On Friday morning, just before composing this newsletter, I delivered a keynote address to the Regional Science Association conference in Alicante, Spain. Notably, the preposition “to” was used instead of “at.” Due to family commitments, I couldn’t physically attend the conference, so I presented via Zoom from the comforts of my home – a common practice we have all become accustomed to over the past three years.
The title of my session was “Is the New Economic Geography Still Thriving in 2023?” The underlying question was whether the concept of economic geography, which examines the reasons behind where people choose to conduct their activities, remains relevant and successful considering the ability to engage in remote discussions with individuals located thousands of miles away.
For context, economic geography has been a longstanding field of study, focusing on the location choices of individuals and organizations. The “new” economic geography encompasses a specific approach to this subject that heavily relies on formal economic models. One of my most cited academic papers, “Increasing Returns and Economic Geography,” published in 1991, was one of the initial works in this genre.
Why is formal modeling important? It aids in clarifying one’s thinking and often reveals insights that should have been obvious, but weren’t previously recognized. These insights can then be easily expressed in plain English. Perhaps the most crucial insight from the new economic geography is the perpetual tension between the forces of agglomeration, which lead to the clustering of activities, and centrifugal forces, which cause dispersal. Technological advancements can tip the scales in either direction, transforming the way we work and live.
In the latter half of the 19th century, the rise of large-scale manufacturing production incentivized industries to concentrate near major markets. The advent of railroads facilitated the transportation of goods, allowing distant farmers to supply urban populations. This led to the emergence of the “manufacturing belt” in the Northeast and inner Midwest.
However, around the 1920s, centrifugal forces gained prominence. Trucking reduced the necessity of being located near rail hubs, and the electrification of factories prompted a redesign of industrial facilities, favoring sprawling one-story structures instead of dense urban locations. Consequently, industries and wealth began to disperse. The manufacturing belt gradually dissolved, and income disparities across the United States diminished over time.
Thus, U.S. economic geography became less captivating. Admittedly, early literature on the new economic geography had a somewhat nostalgic, almost steampunk appeal. It focused on milestones such as the rise of the manufacturing belt and the emergence of local manufacturing clusters, for example, the detachable collar and cuff industry in Troy, N.Y. China also garnered significant interest due to its ascent as a manufacturing superpower, accompanied by the development of industrial clusters reminiscent of those once prevalent in America around 1900.
However, the story didn’t end there. Around 1980, the dynamics propelling economic geography shifted again with the rise of the knowledge economy. Technology-oriented firms sought access to a large pool of highly educated workers, predominantly concentrated in major coastal metropolitan areas. The resulting employment opportunities attracted even more highly educated individuals, leading to an amplification of regional disparities.
This shift is reflected in several charts. For instance, consider the ratio of per capita income in Massachusetts, which has consistently been one of the wealthier states, to income in Mississippi, one of the poorest and less educated states in America:
Between the 1920s and 1980, the income gap between these states significantly narrowed, making the American economy appear increasingly equitable in terms of location. However, this convergence reversed after 1980.
A study conducted by the Brookings Institution approached this issue from a different angle by examining the dominance of a select few “superstar” cities. The study revealed these cities rapidly distancing themselves from the rest of the country:
While major coastal metropolitan areas experienced significant growth, large parts of the United States, particularly the eastern heartland, were left behind.
Then came Covid-19. For a brief period in 2020, it seemed like population density itself posed a considerable risk of contagion. However, as we learned more about the virus and vaccines became available, this concern diminished.
However, Covid-19 brought about another change. Remote work has been technically feasible for quite some time, but it was largely underutilized until the fear of contagion forced a surge in remote work. This sudden shift led to it becoming the norm, with millions of workers learning to interact via the internet. Surprisingly, remote work proved to be popular due to the absence of commuting and improved work-life balance.
Consequently, even though life has largely returned to its pre-pandemic state, many people are still working remotely, resulting in reduced office occupancy:
Is this the beginning of a sustained decline for superstar cities? I don’t think so.
While remote work is undoubtedly here to stay, there’s a significant difference between fully remote work and hybrid work. Fully remote work can be done from anywhere, and it’s possible that a notable number of fully remote workers may relocate to smaller cities offering urban amenities like walkable downtown areas. However, early indications suggest that fully remote work will remain a niche within the workforce. Both employers and workers are increasingly recognizing the value of informal interactions that occur in an office environment, at least part of the time.
Additionally, hybrid workers still need to reside within the commuting zone of major metropolitan areas.
In fact, if anything, the rise of hybrid work may reinforce the advantages of superstar metros or, more accurately, alleviate one of their significant disadvantages. One of the main drawbacks of working in cities like New York City is the time and expense associated with commuting. Hybrid workers have reduced commuting requirements compared to full-time office employees. Alternatively, they can choose to move farther away from their workplaces, benefiting from cheaper housing while accepting longer commuting distances but for fewer days.
Will new technology eliminate the edge that superstar metros have gained over the past generation? Probably not. It may necessitate significant changes in their internal structure, such as addressing the surplus of office space. Nonetheless, I don’t foresee another historical reversal in the geography of the economy at this point.
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