Economic growth is good, but often involves dislocations that hurt some people. This is true on the consumption side of the economy as well as on the production side. It is evident in the Twin Cities urban metro right now, as chain retail and multifamily housing changes street and parking and pushes out historic businesses; and in older neighborhoods, with serviceable post-war houses being scraped off their lots to be replaced by McMansions.
Is the community really better off as a result of all these changes? Who benefits and who suffers? And what market forces are causing this effect.
A reader raised this question in reaction to all the hoopla over competition between states and cities to get major new Amazon headquarters, for which Minnesota is in the running. He had been reading commentary on the social problems imposed in the Seattle area by the growth of Amazon and other new-tech businesses there and wondered how our metro area might be affected if we did land the facility.
The answer is the usual economists’ waffle: It depends. Economic growth generally benefits society, especially when it comes from new technology that boosts productivity rather than just higher consumption of natural resources. But growth and technological change always involves not only economic dislocations, but social ones.
Josef Schumpeter, the Austrian-American economist prominent in the first half of the 20th century captured this in saying that capitalism is “a process of creative destruction.” That has been an enduring insight. It refers to the way in which market economies generate incentives to innovate in the production of goods and services. These innovations benefit society as a whole, but hurt existing businesses using the old methods.
Could the same be true for the gentrification of older neighborhoods by an influx of high-income high-tech workers from Amazon? Change will occur, but will it be positive?
On the production side, the winners and losers through history are clear.
The discovery that kerosene could be refined from petroleum greatly lowered the cost of illuminating a home or shop, but brought a hammer down on whaling. Steamboats lowered the cost of transporting things on the Ohio and Mississippi rivers, thus greatly benefitting farmers west of the Alleghenies, but it put many keelboat men out of work. Railroads squashed canal businesses. Steel mills using open hearths squeezed out older mills with Bessemer converters. Diesel locomotives moved freight cheaper than steam, but Baldwin, an enormous company making steamers, went out of business. And the fact that diesels required so many fewer man-hours of maintenance labor per hour on the road meant that thousands of lower-skill roundhouse workers lost their jobs.
In all these cases, the nation as a whole was better off because of innovation. The general population got more goods and services to meet their needs relative to resources used up. This usually included more output per hour of human labor. So wages could rise. Goods were cheaper. Living standards rose.
But in all these cases, many existing businesses and people were hurt. People with well-established jobs lost them. Towns stagnated or faded away. People who had established retail businesses or bought houses in whaling towns or near a steam locomotive factory saw the value of their shops and homes evaporate. People had to migrate to get work.
Sometimes this was the result of pure market incentive. Sometimes government policies played a role. In 1899, Baltimore was the center of vegetable canning for our nation; Heinz produced its catsup in Pennsylvania because that state was a center of tomato farming. But by 1920, this was fading fast. Vegetable production and processing moved to central and southern California due in great part to irrigation water furnished largely at federal government expense.
Sometimes it was the result of technology. In the late 1930s, the mechanical cotton picker lowered production costs, but forced millions of Southern blacks off the land and north to cities like Chicago and Detroit. Society as a whole was better off. Clothing was cheaper than it would otherwise have been, but millions of poor families had to make wrenching adjustments.
When the change is underway, people often overestimate how bad the adjustment will be. I’m old enough to remember when American Hoist and Derrick closed most of its plants across the river from downtown St Paul. These were good-paying jobs and many said the city was being dealt a blow from which it would be hard to recover. But now only people my age and older remember it. Ditto for Koppers, that operated a coal distillation plant in the Bandana Square area. The work was dirty and dangerous, but when it closed some saw the deindustrialization of America. Do we miss its smoke and smell?
These stories of changes on the production and employment side of the economy are familiar. What about on the consumption side? What if an Amazon comes in, as it did in Seattle, and grows to employ thousands of young professionals, all high-paid, all seeking to buy into an authentic urban lifestyle? What does that do to the existing community?
Disposable incomes drive consumption patterns. Changes on the production side of an economy, say from production-line assembly work to B.S. in computer engineering or MBA-level jobs, means that there will be more potential spending on goods and services that go beyond the bare necessities of household life.
If lifestyle fashions favor living in loft apartments close to light rail transport rather than tract townhouses in outer-ring suburbs, then existing housing and retail buildings in hot corridors will get scraped off to be replaced with trendier buildings. The small plumbing supply wholesaler that occupied a storefront for a half-century will disappear and shops selling herbal essences or yoga apparel will spring up in its place. On secluded streets, the Cape Cod built for an Eisenhower-era young family will get knocked down to be replaced by something resembling a rocket assembly building at the Kennedy Space Center.
As is always the case, when higher-income people decide a particular area is desirable, lower-income people have to bear most of the adjustment costs. Leases on the low-cost apartments over the plumbing supply house get canceled. Neighborhood restaurants lose their parking. Starter houses for blue collar couples become rare — or move farther out to the suburbs — forcing longer commutes and traffic. Elderly people who have rented the modest apartments for decades suddenly need to find strange new digs for the last years of their lives.
Is society worse off? No, in almost all cases, at least not on balance. But it makes us uneasy. In some cases it is nostalgia, “the old neighborhood just isn’t what it used to be,” or “Gee, I really miss being able to go to the Broiler.” It may be a sense of the loss of social cohesion. The neighborhood church may not mean as much to the 20-somethings walking past it on their way to the light-rail station as it did to the children of the ethnic group that established the congregation a century ago. But metro area neighborhoods and municipalities have great resilience.
In St. Paul, Selby-Dale was emblematic of poverty and crime in 1970, perhaps more so in perception than in reality, but by 1990, it became a desirable place to live, shop or have a meal. Hopkins was a struggling ex-small town when the plant that overhauled military vehicles faltered, but its main street now has the best Brazilian restaurant in hundreds of miles, among other eateries and great antique stores. You cannot get Massey Ferguson parts in Hopkins anymore, as I once did in the 1970s, but the town is just fine, thank you.
The importance of catching big facilities of national corporations is overrated. Whether or not Amazon sites a major facility in Minnesota is less important that the aggregation of myriad other small investment decisions. These seem to be turning out just fine for Minneapolis-St. Paul right now and that will likely continue.