Get Ready for Disruption
Understanding the future of the economy is part of the job of Geoffrey Hewings, professor at the University of Illinois and director of the Regional Economics Applications Lab. Andrew Benedict-Nelson of Insight Labs peered into that future with him.
Andrew Benedict-Nelson: At your institution, you use certain methodologies to make economic predictions about various regions. Could you tell me about some of those methods and how they work?
Geoffrey Hewings: Basically we try to understand how economies work, how they change, and what the implications of those changes are likely to be. We don’t worry about what the exact population will be so much as we worry about the direction of change and the orders of magnitude of change. When a lot of people hear about forecasting, their first question is, “How accurate are your forecasts?” That’s a relevant question, but the main question is whether we’re getting the direction of change and the rate of change right in industry and demographics.
So as part of our process, we come up with a best guesstimate about how sub-national economies are going to grow. Then we do some sensitivity analysis. So if the rate of immigration were to change, for example, how would that affect the economies of Chicago or Illinois or the Midwest? Or what about something like the potential that advanced manufacturing or 3-D manufacturing could change locational dynamics?
We’ve gone through a period of 15 to 20 years where firms who were in supply chains were asked by the people to whom they sell, “What is your address going to be in China?” The implication is that if you don’t move to China, you won’t be competitive. But the Boston Consulting Group has estimated that wage rates in China could approach those that we currently see in Eastern Europe within three to four years, and the rest of the Europe or the U.S. in three to five years.
That has very important implications for regional forecasting. If you look over the last four decades, first firms moved from the Midwest to the South. Then they moved to Mexico because wages were cheaper. Then they moved to China because wages were cheaper. Now they’re moving from China to Indonesia, to Malaysia, and so forth. Where do they go next? The only unknown in all this is the potential for Africa, where there are currently huge logistical challenges, problems with training, problems with governance.
But my sense is that when we look at the future, when we try to predict four or five years ahead, we’re going to see changes that we haven’t even thought about yet. This advanced manufacturing or 3-D manufacturing is a very good example of that. It was there lurking in the background for years, and now it’s all anyone wants to talk about. So this is a process that engenders a huge about of humility about our ability to make forecasts. But we always make the caveat that forecasts are based on assumptions. If the assumptions change, the forecasts could change dramatically.
So what if 3-D manufacturing became a dominant mode of production? Would we see massive “onshoring” of jobs, as some have predicted? Or would it just slow down the erosion of manufacturing jobs? That’s an example of the kind of thing we do.
The other area that we are spending a lot of time thinking about are demographic changes, and in particular those engendered by the aging population. By 2030, 20 percent of our population will be over 65. As I drive into Chicago, there is a billboard from Prudential that says that one out of every three babies born this year will live to be 100. Those things make an enormous difference. When undergraduates come in to see me, they worry that they don’t have their career job at 21 or 22. But I tell them not to worry, since they’ll probably be working until they’re 75! They have some time to figure it out.
Andrew Benedict-Nelson: Let’s talk about 3-D printing a little bit more. I’m curious about that as an example of how economies could be re-configured. So let’s say that what you said happens, and 3-D printing becomes the dominant mode of production. How might that affect a person who works in a white-collar job or another industry entirely?
Geoffrey Hewings: Actually, the distinction between blue-collar and white-collar jobs would largely disappear. This is already evident if you walk around a modern auto assembly plant. Now I’m about 5′ 7″. I can’t dunk basketballs. I never could have worked in an auto assembly plant lifting 80-pound doors all day. Now I see young women who weigh less than I do putting doors on cars through robotics. And the emphasis in that work environment is on coordination, the active use of computers, working in teams, understanding and diagnosing problems. That’s very different from the standard vision we have of a guy schlepping heavy things around a factory.
So if you fast-forward ten or fifteen years, we’ll probably have people who work in manufacturing going to work in suits. Well, metaphorically anyway — hardly anyone goes to work in a suit anymore. But the distinction between the manufacturing and service sectors will blur. The skills you would need to work in the manufacturing industry will be closer to those you would need to work in the medical profession or the legal profession. That will be one of the most dramatic changes of all.
