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Lower oil prices a threat to Texas economy

This story was written by Claudia Grisales and appeared in the Austin American-Statesman on 12/19/14.

Experts: Lower oil prices a threat to Texas economy

These days, Texas consumers are celebrating the lowest gasoline prices in more than five years.

But lower oil prices are also a risk factor for the overall Texas economy, which depends heavily on the energy industry. In fact, some experts say Texas is in danger of losing billions in revenues and hundreds of thousands of jobs due to the declining price of oil.

Thanks to booms in the Eagle Ford Shale and the Permian Basin, oil production in Texas has soared to more than 3 million barrels per day. Oil and gas extraction accounted for 11.9 percent of Texas’ nongovernment gross domestic product in 2012, according to the federal Bureau of Economic Analysis.

Austin economist Brian Kelsey, concerned about the potential impact of falling oil prices on the state’s economy, is examining what could happen to the state’s revenue and jobs under a continued decline for the energy industry.

If oil and gas industry earnings in Texas fall 20 percent, Kelsey estimates, the state could lose 212,000 jobs and $13.5 billion in total earnings. In turn, the Austin metro area could see a loss of 4,200 jobs and $210 million in earnings.

A significant decline for the energy industry, Kelsey said, would ripple throughout the state’s economy.

“Earnings in the oil and gas sector drive a significant portion of overall economic activity in Texas,” Kelsey said. “So consumers may enjoy seeing lower gas prices, but falling oil prices can hurt more in other ways.”

Michael Feroli, J.P. Morgan Chase’s chief U.S. economist, made an even more dire prediction in a Thursday note to clients. He compared the current situation in Texas to the 1986 state recession, which happened after oil prices dropped by about 50 percent in a six-month period.

“As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession,” Feroli wrote.

The oil and gas sector, which includes a dozen related industries, accounts for 411,372 jobs throughout Texas, about 3.2 percent of jobs statewide, according to Kelsey’s analysis of workforce data from EMSI. The core oil and gas extraction industry on its own accounted for 111,422 jobs, about 0.9 percent of Texas payrolls.

Robert “Bill” Gilmer, director of the Institute for Regional Forecasting at the University of Houston’s C. T. Bauer College of Business, has warned that oil prices below $60 a barrel could lead to significant cuts in domestic oil exploration and drilling. Brent crude prices fell to $59.27 per barrel Thursday, while West Texas Intermediate crude oil has dropped below $54 a barrel, marking a five-year low.

Gilmer, who has called the scenario of low gasoline prices versus low oil prices a “strange mix of good news and bad news,” said the lower oil prices could be felt in a range of Texas businesses, from machine shops and factories to office towers.

Texas lawmakers and some economists, however, say the state’s economy has become diversified enough to weather a downturn in the oil and gas sector.

“The good thing for Texas is we are in a pretty good position,” said Michael Seman, senior research associate with the University of North Texas Center for Economic Development and Research. “Texas is now a much more diverse economy.”

State Rep. Jim Keffer, R-Eastland, chairman of the House Energy Committee, said he doesn’t see “any doom and gloom.”

“But I see the obvious realities of an economy, and we are world player now,” Keffer said. “We’ve been here before. We are positioned to ride the storm very well. I think we can blunt some of the sharp edges of an oil and gas downturn.”

However, Keffer said a decline in oil and gas industry revenues could impact the state’s rainy day fund and other areas of the state’s budget.

Budget surpluses driven by oil and gas revenues “may be slimmed up for the next session,” Keffer said. So “we have to be judicious in how we look at the future.”

“It’s good to be reminded that this is a commodity,” Keffer said. “We are being reminded it’s not always such a rosy picture, and we have to make our decisions based on a cycle or a trend, not just what we are doing now.”

Meanwhile, Texas consumers continue to bask in the glow of the lowest prices at the pump since May 2009. On Thursday, the statewide average for a gallon of gasoline reached $2.26, while Austin was at $2.31, down 37 percent in the past six months, according to AAA Texas.

The lower prices, AAA Texas estimates, are translating into savings of $400 million each day compared with higher prices earlier this year. It’s also forecasting 8.1 million Texans will travel this holiday season, marking the highest growth rate since 2009.

