In a culture preoccupied with Top 10 lists, it is not surprising that places are now scored, ranked, and promoted as “family friendly,” “great for singles,” and even “weird.” What is the value – if any – of these inventive metrics, and what do they mean for economic developers?

We’re [all] Number One!
Traveling across the country and meeting with hundreds of officials every year, we have become anesthetized to the “quality of life” pitch we receive from cities. It turns out that every community has the best quality of life in America. But before you laugh, it’s worth being reminded both why we hear this and – amazingly – why it is true. We hear it because people are proud of where they live. They are proud even while their industries are leaving and their populations are declining. It is not a paradox because that statement is true for them. If they did not believe in the quality of life of their city, they would not be there. In other words, quality of life reflects the values they hold dear, their reasons for calling their city home. What the phrase does not do, however, is critical to the entire economic development enterprise.

So where does “quality of life” fall short? What does it fail to do? The answer to that question is the answer to why people move, and especially why young people move. Quality of life does not speak to the values of the non-resident. It does not speak to the restless and the adventuresome. Quality of life does not capture what is unique about a community, what makes it different from other communities. It is for this reason that we began using the phrase “quality of place.”

A “Place” for Talent
While the importance of “place” is nothing new to planners and urban theorists, it was slow to be embraced by economic developers. The term gained currency in the late nineties, with increasing references by Richard Florida and Rebecca Ryan. In 2004, Joe Cortright published “The Young and Restless” in which he tried to capture some of the factors that attract young professionals to a community.

What these writers and speakers have in common is a desire to understand why people choose to relocate to a particular city. In the larger context of traditional economics, this is the “labor” part of the land, labor, and capital model. The greater mobility of Americans in general, combined with structural changes in the economy, make location decisions of skilled workers especially important. When you combine this with the demographic changes we know will occur as the baby boom begins leaving the workforce in large numbers (beginning in 2012 and accelerating thereafter despite the recession), the hunt for a talented workforce will be foremost on the minds of community leaders.

So what have we said so far? First, we need to evaluate the appeal of a city by how outsiders see it. Second, quality of life is no longer a useful measure of whether a community can attract or retain young people. And third, the importance of attracting talented workers will become more important than ever.

Evidence in Economic Vitality
If you accept these points, and certainly not everyone does, you are still left with the question of what is quality of place. Can it be measured? And is it the right way to think about how you can attract people to your community? We have to accept that a popular turn of phrase is not a term of art. In other words, it’s not something on which we can all agree (like how to measure the area of a circle). We can run opinion surveys, we can draw correlations based on regression analyses, and we can measure results based on in- and out-migration. But none of these will satisfy. They won’t tell us what is what cause and what is effect. They won’t tell us what changes over time (try asking about “connectivity” in 1990). And they won’t capture many of the intangibles that create buzz in a city. That means that as scientific and rigorous as we’d like to be, we’ll fall short.

What we can do, however, is draw correlations between economic vitality and quality of place. Where those correlations hold true over time, we can make assumptions. Then we can test those assumptions on the talent pool we hope to attract. Quality of place defines opportunity for non-residents. It is what outsiders can recognize as unique, inviting, and having the potential to involve them.

Although it is hard to measure quality of place directly, indicators of economic vitality such as in-migration, education, new business formations, and civic engagement are good proxies. They suggest that (1) a place is attractive to new residents and (2) there are a wide range of opportunities for existing residents to invest in their community.

As for “weirdness,” we won’t claim to have a corner on the market here in Austin. If that appeals to you, you’re welcome to join us.

Jon Roberts, TIP Strategies

by Jon Roberts

In my view, planning for recovery from the current recession involves three primary tasks. Task one is to assess and educate. This involves an objective and non political identification and evaluation of local assets and liabilities. It also involves educating yourself (as an economic developer) and your local leadership team about the global, national, regional, and local economic environment. How is it affecting your local economy? Which of your local sectors, individual businesses, and organizations are most vulnerable to economic pressure? Which are best positioned to weather the crisis or even do well? Focusing on existing business should be the heart of any economic development strategy. This is especially true in light of current economic conditions.

