Regional Growth Through Economic Policy
Ed Glaeser, Ph.D.
Fred and Eleanor Glimp Professor of Economics, Harvard University
A century ago, cities could succeed by being low-cost producers of
manufactured goods. Good ports and rail yards made the cities of the Midwest and
Northeast industrial powerhouses. Changing transportation systems and
globalization have eliminated that path to prosperity. Today, cities can succeed
only if they are centers of innovation that produce new technologies and new
business models. There is no way for governments to mandate innovation from on
high. Individual entrepreneurs are the key producers of new ideas. But how can
places manage to be centers of entrepreneurship?
At the city level, an abundance of small entrepreneurial firms predicts
success. High skill-levels are a potent predictor of population and income
growth. Industrial diversity and an abundance of independent suppliers also seem
to be helpful. These are the facts that suggest that cities should put
entrepreneurship ahead of smokestack chasing.
There are two related tasks involved in creating entrepreneurial cities.
First, cities must attract smart, entrepreneurial people. Second, cities must
possess an infrastructure that supports creative, risk-taking behavior. The two
tasks feed into each other. Smart, entrepreneurial people will be attracted by
good entrepreneurial infrastructure. If those entrepreneurial people come to an
area, they will help to build the legal, social, and physical infrastructure
they need to successfully innovate.
The economic imperative to attract skilled, prospective entrepreneurs means
that quality-of-life policies become economic development strategies. Good
schools both produce well-educated students and attract well-educated parents.
Kalamazoo, Michigan’s strategy of paying for college for all of the city’s
10,000 public school children is a creative education strategy that may attract
smart people. Smart transportation policies, like congestion charging, can
create fast commutes and help connect prospective entrepreneurs. Moderate taxes
also will attract people who are planning on generating wealth.
Heavy land-use regulations restrict local growth and keep housing prices
high. If an area wants to attract young, prospective entrepreneurs, that area
needs to make sure that developers can build a new, affordable housing stock
that will appeal to future business leaders. This doesn’t mean housing
subsidies; it means just giving the free market enough freedom to build needed
homes and business space.
Government policies should support rather than stymie entrepreneurial
activity. Entrepreneurs are sensitive to business taxes and regulations.
Right-to-work states have been much more successful in attracting new businesses
over the last fifty years than their more pro-union competitors have been. In a
world where firms are extremely footloose, an area must make sure that it is not
erecting policies that stand in the way of smart people trying new things.
Entrepreneurship is rarely a solo enterprise. Smart people learn from each
other, and an infrastructure for entrepreneurship should encourage connection.
One of the great advantages of urban density is that physical proximity promotes
the exchange of ideas. The great success of places like Silicon Valley and
Research Triangle Park owe much to the easy flow of ideas in these concentrated
clusters.
All cities can do more to promote the interactions of current and future
entrepreneurs. Easy transport is one way to achieve this end; public and private
spaces that encourage interaction also may be helpful. New ideas often are
created by fusing together two disparate old ideas, which may explain why
industrial diversity can be helpful. Mentorship programs and entrepreneurship
classes in public schools provide other means of connecting entrepreneurial
people.
There also is a case for experimenting with pro-entrepreneurship legal
infrastructure. Some researchers have suggested that California’s unwillingness
to respect non-compete clauses helped create the serial entrepreneurship of
Silicon Valley. More states may want to consider following California’s example
in this area. The costs of not recognizing non-competes is that some firms may
fear losing their best workers, but as long as other states don’t recognize
these clauses, this fear will always exist. Accepting non-compete clauses can’t
ensure that firms will get to keep their workers; states that recognize those
clauses can only make sure that workers who want to leave to start their own
firms will move elsewhere.
Ultimately, embracing pro-entrepreneurship policies requires a different
mindset for local government. The goal should not be to attract a few big
employers. Instead, the goal should be to attract a large number of smart people
and then to get out of their way. Unplanned creativity will be the most potent
driver of urban success. City governments need to put their faith in the ability
of smart people to build their own economic futures, rather than in the
seemingly safer, but ultimately less robust, strategy of attracting mature
industries.