“Lower oil prices mean lower prices at the pump and translates into more money for consumer spending,” said Seman, the University of North Texas researcher. “It’s also at the time when we are buying gifts, and there’s more money for that.”

So while the current energy price declines “are not without some belt-tightening and some uncomfortable economic situations,” Seman said he doesn’t see reason to panic.

“If history is a guide,” he said, “this is just a dip in a long series of ups and downs.”

Staff writer Dan Zehr contributed to this report.

What do falling oil prices mean for economic developers?

The falling price of oil will compete for economic story of the year in 2014, but what does it mean for economic developers heading into 2015? Most of the attention so far has been paid to oil-producing states like Texas and North Dakota, but for economic developers in non-production states, could lower oil prices create opportunities for leveraging their own competitive advantages?

Economic developers have access to many tools that can help frame the situation for their communities. The first step is to understand how oil and gas impacts your economic geography. Using the fabulous new and improved U.S. Cluster Mapping Project, developed by Michael Porter’s team at Harvard Business School and funded by the U.S. Economic Development Administration, and 2014 estimates from EMSI, I ranked the top fifteen counties by jobs in the Oil & Gas Production & Transportation Cluster in Table 1.

Harris County (Houston) is the obvious outlier, but falling oil prices will have even more severe impacts on smaller counties where the oil and gas cluster makes up a larger share of total employment and carries a huge multiplier effect, such as in Midland and Ector County, Lafayette Parish, Williams County (Williston), and Lea County. Larger and more diversified counties, such as Dallas, Tarrant, and Los Angeles, will no doubt feel the impact of lower oil prices through declines in corporate profits, lower earnings, and reduced consumer spending, but the shock should be absorbed to some extent by virtue of having other industries to lean on.

So how strong might that shock be? Oil and gas industry market forecasts seem to be all over the place, but some analysts are projecting declines of up to 30 percent:

According to Porter’s team at Harvard, there are twelve industries in the oil and gas cluster. Let’s assume that lower oil prices result in a 20% decline in earnings across all industries in the oil and gas cluster. That’s probably a bit steep in terms of how lower corporate earnings would translate to wages and salaries of workers, and it’s unlikely that lower oil prices would produce the same 20% decline across different industries in the cluster (e.g., extraction vs. oilfield machinery manufacturing). But we’ll use it here for the sake of illustration.

Table 2 (second tab if you’re using the link) shows how a 20% decrease in earnings may impact the counties in Table 1, based on my analysis of EMSI data and accounting for direct and multiplier effects.

Whatever your experience and/or intuition says about oil prices in 2015, economic developers working on behalf of communities with strong oil and gas clusters should be doing scenario analysis like this right now, evaluating a range of potential impacts of lower oil prices and how public services, such as the workforce development system, may be affected. Further, many community colleges and technical schools have added new programs or expanded capacity to meet the strong demand for oil and gas workers during times of higher prices. Seek out and collaborate with your education partners, too, so they can weigh in and benefit from the results of your analysis. Many of them have likely been through this before.

Economic developers everywhere would be wise to follow suit, even in communities with little or no obvious oil and gas industry presence. Austin, for example, is known for technology, not oil and gas. But as Dan Zehr, who covers finance and the economy at the Austin American-Statesman, explains in his excellent deep-dive on Austin’s oil and gas industry, the “Blueberry in the Tomato Soup” will not escape the downsides of falling oil prices because earnings from oil and gas holdings are a key driver of the regional economy.

Earnings are wages, salaries, supplements (employee benefits), and proprietor income. As Zehr points out, investors, owners of holding companies, and the like derive significant income from oil and gas while living in Austin–with very few oil and gas jobs showing up in an analysis of the local economy. In fact, according to EMSI estimates, oil and gas extraction is the eleventh largest contributor to Austin’s GDP at $1.63 billion per year in value added, but only accounts for approximately 1,300 jobs (0.1% of total employment). Yet, the same 20% decline in earnings modeled above for the oil and gas cluster results in a loss of an estimated $307 million in earnings and 5,700 jobs for the Austin-Round Rock MSA, according to my analysis of EMSI data.

