The Hub has averted economic disaster before and can do so again

What a difference two decades make. In 1980, Boston was a city in decline, the Hub not of the universe but of a middle-income metropolitan area in a cold-weather state. The city’s population had fallen from 758,000 in 1920 to 563,000, and real estate values had sunk so low that three-quarters of its homes were worth less than the bricks-and-mortar cost of constructing them. At that point, Boston seemed to be on its way to joining Rust Belt relics like Rochester, Newark, and Detroit on the dustbin of industrial history.

The Boston of today is a high-tech, culture-rich beacon of the future. The city’s population has risen, if only slightly, in each of the decennial US Census counts since, 1990 and 2000. The metropolitan area is now the eighth richest in the country by per-capita income–the richest outside the New York and San Francisco regions. Housing prices–the surest sign of how badly people want to live someplace–have soared. In the 2000 census, a median housing value of $233,000 made Boston the fourth most expensive metropolitan area outside New York and San Francisco (after Boulder, Colo.; Honolulu; and Orange County, Calif.). Of the 542 cities for which the Census Bureau has released data, four of the five cities with the fastest growth of housing prices between 1980 and 2000 were in this area: Somerville, Newton, Boston, and Cambridge.

What took place here in the last decades is well known. The region transformed itself from a declining manufacturing center into a burgeoning capital of the information age. We see this reinvention in the region’s newly dominant sectors: high technology, professional and financial services, and higher education. Boston was able to accomplish this reinvention because of its skill base, not just relative to its Rust Belt peers like Detroit and Syracuse, but also compared to the nation as a whole. A region’s skill base is among the strongest predictors of its growth rate, and today Boston is one of the most educated metropolitan areas of the country.

It is tempting to see the region’s recent reinvention as a product of historical accident, a strong educational tradition fortuitously bumping into a new information age that gives education particular economic value. But reinventing itself is a Boston tradition that’s nearly 400 years old. Time and again, Boston has faced economic crises that seemed to doom the city and its surrounding area to second-tier status, if not worse. Time and again, Boston has found new sources of productive growth.

Such crises of economic confidence are by no means unique to Boston. As world, national, and regional economies change over time, metropolitan centers are forced to change or face long-term eclipse. Boston’s capacity for phoenix-like rebirth suggests basic lessons not only for New England’s largest city but for cities everywhere. How it has accomplished this repeated reinvention also holds within it a cautionary tale for a city desperate not to lose this economic talent.

Busts and booms

Boston faced its first economic near-death experience within 20 years of the landing of the Mayflower. The Massachusetts Bay settlers initially survived on supplying goods to religiously oriented migrants seeking to settle in the New World. By 1640, however, the flow of British expatriates dried up, in part because of the political success of like-minded Protestants in England. Midway through the 17th century, Boston redefined itself as the center of a trade network that supplied the colonies of the Caribbean and the American South with food and basic provisions (the southern plantation lands were too valuable growing sugar and tobacco to be wasted raising foodstuffs). This arrangement fueled the regional economy well into the next century.

Boston seemed on its way to the dustbin of history.

In the latter half of the 18th century, however, Boston’s population stagnated for 50 years while the colonies spread inland. New York and Philadelphia had greater proximity to the rich American hinterland and became far more important centers for shipping goods into and out of the 13 colonies. This led to a second major reinvention, when the city capitalized on a remarkable base of seafarers to become a center for global shipping and sailing in the early 19th century. In this economy, Boston’s comparative advantage was not its port but its people, who crewed, captained, and owned ships. As the 19th century economy became more global, maritime talent overcame Boston’s locational disadvantage and the city became the center of a vast mercantile and fishing empire stretching all the way to China.

But in 1840, at the height of its maritime supremacy, Boston’s third crisis was already brewing. Steam technology was quickly improving and making clipper ships obsolete. Steam required both less human capital and different human capital than sails did and, as a result, Boston’s maritime workforce lost much of its value. Boston, Salem, and New Bedford all suffered sharp economic dislocations. Salem and New Bedford never really recovered from the shift. But Boston, as a last product of its sailing supremacy, acquired a vast population of Irish immigrants. In what almost seems a freak of fortune, the Potato Famine coincided with the last decade of Boston’s seafaring dominance. As a result of unusually cheap fares from Liverpool, large numbers of hungry Irish came to Boston. Had the famine happened 15 years later, the Irish would likely have bypassed the city entirely. Irish immigrants provided the human energy that–aided by merchant-made fortunes, a burgeoning rail network, and the rise of steam-powered engines, which allowed factories to move from rivers like the Merrimack to more central locales–turned Boston from a maritime city to an industrial city between 1840 and 1890.

Staying true to a single model of development is a recipe for disaster.

