The Gated Valley
Posted by ryan on September 13th, 2011 It seems clear to me that current weakness across the American economy is primarily a demand-side phenomenon; output is falling below potential because consumers and businesses are reluctant to spend and invest, and a demand-side government boost would make a big difference.
At the same time, I think there are significant structural problems in the economy that acted as a drag on growth prior to the recession and which constrain recovery now, not the least of which are the ones I describe in my book. New data on metropolitan GDP help make my case. In 2010, the San Jose metropolitan area enjoyed real GDP growth of 13.4% — well above the 3.0% growth rate for the economy as a whole and easily the best performance of any large metro. This was quality growth, too. The information sector contributed 3.62 percentage points to growth, professional and business services added 1.72 percentage points, and much of the rest is almost certainly attributable to high-tech manufacturing (based on the share of growth in manufacturing and the historically high share of high-tech, computer and electrical equipment manufacturing in San Jose GDP).
That 13.4% rate is eye-popping but not entirely shocking. Tech firms have done very well lately, including business service firms, retail-oriented businesses like Apple, and the rapidly growing social-networking sector. And among fast-growing portions of the economy, these are the businesses that contribute a large share of value added and which are a key component of American exports. The health care and education sector growth we see elsewhere doesn’t necessarily score well on those measures.
But there’s a problem: for all that growth, the San Jose area added just 16,000 private-sector jobs in 2010. Real output expanded by 13.4%, and private employment rose by just 2.1%. By comparison, the Houston metro area experienced comparable employment growth at 2.0%, despite real GDP growth in 2010 of just 1.6%. Why isn’t San Jose’s blockbuster growth translating into lots of new jobs?
The city of San Jose’s housing statistics report gives us a pretty good idea what the problem is.A San Jose household hoping to limit fair market rent to 30% of income must earn $5,673 per month. The owner-occupied housing market in San Jose remains dysfunctional, not least because of the difficulty of getting a loan. The rental market gives us a clear sense of what housing conditions are like for typical families, however. The rental vacancy rate in San Jose is about 4% — strikingly low. And average rents have been rising since 2009 and are up 11% year-over year.
Reuters has been kind enough to publish an excerpt from my book, and conveniently enough, it’s from a chapter analyzing Silicon Valley entrepreneurship rates during the Dot Com boom. The pattern is clear: when new technologies drive a Silicon Valley boom, wages and housing costs rise while entrepreneurship and employment lag. The San Jose metro area’s inability to allow enough new housing to accommodate housing demand translates rising incomes into rising rents rather than rising employment. This, in turn, prevents the American economy from taking full advantage of Silicon Valley’s economic potential. |
