Human Capital, Employee Mobility, and Economic Development

The business community in SW Pennsylvania beats a regular drum for the one "reform" that it argues will prompt renewed economic growth: lower business taxes. The argument is that PA's business climate is not competitive with that of other states, and PA's competitive disadvantage can be traced to its higher taxes. Higher taxes discourage investment in new and expanded businesses. Reducing taxes would prompt more investment. It sounds pretty straightforward. But I have never been persuaded, despite data like this chart regarding new business formation (plus this one). (In the comments, feel free to toss in links to more detailed and up to date data.) At best, lower taxes help the folks who own and run employers; they don't do much, necessarily, to help the employees. What would help employees more? Public policy aimed at increasing labor market flexibility and employee mobility.

Here's my plug for a change to PA law that would positively impact the local economy: Abolish the enforceability of employee noncompetition agreements. Adopt a rule that essentially mirrors the law in California -- where noncompetes are unenforceable, except in a small number of exceptional cases -- and abolish the current PA rule, which makes noncompetes enforceable so long as they are "reasonable" in duration, geographic scope, and (job) market scope.

Folks familiar with the literature will recall Annalee Saxenian's work comparing the California high tech economy with its counterpart in Massachusetts, along with other, related work by Ron Gilson that associates historical differences in growth rates in the two states with their different approaches to noncompetition agreements. Massachusetts, like PA, has enforced them.

Earlier this month, the Third Circuit Court of Appeals (the federal appellate court that has jurisdiction over Pennsylvania, among other states) decided a case that is important mostly for its entertainment value: Bimbo Bakeries v. Botticella, involving a senior manager, Botticella, who left Bimbo for a new job with Hostess -- and who was poised to disclose the secrets behind the production of Thomas' English Muffins. Bimbo sought and obtained an injunction against Botticella's taking the new job, and the Third Circuit upheld that ruling. Muffin secrets will stay put.

Over at my other blog, I posted a note the other day about what the case means in terms of trade secrets. The takeaway: not much.

The case is more interesting for what it did not involve -- namely, a noncompete. Botticella was accused of threatening to disclose the secret recipe for English muffins. He was not accused of violating a noncompete -- because he didn't have a noncompete with Bimbo. But as with many trade secrets cases involving former employees, the outcome was the same: Botticella was prevented from taking a new job in the one field where it appears he has special expertise. In other words, trade secrets claims are often used instead of noncompetition covenants to protect company interests. That's true in California as well as in Pennsylvania. And there is nothing wrong with that. I don't propose to change the law of trade secrecy.

Where there are no trade secrets at stake, however, the public policy balance shifts. I read about English muffins just before I heard a presentation of some research at a conference in California, and that presentation summarized a body of research on noncompetes as follows. What the presenter called "weak post-employment controls" (low enforceability of noncompetes - in the absence of related trade secrecy claims)

-- increase inventor mobility, both within and between states

-- increase entrepreneurship

-- increase corporate R&D spending

-- increase the performance-based component of salary (because lateral employment tends to drive up salaries)

AND

These effects are "bi-directional," meaning that the effects show up both with respect to "losing" firms (employees depart) and "winning" firms (employees arrive).

I'll work on tracking down some of the relevant underlying work, in case some folks think that some of the empirical data is thin. For a sample, try this link to a recent paper about noncompete enforceability and employee mobility. That article is summarized here. The short version is that non-enforcement increases inventor mobility.

The public policy choice, then, comes down to this, more or less: PA could loosen its labor market and increase employee mobility, a move that almost certainly would contribute positively to new business formation and entrepreneurship, while putting some existing firms at unknown risk of losing some employees and having to hire others. Or, PA could maintain its current more restrictive labor market, a decision that almost certainly contributes negatively to new business formation and entrepreneurship, while preserving existing firms in their current condition and preventing some people from practicing their skills.

Meanwhile, up in Massachusetts, there is a strong move afoot to change its rule and adopt something closer to the California approach.

Pittsburgh Misses the Cut

Kiplinger's Personal Finance compiled a list earlier this summer of the "10 Best Cities for the Next Decade." And Pittsburgh isn't on it.

These "best of" or "most underrated" or "most livable" lists don't mean too much, or at least they don't mean nearly as much as some folks think they mean (especially when Pittsburgh makes the list). They do provide little insights into what different media and their consumers think is important. So, here are Kiplinger's criteria, which have a Floridian air:

In Kiplinger's latest search for top cities, we focused on places that specialize in out-of-the-box thinking. "New ideas generate new businesses," says Kevin Stolarick, our numbers guru, who this year evaluated U.S. cities for growth and growth potential. Stolarick is research director at the Martin Prosperity Institute, a think tank that studies economic prosperity. "In the places where innovation works, it really works," he says.

