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Why the United States Will Rule the Legacy Economy

Talent is the new oil, and our universities—talent production facilities—are the best in the world.
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Manhattan skyline on September 9, 2013. (Photo: stockelements/Shutterstock)

Manhattan skyline on September 9, 2013. (Photo: stockelements/Shutterstock)

To review, Silicon Valley is dying. Pittsburgh will take its place as the epicenter of the next economic epoch. The Innovation Economy is in decline. The Legacy Economy ascends. There isn't a next or new Silicon Valley. Like the automobile industry in Detroit, production will diffuse to places with cheaper labor. The cost for talent is too damn high.

Perhaps Pittsburgh won't reign as king of the Legacy Economy. It could be Boston. It could be a city I'm overlooking. But I'm confident the United States will host the center of gravity for an era when talent is the dearest commodity.

I see the Legacy Economy as a the reattachment of economic activity to the geography of natural resources, albeit talent replacing abundant coal. Talent is the new oil, or something like that. Given the demographic decline taking over the globe and more places actively competing for the same creative labor, I expect the sites of talent production (i.e. universities) to anchor a diverging economic landscape. The world's growing middle class has to study somewhere:

According to senior Mexican officials, at a U.S.-Mexico meeting during the summit, Mexican President Enrique Peña Nieto showed Obama a poster with a graphic explanation of a new Mexican plan to increase the number of Mexican students in U.S. colleges from the current 13,800 to 100,000 by 2018. ...

... If Mexico’s study-abroad plan is carried out as planned, it will be among the most ambitious of its kind. Student mobility, especially that of foreign students to U.S. colleges, is considered a key issue in today’s race for competitiveness, because all major world university rankings agree that U.S. universities continue to be by far the best in the world. They produce the bulk of scientific research and patents within the world’s academic community.

Mexican officials say they plan to pay for the massive increase in student exchanges with public and private funds. The Mexican Congress has already earmarked an increase in funds for education exchanges this year, and the government will now ask Mexican and U.S. companies to contribute their share, as they will be the first to benefit from highly skilled scientists, engineers and technicians, officials say.

Emphasis added. No shock to regular readers of this blog, the Mexican government is funding brain drain from the country. International talent trade is a major geopolitical concern. In that regard, the United States dominates the planet. Mexico's only play is to embrace that reality. Mexicans will stream across the border not for agricultural work, but higher education.

The world is full of colleges and universities. Other nations are vying for international students, as are the glut of tertiary institutions within the United States. Why will a few flourish and most fail? The economics of Massive Open Online Courses (MOOCs):

Having invested in the production of a course, a provider’s incentive is to sell it to as many students as possible. After the initial cost is covered each additional unit sold is pure profit. A low price maximises registrations and profit. But as prices converge towards marginal cost, there will be little scope for undercutting the competition. Instead MOOCs are likely to compete on quality, Mr Tabarrok reckons. Higher production costs are a small price to pay to attract much greater numbers of students. Such markets often evolve into winner-take-all, “superstar” competitions. The best courses attract the most customers and profit handsomely as a result. In this respect online education may more closely resemble information industries such as film-making than service industries such as hair-cutting.

The market for textbooks already fits this description. New textbooks are costly to write and design but can be reproduced fairly cheaply. Not surprisingly, only four introductory economic texts account for half of the American market, according to Mr Tabarrok. Indeed, says Tyler Cowen, a co-founder of Marginal Revolution University, it is possible that textbook publishers are better equipped than universities to develop MOOCs profitably.

The market for instructors will also be transformed. The best teachers will be fabulously productive, reaching hundreds of thousands of students. There may therefore be far fewer of them, each compensated like superstars in the entertainment industry.

Ironically, the technologically flat world of higher education will make location more important. MOOCs will help the rich (e.g. MIT) get richer. Talent production will agglomerate faster and more intensely. Export eds or die.

I'm bullish on Pittsburgh because the demographically challenged city has been importing college freshman for a few decades. The regional market has little to do with the health of Pittsburgh's Legacy Economy. The great exodus of the 1980s made sure of that. The rest of the country is busy catching up:

One recent USC study predicts that the Los Angeles area, due in large part to declining immigration, will continue aging rapidly. In the next two decades, the study projects, Los Angeles County will gain 867,000 senior citizens and have 630,000 fewer residents younger than 25. ...

... Southern California right now is not experiencing much youth migration. Hollywood, great weather and the beaches are still all here – in a climate enhanced by a greater cultural diversity – but young people still are not moving here in droves. From 2007-12, this region ranked a mediocre 31st in migration by 20-somethings. Overall, we are losing millennials, while other regions, such as Washington, D.C., Houston, Denver and Austin, Texas, are luring them.

Perhaps even more troubling, the region also ranks 47th for migrants in their prime child-bearing years and 32nd in terms of newborns. If not for the Inland Empire, which does markedly better with the 30- and 40-something groups, Southern California would be starting to look like a multicultural version of supergrey Japan. A recent report for the U.S. Conference of Mayors projected that, by 2042, Los Angeles will rank 58th of 70 U.S. regions for population growth, with the slowest growth of any major city in the South or West.

Whether you live in San Francisco or Los Angeles, colleges will have to import high school graduates in order to keep class seats filled. San Francisco is good at attracting the young and college educated. L.A. is a good place to grow old. Both cities desperately need Mexican freshmen. Southern California is in good position to reap the benefits of path dependent immigration. Will the local population tolerate the influx?

I could be overlooking Los Angeles. L.A. has a powerful Legacy Economy, more so than San Francisco. Outside the Rust Belt, the University of California-Los Angeles is the best place to find software developers. Asian migration to the West Coast is cemented in stone. The Mexican talent influx is more a matter of proximity than path dependency. Advantage Southern California.

Much of the talent that drove Silicon Valley and the Innovation Economy was educated in the United States. If you want to be the next Silicon Valley, then you need U.S. graduates. A second American Century is secure.