Brookings' Bruce Katz: The New Silk Road - US 21st Century Economy Powered by Exports, Energy & Innovation

Editor’s note: This speech was originally presented on May 15, 2013 at the Houston convening of the Global Cities Initiative, a joint project of Brookings and JPMorgan Chase.

Good afternoon everyone. Thank you Mayor Annise Parker. Thank you JP Morgan Chase and Rice University for having us here today. It’s great to come back to Houston—there’s so much vibrancy, vitality, opportunity, and energy (no pun intended). We actually just had a piece in Newsweek today called “Where the Cool Kids Live.” The top three metropolises attracting young talent in this country: Washington DC, Houston, and Denver—so you can go take a look at that.

JP Morgan and Brookings have been focusing on what are obviously some serious challenges facing the country. It’s hard to believe this at times in Houston, but we still have 10.2 million jobs to recover from the Great Recession and keep pace with population growth. More importantly, in one decade, we went from 81 million people living in or near poverty in 2000 to 107 million by 2011.

Those numbers are not coming down any time soon, so our whole Global Cities effort with JP Morgan is to say, “We have to purposely restructure our economy from one that has been following an old growth model, looking very internally to the United States, to one that fully engages the world.” That means having a different narrative, and that narrative is essentially an economy that is driven by exports, powered by low-carbon and advanced energy, and fueled by innovation (both ideas and manufacturing). It’s also an economy rich with opportunity.

That is not a national growth model, though, because national economies are driven by metropolitan economies, particularly in the United States but also in Europe and rising nations as well. That’s because cities and metropolitan areas concentrate and agglomerate all the assets that nations need to compete and prosper in the world.

The final point I’ll make today is: it’s not national or state governments, for the most part, driving innovation and competitiveness in this country—it’s cities and metropolitan areas. The constitutional adults in our system, to a large extent, have left the building. You’re still here. As we’ll discuss, a network of leaders are going to have to step up and do the hard work to grow jobs and restructure our economy for the long haul.

So let me talk about what a former president called “the vision thing.” I’m going to talk about exports and global trade at the heart of the vision—just think about an economy where more firms and more sectors trade more goods and services with rising nations abroad. Why is that important? We really have crossed this economic Rubicon where Brazil, India, and China—the BICs—count for about a fifth of global GDP. In 2009, they surpassed the United States for the first time, and they are going to grow even more as our share of global GDP begins to shrink. As the president of Rice said, that is reflecting the rise of cities. 50 percent of the world’s population now lives in cities and metropolitan areas; the share will reach 60 percent by 2030. So the rise of Brazil, India, and China reflects the rise of cities—that’s why they are becoming so powerful.

The locus of economic power in the world is shifting. The top 30 metropolitan performers today are almost exclusively located in Asia, and the 30 worst performers for the most part are located in Europe, so we need to reorient our economy. As I said before, we are the most diverse nation in the world, but we tend to look inward for our growth, and only 13 percent of our GDP comes from exports compared to our competitors and partners—and the European Union obviously hides the global powerhouse of Germany.

We’ve got some challenges. The movement of freight is compromised: it’s undermined by transportation networks that tend to be clogged and congested. Also, we know Americans don’t get out much: only 36 percent of our population has a passport (well below the shares that we see in Germany, Canada, and many of our partners).

Can we get back into the export game? Now, this is really critical for people to understand: we still make things in the United States. We are not a post-industrial economy.

We have huge traction in aerospace, space, high-precision medical instruments, and high-quality pharmaceuticals. So we need to understand that we have a strong base. We remain a manufacturing powerhouse; we exported about $944 billion dollars in manufacturing goods in 2010, making us the third largest manufacturing exporter in the world behind China and Germany. It’s not just about the advanced manufacturing of high-value goods—we’re the number one exporter of private services in the world, exporting about $518 billion in services in 2010. That gives us a huge trade surplus in services, and that includes international students coming here, healthcare, tourism, and obviously business and other services abroad. So we have a huge potential for exports, and it’s hidden in plain sight.