After researching and visiting our 2010 Best Cities, it became clear that the innovation factor has three elements. Mark Emmert, president of the University of Washington in Seattle, put his finger on two of them: smart people and great ideas. But we'd argue that it's the third element -- collaboration -- that really supercharges a city's economic engine. When governments, universities and business communities work together, the economic vitality is impressive.

And it's no coincidence that economic vitality and livability go hand in hand. Creativity in music, arts and culture, plus neighborhoods and recreational facilities that rank high for "coolness," attract like-minded professionals who go on to cultivate a region's business scene.

The list:

Austin, TX
Seattle, WA
Washington, DC
Boulder, CO
Salt Lake City, UT
Rochester, MN
Des Moines, IA
Burlington, VT
West Hartford, CT
Topeka, KS

Speaking of Rich F., he recently compiled his own list of the 20 cities with the fastest growing job markets. And Pittsburgh isn't on it.

His list, like Kiplinger's, includes a lot of college communities, state capitols, and health care centers:

Rochester, MN
Washington, DC
Durham, NC
Bethesda, MD
Tallahasee, FL
Trenton, NJ
Charlottesville, VA
Olympia, WA
Gainesville, FL
Ithaca, NY
Boulder, CO
Duluth, MN
Brownsville, TX
Poughkeepsie, NY
New York, NY
Corvallis, OR
Atlantic City, NJ
McAllen, TX
Boston, MA
Springfield, IL

Magic Bullets All Over Pittsburgh

I need a theme to connect several notes that I collected. The theme is magic bullets. Pittsburgh is still looking for its magic bullet, the one great thing that will restore the city and the region. That's the bad news. The good news seems to be that we've got a lot of 'em. No more eggs in one basket. We're adding baskets.

Today's PG: "ALS drug brings payoff: South Side firm gets up to $345M for rights; a boost to biotech in region." Read past the sensationalist headline; local drug developer Knopp Neurosciences is getting $20 million in cash, is selling $80 million in stock, and hopes to get the rest way down the road (years down the road) if its ALS drug turns out to be approved -- and is effective and successful. The deal is definitely a nice little win for Pittsburgh's fledgling biotech sector, but the fact that it is front page news shows just how far that sector has to go.

Today's PG: "McCartney christens Consol with high-energy show." Thousands of baby boomers paid a ton of money to see the biggest baby boom icon of them all "christen" the "Consol Energy Center," the publicly-subsidized hockey arena (oops, "multi-use arena") that will save Uptown as well as the Pens and their fans. I'm more of a John person than a Paul person, but either way, the event just goes to show how much Pittsburgh's future is invested in its past. The future arrives on September 5. That's the Lady Gaga show.

Today's PG: "Imagining a bright future for rusty relic of Pittsburgh's age of steel." Absolutely: create a park to preserve some of the history. Check out the Steel Industry Heritage Corp. But the restored site will take off? People will go out there for symphony concerts? Who? I looked around the Rivers of Steel site for data to back up the idea that a national historic site would be anything other than a pleasant and attractive part of the national park system -- a 20th century counterpart to, say, the Fort Necessity National Battlefield, which is one of my favorite stops when I show the region to out-of-town guests. But there is nothing.

In better news (for me): At Burgh Diaspora the other day, I got some props from geographer and Pittsburgh enthusiast Jim Russell for my skepticism about the future of Pittsburgh manufacturing. Wherever you sit in this conversation, I thank Jim (and Harold Miller) for continuing the kind of *constructive* dialogue about Pittsburgh's future that the region really needs.

In better news (two): Pitt's Center for Social and Urban Research (the unfortunately acronymed "UCSUR") has started a blog: "The PUB," which stands for "Pittsburgh Urban Blog." Another acronym, featuring a pun, no less. I will add it to the blogroll, though Chris Briem's impressive firehose of Pittsburgh data is already enough for me. Since Chris works at UCSUR, one wonders whether The PUB will be "more of" or "instead of" relative to Chris's prodigious output.

Better news (three): Someone is out there talking about dysfunction (or creative destruction) in the market for entrepreneurial capital. Read Michael Arrington's piece at TechCruch, about angels (playing small ball with lots of little plays, but getting more aggressive) and VCs (looking for swing-for-the-fences plays). Are angels jumping in where VCs fear to tread? Are social media startups (low capital needs) changing the character of startup investment altogether? What's happening in Pittsburgh on this score?

And the best news (four): Paul McCartney and Steel may be the metaphorical ghosts of Pittsburgh's past, but the real ghosts of Pittsburgh's past are starting to get their due. "Haunted Pittsburgh Ghost Tours" is going strong. Check it out - here.

