Here’s hoping that in the closing weeks of the county mayor’s campaign, our struggling economy – when compared to peer cities – would take center stage with a discussion about what to do to create a better performing and more equitable economy, to jumpstart better results, and to develop a real plan to diversify an economy that today is too reliant on low-skill, low-wage jobs.
With its reliance on agriculture and commodities for much of its history, the Memphis region has a long-time focus on cheap and low-skill labor, and even when the city was home to several large banks, they were timid in their loan policies and supported companies with that traditional focus.
The 1979 Memphis Jobs Conference, held in the midst of an economic crisis, was convened to turn the economy around, but in retrospect, it was just a more evolved emphasis on cheapness with its priorities of tourism and hospitality, distribution and logistics, and agribusiness.
City and Chamber officials even sent that message with new welcoming signs at every city entrance – Welcome to Memphis: America’s Distribution Center. It was hardly the convincing argument that was needed to position Memphis nationally for high-skilled workers or to encourage the educational and workforce investments needed to create workers who could compete in a knowledge economy.
A Fatal Flaw
That’s been a fatal flaw: commodity economic development appeals to companies who make their decisions based on the lowest prices. This kind of economic development has been a race to the bottom and thinks Memphis wins if it can offer cheap land, cheap labor, cheap utilities, and cheap taxes (in the form of the most liberal tax freezes policies anywhere).
And yet, the other side of the coin is an aversion to risk-taking, which in turn undercuts innovation and entrepreneurship.
All in all, after the past half of century of blind obedience to this kind of economic development, we have come to the point where we need to answer Memphis and Shelby County’s most pressing question: Could it be our fate that Memphis salaries are just too low to inspire innovation and development in the local economy?
This was the question asked in the blog post earlier this year by David Ciscel, economist emeritus for University of Memphis’ Fogelman School of Business. He wrote: “Low wages do not inspire new capital investment. Business finds that using old technology is sufficient to make a good return – in the present. But without development, the future is very uncertain…Back in the 1980as, we hoped that logistics would move us to a gallop. There was the dream that robotics and transportation would combine to make the Memphis economy growth rapidly again. But the spurt that logistics clearly gave the local economy did not last. “ And part of the factor of regional stagnation may have been that Memphis wages, not just in logistics but throughout the local economy, were just too low to inspire large investment in innovative and labor-saving improvements to the regional economy.”
Is Cheapness Really An Advantage?
We were reminded recently of Dr. Ciscel’s wise commentary when we read a post by Portland economist and lead commentator for City Observatory. It too had important advice for Memphis and Shelby County “Being cheaper may not be an advantage at all in a dynamic, knowledge-based economy.”
Here’s what Mr. Cortright wrote:
It’s axiomatic in the world of local economic development that the sure-fire way to stimulate growth is to make it as cheap and easy as possible to do business in your community. Area Development, a trade journal for industrial recruiters rates states every year. They’re clear about their criteria:
What’s it take to be recognized as a top state for doing business? . . . The overall cost of doing business is, of course, a primary consideration, one that encompasses a wide range of components, from real estate costs to utility rates to labor expenses.
So it’s a seeming paradox that some of the most expensive, highly regulated places are routinely the most entrepreneurial and innovative. Cities like New York and San Francisco have some of the most expensive rents, and their workers are highly paid. And yet, year in and year out, they generate many of the most creative and successful businesses.
In part, we suspect it’s because cities function as rigorous selection environments for businesses. By selection environment, we mean that the characteristics of the city systematically favor some kinds of enterprises and disadvantage others.
Low Costs: No Need To Innovate
If you have a low margin, low growth business that’s sensitive to land costs or worker wages, you’ll likely find that its cripplingly expensive to do business in a San Francisco or New York. The only businesses that can survive in such a location are the ones that are innovating quickly enough to be able to afford to be there. You need to be highly profitable, or on a plausible track to generate profits in order to pay the bills. Businesses that can’t meet those tests don’t start there, are more likely to fail, or will move away. The result is that surviving businesses are likely strong competitors.
As Frank Sinatra told us in the the famous refrain from New York, New York: If I can make it there, I’ll make it anywhere.
The tough competition for market share, recognition, capital and talent in these cities means that, disproportionately, the strongest business concepts and capable management teams move forward. The press of competition also forces firms move quickly, lest they be left behind.
