Gordon Hanson (4:14)

Thank you very much Peter, and thank you for welcoming me back to the lsc. It's great to be here and it's great to see some old friends in the audience. What I'd like to Talk about Today I'm sounding very loud as is my tendency what I'd like to talk about today is what have been some of the consequences of creating left behind regions, regions in which there is a dearth of economic opportunity and regions that have suffered from the travails of global economic change over the last couple of decades. I'm going to start with just a bit on where this came from. That's what I've been spending the last 30 odd years doing research on. But I want to spend most of the time talking about what we do about it. I'm going to ground things in the US experience, but then tying things to what we know internationally. There is increasing convergence across high income countries in the sets of challenges we face in terms of regions that used to be part of the manufacturing base, regions that had lots of high paying jobs in industry, that have now found themselves with persistent, persistently high joblessness and attendant social problems that come along with that. I will try and keep my remarks about 30 minutes. We have ample time for discussion. So to start things off, I want to introduce you to Martinsville, Virginia. Martinsville lives up to the fine US Tradition of naming herself the world capital of something. If you do anything in the United States, you are the world capital of that thing. I come from Fresno, California. We are proudly the raisin capital of the world. Martinsville, Virginia was the sweatshirt capital of the world. It had a small but vibrant manufacturing sector that employed about half of working age adults. Somewhere about half of those half were in sweatshirts, the other half were in furniture. Martinsville wasn't always the sweatshirt capital of the world. It had been a rural area but succeeded in pulling factories out of the US north after World War II. And then it became part of the second US manufacturing belt. The first manufacturing belt was Boston and Baltimore and Cleveland and Chicago, bigger cities. The second were the smaller towns in the southern Midwest and Southeast where those Jobs moved as bigger cities moved on to finance services and the like. What happened in Martinsville, and I'll give you a little bit more data about this in a second, was three decades of economic decline triggered by a set of changes in the global economy that led to the loss of manufacturing employment in the United States, in the uk, in other high income countries. The causal factors behind that decline we now understand pretty well. It started with automation. It started with technological change, which made it possible to produce a dollar of output with fewer workers every single year. But it really ramped up with what my colleague Danny Rodriguez calls the era of hyper globalization, the center of which was China's emergence on the global scene and increasing import competition, with sweatshirts being something that China is really good at. The world capital of sweatshirt manufacturing moved from Martinsville to Zhejiang province in China. Then what happened? Well, at the time, as we were thinking in the heady days, I was just a French, freshly minted PhD watching globalization explode around me. What did we think would happen? We're going to regions and countries, they'll stop doing one thing and they'll do something else. That's what comparative advantage is about. As we lower barriers, if China's going to come in and produce sweatshirts and shoes and children's toys and games, which is what they did primarily at first, that's going to free up that, that labor in the United States to go do what the US Is good at. And that can be higher tech manufacturing, that can be finance, that can be other professional services. And so there might be some pain, lower wage workers might feel a hit or going to enjoy lower prices. And that better comparative advantage is going to unleash dramatic productivity growth. It didn't happen that way. What happened was places that lost those jobs got stuck with persistent joblessness. And joblessness leads to that social disruption that comes with that leads to various types of social breakdown. And we've learned that folks outside the economics discipline knew this all along, that work confers dignity. And when you take work away, you take dignity away. And the absence of dignity has deleterious consequences for communities. So that was job loss, social disruption. And then we saw the political consequences of this. The rise of populism isn't entirely due to manufacturing decline. There are many forces that have combined to give us the political moment in which we're living today. Today. But on the margin, when you do the empirical analysis, what you find is that regions within countries that were more exposed to manufacturing job loss in the UK were more likely to vote for Brexit in the US were more likely to vote for Donald Trump both in 2016, 2020 and then again in 2024 in France, as the National Front was rising, the National Front rose more quickly in places that had experienced greater manufacturing job loss. And initial support for alternatives for Deutschland in Germany were also tied to places with more trade induced manufacturing decline. So we've got economic consequences, we've got social consequences and now we've got political consequences. And I just want to highlight for you, I'm going to spend just a little bit on of this just because I spent the last 15 years utterly obsessed with the China trade shock. So I want to just highlight for you a feature of this that helped bring us to this current moment and that was the scale and speed with which all of this happened. Automation has been going on more aggressively since 1980. We've been worrying about it for more than half a century. The first piece of national US legislation to fund worker training, the Manpower and Training act in 1962, was motivated by concerns over job loss from automation. So we've been thinking about what automation would do. And automation has had enormous impacts on the structure of employment in high income economies and now in middle income economies. But it works slow, slowly, it works across multiple decades. What was different about globalization is China here as a share of global manufacturing exports prior to kind of its explosive growth in the 1990s was at 2%. Barely two decades later it's at 20%. And the speed with which China came on and took over big chunks of manufacturing and the scale of job loss in other countries was what contributed to the ongoing trauma of manufacturing decline. The reason this played out as concentrated as a way that in as concentrated a way as it did in the United States was because manufacturing production in the US is geographically concentrated. It's always been geographically concentrated. The first scholarly. I don't know if the first scholarly work, Michael Storper could tell me if it's the first scholarly work on the origins of industry agglomeration. But Alfred Marshall, helping unpack why the cotton textile industry concentrated in lancashire in the 1830s and 1840s, talked about a set of technological forces that make firms and workers in manufacturing want to locate near each other those spillovers, those agglomeration economies continue to exist today. What it means that at any moment in time manufacturing is concentrated in specific places. So if they're big shocks to manufacturing, they're going to hit those places very hard. And that's what happened in Martinsville 1980. What we see is 45% of Martinville's working age population, not of employment of working age adults were in manufacturing. This was an industry town. They earned that sweatshirt capital of the world moniker. What happened over the next three decades is that 45% fell to 13%. And this wasn't just the China trade shock. This was a combination of of technological change in manufacturing. And it's also a consequence of the fact that as our incomes grow, we spend a smaller share of our income on physical stuff and a larger share of our income on services. So okay, fine, Martinsville has to find something new to do. Martinsville is in a part of the US where we have some of our strongest regional traditions. They might have become like one of these kind of four folk music hubs, gone into tourism or something else. What did that 30% of adults do? If you look at the employment rate, so the fraction of working age adults who were employed, it went from 23% to 53%. So of that 30 percentage point drop in the share of adults who are employed in manufacturing, two thirds of that was absorbed by a move into joblessness. And this is what caught us by surprise. Regions were not transitioning well. So the economists have been aware of the consequences of job loss at an individual level. Going back a bunch of decades. Seminal work by Jacobs of Lalonde and Sullivan in 1993 talk taught us that job loss is scarring. What does that mean? That means when you lose your job in a factory because your factory shuts down. So didn't have anything to do with you, wasn't mistakes you made that caused the factory closure. Something going on in the broader economy. What happens comparing you to someone who is your same age, same amount of work experience, same earnings, working in a company of kind of similar size and and productivity, you suffer an immediate hit in your earnings, which depending on the country can be between 5% and 50%. Not a surprise. You lose your job, your income goes down in that year. The scarring effects are about your inability to recover those earnings relative to your twin who didn't suffer the the closure of a factory. And in the original Jacobs of Lalonde and Sullivan work, what we found were earnings losses in the long run in the US for you versus your twin of about 10 to 15%. That work has since been replicated in a bunch of other countries. And so here for across seven different countries, we're looking at that same sort of natural extension