The Biden administration’s ambitious place-based industrial policy aims to both revitalize struggling regions and bolster America’s strategic economic sectors, but these two goals often conflict. Walter Frick writes that while policies that boost economic prospects in distressed areas may not immediately transform them into innovation hubs, they could unlock the potential of future generations and ultimately contribute to the nation’s innovative capacity.
The world according to President Joe Biden is not flat—it matters where things get made. Since taking office, the Biden administration and Congress have undertaken a massive experiment in place-based industrial policy, meaning rather than merely allocating federal funds to a specific industry, they are further directed toward revitalizing specific local economies and regions. More than $80 billion has been authorized for place-based spending. The recognition of place in economic policy is overdue, but the administration is pursuing two distinct goals with its place-based approach, and they’re often directly at odds with each other.
This tension was on display in early April at a conference in Washington, D.C. on place-based policy, put on by the Economic Innovation Group (EIG), a think tank and advocacy organization. In his remarks, Jed Kolko, until recently Biden’s under secretary of commerce for economic affairs, distinguished between two “buckets” of place-based policy. First, the administration wants to lift up distressed or left-behind communities and reverse rising geographic inequality within the United States. Second, it wants to advance America’s capacity in key strategic sectors, like semiconductors, for national security reasons and to speed decarbonization. The goal in the first instance is to improve economic conditions in particular places, said Kolko. In the latter, it’s to find the places where the marginal dollar can be put to the most effective use.
Can one policy achieve both aims? In Kolko’s view, these two goals are tricky to combine—but reasonably well separated in practice. However, they have a way of getting lumped together whenever geographic inequality gets discussed. For example, when Biden’s National Economic Advisor Lael Brainard spoke at Brookings earlier this year about “place-based growth,” she highlighted both the administration’s efforts to aid severely distressed communities and to provide new funding for “innovation hubs,” which is intended to seed new technology clusters. Both of those agendas make sense on their own merits but the policies involved are very different—and they apply to very different kinds of places. For innovation hubs in particular, there is a real tradeoff between helping struggling places and furthering U.S. dominance over key technologies.
In late 2022, EIG developed a “Hubs Index” to guide the administration’s choice of innovation hubs. It combined numerous measures of U.S. metro areas’ innovative potential alongside measures of their economic need. The report nicely summarized the rationale behind the two competing goals of place-based policy:
First, consistent with the policy’s goals of promoting translational research, hubs should be located in metros that have the potential to invent new technologies and put those new technologies into practice. This includes, for example, regions with a great deal of human capital and regions with innovative and complex industrial bases. Second, consistent with the policy’s goal of bringing new regions to the technological frontier, hubs should be located in lagging regions or in areas that are otherwise undershooting their economic potential. This includes, for example, regions far from so-called superstar cities, regions with low prime-age employment rates, and regions experiencing brain drain.
Sure enough, EIG’s two measures—of potential and need—were significantly negatively correlated. The index illustrates the ways in which the goals of national innovation policy and helping left-behind places seem empirically at odds.
In late 2023, the Biden Commerce Department designated 31 tech hubs—essentially choosing them as finalists for five to ten “implementation grants” that will total $500 million. Again, the designees list illustrated the tension between place-based policies focused on innovation and those focused on “left behind” places. The 31 tech hubs skewed toward existing innovation clusters, according to EIG, and included cities like Chicago and Philadelphia. The Biden administration is trying to thread the needle, and to fund promising would-be tech hubs that lag behind “superstar cities” like Boston and San Francisco. The designees mostly fit the bill—enough innovative capacity to host a specialized tech cluster, but not able to rival the likes of Silicon Valley.
But while it may be possible to seed a new, wider circle of US tech hubs, those hubs are “agglomerative” by their nature. That means the ones that succeed will pull people and capital in towards them. And even if the U.S. innovation system broadens from half a dozen “superstar” clusters to 15 or 20, it would do little for the most severely distressed parts of America.
The tension of today’s surge of place-based policy is that at any given point in time policymakers face a sharp tradeoff between leveraging place for national innovation policies and combating regional inequality. That tradeoff is significant enough when comparing U.S. cities; it’s even more stark when rural areas are included. An ocean tech hub in Providence, Rhode Island sounds good as a matter of innovation policy, to use one innovation-hub designee as an example. But it will do little to transform the most economically distressed parts of the country.
More distressed places do have economic advantages, including lower costs of living and more economic “slack.” And remote work may make it easier for new clusters to pop up far away from “superstar” cities. Most importantly, superstar cities in the U.S. have not built enough housing to keep growing. These second-best concerns raise the possibility that the marginal dollar of tech funding may be most effective in second- or third-tier U.S. cities.
Nonetheless, economic geography is remarkably persistent and hard to change quickly. The Commerce Department has documented that the relative income of US cities hasn’t changed much since 1980, for example, and other research finds persistent differences in regional wealth since the 19th century. As for technology, a majority of the most important innovations since the 1970s have come out of either Silicon Valley or the Northeast, and have often taken decades to diffuse to other parts of the country. Part of appreciating the economic importance of place is recognizing that the most distressed places in the U.S. will probably not become innovation clusters anytime soon.
In short, it’s extremely hard to build innovation clusters—and in the best case it likely takes decades. That’s why it’s critical to keep the two types of place-based policies conceptually separate. There are a range of policies that can help boost employment in struggling places, like building public infrastructure or improving residents’ skills through community college workforce programs. The Biden administration is right to embrace them. However, these policies are not going to transform towns and cities into cutting-edge technology hubs overnight. To the extent that the Biden administration believes it is in a race against the clock to, say, build more domestic semiconductor manufacturing, it should therefore keep the two tracks of place-based policy separate.
There is, however, a silver lining. While the tradeoff between promoting innovation and lessening place-based inequality is sharp at any point in time, it’s less obvious over the long term. Policies that boost the economic prospects of distressed places can improve the lives of the people living there—especially the lives of kids. And so the payoff of those policies should be measured in generations. On that timescale it’s very possible that they could increase the innovative potential of distressed areas. As research by Alex Bell and colleagues has shown, kids with higher family incomes are much more likely to patent as adults. The worthy goal of lifting up left-behind places today should not be confused with urgent efforts to reshore advanced manufacturing or speed decarbonization. But those efforts to stem geographic inequality can unlock the potential of the next generation of inventors.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
