The magnificent seven

Boston, NYC, DC, Seattle, Bay Area, LA and San Diego.  What do those 7 metro areas have?  What’s their secret sauce?

Aaron Renn discusses the recent (rumored) Amazon decision to add headquarters in NYC and the DC area, and has a number of interesting observations:

Amazon chose not one but two elite coastal cities for its new headquarters.

There’s no other way to slice it: Amazon repudiated the heartland with this decision. This was probably the ideal case for a heartland choice. It was not just a small executive headquarters but a gigantic number of employees. And Amazon, having lower margins than say Google, has to be much more cost conscious. My own analysis turned on the question of whether or not Amazon would be concerned about costs. I thought they would be, but it turns out they didn’t care. No matter what subsides Amazon extracts from New York and Virginia, they certainly won’t offset the labor cost differentials in those locations.

Why not Chicago or Austin?

As one person tweeted, “A friend is the founder of a fintech company. They want to hire more college graduates to their Austin office instead of NYC. New talented recruits have multiple offers & most want to be in NYC, not Austin. Austin isn’t exactly a horrible place to live.”

At this level, cost is essentially irrelevant at present. The ability to attract A+ caliber talent is all.

That’s not to say heartland places can’t be successful in many ways. But it won’t be at the elite tiers of the economy.

The Biggest Loser

The biggest loser in this is Chicago. Chicago had the urban location, transit, a great pipeline of talent from the Big Ten, and lower costs. That’s why I picked Chicago as the favorite in my analysis. It checked every box at some level and had lower costs than the coasts to boot.

I’m too close to this to see the problem.  I grew up in the Midwest, at a time when the Midwest was quite prosperous.  I attended the University of Wisconsin and then Chicago.  The Windy City trails NYC in cultural sophistication, but it doesn’t trail the other 6 coastal stars in that regard.  Illinois has budget problems, but Texas doesn’t.  Why don’t they like us?

My wife told me I’m asking a silly question.  Of course the elite talent want to be on the coast, how could anyone think otherwise?  She has an Asian perspective, specifically Chinese.  In China, everyone wants to be in the sophisticated coastal cities, not the backward interior.  The Chinese associate the US East Coast with sophistication—Ivy League universities, etc. I’d guess the same is true of Indian immigrants.

While Asians are only 5.6% of the US population, they are 40% of the student body at elite West Coast universities.  You know, the ones that don’t discriminate on the basis of  . . . er . . . “personality”.  So maybe the Asian-American perspective does matter.

There’s plenty of work to be done by the bottom 99%, which is why the population of Dallas and Austin is growing much faster than the population of the coastal stars.  But it seems like the attraction of the coastal cities is so great that the elite talent will accept sharply lower real wages to work there.  Is it because the millennials are a post-materialistic generation?  They don’t want a 7000 sq. foot home in a Dallas suburb?  An 1800 square foot home in San Jose is plenty big for their web surfing and euro-style kitchen?  They’d rather walk to a restaurant?

Or is it some sort of environmental factor?  The West Coast is beautiful, and even the East Coast has some climate and scenery advantages over the Midwest.  Or is it cultural—once a critical mass of like-minded people form in an area, it starts snowballing? It’s obviously not crude economic factors like tax rates.

That doesn’t mean supply-side economics is wrong; the zero state income tax places are growing faster on average, just not with the top 1% talent (except Washington state.)

Are these trends important?  It’s not like the Midwest contains a bunch of dummies—they still attract the top 10% to 20% talent:

Having lived in both Chicago and New York I can tell you that the caliber of talent is as different as night and day. Chicago has a ton of solid Big Ten type recruits. They are drawing the top 10-20% type people. But Chicago is very weak in top 1-2% types, and that’s a huge handicap when you are trying to position yourself as an elite player. You can’t do it without elite talent, and Chicago doesn’t have nearly enough of it. I wouldn’t be surprised if this were the key factor for Amazon.