experiment. And what do we see everywhere in the long run, the job losing sibling versus the job retaining sibling suffers a long run Income loss of at least 10%. And in the worst hit countries it's over 30%. So what we see here is big variation across countries in those scarring effects. But you even, we even get scarring in Denmark. Denmark, when it comes to labor market policy and helping workers move between things is just like off the charts. It's like Denmark and Singapore. They're nice to talk about. They're these mythical examples of Disneyland economies where things could really work well. It's hard for any of us imagining living in there every day. Even Denmark has scarring up effects from job loss. Good. Okay, so this is scarring effects at the individual level. Now imagine this happening in Martinsville where we've got 30% of the working age population experiencing those scarring effects all at the same time. What happens then is a local recession because you get a drop in aggregate demand as a consequence of people losing that income. And that means purchases of non traded goods and services fall. That then leads to business closure radiating out from manufacturing to other sectors. Once this happens, incomes have fallen enough that housing prices fall. Now why does that matter if for the creation of small businesses, the home equity you have is often the basis for getting the capital you need to create a new business? In the US and in many other countries, young small firms are the source of almost all net job growth. So if we interrupt that by causing the housing market to tank, not only do we have a bunch of folks who are unemployed, we've diminished our ability to employ those folks in new plan places. So what we have seen then over time is this loss of manufacturing. And as seen, individuals and companies have a difficulty in recovering from that loss. But that loss is experienced in very different ways, whether you have a university degree or whether you don't have a university degree. So this is from work that Enrico Moretti and I have done looking at the location of good jobs in the US economy from 1980 to the present. So what is a good job? It's a job that pays you a lot, holding constant your education, your demographics, and so forth. So there are some industries that just pay more. Manufacturing is one of those industries. 3. We can talk in the Q and A about what makes manufacturing special, if folks are interested. The shorter answer is that manufacturing has is one of those industries with lots of big, highly productive firms. Big, highly productive firms tend to be profitable firms. And those firms tend to, for whatever reason, kick some of that back to workers. Go back to 1980 and in 1980, of workers without a BA degree in the United States, 39% of those workers who were in good jobs, which we define as jobs in the top third of income earners, controlling for everything we know about you. And for workers with a university degree, it was also 39%. So the magical thing about manufacturing was that it provided good jobs to everybody. Now you come to 2021, that share has fallen to 20% for non college workers. It's fallen to 20% for college workers too. So the shift out of manufacturing has been universal. The big difference is where those workers have gone. For workers with a college degree, they have gone to finance, professional, legal, it, consulting, knowledge intensive jobs in knowledge intensive industries which primarily employ workers with a university degree or higher. These jobs, like manufacturing before it, are also geographically concentrated. In our superstar cities, that same sector did very little to absorb workers without a college degree. And so as a consequence, good jobs were disappearing on net for non college workers. The sector that picked up some of the slack was construction. Construction. So you think about welding, plumbing, master carpentry. Those are good jobs that pay good wages. They're not jobs that drive growth in a region because they're non traded. They feed off of growth coming from something else. So unless your region has a thing that's giving you that growth, you're not going to get those good jobs. Okay, so the consequence of this then is a geography of joblessness which is highly concentrated and then has contributed to those economic, social and political disruptions that we've experienced in the US You've experienced in the uk folks have experienced it on the European continent. The simplest way to describe that disruption is just look at the fraction of working age adults who aren't working. If we go back to 1990 here, I'm showing you the jobless rate. So the fraction of men 25 to 54 without a university degree who are not employed. And you see that dark red, red places where joblessness is above 30%. They're pretty few and far between. Sidebar. The employment rate is different from the unemployment rate. The unemployment rate is about people who don't have a job, but who are looking for a job. The employment rate is people who have a job. So joblessness combines the unemployed and the people who've given up or the are the people who just aren't interested. So high levels of joblessness, pretty rare in 1990. You see some of the areas of concentration. This is the Appalachian region of the United States dealt with. The decline of coal mining has a attendant set of problems. We are doing work on worker training in Appalachia. I'd be Happy to talk about in the Q and A. If folks are interested, let's jump ahead 30 years. What do we see? The increase in joblessness just takes off. So now what do we have? We've got lots more regions with joblessness rate among 30% and lots more above 24%. And that spread throughout the old industrial belt in the US Midwest and Southeast. So this is part of where, where economic inequality came from. But it is manifest regionally and it is magnified as a consequence. Now let's redo the slideshow. Bringing in workers with a college degree. And our legend here uses the same cutoffs. So then we're now what we're identifying is places with high joblessness for workers with a university degree. Lots more places with low joblessness in 1990 that we've already known. What happens over those 35 years? Not much. So it's like today college and non college workers are living in a different country. Now this is for men. Why did I show it for men? Because men already had high levels of employment in 1990. So that the difference we're seeing over time is about the secular change. Women had sharp increases in their employment rates to 1990 that have then leveled off today. What do we see when we look at women is that places with high joblessness for women and places with high joblessness for men are by and large the same. So joblessness is now a characteristic of a region. So here's the UK using different kind of. Well, not all decays, just England and Wales showing you joblessness. Dark blue. So in the US we're a little more dramatic. We want to make red when things are bad, you know, you're kinder and gentler and more cultured. In the UK so we use blue to indicate areas of difficulty or lighter colors for areas of difficulty. And so what do we see here for this is percentage of employment? So lighter colors, our lightest colors are where we have at least half of workers not working. Birmingham pops up here as do other areas of the industrial north. This phenomenon of concentrated joblessness is something that is common to many high income countries today. So what do we do about it? Option one is let markets do their thing. How will markets do their thing? Primarily through the out migration of labor. Now you think that you've got all these unemployed workers who are willing to work for low wages. Don't firms want to come in and hire them? No, firms don't like places with high unemployment because things, other things are broken in those places. You don't have tax revenues to pay for the things that firms want. You have young workers who are leaving. You have concerns over the social disruption that comes with high unemployment. So high unemployment is almost never an attractor for new investment. So how do you just. By having people leave. As it turns out, most people without a college degree are just not very mobile in response to negative economic shocks. So people will leave, but it will take the better part of a generation. So the market forces approach, it works, but you can have high social cost during the transition approach. Two, target people in distress. So this is just standard social safety net policies. So this would include, upon losing your job, unemployment insurance benefits. These are really important because for workers in the middle of the wage distribution, your savings are not more than £1,000 or £2,000. So what does that mean? You lose your job, you exhaust your savings very quickly. Those unemployment insurance benefits help you keep expenditure and taking care of your family sustainable for some period of time. But they don't create new jobs. They're a stopgap measure. So third possibility, target places in distress. And we're going to be talking about a couple versions of this. Tax incentives to lure business in workforce development. That means training those folks who are not going to get or on their way to a college degree. But there are a bunch of challenges with place based policy. One is that you put the tax incentives in place. What's going to happen? Business is just going to come in and completely manipulate it and so undo the effects that you want to achieve. And it might be hard to figure out what to do. So I'm going to talk the final couple minutes here. I'm going to talk through examples of how we do these things well and how we do these things poorly and where we might go from here. Okay, so this is sidebar. So when economists talk about place based policy today, they really, they're talking about a simple question which is, is Silicon Valley, is London too big or are Silicon Valley and London too small? That is, are those agglomeration economies that Alfred Marshall talked about, do