The Toronto Exodus and Regional Economic Development

I received a mountain of thoughtful questions and comments after I published Examining the Exodus out of Toronto, a piece about how young families are getting priced out of the GTA due to the cost of housing and daycare (while housing gets all of the attention, we shouldn’t overlook the impact of high GTA daycare costs on young families). There was story after story from young parents, who moved out of the GTA and took lower wage jobs elsewhere, simply because they could not afford to raise a family in Toronto.

Ontario has an economy where young families are actively moving away from where jobs are being created. That’s a big problem.

I also received a number of great questions, along the lines of “why the focus on making Toronto more affordable — aren’t there other solutions?” Of course. We can group solutions into three big buckets:

1. Policies to make it easier for young families to live where jobs are being created.
2. Policies to cause job creation in the places young families can afford to live.
3. Policies to make it easier to live in one place and work in another (e.g. train service from Kitchener to Toronto).

Although my piece focused on the first bucket, my day job largely revolves around the second. It’s the question that has consumed me for the last decade — how can we ensure there is economic opportunity in the 21st century in places which are not “big cities”.

Of our three buckets, “job creation in non-big cities” is the most ideal. Families could have a nice house with a decent sized yard. We’d avoid big city congestion. We wouldn’t have to spend billions on transit infrastructure. Economic opportunity would be dispersed across the province.

Here’s the problem: Clustering and the “geography of jobs” are mostly determined by economic factors outside the control of any government. Most regional economic development strategies are counterproductive and a waste of taxpayer dollars.

I cannot recommend highly enough Enrico Moretti’s book The New Geography of Jobs which is the single best resource on what causes industry clusters and the role of public policy. This piece at Stanford Business School (free) is a good summary of Moretti’s arguments. Moretti doesn’t pull any punches:

It’s tough because, in some sense, if this clustering effect is particularly strong, it’s good news for places like here, but it’s terrible news for places like Flint or Detroit. A successful local labor market has a very nice equilibrium, where you have a lot of skilled workers who want to go there and a lot of innovative employers who want to go there. It’s really hard to re-create somewhere else.

And it’s not like we’re not trying. We’re spending $15 to $18 billion annually in what economists call place-based policies, which are essentially subsidies to try to attract employers to these areas. The idea being: “They’re not coming, so if we just break this vicious circle, if we just bring some, then the clustering effect starts taking off. We can effectively create innovation hubs where they don’t exist.”

These place-based policies are not only counterproductive, they are also regressive — they transfer dollars from taxpayers to some of the largest corporations in the world. The Wynne government was particularly fond of them, giving hundreds of millions of dollars to multinationals like Cisco, which I said at the time “easily ranks as the worst Canadian public policy of 2013.” I still believe that. Though, in fairness, it was not nearly as bad as trying to develop an automotive assembly industry in New Brunswick.

Alternatively, you have jurisdictions like Kansas, who believe the way to create clusters is through large deficit-financed tax cuts to corporations, which did not cause an economic boom but did nearly bankrupt the State.

So what can governments do for regional economic development, if they cannot effectively counteract the economic forces of clustering? Here are two things that can work:

1. Creating the initial conditions for cluster formation.
2. Removing the bottlenecks to firm growth in already existing clusters.

For the first, creating strong regional universities and colleges can play a helpful role. John Michael McGrath has written about this in the context of Ontario. Noah Smith’s work on how research universities have “transformed the economies of entire regions” is a must-read. The best thing the province of Ontario could do is take the higher education assets we already have in places like Chatham-Kent and turn them into fully independent universities and colleges, just like the province did with the University of Waterloo back in the 1950s. Waterloo is a perfect example of creating the initial conditions for cluster development, though we should also recognize that the process took several decades.

For the second, I co-authored an entire book about it, Towards an Inclusive Innovative Canada [free PDF download], which included “10 Big Ideas” on accelerating innovation, many of which focused on helping regional economies flourish. Of the 10 ideas, the easiest one for a government to implement is to codify the rules around non-competes (that is, essentially ban them), which would help thicken labour markets. The core idea is to identify the bottlenecks preventing already existing industries from growing larger and more successful than they already are.

My current work at Smart Prosperity continues on this theme. I’m examining the role of public policy to meet Canada’s two big priorities in the agri-food sector. The first is to meet the growth targets for the sector, as set out by the Report of Canada’s Economic Strategy Tables: Agri-food which, if successful, would create jobs and opportunities in many rural and small-town economies. The second is to reduce the environmental footprint of the sector, which includes everything from greenhouse gas emissions to the eutrophication of Lake Erie.

There’s also the third bucket of policies, around transport links between cities, which I’m not currently working on but is incredibly important. Better transportation links increases the geographic footprint (in an economic sense) of a city through a concept known as Marchetti’s constant. It also thickens labour markets and creates economic opportunity in mid-sized cities, through a concept known as “option value”. But I’ll leave that for another time.