The Three Legs Of Traditional Economic Development Strategy Are Breaking

I was asked to lead a panel on economic development at the Annual Meeting of the National Association of Counties last Friday.  My task was to provide some background on economic trends for the panelists who were to speak on what their communities are doing.

I presented what have been the three main legs of the traditional economic development strategy of state and local governments:

1. Provide incentives for big companies to bring lots of jobs to your community

2. Encourage the creation and development of physical clusters of the same kind of businesses

3. Subsidize the building of places that concentrate a large number of jobs, like office buildings, factories, etc.

Then I pointed out that these three parts of the traditional strategy are being undermined by the consequences of:

  • a shift in employment from making things and food to intangible services and digital goods and 
  • increasingly available communications

As a result, incentives to big companies don’t work well because those companies can no longer deliver or move lots of jobs.  In addition to explaining why this is, I gave examples of the failure of incentives.  

In a sense, there is a movement away from the world of Coase to the world of Shirky.  Ronald Coase, an economics Nobel Prize winner, developed the theory of the firm – why large enterprises emerged in the industrial era and were more efficient in many ways than the marketplace itself.  Clay Shirky of NYU has written about how the Internet can provide the means of collaboration today that only the large industrial corporation used to provide.

As a result, in their thinking about economic growth, governments should focus on small companies and fluid teams as the individual increasingly becomes the key unit of economic activity.

The second part of the traditional strategy has been to create clusters.  However, as some major economic studies have made clear, the value of physical clusters of the same industry is waning. Moreover, the more recent talk of “innovation clusters” would seem to fly in the face of what we have learned about how innovation happens.  Innovation is more likely to occur from people in diverse fields exchanging ideas than people who are all narrowly focused on the same domain of knowledge.

Then finally there has been the practical equation of real estate development with economic development. As noted in an earlier blog, companies require less commercial real estate space per employee.  Work at home and flexible co-working spaces are the substitutes and these don’t look like traditional office towers.  Physical real estate itself is changing and become more a blending of virtual/physical.  So perpetuating more traditional office or other industrial real estate projects would not seem to be a good future-proof investment of public funds.

I suggested that public officials needed to shift their thinking about what is economic success.  Is it the total revenues of companies that might happen to have an address in your county OR is it the amount of income and wealth of its residents?

To put it another way: if you had to choose, which is the better economic picture for your community – corporate skyscrapers or headquarters in downtown, but a median household income of $40,000 per year OR no skyscrapers, but a median household income of $100,000 per year?  To me the answer is clear – the latter option to both questions.

My talk was followed by presentations from the two coasts of the US.  First, Ira Levy of Howard County, MD described that county’s approach with its emphasis on entrepreneurs, education, etc.  We didn’t do any coordination ahead of time, but his presentation was very much in line with the ideas I presented in the opening talk.  And, of course, he had to point out that Howard County has a median household income of $105,000.

A similar story came from Robert Ross of the San Mateo (CA) Council, who referred to the trends that I had outlined.  These required a change in strategy even in the heart of Silicon Valley. 

Please feel free to contact me at if you want a copy of the details of the presentation.

© 2012 Norman Jacknis