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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Another Aspect of the Financialization vs. Real Economy Puzzle



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If Stengler and Kedrosky are right and the financial sector is pulling in engineering talent that might otherwise have embraced real-economy entrepreneurship, I wonder if a small part of the puzzle might relate to consumption externalities. Stengler and Kedrosky emphasize the financial rewards for graduates in the financial services industry, but consider also that the financial services industry is concentrated in high-cost metropolitan areas where young adults can find a wide array of pleasant diversions, particularly young adults with a large amount of disposable income. Building a company, in contrast, entails not just a sacrifice in money and leisure time; it might also require moving to a low-cost metropolitan area, where the most desirable consumption opportunities are harder to get a hold of. I’m reminded of Tony Hsieh’s account of the early days of Zappos, when he dispatched a loyal employee to build a shipping and distribution center in a decidedly un-urban corner of the Midwest.

Just as we’ve seen an increase in wage dispersion and wealth concentration, we’ve arguably seen a growing amenities gap among U.S. metropolitan areas. The conventional view is that air travel and broadband access have leveled the playing field, and this is certainly true in some domains. Broadband is great. But broadband plus density is even greater, as it lowers the cost of accessing a wide range of specialized service providers. Moreover, isn’t it likely that more geographical mobility would make it easier for the people who invest the most in their erotic capital to cluster in a small handful of global cities? And if this is indeed true, money isn’t the only reason a recent MIT grad would choose a finance job in London or New York over an opportunity to build an exciting real-economy start-up in Coventry or Pittsburgh. 

We tend to think of consumer internet businesses when we think of start-ups, and these firms tend to cluster in the same cities where we find large numbers of financial professionals. But many of the great business opportunities in the US are presumably in less-glamorous industries and less-glamorous places. 

So what is the policy upshot? I see at least two: (1) It is very important for the high-cost metropolitan areas to do what they can to lower barriers to entry, e.g., relax zoning restrictions, parking requirements, rent regulations, and other measures that raise the cost of housing and make an effort to control other congestion costs through market pricing. This will make real-economy entrepreneurship at least somewhat more likely in the most desirable cities. (2) Cities and regions that aren’t in the charmed circle might need to embrace a triage mentality. (i) In terms of place-based strategies, choose the most well-situated, amenity-rich locales in your jurisdiction and double down on making them more desirable rather than spreading your resources too thin. (ii) Accept that people-based strategies are your best bet and that relative decline is inevitable as your community dwindles in population. 



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