The second piece is energy. Energy is shifting in this country, and we all know it. The energy we use, the infrastructure we build, the homes we live in, the office and retail buildings we frequent, the products we buy—are shifting in radical ways. Our competitors have really embraced the clean, lower-carbon economy, and they’ve created markets, grown jobs, and stimulated investment. They’ve seen it not as an environmental imperative, but as a market imperative.

So can we play? Our research shows that we have a very strong base of 2.7 million clean economy jobs, from renewable energy to pollution reduction to the recycling program that Mayor Parker just announced here. To put that into context, the clean economy is nearly twice the size of the bioscience field and 60 percent of the 4.8-million-strong IT sector. It has more jobs than fossil-fuel-related industries. We need to change our narrative about the clean economy because it is an export powerhouse. We are looking at clean economy establishments that are twice as export intensive as the national economy because this sector involves an enormous amount of production.

Now that obviously leads to the discussion of innovation. We must continue to be the world’s innovation nation, a hotbed of not just invention and ideas generation, but a platform for advanced production. That means we must embrace something that earlier generations understood implicitly and that Mayor Daley talks about as much as anyone in this country—the inextricable link between innovation and manufacturing. Innovation is only about 9 percent of all US jobs; but it’s 35 percent of all engineers in this country; it’s only about 11 percent of our GDP, but it’s 68 percent of all private sector spending on R & D; and it’s 90 percent of all patents in the United States. We will innovate less if we don’t produce more. We must make things again, and we must make advanced industry part of our narrative in this country.

So can we seize the future and realize our potential as an innovation nation? Market dynamics are changing globally; labor costs are rising in China; concerns persist about intellectual property; energy is cheaper here (partly because of the shale gas revolution); and we now need to experience a reshoring of US manufacturing, both American firms and frankly, foreign firms as well.

Finally, if you actually build an economy like that, it can be opportunity-rich, and that’s because firms in export industries pay workers more and are more likely to provide health and retirement benefits because they’re globally tested.

But this is going to require us to get really smart really fast because the rates of educational attainment are lowest among some of our fastest-growing populations. The United States is demographically blessed because we have a large, growing, diverse population, but we see large disparities between Whites, Asians, African Americans, and Latinos. This is not just an issue of fairness and equity—it’s an issue of competitiveness. For a place like Houston, upgrading the education and skills of your workers is essential to being able to grow this economy.

Second point: metropolises drive the world. This is what I consider to be the United States: 100 metropolitan areas, sitting on 12 percent of our landmass, they’re two thirds of our population, three fourths of our GDP, and on many of the indicators that really matter they punch way above their weight. We don’t think of ourselves as a metro nation in the US, but that’s why we’re so powerful and why we’re one of the preeminent economies in our world. Metropolises generate the majority of GPD in 47 of the 50 states, including states we think of as rural: Nebraska, Iowa, Kansas, and Arkansas. Texas is a metro state; your top six metros have 71 percent of your states population and 74 percent of your GDP; all 25 of your metro areas house 88 percent of your population and 89 percent of your GDP.

Now when we look at exports, the 100 metros obviously dominate, particularly on service exports because those are so dependent on talented workers, but they even perform very well in manufacturing exports as well. Given their edge in sectors like chemicals, consulting, and computers, the top 100 metros really are the front line of our commerce with China, Brazil, and India. The top 100 metros drive exports for another reason: they are logistical hubs that can move people and goods by air, rail, and sea. But here’s the really important thing: they don’t exist in the aggregate, they have distinctive starting points, and every US metro really presents a different economic face to the world.

About 30 percent of all US exports come from the top ten metropolises. It’s not just about large, diversified economies; these top ten metros saw the fastest growth in manufacturing since the beginning of the recession.

