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February 18, 2020

1/2/2020 7:28:00 AM
Major think tanks propose another Wisconsin industrial cluster
Plan would add another $10 billion a year in federal spending

Richard Moore
Investigative Reporter


At a time when industrial clusters are coming under increasing scrutiny over whether their regional benefits outweigh the economic costs to other regions, a couple of Washington think tanks are proposing as many as 10 new technological clusters in the Midwest, with Madison leading the way on their list.

The report by the Brookings Metropolitan Policy Program and the Information Technology & Innovation Foundation (ITIF), "The Case for Growth Centers," calls for federal funding of up to $10 billion annually over the next 10 years to advance "eight to 10 new regional growth centers across the heartland."

The federal money would include increased support for institutions of higher education, workforce development, and potential tax incentives for investments in these new regional tech centers. The report listed 35 possible locations for the hubs, with Madison ranking ahead of all others, and Milwaukee ranking 17th on the list.

After the report was released, Gov. Tony Evers embraced it in a letter to the state's congressional delegation.

"Based on the study's proposed criteria, we believe Wisconsin is uniquely poised to lead the nation in this exciting next phase of entrepreneurship and innovation," Evers wrote. "Therefore, we urge you to give close attention to this proposal as it advances in the coming weeks and months and the potential it offers to build on our state's strengths."

Madison surged to the top of the list based on university STEM (science, technology, engineering, and math) spending per capita, share of residents holding at least a bachelor's degree, and percentage of STEM doctoral degrees, Evers observed.

Paul Jadin, the CEO of the Madison Region Economic Partnership (MadREP), said the recognition of Madison's status as a national leader in innovation was an honor.

"Stratospheric growth in our information communications technology and biosciences sectors, combined with our economic stability as the most industrially diverse MSA in the country, makes the Madison region an ideal location for this type of investment," Jadin said. "MadREP has pledged its support to our state, to the University of Wisconsin System, and to our Milwaukee partners to do what we can to assist Brookings and ITIF in advancing the concept."

Pat O'Brien, executive director of the Milwaukee 7 Economic Development Partnership (M7), said the new report would intensify economic development efforts in the area, given its potential.

"To unlock that potential, we are engaged with regional and statewide partners to develop and attract the talented employees it takes to support the innovative companies that are here already, and those that will arrive in the future," he said. "We welcome additional resources that can accelerate that growth."

Evers said the state has demonstrated that it has the infrastructure, institutions, and the relationships and commitment to transform ideas into successful outcomes, and Wisconsin could benefit immensely from the type of initiative proposed in the report.

"Moreover, this type of bold initiative could not only support the communities that receive funding, but ultimately strengthen our state and our country and support our position on an increasingly competitive world stage," he said.



The report

According to the report, the U.S. technology sector continues to grow rapidly, driving the nation's innovation and overall economic growth, but advanced technology companies are increasingly concentrated in only a few very high-cost hubs such as Silicon Valley, Boston, and Seattle, creating a "winner-take-most" dynamic.

"America's successful tech hubs haven't emerged by accident - most are products of deliberate policy choices and federal government support," report co-author and ITIF president Robert D. Atkinson said. "The neoclassical economics idea that markets can be left to drive innovation has instead left the heartland behind. A strong federal effort focused on helping some metros transition into self-sustaining tech hubs can help more Americans benefit from the significant opportunities enabled by high-tech industry growth."

Mark Muro, another co-author and Brookings Metro senior fellow and policy director, said the nation's tech-driven spatial divides have reached emergency status and won't resolve themselves on their own.

"It's time for the nation to push back against these trends and conduct a major experiment to see if we can help eight to 10 promising metros emerge as really dynamic anchors of growth in the nation's heartland," Muro said.

The report says it has become clear that while the future of America's economy lies in its high-tech innovation sector, that same sector has widened the nation's regional divides, a fact the report says became starkly apparent with the 2016 presidential election.

"Dependent on intense agglomerations of highly skilled workers and based on winner-take-most network economies, the innovation sector has generated significant technology gains and wealth but has also helped spawn a growing gap between the nation's dynamic 'superstar' metropolitan areas and most everywhere else," the report stated. "Neither market forces nor bottom-up economic development efforts have closed this gap, nor are they likely to. Instead, these deeply seated dynamics appear ready to exacerbate the current divides."

That's why the nation needs a major push to counter those dynamics, the report states.

"Specifically, the nation needs - as one initiative among others - a massive federal effort to transform a short list of 'heartland' metro areas with compelling strengths into self-sustaining 'growth centers' that will benefit entire regions," the report states.