The converse is also true: low cost locations may insulate businesses from the need to innovate. If rents are cheap, taxes are low, and labor is docile and low paid, there may be little reason to undertake the risk and expense of new equipment investment, worker training, or research and development. Economists often speak of “the resource curse“–that an abundance of some valuable natural resource, like gold or oil, skews a local economy’s activity away from innovation and entrepreneurship. In a sense, cheap housing and low business costs can be a kind of resource curse.
There’s an additional factor as well: cheap housing tends to attract and retain low skilled workers. If you live in a place with low housing costs, you may find it too expensive to move to a place like New York and San Francisco–unless you have the kind of skills that will get you a job that pays enough to afford high rents. So workers may self-select as well–and as a result, employers in low cost housing markets will have a lower skilled labor force.
Selective factor disadvantages: What doesn’t kill you, makes you stronger
Economists tend to focus on the story of comparative advantage: that economies tend to grow and flourish in those industries to which their natural and human resources are most conducive, relative to other locations. But in some cases, as business strategist Michael Porter has pointed out, comparative disadvantages can prompt innovation.
What is not so obvious, however, is that selective disadvantages in the more basic factors can prod a company to innovate and upgrade—a disadvantage in a static model of competition can become an advantage in a dynamic one. When there is an ample supply of cheap raw materials or abundant labor, companies can simply rest on these advantages and often deploy them inefficiently. But when companies face a selective disadvantage, like high land costs, labor shortages, or the lack of local raw materials, they must innovate and upgrade to compete.
With a lack of coal and high cost electricity, Italian steelmakers were an absolute competitive disadvantage to British and German steelmakers. Their disadvantages forced them to innovate, and their highly efficient electric mini-mills made them a flexible, low cost producer.
The fact that some factor disadvantages can stimulate an adaptive response with an economic upside doesn’t mean that one should treat this observation as a universal rationalization for high business costs. The key word in Porter’s formulation is “selective.” That suggests that you need to look at business costs, and the business climate, in a more comprehensive and nuanced way than is presented in the usual index rankings compiled by Area Development and its ilk.
You can build a simple, static model of economic competition in which having the low cost always wins. But in a rapidly changing knowledge economy, the ability to continuously create new ideas, new products and new businesses is the key to success and being “dynamically efficient,” as Douglas North put it. Cities are the selection environment that gives rise to new businesses, and the cheapest location is unlikely to be the one that optimally selects robust competitors.
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Memphis is a poor city in so many measures.
Salaries here are historically low and have not improved with our bad bet on distribution and warehouses being the base of the local economy.
It’s really hard to inspire innovation of any type in a city where poverty and crime are out of control.
I should weigh in on this topic, since I feel strongly that the ‘low wage’ strategy, that we have used for years, is a bad one. Converting to a high wage/high income economy is not easy. But Memphis has been big in three areas: logistics, retail, and medicals services. In each of these industries there has been and still is a lot of turmoil. We do not know where they are going end up. In trade, we have always been strong — both in wholesale and in retail. Not only has the geographic range of trade expanded, but the meaning of trade has completely changed as ecommerce has partially replaced brick and mortar stores. Logistics has transformed Memphis a couple of times already, and the sector continues to evolve with AI in airplanes and trucks, and robotics in the warehouse. Medical services is, of course, one the fastest evolving sectors in the US. So we are not trapped by the low wages in these three sectors — we are primed to take advantage of the opportunities in these economic sectors. Will we take advantage of the potential offered this community — or will Omaha or Louisville be leaders? Time and commitment will tell.
Thank you, Dr. Ciscel. We always value your experience and insight. It should be used to guide our economic development policies.
While cheap is a concern in driving value and innovation, I see an even perhaps more fundamental problem. That is being closed to new ideas, approaches, innovation and just basic course correction of what is Not Working. It appears to be a social construct bent on protecting the status quo over and above what is typical in other communities which results in a Rigged State and systematically protecting what is Not Working….
Joe B Kent is correct about Memphis being very closed to new ideas and innovation.
It’s always the same tired people who seem to be involved in everything and very little progress is ever made. A good example is the group of former Commercial Appeal writers going to a “new” publication. Where is the new blood here?
Memphis continued to be badly hampered by the lack of a world class university, especially for medical services. We need an institution like a Vanderbilt or Duke here to spur all sorts of things in both education and the economy. I would albet on a Louisville or Omaha far outpacing Memphis any time.
Memphis is just barely keeping its head above water. I agree that most people here think the status quo is just fine. That is very disturbing and does not bode well for the future.