This heady period of growth was over by 1920. At that point begins the familiar story of Boston’s–even New England’s–slide into regional decline. From 1920 to 1950, the city’s population remained flat, while the country’s population grew by 50 percent, and then began to dwindle, bottoming out in 1980. This decline can be chalked up to at least four separate reasons. First, the climate was cold and harsh, when air conditioning, improvements in public health (such as draining America’s swamps), and highway travel made the Sun Belt a much more attractive option. Second, as in other industrial towns, Boston’s core manufacturing economy was declining as jobs moved to areas with cheaper labor and less regulation, especially in the South. Third, the automobile itself made Boston’s dense urban form–and its pioneering public transportation system–somewhat obsolete, as growth spread to the suburbs. Finally, Boston suffered from high taxes and heavy regulation. Starting with mayors like James Michael Curley, who put Brahmin-baiting ahead of economic growth, Boston’s city government began favoring higher taxes and more regulation.

Rather than signal Boston’s final descent into economic and demographic oblivion, the long mid-century slide set the stage for Boston’s reinvention as the high-tech economic juggernaut it is today. The current moment of recession hangover–and the even more severe dislocations of the early 1990s–notwithstanding, the Greater Boston/eastern Massachusetts area has developed an internal economic skeleton of technology and know-how that should sustain growth for years to come. That is, until the next structural crisis develops. When the crisis hits–even more, before it does–it would serve us well to understand how to reinvent the local economy, as it has been reinvented before. Rather than looking for modern miracles to understand the modern Boston miracle, not to mention preparing for the inevitable next one, we should look to the factors that facilitated reinvention throughout Boston’s history.

1. Innovate or stagnate. The most obvious lesson of Boston’s history is that metropolitan economies develop along quirky, bumpy paths. Staying true to a single model of economic development is almost always a recipe for disaster. At each turning point during its long history, Boston has changed primary industries and revamped itself, from gateway for the Puritans to the first port of the Americas, from first port of the Americas to a center of global shipping, from shipping city to manufacturing city, from manufacturer to information master. For any city to survive as the economic core of a thriving region, such transformations are inevitable; indeed, as wrenching as they may be along the way, they should be welcomed and urged along, not dreaded and impeded.

What is it that makes economic change–for the good–happen? Every one of Boston’s rebirths has been led by smart, ambitious people who had access to capital and who wanted to stay in or come to Boston despite other options that were available to them. Cities make themselves smart by educating their own and attracting the highly skilled from elsewhere. Now and in the future, Boston’s success hinges critically on the quality of its schools and on its ability to attract high-skilled residents, even against the tough competition of warmer climes. For many other reasons, as we shall see, education and attraction are key components of Boston’s economic success, but perhaps their biggest role is in ensuring a steady supply of entrepreneurs to drive future reinventions.

Government policy also matters, but not in the typical forms of enticement and giveaway, or even in giving the free market free rein. Rather, the key is to have a system of regulation that is relaxed enough to permit innovation, but active enough to protect investors and to preserve Boston as an attractive place to live. In housing markets, for example, it is important to have regulation to make sure the city’s beauty is not squandered, but also enough freedom to allow sufficient new construction to relieve the dramatic rise in housing prices. Complete laissez-faire is unlikely to produce attractive cities, provide good schools, or offer safeguards for investors, while excessive regulation will stymie entrepreneurs and builders, preventing them from creating the solutions our changing economy requires. In my work on housing regulation and prices with Joseph Gyourko, we have found that high housing prices in the US are to a large extent the result of restrictions on new construction. Many communities in the Boston area have among the toughest restrictions on new construction in the nation. What’s needed is a regulatory middle road–hard to find, and even harder to follow, but necessary for Boston’s future.

One sure sign that a policy is a mistake is if its principal purpose is to preserve and perpetuate the past. Economic reinvention inevitably involves dislocation and hardship. It is surely tempting to try to bolster declining industries to ease the pain that accompanies decline. But given the necessity of reinvention, such attempts are urban suicide. If Boston had taxed the information economy heavily to keep its dying candy factories afloat, we would not have saved the candy industry, but rather killed the region’s economic future.

2. Value diversity and complexity. Reinventing a local economy requires diversity. That’s because, in general, reinvention doesn’t mean starting new industries from scratch, but rather expanding industries that were always there, but much smaller, and in a position to grow when they prove a more promising fit for a changing economy. Such economic diversity enables cities to switch horses when their primary industries decline. For instance, there has always been manufacturing in Boston–before it was a manufacturing center, and even now, in the post-manufacturing age. The city’s transformation from a shipping center in 1840 to a manufacturing region in 1890 was built on an older tradition of Yankee craftsmanship. Similarly, technology, professional services, and higher education have been parts of the Boston economy for centuries. They did not have to be imported, or grown from seed, to enable the switch from manufacturing to these more productive sectors over the past 20 years. The broader a city’s portfolio of industries, the better it can adapt to shifts in the international economy.

Apart from allowing a city to hedge against a particular industry’s decline, diversity seems to engender growth in its own right. Many social scientists, from Jane Jacobs to Martin Weitzman, argue that new ideas come from combining older ideas. Jacobs’s famous example is the brassiere, which was invented by a dressmaker, not a lingerie producer. Today, Starbucks is a concept that combines the European café with American fast food. Most of the Internet innovations of the past decade simply combine online access with traditional business functions (auction house, bookstore, travel agent). If innovation means combining ideas from diverse sources, then urban diversity ensures there are a lot of old ideas around to combine. Moreover, a diverse economy means infrastructure is in place to support these industrial interactions, as well as suppliers who can cater to new start-ups.

