

On innovation, you have a strong, distinctive legacy in manufacturing. Despite the downturn in manufacturing jobs over the last decade, you still have 46,000 manufacturing jobs — about 8.4 percent of the metro’s total employment. Mark my words … manufacturing and advanced industry will have a renaissance in this country due to rising wages in China, cheap, reliable energy in the U.S. and the desire for global companies to have more control over their supply chains.

Finally, on opportunity, you perform much better than the U.S. as a whole on skilled-immigrant composition. Thirty-six percent of your immigrants are high-skilled — defined as those with a bachelor’s degree of higher — compared to 30 percent for the U.S. You also have a smaller share of low-skilled immigrants (22 percent) — those with less than a high school diploma — than the U.S. (28 percent). The University of Buffalo is a talent magnet … with 5,000 international students studying there every year.

I do not want to minimize the challenges you have … on racial and ethnic disparities in education, on municipal fragmentation and fiscal stress, on sprawl and decentralization.

The final challenge is related to the other two and needs special attention.

From 1950 to 2000, your urbanized area nearly tripled, from 123 square miles to 367 square miles, while the Buffalo-Niagara metro population grew by only 7 percent. As people have spread out, so have jobs. As of 2006, more jobs in the Buffalo-Niagara metro were located beyond 10 miles from the downtown (29.5 percent) than within 3 miles of the central business district (19.5 percent)

How a place grows physically affects how you grow economically. 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. 

That leads to my final proposition: To build the next economy, the U.S. must unleash the entrepreneurial energies and dynamism of our metropolitan engines.

This is a unique, disruptive economic moment, where recognizing your special assets and strengths — and acting on them — is the central challenge facing cities and metros, here and abroad. Here is what I contend metropolitan America and metropolitan Buffalo must do to spur economic recovery and renewal.

First, metros must innovate locally to engineer the shift from an economy characterized by debt and consumption, to one that is productive and sustainable.

The prior consumption led economy minimized the differences between metros. A Wal-Mart outside Buffalo is the same as a Wal-Mart outside Boston. Same design. Same footprint. Same goods.

A housing subdivision outside of Denver is the same as one outside Detroit.

Mesmerized by consumption mania and the erroneous notion of cookie cutter economies, communities followed a uniform “Starbucks and Stadia” recipe, irrespective of market condition and location. 

The next economy, by contrast, accentuates what is unique about different metros.  What Buffalo exports is different from what Boston sells to the world.  And what makes Denver a special global metropolis is different from what drives Detroit. The next economy rewards metros that intentionally build from their special assets and strengthen their strengths.

The prior economy also lacked any fiscal discipline. Cities and suburbs competed to literally move businesses a few miles across artificial political borders. The next economy, by contrast, rewards cities and suburbs — and even nearby metropolitan areas with complimentary economic assets — that collaborate to compete rather than compete against each other.

To do this, we at Brookings have set out to adapt the discipline of private sector business planning to the task of revitalizing and restructuring metropolitan economies in what we call “metropolitan business plans.”

Over the past several years we have worked closely with metros across the country, starting with leadership teams from Northeast Ohio, Minneapolis/St.Paul and Greater Seattle.

These teams worked collaboratively to flesh out a detailed initiative for economic progress, tailored to the special assets and challenges of these disparate places:

• • Retooling manufacturing firms and retraining industrial workers in Northeast Ohio;

• • Spurring entrepreneurial activity and commercialization of innovation in the Twin Cities;

• • Becoming the global hub of building energy efficiency technologies in Greater Seattle.

We recently concluded a special business planning exercise with World Business Chicago, done at the behest of Mayor Rahm Emanuel of Chicago.  There, the city has already committed to stand up and capitalize a special infrastructure bank for the city. 

Business planning, of course, cannot be confined to economic development because economy shaping requires a new form of place making.  One of the central tenets of the business plan model is to help metropolitan areas improve their “spatial efficiency,” a fancy way of saying that places need to engage in smart growth that curbs sprawl and promotes reinvestment.

These business plans are low cost but high impact.  They are primed to attract public and private investment, produce jobs in the near term and retool economies for the long haul.

The Western New York Regional Economic Development Strategic Plan is a great start towards designing and implementing a best in class business growing strategy for the city and metropolis.  You have demonstrated not only a clear sense of the innovative firms, clusters, and institutions that drive growth … but also the critical role that quality place making plays in productive economy shaping. 

The governor’s $1 billion challenge raises the stakes and asks your city and metropolis to identify a targeted set of investments and interventions that will put Buffalo back on track towards economic growth.  This should only be done with objective evidence … with clear metrics of performance … and with strong knowledge of what other similarly situated, older industrial metros like Sheffield, Torino, and Bilbao have done to change their economic trajectory. 

We at Brookings are pleased to help you identify the investments and interventions that truly matter … and would have transformative impact for decades to come.

