WORD ON THE STREET: The past few years have been an extraordinary period for all of us. We have endured a financial crisis and the worst global recession of the post-war era. This period has served as a striking reminder of how economic forces and decisions – both large and small – can influence events on Main Streets and neighborhoods across our Federal Reserve District and our nation.
Yet the economy has now grown for 11 consecutive quarters. To be sure, growth is not robust. But growth in the past year has continued, despite significant risks and external and internal headwinds. Natural disasters in Japan, a sovereign debt crisis and banking problems in Europe, turmoil in North Africa and the Middle East that led to a steep increase in oil prices, and our own debt-ceiling fiasco all made growth difficult.
But I also remind you that the U.S. economy has a history of being remarkably resilient. These shocks held gross domestic product (GDP) growth to less than 1% in the first half of 2011, and many analysts were concerned that the economy was heading toward a double-dip. Yet, the economy proved resilient, and growth picked up in the second half of the year.
What leads to such resilience? We know that older manufacturing cities have suffered from secular declines as many of these communities have struggled to find their way in a changing economy. The long-term trends of improved productivity and efficiency in many large-scale manufacturing industries, which are good for the economy as a whole, have led to a secular decline in employment in many of these industries.
As a consequence, many older cities with industries that depended heavily on older-style, labor-intensive production processes have felt the brunt of shrinking employment and the loss of an industrial base that provided the economic foundation for their communities. If these communities are unable to adapt and change, the fallout can include declining populations and tax bases, and deteriorating housing markets.
Yet, some of these cities have fared better than others. At least one recent study by the McKinsey Global Institute finds that over the next 15 years, half of worldwide GDP growth is likely to come from so-called ‘middleweight cities’ – those cities with a current population between 150,000 and 10 million. One key to achieving this will be to determine how communities can use their strengths and resources to become resilient cities.
But what does it mean to be resilient? One source defines community resilience as ‘the individual and collective capacity to respond to adversity and change. It is a community that takes intentional action to enhance the personal and collective capacity of its citizens and institutions to respond to and influence the course of social and economic change.’
The Rochester experience
My interpretation of community resilience is one that, in part, reflects my personal experiences. I was an economics professor at the University of Rochester in Rochester, N.Y., for many years and served as dean of the William E. Simon Graduate School of Business from 1993 to 2003. I think it is fair to say that the Eastman Kodak Corp. was to Rochester as the Big Three automakers were to Detroit. Kodak was the dominant economic force and employer in Rochester for more than three-quarters of a century. More generally, over the last several decades, the solid manufacturing base in Rochester – home to firms like Kodak, Xerox, and Bausch and Lomb – has steadily shrunk.
Yet, Rochester ensured that it was not solely dependent on past technologies. During my time there, Rochester was able to shift its focus from the darkroom to medical imaging and other technologies. New companies were formed around the university and area medical centers. Scientists and engineers from these manufacturing firms became entrepreneurs. So even though Kodak's local employment fell from a peak of 61,000 to fewer than 7,000 today, Rochester has exhibited remarkable resiliency. In fact, the region has gained 90,000 net jobs over the same period.
Challenges, of course, remain, as such transformations take a long time. Rochester is but one example. My hometown of Birmingham, Ala. – once called the Pittsburgh of the South – was ravaged by a declining steel industry, as was its larger namesake. Yet it has revived and proved its resiliency. Across the nation, countless cities and smaller communities have found ways to use their assets to rebound from economic challenges. The stories and strategies may vary, but there are lessons to be learned.
The research department at the Philadelphia Fed has begun a research project to measure urban resilience. Resilience is based on the response of local economic activity to an economic shock – whether it be a temporary shock (related to the business cycle or some other temporary factor) or a persistent shock (related to long-run trends in technology, productivity or preferences). Our researchers are examining two working definitions of resilience that are grounded in economic theory.
According to the first measure, an area is considered more resilient to the extent that it experiences milder fluctuations in employment over the business cycle. According to the second measure, resilient areas are those that experience faster employment growth than could be expected based on national growth rates given their industrial structure. The aim of the research project is to combine these two measures into an index that we will then be able to track over time. The project is a work in progress, and it is too soon to share definitive results.
However, the results to date are suggestive. Our researchers have found that larger older cities, especially those in the Northeast and Midwest, have seen smaller fluctuations in their employment cycles than other cities have. Detroit was a notable exception, having experienced much larger cycles, especially in its declines after 2000. Southern cities score higher on the second resiliency measure, having experienced higher employment growth, reflecting household migration patterns. Combining the two measures, Philadelphia scores in the middle of the group of 25 metropolitan areas that the staff examined.
The next step in the analysis is to examine how the indexes change over time and see whether there are certain metropolitan area characteristics that are correlated with resilience. Early results suggest that industrial diversity is related to greater resilience.
I do want to caution you that resilient and vibrant communities are not just about government programs or directed industrial planning by community leaders. Indeed, one can find instances where government and entrenched interests, seeking to restore the ‘good old days,’ actually slow the innovation and change many communities should undertake.
The economic strength of our country is deeply rooted in our market-based economy and the dynamism and resilience of its citizenry. As we contemplate strategies for unleashing the potential in our communities, do not underestimate the importance of entrepreneurship and individual initiative in laying the foundations for change and growth.
Government regulations on small and emerging companies can have a stifling effect on economic growth, and despite our best intentions, the law of unintended consequences can loom large in any effort to direct or control economic activity. After all, we all now know that small businesses are the engines for employment growth, and some become very large and successful businesses.
So I urge you to look beyond planning and directed investments, all of which may have a place, and look to people: How do we improve education and equip them for a more knowledge-based economy? And how can we unleash the creative and entrepreneurial spirit of all our citizens? They are our most valuable asset and the ultimate source of opportunity and growth.
Charles I. Plosser is president and CEO of the Federal Reserve Bank of Philadelphia. This article was adapted and edited from a speech on May 9 at the conference Reinventing Older Communities: Building Resilient Cities. The original text is available online.