October 20, 2020

Article at Business Insider

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If America wants to bounce back from the recession and grow the economy for years to come, we should push tech companies to move to midsize US cities

The Cleveland skyline.
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  • The geographic divides in America have split the country politically and economically.
  • The tech sector has been a major driver of the economy since the last recession, but has grown primarily in a few major cities.
  • A national economic strategy is needed to grow tech hubs and jobs in midsize cities and reignite the US's innovation sector to kickstart economic recovery.
  • Emil Skandul is the founder of a digital innovation firm, Capitol Foundry, and an opinion writer on technology-based economic policy.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider's homepage for more stories.

The urban-rural divide over the past decade has become the political and economic fault line in America. The polarization has deepened as workers in America's heartland have seen industries wane and jobs depart offshore.

At the same time, the US economy is increasingly centered in large urban metropolises – New York, Los Angeles, Chicago, DC, and San Francisco – and is more and more undergirded by the technology economy. Today, in the midst of the pandemic-caused recession and as an internal migration takes place, cities that decades earlier sustained middle America have an opportunity to make a comeback.

To grow the US economy in this recession, policymakers should focus on tech growth in midsize and second-tier cities. By doing so, the economic drivers of big cities that have been recent winners in the new economy can be seeded elsewhere to provide growth across the US.

No other sector has performed like technology

In the post-recovery period after the Great Recession, tech led US growth in economic output which was also reflected on the stock market. At nearly $1.9 trillion, the sector now generates one-fifth of the total US economy only behind manufacturing and government. All this with over 70% of the sector's GDP grown in just the past decade.

Correspondingly, during the longest bull market in US history, the tech-led NASDAQ hit a low of near 1300 points in March of 2009 and hit a high near 9800 points this February — a 650% return that doubled the rate of return compared to the Dow Jones.

The tech industry's stock market growth is impressive, but it is job creation where the industry's impact can be felt most. Job creation in the tech sector has outpaced all other industries — save for food preparation, personal care, and transportation — growing at an annualized rate of 2.6% year over year. Though the sector accounts for only 10% of jobs in the US, it produces 18% of economic output.

This is significant for two reasons, the first being that tech sector wages have delivered a significant premium over other private sector wages. In 1990, the average tech sector employee made $1.60 for every $1 earned by the average private sector employee. Today, that premium wage has risen to $2.20 for every dollar earned by Americans in other industries.

The corollary is that 12.1 million tech workers in the US make more and enjoy better living standards. Many of the jobs within food and transportation that have surpassed it in job growth, come with lower wages, less stability, or a high likelihood that jobs may be replaced by automation over the long-term.

The other notably beneficial effect of the tech economy is the high job multiplier of the industry. On average for most industries, every new job at a firm leads to the creation of less than one other job in the local economy as a result. But for the tech industry, the high job multiplier means that every new tech job creates roughly two and as many as five indirect jobs. Combined, the direct and indirect effects of job creation — a factor of four or more — as well as the economic growth of the tech sector makes it unrivaled as an industry.

Investing in the tech economy in midsize cities

The tech sector has become a pillar of American economic progress, but that prosperity hasn't been shared, causing widened economic, political, and social divides between cities and regions. It's this geographic sorting of highly-skilled and educated workers in urban areas that has driven socioeconomic differences.

As workers moved to major metropolises beginning in the 1990's, through the 2000's, and well into the 2010's, companies coalesced and accelerated job creation and economic growth in those urban, and mostly coastal, areas. The shift from manufacturing to services and tech exacerbated income disparities for rural, suburban and many second-tier cities that eventually faced decline.

The innovation economy is critical to helping the national economy out of this recession. Yet, while most startups and venture capital firms are concentrated in San Francisco, New York, and Boston – cities that have recently seen significant outbound migration as evidenced in rent decreases — midsize cities should also develop their tech credentials. Why can't Tulsa, Oklahoma or Cleveland, Ohio also birth tech communities and grow global tech firms?

In fact, they can — if the right federal and regional policies are put in place.

Recently proposed legislation by Senators Dick Durbin and Christopher Coons would fund federal investment for research innovation centers in ten midsize areas, a small but important step towards spreading tech sector growth. It's not a guarantee, as most of the cities around the world that have attempted to mirror Silicon Valley's magnetism have been unsuccessful.

In fact, the 1990's saw a similar model proposed by Harvard economist Michael Porter for regional innovation hubs and research parks combined with venture capital that were pursued fruitlessly. One of the missing elements was an investment in people and in developing ecosystems that could further the technology transfer of research into business applications. After all, how else will new discoveries be applied in the real world as a product or service?

Investing in regions with existing universities, capital, and young workers provides the minimum necessary conditions for the agglomeration of an innovation cluster. But the human component of the equation requires cultivating young and educated workers while developing the skills of other workers coming from other industries. This also calls for developing linkages between people and institutions, encouraging communities of risk-taking entrepreneurs, and establishing places for ideas and startup culture to develop.

The strategic approach to developing these tech hubs must also be changed to be regionally specific. The tech sector generally has fifty sub-sector industries that include, using the North American Industry Classification System, information technology, telecommunications, research and development, internet services, and software. But it is also embedded within every legacy industry including advertising, financial services, healthcare, manufacturing and more.

This tech-sector tethering to existing industry clusters is what can allow midsize cities to develop their competitive advantage in the tech economy. Detroit has a better chance at succeeding if it focuses on developing automotive technologies than on cybersecurity technologies.

Omaha, Nebraska shouldn't emphasize building startups in the consumer space, but instead in the agriculture technology space. The shortcomings of previous efforts to re-create Silicon Valley tried to mimic it, rather than nurturing the unique identity of a region.

Tactically, what comes next are the policy tools for place-based economic development that can activate growth. Creating special zones, or federally-supported innovation districts, with economic benefits for firms who train or hire locally could further advance these non-coastal growth centers.

These zones could provide infrastructure investments in land reuse than can retrofit unused manufacturing hubs as tech offices and mixed work-live buildings with community spaces. Establishing government-backed revolving funds that continually reinvest returns and proof-of-concept venture funds could open up access to capital to riskier tech projects. However, most effective may be the expansion of tech transfer programs beyond universities that could bring innovations with commercial interest to market faster.

Tech innovation as a national economic strategy

No better time has arrived at rethinking economic growth in the US. As the election looms, a new promise to Americans can be made, one that can restore America's heartland regions and promote tech growth as a national strategy to address regional divergences.

Economists today worry that America's innovation edge is dulling, despite growth in science doctorates and research spending. Some point to a widening chasm between research and business application – to which the solution then includes the cross-pollinating concentrations of tech communities that can adapt science and apply it as innovations in the market.

Vice President Joe Biden and Senator Kamala Harris, who previously introduced the 21st Century SKILLS Act, can reinvigorate the American potential and double down on the innovation sector when so many Americans continue to be unemployed. They can expand the pool of the tech workforce beyond urban coastal regions while augmenting the development of innovation-based regional economies.

Promoting a robust tech-oriented economic agenda by advancing regional growth hubs will reorient the country's path towards the tech sector's many opportunities. It's a vision for shared growth that leans into a technology-dominated future.

Emil Skandul is the founder of Capitol Foundry, a digital innovation firm. He is an opinion contributor on technology-based economic policy.

This is an opinion column. The thoughts expressed are those of the author(s).