For the second part of this, you could look at something that was said by Robert Reich, the Secretary of Labor under Bill Clinton. He said that somebody entering the workforce at the beginning of the 1990s is going to have to be trained or re-trained up to six times. What that implies is that as we look ahead 15 years or so, that may increase. I don’t know about you, but my inbox is full of offerings to do everything from managerial training to courses in Excel and other software tools. There is this constant sense of having to invest and re-invest in what we know. That process will just accelerate.
So the people operating firms will realize that investment in human capital will be one of the most important expenses. In the same way they upgrade machines, firms are going to have to upgrade human capital. And a big question is who exactly is going to do that upgrading? One of the biggest problems that we have right now is that our education system is ossified into these two-year and four-year increments. I think we’re going to have to re-think a lot of that, using shorter time increments for re-training.
Andrew Benedict-Nelson: It sounds to me like you’re talking about every profession becoming more like computer coders. Most folks who do that professionally have become accustomed to the idea that they’re going to have to acquire new programming languages and techniques. And college degrees aren’t very relevant to them.
Geoffrey Hewings: Yes. If you look at the University of Illinois, we offer degrees in things like management, human relations, advertising, logistics. But we don’t offer a degree in how to put things together, what you might call “production engineering.” I think that in the future, we’ll have degrees like that. It will be work you do with a computer instead of your hands. And it would require an enormous range of skills, from visual design to manufacturing systems to problem-solving skills. It would be sophisticated and intellectual.
Andrew Benedict-Nelson: I think this explains some of the schizophrenia we see in education right now. Some people are really clamoring for specific technical skills to be built into the education system — they think we should teach everyone programming languages like Ruby on Rails. While other folks are saying that all an education can really do is help you learn how to learn, and the specific skills are going to change over time. I think that thinking about a discipline like “production engineering” could give you a happy medium between the two. Presumably someone with a degree like that would need to know some eternal principles of visual design, for example, even if the system used to put them into action changes every year.
So what might these changes look like to people who think about economic policy?
Geoffrey Hewings: It’s going to become very difficult, because as the economic changes accelerate, no one individual office will be able to work alone. And unfortunately, agencies and cooperation have sort of an oxymoronic relationship. In the greater Chicago area, you have layers and layers of organizations and agencies that are not operating together very effectively. That presents a major challenge if you need to bring about rapid change. At some point we’re going to have to re-think how all of this is coordinated so that policymakers can actually make strategic decisions.
Obviously we don’t want any actions taken without careful deliberation… but just doing something like getting a new degree program at the University of Illinois would probably take three to five years. That’s far too long. I think the concern over states’ competitiveness will move to things like that rather than more traditional concerns over things like logistics costs, wage rates, and taxes.
Remember, firms are going to have much greater locational flexibility. Here’s where I disagree with Tom Friedman. He said the world will be “hot, flat, and crowded.” But the world will not be flat — the world is incredibly spiky. It will probably become even spikier, because the differences in places will include all of these response factors and how quickly we can adapt, how quickly we can respond to new opportunities.
Andrew Benedict-Nelson: What about an even higher level of economic policy, folks like the Department of Commerce or the Federal Reserve?
Geoffrey Hewings: I think one of the paradoxes we see happening is that states and countries are at the same time becoming more competitive with each other but also more complementary. Here’s a good example. Supply chains have become more expensive because of what we call the fragmentation of production. Producers are breaking up their processes into more and more differentiated operations. These are designed to be located in sites where they can take advantage of economies of scale. So instead of having one plant in Indiana, one in Wisconsin, and one in Ohio that all do the same thing, they now specialize in different aspects of production. One will bend the metal, the next will coat it, the next one will put the parts inside it, etc.
These separate actions may take place in different states. And states also compete with each other to attract these different activities. Thomas Klier of the Chicago Fed noted that the average automobile component is now moving across four or five states before it ends up in a car. So when the governor of Indiana foolishly decided to spend money on an advertising campaign to lure companies away from Illinois as a result of the increase in the income and corporate taxes, he was not successful. Because firms are very much aware of their supply chains and the advantages of the locations they’re using now. For them to change is very expensive. They already understand how integrated they are into an interconnected regional economy.
