The Great Recession: What Comes Next for Our Metropolitan Nation

Bruce Katz
Bruce Katz Founding Director of the Nowak Metro Finance Lab - Drexel University

October 26, 2009

Thank you for the invitation to speak today. It is a pleasure to return to Central Massachusetts and be on the same program as John Olver, your super-effective representative in Washington.

The Great Recession has dramatically disrupted the lives and livelihoods of tens of millions of our fellow citizens through lost jobs, foreclosed homes, diminished incomes, and vanished wealth.

The recovery, we now know, will be long, messy and uneven. Key sectors of the economy—housing, finance, manufacturing, trade—have been hard-hit. American consumers are spending less and saving more. There will be no “return to normal,” since what preceded the downturn was anything but normal.

At the same time, a confluence of events—an ambitious president, urgent energy and environmental imperatives, brutal fiscal challenges, and deeply rooted demographic, and social trends—has set the conditions for the kind of historic, national “reset” we witness once or twice a century.

History teaches us that crisis begets innovation.

Our collective challenge is to rise to this moment and master its possibilities.

As U.N. Secretary Ban Ki Moon has admonished, “This is not a time for tinkering, this is a time for transformation.”

I want to make four major points today.

First, in the midst of rising unemployment, increasing poverty and battered industries, the shape of the next economy is slowly coming into view.

  • It will be a lower carbon economy, as we struggle with the existential threat of global warming.
  • It will be innovation led, as we strive to make quantum leaps on everything from clean technology and renewable energy to high speed rail, the smart grid and health care information technology.
  • And it will be less driven by domestic consumption and more oriented towards exports, particularly to rising nations that are rapidly urbanizing and industrializing.

This economic transition raises the tantalizing prospect for the kind of productive, inclusive and sustainable growth that has eluded America over the past several decades.

Second, the next economy will be metropolitan-led. This is, in essence, a Metro Moment for the United States and the globe. Metropolitan areas, here and abroad, are the unequivocal engines of national prosperity because they concentrate at an unprecedented level the assets that matter. These are assets like innovation, human capital, infrastructure, and quality places. There is, in essence, no United States or German or Chinese economy but rather a network of sophisticated, hyperlinked and globally-connected metro economies.

Third, United States metros—if they are to realize their potential—cannot go it alone. Federal and state governments must become true strategic and accountable partners and embrace a 21st Century Metro Policy, placing their policies squarely in the service of metropolitan prosperity. The good news is that there are signs that President Obama “gets” this agenda. His rhetoric as well as initial moves on investments and policy reforms, aided by smart Congressional leaders like John Olver, is very promising. But make no mistake, we are still at the early stages of reform and renewal.

That leads me to my final point. The recovery of older industrial metros like Greater Springfield requires a special and more fundamental revolution in policy thinking and action. The U.S must learn from Europe’s 30-year effort to restore the health and vitality of battered places like Torino, Bilbao, Leipzig and Sheffield. The United States, an insular nation in a globally connected economy, must adopt the successful European playbook of reclamation and regeneration if places like Springfield and Holyoke are going to experience true prosperity.

So let me begin with the initial frame: the contours of the next economy and future prosperity are slowly coming into view.

This may seem counterintuitive to say in the midst of the worst economic downturn in seventy years.

In the last year, the United States unemployment rate rose almost 4 percentage points, and now stands at 9.8 percent. The rate is 15.4 percent and 12.7 percent for African Americans and Hispanics respectively. There are nearly 15 million people unemployed—the highest number since records started being kept in 1948.

Some 39.5 million people are now living below the poverty level, compared to 31.5 million people in 2000. The poverty rate has now hit 13.2% percent, and leading experts predict we will not see a return to 2007 levels for another decade.

The housing sector is battered. As housing values have fallen nationwide, foreclosures have risen sharply due to a first wave of toxic subprime mortgages and now the ravages of unemployment and loss of income.

We have reached the limits of over-consumption. The household saving rate fell from 10 percent of disposable income in 1980 to close to zero in 2007. Household indebtedness rose from 67 percent of disposable income to 132 percent during the same period.

