The Royal Society of Edinburgh Part of the Edinburgh Lecture Series: Talking Cities The Next Economy Professor

Bruce J. Katz Director, Brooking Metropolitan Policy Program

Wednesday 15 December 2010

Report by Jeremy Watson

Bruce Katz loves cities and, in particular, loves their energy levels. Revealing that he last visited Edinburgh 30 years ago as a student, he said he was instantly taken by the vibrant buzz, likening it to the streets of Manhattan. It is that energy, he said, that will be the platform for the next economy as the worlds metropolitan areas grow in the short term and retread for the long haul. There can be no return to the previous world economic order. In the United States, 8.4 million jobs were lost during the recession, which began in December of 2007. Nearly one out of every ten Americans remains unemployed, and three out of four people in the United States have either lost their jobs or are close to someone who has. For the past several decades, America had an economy which elevated consumption over production and financial chicanery over real innovation. The result was the largest recession since the Great Depression. There will not, and should not, be a return to this type of economy. Therefore, the question arises: what type of future economy should be built? First, the United States must shape a next economy that is driven by exports, powered by low carbon, fuelled by innovation, and rich with opportunity. This is a vision where America exports more and wastes less, innovates in what matters, produces and deploys more of what it invents, and ensures that the economy actually works for working families. Secondly, the next economy will largely be metropolitan. Americas economy is no longer driven by small towns but, rather, it is the large metropolitan areas (metros) that will deliver the next economy. The major US metros already generate more than three-quarters of the countrys gross domestic product. Finally, the next economy will be built by unleashing the entrepreneurial energies of Americas metropolitan engines. This will require metros to exploit their unique advantages, and the state and federal governments to align their resources to metro priorities. In order to build the next economy, American exporters must better engage with the world. More firms in more sectors must increase trade with other nations, especially with those that are rapidly urbanising and industrialising. This is an economic imperative for the United States, given that Brazil, India and China were expected to account for about a fifth of global GDP in 2010, surpassing the US for the first time. The rise of the BICs (Brazil, India and China) reflects the rise of metros. For the first time in recorded history, more than half of the worlds population lives in cities and metropolitan areas. By 2030, the metro share will pass 60 per cent. However, the top 30 metropolitan performers today are almost exclusively located in Asia and Latin America, while the 30 worst performers are nearly all located in Europe and the US. It is these rising nations and their

rapidly growing metros that will power the world economy in the twenty-first Century, and the US must take advantage of this increasing global demand. Despite an infrastructure that is third class which hampers US export potential the US maintains a trade surplus in services and still manufactures a range of advanced goods that are in high demand throughout the world. President Obamas challenge to double exports in the next five years is exactly the kind of ambitious, far-reaching goal America needs at this moment to help the United States remain competitive in the global economy. As with exports, low carbon is another feature of the next American economy. The US should be the vanguard of the clean, green revolution. This means the US must invest in smarter, faster and more technologically-advanced infrastructure systems, and design more sustainable and efficient homes and offices. Other nations, including China, Brazil and Germany, have embraced the green economy, and are creating markets, growing jobs and stimulating investment. China continues to outpace the US through significant investments in renewable energy, high speed rail, and a host of other sustainable products. The United States, however, is certainly capable of competing in the low carbon revolution. Brookings research has identified a strong base of more than two million green jobs, in sectors ranging from renewable energy to pollution reduction. America also has significant advantages in domestic demand, advanced research, venture capital and entrepreneurial dynamism. It is now time for the US fully to engage the shift to low carbon. Another crucial hallmark of the next economy is innovation. The US must strive to be the worlds Innovation Nation, a hothouse of invention and a platform for production. The next decade has the potential to produce new technologies that have the power to transform economies, create jobs and change the way we live our lives. In order to spur these types of innovations, the United States must focus on science and technology, through greater investments in education and research and development. Currently, the US ranks 45th out of 93 countries in the share of Bachelor degrees in science and engineering, and has gone from a trade surplus to a deficit in advances in technology products over the past decade. In the future, America will not sustainably grow if it does not innovate and produce more goods and services. Finally, the next economy must be rich with opportunity. The US needs to get smart fast. African Americans and Hispanics currently comprise about 25 percent of the population soon to rise to 40 per cent yet the educational attainment of these groups is significantly lower compared to that of whites and Asians. In the years ahead, upgrading the education and skills of Americas workforce is no longer just a matter of social equity. It is fundamentally an issue of national competitiveness and national security. This next economy will largely be led by Americas metropolitan areas. Even now, there is no single national economy in the US, but a network of powerful metropolitan economies. The top 100 metro areas dominate trade in goods and services, concentrate critical sectors of the low carbon economy, produce the bulk of our patents and research funding, and serve as our transportation and logistical hubs. Therefore, the next American economy will be built by unleashing the entrepreneurial energies of its metro engines. In an ideal world, the federal government would assist metros by embracing trade, pricing carbon, investing more in R&D and infrastructure, and overhauling immigration. Unfortunately, Washington is broken and the states are broke, so the next economy is going to have to be built the hard way, through a pragmatic caucus of public, business, and non-profit state and metropolitan leaders who spur economic recovery and renewal despite political odds and fiscal obstacles. Make no mistake, the stakes are high, because other nations are moving with deliberation and discipline to exploit the full potential of their metro engines.