Our second act naturally follows from the first:  metros should advocate nationally to enlist the help and support of state and federal governments.

In most states of the country, this is a hypothetical question.  In New York state, however, Governor Cuomo is taking action both to set a strong platform for metropolitan growth and to align state resources to metropolitan priorities.

On platform setting, New York State is once again “open for business.”  The state’s actions to manage its budget are sending strong signals to the market that New York state can be a serious, reliable partner.  In addition, the state’s commitment to renewable portfolio standards and sustained investments in clean energy, infrastructure, innovation and higher education also shows a keen understanding of the importance of targeted public resources in leveraging private sector growth. 

On metro alignment, New York state has done more than any state to incentivize bottom-up economy-shaping.  Last year, the state challenged 10 regional councils – public private partnerships of corporate, civic, university, labor, environmental and local governmental leaders – to craft economic development plans for their regions.  The New York competition flipped traditional economic development on its head, rewarding strategies rather than transactions and local investment priorities rather than state solutions dictated by inflexible bureaucracies and fragmented programs. 

Western New York was a one of the four winners in the Regional Council competition … rightly so, given your new spirit of collaboration, the strong leadership of Howard Zemsky and Satish Tripathi, and a clear sense of what makes your city, metropolis and region economically special and significant.

Eventually, metropolitan performance in the new global economic order depends on smart actions by the national government … to open up foreign markets to U.S. goods and services; to fiercely protect the intellectual property rights of American businesses around the world, particularly in China; to design and implement a national freight strategy that modernizes our air, rail, sea and land hubs and corridors so goods can move quickly and efficiently through the nation, with the least environmental impact; to invest in advanced research and development at scale over a sustained period of time, to have a sane and sensible immigration policy … and so forth and so on.

Metros and their states should not be holding their breath however for smart federal action … they should, by contrast, be innovating in such a way that ultimately the federal government will now excuse but to act.

This is the genius of American federalism … innovations today at the state and metro level become federal policy tomorrow.

That leads to the final step: metros must network globally – to create and steward close working relationships with trading partners in both mature economies and rising nations. 

Strong connections already exist:

Metros with concentrations in financial services, like New York, are forming tight, interlocking networks with similarly focused metros around the world: London, Frankfurt, Paris, Shanghai, Tokyo, Sydney.

Metros with concentrations in advanced manufacturing, like Detroit, are similarly linking with metros in both developed and rising nations: Monterrey, Sao Paulo, Buenos Aires, Cologne, Johannesburg, Chennai, Chongqing, Hanoi

And port metros like Los Angeles are making key connections with the world’s air, rail and sea hubs: Tianjin, Seoul, Hong Kong, Singapore, Dubai, Hamburg, Rotterdam.

These networks obviously start with firms that do business with each other.

But, over time, they extend to supporting institutions— governments, universities, business associations— that provide support for companies at the leading edge of metropolitan economies.

In Northern California, for example, the Bay Area Council has become a foundation of respected, actionable, up-to-date information about its global connections and networks—focusing on emerging markets like China and India, as well as mature economies like Canada and the United Kingdom.

This platform is supplemented by the activities of private/public organizations like China-SF, which acts as a matchmaker between firms wanting to sell goods and provide services to China, and Chinese investors looking for investment opportunities in the Bay Area.

This is a model to be replicated widely … and a challenge to be overcome.

As Buffalo moves forward with your distinctive economic play, backed and supported by a strong, innovative state … it is imperative that you know what you trade and who you trade with … and then build strong, deep relationships with your trading partners.

Conclusion

Let me conclude with this story.

During the 1890s, Westinghouse and Nikola Tesla designed and built the Niagara Falls hydro electric power plant to provide electricity to the city of Buffalo.  Despite skepticism about the feasibility of their plan, their electricity distribution system received financing from the major investors of the day: J.P. Morgan, John Jacob Astor IV, and the Vanderbilts. 

In order to transfer electricity across the 25 miles to Buffalo, they constructed giant underground conduits leading to turbines that generated power for the city.  The Niagara Falls Power Point became the major hydroelectric power plant in the world, and hydroelectricity from Niagara Falls continues to be a major source of power for the Western New York region to this day.

I tell this story for three reasons.

Buffalo was clean before clean was cool.

Buffalo was innovative before we understood the extent to which innovation drives metro prosperity.

Buffalo’s early success built on your distinctive industry, incomparable natural assets, and prime location.

The latter half of the 20^th century was brutal to Buffalo. But the past does not need to be prologue. The global economic order is shifting. The rules of the game are shifting.

I fundamentally believe that older industrial metropolitan areas like Buffalo have a future if you get focused, plan smart, build on your strengths and execute with discipline and creativity. 

You have the local talent. You have the state backing. You have a global network of individuals who feel passionately about your success.

Carpe diem. Good luck.