Katz: Global Economy Favors Regions That Strategically Invest in Infrastructure and Human Capital

The Los Angeles County Economic Development Corporation is engaged presently in a regional goal-setting economic development strategic planning process for LA County’s 10 million residents. What are the challenges LA’s leadership must address—even with the equivalent today of a gross domestic product of $640 billion—to continue to attract investment, retain jobs, grow competitively, and reduce income inequality?

Bruce Katz: The United States has an incredibly strong economic base. But over several decades, we’ve hemorrhaged jobs in the manufacturing sector. Because of that, we’ve seen the kind of wage and income effects that to some extent are fundamentally roiling our politics today.

We went from about 19 million jobs in manufacturing in 1980 to about 12 million jobs in 2013. Obviously, the country has grown enormously in that period. When you’re at that kind of impact in a sector that is highly innovative and pays a premium to talented workers, it’s not surprising to have broader questions around growing income inequality and social mobility.

The challenge for cities and metropolitan areas is to understand: What is your starting point on advanced manufacturing and advanced industries, in terms of trade-oriented clusters and companies? Irrespective of national and state policy, how do you become the best 21st-century version of yourself, leveraging your distinctive strengths and opportunities?

I think that’s what LA County is trying to do. Having read its strategic plan, I think that there’s a very healthy level of self-awareness and understanding of what makes LA County and the LA metropolis distinct.

What regional economic development strategies are succeeding in the US today? 

The US has seen a slight resurgence in advanced manufacturing since the recession. In the global economy, we’re beginning to revalue quality products and smart products driven by technology and software. This is true particularly in the water sector.

Once you move from a manufacturing scenario that favors lowest-cost countries to a scenario that favors countries like Germany or the United States, you’re going to see rebalancing of the spatial geography of advanced manufacturing. We’ve seen that to some extent since the end of the recession.

That means we need to have a fundamental paradigm shift among public, private, and city leaders about the role, function, and big multipliers of manufacturing in our country. We need to make things again if we’re going to get back to an economy that actually works for a broader section of our citizens.

There’s a book that just came out called The Smartest Places on Earth by Antoine Van Agtmael and Fred Bakker. Antoine coined the term “emerging market.” I think this is going to be the most important book of 2016. It says that the global economy is beginning to re-favor those places—not just countries, but also cities and metropolitan areas—that can draw a direct line between their companies, their clusters, and the competencies of their academic institutions. The ecosystem, in short. That’s what LA County, New York, or any other part of the United States needs to do if it’s going to take advantage of this structural shift in the global economy that re-favors smart places. 

Please give our readers examples of successful public policies, strategies, and initiatives that are benefiting from a paradigm shift that favors “smart places.”

There are several steps to take.

First, understand who you are, because advanced industry in LA is going to look a lot different from advanced industry in Louisville, Kentucky. The American economy has evolved over centuries to create highly differentiated metropolitan economies. What I like about the LA County Strategic Plan is it was able to list out those sectors of advanced industry that LA County has competitive advantages in.­­

Second, draw that direct connection between companies, clusters, and the competencies of academic institutions. You’re going to succeed if you become a brain hub—a place that is able to commercialize research for new products or continuously improve products so that your advanced economy remains competitive.

Third, begin to work on the continuum of programs that upgrade the skills of company workers and bring more workers into advanced industries. These are apprenticeships and community college credential systems aligned to what your region is good at. This builds on and draws from the German model, which has been successful over so many decades. For the most part, the American workforce development system has not prepared workers for jobs in these advanced industries, many of which do not require Baccalaureate degrees. They require sub-Baccalaureate degrees and technical skills.

Fourth, invest in infrastructure at multiple levels: freight infrastructure and transit, so that you can move people and goods around efficiently in your communities; and Internet connectivity, because academic institutions and globally competitive companies require and rely on the most sophisticated Internet connectivity to do their quick data computations and product innovations.

The last piece is, in some ways, the hardest to define but might be the most important: Create a culture of collaboration that comes to ground in real, particular ways in relatively small geographies. This is what we call innovation districts. Your companies, entrepreneurs, investors, academic institutions, and talented workers all collocate in geography that’s anywhere from .5 square miles to 1.5 square miles, usually in the shadow of advanced industries or institutions. That’s where innovation begins to accelerate.

The old model of having science parks 20 miles outside—Los Alamos National Lab, Cold War-style—is dead in the United States. What is now required are urbanized environments in which the interaction among smart people, smart companies, and smart universities can accelerate and have market impact.

Your latest research highlights “special-purpose public, quasi-public, and civic institutions” that are “unlocking the value of underutilized public assets, and financing a wide range of transformative projects.” Could you elaborate?

The best example of this has come out of Europe, not the United States. The major European cities, like Hamburg and Copenhagen, are setting up publicly-owned private corporations able to leverage the full value of public assets—like land, buildings, ports, and waterfronts—for large public purpose. Think about the regeneration of HafenCity in Hamburg, which is an expansion of the existing Downtown of Hamburg by about 40 percent—designed, financed, and delivered by a private corporation that is owned by the city. Think about Copenhagen City & Port Development, a private corporation owned by the city government and the national government that is selling off publicly owned land and using it to finance transit expansion and waterfront redevelopment. That is the next generation of private-public demand in institutional modernization.