Tough Love for Pittsburgh

In today's Post-Gazette, local architect Dan Rothschild volunteers a "Love Your City" solution to Pittsburgh's fiscal woes: Everyone who doesn't live in the city but works there or plays there or perhaps just drives through once in a while should just chip in an extra $500 or so. Voluntarily. Because it's the right thing to do. "Participation would revolve around optimism, connectivity, regionalism and civic-mindedness." And, he admits, guilt at being reminded of getting something for nothing.

As an actual proposal, this is fantasy, so I don't think that it is offered seriously. Out in Mt. Lebanon, Dan is known as a man of clarity and reason as well as imagination, so I'll write off the specifics of his notion as idealism in support of something else. Pittsburgh is many things, but it is hardly filled with large-scale or even modest-scale optimism, connectivity, regionalism, and civic-mindedness.

But what else?

Think of the city of Pittsburgh as a very large not-for-profit (in fact, that's what it is), and think of the challenge that any not-for-profit has: How can it and should it raise money to fund its operations?

Let us set aside for the moment the idea that the not-for-profit might scale back its operations or run its operations more efficiently or rationally, all in order to reduce its expenses. That's an important theme, but not part of this post.

Cities, of course, are not ordinary not-for-profits; they have the power to tax and to impose other kinds of user fees (parking revenue and building permits, for example) that produce involuntary revenue, or at least implicitly "bargained-for" revenue. If you live in the city, then you've submitted to the bargain of its coercive authority; if you want a service from the city, then you have to pay for it.

What Dan Rothschild is getting at, however, is the kind of fundraising that ordinary not-for-profits do have to think about: Getting people to wake up in the morning and say to themselves, "Yes, in fact I will give a bunch of money to the cause, rather than blowing it on rent or food or health care." The City of Pittsburgh may not actually take that approach, but metaphorically that is part of the city's challenge: How do you get people -- residents and especially non-residents -- voluntarily to sign up for the cause? Maybe Pittsburgh really does want to get voluntarily "tax" payments from non-residents; Pittsburgh certainly does want both residents and non-residents to invest their *time* in service to the city and its communities; and at the least the city of Pittsburgh wants everyone to invest their psychic energy in the *idea* of Pittsburgh. That last bit obviously has few if any short-term concrete payoffs, and perhaps few long-term concrete payoffs, but it is in the mix -- even if it sounds either like a cat chasing its tail, or like an emergent property of a complex system. I.e., useless. Yet seemingly useless issues sometimes drive very large questions.

So, here is a large question: How does a not-for-profit tap the energy (cash and time) that it wants and needs?

First: The not-for-profit actually has to have a vision, and that vision has to engage people at an emotional level. A vision or ... an idea of itself, that is, what it wants to be. And that vision has to prompt passion. That combination is difficult enough for a typical not-for-profit; it is an almost insuperable problem for an entire city. But that's where the giving equation has to start. For people who have long-time family commitments to Pittsburgh, that is, for true Pittsburghers, that passion is much easier to come by; for people like me, who moved here as adults and like the place a lot, passion comes in bits and pieces. But passion alone isn't enough; passion has to be connected to a view of the future. (Lots of Pittsburghers have passionate connections to the Pittsburgh of the past; fewer have passionate connections to a Pittsburgh of their future.) Dan Rothschild will never persuade me that a "something for nothing" guilt trip will lead me to write an extra $500 check to the city of Pittsburgh. There is a chance, however, that I'll be inspired to give (give something, if not necessary cash) by a vision of what Pittsburgh can become.

Second: The not-for-profit has to convince people that their investment not only won't be wasted (that's important, but again, not enough), but also that their investment will make a difference. There are no guarantees, here; there are only expectations, hopes, and measured risks. If I'm going to take some of my rent money, or food money, or health care money (or entertainment money, or gifts for the nieces and nephews money) and hand it off to a stranger, I want to know that the money is going to actually have help achieve the vision that I believe in. That impact may or may not involve getting something personal in return. It's about achieving the vision, and being personally involved in achieving the vision. It's about a story being told, and being part of that story. And in Pittsburgh? Like Dan, I live in Mt. Lebanon, a place that prides itself on top-quality governance. Like Dan, I take the view that my elected officials in Mt. Lebanon (mostly the school board, but in many contexts the commission, too) have completely and utterly abused the public's confidence. Does Pittsburgh have a better record of fiscal prudence than the wastrels of the South Hills? I don't think so.

