Friday, August 19, 2016

Housing: Part 174 - San Francisco as the next Detroit

One implication of the Closed Access problem is that the productivity of innovative cities is taken as economic rents, which are shared by firms, workers, and real estate owners.  This is similar to other places in previous eras.

Detroit was the San Francisco of its day.  Because of survivorship bias, path dependence of supply chains and organizational advantages, etc., the large automakers of the mature industry enjoyed excess profits.  These profits were geographically constrained, and so local interest groups - unions, city governments, etc. - could extract some of them for themselves.  The problem is that these extracted rents are sticky.  The interest groups that capture them tend to contrive moral stories about why and how they were able to capture them.  So, when something comes along like Toyota and Honda, the industry that was once bathing in excess now suddenly is hampered with excess costs which are difficult to remove.  When the tipping point arrives, the bottom falls out fast.  In the case of automakers, we now have the perverse outcome that there is a thriving automobile manufacturing industry in the country except for the one place that was in a position to maintain it.  Suffocated by its own success.  The rent seeking around automakers, coincidentally, seems to have been a somewhat equalizing force, mostly being claimed for working class union members and city services (though corruption was part of the story, too, as it inevitably is when rent seeking is endemic).  The rent seeking around tech, finance, trade, etc., in the Closed Access cities seems to be a force for exclusion and inequality through housing - a sort of meritocratic kleptocracy.

The broad story of frontier economic leadership in the 21st century may come down to a race between Western cities that have a legacy of risk taking and creativity, but are unable to allow the density that would realize the full value of that culture, and Eastern cities that are capable of building densely but that still seem to be developing the culture of risk taking and creativity that draw so many of the world's brightest to Western universities and innovation centers.  Maybe I don't know what I'm talking about regarding the Eastern cities.  Please add color in the comments, if you have thoughts on the matter.

Anyway, I thought this story about Ford was interesting, given this backdrop.

The company is doubling the size of its staff in Palo Alto, California, to more than 300 employees, expanding its offices and labs in that city, and signing new partnerships with companies that are developing technology for self-driving cars. The moves are the latest by Fields to reposition Ford into a full-fledged mobility company.
Since he became CEO in 2014, Fields has moved quickly to expand Ford's operations in Silicon Valley. Within months of taking the helm, he opened the company's research and development center in Palo Alto, saying the automaker wanted to be "part of the conversation" in an area rich with tech talent and engineers working on autonomous-drive vehicles.

Geography is as important as ever, ironically, even in endeavors that require few geological inputs.  So, even Detroit is moving to Silicon Valley.


  1. Forgotten today is that Los Angeles was the high-tech hotbed of the 1950-70s with many aerospace firms and spinoff technologies there. The laser was invented in Malibu! The tech is gone, but the region kept growing, I think mostly on weather and Hollywood. The smog is gone.

    That's the enduring facet of the West Coast, it is the nicest place to live nearly in the entire world.

    The region can crap on business and wanna-be residents forever, unfortunately.

    1. Hm. Has tech left LA? I haven't quite put my finger on LA. Avg. incomes there aren't particularly high because of high Hispanic immigrant population, but there are definitely pockets of high income. NYC has finance, fashion, trade, etc. Boston has biotech, etc. SF has info tech. LA doesn't seem to have an archetype - entertainment, some tech, some trade, etc. Jet Propulsion Lab is there, etc.

    2. LA has at least two major agglomerations: entertainment and import/export.

      The entertainment agglomerations – movies, TV, and music – are clustered on the north and south sides of the Hollywood Hills.

      The import/export agglomeration is built around the port, which is the best link from the US to Asia, and the rail connections, which are the best link from the interior of US to the Pacific. There are a lot of logistics centers in Riverside/San Bernadino, where cargo from the ships is routed to trucks or rail. Lots of professional service jobs support the industry: accountants, lawyers, and insurers. There are also lots of manufacturing jobs in Greater LA that are built on top of the world-class shipping node, like the garment industry – particularly fast fashion – and CPG manufacturing.

      The defense cluster, as Benjamin noted, died off when the cold war ended. The region had a bad decade economically in the 90s, but great metropolises usually don't go unused for long.

      Similarly, San Francisco had a bad decade economically from 2001-2010. There were lots of attempts to build a cleantech or biotech agglomeration, but the GFC + tech rebirth sucked all the oxygen (housing/office space/VC money) out of the room.

  2. "In the case of automakers, we now have the perverse outcome that there is a thriving automobile manufacturing industry in the country except for the one place that was in a position to maintain it."

    -There are still 24K auto manufacturing jobs in Metro Detroit and 2K in Metro Flint.

  3. Interesting idea that SF could ever go the way of Detroit. Just FYI, Greater Detroit still has a bigger GDP than Greater Phoenix, and Greater Detroit is smaller.

    As far as self driving cars are concerned, they will never catch on in Las Vegas. People hate the idea of no steering wheel. These will be controlled by centralized computers in some office somewhere. That is what Google/Ford are NOT telling people. Las Vegas people believe this is a scam and certainly, if the main computer is hacked, we are talking about thousands upon thousands of accidents. Remember Delta if you think you trust a massive system to keep you safe in a car.

  4. What's really funny is that Detroit has such a terrible reputation that it's probably the best city in the nation in terms of wage/COL for white collar workers.

    1. I'm just spit-balling here, but on the topic of rent-seeking in Detroit generally going to middle class union workers, etc. while in SF it is taken through housing and is more exclusionary, I wonder if the entire pattern gets reversed.

      In Detroit, the collapse of the source of economic rents meant that the working classes moved away. In SF, the working class move away because of rent seeking. When the source of economic rents collapse, maybe the migration will reverse and high income households will move away while low income households move back in.