Introduction

In the last 15 years, a "New Economy" has emerged in the United States. Among its defining characteristics are a fundamentally altered industrial and occupational order, a dramatic trend toward globalization, and unprecedented levels of entrepreneurial dynamism and competition - all of which have been spurred to one degree or another by revolutionary advances in information technologies (IT). As these developments have swept through our national economy, they have also restructured and reshaped the nation's 261 metropolitan area economies (a metro area is defined as an urbanized area with a population of more than 50,000). Metropolitan areas differ, however, in the degree to which their economies are structured and operate in accordance with the tenets of the New Economy.

America is predominantly neither an urban nor a rural nation, but rather a metropolitan nation where the majority of the population lives and works in large metropolitan areas that include both historic central cities and dispersed suburban development. Moreover, leading-edge New Economy activities are more concentrated in metro areas, particularly large and mid-sized ones. Both factors make it appropriate to use a metropolitan lens to view the New Economy.

As a result, this report uses a set of 16 economic indicators to assess the 50 largest metropolitan areas' progress as they adapt to the new economic order. Collectively, these metros account for approximately 60 percent of the nation's workforce. The report is not intended to rank business climates, economic performance, or economic development policies in the traditional sense. Nor is it intended to crown "winners" or stigmatize "losers." Rather, our intent is to highlight differences among the structural foundations of metro economies and to focus attention on a policy framework aimed at promoting fast and widely shared income growth.

Was the New Economy a flash in the pan? Or, even worse, a myth spun by an over-imaginative media? To paraphrase Mark Twain, reports of the New Economy's demise have been greatly exaggerated. The New Economy is here to stay. To be sure, the Nasdaq has fallen sharply, many dot-coms are going bust, and investment in information technology is down. When this news is conflated with the other negative economic indicators that surfaced in winter 2001, it is an easy but mistaken step to pronounce the death of the New Economy.

The fallacy of this leap rests on the belief that all the New Economy is about is the Internet and what investor Jim Clark and writer Michael Lewis dubbed the "next new thing." On the contrary, the New Economy embraces more fundamentally a profound transformation of all industries, the kind of transformation that happens perhaps twice in a century. The emergence of the New Economy is equivalent in scope and depth to the rise of the manufacturing economy in the 1890s and the emergence of the mass-production, corporate economy in the 1940s and '50s. As documented in PPI's New Economy Index the New Economy represents a complex array of forces including the reorganization of firms, more efficient and dynamic capital markets, more economic "churning" and entrepreneurial dynamism, globalization, economic competition, and volatile labor markets.

But underlying and powering these changes is the information technology revolution which, notwithstanding media reports of new "pure play" dot-com bankruptcies, is fundamentally healthy. The online market continues to grow at a robust pace, with more and more of its work done by traditional "bricks and mortar" companies diversifying into "clicks and mortar" operations. The Census Bureau reports that e-commerce retail sales grew seven times faster than all retail sales in the fourth quarter of 2000 and was 67 percent higher than in the fourth quarter of 1999. Moreover, between October 2000 and February 2001 Internet growth actually accelerated. Almost five million Internet domain names (e.g., dot-coms) and 17 million Internet hosts (Internet addresses) were added. Home broadband use increased 150 percent last year and is projected to continue growing rapidly. Worldwide Internet use is expected to more than triple by 2005 to more than 1.5 billion people.

But what about the slowdown in tech investments? Doesn't this mean that the tech revolution, and by extension, the New Economy has run its course? On the contrary, as a host of new technologies becomes ready for the market, IT investments will remain robust. These include voice recognition, expert systems, smart cards, e-books, cheap storage devices, new display devices and video software, intelligent transportation systems, "third generation" wireless communication devices, and robots.

In short, a New Economy has emerged: it is a global knowledge and idea-based economy where the keys to wealth and job creation are the extent to which ideas, innovation, and technology are embedded in all sectors of the economy-services, manufacturing, and agriculture.

