There are various dueling popular narratives about what drives economic growth in a city or region. One narrative focuses on business climate factors such as taxes and regulation. Others stress the importance of locally available talent or affordable housing and commercial property. But the reality is that economic growth is multi-factorial. There’s no single component that drives every outcome. Places have to pay attention to many things, not just one.
Consider, for example, the recent announcement that the investment management firm AllianceBernstein will relocate its headquarters and more than 1,000 jobs from New York City to Nashville. If talent were the deciding factor in where to locate that business, the idea of leaving New York City would be unthinkable. New York has the best finance talent in the country.
But AllianceBernstein’s move to Nashville is part of a larger trend of finance jobs leaving New York City for lower cost locations. Deutsche Bank opened an office in Jacksonville, Fla., where it now employs 2,200 people. Goldman Sachs employs more than 2,300 people in Salt Lake City. This has been bad news not only for New York but also for its region. Traditionally, finance businesses leaving Manhattan moved across the river to places like Jersey City, N.J., or somewhere in Connecticut. Today, they’re just as likely to move across the country.
Cost savings is definitely a big part of the agenda in these moves, but it’s not the entire story. Some AllianceBernstein functions, such as wealth management and trading, will remain in New York. And overall, New York City continues to do very well economically, with the city at an all-time employment high. For the highest-end functions in specific sectors that heavily leverage New York’s unique human capital base, the talent factor still seems to loom large.
It’s also the case that having a good business climate doesn’t guarantee that your city will thrive. Nashville is booming, but Memphis, which benefits from the same business-friendly state policies, has not posted nearly the growth numbers. Indeed, we often find that within a state different regions can have strikingly different growth rates despite facing identical state tax and regulatory climates.
Like business climate and talent, crime rates are sometimes touted as a driver -- or inhibitor -- of new growth. Yet Nashville’s murder rate is four and a half times as high as New York City’s. Perhaps crime today is perceived as “low enough” in most places. Or perhaps crime is now even more racially segregated: Chicago’s gentrifying neighborhoods are far safer than its economically struggling ones. In city after city, the upscale residents of favored urban districts now face far lower exposure to violent crime than in decades past.
Economic growth, then, appears to spring from an amalgam of factors. Talent, wherever it can be found, really is of great importance. If you don’t have or can’t get the labor force to meet the demands of business, it’s going to be tough to grow your jobs base. And if other places have or can get the same talent -- or perhaps easily convince your talent to move there -- and have other advantages over you in terms of costs and business climate, then the talent you have may not save you.
There’s another troubling labor factor: Many places have shrinking labor forces, or will have them soon. This means it’s not very likely they will be able to grow their economies significantly no matter how favorable their tax climate. While it’s possible for them to become higher-value economies while shrinking in jobs, that’s not likely either. For some places, their struggles to attract people may be in part related to high taxes or onerous professional licensing and other regulations. In others, quality-of-life issues like crime may loom larger. Or perhaps problems like a bad brand in the market lag behind the reality of positive changes.
Much of the Rust Belt falls into this category. Many cities and rural areas are shrinking or stagnant in population. A number of them have job openings going unfilled, but these jobs are not good enough to lure people to the community. Some places are actually turning to economic subsidies to lure residents, not just businesses. Without some major change in their demographics, they may be essentially capped out economically.
Places that do have growing labor forces with in-demand skills still need to pay attention to their cost profile, taxes and regulatory climate. The most elite cities can perhaps get away with not doing so, for a while at least. But as they become more dependent on the highest-end businesses to pay the civic bills, they will become more exposed to fragility in those sectors.
Beyond talent and taxes, places also need to pay attention to a variety of other factors including public services, racial inclusion and their distinctiveness in the market. And even considering all this, it can be difficult to pin down exactly why one place is growing faster than another. It would be nice if cities and states could rely on simply pulling one lever for economic growth, but in the game of economic development there is no simple rule.