Task two is to appraise and prioritize infrastructure. This extends to both physical infrastructure and human capital, including the social networks increasingly driven by technology. What is successful? What is sustainable? What must be maintained versus what should be abandoned? What new infrastructure must be developed to position your community for recovery?

Task three is to identify and pursue business development opportunities. Once a community understands the competitive environment and the assets required to compete, it can then look at business development in a fresh light. Current opportunities may be found in the federal stimulus package, national or regional business consolidations, counter-cyclical sectors (e.g., discounters, repair, refurbishing, energy efficiency), and non primary sectors (e.g., healthcare, education, security, tourism). Specific strategies and actions for pursuing these opportunities must be devised and priorities must be set. In order to implement the plan, local resources and leadership will have to be committed and the public engaged.

Whether it is updating an existing plan to current conditions or starting a plan from scratch, now is the time to bring your local leadership team together to rethink how to support existing businesses and to attract new investment, people, and jobs. TIP Strategies has assisted communities and regions throughout the country, both in good times and in bad, to establish a clear vision for economic growth. We offer a fresh approach that integrates community development principles with an understanding of more traditional economic development practices to help communities maximize their potential.

By Jon Roberts, Managing Director of TIP Strategies

The past three months have seen a precipitous drop in production, a staggering loss of jobs, and an unprecedented decline in consumer spending. As the map below illustrates, the nation’s economic problems are widespread. While a few regions are still bucking the trend, especially in Texas, the overall picture is bleak. The current situation cannot help but make us think about how we got here, how the future will unfold, and what our options for dealing with it will be. It is in this context that we raise the question: What would it mean to “reset” the economy?

Unfortunately, the limitations of economic data make it peculiarly difficult to understand what all these grim statistics portend. Think of riding in a car faced backwards, that’s a fair analogy of how economic indicators work. That’s the way it is for a recession: two or more quarters of declining gross domestic product (GDP), but not always visible until after the fact. So we learn that we have been in a recession now for four quarters. And, worse, we won’t know the severity of this recession for some time yet. Better, perhaps, to ask whether we should think differently about the economy as a whole.

Several factors contributed to our current woes – the housing bubble, careless lending practices, and a dramatic increase in consumer spending. Of course, we now see that these are related and that we created an entire “shopping infrastructure” for what may turn out to be an unsustainable habit. This infrastructure consists not only of millions of square feet of retail space, but also of hundreds of thousands of jobs. In the 15 years leading up to October 2008, we created nearly 6 million jobs in retail, accommodation, and food services. One out of every four new jobs in the last five years falls into these sectors. Even if this level of retail employment were just 20 percent beyond what we could maintain, that would mean we could expect to shed over a million jobs in those sectors alone. And it is not just direct jobs that are affected; the businesses that make the goods we consume are also laying people off – not just in the U.S., but in Asia and Europe and elsewhere. For much of this decade we lived with the illusion that “deficit household spending” was justified by the increasing value of our homes. It was the classic bubble, and it was doomed to burst.

As with most economic assumptions, there is an expectation that whatever jobs we lose we will – over time – regain. To the extent that our population continues to grow and that past practices continue, this is not an unreasonable view. The chart below shows the roller-coaster ride of job creation (and loss) experienced by the U.S. over the last 50-plus years. But what if we changed our ways? What if we adopted consumption patterns that were more sustainable? What if we accepted that there are consequences to our actions and that those consequences might be painful? Which brings us back to the initial proposition, what would it mean for the economy to be reset?