I remain much more upbeat that the other comments on Memphis. I really believe that everything is here. We are just not moving it. And, to be honest, we are not sure how to move it. In medicine, we have a huge medical research institute that most cities would kill to have, we have an OK medical university, and a good state research university. So why can’t we marshal these institutions to make medical services really take off? I am not sure, but the fundamentals are in place.
Memphis is a strange place — we are a full employment stagnant economy. I am baffled, but not downbeat.
My target audience for much of my writings and research has been the highly educated in Memphis. Many of them who I know and are not intimately involved in the Memphis Corporate Community Leadership complex but have been in Memphis all of their professional lives.
They know nothing else but local community leadership and have been locally successful as the Memphis ecosystem has declined without an external event. Those people are starting to look around and scratch their heads. The problem is a rigged System that lacks the vitality to course correct due to deficient culturally normed corporate community leadership that resides largely in the unchecked economic development and 501c3 complex. It’s a system that has taken on qualities of the Crump Machine of 100 years ago which is a little outdated for the global economy.
Other cities are dysfunctional and inefficient but eventually course correct but not Memphis. So many highly educated in Memphis know nothing else and they don’t know that they have been saddled with a highly deficient and culturally normed largely taxpayer funded corporate community leadership complex…
The work requires that you let the educated know that groups that they trusted and even perhaps feared in for example Memphis Tomorrow don’t know what they are doing regarding economic development….Memphis Tomorrow is way down in everyone of their areas in public safety, workforce and economic development which can’t be defended. The good news is stop listening to the same people in for example Memphis Tomorrow and things can only get better….
Joe B Kent: One of my favorite local outcomes is the “nationwide search” for a new board member or community leader. Somehow we ALWAYS hire a local. And once that person is installed they will have that job for life. Think of the head of local convention and visitors bureau even scandal could not dislodge Kevin Kane. He will never be recruited by another city; he will never crave a new experience; only when he’s ready will he go and when it time for him to retire he will appoint his successor. This “leader for life” is a disaster for new ideas and bold thinking. This is what happened at the airport. In order to get his massive pension Larry Cox was allowed to stay in place longer than Saddam Hussein ruled Iraq. And then he appointed his own successor.
Matt: The Rigged nature of things here in Memphis is what takes vitality out of the system allowing for course correction, new ideas and small business to flourish. That’s the problem with small business vitality here is the closed rigged culture. I dont think its a racially related as folks make it out to be but more about a rigged culture. I have been trying to get some business here locally for an unmet economic development need for which I am uniquely qualified for 3 years now and have had no luck. Based on the rigged state of things here which is beyond the common dysfunction and inefficiency that you see in other cities, I began doing research as I pursued professional goals. Like someone goes undercover as a homeless person to conduct research, I have gone undercover as a small business trying to make it in Memphis and conducted research. Right now, I am probing/challenging the system to get the legislative bodies to actually lead the economic development effort and not wait on the local Memphis Tomorrow, EDGE, Chamber complex like they are supposed to be doing. I am asking them to do things like hold public hearings and take up the needed work to restructure EDGE. Given the current state of things its amazing that they have not already been holding unrigged public meetings taking in testimony and etc to chart a way forward. This request for more public meetings with regard to economic development just flies in the face of the closed rigged nature of things here locally. Anyway, here is my research at http://mcclmeasured.net
The connection between salaries and innovation is an interesting one, but I wonder if you are confusing cause and effect. Perhaps salaries are low here because the average talent level indigenous to our region just isn’t very impressive? It takes curiosity, creativity and initiative to innovate. Businesses looking for those talents cannot find them in this region to the extent they can elsewhere. We are hardly sitting in the intellectual or academic breadbasket here.
Yes, there are globally-competitive companies here who MUST pay good salaries to attract the talent they need to stay globally competitive and to overcome resistance to moving to non-glamour market like a Memphis. But even then, they aren’t going to lure the cream-of-the-crop talent that feels like it has to go the magnet cities or risk economic and social irrelevance.
One cannot expect businesses to pay higher top-tier salaries speculatively to lower-tier talent, hoping that innovation will spontaneously breakout. We have to raise the value of our own home-grown workforce by cultivating a culture of knowledge and innovation. This means we need institutions with demanding curriculum, opportunities for collaboration with global leaders in their fields. I believe this is what has happened in Nashville during the past three decades. That city was in no better shape than Memphis in the 1980s and early ‘90s. But since that time has leveraged its large output of university-educated graduates to attract higher-paying employers in finance, health care and other industries, until reaching critical mass where it finds itself today (combined with a media/entertainment/tourism machine and state government we can’t expect to replicate).