In the United States, we have been waiting for Godot, to some extent, for an infrastructure bank at the national level. Frankly, I’m not sure that’s going to happen. As a result, as you’ve seen in LA County, you’re going to the ballot box, you’re raising yourself tax revenue to build out your transit system (which is very smart), and you’re beginning to modernize existing sections of your infrastructure ecosystem—whether it’s your port, airport, or freight. Again, these tend to be segmented. They’re all interrelated, but the leadership tends to be compartmentalized.

In the next decade, we’re going to have to adapt and tailor European innovations to the United States. The federal government has a role. It still does many things. The transportation bill that just passed recently has some very helpful credits for electric vehicles in it. But I don’t think our institutions in the US have innovated to the full extent necessary.

You mentioned the role of finance and the availability of new financial tools. California has a state infrastructure bank, as well as a state treasurer’s office committed to advancing green bonds as a solution. As you mentioned, California also has a form of ballot-box financing for much of our infrastructure. Is California the norm, or is it driving change nationally regarding how infrastructure is financed?

We’re moving from a system of traditional federal spending in transportation, housing, or other areas of domestic policy, or the traditional municipal financing system in the United States, to a new system of what I call instruments, intermediaries, and institutions. Green bonds are an example of a new kind of instrument.

For the most part, this shift is centered in Europe because they treat climate change as not only a moral imperative, but also an economic opportunity for innovation. They’re not loyal to the partisan politics we have around scientifically settled issues.

Europeans are also inventing a way to treat portions of a city as a unified asset class. In the United States, we tend to invest separately in housing, small business, and infrastructure. In places like King’s Cross in London, pension funds are treating the entire redevelopment of the surrounding area as one unified asset class. That allows for larger, less prescriptive investments to happen with attention on long-term return, not just on short-term return.

Instruments are being invented in the United States. We do have access to the ballot box. We have a very sophisticated capital market. But I don’t think we’re at the end, by any stretch, of the innovative cycle of creating new instruments.

Then the question is: Do we have the intermediary structures that could help match capital to the investments we know we need to move from grey infrastructure to green infrastructure—to build up state-of-the-art transit centers? Do we have the new kinds of institutions like you’re seeing in Hamburg and Copenhagen that can design, finance, and deliver, with an understanding of the kind of institutional investors that potentially can become part of the solution?

Elaborate on the functions these intermediary institutions now serve, and the ingredients necessary to form them.

Intermediary institutions exist at various levels. In the United States, we’re exceptional because we have a very distributed network of advanced research institutions like USC and UCLA, as well as the National Labs and our military research. But we’re not commercializing enough for the market.

Some intermediaries, like 1871 in Chicago or Cambridge Innovation Center in Central Square—and to some degree, your Cleantech Incubator and Impact Hub—are committed to being the place where smart scientists, faculty researchers, and even student entrepreneurs can be matched up with the right kind of venture capital. That’s one matching function that intermediaries are serving.

The other function intermediaries are serving in regard to broader infrastructure is understanding the kinds of innovations happening outside the United States. We are lagging in terms of building both great infrastructure for our cities and sustainable transit systems, particularly those that retrofit the infrastructure investments we made back in the 50s that scarred, divided, and segmented our cities. In a way, we’re catching up to Europe. For decades, Europeans have decked over their freeways and rail lines, and built out much more substantial transit systems and clean infrastructure systems than we did. You need intermediary structures that translate European financing or institutional models to the United States. That’s beginning to happen.

In the past, a national government would lead the charge. Washington is not completely out of the picture, but they have been hampered not just by partisan gridlock, but also by a broader structural shift. Our national government is basically becoming a healthcare company and an army, if you look at the budget and spending.

The necessary changes need to be bottom-up. They have to come from sophisticated and mature metropolitan economies—not just county governments, but also business leaders and philanthropists.

Lastly, in the heat of the national presidential election this year, is there a vibrant national conversation focused on regional economic development? If there is, what is its focus? If not, what explains the dearth of informed commentary regarding strategies for subnational economic development?

The national election is a reality TV show. I don’t think it’s even close to being a substantive conversation about how the United States invests in the future.

We need to invest on a broader scale in innovation and apply that innovation for market discoveries. We need to invest and retrofit aging infrastructure, but also infrastructure that leapfrogs into the next century. Then, we need to invest in talent, in people, in the workforce, and fuel not just idea generation, but also the production of advanced manufacturing and advanced industries. We’re not having any of that conversation.

When we do have a conversation, we tend to be talking about symptoms or looking in the rearview mirror and focusing on what went wrong, not how to solve it. Perhaps as we move to the general election, we’ll get a little bit more of a conversation.

But again, the defining point about the United States is that we are a federal republic where the health of our society is not dictated by the health of our national government, but by the vibrancy of our cities and metropolitan areas. More than in any other country in the world, they are the driving engines of our nation and our society.

Even though I wring my hands about the lack of intelligent discourse in the national elections, at the end of the day, places like the LA metropolis have a GDP broader than just about every other country in the world and have the talent and the capacity to move forward.

We’re having a presidential election as if it’s 1960 and the whole country is governed from the center. That has not been true for decades. We should start understanding that we need a much more balanced discourse about how much this country is governed from the bottom up, and how much real power is in the hands of public, private, and civic institutions.