And it’s not just places in major production states. The oil and gas cluster accounts for at least $200 million in earnings in Contra Costa County, CA, Lake County, IN, Salt Lake County, UT, Jackson County, MS, Yellowstone County, MT, Dakota County, MN, Orange County, CA, Lucas County, OH, and Duchesne County, UT, as well as several higher-profile counties in Pennsylvania, according to EMSI estimates.

What about the upside of lower oil prices? Indeed, lower oil prices may present an opportunity for some economic developers. According to other data from EMSI, approximately 85 percent of total sales in oil and gas extraction go to petroleum refineries, which are part of the oil and gas cluster as defined by Porter’s team at Harvard. Sorting out and measuring the feedback loops within the same cluster is complicated. However, there are several industries not in the oil and gas cluster that use oil and gas extraction products as inputs that may benefit from lower prices.

Economic developers in places such as Salem County, NJ, Orangeburg County, SC, and Morgan County, AL (petrochemicals), Clayton County, GA (air transportation), Sarpy County, NE (trucking), and McCracken County, KY, and Unicoi County, TN (chemicals) all have major employers in industries that represent $200 million or more in sales nationally for the oil and gas extraction industry.

I have no idea what lower oil prices may mean for those industries, but it’s a good conversation starter for economic developers who want to approach local industry representatives about business retention and expansion, getting a cluster initiative up and running, recruitment and/or entrepreneurship possibilities through supply chain analysis and import substitution, etc.

Economic developers are in a unique position as experts on their local economies. They stand at the intersection of the public and private sectors, and the best economic developers can leverage their expertise on the local economy to identify opportunities for public-private partnerships.

For economic developers in regions with strong oil and gas clusters, now is the time to evaluate what sustained lower oil prices may mean for your economic geographies. Economic developers in non-oil and gas regions should take advantage of the tools at their disposal, as well, to explain to community leaders how lower oil prices may impact their local economies, aside from the price at the pump.

Most seasoned economic developers I’ve worked with have at least one success story that began with a seemingly trivial conversation, perhaps about something like gas prices. But armed with the right information, you never know where those conversations may lead.

Thorny Housing Issues

This article was written by Jim Russell and appeared in Pacific Standard on November 3, 2014.

Does Population Change Drive Demand for Housing?

Most conversations about housing affordability define demand in terms of population change, but income is a far better measure.

Brian Kelsey provides the provocation for this post, “78704 population didn’t change much 2000-2012 but % w/ bachelor’s degree or higher increased 37% to 50%.” Translating character-restricted Twitter lingo, “78704” is an Austin, Texas, zip code. For that part of the metro, residents didn’t become more numerous so much as they became more educated. Brian was discussing housing affordability in Austin (hence the hash tag “#atxaffordability”). Real estate appreciates without population gains or more restrictive regulations on building.

If population growth isn’t driving demand for housing in 78704, then will greater supply drive down prices? That’s not the matter of debate, but it should be. I can subscribe to basic supply and demand theory while questioning the efficacy of increasing housing units as a solution to the affordability crisis. Define demand.

Most conversations about housing affordability define demand in terms of population change. No one defines housing demand in terms of income, save the scholars worried about gentrification. Regarding gentrification, higher incomes displace lower incomes. The population in a neighborhood could go down. Tenured residents are still forced out of their homes. Vacancy rates can increase.

I wouldn’t put much stock in population numbers. I learned my lesson from studying Rust Belt population decline, particularly the recent good fortune of the shrinking city of Pittsburgh. You’ll find a similar story in St. Louis:

“American families have changed dramatically over the past half century. The average household size in St. Louis in 1950 was 3.1 and in 2010, 2.2. With every other factor held constant, the decrease in city population would have been 248K or 29%. This means that with the same number of homes, the same number of apartments, and the same number of families as resided in the city in 1950, the decrease in average household size could account for 46% of the city’s population loss.”