they? There's a market distortion, but it could go either way. We don't, we either have too few people in London, we should be bringing more people here, or are we to have too many when we should be sending folks to Birmingham? And so place based policy, then comes, it is dependent on the answer to that question. That to me is not what place based policy about. Place based policy is about dealing with the challenges of transition from doing one thing to doing something new. Because in that transition, what you can get is massive social Disruption that feeds on itself that can lead you to permanently lower levels of well being. So I'm happy to talk a little bit about the kind of intellectual origins of this. Okay, what is the place based policy today? If you want full discussions of how things work in the US context and in the European context, I have suggested reading for you. For the European. Michael Storper has a new chapter in a book coming out for the National Bureau of Economic Research that we edited that helps you understand the institutional basis for place based policy in the US context. Danny Rodrick and I with Rohan Sandhu have a version of that that talks about it in the US context. What does place based policy try to do? Increase investment. And you can do that in three ways. Tax incentives for big firms to come do their thing. Tax incentives that aren't about the firms are about the location. You get the taxes and you invest in a low income place. Or tax incentives that target small business. Then we have workforce development. So those are all varieties of treating capital, physical capital, financial capital. Then we have an alternative which is treating human capital, creating incentives for. For enhancing incentives for skill accumulation. And then there's kind of a fifth variant which is about technology hubs. Not all that relevant for place based regions. I can talk about that in the Q and A, but not going to go into that here. Three different versions of this approach. What is the US approach? It's kind of how we do everything. It's a cacophony. You've got the federal government, got the state government, you've got local government, you've got philanthropy, you've got all these nonprofit organizations. It's Toquevillian. Everyone is kind of doing their thing. Sometimes it works and sometimes it doesn't because it's tofelian. It relies on the strength of civil society and that's a condition for this to work well. So the US has lots of experimentation and innovation, but strong absences of uniformity in how policy is carried out across place. EU is very eu. We have a set of rules. They're decided in Brussels, they're handed down. Regions do their thing. There's some scope for variation in experimentation, but not the sort of music festival chaos that the US likes to engender. The UK had a of lot live within the EU model for a while. You're now free to do what you want. And the tradition in the US of poverty alleviation is more Toqueville. It used to be the parishes who were the entities that delivered social policy. So you all are figuring out where you are on that journey. So let me close with examples of of two types of policies and in each case doing it well versus doing it poorly. Tax incentives for business. So what does this mean? We want business to go to particular places to deal with economic distress so that we then go and incentivize that investment. Let's start with the positive story first. Okay, so how do you do that well? How do you do that well is to say what's the problem we're trying to solve? The problem we're trying to solve is concentrated joblessness in distressed places. So we should be incentivizing investment that goes into those places. We want to arrest that downward spiral. This idea was originated here in the uk. Sir Peter hall, an urbanist at University College London in the late 1970s came up with the idea of enterprise zones give tax breaks for investing in blighted areas. Search Geoffrey Howe and other kind of conservative politicians pushed this on Margaret Thatcher in the early 1980s. We had some experimentation there data weren't all that great. There was like confusion. Did we do it? Did they do it well? Did they not do it well? Wasn't clear. Now four decades later we have examples that we've learned a lot along the way and that these sorts of programs can work very well. One comes from the UK approach. So this is work by Chris Colo, Martin Overman and Van Reinen, Henry and John here at LSC looking at changes in which regions were eligible to get tax incentives for investing in low income areas in the UK context and what do they find? When you incentivize investors investment in low income areas and you're really rigid about the application of those rules and there's no bending them, what do you get? You get job growth in those areas and that job growth isn't being stolen from neighboring areas. You really are creating good jobs. California context Work by Matt Friedman for Friedman, Khanna and Newmark looked at California's version of Enterprise Zones v1 of that version was sloppy. If you invest in an area, convince us that it's distressed and we'll give you tax incentives and kind of go do your thing. Newmark David newmark in work 15 years ago on this showed that that original California enterprise zone didn't work. Zero effects on employment. California actually looked at his research. It's very heartening when policymakers look at the stuff we do and they said okay, we should do better. So they created the California competes tax credit. Completely different. Now you're going to, we're going to have a request for proposals you're going to apply for tax credits to invest in a place. You're going to convince us that you're going to go into that place and you're going to create those jobs. And it has to be a distressed place according to a set of standards. Then we're going to come back and look at what you did in year one, year two, year three and year four. If you're not doing those things, we're going to take the money away and you're going to compete for this money. So those who have the more compelling proposals are going to be more likely to see support. So what you got out of this program was really Strong job multipliers. 3 total jobs created for every incentivized job. What you got in the UK program, which was bigger and therefore the treatment effects are going to be a bit smaller. 10% more job growth with a 10% increase in subsidies. Okay, how not to do it well, there are a lot of examples of how not to do it well. How not to do it well is to think about who's doing this and what are the incentives that they have. So who doing it are folks who in the US context are local economic developers. They are incentivized by some count of jobs created in their jurisdiction. So what is the jobs created? You know, it's what the company says they're going to do and then the governor is going to pay. You could put you on a performance pay scheme according to that. So the wonderful metropolitan area of Kansas City straddles two states, Kansas and Missouri. So we have Kansas City, Missouri, oddly enough, and Kansas City, Kansas. Now, economic developers in Missouri work for our. They are rewarded for jobs created in Kansas City. In Missouri, economic developers in Kansas City, Kansas are rewarded for jobs created in Kansas. Now what's the easiest way to create jobs in Missouri? Give firms incentives. They're already in Kansas City. Let's just get them to move across state borders and stay within the area. Their workers don't have to move. The customer, the suppliers, it's easy, right? So Missouri started this and Kansas said, oh, this is a great idea and we're going to copy you. Between 1911, 2011, 2019, the two states spent $335 million incentivizing firms to cross state boundaries. It was just all out war, complete zero sum game. What happened was the heir to the hallmark greeting card fortune stepped in and said this is an egregious waste of money and negotiated a truce. That truce has mostly held. There have been some signs of its fraying so the lesson from this is we're talking about an idea that is over 40 years old. What's needed in this space are not necessarily new ideas. Where are we in place based policy? It's not like cancer. With cancer, we need lots of molecular biologists who can find compounds that work with place based policy. A lot of that has been done. The molecular biology is pretty well established. What we need are good primary care docs who can walk you through the menu of options you have available and help you understand the peculiarities of your specific diagnosis. I've got another version of this which regards workforce development, but I think I'll leave that for the Q and A again. The other major branch of place based policy, examples of how to do this well and examples of how to do this poorly. And I'll close just by noting that when you talk about place based policy, what are we talking about? Development economics in high income countries. When you say development economics, you say, oh, it's development economics. We can intervene anywhere we want all the time. We have randomized control trials. We gave three Nobel control prizes to development economics in 2019. But when you talk about place based policy, which is the same policies in different contexts, you say, nope, we're going to have capture of this by special interest. We're going to make policy mistakes. We have no faith in the ability of policymakers to do the right thing. What we have is both an intellectual convergence in understanding the distortions involved and and which solutions address those distortions, but also a conversion in terms of policy practice. When the work we're doing in Appalachia has attracted folks in China who are figuring out what do we do with workers who are being displaced as coal mining declines in certain parts of the country. So what do we need to do is not not create the new ideas, but to help build capacity for implementing those new ideas and redirecting money from the Kansas City border war to well constructed enterprise hunts.