The Brookings Institution has been working with metropolitan areas in the US to explore how to exploit their unique competitive advantages. There are various models of economic renewal around the world; for instance, Turin has transformed itself into a design hub and Barcelona has become an entrepreneurial hub. These are two European metros which have embraced intelligent economic design and purposeful action, playing on their special assets. Ultimately, metros will need greater engagement from the federal and state governments to retool the US economy. Brookings is now working with three US metros Minneapolis/St.Paul, Seattle and Northeast Ohio to produce metropolitan business plans aimed at aligning state and federal resources in the service of metropolitan growth. These business plans are designed to help the metro areas capitalise on their unique assets and establish a regional framework for growth. For instance, Minneapolis/St.Paul has the potential to become a hub of innovation and entrepreneurial activity, while Seattle might become a global leader in producing advanced green technology. States can also help their metros by offering voters the opportunity to support market shaping investments tailored to their metros assets. This is what the state of Ohio did in 2010, where voters approved a $700 million bond issue to extend the states Their Frontier Fund that invests in technology and energy start-up companies. The US government should also use its broad resources to assist metros, when possible, in their strategies for growth. Take the 30/10 initiative in Los Angeles, California, where voters approved a sales tax to build a state-of-the-art metro transit system in 30 years. The mayor of Los Angeles suggested a plan to the federal government whereby it give the city a low- cost credit, backed by the sales tax revenues, to finish the job in just 10 years. This accelerated construction could create 160,000 jobs in a metro where 765,000 people are currently unemployed. The federal government should also invest in a National Infrastructure Bank to improve Americas outdated transportation networks, and a National Green Bank to accelerate the delivery of a low carbon economy in the US. The federal government must also end the incentives that prompt excess consumption. If the US government caps the mortgage interest tax relief, which has financed the property sector that contributed to the onset of the recession, then it will save $177 billion over five years to spend on infrastructure improvements. So from all of this, what are the implications for Scotland and the UK? The UK economy resembles the economy of the United States in many ways. It elevated consumption over production and helped the recession along. But in the next economy Scotland has certain advantages already, as it has enormous possibilities in the field of a low-carbon economy. Devolution is also working in Scotlands favour in that it has extended power down from central government to metropolitan areas. This is evident in the central belt. The waterfront areas are being regenerated and there is collaboration between Glasgow and Edinburgh, which is very promising. However, all this needs to be explicit national policy. Otherwise, Scotland and the UK will not be able to compete fully. Directly electing mayors is also a policy that deserves more consideration. They are crucial to the next economy as they bring together producing sectors for the benefit of everyone. Cities should be brought together. Their distinctiveness should be embraced, but their unique assets should be used for the advantage of all.

Opinions expressed here do not necessarily represent the views of the RSE, nor of its Fellows The Royal Society of Edinburgh, Scotlands National Academy, is Scottish Charity No. SC000470