I do notice that a shrinking household does not account for all of the population decline in St. Louis. Still, a drop of almost 250,000 people would constitute a substantial dent in demand. And yet, the same number of houses would be occupied. Population decreased by a quarter of a million residents and demand for housing remained constant. What a lousy way to measure demand.

Instead of population, I recommend using income to measure demand. The income variable has warts, too. It’s still better than using population change. A household earning $60,000/year eyes another household in a different neighborhood making $30,000/year. The wealthier household is currently paying 50 percent of its income on shelter to be near the city center. This household could pay a lot more than the poorer household for the same home a bit further from the city center and still have more disposable income. Demand goes up without any population change.

Just because I have redefined demand in terms of income doesn’t mean that increased housing supply can’t help balance the real estate market. The policy geography for increasing supply is different. Birth of a gentrifier:

“In the opposite scenario where housing and office development remains static, the resulting paucity of workers to meet labour demand leads to an increasingly tighter labour market, sparking a bidding war, which in turn leads to wages spiralling higher, which finally leads to still higher housing costs and eventually an out-migration of precisely the kinds of workers that are needed.”

I don’t expect the feedback loop described would price such highly skilled talent out of the regional labor market. But it could push workers into other parts of the city. Hello gentrification. Instead of building more in the destination neighborhood, the target would be the source (of the gentrifier) neighborhood. Note how greater supply is addressing the upward pressure on wages, not greater numbers of people piling into the same place. This is the Financial Times talking and the prescription for the problem is to liberalize land use and building regulations. The author believes in supply and demand theory while linking higher wages with higher housing prices. Build baby build.

I wish the solution were so simple. Let migration theory explain. Most people, when they move, move short distances. Long-distance relocation is rare. Why? Long-distance relocation is scary. You leave your social network behind. The new place is, well, new. It is filled with known unknowns and unknown unknowns. Thus, the new-to-town cluster in the same neighborhoods where they are less likely to encounter townies who hate them. The new-to-town make more money—much more—than the average household in the area. Gateway neighborhoods for outsiders tend to sport some of the most expensive real estate in the metro. Meanwhile, locals moving around the region (most migration) are seeking some sort of return on their intimacy with place, “Can I have it all at half the price?” Eventually, newcomers transform into tenured residents and join the hunt. And the erstwhile newcomers enjoy a greater return for their labor. They ruin everything. They ruined Austin, Texas.

Places such as Austin are importing higher labor costs which will eventually diffuse. Places such as San Francisco not only import higher labor costs, they also offer attractive investment opportunities for the wealthy living and making money in other countries. Effectively, San Francisco’s real estate market imports higher wages without offering such jobs locally. The price for shelter has long been disconnected from local population change. Increasingly, the price for shelter is disconnected from local wages. Supply-side solutions to the housing affordability problem have a woefully anachronistic definition of demand.

Economic Impact of Google Fiber

This story was written by Brian Gaar and appeared in the Austin American-Statesman on November 2, 2014.

Austin business leaders: Google Fiber can’t get here soon enough

Google Fiber hasn’t officially arrived in Austin yet, but local business and technology leaders say the ultrafast Internet service will be a game-changer when it debuts here next month.

While Google has only announced its residential service and hasn’t yet given details about commercial availability, business leaders and entrepreneurs say the prospect of 1 gigabit-per-second Internet speeds will enhance Austin’s reputation as a tech hub and spark new innovations. The service is more than 100 times faster than today’s typical broadband Internet access.

“I think it’s going to be awesome,” said William “Whurley” Hurley, an Austin entrepreneur who co-founded mobile developer Chaotic Moon and is planning to launch another startup next year. “It’s going to be revolutionary for a lot of businesses that I don’t think see it as that now, but it will be.”

Hurley, who is no longer with Chaotic Moon, predicted residents will flock to areas of Austin where Google Fiber is rolling out first. Google recently announced that parts of South and Southeast Austin will be the first to get the new service starting in December.

Part of the allure is reducing the time that many tech businesses spend uploading — and downloading — data to the cloud, for such operations as data processing.

That represents a lot of downtime, Hurley said.

“Speed is part of the new business formula,” he said. “You have to be able to work fast, and speed becomes an advantage.”