If Boeing didn’t have legacy investments, they’d want to be in Dallas or Chicago, not Seattle.  Elite tech firms seem different.

I encourage people to read his entire piece, and I welcome suggestions as to what I’m missing.  And then read Kevin Erdmann’s new book when it comes out in January.

PS. David Beckworth has a new podcast where he interviews me on monetary policy.  It was recorded at the University of Texas a few weeks ago.

PPS.  I feel sorry for my home state of Wisconsin.  They got conned by Foxconn into massive subsidies for a new TV flat panel manufacturing plant, and now it looks like Foxconn is backing off on its promises.  Scott Walker’s dumping the problem onto the next governor.



30 Responses to “The magnificent seven”

  1. Gravatar of West Coast Techie West Coast Techie
    12. November 2018 at 13:32

    It’s pretty straightforward – as a techie who has worked on both coasts but grew up in Wisconsin, my goal is to make enough money to support myself 100% on interest income. That’s somewhere between 5M and 10M dollars minimum. Once I make that money, I can live anywhere in the world. It is exceedingly unlikely that I could make that money anywhere in the midwest. There’s simply aren’t enough startups, nor enough of the big tech firms that pay giant salaries to make that feasible. I’m happy to pay a crazy high cost of living for 10 years in exchange for the future freedom to do anything. This is true of almost everyone I work with.

  2. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. November 2018 at 13:37

    I am not sure that living in a suburb of one of the “magnificent seven” is that much better than living in a suburb of some Midwestern city. But if you are of the elite who can afford inner city living, then the difference is likely very noticeable.

  3. Gravatar of David Pinto David Pinto
    12. November 2018 at 14:11

    I live in a very town in Western Massachusetts. People live here because of the good school system, the lack of traffic compared to eastern MA, and a quieter lifestyle. It’s a good place to raise a family, but all the children want to leave. They can’t wait to go to college and move to a city like Boston or New York. This has been true going back a couple of generations. Then they get married and start having children, and suddenly they realize they need to move back home because it’s a better place to raise their children!

    In ten years, most of those 1-2% types will be moving out of the cities and back to the midwest.

  4. Gravatar of msgkings msgkings
    12. November 2018 at 14:17

    @Lorenzo: True, suburbs are more similar than city cores, but you still have better weather on the coasts (especially the West coast). Also, the young talent places like Amazon want aren’t ready for 2 kids and a house in the burbs yet.

    I am surprised they went with 2 East coast spots though,I figured one in NYC and the other in Austin.

  5. Gravatar of Viking Viking
    12. November 2018 at 14:54

    “I am surprised they went with 2 East coast spots though,I figured one in NYC and the other in Austin.”

    NY for the cosmopolitans, Va for sucking on the government teat!

    Re Foxconn conn: Pretty sad, shows the advantage of having a uniform policy of not picking winners, rather avoiding business hostile policies like property taxes in excess of what is provided in services, and a guarantee that tax rates will not be changed on old investments.

  6. Gravatar of Jerry Brown Jerry Brown
    12. November 2018 at 15:01

    That was a great podcast with David Beckworth. To follow up on one of the audience’s questions near the end- if you would support allowing the central bank to purchase all kinds of assets (if needed under some circumstances), would you also support the central bank purchasing labor power under some circumstances? I mean, the ability to work is an asset- maybe most people’s most important asset. And renting that ability would immediately solve an individual’s unemployment problem, far more directly than purchasing some financial asset from some third party would?

  7. Gravatar of Kevin Erdmann Kevin Erdmann
    12. November 2018 at 15:01

    I think it is useful to think about relative substitutions. One way to describe the story is that households with lower incomes aren’t willing to downgrade their consumption of real housing any more, so as you move down the income distribution, coastal urban rents take up an increasing portion of income. For those families, they increase rental expense rather than decreasing their housing consumption, until they can’t any more, and they migrate away.

