The interesting and turbulent age we inhabit urges us think about the lasting impact of current events. For an economist, chief among the questions to ask is how will the agents of change we now experience affect the location of economic activity. I don’t have answers, but offer a way to think about them.
Halfway through 2020, we find ourselves locked into a trade war that pushed much of the nation near recession by the end of 2019. We face a global pandemic that continues to kill Americans at a stunning rate, and which has no realistic end in sight. That pandemic led directly to an economic downturn that left a full quarter of workers unemployed. Our economy is in the deepest downturn since the Great Depression and faces years of recovery. As I write this, a protest movement with overwhelming polling support has entered nearly every American city.
Most of the analysis of this is political, but surely it has some lasting effect on local economies. It is too early to make predictions, but it is a good time to think about the direction and power of forces that will realign economic activity between urban, suburban and rural places.
The trade war did precisely what a tax on trade would do. It raised the price of manufactured goods and reduced consumption. As it turns out, executive orders cannot repeal the law of demand. Evidence thus far is that the trade war may have begun a slow migration of manufacturing away from China. Multinational firms are smart to disperse factories across more nations, but there is no evidence of production moving to the United States. All we got from the trade war was less manufacturing, just as all but one economist predicted.
This pandemic may last for a long time and will do more to spread manufacturing out of China than any tariff. It will do little to U.S. manufacturing, but it may have profound impact on where we shop, live, work and recreate. The most immediate thought about COVID-19 is that it will make dense urban centers less popular. However, few Americans live in places that are dense in global terms. Our city centers have high rise apartments, but American metropolitan areas remain mostly suburban places. Earlier pandemics did little to reduce the popularity of cities, and it seems unlikely this one will either. The inevitable movement of millennials to suburbs will impose a larger population shift than disease risk from COVID-19.
However, the response to COVID-19 will cause us to rethink how we work. A large share of workers, particularly in metropolitan areas, are now working at home. For many, that experience has been successful, and at least one high-quality study found higher productivity among those who were randomly assigned to work at home. It is certain that many businesses will migrate away from expensive urban offices. If this happens across a plurality of businesses or across whole occupations, it will change the urban form. Workers who feel confident in finding employment in remote work will be less constrained by their choice of home. This force will spread cities more broadly, vexing urban planners but delighting workers and employers.
Another force is at play in urban size. More at-home work means lower prices for urban office spaces. This would in turn attract more businesses to have a modest presence in large urban centers. It is easy to imagine larger, more geographically dispersed cities, with more businesses renting flexible work spaces instead of downtown offices.
The pandemic alters what we buy and where we recreate. The rapid shift to e-commerce may be permanent, shuttering a significant share of retailers. The shock to recreation, restaurants and bars may lessen over time, but we may also see measurably large, permanent declines in the share of consumer spending on these items.
The current recession will likely magnify current trends of occupational growth. As with previous downturns, the most stable occupations are those requiring a college education. The unemployment rate among high school grads is more than twice that of those with a bachelor’s degree. Places with a large share of high-skilled workers face a less volatile business cycle. This recession should end the fact-free claims of worker shortages that have animated Indiana’s education policy for most of the past decade. Sadly, it probably won’t.
Finally, we have to consider the urban unrest that affects every city in the nation. I don’t know how long it will last, or what nature they will ultimately take. But, as I write this column, several polls show overwhelming support for protestors. This is not surprising. From what I can tell, these protests are about our failure to fully realize the promise of the Constitution and Preamble to the Declaration of Independence. If they are successful in creating a more perfect union, then these protests will improve the economic prospects of America’s urban centers. If not, we will all be worse off.
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