Joel's Jambalaya #9 - Economic Development for the 21st Century
Economic development agencies across the country collectively offer billions in incentives each year. The idea is that if a big employer moves in (usually manufacturing-based), it creates jobs and stimulates the economy. This used to be sort of true, but there are two big problems:
Every year, the U.S. economy is less reliant on the capital-intensive manufacturing that this type of strategy seeks to incentivize
It is a hugely risky, race-to-the-bottom approach - that one employer often moves or closes at some point, taking a significant chunk of the city’s economy with it and plunging it into a local recession. Further, the city able to offer the most in incentives usually overpays (The Winner’s Curse Effect)
Many of these agencies are incentivizing economic activity from 50 years ago. They are also often incentivizing companies that might have moved there anyway, resulting in a large loss to the taxpayer.
There are some economic development groups doing new things, like the Remote Shoals program here. But it amounts to the same thing: a fixed incentive of $X per job. These are all worthwhile pursuits, but I just can’t help feel like there should be other approaches.
The question I like to ask when imagining a startup city is: If this was being done from the ground up today, would it still be done the same way? How would a private, resident-owned city think about growing the economic activity in its boundaries?
Economic Development Today
Here are two true statements:
All economic activity is inherently risky.
The main goal of publicly funded bureaucracies is the (perceived) elimination of risk.
I believe it is these two facts that conspire to create the government ineffectiveness most of us have had some experience frustration with.
It is not possible to run a great economic development agency (or much else) by committee. Committees, especially publicly funded ones, will not take risk, and without risk there is no economic activity.
When you frame it this way, it seems perfectly obvious why most economic development work fails: It’s not actually developing economic activity at all!
Jobs, Jobs, Jobs
Growth in the city would at first be largely driven by individuals who work remotely, either for a company or as freelancers/self-employed.
These are called primary jobs. In economics-speak, they are tradable - they can be done by people anywhere in the world. These are often the types of “winner take most” jobs that can result in very high incomes for the talented people who perform them.
The way to think about new forms of economic development is to think of the city less like a municipality or government, and more like a new product offering.
It should attract primary residents by offering them something truly better than what’s available today. Today’s agencies offer cash incentives. It’s a start, but I think we can do better. Instead of an incentive, we need to offer a more compelling product. Here are some thoughts:
Well-designed, proximate, affordable housing
In the United States today, it is difficult to get all three of these: 1. Well-designed housing 2. Near most daily activities 3. At a reasonable price.
Nearly every American city fails on at least one of the requirements above, and many fail at all three. The housing there might be cheap, but it’s not well-designed or proximate - it is isolated from other uses or people. Or it might be proximate to lots of people and activities, but is not cheap.
Proximity is the vital ingredient that makes all urban areas tick. It is this proximity that enables people to exchange ideas, goods, fashion, beliefs, knowledge and anything else they see fit, generating the diversity that the most valued places all share. It is when people come together that mankind's greatest achievements and most engaging environments have been realised. And it is when this proximity is diluted that the success of urban areas is most harmed. - Jane Jacobs
American cities are experts in diluting proximity. This is not just a problem because car-dependent sprawl is unpleasant to live in. It’s a problem because Jacobs is right at a profound level. Cities simply don’t work well when they are too spread out and uses are isolated from each other.
It’s the difference between walking around Amsterdam:
and driving through this:
Though technically are both technically “cities”, it feels a little insulting to Amsterdam to call them the same thing.
Building a Better Product
When you purchase a car, how do you make your decision? Well, you analyze which features you get, how it feels to be in it, how efficient it is, and how those factors relate to the cost.
Usually you face tradeoffs like: I can buy something inexpensive and used, but it might be less reliable and have older technology. Or I can buy something new with a warranty, but I will pay more.
At the risk of breaking my analogy, most Americans are paying new Range-Rover prices for a 1996 Toyota Camry. Either car is fine - they both have advantages and tradeoffs - but the mismatch is in the amount paid for the value received.
In our case, we will try to simply offer a better product with the right features for less cost by giving people The Right Kind of Ownership. I’m working on a few pieces that detail more of the “cooperative city” idea, but the thinking is to slightly modify ideas that already work (like community land trusts) to create a place where the land is held in common by all residents while also incentivizing growth of the city.
The value proposition then becomes pretty straightforward for residents, developers, and businesses alike. If they move there, they become owners of the city as a whole, benefitting directly from the economic activity they contribute. They are active participants in the growth and value creation of the city. It’s incentive alignment on a large scale:
Today, companies have to be offered huge subsidies to consider locating in certain areas. This is because both the company and the city know that the company is creating a lot of value for the city by employing a bunch of people there. People living somewhere = tax dollars.
The incentives are a fee the city has to pay to capture that value because the incentives are not well-aligned between the city and company. The company has lots of choices of where to go, so it solicits bids from as many governments as it can. Its goal is to extract as much as it can from cities.
In our situation things look different. Instead of being in opposition to each other, the company and city are well-aligned. The city says to the company: “If you move here, you become an owner just like all the other residents and companies. So every dollar of value you create through your employment and activity benefits you directly”.
This is the difference between employees who own a lot of stock in a business and those who are just there for a paycheck. It may seem like a small difference - they are both still getting paid, after all - but the mindset completely changes.
Instead of “How do I do the least and still get paid the same amount?” it becomes “How do I maximize the value that accrues to this company - both for myself and fellow employees?” Meanwhile, the other residents are thinking the same thing. Everyone’s approach to creating value might be different, but that’s actually very healthy - the end goal is the same and we have a diversity of approaches.
Shifting the Incentives
Cities move from providing the minimum services necessary to still extract tax revenue to using all means possible to attract new residents.
Cities move from competing with their complements like real estate developers and business owners to cooperating with them to build as much housing and stimulate as much economic activity as possible.
In short, it moves cities from the right side of these curves to the left side:
https://a16z.com/2019/03/02/cooperatives-cryptonetworks/
The above post is worth reading in its entirety for more on this line of thinking.
Conclusion
To sum the ideas in this post up: if you get the incentives right in a startup city, you don’t need a bunch of people “Doing economic development” because it emerges naturally as a feature of the system.
Not only that, but with the right rules in place, the city could grow in a much more sustainable and human-scaled way. That’s the benefit of starting somewhat from scratch: there isn’t 80 years of car-centric development to deal with. I think this is how we build better cities in America:
Get the incentives right (Give people & companies ownership)
Get the regulations to guide growth right (Don’t use single-use zoning, for instance, and think of the city in product terms - what does it offer the resident?)
Let people build
Step 1 is why I think this is probably impossible to implement many of these ideas in existing American cities. There are too many entrenched interests; the status quo is too powerful. In the words of Bucky Fuller, we have to instead “build a new model that makes the existing model obsolete.”
Until next week,
Joel