Think about local public radio: Economists have wondered for a long time about why people give money to local public radio stations, when they can listen to the broadcasts for free. Do they give because they get t-shirts and coffee mugs? Mostly, no; the coffee mug is almost always worth far less than the contribution. Do they give because they feel guilty about listening and not paying for the product? Mostly, no; people can listen to commercial radio for free, too, and commercial television, and few people feel guilty about not sending money to the local broadcaster and not buying the products featured in the commercials. Mostly, people give to local public radio (and to National Public Radio) because they believe in the mission. Do you want public radio to exist and do whatever it is you think that public radio is doing and should do? Do you think that your contribution will help make that vision a continued reality? Then give. And those people do.

What you get back, if the chapters of the story are aligned correctly, is important, too; it can be a virtuous circle of good feeling and good works. Can Pittsburgh borrow this concept? Is Dan Rothschild really saying that to love the city of Pittsburgh, the city has to give us all -- not just the natives -- reasons to love?



Maybe. The person who figures out how to pull this off, of course, deserves to be the next mayor. And chief cook. And bottle washer.

Making Things in the Burgh

Off and on at Pittsblog, I've expressed skepticism that a revival of manufacturing holds the key to Pittsburgh's future prosperity. That view brings me into mostly friendly conflict with Harold Miller, who has much more data than I do, and who therefore tells a different story.

Last Saturday, Harold's PG column focused again on this theme:

Because manufacturing jobs are among the highest-paying in the region and
because manufacturing firms are a major source of income for many service firms,
the slow growth we're experiencing in the manufacturing sector is a serious
concern. It is critical that state and local government leaders create a more
competitive business climate to help existing manufacturers recover, and that
private investors and economic development agencies provide the capital and
technical assistance that entrepreneurs need to start and grow new manufacturing
firms.

A slightly more detailed (and more richly illustrated) version of his column is up at Pittsburgh's Future.

For a couple of reasons, I remain unpersuaded. One, I usually detect the aroma of nostalgia in almost any discussion of manufacturing in Pittsburgh. Not necessarily nostalgia for steel or for industrial manufacturing, but nostalgia for the idea that Pittsburgh is a place where people make things, and that making things is the right and best route to prosperity and security. That's an important story, but it's a story, rooted in a particular history.

Turn that story around (turn around the causal arrow, in other words), and that leads to the second reason. The idea that the service sector needs the manufacturing sector -- that the former is in some respects servient to the latter -- carries a hint of the nostalgic story, but that idea is also questionable on the merits. So, two, I wonder about the extent to which the regional services economy is really dependent on a flourishing local manufacturing economy. By employment and (I believe) by economic impact, the two largest sectors of the local services economy are medicine and higher education. I can't suggest that these have no dependency with respect to local manufacturing, but I have to suspect that the relationship is weak - and more important, that local manufacturing is now more dependent on eds and meds than the other way around.

Moreover, the services sector that I know best -- legal services -- is increasingly not dependent on demand from locally-based clients. Even in Pittsburgh, and perhaps especially for a regional market like Pittsburgh, the largest law firms are looking nationally and globally for legal work. And large law firms in other urban markets are starting to locate significant parts of their back office work in the broader Pittsburgh region -- in Wheeling and in southeastern Ohio. I find it difficult to escape the impression that measuring Pittsburgh's economy and economic recovery is complicated by its diminishing regional isolation.

I'm not down on manufacturing; a mixed economy is a strong economy. And an attractive climate for new and for growing businesses of all kinds should be a key feature of Pennsylvania's and Pittsburgh's public policy. But making things takes many forms, and increasingly Pittsburgh makes things of the intangible kind -- new ideas, inventions, arts, and technologies that make their ways into medical therapies and motion pictures, among other things. If the Commonwealth is going to design public policy to subsidize growth -- and that's where Harold Miller's argument is meant to take us -- how much of our policy resources should be weighted toward manufacturing, including high-tech manufacturing, and how much should be weighted toward other things?

What Ails Pittsburgh?

Borrowing Letters to the Editor and critiquing them for utter cluelessness is the usual territory of another Pittsburgh blogger, but this morning, I can't resist. From the Post-Gazette comes this gem of a letter that captures something priceless about a culture that expects free lunches at every turn. For the want of a quarter, a kingdom was lost! The text:

After living in the North Side for 25 years, I had to move to the suburbs a few years ago, and one of the things I miss most is the Friday Citiparks Farmers Market in West Park. I had been a faithful customer since it started and made the effort to go last week to stock up on fresh produce.

Imagine my dismay to find a $20 parking ticket on my car on Cedar Avenue after less than a half-hour of shopping (and spending over $30 with various farmers)! I will have to pay the ticket because I didn't put a quarter in the meter, but it seems mean-spirited and shortsighted to patrol that section of parking so vigilantly during the farmers market hours of 3 to 7 on summer Fridays.

There are lots of other places to shop where parking is free, so that's where I'll go from now on; the city will get the parking fine but lose yet another city lover.

And while she's dreaming, she'd like a pony.