Podcast Host (40:19)

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Peter Tribowitz (40:46)

Gordon, that was terrific. I can't believe you did all of that in about 30 minutes. I know there's going to be a lot of questions. I guess maybe a first question is to avoid that kind of arms race that you Described, you know, across the border. I mean it seems like somehow you need to scale up like that. I don't know whether needs to be imposed at the federal level, but if you wanted to avoid those kinds of, you know, like a race to the bottom there and to I guess leverage best examples, best cases like we're talking about in the American context, it would seem like you need to somehow scale it up so that it is, there's a kind of maybe like a best practice that is, if not nationally imposed, is somehow incentivized by the national government. Otherwise I mean when you, you'll just get a kind of Swiss cheese kind of approach to this or not.

Gordon Hanson (42:09)

I mean so that, that would be one approach. What you're talking about is like it's like a WTO for regions inside a country in which we come together and we agree not to do the things that harm each other. And that would mean de escalating that arms race of tax incentives. It works wonderful. In terms of economic theory, it's hard to pull off, but it's not always hard to pull off talking to local economic developers. There are plenty of contexts in which mayors work together, in which governors work together to try and defang the ability of business to come in and set you at each other. Because what does business want? They want to create an auction in which you were bidding for the right to host you as a firm. And what you want to put it in is more of a rules based system where the firms are competing for access to a set of dollars that can be deployed. So those rule based systems like in the California context and like in the UK context can work very well. It's not good politics, politics, politicians hate rules, discretion. That's how, that's how you kind of reward constituents. And the political science work in this area says it's very much true. You get rewarded for announcing big shiny new deals, moonshots even well before there's been any net economic impact of those deals themselves.

Peter Tribowitz (43:48)

Just out of curiosity, I mean how does the like the Trump tariffs and protectionism like that strategy interact with your story here? And I think maybe even just more generally what should on the, on the other end of this, what let's say in the American case, what should the direction of travel be with respect to international trade? I mean there's the left behind already. But if you were to continue with trade liberalization, let's say, is this problem likely to just continue to cascade?