With only a handful of other cities in the queue for Google Fiber at this time, Austin will have a huge advantage over most of the country with the increased Internet speeds, said Manny Flores, CEO of Austin advertising firm LatinWorks.

“Austin will be able to work harder and faster, and I’m looking forward to seeing the results,” Flores said.

Advertising in particular is a fast-paced business, he said, with clients looking to push boundaries and outpace their competition. Internally, there’s also the need to be more efficient in the way that LatinWorks conducts business on a daily basis, he said.

“Faster Internet speeds will allow us to communicate seamlessly across departments and with our clients,” Flores said. “Our increased ability to download and process big data will allow for more efficient optimizations across all of our digital campaigns, as well as a more efficient work flow for our creative teams who are constantly downloading and working with large files.”

Gary Gattis, CEO of Austin gaming studio Spacetime Studios, said he’d love to be wired with Google Fiber at home and at work.

“We transmit a huge amount of data whenever we work from home,” he said. “Google Fiber would make it much more manageable.”

Faster Internet service has proven to be a lure for fledgling businesses in other communities where Google Fiber has landed. In Kansas City, where Google Fiber first launched, startups sprouted in a number of neighborhoods. The movement has dubbed the “Silicon Prairie.”

The advantage for startups is simple: A faster Internet pipe makes it easier to handle large files and eliminates buffering problems that plague online video, live conferencing or other network-intensive tasks.

Infrastructure of that caliber has certainly been an asset for other communities’ business attraction and retention efforts, said Brian Kelsey, principal of Civic Analytics, an Austin-based economic development firm.

He pointed to Chattanooga, Tenn., which is running a municipally owned fiber-optic network “that has really improved their position among peer communities.”

Chattanooga’s taxpayer-owned network has indeed sparked growth.

Former factory buildings on its Main Street and Warehouse Row on Market Street have been converted to loft apartments, open-space offices, restaurants and shops. The city has welcomed a new population of computer programmers, entrepreneurs and investors.

“It created a catalytic moment here,” said Sheldon Grizzle, founder of the Company Lab, which helps startups refine their ideas and bring their products to market. “The Gig,” as Chattanooga’s fiber-optic network is known, “allowed us to attract capital and talent into this community that never would have been here otherwise.”

Another benefit, business owners point out, is that Google’s entrance into the Austin market has prompted other providers, including AT&T and Time Warner, to roll out faster Internet speeds on their Austin networks.

“Competition is a beautiful thing, and all of us benefit from it when it’s allowed to happen in the marketplace,” said David Kaelin, who owns the Austin-based retro gaming chain Game Over Videogames.

Austin-area business owners also say faster Internet service leads to innovations that weren’t possible with slower connections. Just as broadband connections made Internet video and online gaming more accessible to the masses, gigabit Internet will likely prompt another round of innovation.

Hurley said the faster Internet speeds will enable a whole host of new ideas and services. Tech incubators at the University of Texas and Capital Factory will benefit to a huge degree, he said.

“I think it’s really going to take things to a whole new level and allow for a whole new set of ideas,” he said.

In the advertising realm, more and more of the industry is shifting to digital, and Flores said he’s looking forward to seeing how the landscape will continue to evolve.

“We’ve seen so many great new technologies and offerings arise over the past few years and can’t wait for what comes next,” he said.

Adjusting to Life as The Human Capital

Note to non-Austin readers: most of the data analysis we share here is for Austin because we live in Austin and want to generate awareness about how and why Austin is changing, and, perhaps, what we can or should do about it. But nearly everything posted here can be recreated for other communities using readily available public data. ~ Brian

Austin, Texas: A Theory of Everything (cont’d)

Why being The Human Capital is, in the immortal words of Homer Simpson, the cause of, and solution to, all of life’s problems

The Austin Chamber ran a campaign a few years ago branding Austin as The Human Capital. The tagline is still featured as the core message to site selection consultants. We’re certainly in the running for that title. The Austin-Round Rock MSA has added an average of 17,000 highly-educated people (bachelor’s degree or higher) per year to the region’s population since 2000–an 80% growth rate that ranks #4 among large U.S. metro areas with at least one million in population.

