Moneybox

The Government Might Borrow a Move From Amazon to Turn More Cities Into Seattle

Get ready for HQ2, uh, part two.

WASHINGTON, DC - MAY 25: Senate Majority Leader Chuck Schumer (D-NY) speaks to the press following a Democratic caucus meeting on May 25, 2021 in Washington, DC. Schumer urged his Republican Senate colleagues to support the January 6 commission legislation. (Photo by Drew Angerer/Getty Images)
Chuck Schumer’s Endless Frontier Act would have cities around the country compete for federal funding to turn themselves into new tech hubs. Drew Angerer/Getty Images

Three years ago, Amazon’s HQ2 competition showed the world just how many local politicians would happily sell their first-born child if it meant bringing tech jobs to their community. Hundreds of cities and regions made bids to land the everything store’s new headquarters, offering all manner of subsidies and perks to one of the most powerful corporations on Earth with the hope that, by the grace of Jeff Bezos, they could one day become the next Seattle.

Advertisement

Most of them never had a chance. Amazon largely ignored the offers from midsized contenders, instead selecting New York City and the Virginia suburbs outside of Washington, D.C., places with already-flourishing tech scenes where it would be easy to recruit talent. Although Amazon also promised to put a smaller office in Nashville, Tennessee, the outcome was a stark illustration of how, left to its own devices, the tech industry would likely continue concentrating itself in a handful of already-rich cities.

Advertisement
Advertisement

But what if it was possible for the government to take the HQ2 model and actually use it to spread the tech wealth around? The Biden administration might be about to try, thanks to the $250 billion U.S. Innovation and Competition Act, the major bipartisan package of science and technology funding now working its way through Congress, which has been pitched as an effort to counter China’s influence on the global stage. After a bit of drama on Thursday, the Senate voted to end debate on the legislation (which was previously known as the Endless Frontier Act), a crucial stepping stone on the way to passage.

Advertisement

Among its various pieces, the legislation authorizes $10 billion to help transform a handful of U.S. cities into new “technology hubs” where cutting-edge industries like robotics, green energy, or artificial intelligence can thrive. The money would be awarded through a national competition overseen by the Department of Commerce, in which groups made of local governments, universities, nonprofits, investors, and others would band together to pitch their town as America’s next great tech haven. But instead of presenting baskets of cash to one of the world’s richest men, they’d be bidding for a slice of federal funding.

Advertisement

The idea is in large part the brainchild of two prominent MIT economists, Jonathan Gruber and Simon Johnson. In 2019, the pair published a book titled Jump-Starting America, in which they argued that the United States should embark on a massive program of public science and technology spending in order to boost economic growth and retain our innovative edge against geopolitical competitors (like China). One of its key points was that the U.S. economy has increasingly come to be dominated by a handful of superstar cities—places like San Francisco, New York, Boston, Seattle, and Los Angeles that have turned into magnets for highly paid tech and finance jobs, and absorb the vast majority of venture capital dollars (about 93 percent of VC investment goes to just 15 metros, with California’s Bay Area gobbling nearly half). The reason why has to do with what economists call agglomeration effects—the gravity-like tendency of industries to cluster geographically, particularly in places where there’s a large pool of professional talent they can hire. Amazon’s HQ2 decision was a high-profile example of agglomeration in action.

Advertisement

Agglomeration isn’t necessarily a bad thing, since it can help make industries more innovative and productive by helping knowledge flow between people and companies. But the rise of superstar cities has created some very glaring problems. As the economy has become more polarized between wealthy metropolises and everywhere else, it’s become more politically polarized too, with liberal-leaning workers with college degrees cloistering themselves in rich urban islands that vote blue. Meanwhile, restrictive zoning laws have driven up housing and land prices in these cities, making it harder for Americans to move toward opportunity, and more expensive to start businesses in them. All of this may be taking a toll on the wider economy: One now-famous study concluded that bad zoning had reduced growth by 36 percent between 1964 and 2009 by shutting people out of cities where their work would be more valuable.