    For workers earning higher incomes, which would allow them to live in a 4,000 sq. ft. unit in Dallas, they spend a similar amount on rent in New York as they would in Dallas, but they can substitute real housing consumption, so they might share a 1,000 sq. ft. condo in Brooklyn with a friend who also earns a high income. They are substituting the material amenities of the housing unit for cultural and geographic amenities and access to captured labor markets.

    This isn’t particularly different than what has always been the case. Housing consumption is pretty much entirely determined by income. Within communities and over time, we have tremendous flexibility about what we consume in order to keep it within the normal proportion of the typical budget. So, there is a longstanding, obvious difference between, say, who lives off of Lake Shore Dr. in Chicago and who lives in Aurora, and what they pay per square foot.

    The supply and demand issues in the key centers have just pushed this to an extreme, so at the high end, the substitution in real shelter consumption is greater and at the low end, outmigration is triggered.

    Clearly the geographical capture of certain labor markets is an important ingredient. There may be issues about demand for certain locations that are a factor. The draw of cultural amenities can induce those substitutions, but the willingness of employers to pay higher wages in those locations adds the fuel that pushes prices to startling new highs. And, in either case, supply is the solution. Whatever we might say about the draw of Chicago vs. NYC, they approved many more permits before the crisis than NYC or LA did.

  8. Gravatar of ssumner ssumner
    12. November 2018 at 15:03

    David, I’m not convinced they’ll move back to the Midwest. Maybe Florida or Arizona.

    Viking, Amazon probably doesn’t expect federal subsidies, they just want to avoid punitive policies.

    Agree on business incentives.

  9. Gravatar of ssumner ssumner
    12. November 2018 at 15:06

    Jerry, No I would not, as it’s not a very liquid asset.

    Kevin, Agree on housing reform. But that won’t help the Midwest.

  10. Gravatar of ssumner ssumner
    12. November 2018 at 15:16

    WCTechie, That doesn’t really tell me anything about why Amazon located on the coasts. You imply that you’d be happy working for this sort of high opportunity company in any location. So why didn’t Amazon pick a cheap one?

    In other words, you are telling me your personal decision given the location of tech, not the original cause of that location.

  11. Gravatar of Scott H. Scott H.
    12. November 2018 at 15:32

    But I agree with WCTechie. First, there’s more 1% talent in the interior than we’re giving it credit for. Secondly, most of the 1% will follow the money.

    Personally, I wouldn’t be surprised if mood affiliation and politics played an outsized role in these decisions.

  12. Gravatar of Matthew Waters Matthew Waters
    12. November 2018 at 15:39

    I have doubts about the top 1-2% thing. That was the line around finance before 2008: That they hired the very smartest people. The narrative is quite suspect now.

    America’s prosperity generally didn’t go through the top 1-2%. We had competition among businesses and some developed far better production. Even in the 90’s, much of the productivity increases were from retail. Fayetteville, AR and Minneapolis (Target) weren’t exactly hotbeds of IT talent.

    I just feel like the victory of the coastal cities is premature. If the housing thing doesn’t get solved, then there will be pressure (like how American Airlines moved from NYC to Dallas).

  13. Gravatar of Gordon Gordon
    12. November 2018 at 16:40

    I don’t know if this factored into Amazon’s thinking, but you’re likely to get the best network performance and through put by being on either coast. And while people think of Amazon as an e-commerce site, it is a major provider of web services that powers the web sites of other major online entities.

  14. Gravatar of Doug M Doug M
    12. November 2018 at 16:44

    I thought that Boeing was in Chicago.

  15. Gravatar of Benjamin Cole Benjamin Cole
    12. November 2018 at 17:01

    Yes, Boeing moved to Chicago, the HQ anyways.

    The decline of material living standards in the “desirable” cities along the coasts is remarkable.