Gordon Hanson (44:30)

So the place based policy gets tasked with doing lots of different things and as you're thinking about a given policy choice, you just want to be very clear about the problem at your trying to solve. I have put forward today one very specific problem and that's what to do in regions that have been beset by a sudden increase in joblessness. And how do we help avoid or unwind the downward spiral that comes when regions have lost their economic footing? It's not the only thing that place based policy might do. If we're thinking about how to promote technological advance, then what we might want to be doing is investing in the highest productivity places. And this is what we in effect do when we support scientific research and development. It goes to universities, it goes to industrial research labs and those are located in special places. They're in Oxford and Cambridge, they're not in Birmingham. And that's fine. You're solving a different problem associated with how do you generate maximum productivity. So when we come to the tariffs, you want to say, well, what's the problem? We're trying to address two problems were. At least two problems were put on the table. One is we're going to bring manufacturing back and help workers who lost their jobs. But the other thing we're going to do is to take on China. So the great economist Avinash Dixit talked about the principle of targeting. And targeting is pretty simple. Targeting. If you want to address an economic distortion, you focus on that distortion and you don't focus with one arrow on two targets or three or four. So Trump said we're going to do two things. The Biden administration said we're going to deal with left behind regions. We're going to solve climate change, we're going to expand entrepreneurship among women and minority groups and then a list of other things. Each of those items maybe are worthy of policies on their own. But if you think you can do the two things at the same time, you're going to have a very hard time. And that's true. We've done economic research on the employment effects of the Trump tariffs in the first administration. Zero impact on manufacturing employments in the places that were targeted.

Peter Tribowitz (46:56)

I'm going to open it up. We'll start with the person in the back there with green sweater, sweatshirt.

Baudi (47:06)

Hi there, my name is Baudi. Thank you. It was very insightful. So my question was today there was news on that with Amazon, 14,000 jobs. Yeah, 40,000 people are going to become unemployed from today on because of AI. And this is this new productivity growth. And I think it's interesting to mention this because maybe you will see a Lot of unemployment with people with bachelor degrees. So actually not the group that you just described. And I'm just wanted to hear if. Yeah, this difference between the that impact that we're going to have now compared to the impact you just described and maybe on a more ironic note, will San Francisco become the new Detroit?

Audience Member (47:51)

Yeah.

Gordon Hanson (47:54)

There'S a lot of concern about San Francisco becoming the new Detroit. And right in the aftermath of COVID there are a lot of folks who are saying headed that way. Then I happened and it was not enough day down the Detroit path for there to be anywhere else but San Francisco where you wanted to do AI. And now we aren't so much talking about the Detroit path anymore, but it's an issue. So if you think about the coming shocks, we want to be give ourselves the freedom to tune policy to the specific challenges that are going to be created by the job loss of the future versus the job loss of the the path. This is why the Trump tariffs are so misguided. And that's because they're mythologizing that manufacturing era and saying the solution is to go back to that world. That world is inaccessible. And so we need to be then tuning for the world in which we live. By the same token, we wouldn't want to then in terms of thinking to assume that enterprise zones for investing in low income areas or workforce development that are targeting workers leaving secondary school and who aren't going on to university are going to be ripe for the coming challenges of the future, which could be triggered by the energy transition or could be triggered by AI. But there is a commonality here. What's the challenge that regions have when you get a major disruption? So Seattle is about Amazon, Microsoft and Boeing. And so it's about the industries in which they're in, but it's really about those three firms. So what you want is to have the dexterity to reallocate your labor and capital to do new things when one of those three firms decides, or the world, the market forces decide that they should just do much less of it in the Seattle area. So on the labor side, what does that mean? That means training people, training young people for the first time to have sets of skills that are sufficiently malleable, but then also having access to training that they can take up on their own account that allows them to reposition themselves. And this is, you know, oddly enough, we're not in bad shape when it comes to the potential for doing this in the US that responsibility would fall on community colleges. Community colleges do that training about half of what they do is for folks who are going to go get a college degree, half who are going to just stop with vocational stuff. They're set up to do this. And then in the uk I always forget, to me it's a, it's a funny title. Higher education colleges. What's the name?

Peter Tribowitz (50:46)

Somebody want to jump in?

Gordon Hanson (50:49)

What is it? Further education? Yes, further education. Everything is after further education, so it's hard to remember. Further education Colleges are set up to do something quite similar. The challenge is making sure that they have the incentives and the resources to, to do those things. And I can go into more detail if folks are interested. They aren't set up well to do that right now.

Peter Tribowitz (51:14)

We call that now at LSE lifelong learning. So that's why I was stumped.

Sichen (51:23)

Thank you for the great talk. So I have a question.

Peter Tribowitz (51:26)

Please introduce yourself.

Sichen (51:28)

Also. I'm Sichen, I'm an assistant professor at the department IR at lse. So I have a question regarding how the US government can do to avoid political capture. So first, can you talk more about who are those people who are reviewing firms proposals when they apply for tax credits and how the local government can manage to guarantee the impartialists during the review process. And in the US setting it's a political system that's very susceptible to political capture because of the lobbying system. Do you have any suggestions for the local government to avoid that?

Gordon Hanson (52:05)

Thank you for that question. There's not one system in the United States, it's us. So we have 40 different state enterprise zones and then we have competing enterprise zone programs at the national level. One created by President Bill Clinton and a second one created by President Donald Trump. The Clinton and Trump ones end up working very similarly and that is that they direct resource there. By statute the money has to go to low income areas. In both cases it goes to low income areas that are already growing, that are poor neighborhoods in richer cities. It's not going to the lowest income areas. Now it's four different reasons. In the Clinton case, the new market tax credit that he created, you can't get it unless you create a special financial institution known as a certified development entity. Who can do that? Sophisticated financial institutions. Who has sophisticated financial institutions, bigger cities with financial systems centers. So that new market tax credit doesn't go to Appalachia, doesn't go in much quantity to my hometown of Fresno, California. The Trump one was just a straight out giveaway to real estate development. And where is real estate development going to happen? In areas that are primed for growth. But here's the thing. We had bipartisan policy failure starting from different positions. The irony is the pilot project that Clinton put in place was just like the California COMPETES tax credit and in fact it was the model for the California COMPETES tax credit. So what happened? We lost the rules based approach and we introduced some new elements that we hadn't tested in the field. So the lesson from this is it's kind of all about policy implementation and it's not about the politics of it, it's about the details of setting things up that directs resources to where they should go.

Peter Tribowitz (54:22)

Chris, let's take one from online.