And while Austin appears to be squarely in the path of the Silver Tsunami, most of this “brain gain” has directly impacted Austin’s labor force. People age 65+ make up about 12% of the approximately 507,000 residents of the Austin-Round Rock MSA with a bachelor’s degree or higher (bachelor’s+). If we assume that people age 65+ are a similar share (12%) of net change in Austin’s total bachelor’s+ population, then that means Austin’s primary working age population has gained about 198,000 bachelor’s+ people since 2000. According to the Census Bureau, 87% of bachelor’s+ people age 25-64 in Austin are in the labor force. So that works out to about 173,000 bachelor’s+ people joining the labor force in Austin since 2000, or roughly 13,000 per year.

To put that in perspective, excluding everybody in Austin age 65+, a gain of 198,000 bachelor’s+ people would drop Austin in the rankings among large metro areas only three spots, from #4 to #7, still well ahead of fast-growing, economically successful places such as Orlando, Portland, and Denver.

Being The Human Capital also makes good economic sense. As with most things in life and data, correlation should not be mistaken for causation. But the signal is pretty strong. Here’s a chart showing the growth rate of nominal gross domestic product (GDP) and the growth rate of bachelor’s+ population for the top 100 metro areas ranked by population. Clearly, human capital is playing a role in driving economic growth across the U.S., and Austin is among the winners of this “war for talent.”

2014-10-29 Growth in GDP vs Bachelor's+ Population MSA

Now, the downside risk, as they say. While we love touting our place at the top of the latest “best of” list, Austin is struggling to come to grips with its rapid ascent. Nowhere is that more evident, especially during this campaign season, than in conversations about inequality, gentrification, and affordability.

I’ll get to housing in detail in a future post. For now, let’s just focus on how adding 13,000 highly-educated people to the labor force per year could be impacting Austin, generally. First, there’s the obvious: growing prosperity, at least in the aggregate. Average earnings for bachelor’s+ workers age 25+ in Austin are $85,608, according to the Census Bureau. That’s about $30,000 more per year than the average for all employees in Austin, which goes a long way toward explaining the explosion of discretionary income that’s fueling our local culinary scene.

Next, growing disparity. Bachelor’s+ workers in Austin, on average, earn about $30,000 more per year than workers with some college or an associate’s degree, and about $40,000 more than workers with only high school. And while the bachelor’s+ population may be growing at the fastest rate, other segments of Austin’s workforce are growing at a healthy pace, as well. Workers with a high school diploma or less make up somewhere between 275,000 and 300,000 employees in the Austin-Round Rock MSA; the high school diploma population has grown by 54% since 2000.

Further, Austin’s rapidly growing bachelor’s+ population is likely exacerbating inequality along race/ethnicity lines, although it’s difficult to say for sure until we have better data available (innovative research efforts like the Central Texas Student Futures Project are certainly helping). For example, according to the latest available census data, only 23% of Black employees and 17% of Hispanic employees in Austin have a bachelor’s degree or higher, compared to 49% of Whites and an astounding 67% of Asians. While each race/ethnicity group in Austin has more education, on average, than its peers nationwide, inequality in educational attainment in Austin translates to significant wage inequality. Average earnings for Black employees in Austin are $39,072 per year, which at 30% of total income, converts to affordable monthly housing costs of $977.

Spend ten minutes looking online for rental housing of passable quality at $977 or less per month in centrally located neighborhoods around Austin and you’ll quickly understand why gentrification has been a dominant theme this campaign season.

Inequality of that magnitude isn’t unique to Austin, of course, but the gaps are wider here compared to some other regions. In my hometown of Raleigh, NC, for example (#5 right behind Austin in bachelor’s+ population growth), average earnings for bachelor’s+ workers are $75,228, and the gap between bachelor’s+ workers and some college or associate’s degree workers is about $5,000 smaller than it is in Austin. I have no idea what difference, if any, $5,000-$10,000 per year could make in shaping our perceptions of inequality and affordability in Austin, compared to other fast-growing, economically successful places like Raleigh. But it’s large enough to get your attention, especially considering the pace at which we are adding highly educated people to the population. More on this later when I take up housing in more detail.

