Summary of Results

The metro area farthest along the path to the New Economy is, perhaps not too surprisingly, California's Silicon Valley/San Francisco (which includes Oakland and San Jose). Unlike the State New Economy Index, in which the leaders were more closely clumped, this index shows San Francisco with an impressive lead over its nearest challenger (Austin), while Austin's lead in turn over the third-ranking metro (Seattle) is also significant.

Both top regions are quintessential high-tech metros. Silicon Valley has become synonymous with innovation and technology, while Austin is noted for Dell Computer, Sematech (the chip-making consortium), and the University of Texas. But they and the other top 10 New Economy metro areas (Seattle, Raleigh-Durham, San Diego, Washington, D.C., Denver, Boston, Salt Lake City, and Minneapolis) have more in common than just high-tech firms. They tend to have a high concentration of managers, professionals, and college-educated residents working in "knowledge jobs" (jobs that require at least a two-year degree). Most are at the forefront of the IT and Internet revolutions, with a large share of their companies and residents embracing the digital economy. Most have a solid "innovation infrastructure" that fosters and supports technological innovation, including universities that graduate a large number of scientists and engineers, conduct research, and interact with companies in the region. Many have experienced high levels of domestic in-migration of highly mobile, highly skilled knowledge workers seeking good employment opportunities coupled with a good quality of life. Moreover, while they tend to be richer metros (there is a positive correlation of 0.48 between their rankings and their per-capita income), wealth is not a simple proxy for advancement toward the New Economy. Some metros with higher incomes lag behind in their scores (for example, New York, West Palm Beach, Philadelphia, and Hartford), while other metros with lower incomes do relatively well (such as Raleigh, Salt Lake City, and Miami). Moreover, size is also not a proxy for a transformation to the New Economy. While there is some positive relationship between the size of the labor force in a metro area and the New Economy score, the correlation is weak (0.16).

Finally, the top-ranked economies do not score well simply because they have found ways to get the right mix of companies, individuals, and institutions. They also score well because they tend to adapt quickly. A high rate of "creative destruction" - shedding old practices while embracing new ones - is the key to economic transformation in the private, public, and nonprofit sectors. This helps explain why the degree to which a metro's businesses close down is positively correlated with total New Economy scores and per capita income growth from 1990 to 1998 (0.33 and 0.35, respectively).

The metros most firmly rooted in the old economy are Grand Rapids, San Antonio, and Jacksonville. Other metros with low scores include Memphis, Louisville, Greensboro, Norfolk, Tampa, Dayton, and West Palm Beach. Historically, these and other metros in the Southern and Southwestern states lagged behind in economic innovation, and many have made limited investments in education and R&D. They have tended to rely on low costs rather than innovative capacity to gain advantage. But innovative capacity (derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive) is increasingly what drives competitive success in the New Economy. Many Midwest metros also score relatively low. In part this may be because there are no available indicators to measure how "New Economy" a metro area's manufacturing sector is (e.g., use of computers). But it also reflects the region's lagging adoption of Internet and other information technologies and its more limited entrepreneurial activity.

Regionally, the New Economy has taken hold most strongly in metros in the West, where metros' average score is 52.2. Northeast metros follow with an average score of 37.4, followed by the South (34.9) and the Midwest (30.8). Broken down further by the nine census regions, the gaps are larger and the leaders and laggards even more clear. Reflecting the New Economy's bicoastal trends, the average score of metro areas in the Pacific region is 56.8, followed by 44.8 for New England, and 43.9 for the Mountain region. The two regions that have the metros with the lowest scores are the East South Central region (an average of 23.2) and the East North Central (28.1). The former has long followed a low-cost economic development strategy, keeping taxes and other government-influenced costs low in an attempt to lure cost-conscious firms (usually branch manufacturing plants) to move to their region. Metros in the latter region are still struggling with how to transform an old industrial region into a more entrepreneurial and technology-oriented region.

How closely do high scores correlate with economic growth? Metros that score higher appear to create jobs slightly faster than metros that score lower. Between 1990 and 1998, there was a modest positive correlation (0.16) between employment growth and New Economy scores.

However, job growth is not the best measure of a metro area's economic well-being. (Rapidly growing metros are likely to experience rising home prices and traffic congestion, declining open space, and increasing environmental pollution, among other negative impacts.) Change in per capita income is a more accurate measure of the economic well-being of the residents. Higher New Economy scores were modestly correlated with growth in metropolitan per capita incomes between 1990 and 1998 (0.19). In other words, the more "New Economy" a place is, the faster its incomes grow. The variables most associated with faster per capita income growth were managerial and professional jobs (0.28), job churning (0.33), adults online (0.29), and high-tech jobs (0.26). When examining all the variables together, holding each constant, only high-tech jobs and job churning are significant. And indeed, regions with high-tech jobs and lots of churning and entrepreneurial activity are those that have done well economically.