Specifically, the report proposes, Congress should establish a rigorous competitive process by which the most promising eight to 10 potential growth centers (all not geographically located near existing successful tech hubs) would receive substantial financial and regulatory support for 10 years to get "over the hump" and become self-sustaining new innovation centers.

"Such an initiative would not only bring significant economic opportunity to more parts of the nation, but also significantly boost U.S. and innovation-based competitiveness, including in the competition with China," the report states.

So just what is the problem? Divergence, it seems.

"Rather than growing together, the nation's regions, metropolitan areas, and towns have been growing apart," the report states. "That has been a shock, including for an economic and policy mainstream that has long trusted the self-regulating, welfare-enhancing nature of the regional economics market."

For much of the 20th century, the report continues, market forces had tended to reduce wage, investment, and business-formation disparities between more- and less-developed regions, which ensured a welcome "convergence" among communities and regions.

But then, that cohesiveness ceased to be.

"However, in the 1980s, that trend began to break down as digital technologies and innovation moved to the center of economic activity," the report states. "Intense new demands for talent and insights increased the value of 'agglomeration' economies, unleashing self-reinforcing dynamics that increasingly benefited big, coastal core regions, often to the detriment of cities and metro areas in other parts of the nation."

So convergence gave way to divergence, and, the report concludes, the result is a crisis of regional imbalance.

"Among the superstar metro areas, the winner-take-most dynamics of the innovation economy have led to dominance but also livability and competitiveness crises: spiraling real estate costs, traffic gridlock, and increasingly uncompetitive wage and salary costs," the report states. "Meanwhile, in many of the 'left-behind places,' the struggle to keep up has brought stagnation and frustration. These uneven realities represent a serious productivity, competitiveness, and equity problem."



The take-aways

So, what to do?

Put simply, the report states, the time has come for the nation to offset the pull-away of the innovation superstars with a concerted federal intervention to support the emergence of new tech stars in new places. For that to happen, the authors contend, managers of the U.S. economy must understand certain realities.

The first is, regional divergence has reached extreme levels in the U.S. innovation sector.

"The innovation sector - comprised of 13 of the nation's highest-tech, highest-R&D 'advanced' industries - contributes inordinately to regional and U.S. prosperity," the report states. "Its diffusion into new places would greatly benefit the nation's well-being."

Unfortunately, the report continues, far from diffusing, the sector has been concentrating in a short list of superstar metropolitan areas such as Boston, San Francisco, San Jose, Seattle, and San Diego, which accounted for more than 90 percent of the nation's innovation-sector growth during the years 2005 to 2017.

"In this fashion, they have increased their share of the nation's total innovation employment from 17.6 percent to 22.8 percent since 2005," the report states. "In contrast, the bottom 90 percent of metro areas (343 of them) lost share. As a result, the U.S. innovation industry has become heavily entrenched in just a few places. Fully one-third of the nation's innovation jobs now reside in just 16 counties, and more than half are concentrated in 41 counties."

All of this points to the extent to which innovation-sector dynamics compound over time, leaving most places falling further behind, the report states. But, the authors contend, such high levels of territorial polarization are a grave national problem.

"At the economic end of the equation, the costs of excessive tech concentration are creating serious negative externalities," they wrote. "These range from spiraling home prices and traffic gridlock in the superstar hubs to a problematic 'sorting' of workers, with college-educated workers clustering in the star cities and leaving other metro areas to make do with thinner talent reservoirs. As a result, whole portions of the nation may now be falling into 'traps' of underdevelopment."

Of particular concern is a stark gap between the productivity of the relatively few metropolitan areas with high shares of innovation industries and the many more with less.

"These patterns are hurting the country's innovation-based competitiveness, since the skyrocketing costs of the most successful tech hubs mean that tech investment is often made in other places - but not in other parts of America, given the shortage of vibrant lower-cost hubs," the report states. "The result is that investments flow to places such as Bangalore, Shanghai, Taipei, or Vancouver, rather than Indianapolis, Detroit, or Kansas City."

Equally concerning is the fact that the nation's divergence is unfair, the authors wrote.

"So many Americans reside far from the opportunities associated with the nation's innovation centers, undercutting economic inclusion and raising social justice issues," the report states. "Regional divergence is also clearly driving 'backlash' political dynamics that are exacerbating the nation's policy stalemates."



Report: The government must save us

According to the report's authors, markets alone won't solve the problem. Rather, they wrote, place-based interventions will be essential in ameliorating it.

"When the economy was 'converging,' it was easy to assume that any problems of regional unevenness would naturally resolve themselves," the report states. "Indeed, until very recently, self-correction remained the expectation of mainstream economists, with their embrace of traditional doctrines of 'allocative efficiency,' 'equilibrium,' and 'welfare-maximizing' spatial results."

