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Ideas Trump Resources When it Comes to City Growth

Natural resources can help, but enduring economic growth is powered by talent and ideas.

The future of plenitude isn't high tech and software-driven, it isn't interactive or knowledge-powered; and it doesn't come from Silicon Valley, San Francisco, or New York City, David Brooks argued in his New York Times column Monday. It comes from old-fashioned, boring extractive industries like mining and oil drilling, and from un-sexy places like the Great Plains, Texas, and the Dakotas.

Brooks cites a recent report by Joel Kotkin, the urban contrarian and an occasional friendly debate partner of mine, that identifies "America's epicenters of economic dynamism." Brooks describes these epicenters as "a giant arc of unfashionableness." He writes, "You start at the Dakotas where unemployment rates are at microscopic levels. You drop straight down through the energy belts of the Great Plains until you hit Texas. Occasionally, you turn to touch the spots where fertilizer output and other manufacturing plants are on the rebound, like the Third Coast areas in Louisiana, Mississippi and Northern Florida."

The country's financial engines aren't in the Bos-Wash corridor or West Coast tech poles from Seattle to San Francisco, but in the low-tax, low-wage, anti-regulation, pro-business places east and west coast elites disparage as "flyover country." Or as Kotkin put it recently, "the real winners of the global economy have turned out to be not the creative types or the data junkies, but the material boys: countries, states and companies that have perfected the art of physical production in agriculture, energy and, remarkably, manufacturing."

We should all be thankful for America's remarkable resource wealth; it's a key dimension of our recent, as well as long-run, economic success. But it's far from the whole story. As Brooks's New York Times colleague Paul Krugman noted last year: "Employment in oil and gas extraction has risen more than 50 percent since the middle of the last decade," Krugman notes, "but that amounts to only 70,000 jobs, around one-twentieth of 1 percent of total U.S. employment."

Brooks and Kotkin's obsession with resource-driven growth is at odds with the broad consensus among scholars of economic development who document that it is not resources but knowledge, and ideas that power advanced economic growth. In fact, economists believe that many resource-rich economies suffer from the "resource curse." Large endowments of natural resources and of extractive industries can, according to this view, pose a powerful barrier to knowledge accumulation, educational excellence, and advanced economic development.

Last year, another of Brooks's New York Times colleagues, Thomas Friedman, seized upon the findings of a major Organisation for Economic Co-operation and Development report to make exactly this point. The report found a negative and statistically significant relationship (-.43) between the percent of economic output that comes from natural resources and the knowledge and skills mix of their people. As Friedman put it at the time: oil and knowledge "don't mix."

Much the same goes for U.S. cities and regions. In a classic article written more than half a century ago, the urban economist Benjamin Chinitz argued that regions organized around extractive industries, like Pittsburgh at the time, tended to evolve as one-industry towns, which dampened their entrepreneurial spirits and made it difficult for them to reinvent and reignite their economies when they slowed down. In contrast, he argued, regions like New York, which were less dependent on natural resources, tended to generate more diverse, entrepreneurial, and resilient economic structures.

A detailed 2012 study by economists Edward Glaeser, Sari Kerr, and William Kerr tested Chinitz's proposition by examining the growth trajectories of metros which had large concentrations of extractive industries (which they measured as proximity to mines) at the turn of the twentieth century (I wrote about the study here on Cities). They found that these extractive metros had lower levels of entrepreneurship, less growth in trade, services, and finance, and lower levels of overall economic growth out to today.

With the help of my Martin Prosperity Institute colleagues Charlotta Mellander and Kevin Stolarick, I decided to take a look at the role of resources versus ideas in the growth and development of U.S. cities and regions. We undertook a statistical analysis of U.S. metros by running simple correlations between their shares of employment in extractive industries and in knowledge-based and creative industries with three key measures of regional economic development: economic output per capita, average wages, and per capita income. Correlation is not causation, of course, but it provides a much better set of benchmarks for future study than cherry-picked statistics and arguments by anecdote.

And guess what: Across all U.S. metros, the share of workers in resource and extractive industries had no correlation whatsoever to four key measures of regional development: economic output per capita, average wages per capita, income, or median household income (the correlations range from -.08 to .09, none being statistically significant). Conversely, the share of workers employed in idea-based knowledge and creative industries was strongly associated with all four regional development measures (with correlations ranging from .53 to .74). In line with the resource curse hypothesis, the share of employment in resource and extractive industries was negatively associated with share of employment in knowledge industries and also with the share of adults with college degrees, a key measure of skill and human capital which economists uniformly find to be a key driver of short and long-run economic prosperity.

The reality, of course, is that it's not an either/or proposition — resources versus ideas. As I wrote last year in response to Friedman, "oil and ideas can go together, as long as leaders harness their resources to promote and create open institutions that harness and channel human capabilities." As Brooks himself notes, "the growing parts of the world … are often the commodity belts, resource-rich places with good rule of law like Canada, Norway and Australia." He rightly contrasts them with more "despotic regimes" in Russia, Venezuela, and the Middle East, which suffer today from the resource curse.

What sets the former apart from the latter is not just the "rule of law" as Brooks points out, but their ability to leverage those resources with ideas, knowledge, and creativity.

Take the case of Houston. It's not growing or becoming wealthier because it's just pumping oil out of the ground, but because it has developed a cluster of high-value added, technology intensive oil production and refining. As a result, it's home to one of the largest clusters of information technology workers and software engineers in the world, who specialize in technology related to oil production and processing. Many of the most successful states and metros in Brooks's and Kotkin's own high-growth corridors are the ones that have invested their resource wealth to build up their knowledge institutions and idea-economies, like Texas, which endows its universities with its natural resource wealth.

Not to mention Calgary, the center of one of the most naturally endowed regions on the planet. It is a case study in how resource wealth can be used to build a robust knowledge economy (the percentage of its workforce in knowledge and creative industries is higher than New York or Toronto). Its ability to combine resources and knowledge has made it most affluent metro in North America on a per capita basis, besting Silicon Valley, New York, or Washington, D.C.

The Bow skyscraper for the oil and gas company Encana in downtown Calgary, Alberta on January 26, 2012. (Todd Korol/Reuters)

Natural resources generate a lot of coin. But enduring economic success stems from using the proceeds from the stuff that's pumped out of the ground to build institutions and social structures which harness knowledge, accumulate the human capital, and generate the innovative capacity that powers economic growth. As the economist Paul Romer likes to say ideas are the most important resource of all. "Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable," he writes. The most important ideas of all, he adds are "meta-ideas," he adds, "ideas about how to support the production and transmission of other ideas."

America's remarkable track record of economic success lies in its ability to combine its resources with ideas, sometimes across different cities, sometimes in the very same place. The same is true of the other successful economies Brooks cites — Canada, Australia, and Norway — all of which combine substantial resource endowments with dynamic knowledge economies, and have even greater shares of their workforces employed in idea work than the United States.

It all boils down to a simple question: if you had to bet on the cities that will have the highest levels of income and economic development over the next few decades, where would you choose:  the "material boy" centers Brooks and Kotkin laud, or the idea cities like San Francisco or New York, L.A., or Washington, D.C., the latter two where they actually live?

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