Saturday, December 18, 2010

The Future of the Midwest

Bill Testa of the Federal Reserve Bank of Chicago has provided a very nice facts based assessment of where the Midwest now stands.   Below, I show you the type of evidence he presents as he makes the case that the Midwest is overly invested in manufacturing.  As this industry declines, the Midwest suffers.  Here is a plot of different Midwest cities documenting the negative correlation between initial city manufacturing jobs share versus subsequent employment growth.  The manufacturing intensive cities enjoy less subsequent employment growth.



Is this a causal relationship? In part.  In my Green Cities book, I argue that manufacturing cities tend to be high pollution cities. If these cities are nasty, then the skilled won't want to live there.If attracting and retaining the skilled is the key to subsequent economic growth, then manufacturing cities will have a problem. The good news is that counter-examples exist. Pittsburgh was a nasty steel city and the silver lining of steel's demise is that Pittsburgh has reinvented itself.  Chicago has had a similar transformation while Detroit has not.

In my new book Climatopolis, I sketch how cities compete against each other for firms and workers.  As Testa's piece highlights, over the last 40 years the Midwest and parts of the East have been losing workers and jobs to the warmer south and Sunbelt.    In Climatopolis, I argue that climate change will reverse this trend.  Put simply, people will be more likely to move to a Detroit than a Phoenix.  Water scarcity, extra heat wave risk in Phoenix relative to Detroit will nudge self interested households to seek out safer, relatively higher quality of life areas.  Today, some homes in Detroit sell for less than $20,000. This may be a good long term investment!

Public health research has documented the deaths that occur due to winter cold. Climate change will reduce the freezing days that hit the Midwest and warmer January temperature will raise the "amenity" level of this region.  When Ed Glaeser releases his new book Triumph in 6 weeks, you will hear a lot of talk about the importance of Warm January temperature as a key urban growth determinant. As of today, Detroit doesn't have this.  Note that in this public health piece that they argue that heat waves do not kill, they harvest. People who were at risk of dying die in the heat wave earlier than they would have died in the absence of the heat wave. They argue that the heat wave "harvest" people who would soon subsequently die otherwise.  In the case of cold waves, this "harvesting" effect is not there.  This finding has implications for the costs of the Moscow Heat Wave of Summer 2010 and the French Heat Wave.  You have to be a pinch subtle here. Of course people died in France and Moscow during their respective heat waves but the Deschenes and Moretti  research argues that these individuals would have died just a few weeks later if the heat waves hadn't taken place.

I also argue in Climatopolis that climate change mitigation efforts will aid Midwest cities.  Carbon pricing will mean that the "death of distance" will die.  Proximity to final consumers will be valued and some manufacturing activity could actually return to the Midwest with the goal being to ship final products to the East Coast cities.

Climate change creates new challenges and new opportunities. Forward looking people choosing how to live their lives have the right incentives to understand the past trends that Bill Testa highlights but to also think ahead about anticipated future trends.

Finally, if you'd like to see what I've had to say about the Midwest --- you might want to read my Federal Reserve Bank of Cleveland Interview

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