Agglomeration, working from home, and the character of places

Why do certain industries cluster together in one location? Social scientists have answers:

Photo by Chris F on

Economists believe agglomeration — like the clustering of tech in the Bay Area — has historically been the result of two main forces. The first is what they call “human capital spillovers” — a fancy way of saying that people get smarter and more creative when they’re around other smart and creative people. Think informal conversations, or “serendipitous interactions,” over coffee in the break room or beers at the bar. These interactions, the theory says, are crucial to generating great ideas, and they encourage the incubation and development of brainiac clusters. The other force is the power of “matching” opportunities. When lots of tech firms, workers and investors clustered in Silicon Valley, there were lots more opportunities for productive marriages between them. As a result, companies that wanted to recruit, grow or get acquired often gravitated to places like the Bay Area.

However, remote work could actually improve certain matching possibilities. Companies can hire smart people anywhere in the world when they drop the requirement that they physically be in a central office. Not only that, they can pay them less. Moreover, killing the office can significantly lower costs for companies, which no longer have to pay for expensive real estate.

So, in this theory, the future of work and the economic geography of America really hinges on whether companies can create those “human capital spillovers” through computer screens or in offices in cheaper locations.

This is a phenomenon with a pretty broad reach as cities could be viewed as clusters of firms and organizations. What has been interesting to me in this field in recent years is how places like this come to develop and what it means for the character of the place.

Take Silicon Valley as an example. This is the home of the tech industry and, as the article notes, the big firms have committed to physically being there with large headquarters (including Google, Apple, and Facebook). These headquarters and office parks are themselves interesting and often a post-World War Two phenomena as highways and suburbanization brought many companies out of downtowns to more sprawling campuses. At the same time, the impact of all of this on the communities nearby is also important. What happens when the interests of the big tech company and the community collide (see a recent example of a Facebook mixed-use proposal)? What did these communities used to be like and what are they?

This is bigger than just the idea of employees working from home. This potential shift away from clustering would affect places themselves and how they are experienced. If thousands of workers are no longer in Silicon Valley, what does this do to those communities and the communities in which more workers are now at home? Silicon Valley became something unique with this tech activity but it could be a very different kind of place in several decades if there is new activity and new residents.

The same could be said for many other communities. What is New York City if Wall Street and the finance industry clusters elsewhere or disperses across the globe? What happens to Los Angeles if Hollywood disperses? And so on. The character of places depends in part on these clusters, their size, and their history. If the agglomerations shift, so will the character of communities.

Explaining Americans’ decline in geographic mobility

Derek Thompson highlights a decline in movement and summarizes what might be behind it:

Between the 1970s and 2010, the rate of Americans moving between states fell by more than half—from 3.5 percent per year to 1.4 percent. “It’s a puzzle and it’s the one I wish politicians and policy makers were more concerned about,” Betsey Stevenson, a former member of Obama’s Council of Economic Advisers, told The New York Times this week. Fewer Americans moving toward the best jobs and starting fewer companies could lead a less productive economy. On Thursday, the Financial Times reported that productivity “is set to fall in the U.S. for the first time in more than three decades.”…

Every dimension of declining American dynamism is connected. The slowdown in most areas’ business development comes from a shifting tide in American migration. For 100 years, population flowed from poor areas to rich areas. Now the trend has reversed. Land-use policies prevent more middle-class families from living in productive areas, because housing becomes too expensive. Meanwhile, the rich can afford to cluster in a handful of metros where entrepreneurship is a norm, while business dynamism falls in the rest of the country. There used to be too much land to settle. Now there’s not enough land to share.

Two quick related thoughts:

  1. You regularly see people make the argument that people should just pick up and move to where there are more opportunities, meaning jobs and a cheaper cost of living (generally referring to housing and maybe taxes). There is even a single case in Evicted where a person moves from a poor Milwaukee neighborhood to a southern city and seems to be doing well. However, moving is not necessarily easy (see #2).
  2. Why are economists the only ones summarized here? Are sociologists not paying much attention to this? On one hand, I can see how economics would drive decisions about moving. Yet, it is not the only factor. People have social connections wherever they live and it can be difficult to form new social networks. While Americans always have prized mobility, don’t they also celebrate finding your roots and being a presence in your community? (Granted, Americans may be doing neither: moving less and being less engaged in civic life.) This reminds me of some public housing residents who didn’t want to leave pretty bad conditions in high-rise buildings. Or, what about explanations like those in The Big Sort or The Rise of the Creative Class where people choose to live near people like themselves.