Online Moderator (54:25)

Thank you. So just to say There are about 150 people registered online and watching from countries including the U.S. sweden, Egypt, Saudi Arabia, Italy, India, France and Colombia. This question is from an anonymous questioner. They ask, is there a role for immigration policy in place based policies?

Gordon Hanson (54:43)

Very much so. I say that recognizing that promoting immigration as a solution to anything right now is just non starter, at least in the United States, just absolute non starter. And I've learned this from talking to politicians in the Republican Party who are sympathetic to the idea that well constructed immigration policy can be an engine of local economic growth. They can't touch it because it's so politically explosive. But let's I'm an economist, so it's easy for me just to leave the politics by side for a moment and to think about what actually works. So if you look historically at what, what newly arriving immigrants, do they go to where they have capacity to earn high nominal incomes, net of the cost of being where they are. So why nominal incomes? That's not what we economists think people care about. People care about real incomes, how much you earn versus your cost of living. Newly arrived immigrant workers tend to be focused on sending money home. So what do you want to do? Get as much net cash into the bank as possible and then transfer it back to family members. There are two ways of doing this, ironically, that send you either to very rich places or very poor places, because very rich places, what do you do? You're going to earn a really high wage, but you're going to live 15 to a one room apartment while you take maximal advantage of job opportunities. And just your standard of living is terrible. Really low income places, the cost of living is dirt cheap and they're probably missing small businesses that you, given your experience, are able to provide. So what do we see? We see immigrants generating facilitating job growth in expensive places like Silicon Valley and also helping regenerate job growth in places that have seen job Loss occur in the past. I should say in the US context, this is happening without direction. All you're doing is saying, come here and you'll figure it out. And the market works pretty well in that respect. But you have to let the folks in for it to happen.

Peter Tribowitz (57:05)

Let's take the gentleman in the middle, middle right there and then the.

W. Yousef (57:10)

Hello. Yeah, my name is W. Yousef. Thank you. Essentially, so I work in consulting at Deloitte.

Gordon Hanson (57:16)

Could you.

W. Yousef (57:17)

Sorry, can you hear me now, Isabella? Yeah, I work at Deloitte in consulting. So I'm quite like what you're talking about. Place based policy is quite important to me because I know AI is coming for my job essentially. So I need what you're saying to work in terms of. You said that further education is really important in the future and in terms of malleable skills to be taught because I don't think I've seen what AI can do. I think consulting, if it's not started, it's almost over, basically. So when you said malleable skills, can you go into a bit more detail? Because what does that look like? How can that. It's almost like a fire that can affect every knowledge based industry sector. When you spoke about it earlier, if that makes sense.

Gordon Hanson (57:53)

Yeah, yeah.

W. Yousef (57:53)

Thank you.

Gordon Hanson (57:56)

So when it comes to worker training, what do we know about what works? And by worker training I mean training that's designed for jobs in particular occupations often targeted either to workers who are from economically disadvantaged backgrounds or to the long term unemployed. We don't have a lot of good evidence on what we do with recent undergrads who trained, who got educated for one few. And the future looks very different. But I think there is some transference of knowledge from one context to the other. So where do you start? You start with jobs that are in demand locally. So you work backwards from your local industrial structure and you have you know who's there and you know nationally who's growing and then you're going to tune your training to jobs that are tied to those, those particular occupations. And you're going to do this in concert with employers because employers are going to tell you the skills that they want. Now there's a problem here because employers1, want you to do all the training and then not have to pay for it. And two, they change their mind. They say we want 50 workers who are doing Amazon. Two years ago would have said we want 100 recent college grads in accounting. And then today they're saying we don't need those books anymore. We've gen AI'd all of that. So you need to be mindful of that changing environment. But the good community colleges in the United States have this ongoing relationship with employers. And what you're doing is you're targeting your programs to meet those demands. And those programs come in two varieties. One is your initial training. And that often that could be what we call an associate of arts degree that could be in something like computer science, or it can be a specialized certificate program that could be as a radiology technician. And if you're training for that radiology technician, you want to make sure that you're providing a skills base that makes it easy to stack criteria credentials in the future as the technology in what you're doing evolves. So part one is the initial training is something you can build upon, but then you need to have those stackable credentials in place as well. Stackable credentials is a really popular concept in community colleges today. We don't have a lot of good evidence on whether it works. It's quite popular. What was also popular were cosmetology degrees in for profit universities in the United States leading up to the Great Recession, such that one third of the training in for profit colleges were in cosmetology because they could sell it to a population and you could get some student aid for it. So having the market test there and, and being able to make sure that folks are doing the right thing is really important. But the two things, the base that is expandable and then being able to provide that expansion.

Baudi (61:13)

My name is geography PhD student in SC. So if the in a case where entire region or entire state is filing, do you think it is better to spread all the government funds to each county or concentrate all of it to a specific state to build up agglomeration economies?

Gordon Hanson (61:33)

So I guess the challenge we're thinking about is we have a state budget for regional economic development. How should we spend it? You want to start with your diagnosis of what the problems are. Are you a place that has undergone a bunch of recent job loss? And so we're in a position where you got a group of workers for whom there is very high value to redeploying them or. And so that would be a place like Seattle. Right now, Seattle just announced there's 30,000 white collar jobs that are going to be axed a big chunk. Not all of those are going to be in Seattle. Plenty of those will be in Seattle. Or are you a place like Huntington, West Virginia and Appalachian where we're working, where job loss is generational. So you then you want a good diagnosis and you may have parts of your state that are doing different things in the Seattle context. What you have is this incredibly vibrant cluster and you want to make sure that the cluster doesn't decompose. You don't want it to become Detroit, you want it to reinvent itself.

Peter Tribowitz (62:43)

Itself.

Gordon Hanson (62:43)

And clusters can reinvent themselves quite successfully. Boston has reincarnated itself economically five times now. Detroit didn't pull that off. That's a very different problem than dealing with the endemic joblessness and the attendant substance abuse and social dislocation that exists in a place like Huntington, West Virginia. You, as governor of your state are going to then have to think about prioritizing. You know, what matters more in terms of the long run future of your place, dealing with the Huntingtons or dealing with the Seattles.

Peter Tribowitz (63:22)

Chris, let's take another question online.

