Beyond any impending bubble in education and health care spending, these two sectors are not a source of economic development in the first place.
Are "eds and meds" — the massive education and medical complexes that many cities and regions have vested so much of their hopes (and dollars) in as key levers for future economic development — a bust? That’s what Aaron Renn, who blogs as The Urbanophile, argues at New Geography:
In the last few decades, as suburbanization and deindustrialization devastated so many cities, they turned to two sectors that seemed not only immune to decline, but were actually growing: universities and hospitals. The so-called “eds and meds” sectors, often related through university affiliated hospitals, became a great stabilizer for many places. For example, the fabled Cleveland Clinic cushioned the blow of manufacturing decline in that city. Après steel, a city like Pittsburgh practically saw themselves as defined by an eds and meds economy, with the new economic pillars being the University of Pittsburgh Medical Center and Carnegie-Mellon University.
Perhaps unsurprisingly, these sectors have come to dominate so many cites' economic development strategies. It’s harder to find a major city that isn't touting some variation of a life sciences “cluster” as a strategic industry than one who is, and local medical schools and hospital complexes feature prominently in this. Similarly, technology transfer from schools is supposed to power startups, while in many cities growth in the number of students itself is supposed to be an engine of growth. For example, there are 65,000 students in the so-called “Loop U” collection of colleges in downtown Chicago, and education growth has been a bulwark of the Loop economy.
Chart by Derek Thompson
Renn sites the above chart, originally from an Atlantic article by Derek Thompson, that shows how steeply the eds and meds sectors climbed after the Great Depression, but it also shows that the two industries have recently leveled off. And this is where, according to Renn, the proverbial other shoe drops: "But for cities hanging their hat on eds and meds growth, a more fundamental problem now looms: these industries are at the end of their growth cycle," he writes. "Spending on healthcare and college tuition costs has been skyrocketing at rates greater than inflation for years."
Clearly, such a trend cannot go on indefinitely. As the U.S. starts to groan under the weight of spending on health care and higher education, it's clear that, as a society, we need to be spend less, not more on these items as a share of national output. Some cities with unique strengths, like Boston, with its many specialized biotech firms, or Houston, with the world’s largest medical center, may thrive in this environment, but the vast majority of cities are likely to be very disappointed in where eds and meds growth will take them.
Regardless of how it plays out, when you look at spending in aggregate in America, it's clear increases in health care and higher education spending cannot keep increasing at current rates. This means that it just isn't possible for all the cities out there dreaming of eds and meds glory to realize their dream. America simply can't afford it.
Whether the end of the great growth phase in eds and meds comes 1, 5, or 10 years from now can't be predicted. But come in the reasonably near future it will, and that's when the bulk of the cities that put all their chips in those baskets will receive a very rude awakening.
If Renn warns of a bubble that is yet to burst, from where I sit, the problem is already apparent. The data, including detailed analyses I've conducted with my Martin Prosperity Institute colleagues Charlotta Mellander and Kevin Stolarick, shows that eds and meds contribute little, if anything, to levels of regional economic development.
In our paper, "Inside the Black Box of Regional Development — Human Capital, the Creative Class and Tolerance," published in the Journal of Economic Geography in 2008 (an earlier, non-gated working version can be found here [PDF]), we looked at the specific occupations that are associated with regional growth and development, measured in terms of income and wage levels. We found no statistical association between either eds or meds occupations across U.S. metros.
Mellander did a similar analysis for this article, this time using more recent 2010 data. She looked at four distinct groups of professional and knowledge-based occupations using data from the U.S. Bureau of Labor Statistics — meds and eds, business and management professionals, science and technology, and arts, design, media, and entertainment. She ran simple correlations between the four and the basic measures of economic development. As usual, I should point out that correlation does not equal causation.
Her findings: meds and eds was not associated with regional wages, levels of high-tech industry, or levels of innovation (measured as patents per capita), and was negatively associated with economic output per capita (-.29). In contrast, the other three groups of occupations — business and management professionals, science and technology, and arts, design, media, and entertainment — were substantially positively associated with all three economic development measures, with correlations consistently in the range of .4 to .7.
Chart from the study, "Inside the Black Box of Regional Development — Human Capital, the Creative Class and Tolerance"
The chart above, from our 2008 paper, plots eds and meds occupations as a share of all knowledge and creative workers in a metro against regional wages. The slope is distinctly negative. The larger the sector's share of local jobs, the lower average regional wages are. We note that:
There are several possible explanations for this. It is likely that the demand for these occupations does not increase with incomes or wages but rather with population. It may also reflect demographic characteristics. Regions for example with a larger share of students will have a greater demand for education and a smaller share of population to engage in other productive activities. Regions with larger populations of elderly households will have a greater demand for healthcare, more healthcare occupations, and a smaller share of the workforce employed in other productive activities. Needless to say, education and healthcare do not appear to add significantly to regional labor productivity and wealth. These occupations might be understood as a regional floor or constant. All regions will need some floor or threshold of these occupations, but the ones that experience productivity improvement and growth are those which have relatively higher concentrations of other occupations such as computer and math, science and engineering, business and management or arts and entertainment.
It’s past time for city and regional leaders to wake up to this fact. Eds and meds may constitute a large part of the urban workforce and provide a substantial job base for many cities and regions, but they are not by themselves a source of economic development.
Top image: George Frey / Reuters