While we have seen continued growth in services during this downturn, goods production has taken a dramatic hit. Incredibly, half of the auto manufacturing workforce has been shed since 2000.

The ravages of the past several years serve to exacerbate long-term structural challenges in our country: wage stagnation for a growing number of workers; persistent racial and ethnic disparities on education, income and wealth generation; excessive residential sprawl and job dispersal, concentrated poverty in inner cities, and market sapping and mind numbing traffic congestion.

The bottom line: this economic recovery will be long and hard and uneven, across sectors and sections of the country. The sectors that drove growth in this decade will not drive growth in the next. True economic recovery will depend on the nation finding a different economic path forward than the one pursued in the past decade.

So what is coming?

With the specter of global warming, we are making a slow transition to a low (or at less) carbon economy. To some extent, the narrow discussion of “green jobs” has obscured how profound a transition this is. Shifting to low carbon will affect all aspects of our lives: the source of our energy, the cars we drive, the products we buy, the kinds of homes we live in, the shape and location of our communities, how we get from one place to another.

This transition will demand and trigger a step change in innovation:

  • in renewable energy technology—solar, wind, hydro, geothermal, ocean waves, bio mass;
  • in state of the art infrastructure—smart grid, high speed rail, rapid bus, electric vehicles, clean coal; and
  • in green building practice and technology—sustainable design, sustainable construction materials, energy efficient appliances and approaches, water efficiency.

All this innovation will catalyze new markets for private investment and job creation.

Alongside the low carbon transition will be a re-balancing of the American economy. As Larry Summers, the head of the National Economic Council recently said, “The rebuilt American economy must be more export-oriented and less consumption oriented.”

He, of course, is being polite. The last decade in particular saw a frenzy of consumption, driven by non sustainable, speculative increases in housing values and reckless engineering of new loan products and secondary market vehicles.

The United States economy went out of whack. Consumer spending and residential investment stood at 75 percent of GDP in 2007, up from 67 percent in 1980. Our trade deficit doubled between 2000 and 2007, jumping from $380 billion to $760 billion before the beginning of the recession. Financial services expanded from 10 percent of S&P 500 earnings in the 1980s to 45 percent today.

The next economy must return to a semblance of balance, of economic sanity, of making things, as well as providing services.

Hard times are the right times to set a new set of goals for the nation: say, to double exports, or to maybe to double the share of jobs in manufacturing and the production of high value goods.

That’s the right debate for us to have in this country… and it is long over-due.

So here is my second proposition: the next economy will be metropolitan led and metropolitan dominated.

The world may be “flat,” as Thomas Friedman has famously concluded, but the spatial reality of modern economies is their intense concentration in a relatively small number of places.

Economists refer to this as agglomeration, because the assets that matter most to nations gather and strengthen disproportionately in urban and metropolitan places:

  • Innovation, the new products, processes and business models that drive economy productivity and sustainable solutions;
  • Human capital, the education and skills that further innovation;
  • Infrastructure, state of the art transportation, telecommunication and energy distribution systems that move people, goods and ideas quickly and efficiently;
  • And quality places, that special mix of distinctive communities and responsible growth that is competitively wise, fiscally responsible and environmentally sustainable.
  • Innovation, human capital, infrastructure, and quality places.

These assets, and the people and firms that leverage them, come to ground in metro America.

Our top 100 metropolitan areas alone take up only 12 percent of our land mass, but harbor two-thirds of our population and generate 75 percent—75 percent—of our gross domestic product.

More importantly, metros gather what matters and make an outsized contribution on each of the assets that drive prosperity.

On innovation, they produce 78 percent of all patents, 82 percent of NIH and NSF research funding and 94 percent of venture capital funding.

On human capital, they gather 74 percent of adults with a college degree, 75 percent of workers with a graduate degree and 76 percent of all knowledge economy jobs.

On infrastructure, they concentrate 72 percent of all seaport tonnage, 79 percent of all United States air cargo weight, and 92 percent of all air passenger boardings.

And, on quality places, they congregate 79 percent of performing arts establishments, 90 percent of our city populations and 95 percent of public transit passenger miles traveled.