Online Moderator (63:25)

Thanks. This is from another anonymous questioner. If place based policies are more successful nationally in the U.S. might this be a way out of political polarization?

Gordon Hanson (63:36)

Oh, it would be lovely to think so. And the thing, the concept of good jobs is popular across the political spectrum. The idea that we need to help left behind regions has universal political support. And there's actually not that much disagreement on many of the policy tools. Industrial policy is back on the left and on the right. The desire to build more housing in places where housing is unaffordable is popular on the left and the right. Is that enough to get people to get along? Having lived through many holiday dinners between warring family members who agree on the sports team we're watching on the television, it may not be. We may need something else that brings us together. What is that something else? You know, historically it's been a galvanizing moment. Whether it's a war, it's some other signature event. So we have scope for cooperation in these particular policy domains, but we don't have a lot of evidence of that cooperation actually happening.

Peter Tribowitz (64:58)

How about this gentleman right down here in the raincoat, I guess.

Audience Member (65:03)

Yeah, I just want to talk about malleable skills. I was thinking about the history of one person or two people. One man named Vivian Thomas, who was a pioneer in heart surgery but had no degree, but started off as a carpenter, then was employed as a lab technician and because of those skills in carpentry, developed a medical technology that would help with the Blue baby syndrome and also. Dammit. So the question should we redefine what the what jobs are? Because the jobless also have skills that they've learned that they've learned from colleges and also from Experience of working in different industries.

Gordon Hanson (66:03)

Yeah.

Audience Member (66:03)

Why is there no policy to enable them to create their own jobs, as it were?

Gordon Hanson (66:10)

Yeah. So in listening to your question, kind of what immediately comes to mind is this idea of a job as being this bundle of tasks that get put together to do a thing. And who you are as a worker is less somebody with a job title than somebody with that bundle of skills. And if we think about what we want out of a training system, it's helping people construct the right bundle for their economic futures. Not just for the job they're going to get right out of university or right out of secondary school, but the job that they'll be getting five and 10 years down the line. So this, this question of malleability, we're tremendously interested in it. We really don't know very much about it now. That said, we now have the capacity to learn a lot more about it because what we put together in many countries is quite comprehensive administrative data on exactly what you did in secondary school and community college and university. So we see the courses that you took and then we can also track the employers for which you worked. So in principle, it should be possible for us to then understand which combinations of training help you be more flexible in response to changing economic conditions. We aren't there yet. What we have, what we're documenting is the value of training beyond getting a BA degree. Economists were obsessed with that. What did it mean to get education meant completing a four year college degree. We have since learned that there is a richer variety of training opportunities that yield value. And now the ante has gone up in terms of understanding that given, given the potential pace of change due to AI.

Peter Tribowitz (68:18)

So I know we had some questions down here in the front, John, maybe we'll take two right now and I'll come back here in a second. Go ahead.

Gordon Hanson (68:28)

Great.

W. Yousef (68:28)

Thank you.

Gordon Hanson (68:30)

Suzanne.

Peter Tribowitz (68:30)

Yeah.

John Minick (68:31)

My name is John Minick. I am an assistant professor of International Political Economy in the IR department here at lse. Fantastic talk. That was excellent. My question is, I wonder if you could just talk about some of the solutions that you described here in context of the idea of a second China shock. I appreciated your op ed in the New York Times warning about the coming of a second China shock. And I wonder if you think that these kinds of solutions, and maybe more broadly the kind of Tocqueville American style of dealing with these problems is adequate to the threat posed by the second chance China shock. And if not, what kinds of solutions you think might be needed, assuming that sort of at a National level tariffs or whatever don't do the trick.

Peter Tribowitz (69:16)

Go ahead, David. And now I'll come to you.

Gordon Hanson (69:20)

Do you want to take a couple questions?

Peter Tribowitz (69:22)

Yeah. Okay, let's take this question right there. She's in the green. Yeah, I think you called for like a Federal Reserve type program for innovation. Right in that.

Gordon Hanson (69:34)

Thank you very much for the talk. I had a question about the scarring. I was wondering if you looked into the impacts, the call closures in Germany, the reparations that were paid out and how. Whether they had an impact on the.

Podcast Host (69:48)

Scarring effects and maybe how that also.

Gordon Hanson (69:50)

Kind of links to the universal basic income as a potential solution. I'll take that question first because the answer is really fast. The scarring effects in Germany from the loss of coal were much less. Two things were different. The support from the state was more generous, but you also had geographic proximity to alternative employment, which is quite different than in other places. And I don't exactly know where we are in disentangling which of the two matters, but both helping people adjust and helping people get to new jobs are both important. On the so The China Shock 1.0 was the economic disruption caused by China from going from being a Maoist centrally planned economy that was heavily agricultural to being a modern industrial economy that produced according to its comparative advantage, which had been in labor intensive manufacturing. China Shock 2.0 is the disruption that will come from China deciding that it wants to take over a bunch of high tech sectors by investing whatever it takes to do so. So what should our policy responses to that be? Well, if in one sense, if China is willing to subsidize the creation of technology that's to the benefit of the world as a whole. Part of it is kind of, well, let them do it to a point. So you think about the adoption of the investments in solar panels that's happened in the last 15 years. A good chunk of that as a result of China massively subsidized its expansion in the solar panel industry. What has been the consequence? A shift towards renewables which has happened much more quickly now. What's happening with investment in battery technology would speed the adoption of EVs. Okay, so that's the good part of China Shock 2.0. What's the bad part of China Shock 2.0? Well, producing EVs are automobiles. These are some of the best jobs for non caliber workers that you can find because they're big. They're jobs in strong economy of scale industries that once you succeed, once you have the shakeout of Whoever's going to be at the top of the EV production tournament, they're going to earn a lot of money and they're going to pay their workers pretty well. Losing those jobs is quite painful. So we need to balance then the benefiting from China's intense desire to take over these industries with the profit shifting, the rent shifting that happens globally as a consequence of China doing so. What that means is then strategizing about which industries you're willing to fight for and which industries you're not willing to fight for. Solar panels, they're gone. That's hard to pull back. EVs very much not gone. Now how do you do this? It's unclear. We're in kind of uncharted territory. The research that we can build on really only thought about this one industry at a time. And it came out of the 1980s. The literature on strategic trade policy thought about targeted incentives for single industries like semiconductors or automobiles. What China is doing because of its size is it's going 20 industries at a bunch. And that creates real challenges. Now what do we do about that? Well, if having gotten around the thorny issue of deciding which are the industries we want to support, we're then at this moment, moment of intense technological change. How have we dealt with these challenges in the past? In the US Context, we did it by either building or relying on an innovation ecosystem that involved private industry. So market forces kind of figuring out kind of who's going to do what, large investments in the basic research that would drive all of this stuff happening through universities and happening through industrial R and D labs, some of which are tied to universities, some of which are nonprofit entities within philanthropy, on the margins, doing some of the most innovative stuff. That innovation ecosystem grew out of what we did during World War II when we created the Office of Scientific Research and Development to create jet propulsion, radar, radio communications, mass produced penicillin, and it became the National Science foundation that then fed into how the US fought the Cold War. We're now at a. So what are the elements of that? Big federal investments, we might be willing to do that in universities. Not happening right now. And so we're at a moment where that kind of, that coming together of public, private, nonprofit sectors to solve a big thorny economic challenge is something politically we seem poorly suited to do. Though we have outstanding historical examples of how actually to do it.

