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Like Manufacturing Once Did, the Legacy Economy Will Usher in a New Era of Prosperity

For a few Rust Belt metropolitan areas anyway.
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Cleveland, Ohio. (Photo: Henryk Sadura/Shutterstock)

Cleveland, Ohio. (Photo: Henryk Sadura/Shutterstock)

As detailed in my last post, investing in global city real estate is hot. Why store money in equities or gold when you could have a stake in London turf? The rush to get a piece of Rochester, Minnesota:

“I certainly have concerns about what’s happening to people who have been the core, the nucleus of downtown Rochester, and what’s happening with all these Destination Medical Center prices already going up,” he said. “Our rent alone has gone up tremendously from what it used to be.” He declined to say how much the rent was but said the firm’s rent is now 40 percent higher.

Foreign financial capital displaces local industry from the central business district. The hot money attraction concerns a globalized form of health care that appeals to clients around the world. The geography of demand for medical services is limitless, which effectively uncaps what patients are willing and able to pay. As a result, local Rochester, Minnesota, real estate becomes global real estate.

Wherever the geography of demand is out of whack with the geography of supply, real estate values will skyrocket. In general economic terms, an industry is divergent when its products are in demand around the world while the production of such goods are severely restricted by geography. "The Bad News for Local Job Markets":

“Ed and meds” have already accounted for a significant share of employment growth over the past several years. More important, these jobs are the only thing keeping many small and midsize American cities from sliding into deeper decline. Several regions are consciously building around these services under the logic that they cannot be outsourced, and local demand will continue to grow. Unfortunately, both assumptions are wrong, and that could mean bad news for many local job markets around the country.

Education and health care jobs are so attractive because unlike manufacturing jobs, which have steadily declined over the last 25 years, they are largely shielded from global competition. As a society we continue to spend large sums of money, both in the public and private sector, on educating our students and caring for the health of our citizens. Since good jobs will increasingly require more education and our population is aging, the long-term outlook for these sectors looks positive. Education and health care also create jobs across income distribution, providing work for home health aides as well as college professors.

However, while the total number of jobs in these sectors could grow, it is not likely that all regions would benefit equally. For example, one might take for granted that there will be growing demand for orthopedic surgeons in Toledo, Ohio, and educational administrators in Iowa City. But the same forces that led other industries to cluster in specific regions (think technology in Silicon Valley or banking in New York) are now sweeping through education and health care.

Manufacturing generates global goods but used to be concentrated in certain geographies, generating great wealth in Rust Belt cities such as Cleveland and Pittsburgh. Likewise, knowledge production and innovation concentrated in Silicon Valley generate tremendous wealth. When manufacturing started chasing cheaper labor, the geography of production (supply) expanded. Pittsburgh and Cleveland started dying. Likewise, knowledge production and innovation have started diffusing away from Silicon Valley to places with cheaper talent. The Innovation Economy is dying. As the Innovation Economy filled the divergent space vacated by manufacturing, so rises the Legacy Economy:

What will happen to enrollment at lower-ranked business schools when students have the opportunity to take courses à la carte at Wharton for less than the cost of their monthly cellphone bill? The best schools will attract more and more students, while the middle- and lower-tier institutions will mostly struggle, leading to less local demand for college administrators, tutors and faculty.

Health care jobs might seem very different at first glance. Every city, large or small, will always need emergency room staff and obstetricians within a reasonable distance. But this could be less true for orthopedic surgeons and cardiologists, who power the high-margin services that pump significant sums into local economies. What will happen when more employers follow the example of Walmart, which announced last fall that it would send employees in need of transplants or heart or spine surgery to one of six leading medical centers around the country, rather than to their local hospital?

Massive open online courses (MOOCs) threaten most institutions of higher education, save schools like Wharton housed at a university with a global brand. The University of Pennsylvania is driving the globalization of urban Philadelphia. The University of Pennsylvania (a la Mayo in Rochester, Minnesota) is driving the gentrification of tenured residents.

I call this emerging landscape the "Legacy Economy" because the small group of winners will look similar to that of the Manufacturing Economy. The robber barons of those times left behind world class infrastructure and civic institutions. Industrialists in Cleveland and Pittsburgh built great universities that underwrite today's meds and eds powerhouses (i.e. Cleveland Clinic and Carnegie Mellon University).

Understandably, the focus of community and economic developers is getting in on Silicon Valley's game. More and more places will be competing in the same talent pool for an industry already at its tolerance limit for salaries. The demand for talent will grow geographically for an already lean labor supply. Instead of wages rising, tech companies will figure out ways to squeeze more efficiency out of employees and find the means to cut existing pay (e.g. hire younger, less experienced workers). Detroit used to be the wealthiest metro in the United States. The Bay Area looks to be following the same path.

The duo of San Francisco and San Jose dominate the ascendance of the Innovation Economy. For the Legacy Economy, the duo of Cleveland and Pittsburgh will dominate. In terms of economic restructuring from manufacturing to knowledge production, Pittsburgh is about 25-years ahead of Cleveland. Concerning the development of the Legacy Economy, the gap is much smaller. I estimate that Pittsburgh is a decade or so more advanced than Cleveland. Given the strength of the Cleveland Clinic in the tradable health care sector, I expect that disparity to disappear. Education comprises Pittsburgh's strength. Demographic decline forced regional higher ed to seek freshmen from far afield. The primary competition for the crown of the Legacy Economy comes from Boston and Philadelphia. I'm confident that Cleveland will outclass both Boston and Philadelphia in divergent health care and subsequently transform the east side of that city. I'm less certain that Pittsburgh will outpace the two with regards to education.

The Legacy Economy isn't all eds and meds. Manufacturing is making a comeback, but not in a jobs sense. In a fashion, Pittsburgh still dominates steel production. Certain kinds of esoteric technical know-how will not magically appear in Brooklyn. The thick labor market of a century ago still pays dividends today. Literally below that unassailable geographic advantage are the Marcellus and Utica Shales. If cheap energy is the new cheap labor, then Cleveland and Pittsburgh are the heartland of the next great economic epoch.