If the five states of Wisconsin, Ohio, Michigan, Illinois, and Indiana were part of a free-trade area, we would be something around the sixth or seventh largest in the world. We think about trade as meaning China or Brazil, but only 15 or 16 percent of the trade out of Illinois is with other countries. The rest goes to other states, though some of that may eventually end up in a product in Ohio that goes to another country.
Firms are becoming very aware about how a one or two percent cost margin in one component can make a huge difference. So one of the fastest-growing parts of the accounting profession are people who know how to figure out the best place to locate something and price it in a way to minimize taxation, either where it’s produced or where your headquarters might be.
But with this increased fragmentation, you also have increased vulnerability. You saw this with the earthquake and tsunami at Fukushima. Toyota had concentrated the production of the chip that tells the hybrid car whether to use the battery or the gas engine in Fukushima. This was to drive down costs. When the plant was destroyed, they lost the ability to manufacture thousands of units as a result of deciding to save maybe five dollars on this one chip.
Many firms are experiencing this kind of vulnerability in their supply chains. There is often no other place to manufacture a particular component, and even if there is, it’s dedicated to some other part of the supply chain.
Andrew Benedict-Nelson: It seems as if you’re making the system more efficient in normal times but more fragile in times of crisis, which is an interesting property for a system to have.
Geoffrey Hewings: If you fly a lot, you’ll see another example of that. There is virtually no spare capacity in the airline industry. So the cancellation of one flight can create havoc. So our capacity to deal with crisis and disruption is now more difficult and expensive.
Andrew Benedict-Nelson: How should people who run businesses respond to that? You can see their dilemma. On the one hand, you want to wag this finger at them and say, “Plan ahead!” But to stay in business, they have to compete with all of these other folks who are making their operations more efficient in these ways all the time. Sure, you could maintain a complete backup supply chain, but it would be so expensive that your company would go out of business before the crisis comes along that forces you to use it.
Geoffrey Hewings: In many cases, they’re taking risks just as you describe. They think of the risks as just part of the cost of doing business. Many of them have just chosen to hope that everything goes well, and if it doesn’t, it will be difficult and expensive. But carrying that excess capacity could be more expensive. On the other hand, you also have to think about how it affects your credibility with customers and things like that. That’s an open question.
Andrew Benedict-Nelson: This helps me better understand events like the Deepwater Horizon blowout in the Gulf of Mexico. I was amazed at the time that no one really had the capacity to fix the problem — not government, not the corporation, not engineering schools. BP paid a huge cost for that in the end. But then again, BP still exists, which suggests that companies can take these big risks and survive.
So you spend a lot of time thinking about and modeling a particular region, the Midwest. Can you give me a kind of Trailways Bus tour of the Midwestern economy in 2023?
Geoffrey Hewings: I don’t think it will look dramatically different in terms of the mix of activities. Most of us are wondering what the nature and composition of cities like Chicago will look like. My guess is that you might see a five to ten percent shift in the share of employment in any one sector or another.
My frustration when I look at a region like the Midwest is that we don’t understand or exploit its interdependence enough. Our local politicians and decision-makers still think that the political boundaries mean an awful lot. There is a lot of zero-sum game thinking. We think of the development of Michigan coming at the expense of Illinois. But in fact, we are so interconnected that turning around a city like Detroit would have huge spillover effects for the rest of the region, so we should all be really invested in that. If they are successful, it would indirectly generate lots of jobs in Illinois, Indiana, Wisconsin, etc.
But this idea is not embedded in the DNA of our decision-makers.
Andrew Benedict-Nelson: Sure, it feels like all we do is play the old game of boosterism badly.
Geoffrey Hewings: Yeah. You can support your state. You can enjoy beating the other states’ teams in sports. But the economic game is a very different one, a more subtle one. It would be nice to see mutualism and complementarity enter the political lexicon. We seem to understand the benefits of trade internationally, but we don’t apply the same ideas regionally.
Andrew Benedict-Nelson: Right. Think about all of the work that has gone into the project of Europe since World War II. While it’s being tested, there’s at least some capacity to deal with trade disputes and that sort of thing. You would think there would be similar mechanisms to work things out between Illinois and Indiana.
Geoffrey Hewings: It would help if we regularly published interstate trade statistics.