    I grew up in Los Angeles and Pasadena. Living standards are lower today than in the 1960s, primarily due to housing costs and heavy traffic. Perhaps the word “lower” is a debatable word. For people with a certain medical condition, there might not be any living in 1960. The advent of tablets and smart phones makes comparisons difficult. Also, it was horribly smoggy in the 1960s and that situation has much improved. The public schools were excellent through the 1950s and 1960s. Taxes in California are much higher today, but also the federal payroll taxes are much higher today than in the 1960s.

    But the idea of a young couple moving to Los Angeles and raising a family, once a stereotype, it is impossible today.

    All in all, I would say living standards along the West Coast have fallen over the last 60 years. Stagnant real wages played a role.

  16. Gravatar of BC BC
    12. November 2018 at 17:24

    Many people predicted at the outset that Amazon would choose a DC location because tech regulation seems to be rising in importance. It’s quite an indictment to think that government regulation is so distortive as to prevent a major corporation from determining its headquarters based purely on economic, rather than political, criteria.

    NYC is a head scratcher to me. I wouldn’t think that Amazon needed to locate in a financial nor media and entertainment center. I usually think of tech talent as concentrated in Boston and Bay Area. I’m not even sure that NYC has more tech talent than Austin, the quoted anecdotal tweet not withstanding.

  17. Gravatar of Seattle Techie Seattle Techie
    12. November 2018 at 18:19

    As a techie, I prefer to live in an area where it is easy for me to switch employers without having to uproot my family. The midwest, while far more affordable, doesn’t really have this going for it at the moment. Although, you could argue that someone’s got to start the trend there. Also, personally, for me as an immigrant, the coasts have far better access to community (Chicago and Austin are probably OK but the rest of the heartland, probably not so much).

  18. Gravatar of Benjamin Cole Benjamin Cole
    13. November 2018 at 01:40

    OT but worth mentioning.

    I genuflect to QE…but what is going on in Japan?

    Bank of Japan’s balance sheet now larger than country’s GDP
    Hideyuki Sano, Tomo Uetake
    6 MIN READ
    TOKYO (Reuters) – Japan’s central bank has become the first among G7 nations to own assets collectively worth more than the country’s entire economy, following a half-decade spending spree designed to accelerate weak price growth.


    I get a chuckle out of the premise of the lead paragraph…Japan is the first, inplying it is only a matter of time….

  19. Gravatar of Kgaard Kgaard
    13. November 2018 at 02:12

    Well the DC location is Crystal City, Virginia — i.e. ground zero for the military industrial complex (and Pentagon right down the road).

    Also that area has a bunch of very nice neighborhoods: Alexandria, Clarendon, Ballston … and lots of housing throughout Alexandria county.

    A pretty decent call if you ask me. You can definitely raise kids on an Amazon HQ salary in Northern Va.

  20. Gravatar of Inklet Inklet
    13. November 2018 at 02:35

    Hi Scott,

    I just listened to your interview in “Macro Musings” and you said that one type of inflation is supply side inflation, which is created by shocks like sudden increases in oil prices.

    I’ve always had problems understandong this. If there is a supply shock, increasing the prices of the raw materials like oil, wouldn’t that cause an equal decrease of prices in the rest of the economy (given a stable monetary base)?

  21. Gravatar of Matthias Goergens Matthias Goergens
    13. November 2018 at 05:47

    As an unAmerican, and arguably member of that 1% of talent you talk about, I’d be willing to experience NYC for a while. But you’d have to pay me serious extra money on top to put up with the flyover states.

    In most of these parts of your country you need a car to participate in society. Not my cup of tea.

  22. Gravatar of foosion foosion
    13. November 2018 at 08:43

    Isn’t there economic research into clustering aka geographic concentration? I believe Krugman has done work in this area.

    The people of Wisconsin weren’t conned by Foxconn. Scott Walker decided this was a good Republican business friendly strategy. It’s one reason he got voted out of office. Apparently, Cuomo decided the same thing and we can only hope for the same electoral result.