At the least, resetting the economy would involve accepting a different norm. If Americans were to conserve more and spend less, we could not expect to regain all the jobs we have lost. Aside from the consequences of changing course too quickly and too broadly – creating a situation where personal virtue becomes public vice (Keynes’s “paradox of thrift”) – this may seem like a sensible path. But it is sobering to see how this might play out and what it means for business and for economic development. This thought-experiment assumes the following:

Consumer demand is reduced to 1998 levels. When consumers cut back, it is never an even process. Broadly speaking, the more expensive the item the more likely the consumer’s caution. Naturally, homes are at the top of the list. For reasons that are well-known, housing sales have plummeted, creating ripples through the construction and professional services sectors. Automobiles are the next largest spending category. As we ask ourselves whether we “need” a new car, we quickly see that repair costs are only a fraction of monthly car payments, even with a no-interest car loan and four years of free maintenance. In the hunt for good deals, none matches that of re-investing in your existing automobile. The average owner keeps his car for about six years. Extending that to eight or ten years would further destabilize the entire automotive industry. The same effects would be felt for all durable goods. Add to that a reduction in spending on non-essential durables (the stuff that collects dust and winds up in the garage), and all that’s left are groceries and a few other staples.

Exports decline. The U.S. has long suffered a serious trade imbalance: we buy much more from other countries than they buy from us. This is a problem for many reasons, since the export sector is hugely important to our economy. From Boeing airplanes to Intel chips, we are a far stronger nation when we sell more abroad. Ironically, the ability of other countries to buy from the U.S. depends on the vibrancy of their economy. As interwoven as we now are (the dark side of a flat world), our economic weakness translates into reduced demand from abroad.

Business investment stays low. U.S. GDP is, of course, not wholly dependent on consumer demand. Our economy grows when businesses invest in plants and processes and equipment for other markets and for other businesses. As this editorial is being written, Intel has announced that it plans to spend $7 billion on improvements to its domestic fabrication facilities. This is good news, but it does not automatically signal a return to the same levels of consumer spending (on computers and other electronics) that we experienced between 2000 and 2008. Similarly, other sectors of our economy (transportation, utilities) are themselves affected by changing consumer patterns.

The consequences of resetting the economy are not easy to accept: entire industry sectors forced to rethink their business model, higher levels of unemployment, a reduction of government services (because tax revenues would decline). Whether or not Americans have the appetite and attention span for such sacrifice is one question; whether or not a sustainable level of economic growth is even possible is another. Since we’re racing forward but looking backward (our speeding car analogy), we won’t know for quite some time whether the current economic policies will work, or whether some lasting change will take place in the American psyche. But history says we’ll return to the boom-and-bust cycle of previous eras.

The implications for economic development have similarly uncertain consequences. As a result it pays to consider both short- and long-term effects. The recession is real and it will be longer and deeper than we anticipated. Here at TIP Strategies, Inc., we have begun focusing on the following:

Understand business consolidation practices. In our interviews with corporate CEOs, we are learning that business models are changing, lean operations with fewer workers are anticipated – now and into the future – and “value-driven” product offerings are supplanting add-ons and feature-rich bundling. While overall employment levels will decline, consolidations will increase and some regions will benefit even as overall corporate job levels drop. This pattern is already visible. Contrast announcements of continued job cuts at Caterpillar (now totaling more than 22,000) with news that the company will consolidate operations in Seguin, Texas – a gain of 1,400 jobs for the region.

As an element in this approach, the Wall Street Journal has already noted resurgent interest in state and local incentive policies. But this is nothing new to economic development. The more important question is what it takes for incentives to be effective (in the short term), and whether the gains outweigh the costs (in the long term). This has everything to do with a resetting of the economy towards a sustainable level of growth.

Invest in infrastructure. The combination of a stimulus package focused on construction-related activity paired with a desire to enhance business growth suggests a return to economic basics. This includes physical infrastructure improvements (sewer, water, and roads), and telecommunications. Along with these basics is a continuing opportunity around alternative energy and conservation projects. Ideally, these would be conducted in conjunction with businesses. Examples include retrofitting of facilities (think solar panels, co-gen, and water recovery), green construction practices, and broad-based energy efficiency practices.

