The magnificent seven

13th November 2018 Off By binary
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Boston, NYC, DC, Seattle, Bay Area, LA and San Diego.  What do those 7 metro areas have?  What’s their secret sauce?

Aaron Renn discusses the recent (rumored) Amazon decision to add headquarters in NYC and the DC area, and has a number of interesting observations:

Amazon chose not one but two elite coastal cities for its new headquarters.

There’s no other way to slice it: Amazon repudiated the heartland with this decision. This was probably the ideal case for a heartland choice. It was not just a small executive headquarters but a gigantic number of employees. And Amazon, having lower margins than say Google, has to be much more cost conscious. My own analysis turned on the question of whether or not Amazon would be concerned about costs. I thought they would be, but it turns out they didn’t care. No matter what subsides Amazon extracts from New York and Virginia, they certainly won’t offset the labor cost differentials in those locations.

Why not Chicago or Austin?

As one person tweeted, “A friend is the founder of a fintech company. They want to hire more college graduates to their Austin office instead of NYC. New talented recruits have multiple offers & most want to be in NYC, not Austin. Austin isn’t exactly a horrible place to live.”

At this level, cost is essentially irrelevant at present. The ability to attract A+ caliber talent is all.

That’s not to say heartland places can’t be successful in many ways. But it won’t be at the elite tiers of the economy.

The Biggest Loser

The biggest loser in this is Chicago. Chicago had the urban location, transit, a great pipeline of talent from the Big Ten, and lower costs. That’s why I picked Chicago as the favorite in my analysis. It checked every box at some level and had lower costs than the coasts to boot.

I’m too close to this to see the problem.  I grew up in the Midwest, at a time when the Midwest was quite prosperous.  I attended the University of Wisconsin and then Chicago.  The Windy City trails NYC in cultural sophistication, but it doesn’t trail the other 6 coastal stars in that regard.  Illinois has budget problems, but Texas doesn’t.  Why don’t they like us?

My wife told me I’m asking a silly question.  Of course the elite talent want to be on the coast, how could anyone think otherwise?  She has an Asian perspective, specifically Chinese.  In China, everyone wants to be in the sophisticated coastal cities, not the backward interior.  The Chinese associate the US East Coast with sophistication—Ivy League universities, etc. I’d guess the same is true of Indian immigrants.

While Asians are only 5.6% of the US population, they are 40% of the student body at elite West Coast universities.  You know, the ones that don’t discriminate on the basis of  . . . er . . . “personality”.  So maybe the Asian-American perspective does matter.

There’s plenty of work to be done by the bottom 99%, which is why the population of Dallas and Austin is growing much faster than the population of the coastal stars.  But it seems like the attraction of the coastal cities is so great that the elite talent will accept sharply lower real wages to work there.  Is it because the millennials are a post-materialistic generation?  They don’t want a 7000 sq. foot home in a Dallas suburb?  An 1800 square foot home in San Jose is plenty big for their web surfing and euro-style kitchen?  They’d rather walk to a restaurant?

Or is it some sort of environmental factor?  The West Coast is beautiful, and even the East Coast has some climate and scenery advantages over the Midwest.  Or is it cultural—once a critical mass of like-minded people form in an area, it starts snowballing? It’s obviously not crude economic factors like tax rates.

That doesn’t mean supply-side economics is wrong; the zero state income tax places are growing faster on average, just not with the top 1% talent (except Washington state.)

Are these trends important?  It’s not like the Midwest contains a bunch of dummies—they still attract the top 10% to 20% talent:

Having lived in both Chicago and New York I can tell you that the caliber of talent is as different as night and day. Chicago has a ton of solid Big Ten type recruits. They are drawing the top 10-20% type people. But Chicago is very weak in top 1-2% types, and that’s a huge handicap when you are trying to position yourself as an elite player. You can’t do it without elite talent, and Chicago doesn’t have nearly enough of it. I wouldn’t be surprised if this were the key factor for Amazon.

If Boeing didn’t have legacy investments, they’d want to be in Dallas or Chicago, not Seattle.  Elite tech firms seem different.

I encourage people to read his entire piece, and I welcome suggestions as to what I’m missing.  And then read Kevin Erdmann’s new book when it comes out in January.

PS. David Beckworth has a new podcast where he interviews me on monetary policy.  It was recorded at the University of Texas a few weeks ago.

PPS.  I feel sorry for my home state of Wisconsin.  They got conned by Foxconn into massive subsidies for a new TV flat panel manufacturing plant, and now it looks like Foxconn is backing off on its promises.  Scott Walker’s dumping the problem onto the next governor.

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