Andrew Benedict-Nelson: So if we went back to 1950 and you had a crystal ball, I could ask you a question like, “Hey, tell me about a really interesting place to live in 2000.” And you might say, “Silicon Valley.” That answer would tell us all sorts of things not just about a certain part of California, but about changes that had occurred in the whole world. So as a person who works on regional economics, where do you think will be a really interesting place to live in 2023?
Geoffrey Hewings: The most interesting dimension of this question to me is the 20 percent of the population that will be over 65. Where will they choose to live? I think you’re seeing a sort of bifurcation. Those who are seeking solace and the sun are still heading off to Florida. But a large number of those people are also deciding that the downtowns of our cities are really interesting. A large number of our twentysomethings and thirtysomethings are telling employers that if they don’t put their IT functions downtown, they’re going to leave. They don’t want to live in the suburbs. They don’t care about the quality of the schools.
So I think that over the next ten years, even without any major policy initiatives, the market will respond to the re-attraction to central cities. The only sad part is that when you look at places like Detroit, there is a huge wasted opportunity. The contrast between Detroit and Chicago speaks volumes about the importance of creating environments that respond to change and have a life of their own.
With increased flexibility, I think we’ll have less of this notion that everybody wants to move to California or Florida or Utah or wherever. Since 2000, migration rates have actually declined — and it’s not a function of the recession. We’ve become less mobile in some ways, and a number of my colleagues are trying to understand why that is. We could end up with much greater mobility within metropolitan regions instead of between metropolitan regions.
I remember one day I ran into my neighbor. There had just been a big snowfall, and I made a joke about moving to Florida. But he said, “Oh, we just moved back.” I said, “Why?” He said, “It’s full of old people. We felt like we were living in death’s waiting room. All anyone could talk about was Medicaid and Medicare, who’s dead and who’s dying. I came back into Illinois and within a month Blagojevich had been arrested and the Bears blew it in the playoffs.” There was plenty to talk about.
So I think a lot of people are re-discovering cities as interesting places to live. If it’s an interesting city in a nice climate, great, but the interestingness may trump the weather. That’s how Minneapolis-St. Paul can be the fastest growing city in the Midwest.
The point is that a lot of the factors that might have made somebody move somewhere 20 years ago are changing. We’ll have much more flexibility in terms of job location. So it’s the amenities, attraction, diversity, quality of restaurants, the arts, etc. that are going to drive these decisions.
Andrew Benedict-Nelson: It could really change the way we think about the value of place. Do you know the recording artist Bon Iver?
Geoffrey Hewings: No.
Andrew Benedict-Nelson: Well, it doesn’t really matter — Bon Iver is basically this guy who lives up in Eau Claire, Wisconsin. And in the past few years he’s become a big international hit. The point is, he never had to leave Eau Claire and become part of a “scene.” And as a result, he’s sort of made his own “scene” out of rural Wisconsin. Yet an artist who wanted to imitate him would never move there to do it.
The point is that if businesses make decisions the same way, it will make almost no sense to try to guess where they’ll spring up. You wonder if you’ll end up with something totally idiosyncratic, like trying to study the economics of first names.
So what happens to the legal industry in the world we’re talking about?
Geoffrey Hewings: The question is whether it would be more efficient for the industry to grow or shrink. We have one-third of the world’s lawyers in the U.S. I think that many interesting niche markets will develop as a result of specialization and innovation. Things like patent law are becoming much more complicated now. Whether you regard it as positive or negative, that could be a huge opportunity for the legal profession.
Andrew Benedict-Nelson: And you would presumably need all of the rapid re-training that we discussed in regards to manufacturing?
Geoffrey Hewings: Right. You’ll need people who do things like law and economics or law and computer science. You’ll also have a lot of medical lawyers — not ambulance-chasers, but people who understand the innovations in medicine and how they work. This stuff requires a huge investment in specialized knowledge that will not necessarily be legal in nature.
Andrew Benedict-Nelson: Do you think that the idea of a profession helps or hurts that kind of transition? At the very least, lawyers already have to do things like continuing education.
Geoffrey Hewings: But that kind of thinking has got to change with the times. If you’re working on a case that involves computer technology, you might need something like a specialized understanding of how your innovation is differentiated from my innovation. Imagine how difficult it would be to propose specific modifications to make a computer program comply with the law. That requires a really specialized understanding of a field that isn’t the law.