Finally, there’s underemployment. Recall that we’re adding about 13,000 bachelor’s+ people to Austin’s labor force every year. It’s difficult to sort out exactly how many jobs requiring bachelor’s+ education we’re adding to absorb that increase in the labor force, but at the risk of raising the ire of the nuance police, we can take a shot at it. According to data from EMSI, we’ve added, on average, about 4,000 jobs per year since 2001 in the Austin-Round Rock MSA in occupations where the typical education needed for entry-level employment is a bachelor’s degree or higher. So that’s 13,000 more bachelor’s+ candidates competing for 4,000 more bachelor’s+ jobs each year. Moreover, even in “boom” years of higher than average job growth for Austin, we’re adding only about 8,000 bachelor’s+ jobs, which is still not enough to meet the demand of 13,000 new bachelor’s+ candidates in the region.

Thus, if you are highly educated and finding it difficult to navigate Austin’s labor market, you’re not imagining it. The Human Capital is getting pretty crowded these days. Now consider what it’s like for the other 63% of Austin’s adult population, which includes approximately three out of four Black employees and four out of five Hispanic employees, struggling to keep up with the rising cost of living in Austin with no bachelor’s+ and on no more than $1,000 per month for housing costs (i.e. rent plus utilities, etc.) and you can quickly see why inequality, gentrification, and affordability are the key topics in most city council races right now.

Austin’s standing as The Human Capital should be celebrated, but the invited guest list needs to be more inclusive.

Austin, Texas: A Theory of Everything

There’s a term from physics I’ve always liked: theory of everything. It refers to the holy grail in physics of a unifying theoretical framework that can satisfactorily explain how everything in the universe works. The physicists you can name off the top of your head have all contributed pieces to the puzzle, but nobody has yet discovered the underlying structure that ties everything together convincingly. Many experts would say that no such unifying theory exists, but that doesn’t stop their pursuit of it. Historical consequence, after all, is a mighty large and tasty carrot.

Urban planners and economic geographers are on a similar quest. While the geographic scope–and thankfully the math–may be less ambitious, the search for that single unifying theory that can explain how cities and regions work is no less tempting. Nor is it less consequential, I would argue, at least for people concerned with the future of their communities. Whether it’s concentrated, inter-generational poverty on one end of the spectrum or rising inequality and gentrification on the other, urban and rural planners are analyzing data, building and testing models, and exploring “best practices” that can help make sense of what they see happening on the ground. Jane Jacobs. Richard Florida. Ed Glaeser. Enrico Moretti. Michael Porter. All rock-star thinkers and writers with massive popular appeal because they’ve offered important pieces of the puzzle: clusters, creative class, urban externalities, etc. A theory of everything, for politicians, planners, and pundits.

We’ve reached somewhat of a fever pitch here in Austin lately, even by our own navel-gazing standards. The confluence of housing costs, traffic, property taxes, gentrification, and 78 candidates running for mayor or city council in Austin’s new single-member districts–not to mention a $1.4 billion rail proposal seeking voter approval–has generated a level of awareness about city planning issues that I haven’t seen since moving here in 2002.

It’s exhausting, but important. And, for planners and civic-minded people in general, encouraging.

So, naturally, it’s my turn to take a shot at a theory of everything:

2014-10-16 Austin Theory of Everything Title Slide

Click on the image to download a PDF copy of the presentation. Thanks to the Austin Board of REALTORS for giving me an opportunity to pilot test this presentation at their 2014 Realty Round Up event.

The narrative goes something like this:

While Austin is indeed a special place–ask anybody–we’re not unique in the growth management challenges we’re facing. Fast-growing cities across the developed world have all experienced a version of what we’re experiencing. However, the reason it may “feel” different here is that Austin is experiencing these changes on an accelerated timetable. Rapidly appreciating property values and rents, especially in the urban core. Growing inequality in an environment of significant wealth creation (in the aggregate). Traffic gridlock. Most other cities on this development path experience this process over several decades. Marking the exact start line in Austin is open to debate, but we’re out for a speed record.