Argument: Sociologists should learn more statistics to get paid like economists

A finance professor suggests the wage gap between economists and sociologists can be explained by the lack of statistical skills among sociologists:

Statistics is hugely valuable in the real world. Simply knowing how to run, and interpret, a regression is invaluable to management consultants. Statistics is now permeating the IT world, as a component of data science — and to do statistics, economists have to learn how to manage data. And statistics forces economists to learn to code, usually in Matlab.

As Econ 101 would tell us, these skills command a large premium. Unless universities want to shrink their economics departments, they have to shell out more money to keep the professors from bolting to consulting and financial firms.

If sociologists want to crack this bastion of economists’ “superiority,” they need to tech up with statistics. Sociologists do use some statistics, but in general it’s just much less rigorous and advanced than in economics. But there is no reason why that has to continue. Sociologists work with many quantitative topics. There are vast amounts of quantitative data available to them — and if there is a shortage, survey research centers such as the University of Michigan’s Institute for Social Research can generate more.

Using more and harder statistics will probably require more quantitative modeling of social phenomena. But it won’t require sociologists to adopt a single one of econ’s optimization models, or embrace any economics concepts. It won’t require giving one inch to the “imperialist” economics of Gary Becker’s disciples. All it will require is for sociologists to learn a lot more advanced statistics, and the data management and coding skills that go with it. The best way to make that happen is to start using a lot more sophisticated statistics in sociology papers. Eventually, the word “sociologist” will start to carry the connotation of “someone who is a whiz with data.” I’m sure some departments have already started to move in this direction.

I imagine this would generate a wide range of responses from sociologists. A few quick thoughts:

1. Using more advanced statistical techniques is one thing but it also involves a lot of interpretation and explanation. This is not just a technical recommendation but also requires links to conceptual and theoretical changes.

2. Can we statistically model the most complex social realities? Would having more and more big data make this possible? Statistics aren’t everything.

3. Any way to quantify this anecdotal argument? I can’t resist asking this…

Robert Shiller suggests economists should be more connected to sociology, other disciplines

Economist Robert Shiller suggests the field of economics should be more connected to other social sciences like sociology:

Unlike many economists who seem unaware that their discipline has lost much of its credibility in recent years, Shiller is appropriately distraught at the seeming disconnect between economics and real-world social concerns.

“My own university, Yale, used to have a department of sociology, economics, and Government,” Shiller told me. “And in 1927 they split them into three departments. I think that was a momentous institutional change — it allowed economics to be cut off from other disciplines. Now they’re in separate buildings. You have to walk some distance. It’s utterly amazing to me how rarely economists quote the greats in psychology or sociology. Maybe they’re read them, but they’re not in their active mind.”

Shiller makes a powerful case that, while recent scandals make it easy to forget, financial innovation has done a lot of social good. As as an example he cites the creation of insurance. Because of it, almost everyone — not just the rich — can bounce back after an accident, fire, theft, or other calamity. In the past, such hardships could financially ruin a family forever.

Some interesting history here. Compared to the natural sciences, the social sciences have a relatively short history. It was only in the early 1900s that disciplines like sociology began to emerge in their own right.

From a sociologist’s point of view, it seems incomplete to only examine financial principles and transactions without the broader understanding of social motivations, interactions, and life. I wonder if sociologists wouldn’t argue that sociology encompasses more of the other social sciences than economics or psychology do, harkening back to Comte’s idea of sociology as the “queen of the sciences.”

Financial planning with a hint of sociology?

Economists and sociologists may have very different views of the world but what about combining some of both in financial planning? Here is a financial planner who argues he has an extra edge because he incorporates insights from sociology and a few other fields:

William Pitney, Financial Coach and President of Focus YouNiversity, LLC (FocusYOU), continues to enhance his expertise as a Sudden Money Advisor. Pitney attended the one-day workshop held in Portland, Oregon on April 19th as a requirement of the 12-month coaching program. The program is designed to provide a deeper understanding of the Financial Planning Process developed by Susan Bradley, CFP® and founder of the Sudden Money® Institute (SMI).

During the workshop, Pitney acquired new skills for navigating clients through financial and life transition events, allowing them to feel more confident as they move forward. SMI provides Pitney with access to the latest research, tools and processes to guide clients through Sudden Money and life events.

Traditional financial training and advice address the facts and figures of money only. SMI provides advanced training that also addresses the emotional and human side of money. “The skills and protocols I’ve acquired through Sudden Money enable me to advise clients in transition more effectively and makes it more comfortable for them as they go through these turbulent and often life altering transitions,” said Pitney.

As a Sudden Money Advisor, Pitney is among a select few professionals with expertise combining the fields of financial planning with cutting-edge research in neurology, sociology and psychology. These techniques integrate the technical, rational aspects with the human experiences of the person in transition.

Is there any evidence that incorporating sociological factors into financial planning leads to increased returns? If so, this could be lucrative for some sociologists down the road…


Conservatives getting behind mortgage modifications?

