How to Build the Next Economy

The phrase "the next economy" has become common currency in the public debate about economics and public policy. The term itself has been used before--Paul Hawken's book, "The Next Economy," was published in 1983--but the term has evolved as the global situation has changed. So when we talk about a "next economy" in 2011, what do we mean, and how will it be different from what existed before?

My candidate for the next economy: one that is driven by exports, powered by low-carbon, fueled by innovation, and rich with opportunity. This is a vision where the U.S. exports more and wastes less, innovates in what matters, produces and deploys more of what it invents, and ensures the economy works for working families.

Why exports? Because the locus of world economic power is shifting. The top 30 metropolitan economic performers between 2009 and 2010 are almost exclusively located in Asia and Latin America. To grow and restructure, the U.S. must purposefully reorient its economy to serve urbanizing nations such as China, India, and Brazil.

Why low carbon? Because the clean economy will trigger a market transformation as profound as the information revolution, creating millions of jobs in the process. The energy we use, the infrastructure we build, the products we buy, the homes we live in, and the office and retail buildings we work in will be cleaner, more sustainable, and more efficient. The U.S. needs to engage fully in the low-carbon sector, expected to grow three fold to more than $2 trillion in the next decade.

Why innovation? Because we are on the cusp of an historic era of technological acceleration, which will dramatically change how people live, companies operate, and communities function. The U.S. must be at the vanguard of technological acceleration, a hot house of ideas as well as a platform for advanced production.

Why opportunity? Because the next economy offers the best chance to reverse the troubling, decades-long rise in income inequality and decline in jobs that pay decent wages and provide decent benefits. This will not just happen. The U.S. needs to upgrade the education and skills of its rapidly diversifying workforce to fill the demands of next economy's jobs and occupations.

An economy with these characteristics will have one additional feature: it will be led by metropolitan areas. The top 100 metropolitan areas, unified economies of cities and their surrounding counties, house two-thirds of our population and generate three-quarters of our GDP. Metros concentrate ideas, people, and technology in a virtuous cycle that generates more innovation, more ideas, and attracts still more people to start the cycle all over again.

In an ideal world, the federal government would set a strong platform for national and metropolitan growth: embracing trade, pricing carbon, investing in advanced R&D, transforming infrastructure and overhauling immigration.

But the U.S. circa 2011 is not an ideal world. Washington is excessively partisan and deeply polarized, and budget crises loom across the country.

So we must build the next economy the hard way, via a pragmatic caucus of state and metropolitan leaders, from the public and private sectors, who can spur economic recovery and renewal from the ground up, despite political odds and fiscal obstacles.

Here are three low-cost and high-impact building blocks that should be replicated widely:

First, states must align to metropolitan priorities.

Many metropolitan areas have economic plans that build on their distinctive competitive advantages. Historically, these plans have been largely ignored by state governments. That may be about to change. New governors in Colorado, New York, and Tennessee are actively seeking to place their investments and policies in the service of ground-up economic development strategies.

Second, the states must govern for growth.

Most states have legacy governments operating with bureaucracies designed for a different era and a different economy. The solution is to both bring more integration to state government and create more nimble, market-oriented institutions to leverage private finance and to make evidence-based investment decisions. Michigan has essentially created a Jobs Cabinet, pulling together economic development, infrastructure, job training, and housing investments under one roof. States should also be looking to State Infrastructure Banks to help make transformative investments to spur trade and low-carbon transmission and production. Private capital and private entrepreneurs are sitting on the sidelines ready to be deployed.

Third, to grow the next economy, the states must cut to invest.

The fiscal crisis could simulate a wave of cost-saving state innovation, from eliminating low-return economic development strategies that use tax abatements to lure firms across jurisdictions, to consolidating duplicative local governments and services. A relatively small portion of the savings could be used for productive activities. For the low price of $9 million, states could create advanced manufacturing centers, perhaps within universities and in collaboration with manufacturers, to help grow productive regional economies.

The next economy could be a bright one for the U.S., but only if we act with purpose and discipline. Delivering the next economy will begin at home, in metropolitan engines that drive our economy and states that can provide a platform for metropolitan growth.

For more on Bruce Katz's vision of the next economy, see his Global Metro Summit Presentation.