Productivity, not population, is the key metric
Last week, the Bureau of Economic Analysis (BEA) reported some welcome news. Economic output (measured as GDP) increased in 304 of 366 metros areas in 2010, after mainly declining in 2009.
Some of the most dramatic growth occurred in Rustbelt metros that were hardest hit initially by the economic crisis. Elkhart-Goshen and Columbus, Indiana, for example, showed overall GDP growth of 13 and 10.1 percent respectively. The metros of the Bos-Wash Corridor led large regions, with 4.8 percent growth in greater Boston, 4.7 percent in greater New York and 3.6 percent growth in Greater D.C. in 2010. Economic growth was much slower in Sunbelt metros, which for a long time had been seen as America’s new growth magnets, drawing people, money and jobs from the moribund Frostbelt. Once the fastest growing metro in the U.S., Las Vegas’s economy continued to contract as its overall GDP sank and its real GDP in the construction industry declined by more than 20 percent, falling below its level a decade ago. The Brookings Institution’s September 2011 Metro Monitor notes that: “The metropolitan areas in Florida, California, and the Intermountain West that experienced a housing price boom followed by a housing market collapse (e.g., Boise, Fresno, Miami, Palm Bay, Riverside, Sacramento, Stockton, and Tucson) are prominent on our list of the weakest recovering areas.”
The economic body blow suffered in once fast-growing housing boom metros should once-and-for-all put to rest the misguided notion that places that draw in lots of people must also be growing their economies. I pointed to the limits of this equivalence in a previous post, dubbing it growth without growth. “A rising population,” I noted there, “can create a false illusion of prosperity, as it did in so many Sunbelt metros, which built their house-of-cards economies around housing construction and real estate development, leaving ghost towns, mass unemployment, and empty public coffers in their wake when the bubble inevitably burst.”
Economic growth comes not from population growth per se, but from improvements in productivity. The “gold standard” for measuring productivity is economic output (or GDP) per capita. My colleague Jose Lobo of Arizona State University has compared the average annual growth in population against average annual growth in GDP per capita for US metros between 2001 and 2010, and there is virtually no correlation between the two. In fact many of the metros which experienced vertiginous population growth over the past decade experienced negligible increases in economic productivity.
To try to get at what has helped some regions recover more and more quickly than others over the course of the crisis, my Martin Prosperity Institute colleague Charlotta Mellander and I ran some basic correlations between metro GDP growth between 2007 and 2010 and a number of economic, demographic, and socio-political measurements. Though I hasten to add that correlation and causation are not the same thing, the associations shed important light on the key factors that underlie economic resilience and prosperity.
Let’s start with what’s not associated with regional economic growth. The economic growth of metros between 2007 and 2010 had little or no relationship to population size, density, levels of innovation, wages or places with warmer summers. It had only a weak relationship to high-tech industry and a weak negative association with housing prices.
Several factors clearly do stand out. Many commentators, from Peter Drucker and Daniel Bell to me have charted the shift from an industrial to a more knowledge-based, creative economy. The crisis appears to have accelerated this shift, as evidenced by the fact that the economic growth of metros has been most closely associated with the share of the workforce in knowledge, professional, and creative industries. The correlation between growth and the creative class is by far the strongest of any in our analysis (about 0.4). Education or human capital levels – measured as the share of adults with at least a college degree, another way of measuring knowledge-intensity – also plays a strong role (with a correlation of about 0.3). Despite the strong showings posted by some metros with traditional manufacturing economies, economic growth was much less likely to occur in metros where the working class makes up a greater share of the workforce. Metro GDP is negatively associated with the share of working class jobs in a metro (with a correlation of -0.2).
America’s so-called “metro-covery,” promising as it is, remains divided. Working class and Sunbelt metros continue to be much harder hit and far less resilient than those with strong human capital-driven, creative economies. In my March 2009 Atlantic cover story, “How the Crash Will Reshape America,” I noted that “as the crisis continues to spread outward from New York, through industrial centers like Detroit, and into the Sun Belt, it will undoubtedly settle much more heavily on some places than on others. As the crisis deepens, it will permanently and profoundly alter the country’s economic landscape.” That is precisely what has happened, and what is happening still.