The same forces that are driving the New Economy - new industries and jobs, globalization, competition and dynamism, and the information technology revolution - are also driving a new reordering of the economic geography of America, including its metropolitan regions.1

In the old economy most economic activity took place in large metropolitan areas. As the IT revolution gives companies and workers more locational freedom, a smaller share of employment is located in the largest metropolitan areas than was the case just 10 years ago. The share of employment located in the largest 61 metropolitan areas actually declined by 1.5 percent between 1988 and 1997, from 55.1 percent to 54.3 percent. In contrast, the share of jobs in mid-sized metros (between 250,000 and 1 million) increased by 4 percent, and the share in small metros (between 50,000 and 250,000) increased by 7 percent. But so far the deconcentrating forces of the New Economy are not all powerful - the share of jobs in rural counties not adjacent to metro areas declined by 11 percent.

These forces are also leading to a decentralization within metropolitan areas. The old economy metropolis was like an atom - most of a region's economic activity was concentrated densely at the center like a nucleus, with residents spread out in rings around the city, poorer ones close in, richer ones farther out. Nothing epitomized this better than the skyscrapers located in the downtown and the large factories adjacent to the downtowns. Corporations erected skyscrapers that, as monuments, were intended to be as lasting as the companies themselves. Manufacturers in the core city were housed in sprawling factories that spewed out thousands of workers at the end of each shift.

But fundamental New Economy forces have acted like an atom smasher, breaking the nucleus up into hundreds of pieces and strewing it across the countryside. An office is more likely to be located in an anonymous building in a remote suburban office park, while the typical manufacturer is a small operation located in a metal "Butler" building located at the outer edges of a metro or in a small town.

In short, the common vision of the metropolitan area as a place with one economy, located among downtown skyscrapers and inner-ring factories, no longer describes the metropolis common to America at the beginning of the 21st century. By the early 1990s, 57 percent of office stock in America was located in the suburbs, up from 25 percent in 1970. Similarly, most high-tech jobs are in the suburbs as well.

And these trends are occurring not just in the newer metros of the West, but all over. Milwaukee's central city lost 14,000 jobs between 1979 and 1994, while inner-ring suburbs gained 4,800, and outer-ring suburbs gained a staggering 82,000. The District of Columbia's share of regional jobs fell from 33 percent in 1990 to only 25 percent in 1998, in part because office space in the high-tech outer-suburban Dulles Airport corridor increased from 20 million square feet in 1992 to 100 million in 1999. Atlanta's share of the metropolitan region's jobs declined from 40 percent in 1980 to 28 percent in 1990, with the northern, predominately white suburbs gaining all the share that the city lost - exacerbating the spatial mismatch for underemployed minorities, who are concentrated in the central and southern part of the city while jobs are increasing in the northern suburbs.

The bedroom suburb - little more than a home to workers commuting to the central city - is an anomaly, something to be experienced in reruns on Nickelodeon. Today, many people live and work in the suburbs and rarely visit the central city; others still commute to the core for work, but find any and all services needed for their daily lives available in the suburbs. These changes have proceeded to the point where even the terms "cities" and "suburbs" have become artifacts of the old economy.

The centripetal forces sending businesses throughout all parts of the metropolitan area mean that people can live farther from the center and not face inordinately long commutes. In the old industrial metropolis, when most jobs were downtown, few people wanted to live 25 miles from the center city. With edge cities and office parks 20 miles from the center city, people now live 30, 40, and even 50 miles from downtown and still have reasonable commutes. For example, the growth of the high-tech I- 270 corridor in the Washington, D.C., suburb of Montgomery County, Md., has meant that people who work there are increasingly commuting from as far away as West Virginia.

