Arts and Cultural Amenities Increase Economic Growth but Their Effects on Quality of Life Alone Are Also Important

In their article, “The Phantom of the Opera: Cultural Amenities, Human Capital, and Regional Economic Growth,” Falck, Fritsch, and Heblich show that the presence of baroque opera houses in Germany helps attract “high-human-capital employees” to these regions. Upon showing this existence of this effect, they extend their analysis to see if these high-human-capital workers will generate knowledge spillovers. They state that: “Answering this question is of practical relevance for local government because in the absence of positive spillovers, it is difficult to justify using taxpayers’ money to subsidize cultural amenities” (Falck, Fritsch, and Heblish, 2011, p. 761). Their finding that cultural amenities do lead to knowledge spillovers and increases in productivity and economic growth is very interesting and important. While I agree with their statement about this being a justification to subsidize the arts, I think their is a nuance here that also need to be mentioned.

Even if there was no knowledge spillovers as they found, there could still be justification for funding of the arts based on the enhancements to the quality of life it brings to the residents of the community. I just feel the need to mention this because I think economics puts too much emphasis on growth in productivity and GDP. It is often argued that if a policy does not increase productivity or GDP growth then it is just not worth pursuing. I understand that these effects are all interrelated in that cultural amenities help attract and retain labor because it enhances quality of life, which could then drive economic growth higher. But, what if the cultural amenities just enhanced the quality of life of those living in the community without boosting economic growth? Could that value not be enough to justify subsidizing the arts? I argue that it could.

Falck, O., Fritsch, M., & Heblich, S. (2011). The phantom of the opera: Cultural amenities, human capital, and regional economic growth. Labour Economics, 18(6): 755-766.

San Antonio 2019 Economic Forecast

It is that time of year for economic forecasts, so here is my forecast for the San Antonio economy in 2019. An update of the San Antonio economy through October and more detail on the forecast can be found here.

Like the U.S. and Texas economies, the San Antonio economy continues to show healthy growth. Employment through October grew 2.47% compared to October 2017, which is about at the historical average growth rate for the region. This is not bad given the extraordinary length of this expansion. The unemployment rate in San Antonio was at 3.2%, the second-lowest among the major metropolitan economies in the state. However, growth in San Antonio has been pretty strong across all sectors of the economy up until about six months ago when year-over-year employment growth in many sectors started to slow and even turn negative. These trends are shown in the following graph where it is clear that growth in the information, construction and mining, manufacturing, and professional and business services industries has started to decline.

Employment Growth in SA Jan 2017-Oct 2018

It is also a sign of economic strength that the unemployment rate in San Antonio is so low. There is mounting anecdotal evidence, though, that the labor market is very tight. There are surely people who are still underemployed or who are not counted as unemployed because they have dropped out of the labor force, but I think we are at the point where growth is going to be driven by growth in the labor force and/or increases in productivity. This is going to be a constraint on growth into the near future.

Similar trends are also occurring at the state level, and the leading index for the Texas economy has been trending down since about May. It is too early to tell if this is an indication that the Texas economy is headed for a downward turn, but it bears watching.

On the national front, one of the best predictors of a downturn in the economy is the yield curve. The yield curve is very close to inverting, and in fact, the yield curve based on the difference between the 5-year and 2-year bond rates has already inverted. Once the yield curve inverts, it is a good bet the economy will move into a recession not too long after the inversion. Relatedly, recessions are typically preceded by the Federal Reserve raising interest rates, which they have been doing and are most likely going to continue to be doing. The housing market nationally and in San Antonio has been strong for a number of years now, but it got a bit frothy, again, and while it remains strong in San Antonio, it is starting to soften in other major metropolitan areas in Texas, particularly Dallas, and other parts of the country.

There are also some worrying trends in the global economy as growth has slowed in China and many countries of the European Union. While there are surely many factors playing into this, the trade war is not helping matters.

The current expansion is now the second-longest in our nation’s history. It is not going to go on forever. Sorry, but if we learned anything from the Great Recession, it is that the business cycle is not dead. There is typically a trigger, though, that turns the economy into a recession. As already mentioned, the inverting of the yield curve, raising of interest rates by the Federal Reserve (which, by the way, is the right thing for them to do, in my opinion), the trade war, Brexit, severe downturn in the housing market, and slowing global growth could each be that trigger. There may also be others not mentioned.