A journalist argues that conservatives are starting to argue that the federal government should step in and help homeowners stay in their homes:

Mortgage modifications have been a key pillar of the progressive response to the economic downturn–and they’ve been one focus of the Occupy protests that have sprung up across the country lately. The Obama administration offered its own such program in 2009, though it has helped far fewer homeowners than anticipated, thanks to a flawed design. But until lately, conservatives had by and large opposed the idea, arguing, as Santelli did, that taxpayers shouldn’t be forced to pay for borrowers’ bad decisions, and that banks shouldn’t have their actions constrained by government.

So what’s changed? By and large, policy hands and political leaders alike recognize that the economy isn’t going to get better on its own, at least not any time soon,. There’s a widespread consensus that until the United States tackles the massive overhang of housing debt–American homeowners’ wealth has fallen by a stunning 40 percent since 2006–the economic recovery won’t gain steam. As Feldstein wrote: “The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater.” Rogoff, too, views the crushing volume of personal debt as an unaffordable drag on growth. “Simply put, you can’t operate an economy where huge numbers of people are desperately in debt and have no real way out,” he argues.

Hubbard originally offered a modification plan in 2010 as a way to avoid another “costly stimulus package” designed to spur consumer demand. But he, too, may also recognize that mortgage modification, though necessary for the health of the economy, is likely to be politically unpopular. If so, better to have President Obama take the hit, rather than a future Republican president—like, say, President Romney.

Of course, right and left don’t see entirely eye-to-eye on the issue. Dean Baker, an economist with the liberal Center for Economic and Policy Research, last week slammed Feldstein’s plan as too soft on banks and a bad deal for struggling homeowners. And it’s hard to imagine that Republicans in Congress would react favorably to an aggressive mortgage modification proposal from the Obama administration.

So if this is true – and “three instances” doesn’t a trend make even as this journalist suggests – what is happening?

1. Conservatives are recognizing that the mortgage debt is holding up the larger economic recovery. If people can’t move, they can’t go to the open jobs. The debt doesn’t allow them to spend on other consumer items. If government involvement can move people past this logjam, then the “free market” can work again. Desperate times mean that political ideology has to be bent a little.

2. As the journalist suggests, they only back this when a Democrat is in charge.

3. This is pandering for votes. American culture has a dream of homeownership – neither party wants to be against that.

This bears watching. Of course, the devil is in the details: who is actually going to support what? Who is going to pay for this? How many homeowners could be helped?

Sort this out: poll of 39 economists suggests “30% chance of recession”

Polling economists about whether the country is headed for a recession does not seem to be the best way to make predictions:

The 39 economists polled Aug. 3-11 put the chance of another downturn at 30% — twice as high as three months ago, according to their median estimates. That means another shock to the fragile economy — such as more stock market declines or a worsening of the European debt crisis — could push the nation over the edge.

Yet even if the USA avoids a recession, as economists still expect, they see economic growth muddling along at about 2.5% the next year, down from 3.1% in April’s survey. The economy must grow well above 3% to significantly cut unemployment…

The gloomier forecast is a stunning reversal. Just weeks ago, economists were calling for a strong rebound in the second half of the year, based on falling gasoline prices giving consumers more to spend on other things and car sales taking off as auto supply disruptions after Japan’s earthquake faded. In fact, July retail sales showed their best gain in four months.

But that was before European debt woes spread, the government cut its growth estimates for the first half of 2011 to less than 1%, and Standard & Poor’s lowered the USA’s credit rating after the showdown over the debt ceiling.

Here is what I find strange about this:

1. The headline meant to grab our attention focuses on the 30% statistic. Is this a good or bad figure? It is less than 50% (meaning there are less equal odds) but it is also double the prediction of predictions three months ago. Based on a 3 in 10 chance of a recession, how would the country and individual change their actions?

2. This comes from a poll of 39 economists. One, this isn’t that many. Two, how do we know that these economists know what they are talking about? How successful have their predictions been in the past? I see the advantages of “crowd-sourcing,” consulting a number of estimates to get an aggregate figure, but the sample could be larger and we don’t know whether these economists will be right. (Even if they are not right, perhaps it gives us some indication about what “leading economists” think and this could matter as well).

3. How much of this is based on real data versus perceptions of the economy? The article suggests this is a “stunning reversal” of earlier predictions and then cites some data that seems to be worse. These figures don’t determine everything. I wonder what it would take for economists to predict a recession – which numbers would have to be worse and how bad would they have to get?

4. Will anyone ever come back and look at whether these economists got it right?

In the end, I’m not sure this really tells us anything. I suspect it is these sorts of statistics and headlines that push people to throw up their hands altogether about statistics.