One thing about the productive, innovative economy is that it is highly differentiated. When you go from place to place across the United States, you see Walmarts, a lot of subdivisions, and we get it in our head that the whole country is just the same. Nothing could be further from the truth because when you think about what powers Hartford or Denver versus Detroit, it’s really a story of radically different starting points in the global economy. So what we’re doing at Brookings with JP Morgan’s help is giving every single metropolis in the US a dashboard so they understand what their starting point is.          

So where do you head? Let’s start with how the world actually works from the bottom up. When we were in third grade, we had books that showed the president and congress sitting at the top of our system, and we’re waiting for them to do wise things. Well, that isn’t going to happen anytime soon. What we do as metropolises is get networks of leaders to understand their position in the local economy and then leverage off that base. We’ve invented something called export planning in metropolises across the US, and essentially we take a page from business planning: understand who you are, what you make, who you trade with, and where the dynamics are going. Then establish some clear goals and strategies and co-produce the solution. It’s not government, or business, or universities, or skill—it’s all of them together that really matters.

Some people think of Portland as weird and crunchy, but it is one of five metros that doubled exports from 2003 to 2008, and they are intent on redoubling their totals, building off their base of leading firms such as Intel and Techtronics, but also their base of sustainable products and services. As the world urbanizes, it needs American firms to help it grow in smart and sustainable ways, and Portland has a wide range of innovative firms and smart collaborations helping them do exactly that.

In LA, the industry base is different. Obviously, Hollywood is a strong cluster, but you also have a large manufacturing base in LA that people never talk about. It’s mostly small and medium-sized firms and they need help to trade abroad.

The U.S. Conference of Mayors has put out an export-ready challenge. They’re calling for 25 metros to stand up with their own deliberate, distinctive export strategies and broader trade strategies. We’re hoping to work with metros across the country to help affect that. We’ve opened up an export-trade boot camp at Brookings where five or six metros come together. But most important is not to do the cookie-cutter thing. Each metro needs to decide what makes you special, what are your challenges and skills, and how it cracks the code on that.

Now, we do still live in a federal republic, so we have to advocate nationally. In some parts of this country the states are stepping up on trade. You see it in Pennsylvania, in Florida, particularly around the ports; Colorado and Ohio are trying to provide a platform for advanced industry clusters. That platform requires investments in advanced R&D.

Our national government has a critical role to play—whether they will play it is really the question. Houston can’t have its own trade policy in the sense of “Let’s negotiate with China.” We need a national government to open markets, reform immigration, modernize and prioritize trade quarters, deal with export financing, and reach out through international organizations or our consulates to help small business really access markets.

The final piece—and perhaps the most important thing to think about: the world exists as a network of trading cities. This is the unifying narrative of the twenty-first century. Nations don’t really trade with each other; companies trade with each other, and companies tend to trade in metro conglomerates. We need to start removing national borders and understanding that this is really how countries and the global economy operate: through networks and supply chain linkages between financial, energy, and manufacturing hubs.

Now to some extent we’re going back to the future. Remember the Silk Road? What was the Silk Road about? It was about different parts—whether it was the Chinese, the Romans, the Persians—trading goods along this extensive route that basically built empires and determined prosperity for a long period of time. Post-Silk Road, you can talk about the Italian City States or the Hanseatic League in Medieval Europe.

I think what’s emerging in this century is the new Silk Road. For Houston to fully realize its potential, not just as a metropolitan area of 6 million, but for each individual family, the key is to understand who your partners are and to reach outside of the United States to structure (as the mayor has already begun to do) tight, sharp, formal and informal relationships between government, business, universities, civic leaders, etc. This is a “sister cities” model brought into this century, so we can link together by trade, learn from each other on urbanization, and then leverage together politically so we get the national rules right so we can expand commerce, investment, and prosperity for all.

So that’s the message out of the Global Cities Initiative. It’s an absolute pleasure and privilege to be back in Houston, because you get it... Thank you.  

Bruce Katz is a vice president at the Brookings Institution and director of its Metropolitan Policy Program. He is the co-author of The Metropolitan Revolution.