Economic Development: Is The Doctor In?

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Christopher Thornberg, PhD
Christopher Thornberg founded Beacon Economics LLC in 2006. Under his leadership the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States.

Here it is, 2018, and the Inland Empire is yet again an economy on the move. In fact, it is currently the fastest growing major economy in the state in terms of employment. The 3.2% annual job growth rate as of December is higher than San Francisco (2%), San Jose (1.7%), and Orange County (.8%). Yet despite all this growth, the region may still feel overlooked inasmuch as the average new job in the Inland Empire will earn substantially less than the new jobs being created in these other three areas. Indeed, addressing income disparity has become priority number one in terms of economic development efforts in the Inland Empire —“yes the IE has lots of new jobs, but they aren’t ‘good’ jobs”—goes the thinking.

We like to think of economic development as medical consulting for a region’s economy. When we have a health problem we go see a professional who will catalog our symptoms and (perhaps with some additional diagnostic tests) use them to determine the underlying ailment. We then assign a scientifically verified course of treatment as a cure. On a periodic basis, the symptoms will be checked to make sure the treatment is working. If not, perhaps a different course of action or a new diagnosis will be needed.

Unfortunately, this isn’t what happens in most economic development efforts. Symptoms of economic maladies, such as the Inland Empire’s lower wages, are collected and debated with great gusto. But while symptoms are usually easy to spot, when it comes to economic conditions, there tends to be little consensus as to the true ailment—data limitations and the inability to easily run controlled experiments limits our understanding of why some places succeed while others don’t.

Without a clear understanding of the underlying problem, the treatment becomes, to say the least, problematic. And the solutions implemented are rarely scientifically studied to determine if they have reduced the symptoms in any meaningful way. The inability to collect good cross-regional data on development efforts, the complexity of the economic environment, and the often relatively small scale of development initiatives makes it difficult to tease out the real impact of many development endeavors—meaning conversations about their success can quickly devolve into anecdote. Sometimes it seems as if just having a treatment is the sole indication of success.

This certainly doesn’t imply that all economic development efforts are ineffectual or shouldn’t occur—many good results come from the hard work of these professionals. What it does mean is that economic development efforts need to be pursued with an honest acknowledgement of what we do and don’t know about the drivers of economic prosperity. Development initiatives need to be practiced under the humbling but constant reminder that efforts may well be missing their target and the only way to verify their effectiveness is through robust data analysis—even if it tells us things we may not want to hear.

The issue of lower wages in the Inland Empire is a classic case of how not clearly understanding causality can lead to suboptimal solutions. Perhaps the most common line of thinking is that the region’s lower wages are being driven by its large share of low skilled workers. It seems clear—raise the skill level of local workers and all will be fixed. Most of the solutions that have been pursued by local governments have largely revolved around efforts to promote higher rates of educational achievement in the resident population—efforts that have had some success in terms of student achievement (which is great) but have not seemed to have any measurable impact on the lower wages paid within the local job base.

Unfortunately, this was fairly predictable. While lower skilled workers are clearly correlated with lower paying jobs, this in no way supports causality. In fact, causality could go the other way—the lack of high paying jobs in the region is the reason more higher skilled workers don’t live in the Inland Empire. The very fact that higher skilled workers are substantially more likely than other residents to commute to the coastal job centers of Los Angeles, Orange County, and San Diego for work, supports this version of causality.

A recent theory is that the Inland Empire’s wage problem is due to a lack of startups in the tech space—hence the dearth of tech jobs in the region. The solution has been a focus on establishing incubators to help local entrepreneurs succeed in building their next Apple or Google. However, again, there is little statistical evidence to support the notion that the lack of high wage jobs in the Inland Empire is being driven by a lack of startup activity. In fact, we really don’t know what the share of small business is in the region as compared to neighboring coastal economies.

This certainly doesn’t mean that starting incubators is a bad idea—it may help improve the region’s wage disparity. But such efforts have to be launched with humility, acknowledging that this is an experiment intended to determine if it might be a cure, rather than assuming it is one. These efforts should also be evaluated closely and their effectiveness assessed before being expanded—do they or do they not seem to be helping? It seems as if many interests already assume incubators are a good idea and everyone in the region is pursuing their own version of one—more of a fashion fad than a scientific cure.

We have a third idea. I recently authored a white paper released through the UC Riverside School of Business Center for Economic Forecasting that suggests the lack of a “downtown”—an urban core dense with jobs—can be correlated to the problem of lower wages in the Inland Empire. This is because high wage jobs are found to be in highest concentration in urbanized zones of heavy job density.

Do we know for sure that changing local zoning policies to support the development of a job-dense urban core would end the Inland Empire’s wage problem? Of course not—our research runs into the expected problems that are created by not having a controlled experiment to observe—few cities would allow economists to come in and experiment with local zoning rules to see which ones promote high wage job growth better. But it is a very plausible idea, based on statistical findings, and one worth considering from a policy perspective, albeit carefully and with persistent and faithful efforts to measure success.

Economic development should not be driven by ‘cool’ ideas but by careful empirical analysis and with the constant reminder that correlation does not equal causation. After all, as the old saying goes “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The following two tabs change content below.
Christopher Thornberg, PhD
Christopher Thornberg founded Beacon Economics LLC in 2006. Under his leadership the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States.

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