Regional Economy Sectoral Mixes

By Fester:

Let us imagine two regional economies.  In most aspects they are the same.  Roughly 70% of the Region A and B's economic output is consumed within the region by regional inhabitants.  Both economies are part of a broader national economy that grows very noisily around a trend path.  The national economy sometimes booms, sometimes busts and sometimes is hanging out at trend.  The big difference between Region A and Region B is the remaining 30% of the regional economy that is engaged in inter-regional and international trade. 

Region A is a mono-culture.  Its export work is overwhelmingly concentrated in a single field of making widgets.  Region A's economy is not superficially restricted as there are design firms, graphics firms, engineers, widget sub assembly and multi-widget component assembly plants.  However all of these seemingly disparate economic activities are highly correlated with widget production. 

Region B's export economy is a bit more diverse.  It used to be dominated by widget manufacturing but over the past few generations, it has diversified.  Widgets are a big cultural artifact in the region, but are an amazingly small economic slice of the pie.  Region B's big regional exports are diverse, there is a decent size optics sector, a decent size medical sector that specializes in a few obscure procedures that no one else in the world can do, a fast growing advanced robotic manufacturing sector, an energy extraction and processing sector, an educational sector, and a back of the house financial sector.  None of these sectors dominate Region B like widgetmaking dominates Region A, but when you add up the export sectors of Region B, they are the same size of export sectors of Region A. 

James Joyner earlier this week asked a very good question about Washington DC's economic monoculture of government and government related activities that I think a further exploration of Region A and B would be illuminating. 

I�m not sure why dry cleaners, car salesmen, restaurant managers, pet groomers, golf pros, auto mechanics, gardeners, HVAC technicians, barbers, or whathaveyou who work in a metroplex where government is the chief employer are any different than those in towns where banking, manufacturing, or some other line of work is central.

I think there are two effects going on that would make the individuals who are not in the export economy of Region A nor B different from each other.  The first is a public choice model that people go to where they are interested in the local environment.  An HVAC tech who is interested in widgets will go to Region A if they relocate (assuming work is available) while another HVAC tech who is not interested in Widgets, would all else being equal, not go to region A.  An expansion on this theme is that local knowledge and conversational norms would have quite a few people fake it to make it --- people in DC who are indifferent to politics still will talk politics more frequently than they would in other locations because that is the regional cultural expectation.  But this is the less interesting reason.

The 70% of the regional economy that does not engage in direct export work has the 30% of the economy that does engage in direct export work as their marginal customers.  If the 30% of the economy engaged in export work is booming, the region is booming as their export earnings are bringing a whole lot of money and some new imports into the region that the other 70% can process and add value to.  If the 30% of the export economy is slumping, the rest of the economy slumps as the marginal customer is now broke.  The bar at the entrance to the world famous Widget Plant that used to be packed to the rafters on the shift change on pay day is now closed as there are no customers as the Widget Plan closed six months ago due to lack of demand.  This is the local multiplier effect in action.

Region A is very vulnerable to a boom/bust cycle as its Widget concentration dominates its economy.  When the demand and price for widgets is high,  everyone is working, and everyone is making money.  However Region A has very little control on national or international Widget demand and even less control over non-Region A Widget supply.  A few boom-bust cycles will leave an economic impact on the region.

However Region B with its collection of weakly correlated industries and occassionally negatively correlated industrial clusters is a more resilient economy.  It may not boom as much as the boom in Widget manufacturing that benefits Region A is a boom for a much smaller segment of the economy of Region B, but it will not bust as much either.  When Widgets are in a downturn, this impacts less of the regional economy, and there is a chance that Gadgets are a negatively correlated cluster to Widgets and thus Gadgets are taking up the regional economic slack as Gadgets are now booming.  That type of development pattern will produce a less volatile, more stable, and probably a more 'trusting' economic environment than the boom-bust Region A concentration. 

And yeah, I am talking about the great mystery of Pittsburgh thta Chris Briem is also puzzling over --- why has the total number of jobs within city limits stayed constant over the past two generations despite the massive dislocation of the steel industry?  And the sub component to that is how has Pittsburgh desynchronyizeddisconnected from the Great Lakes regional economic cycle that has produced several kicks in the nuts in this recession for Buffalo, Cleveland and Detroit?

[edited for a little more clarity in the last paragraph]