Saturday, October 3, 2015

My Amazon Review of Michael Storper's "The Rise and Fall of Urban Economies: Lessons from San Francisco and Los Angeles"

Winners and Losers in the New Urban Economy

Michael Storper et. al. have written an important book on the impact of the “new economy” on the growth and decline of major urban centers. It is destined to become a classic in regional economics and urban planning. The lead author is a professor of urban planning at UCLA. The authors use the Los Angeles and San Francisco metropolitan areas from 1970 to the present as a contrasting case study of how these two regional economies adapted to the transition from an industrial economy to an information economy.  To Storper and his coauthors San Francisco succeeds because it has a far more adaptable and open source business ecology than the more enclosed corporate world of Los Angeles. Further San Francisco’s advantage is augmented by a more far seeing and cohesive business/government community that adopts public policies to enhance the information economy. To the authors it is these two critical factors more than the role of immigration and the 1990s collapse of aerospace in Los Angeles that account for the stunning differences in economic performance.

To be sure these are valid points, but to my mind the authors over-state their case. Simply put the Los Angeles of 1970 suffered from the “tyranny of an installed base” and lacked the high gross margin businesses that could withstand the increasing tax and regulatory pressures coming from local government and the state of California.

Now let’s look at the data. In 1969 the Los Angeles CMSA had approximately four million workers with 1.1 million of them engaged in manufacturing. At the same time the San Francisco CMSA had approximately 2.1 million workers with fewer than 400,000 engaged in manufacturing. Los Angeles was a manufacturing region, in fact the largest in the U.S.. If that is all you knew and you posited that the revolution in global trade would bring U.S. manufacturing to its knees in the coming decades, then you would predicted that San Francisco would easily outperform Los Angeles. By 2013 employment in Los Angeles increased to 7.6 million, but manufacturing jobs plummeted to 700,000. By contrast San Francisco employment increased to four million jobs while manufacturing barely declined to 360,000 jobs.

What Los Angeles had was low margined traditional industrial, aerospace and apparel jobs, while San Francisco had much higher margined technology and specialized production jobs. To further prove my point the worst performing Bay area county was the one with the most traditional manufacturing jobs, Alameda County. Although people talk about the economic juggernaut of Silicon Valley few talk about the success of Alameda County’s major city, Oakland. Although it is an exaggeration, economically speaking the Los Angeles of 1970 looked a lot more like Oakland than San Jose.

One of the advantages Silicon Valley had was a legacy of the politics of the 1960s. Recall that at that time the primary buyer of advanced electronics was the Department of Defense and Silicon Valley vigorously competed with Highway 128 in Boston and Texas for the business. With the Kennedy-Johnson years defense money flowed to Boston and Texas and not to Silicon Valley which did not have the near monopoly position that Los Angeles had in defense oriented production. So what did Silicon Valley producers do to respond? They went after the commercial market and became far more adaptable than their competitors. Thus, when the aerospace recession of 1969-76 hit, Silicon Valley was prepared.

The authors duly note that Los Angeles was a major technology center in 1970, but most of that technology was based on aerospace. Unlike northern California where most technology enterprises were small and entry was easy, the ecology of the aerospace industry is based on large units with difficult entry. While job mobility in aerospace is high, for example I spent two years in the aerospace industry and worked at two large firms, capital mobility is not. You didn’t see venture capital funding aerospace start-ups.

Another way in which the tyranny of an installed base affected Los Angeles was the presence of a huge Hispanic population in the area. This meant that when the manufacturing base collapsed, the political structure had to respond to the loss of employment opportunities for that population. The response was to beef up the ports of Los Angeles and Long Beach which made them the entrepot for the flood of goods coming in from Asia. To the authors this activity increased middle and lower income employment, but were nowhere near the high jobs being created in San Francisco. What choice did the political establishment have?

This review doesn’t do justice to the very serious economics work that the authors present. I just wanted to point out to future readers to not completely buy in to the authors’ thesis. Initial conditions are very important and cannot be discounted. However, the authors offer much food for thought and demonstrate that public policy in this area is very difficult to make.


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