  23. Gravatar of Jeff Jeff
    13. November 2018 at 09:20

    It’s snob appeal. The people who are really successful in tech, as elsewhere, work incredibly long hours and will never manage to avail themselves of all those cultural amenities anyway.

  24. Gravatar of Jeff Jeff
    13. November 2018 at 09:22

    A nice house within an easy commute of Crystal City is a million dollars plus. You forget how awful Northern Virginia traffic is.

  25. Gravatar of P Burgos P Burgos
    13. November 2018 at 09:34

    I am surprised the more people aren’t echoing Seattle Techies comments about agglomeration. If you are a tech worker, would you rather live in a metro with 10K IT employees and say 500 employers (most only employing one or two IT workers), or would you rather live in a metro with 1 million IT employees and 10K employers? Both DC and NYC have a lot of IT workers and employers already, and Google is going to have offices in metro NYC with 20K employees. So Amazon is opening up offices in a couple of Metros with deep lakes of IT talent. That isn’t crazy; it is just like a factory plopping itself down next to say, a mine when the ore from the mine is its limiting factor of production. In Amazon’s case, the resource they have the hardest time getting enough of is employees with the requisite background, so they are locating operations in locations that already have a lot of people that they would like to employ, instead of trying to entice those people to move. Midwestern cities (outside of maybe Columbus and Chicago, and perhaps increasingly Pittsburgh (Appalachian but interior and north of the Mason-Dixon line, so for these purposes Midwestern) ) don’t have enough IT employees and employers to provide a liquid enough market for IT workers.

  26. Gravatar of ssumner ssumner
    13. November 2018 at 15:55

    Scott, See my reply to Techie, You are confusing cause and effect.

    Matthew, You said:

    “The narrative is quite suspect now.”

    Really? What evidence do we have that Wall Street doesn’t employ lots of top talent? The fact that they lost lots of money in 2008? The EMH says that’s meaningless.

    The rest of your comment misunderstands the claims being made. No one is claiming that these cities will grow faster than Dallas, just that they’ll attract top 1% talent.

    Doug, I meant the manufacturing of Boeing jets.

    Ben, You said:

    “The decline of material living standards in the “desirable” cities along the coasts is remarkable.”

    Millennials would laugh at this claim. Tell them about your lifestyle in the 1960s, they’ll be horrified.

    Inklet, An adverse supply shocks reduces real GDP, which raises prices for any given M*V.

    foosion, Yes, but why are all the clusters on the coasts? With Silicon Valley it might be coincidence. But all seven?

    Burgos, Why did Microsoft and Amazon pick Seattle in the first place?

  27. Gravatar of P Burgos P Burgos
    14. November 2018 at 10:31

    I thought Microsoft and Amazon choose Seattle due to the accident of history that their founders lived in Seattle during the time of the companies’ rapid growth.

  28. Gravatar of P Burgos P Burgos
    14. November 2018 at 10:33

    Austin, the Research Triangle, Salt Lake City and the Front Range, and Denver are all tech hubs that aren’t on the coasts.

  29. Gravatar of RocketMan RocketMan
    15. November 2018 at 16:39

    The average Amazon salary is $27K…the average Alphabet salary is $200K, Facebook: $240K…

    Amazon obviously wants to be technology company…when they are really more like Walwart with a couple of cool products like Alexa and a film studio…

    So, DC and NYC where probably chosen for company image reasons and those areas are strong in cyber and fintech..which are some core technology areas. Bezos wants to rule the world and be cool, have his own trendy film studio, rocket company, etc…not be another Sam Waldon…But yes I agree with the analysis…this is could beginning of the end of Amazon….long WMT…but then again I said that 10 years ago…

  30. Gravatar of P Burgos P Burgos
    19. November 2018 at 08:44

    @ RocketMan
    Amazon Web Services is, in itself, a huge IT company, with billions of dollars in profit each year. They are the biggest player in outsourced computing power.

    Amazon itself is mostly a retailer, which is why its average salary is so low.

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