It's Time to Confront Our Coastal Elite Economy

Coastal cities have disproportionately thrived thanks to economic centralization. Yes, the marketplace is to blame, but so is federal policy.
January 2018
Coastal cities such as San Francisco have disproportionately thrived in the current economy. (Shutterstock)
By Aaron M. Renn  |  Columnist
Senior Fellow at the Manhattan Institute

Much has been written about our “winner-take-all” or “superstar” economy, in which elite coastal metropolises and other knowledge hubs have disproportionately thrived in terms of GDP and per capita income growth.

But what’s less discussed is what has driven this divergence, which has left large swaths of the country struggling. If we want to promote more even development, what should we do?

The drivers of this continuing economic centralization are a few mutually reinforcing trends: globalization, technology and changing lifestyle preferences.

The globalization of the economy has rewarded increasing scale. Larger scale is needed to run a seamlessly global business versus a national one, or an international one made up of largely independent country-based operations. Federal policy lifted many of the caps that previously limited consolidation in industries like banking and media. The result has been rollups of many major industries, with some becoming de facto “two towers” configurations like AT&T and Verizon, or Walgreens and CVS.

As detailed by sociologist Saskia Sassen, globalization also fueled demand for new financial and producer services needed to help companies manage more complex global businesses. These required specialized skills possessed by a limited number of people who tend to cluster in global cities.

We’re seeing other new trends contributing to economic centralization, such as the relocation of corporate headquarters into central cities to take advantage of proximity to professional services, talent and international flights. Companies like ADM, Caterpillar and GE have made or announced such moves. These are typically only small executive headquarters, but the loss of senior staff is significant for many of the less advantaged communities these companies are moving away from.

Then there’s technology, which has revolutionized business and many areas of everyday life. Technology-based businesses like Facebook or Google have network or other scale effects that create winner-take-all situations in some domains. This has centralized significant economic power in tech hubs. Technology also requires specialized skills, and the distribution of people with those skills is not even. They are again concentrated in global cities.

And then there are changes in lifestyle preferences, especially among younger adults. Compared to Generation X and baby boomers, millennials with college degrees have shown a greater preference for urban living with its dense, mixed-use development, walkability and public transit. Those amenities are also unevenly distributed, mostly existing in older cities built in the railroad and streetcar era.

A comparison of the share of young adults with college degrees in 2000 versus 2016 shows that many of the highest gains over that time were made in the usual-suspect coastal cities of New York, San Francisco and Seattle, although Chicago has done well along with a few other interior cities that include Nashville and Pittsburgh. The latter has an ongoing tech boom centered around Carnegie Mellon University, and the former has emerged in recent years as a hip destination. Cities such as Charlotte, N.C.; Columbus, Ohio; and Dallas have done OK playing to their strengths. But the biggest winners continue to be the coastal metropolises and tech hubs.

Many have argued that rising living costs will threaten these elite cities’ success, and that they are especially limited by their lack of housing affordability and construction. That may well be. Everything eventually suffers a correction. But it hasn’t happened yet. As my Manhattan Institute colleague Alex Armlovich has pointed out, just since 2013 New York City has added 10 times as many jobs as are projected for the second Amazon headquarters that so many cities are competing to lure.

Looking at this collection of trends, it’s clear that most of them are a result of the marketplace. Changing government policy to encourage more even development would not be an easy thing to do. How do you stop technology innovation, for example? How do you tell people where you want them to live?

Because these trends came from the marketplace, it’s likely only the marketplace itself can fix things. Don’t forget, this has happened before. Only a few decades ago, places such as New York City were all but written off as doomed. Now look at them. And some trends already seem destined to abate. As the millennials age and start families, many will be moving to the suburbs. Generation Z behind them is much smaller and may also prove to have different lifestyle preferences.

But the marketplace doesn’t explain everything. Industry consolidation and globalization were in part intentional creations of federal policy. The last few decades have seen significant regulatory changes to permit industry consolidations. And while globalization has become a dirty word in some circles of both the left and right, its promotion was explicit bipartisan policy in Washington for many years.

Given the poor economic results we’ve seen since 2000, with anemic GDP and job growth along with declining real median incomes, a reconsideration of federal policy related to globalization and industry consolidation is warranted. I won’t claim to have all the right answers, but it’s clear that staying with our current policies isn’t a solution. In light of today’s poor performance that afflicts so many communities that once thrived, America’s leaders need to be willing to embrace changes to the previous consensus in areas where deliberate policy may have contributed to these poor results.