This kind of sprawl is not necessarily leading to lower population densities within the current bounds of metro areas. On the contrary, the fact that suburban areas are becoming urbanized accounts for much of the concern over sprawl. Residents who moved to the suburbs to get away from it all - to experience the equivalent of Frank Lloyd Wright's Broadacre City - are increasingly wondering what happened to their semi-rural good life. For example, while population density in the city of Chicago fell from 16,000 persons per square mile in 1950 to 12,000 in 1990, the density in already developed suburbs increased from 400 to 1,200 as infill and multifamily homes increased. Between 1980 and 1990, population density of the built-up areas of the 40 largest metropolitan areas actually increased 14 percent, from 456 persons per square mile to 523. Thus, while many urban core areas are getting less dense, inner and outer suburbs are getting more dense.

But while inner and outer suburban densities may be increasing, development on the far fringes of metropolitan areas, which often leapfrogs existing metropolitan development by miles, has meant that overall population densities are declining as many metro areas encompass increasing amounts of land. For example, by the mid-1990's the population of the Philadelphia metropolitan area was only 100,000 more today than it was in 1960, but it's spread out over a land area 32 percent larger than in 1960, representing the development of 125,000 acres of open space. In Chicago, while the region's population grew only 4 percent, the residential land area expanded 50 percent. It is this low-density development at the fringes of metro areas that is commonly referred to as sprawl.

But these patterns of dispersal differ by region. Places like Phoenix and Los Angeles are sprawling outward, but because they are gaining population, overall densities are going up. In contrast to this "dense sprawl," places like Rochester, N.Y., and other slow-growth metropolitan areas can be characterized as "thinning metropolises," where low-density exurbs continue to develop even as the population remains constant (or, as in the case of places like Buffalo, N.Y., even declines). In the New Economy, dispersed development is the dominant spatial form in virtually all areas.

But it's not just the spatial order of economic activity that the New Economy has transformed; it's also the industrial and occupational order. Because of superior productivity, in the last two decades manufacturing employment has declined as a share of total jobs and now accounts for only 14 percent of total employment. But in the 50 largest metro areas, its share is even less - only 11 percent of jobs.

With the relative decline in manufacturing employment, the economy has specialized in high-tech and business services (e.g., banking, consulting, insurance). Office jobs now account for over 40 percent of all jobs, while managerial, professional, and technical jobs account for almost 30 percent of employment. But these activities are even more concentrated in metro areas. While the 114 largest metro areas account for 67 percent of all jobs, they account for 81 percent of high-tech employment, and 91 percent of Internet domain names (e.g., dot coms). Between 1988 and 1997, urban counties of large metropolitan areas (over 1 million in population) have seen advanced business services jobs increase by 21 percent, and high-tech by 24 percent, while their suburban areas have seen increases of 39 percent and 43 percent, respectively.

The inherent drivers of the New Economy - the rise of information and knowledge jobs, constant innovation and "churning," and competition, all coupled with a radical and deeply transformative information technology revolution - have enabled these changes. The New Economy gives both companies and workers more locational freedom. Whereas manufacturing and distribution facilities formerly needed to locate on water or rail lines, ubiquitous highway access now lets them locate almost anywhere. Likewise, many service facilities needed to locate downtown to facilitate face-to-face transactions, but now e-mail, faxes, and the Internet give them new freedom. As more and more Americans own cars and can afford single-family homes, they too can live in a much wider range of places. The result is that dispersed development of people and jobs - what critics call sprawl - is by its very nature a part of the New Economy.

This isn't to say that public policies should seek to exacerbate the centrifugal forces of the postindustrial New Economy. It is to say that policy makers need to understand and work with its systemic forces. It also is to say that, because the working economy now is not just the central city but the entire region, policy makers must view the region as a complex interconnected organism whose overall health is affected by the health of the parts. Because the metro area as a whole is the right unit for analysis, it's also the right unit for policy. Policy makers need to look at a host of issues, including transportation, education, training, and economic development, through a regional frame.

The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
600 Pennsylvania Ave., S.E., Suite 400, Washington DC 20003
Phone: (202) 547-0001
www.ppionline.org

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