Advertisement
Advertisement

As Gruber told me in an interview, economists have long said that the solution to these issues is simply to make cities loosen their zoning laws so more people could flock to them. The problem? “That’s just not happening.” (While a handful of places have begun to ban single-family zoning, change is slow.) So instead, he and Johnson wrote that the government should invest in new tech hubs outside the coasts, and borrow a page from Amazon by staging a competition between cities for a piece of funding, to show that they have the resources, and the local buy-in to make use of it. (A team from the Brookings Institution proposed a similar plan in 2019, as well.) “We need to actually engage in creating new places that can compete with existing superstar cities,” Gruber told me. If Americans can’t move toward tech jobs anymore, we need to move the tech jobs toward them.

Advertisement

Gruber and Johnson’s proposal was grand in scope: They suggested the government spend $100 billion per year on new R&D ventures, and identified 102 cities, from Rochester, New York, to Tuscaloosa, Alabama, with the right combination of college grads in the workforce, university presence, and quality of life that they could make plausible tech hubs. Their idea was picked up by Rep. Ro Khanna, the California Democrat representing Silicon Valley, who turned it into a bill in 2020.* The concept eventually shrank down to bipartisan size in the Endless Frontier Act spearheaded by Senate Majority Leader Chuck Schumer and Sen. Todd Young, the Republican from Indiana, which was folded into the wider USICA. The technology hub competition is just one piece of a deal that, among other things, would also boost funding for the National Science Foundation and create a new technology directorate within it focused on applied research in critical fields, provide subsidies for domestic computer chip manufacturing, and send more money to the national labs and DARPA. But if the bill passes, the hub contest could become the most public symbol of a new national push to fund the sciences.

Advertisement
Advertisement

One obvious question is what these new technology hubs would actually look like in practice. Based on the bill, that’s not entirely clear. It would let cities and states use the money—some of which they would have to match—for everything from workforce development to building out tech incubators and testing facilities. Another piece of the legislation would provide a separate $9.5 billion to fund new academic “innovation centers” at universities focusing on key tech areas; in theory one of those could also be part of a hub. You can imagine a city trying to build something similar to North Carolina’s famed Research Triangle Park, creating a space where private industry and university talent meet and develop products. But it might not be something quite that concrete.

Advertisement

And what are the chances any of these tech hubs will succeed? That’s anyone’s guess. Federal spending has often played a critical role in building up local tech ecosystems—military and NASA contracts were crucial to Silicon Valley’s nascent semiconductor industry in the 1960s, for instance. But most of America’s most important tech centers grew up somewhat organically; the only one that was truly planned ahead of time is Research Triangle Park, which was founded way back in 1959. Meanwhile, the history of regional development is littered with examples of science parks and tech incubators that never really lived up to their ambitions.

Advertisement
Advertisement

Gruber, for his part, told me he expects that some of the tech hubs simply won’t work out. “Failure does not mean, you know, the Big Lebowski and dust balls blowing through the prairie. Failure could mean you just don’t grow any faster,” he said. “But it’s true. You’re not going to create 18 Seattles. You’re just not.” The political question, he said, is whether lawmakers and voters will be willing to think like venture capitalists, who know that only a handful of their investments work out, but pay off massively. He admits that recent history isn’t encouraging on that front: President Barack Obama’s green energy loan program is still remembered largely for the failure of solar panel–maker Solyndra, even though it successfully kickstarted the American renewables industry.

Advertisement

Then there’s the issue of funding. At the moment, the bill calls for the Department of Commerce to submit at least three new hubs in each census region, for a total of 18. That leaves about $556 million for each, dolled out over five years. If you include the separate pot of money for university innovation centers, it comes out to potentially a billion each. That is, to put it bluntly, not a lot of money if your goal is to transform the economy of a metro area. In its proposal, the Brookings Institution suggested that it would take $6.9 billion over 10 years to turn a city into a tech hub. It based that calculation on the amount of federal money flowing to universities in places like San Francisco, Boston, and the Research Triangle.

Advertisement
Advertisement

Khanna, who has sponsored a version of Endless Frontier in the House, told me he’s worried about Congress stretching funding so thin that it will prevent any one hub from becoming successful. “I think it’s important that you limit the number of tech hubs and that you have competent execution.” At some point, as this bill makes its way through the House and toward final passage, lawmakers will have to choose between handing out money to as many cities as possible to make their voters happy, or making sure some of these efforts have a chance at succeeding. Otherwise, it might not do much more to spread the tech industry around than Amazon’s big sweepstakes.

Correction, May 27, 2021: This post originally misspelled Rep. Ro Khanna’s last name.

Advertisement