It may well be that other public policy initiatives will come into play: land banking and cooperative ventures with developers seeking business park improvements are likely examples. Of course, each of these opportunities requires extensive analysis. In an area such as telecommunications, it has become apparent that large investment may yield only minimal benefits. Conversely, small changes in policy can open huge opportunities for business expansion.

Capitalize on countercyclical industries. Healthcare and education continue to see year-over-year gains nationally, making them good targets for investment. They also help position a community regionally and attract talent and create opportunities while other sectors struggle. Repair and maintenance industries are likely to thrive, with none being too mundane for consideration (both the Wall Street Journal and the New York Times have covered the rising fortunes of the shoe repair industry). The decision to make do with what we have – from cars to major appliances to clothes – can translate into increased earnings for establishments in the business of fixing them.

Some technology companies show resilience in their ability to offer streamlined products that replace previously cumbersome and expensive alternatives (computers and cell phones are good examples). In fact, the process of “paring down” is likely to creep into product lines. Those companies that can respond quickly to changing markets remain excellent targets for recruitment and consolidation.

The challenge for economic developers is a reflection of the challenge we all face. We are uncertain how much capital will be available to us (in Texas we worry about how the sales tax receipts that fund EDCs will affect operations); we are uncertain about whether to invest while prices are low or wait for them to go lower yet (think land banking); and we are uncertain how tight to pull the belt in anticipation of further job losses. We know that a region that loses its vibrancy does not easily recover. Companies naturally migrate to where risks are low and where recovery will be rapid. Positioning to that end is critical.

Book Review, Jon Roberts

The current economic crisis is schooling us in the fundamentals of economics – whether we are interested or not. And no one can observe the events of October 2008 without being put in mind of the Great Depression and the Crash of 1929.

We have to wonder what Professor Galbraith, who died in 2006, would have made of current events. Written in 1954, the book reads as if it were a primer on current affairs.

Even those with only a passing interest in historical events will find this book bracing. In less than 200 pages he captures both the mood of the late 1920′s and the run-up to the market’s collapse. The last chapter (“Cause and Consequence”) is a must-read. It is here that we are invited to ask whether the Crash itself was enough to cause the Depression. It is a timely question. The aftermath of that Crash is even more disturbing as we struggle with stimulus packages and initiatives not taken then. By 1933, one of four workers was unemployed, and in 1938 it was still one in five. My first impression after reading this book was that the fraud and corruption of the late ’20s was unique to that time. But that was before the Madoff scandal came to light. In short, the parallels are eerie and a better understanding of those events are captured brilliantly by Galbraith.

Jon Roberts has written an editorial addressing the current financial crisis and how economic development strategies will need to change as a result.

It is extraordinarily difficult to keep abreast of our current economic woes. Just as IEDC schedules a web seminar on “The Future of Economic Development at $5 Gallon,” oil prices fall to under $90 a barrel and prices at the pump drop to $3. Just as sustainability conferences are announced, a large contingent of developers now speak of survivability instead. And just as we were sure that a $700 billion “rescue package” would bolster the economy, the Dow dropped further.

If you had heard someone make these predictions a year ago, you would have looked askance at the speaker. Things are bad, you would have said, but please don’t exaggerate. They are not *that* bad. But now we are facing unprecedented volatility in our financial markets. Whether we are economists, city officials, or economic developers, we are equally beset by uncertainty. What follows is a brief primer on why we find ourselves in the current situation, and what it might mean for economic development.