Peter Tribowitz (75:30)

Take this right down here, gentleman, down here. Thank you.

Audience Member Alex (75:35)

You made reference earlier to Birmingham in particular as being a left behind area. And I had a factory in Birmingham for more than 30 years where place based incentives have been successful. How have they addressed the challenge of often low levels of both skills and aspirations that tend to pertain in those areas? Because if I was going back into that area with a higher growth enterprise, I'd have big questions about whether I could get the people I would need. The motivation is there, but there just isn't the skill base in many cases. How is that addressed when it's worked.

Gordon Hanson (76:27)

When it's worked and it's worked at an organizational level. I don't, I can't cite examples of this having the, of the training part alone having turned around entire regions. But the, the approach that does work well is combining those sector specific skills. So we're working with employers, we're looking in the, in the regional economy or saying what, what skills will get folks jobs? And you combine that with what has come to be known as wraparound services? So what does that mean? One, it's getting to people, getting young people to think about what their economic futures look like. If you have this job, this is how much you can earn. If you earn that much, this is the type you could afford to. Could you afford to buy a house? Could you afford to buy one car? Could you afford to afford to buy two cars? What sort of family life could you have? It involves job readiness. How do you go and find a job? How do you present yourself to employers? How do you map out the landscape? It involves skills for job search itself. Then once you're ready to go out and find that job, how do you systematically go through the options that are there and then career advancement? How do you succeed on the job? This approach was pioneered by someone named Ernie Cortez in a non profit called the Industrial Areas foundation, which Saul Alinsky, who was a kind of social organizer and advocacy guru of the American left in the 1970s and the Ernie Cortez model developed in the late 1990s. He won a MacArthur genius award, the Kennedy School gave him a prize, and we've known it for 25 years. The challenge has been in how do you then scale that up. So here's the problem in the scaling that we've encountered is that that model has a filter attached to it. What do you need the standard? Those filters will be things like being able to pass in the US what would be 10th grade math and reading exams and to pass a drug test. Well, guess what? Huntington, West Virginia, working with these nonprofit organizations, 70% of people that are coming to them are coming out of prison or rehab or both. And very few of them would pass that filter. So we have a system that works for say the top 20% of folks who are unemployed but motivated enough and can do the thing. And we're still working on how you extend that to folks who face more challenges. But it is very much about addressing the personal challenges in the their lives. This organization we're working with in Appalachia has an approach called 33, 6 and 3. They provide you 33 hours a week in a social enterprise to get skills on the job. You spend six hours of education in a local community college and sector specific skills. And you spend three hours a week on personal development. Getting a driver's license, making child support payments, getting your car repaired, overcoming the barriers that you face that are keeping you behind. But the personal development part of this is absolutely essential.

Peter Tribowitz (79:58)

We have time for one more question. How about right here in the middle down?

Gordon Hanson (80:04)

Yeah.

Baudi (80:06)

Hello.

Online Moderator (80:07)

Thank you. My name is Alex. I work at the Just Transition Finance lab here at blse. So my question would start off with two points and am I really interested in your work in the Appalachia region? Which the first point would be that investments are usually quite risk averse. New investments into regions and then on the second point is you have a problem like climate change and both the physical and transitional risks that kind of keep on compounding. Do you see kind of a place for place based policies in managing those risks? Risks either in advanced economies or in developing markets.

Gordon Hanson (80:48)

Capital is risk averse and the solution to that in many places have been to create what are known as regional industrial corporations where you have the public sector will put up a certain amount of capital and then you go out to the bond market and we, we say we're going to pay you the market rate of return on high grade bonds and then on the public capital is going to accept a lower rate of return. And what you do is you go in and you invest in sufficient scale in places in order to try and turn the downward spiral into coming back up. Now an alternative model of, of this is to have a billionaire who lives in your town who wants to do this all on their own. Dan Gilbert, who owns the Cleveland Cavaliers basketball team, if you're an NBA fan, is very tied to the city of Detroit and he is investing massive amounts in helping redevelop downtown Detroit to try and draw that money in. I'm sorry, second part of your question.

Peter Tribowitz (82:00)

Climate, climate.

Gordon Hanson (82:02)

We need to, as we need to be thinking about the shocks of the future. And so that could be the energy transition, that could be AI and that means having a sense of which places are more exposed and then which of those places either have the organizational capacity to solve these problems or do not. At our website, by reimagining the economy, we've developed a data visualization platform in which we're developing models of which areas are more exposed to the energy transition and also characterizing the organizational capital that places have in their communities to address some of these issues so that we can find those areas where you have high risk and low capacity. We haven't done that for AI yet because the AI experts will tell you quite confidently we have no idea which occupations are really going to be disrupted yet. But once we get that sense, then we can do the same. There.

Peter Tribowitz (83:09)

We are going to leave it. We've hit the bewitching hour. Gordon, I want to thank you. This is absolutely terrific. Please join me in thanking Gordon.

Podcast Host (83:26)

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