The cumulative impact of these assets is stunning.

Incredibly, 96 percent of the economic output of Massachusetts is generated by the four metropolitan areas in the state that rank among the top 100 nationally. And every county in Massachusetts is part of a metropolitan area.

Massachusetts is a Metro State.

And Massachusetts is not alone. Metro areas generate the majority of gross domestic product in 44 of the 50 states.

The United States is, incontrovertibly, a Metro Nation. The real question facing the nation is whether we begin to act like a Metro Nation and organize and invest in our assets to achieve productive, inclusive and sustainable growth.

That leads me to my third proposition: United States metros cannot go it alone: Realizing your potential requires the federal and state governments to embrace a 21st Century brand of Metro Policy.

No matter how much Springfield/Holyoke, Boston or Worcester focus and innovate, they do not have the resources or powers to “go it alone.” And they shouldn’t have to.

The forces affecting metros are the same ones that are buffeting our nation.

The movements of talent and capital or the drift of carbon emissions take place at the global scale and have impacts and implications that transcend parochial borders.

Thus, a metro can focus on building its economic strengths and finding new ways to further innovation, but its economy is profoundly influenced by federal monetary, trade, energy regulatory and investment policies.

A metro can focus on reducing income disparities and elevating the education and skills of its workforce, but only the federal government can close the gap between wages and the cost of living.

A metro can focus on reducing congestion and implementing market shaping infrastructure investments, but the federal and state governments are the major financiers of such investments.

And a metro can do what it can to address the “existential threat of global warming,” by promoting green building, transit oriented development, urban regeneration and renewable sources of energy, but only the federal government can set standards and regulate industries on a national scale.

A rapidly changing world demands that the federal and state governments serve as strategic, flexible and accountable partners so that metros can address their central problems, realize their full potential and, in so doing, resolve our most pressing national challenges.

At the core of Metro Policy is a call for a new federalist compact.

This compact should have three essential components:

First, the federal government should lead where it must. Global challenges, broad in scale and geographic reach, require national solutions. Only the national government can set a strategic vision for the entire country, address issues that naturally transcend state borders and establish a unified framework for smart private and public sector action.

Next, the federal government must empower metros where it should. A nation of our size and diversity displays immense variation. Minneapolis is not Miami. Charlotte is not Cleveland. Phoenix is not Pittsburgh. Federal policy must enable these and other metropolitan areas to bend national policies to their own distinctive market realities and strengths.

The final piece to our federalist puzzle: the federal government must maximize performance and fundamentally alter the way it does business in a changing world. It is time for Washington to “get smart” and become a fact-filled rather than fact-free zone.

We need a 21st-century federalism, in essence, that marries national vision and purpose with local and metro implementation and invention, and couples public sector engagement with private sector energy and discipline.

The good news is there are early signs that Barack Obama’s administration “gets” and embraces this new vision of Metro Policy, but there is still a long way to go.

At the paradigmatic level, President Obama talks about city and metropolitan areas in a modern way, a sharp departure from traditional rhetoric. On July 13th the president launching the White House Office of Urban Affairs, laying out a new vision for a federal-metropolitan partnership in service of productive, inclusive, and sustainable growth. The president’s embrace of the new metropolitan framework is critical since policy choices are ultimately derivative of broader paradigms.

Beyond rhetoric and framing, investments in both the American Recovery and Reinvestment Act (ARRA) and FY 2010 budget seem metro friendly on the surface because they are investing in the key assets: innovation, human capital, infrastructure and quality place.

On innovation, ARRA invests tens of billions in federal research and development, both through old agencies (e.g., NIH, DOE, NOAA, NASA) and a new one, ARPA-E.

ARPA-E supports cutting edge energy technology and bridges the gap between basic research and the commercialization of products.

On human capital, there is $77 billion in direct funding for education, including billions in funds for incentives to states and innovations in urban school districts.

On infrastructure, there is $152 billion in spending across a slew of categories, including $57 billion for transportation, $17 billion for energy grid, $13.2 billion for water infrastructure and $10.5 billion for technological infrastructure.