However, the authors argue, the rise of newer innovation-oriented economic theories has thrown more attention onto the power of local "agglomeration" effects, by which they say large benefits accrue to firms when they locate together in urban areas.

"Substantial evidence now suggests that agglomeration brings with it strong self-reinforcing tendencies that not only do not support the 'spread' of development, but are likely to exacerbate its concentration," the report states. "Moreover, 'bottom-up' technology-based economic development efforts cannot significantly change these patterns by themselves, in part because the resources states and cities can bring to bear are limited."

Accordingly, the authors argue, the U.S. needs not just nation-scaled solutions for its regional imbalances but place-based ones, and the nation should counter regional divergence by designating eight to 10 new regional "growth centers" across the heartland.

"The time is right for, among other initiatives, a 21st century comeback and update of 'growth pole' strategy - the 1960s and 1970s emphasis in regional economic planning that called for focusing transformative investment on a limited number of locations to catalyze the takeoff of those regions and the nation," the report states. "What is needed in this respect will be: generous awards of key federal innovation inputs (including support for scientific and engineering research, regulatory benefits, and supports for high-quality placemaking) coupled with a rigorous and competitive selection process to identify the most promising locations for intervention."

As such, the authors argue, the federal government should assemble a major package of federal innovation inputs and supports for innovation-sector scale-up in metropolitan areas distant from existing tech hubs - places like Madison.

"Central to this package will be a direct R&D funding surge worth up to $700 million a year in each metro area for 10 years," the report states. "Beyond that will be significant inputs such as workforce development funding, tax and regulatory benefits, business financing, economic inclusion, and federal land and infrastructure supports. The increasing preference of innovative people and companies for mixed-use downtowns, waterfront areas, and urban 'innovation districts' means that federal contributions to urban placemaking also should be prominent."

Overall, the authors project, a rough estimate of the cost of such a program suggests that a growth centers surge focused on 10 metro areas would cost the federal government on the order of $100 billion over 10 years.

As the authors point out, that is substantially less than the 10-year cost of U.S. fossil fuel subsidies.

In addition, the authors continue, the government should establish a competitive, fair, and rigorous process for selecting the most promising potential growth centers to receive the federal investment.

"To distribute its supports, the proposed growth center program would select for awards the eight to 10 metropolitan areas that had best demonstrated their readiness to become a new heartland growth center," the report states. "The process would employ a rigorous competition characterized by an RFP-driven challenge, goal-driven criteria, and an independent selection process."

Numerous metropolitan areas in most regions have the potential to become one of America's next dynamic innovation centers, the authors argue.

"Skeptics may doubt that eight to 10 metro areas worthy of growth center investment can be identified and catalyzed for 'take off' and self-sustaining growth," the report states. "However, even a fairly restrictive list of eligibility criteria yields plenty of potential candidates. Based on a demonstration in this report, some 35 potentially transformative metro areas surface as candidates for growth center designation."

Madison is number one on that tentative list, but candidates are situated in at least 19 states, the authors wrote.

"Many more promising metro areas exist," the report states. "There is likely a score of 'up-and-coming' metro areas that hold a solid capacity for countering the nation's regional divides by bringing tech-based development closer to the nation's left-behind places."



Critics will exist

To be sure, the authors wrote, there will be objections.

"Some will say the present proposal goes way too far, while others will say it doesn't go far enough," the report states.

To the first point, the authors contend, many conventional economists will argue that any such push to promote regional equity will come at the expense of efficiency.

"However, because of both the negative externalities from growth in booming tech hubs and the positive externalities of growth in targeted emerging hubs, intervention can help underperforming metro areas turn the corner, escape a cumulative causation trap, and add to the nation's total welfare, including its global competitiveness," the report states.

Other critics will deny the ability of the federal government to effectively pick regional "winners" or reject that the emergence of existing clusters had anything to do with government efforts, the authors observe.

"But one has only to examine the history of U.S. technology hubs such as Boston, the Bay Area, and North Carolina's Research Triangle to see that the federal government has often played important, if not decisive, roles in helping new tech centers attain critical mass," the report states.

To the other point, others may say that a growth centers push does not sufficiently "change capitalism" or address the full crisis of America's smaller cities, towns, and rural areas, and certainly, the authors acknowledge, that is true.

"There is much more that needs doing, especially for the most deeply struggling communities," the report states. "But the proposed innovation surge would absolutely begin to transform the nation's spatial malaise. Most notably, it would bring new vitality closer to more struggling communities, allowing for smaller towns and counties to benefit through supply chain relationships, commuting, and other interdependencies with the growth centers."





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