Let’s consider what lies at the root of the problem. Is it right to call this a “credit crisis?” No, it is not. What we have, and have had for a very long time, is a debt crisis. Bad credit is a consequence of too much debt backed by too few (or declining) assets. In short, we’ve been spending beyond our means – individually and as a nation. We’ve done that because banks and credit card companies and mortgage lenders have allowed us to do it. We are all complicit in this. We wanted things we could not afford and should not have bought. Lenders enabled us to do this because they were making enormous sums of money by doing so – even as they knew perfectly well that the risk was growing. They were willfully blind to the fact that the only tangible asset we could offer as collateral was our homes. As long as the value of homes was going up, the house of cards could be built higher. And was. Deregulation enacted in 1999 allowed banks to bundle and trade those loans. You noticed it as your mortgage was sold, and resold. And each time that happened, some firm made a lot of money. That money fueled a desire to make more, and lenders began offering loans at below market rates while only vaguely addressing the long-term debt burden being assumed by borrowers. This is how the crisis expanded to Freddie Mac and Fannie Mae, and beyond that to credit markets in general

At the same time, the federal government was also sinking further into debt. Foreign wars and unprecedented domestic spending pushed the deficit steadily higher. It is difficult to comprehend just how onerous the burden has become. And we’re part of it. With a total national debt upwards of $10 trillion, we have a per capita debt for every man, woman, and child in this country of $33,333. These obligations must, eventually, be discharged. It is money owed by the government to, among other things, foreign countries – especially China and Japan. To recite further statistics at this juncture is to cast a deep gloom: Fully 10 percent of the nations 51 million mortgages are at least 90 days in arrears. Perhaps as many as 6 million homeowners may lose their homes by this time next year, and individual credit card debt stands at $8,500 per household. With the primary asset backing that debt (our homes) also in decline, it is highly unlikely that consumer spending will stimulate the economy. Meanwhile, credit for even the most successful small businesses is tightening and venture-backed IPOs have dropped precipitously. In short, we cannot spend our way out of this crisis.

This situation has been a long time coming. While this may not be cause for despair, it does require us to rethink how we do economic development. We have taken for granted that our unemployment rate will remain low, that we can borrow cheaply and freely, that consumer spending will continue unabated. Funding for our economic development organizations was predicated on these assumptions as well. Here in Texas, sales tax receipts fund most of our communities. Those receipts will almost certainly decline. Contributions from the city (or economic development departments within city governments) are already in decline. This is due in part to reduced tax revenues (including property and sales) and will have an effect on capital projects – which we are already seeing with the tightening of municipal credit. Corporate contributions can hardly be expected to remain at their current levels. At the same time that budgets decline, expectations for what economic development organizations can do will increase. Here, then, are assumptions that follow ineluctably from an economy in decline:

+ Business expansions will slow dramatically – making business recruitment efforts extraordinarily difficult.
+ Credit for start-up and small businesses will be difficult to secure – forcing entrepreneurial programs to change expectations.
+ Unemployment will rise even as requirements for skilled workers will increase – placing increased demands on workforce programs.
+ Commercial real estate activity will decline – putting a damper on professional service
growth.

So is the sky falling?

No. Markets are adjusting downwards but are not in free-fall. Aggressive intervention by the U.S. and Europe will help support an admittedly strained economy. But even if the sky doesn’t fall, can we expect a rapid return to a vibrant economy? The answer,unfortunately, is that we are likely to face a prolonged period of uncertainty and market volatility. The challenge at the local level is to return to fundamentals. And what are those fundamentals? A diversified economy, a trained and flexible workforce, and a forward-looking public sector that can itself act as a stimulus for growth. Each of these fundamentals, however, must be viewed creatively. Diversification must occur not only by sector, but by size of business, by access to international markets, and by finding a way to maintain R&D spending. A skilled workforce will mean a fresh look at apprenticeship and the engagement of technical and community colleges. The involvement of local governments is, however, one of the most critical and underappreciated elements of a responsible approach to a recession. A clear understanding of what infrastructure projects can be undertaken with reduced revenues, how contracts are awarded, and how economic development at the *public-sector level* can stimulate future private investment is the immediate challenge.

These are frightening circumstances. It may be too trite by half to suggest that the time has come to pay the piper. It has become clear, however, that deficit spending (whether by individuals or by government) is not a substitute for a sound economy.