The upshot is that I believe we will continue to see the San Antonio economy grow into 2019, but I predict (as do many other economists) that we will move into a recession toward the end of 2019 or in 2020. It may not be as severe as the Great Recession, but I am very concerned about the federal government’s ability to respond to it. This is due to the fact that the Federal Reserve may not have as much room as they need to lower interest rates, which may mean they have to resort to quantitative easing again. But, there could be pressure not to implement such a policy again. A similar issue concerns me with respect to the ability of the federal government to provide any sort of fiscal stimulus given the increasing federal budget deficit due to the recent tax cuts of the Trump Administration. If the deficit is over $1 trillion by the time the recession hits, are the policymakers going to be willing to provide an economic stimulus large enough to pull the economy out of the recession, since it will make the deficit even worse?

In this environment, I think San Antonio will continue to see growth in 2019, but the growth in employment will likely slow to somewhere in the range of 1.75-2.25%. The unemployment rate is also likely to tick up a bit to about 3.5-4.0%.

Insights #2: Innovation is a Collective Process.

I am currently reading The Value of Everything by Mariana Mazzucato, and one of the great insights she provides in the book is the key role that the public sector plays in innovation. It busts the stereotype of innovation being driven by the lone inventor toiling away in his or her garage or dorm room. I believe she has written a book on this very topic, which I have not read, yet, but it is high on the reading list. I think the following passages summarize this insight pretty well.

Understanding both the role of the public sector in providing strategic finance, and the contribution of employees inside companies, means understanding that innovation is collective: the interactions between different people in different roles and sectors (private, public, third sectors) are a critical part of the process. Those who might otherwise be seen as lone entrepreneurs in fact benefit from such collectivity; moreover, they stand on the shoulders of both previous entrepreneurs and taxpayers who, as we will see, often contribute to the underlying infrastructure and technologies on which innovation builds (p.194).

Examples she provides include:

  • The smartphones many of us depend on these days are driven by technologies created with public funding.
    • The internet and SIRI were developed with funding from the U.S. Department of Defense.
    • Touchscreen display was developed with funding from the CIA.
    • GPS was developed with funding from the U.S. Navy.
  • The U.S. National Institutes of Health has funded the research supporting the development of two-thirds of the most innovative pharmaceuticals.
  • U.S. Department of Energy has funded many of the greatest breakthroughs in energy (p. 194).

As she then goes on to point out, “In the very early days it is often public R&D agencies or universities that fund the science base, and only when innovation is close to having a commercial application do private actors enter” (p. 195).

 

Source:

Mazzucato, M. (2018). The Value of Everything. New York, NY: PublicAffairs.

Using Data to Foster International Trade, Foreign Direct Investment, and Collaborations Among Metropolitan Areas

The City of San Antonio has been engaged in a six-year process to identify opportunities in foreign markets for international trade, foreign direct investment, and institutional collaborations. The effort was lead by The Brookings Institution, and with the support of JPMorgan Chase, the final portion of the process, called the Global Cities Initiative, was recently completed. In this stage of the process, each of the nine cities involved in the process selected an industry or two on which to focus their efforts in determining these global opportunities. In the case of San Antonio, our specific focus was on the cybersecurity industry. TheĀ culmination of the work was the release of the report by The Brookings Institution, Six Steps for Metro Areas to Prioritize Global Markets.

The six steps include:

  1. Organize for action
  2. Select a priority specialization
  3. Set the goal
  4. Measure global market opportunity within the specialization
  5. Factor in market accessibility
  6. Combine and synthesize data

As they are listed, these steps are rather generic and do not say much. I was fortunate and honored to be a part of the San Antonio team working on the project, so I can say with first-hand knowledge, it is quite a thorough process that has educated and enriched the knowledge of the communities involved about the opportunities in cities around the world for particular industries. I am sure it can do the same for other cities that want to engage in the process. If you want to get into the detail, I highly recommend you read through the report authored by Max Bouchet, Marek Gootman, and Joseph Parilla of The Brookings Institution. It can be found here.

SRN-LogoMark-Green-FORWEB