And on quality places, Congress has enacted tens of billions in spending and tax incentives for energy retrofits, inner city business development, community development, transit and brownfields

The president’s FY 2010 budget goes even further, proposing a $150 million Sustainable Communities Initiative to develop integrated regional plans that link housing, transport, jobs and land use, a $250 million Choice Neighborhoods Initiative to make game changing interventions in neighborhoods of high poverty and an Infrastructure Bank to make market-shaping investments in a range of infrastructure assets, in part through the leveraging of private sector financing.

Now all this is really positive and offers places like Holyoke and Springfield new tools and new resources to tackle persistent and deeply rooted challenges.

But you and I both know we are at the early stages of reform and renewal.

President Obama inherits a legacy government in Washington, D.C. that has lost its sense of purpose and squandered its capacity over the past several decades.

The brutal truth is that Washington accumulated a plethora of bad habits that need to be broken.

It has become a transaction culture, driven by earmarks and special favors rather than national vision.

It has become a fact-free zone, with little investment made in data and metrics and analytic tools that enable evidence based decision-making.

It has become an unaccountable investor, with no focus on serious goals or measures to gauge progress or incentives to reward good behavior.

It has become a fig leaf government, with a deep loss in the competence and capacity of the civil service and the ability to act as a true partner.

So there is a lot of work to do in our nation’s capitol and we are at the early stages of remaking policy and the mechanics of government, the delivery of policy.

But here is my final point.

As federal government undergoes a long deferred extreme makeover, older industrial metros like greater Springfield, which includes the city of Holyoke, require a special focus given their distinctive economic and social starting points.

Fortunately, there is a playbook to follow here, forged in older industrial Europe over the past several decades.

Since 2004, Brookings and the London School of Economics have assessed the economic trajectory of seven industrial cities in Europe that, against all odds, have come back from the dead. These seven cities—Belfast, Bilbao, Bremen, Leipzig, Saint Etienne, Sheffield, and Torino—have adapted to industrial shocks, economic cycles, world wars, and demographic and cultural shifts and reemerged as functioning, viable economies and stable places to lead middle class lives.

The core element of this recovery: restoring and remaking the urban landscape.

These European cities, with the help of the European Union and their own nations, have taken systemic actions over several decades to restore their core.

They have, like Leipzig, realigned their population around central districts and university hubs, demolishing tens of thousands of unnecessary housing units in the process.

They have, like Bilbao, cleaned up industrial waterfront areas of contaminated land and repopulated them with stores and homes and businesses and iconic institutions like the Guggenheim Museum.

They have, like Torino and Sheffield, upgraded and extended transit within the metropolitan area.

They have, like Leipzig and Saint Etienne, embellished the rail connections between these communities and key hubs like Berlin and Lyon.

All of these moves have required investments, a commitment to density, an appetite for risk taking and leadership across sectors and disciplines.

The results are striking… cities left for dead making sizable, measurable progress on multiple metrics of prosperity.

The ingredients of European recovery are not new to people in this room.

Several years ago, the report on Gateway Cities released by Brookings and MassINC recommended many of these elements, particularly around connecting hubs via rail corridors.

The point here is for older industrial metros in our country—particularly in New England and the Great Lakes—to coalesce around systemic change in D.C. and state capitols and make the kinds of investments and reforms that would yield transformative results.


Let me end where I began.

The United States enters a new century with a new geography and a new face.

We are no longer Jefferson’s nation of rural hamlets and small towns, with economies that are internally focused and self reliant.

Rather we have emerged as the world’s preeminent economic power precisely because we are now a network of metropolitan areas that are integrated and connected with their sister economies across the globe.

Our challenge is to get comfortable in our new metropolitan skin and alter the way we govern so that our metro communities can achieve their fullest potential as our engines of national prosperity.

The federal government, at a time of economic crisis, social challenge and unprecedented environmental pressure, can catalyze the move toward metropolitan governance and, in so doing, pave the way for decades of growth and development that is smart and sustainable.

We need a Metro Policy for a Metro Nation.