Over the next couple of weeks I’ll do a series of posts expanding on several of the points made in the presentation. Topics will include:

  • Why being The Human Capital is, in the immortal words of Homer Simpson, the cause of, and solution to, all of life’s problems
  • Austin’s perceived lack of “middle-wage” jobs–i.e. economic development is ruining the city because it’s all software developers
  • Why we should be organizing civic leadership trips to Raleigh, Charlotte, and Nashville. Not San Francisco.

Brookings: next-best options for incentives

This article was written by Amy Liu and Owen Washburn and appeared in The Avenue, a blog hosted by the Metropolitan Policy Program at the Brookings Institution, on September 28, 2014.

If No End to Incentives for Jobs, then What?

Nevada’s recent incentive package, valued at $1.25 billion, to bring Tesla’s battery production near Reno has reignited a longstanding debate about the merits of state and local economic development subsidies to attract or retain firms and whether to ban the practice all together.

Let’s be honest: The ingrained practice of taxpayer-funded business recruitment has not lessened despite the mounting evidence that many incentives don’t actually pay off. The firms that receive incentives do not tend to generate more jobs than firms that don’t get them. And the overwhelming majority of state job growth comes from births of new establishments or expansion of existing establishments, not from firms moving to the state.

But we are seeing hopeful attempts by states and metro areas to do business attraction and job creation smarter, in five main categories:

1. Sign a truce.

Some municipalities within a region have signed a “code of ethics” to collaborate and coordinate on business location strategies so the entire region wins, including ending the practice of “poaching” jobs and firms from each other, which produces no new benefit or growth. In Denver, as Good Jobs First explains, the Metro Denver Economic Development Corporation has such a code of ethics, followed by every city and town in the metropolitan area, which ensures regional collaboration on every business location decision. Similarly, members of the Milwaukee 7, a seven-county, multi-sector economic initiative, adopted its own detailed code of ethics, including a pledge that “Members will not solicit intra-region company relocations” and that a “Violation of this commitment shall be viewed as a breach of our membership pledge.”

2. End single-firm incentives.

Providing tax breaks to individual firms distorts markets and is a highly inefficient use of public resources. Some states are moving to provide broader tax incentives for firm activities in priority industry clusters as they come into or expand in a local market. While being approached by Google, Iowa decided not to give that company its own tax break but instead passed legislation to provide tax abatements on equipment and infrastructure purchases by any data centers coming into the state. This broader approach helped attract multiple high-tech firms bringing their data storage facilities to the state.

3. Lure firms with assets, not just cost reductions.

South Carolina, one of the best in attracting and deepening foreign investments in key clusters from target markets like Germany, often leads their attraction efforts with their investments in world class workforce training programs, modern port and infrastructure, and responsive business climate. The state has also adopted a German-inspired apprenticeship program, Apprenticeship Carolina, which pairs subsidized on-the-job training for workers at firms like Robert Bosch and BMW with industry-focused technical college skills development. And it has invested in advanced R&D programs, including the Clemson University International Center for Automotive Research, to bolster the state’s highly-competitive auto-related clusters.

4. Make incentive strategies and practices more responsible and effective.

As Tim Bartik, Brian Kelsey and others have argued, incentives should be both transparent, so that the public understands the costs and benefits before a deal is finalized, and aimed at high-quality jobs that raise the standard of living. The states of Oregon, Washington and Rhode Island have all integrated evaluation processes into their incentive strategies,including public hearings and formal budgetary review, to ensure public input and review into their business recruitment practices.

5. Focus on what matters to economic growth.

Finally, the best regional economic leaders know that, while firm movements are always afoot, the real opportunities to grow sustained prosperity comes from a focus on local assets and clusters. The Kansas City region, which straddles Kansas and Missouri, has embarked on a renewed regional conversation about the factors that can contribute to economic competitiveness. Rather than have the border war between its two governors dominate economic debate, Kansas City area leaders are actively working together to expand the economic development toolkit to strategies that strengthen trade, innovation and talent development as the course to better jobs and opportunity.

By adopting these approaches, cities, states and regions can move toward a more effective and efficient model of economic growth, one that relies less on traditional incentives.