Introduction: The Secret Sauce of American Economic Growth
Many years ago in the scholarly writings about regional economic growth, an idea grabbed hold of the imaginations in academia that involved "stages" of economic development.
In his popular work, The Stages of Economic Growth: A Non-Communist Manifesto, (1960), W. W. Rostow explained how economies started out as pleasant pastoral peasant societies and evolved through multiple stages, ending up in the mass consumer market, high productivity economies, that looked remarkably like the U. S. economy in the late 1950s.
While the idea was attractive as an alternative to the command and control economies of the Soviet Union, the idea suffered from an operational defect in its implementation as an economic development strategy.
[Related -Gold Slides On Perfect Storm For Dollar]
Rostow never told anyone how to make the secret sauce that led from one stage to the next, or what to do if the economy slipped from a high level stage back down the ladder into a lesser development stage.
Eventually, this absence of a secret sauce to oprerationalize economic growth caused stage theory to give way to an even more wildly popular idea called "industrial clusters." Academic seminars and conventions were held world-wide to discuss and debate the importance of industrial clusters as an economic growth strategy, giving rise to the term "a cluster of clusterers."
Every one, and every region, it seemed, had to have an industrial cluster strategy. The Daddy of this idea, Michael Porter, in his more recent version of the idea The Competitive Advantage of Nations, (1990, 1998), presented a very attractive diamond-shaped graphic that explained relationships inside a cluster.
[Related -Forward Guidance Now A Nightmare For Fed.]
The picture of the diamond was so compelling that at almost every burg and hamlet in America that had an industrial cluster strategy, the graphic would appear in the official report, as if magically bestowing intellectual credibility to the strategy.
Alas, while the graphic was very pretty, Porter failed to mention the secret sauce of exactly how and why industrial clusters appeared in the metro regions where they did, or what to do if your region did not have a cluster. Many regions went down the industrial cluster path only to be confronted, after the fact, that the important secret industrial cluster sauce was missing.
At the same time in history that Porter's ideas about industrial clusters were reaching their public relations zenith, the President of the United States confronted a real economic dilemma. It was the economy, stupid.
Like President Reagan, before him, who solved America's inflation problem by opening the U. S. trade borders in order to export high prices and import low ones, President Clinton decided to open the borders even wider.
He also directed an increase in the money supply and engineered a drop in interest rates, contributing to the first big speculative bubble in information technologies. That bubble crashed in March of 2001, but it provided several years of hyper economic growth based upon wild speculation (aka irrational exuberance) for which President Clinton modestly took credit. The capital gains made during that speculative boom were reinvested but those subsequent investments came up an economic cropper.
The tech bubble had to be replaced by another bubble.
It was partially replaced by the Year 2000 scare, and then by the massive housing/mortgage loan/ fiasco that contributed very little legitimate long-term economic growth, but bought a few years of idle time down on the ranch for President Bush.
That housing bubble was replaced by the oil and gas bubble, which is not having the desired economic growth effects on the American economy.
The series of speculative bubbles have tended to obscure a dark economic fact that America's ability to innovate has been seriously damaged by the open border, bubble strategy. During the era of bubbles, the formerly integrated American economy was replaced by two economies: a global market made up of 1500 large corporations, and the rest of the domestic economy, not plugged into the global economy.
The major issue for workers in the domestic economy is that while open borders work great for the 1500 global corporations, and all of the diminishing number of staff who work there, it does not work so great for the remaining 90% of Americans. The two economies are not integrated and the benefits of free trade, consequently, are not widely distributed in the American society.
As a result of the open border bubble strategy, the innovation capacity of the entire American economy is being "hollowed-out," just like the regional economy of Chicago was hollowed out in the late 1980s when its production capacity and innovation potential were shipped overseas.
The American economy is in serious long-term trouble. There is not a moment to spare on old ideas like stages of economic growth, or ideas about industrial clusters that have no secret sauce of commercial application.
America needs a new economic stool!
The First Leg of the Stool: Revival of Innovation At The Metro Regional Level
In their recent research on regional economies and innovation, Agglomeration Economies within IT-Producing and IT-Consuming Industries in U.S. Regions, Frédéric Miribel, Christian Le Bas, William Latham, and Simon Condliffe (hereinafter MBLC), make a very important contribution to the secret sauce of economic growth by breaking the innovation effects of IT into two parts. (Center for Applied Demography and Survey Research, University of Delaware, July 21, 2008).
Their work emphasizes "local" economies and the benefits of "localization." This is one of the important ingredients of the secret sauce of economic growth. Economic growth is based on innovation that occurs in "localization" economies.
They create two types of information technology companies. As they describe, "we first split the economy into two sectors, following Porat (1977): IT and non-IT sectors, respectively. Then, following a productive suggestion from Jorgenson (2001), we sub-divide the IT sector into two components: IT-producing and IT-using sectors."
Information technology is one of the engines of economic growth, but many advocates of IT fail to mention that both sides of the market, both consumers and producers of IT, must be incorporated into the economic strategy.