A metropolitan area's economy is in no small part determined by historical factors. The fact that Bill Gates grew up in Seattle and returned home to build Microsoft has done more to shape that area's economy than all the economic development policies of the region. History is just as often a drag on moving to the New Economy. Some metros that did well in the old economy have been slow to adapt to the New Economy. For example, metros that relied on natural resources and older manufacturing industries (like Buffalo, Oklahoma City, Cincinnati, and Grand Rapids) or depended on retirement and tourism (such as Las Vegas and almost all the Florida metros) tend to score poorly on New Economy indicators. In contrast, metros that emerged in the postwar period and/or had high levels of government R&D spending (such as San Francisco, Austin, Raleigh, Washington, D.C., and Salt Lake City) tend to have high indicator scores. Metros that underwent industrial transformation in the 1960s and 1970s and have since rebounded on a new high-tech and advanced-services economic base (such as Boston, New York, Minneapolis, and Philadelphia) also generally score well.

Yet, while history shapes the hand a metropolitan area is dealt, public policy determines how that hand is played. For example, policies that promote technological innovation and improve education can boost an area's innovative capacity and create a more dynamic and productive workforce. Clearly, Raleigh-Durham and Austin owe a share of their strong performance to public policy - strong support of research universities and development of research parks. The experiences of these and other places demonstrate that forward-looking policies can pay off. As a result, some of the metros with rankings in the middle of the pack (such as Indianapolis, St. Louis, and Cleveland) could see improvements over the next decade as recently enacted and proposed New Economy policies begin to bear fruit. In contrast, some higher-ranking metropolitan areas may be resting on their laurels and not making the kinds of investments and policy changes needed to maintain strong economic foundations. The unwillingness of most large metros, like San Francisco, Washington, D.C., and Boston, to deal with traffic congestion, housing prices, and problems in elementary and secondary schools is a leading case in point. Just as New Economy businesses constantly scramble to embrace new practices and innovations, metropolitan areas must continually improve their policies and governmental operations.

For most metropolitan areas, not only are the factors that drive growth today very different from what they were 25 years ago, but the very definition of economic success has changed as well.

In the old economy, the preconditions for economic success were things like low costs; abundant, basically skilled labor; and good transportation and other physical infrastructures, including a preexisting economic base stemming from natural-resource advantages such as waterways and coal. In order to avoid the ups and downs of the business cycle, regions sought to diversify their economies - not to specialize too much in one industrial sector or another. The standard bag of economic policy tricks included land giveaways, tax holidays, low-cost financing, and other business incentives. But the playing field and the rules of the game have changed in the New Economy.

The New Economy is a knowledge- and idea-based economy where the key to wealth and job creation is the extent to which ideas, innovation, and technology are embedded in all sectors of the economy. Economic growth is determined by the extent to which innovative ideas and technology are embedded in services and manufactured products. As a result, metropolitan areas' success will increasingly be determined by how effectively they can spur technological innovation, entrepreneurship, education, specialized skills, and the transition of all organizations - public and private - from bureaucratic hierarchies to learning networks.

Moreover, as more of the economy is conducted digitally, old patterns of location based on minimizing distance and maximizing communication become less important. The discriminating factor determining success is increasingly whether professionals want to live in a place, suggesting that "natural resources" such as a good climate and outdoor recreation will become more important than the "natural resources" that built the Industrial Revolution. As a result, the nation's largest metro areas can no longer take it for granted that they will be the natural home for most economic activity. To succeed, they will need to ensure that people enjoy living and working there.

Finally, in the New Economy, where business cycles are less important and regional "clusters" of firms in the same or similar industries drive innovation, successful regions specialize and gain "critical mass" in key sectors. An increasing number of metropolitan areas specialize in one or several industries (e.g., biomedical, financial services, semiconductors, telecommunications).

All of these factors suggest the need to fundamentally rethink both the goals and the means of metropolitan economic development. After ranking the 50 largest metropolitan areas according to the 16 economic indicators, the second half of this report outlines a progressive, innovation-oriented public policy framework designed to foster success in the New Economy. That policy framework is grounded in developing a new goal of "getting prosperous, not bigger," and a new means focused on "getting better, not cheaper." It then documents seven key policy strategies metro areas need to follow in order to improve:

Metropolitan areas that focus their policy efforts in these areas will be well positioned to experience strong growth, particularly in the incomes of residents across all socioeconomic strata. And that is the true objective. Developing a vibrant New Economy is not an end in itself; it is the means to advance larger progressive goals: new economic opportunities and higher living standards, more individual choice and freedom, greater dignity and autonomy for working Americans, stronger communities, and wider citizen participation in public life.

The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
600 Pennsylvania Ave., S.E., Suite 400, Washington DC 20003
Phone: (202) 547-0001
www.ppionline.org

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Summary Of Results