THE MILLION-DOLLAR PLANT
The key ingredient of Romer’s happy narrative was the spillovers: the idea that skills build on each other and that putting skilled people together in one place makes a difference.
Clearly, this is something people in Silicon Valley believe. There are many parts of California prettier than Silicon Valley, and most are cheaper. Why do companies still want to locate there? States and cities in the United States and elsewhere offer large subsidies to attract firms. In September 2017, Wisconsin gave at least $3 billion in fiscal advantages to Foxconn to have it invest $10 billion in an LCD manufacturing plant.34 This is $200,000 for every job they promised to create. Similarly, Panasonic received more than $100 million to move its North American headquarters to Newark, New Jersey ($125,000 per job), and Electrolux was given $180 million in tax abatements to start a new plant in Memphis, Tennessee ($150,000 per job).35 The most recent example of this competition was the very visible scramble to attract Amazon’s second headquarters, HQ2. Amazon received 238 proposals from different locations before choosing Arlington, Virginia, and New York City.36 These 237 or 238 cities (depending on whether New York finally withdraws or not) clearly believe in spillovers.Apparently, Amazon does too. In choosing the location for HQ2, Amazon listed a preference for (among other things) “metropolitan areas with more than one million people” or “urban or suburban locations with the potential to attract and retain strong technical talent.”37
Amazon’s theory seems to be that being in a “thick” market, a market where there are lots of sellers, in this case of skilled labor, is valuable, presumably because it is easier to find, retain, and replace workers.
Romer’s theory, you may recall, was more about informal conversations that occur when many people working on related topics are together.
There is some evidence for such spillovers. We know, for example, that inventors are more likely to cite patents from other inventors in the same city, suggesting they were more likely to be aware of them.38A variant of Romer’s hypothesis that is less specific to Silicon Valley and its imitators is that the presence of more educated people makes everyone else more productive. It turns out, however, that the evidence that we are all becoming more productive as a result of having more educated people around us is not overwhelming. We do observe that everyone earns more in cities where there are more educated people, but this could be for a variety of reasons. Cities with more educated people may also attract more high-paying firms (high-tech firms, more profitable firms, firms that care more about the quality of work, etc.), drawn in by the prospect of being able to find the right kind of workers. The problem is finding instances where the level of education in the population at large goes up significantly without other things (policies, investments, etc.) changing at the same time.
There is clear evidence, however, that cities as a whole can benefit from a large investment. Michael Greenstone, Rick Hornbeck, and Enrico Moretti (who is the author of The New Geography of Jobs,39 which argues that spillovers are the reason why cities are growing and rural areas are not) ask whether cities as a whole benefit from attracting a high-profile plant, much like Amazon’s HQ2.40 To answer this question, their study compared the winners of bidding wars to attract companies to the first runners-up. They find that TFP of the plants already present in the winning county surged, consistent with there being large spillovers—TFP five years after the plants were set up was on average 12 percent higher in places that received the plant than the ones that just missed out, translating into $430 million per year more in earnings for the county. Both wages and employment went up.
In many cases, we do not know how much the average state or city spent to attract the plant, but we have some examples. For instance, in the case of the BMW plant that eventually went to Greenville-Spartanburg, South Carolina, over Omaha, Nebraska, the subsidy on offer was $115 million. If they got the average 12 percent benefit, the investment clearly paid off handsomely. This was the argument made in New York City in support of the subsidies to Amazon: that as an investment they were well worth it.41An alternative way to attract businesses to a particular location is to build infrastructure. This is what the Tennessee Valley Authority (TVA) did for Tennessee and its neighboring states over the period 1930–1960, using public funds to build roads, dams, hydroelectric plants, etc. The idea was that infrastructure would attract firms, firms would attract other firms, and so on. Jane Jacobs, one of the most influential American urbanists of the twentieth century, was skeptical. She wrote a piece about it in 1984, called, quite simply, “Why TVA Failed.”42
But it did not fail. Enrico Moretti and a colleague compared the TVA region with six other areas initially supposed to receive the same type of investment but where, for various political reasons, nothing happened. They found that between 1930 and 1960, the TVA counties generated gains both in agricultural and manufacturing employment relative to this comparison group. It is true that once outside funding for the program stopped in 1960, the gains in agriculture vanished, but the gains in manufacturing persisted and actually continued to intensify all the way until 2000, consistent with a widely held view that spillovers are more important in manufacturing than in agriculture. The effects are substantial; the authors estimate that over the long run the income gains as a result of TVA in the region will be $6.5 billion more than what it cost to set it up.43
Does this mean countries can create the conditions for permanently faster economic growth by promoting regional development, perhaps in multiple regions at the same time? There are two reasons why this does not follow.
First, it is not enough that the firms gain from the initial investment. They have to gain enough to overcome the usual forces that slow down growth: shortages of land, labor, and skills. Moretti estimates that a 10 percent change in employment today will increase employment in the future by 2 percent, which is not big enough to generate sustained growth over the long term; pretty rapidly the original boost will peter out.44Second, growth in one region is different from national growth because it can happen in part by cannibalizing growth in the rest of the economy, drawing capital, skills, and labor away from other areas. The cities where Amazon eventually locates will grow, but partly that will be at a cost to other American cities. Moretti estimates the two effects might actually net out, with the result that national growth will be more or less unaffected.45
Moretti concludes from his reading of this entire literature that regional development is unlikely to be the lever that will help us avoid the end of growth.46 It is possible his assessment is slightly too pessimistic, but the note of warning is certainly valid. While it may make sense for an individual city to try to lure jobs away from another, this is unlikely to be a large win for a country as a whole, unless it is a very small country (the city state of Singapore, for example) that can grow at the expense of others.