Economic diversity seems to engender growth in its own right.

Boston’s advantage in economic diversity–and its corollary, complexity–can be traced back to colonial days. Virginia’s tobacco trade was simple, hinging on vast plantations. Boats would come down the river to pay cash for bales of tobacco. Since the trade was simple and enormously profitable, there was no reason for cities or mercantile infrastructure to develop. Conversely, Massachusetts had few products that were worth shipping to England. To make up for this weakness, the colonial merchants developed a complex trading system to handle a variety of commodities, which were shipped to four separate countries. One third of Boston’s population was directly involved in the shipping trades. At the time, Virginians were much richer. But in the long run, the institutions that developed around the diverse and complex Boston economy were much more conducive to economic growth.

Boston’s elite grouped together to share risks and information about prices and shipments. Since Massachusetts exports required workmanship, especially ships and other wood products, Boston became a center of this form of manufacturing, transforming New England lumber into finished goods. In addition, as a teeming city, Boston also provided support services, such as taverns and boarding houses, for the sailors. The various ingredients of this motley economy would provide the seeds for Boston’s eventual triumph over the single-crop economies of the American South.

3. Attract people, not companies. Increasingly, urbanists draw a distinction between producer cities and consumer cities. Producer cities grow because of the desire of firms to locate in a particular place where economic returns are higher, while consumer cities thrive because people want to live there. Over the past 50 years, consumer cities have enjoyed increasing success, largely at the expense of producer cities.

Consumer cities are particularly conducive to the process of reinvention. If the only reason people live in a particular place is because of its proximity to some productive asset, such as anthracite coal mines or the Merrimack River, then that locale loses its charm if that asset loses its value. Indeed, Pennsylvania coal country is a vast graveyard of once-prosperous towns telling stories of past economic grandeur. But if a place exists because people want to live there, then the people who live there can respond to economic downturns by innovating to make their chosen environment productive once again, rather than moving.

Boston, almost alone among America’s earliest colonies, was a consumer colony. No one came to Virginia because they wanted to live there; they came to get rich. But the early migrants to Boston were founding a “city on a hill,” a shining beacon for its Christian community, and did not come simply because of its material prosperity. From early times, Boston merchants didn’t immediately head south in response to economic downturns, but rather expended effort to make the city viable by figuring out new opportunities for trade.

Later, when Boston became the first city of Irish America, Boston’s appeal was never primarily high wages. At first, the city capitalized on cheap fares from Liverpool, but after that, its success depended on its thriving Irish community. The churches, clubs, pubs, and neighborhoods that were built by the early migrants from Ireland attracted later ones, even when New York boasted cheaper fares and higher wages. Once wealthy Bostonians could see the profits in employing this vast force of Irish laborers, the industrialization of Boston took off.

Today, Boston is a center for the knowledge economy in part because people want to live here. Boston may not have exactly the same amenities as the Bay Area; it certainly doesn’t have the weather. But if Boston isn’t Palo Alto, it isn’t Detroit either. Its changing seasons, ready access to Atlantic beaches, and rich history continue to attract residents as well as visitors. This allure is crucial for the city’s continued economic success. But, the most evident seed of Boston’s next economic crisis is its high housing costs, which are starting to price the next generation of reinventors out of the market.

4. Invest in education and social capital. The fact that Massachusetts settlers saw themselves as permanent residents led the new colony to create a number of important legal, social, and educational institutions. Perhaps the most remarkable feature of early Boston was its focus on education. The Boston Latin School was founded in 1635 and Harvard College was founded–with government money, it’s worth noting–the next year. The Calvinist attention to literacy surely mattered, but the more complex Massachusetts economy also demanded more widespread learning than did the tobacco culture of the South. Harvard’s earliest graduates were men of the cloth, but increasingly a Harvard education provided valuable background for merchants and lawyers in a world where knowledge increased earnings. Education was not a luxury, as it was for Southern aristocrats; it was a central ingredient in the evolving economy.

Meet the Author
Human capital has been Boston’s strongest asset throughout its 400-year history. Skills with sailing ships enabled the city to reinvent itself as a global maritime center in the early 19th century. Yankee technology and Irish labor together fueled industrialization. And today more than ever, Boston’s skills provide the impetus for economic success in technology, professional services, and higher education.

Boston will never be anything other than what it is. It will never have the climate of Los Angeles or the developable land of North Carolina; it will never have oil wells or uranium mines. What has always made Boston dynamic–and does so to this day–is its reinventiveness, its ability to find new ways to fit into an evolving national economy. The economic power of education and cultural dynamism is news to some people–note the recent success of Richard Florida’s book The Rise of the Creative Class–but it’s old news to Boston. Still, the Bay State’s long tradition and first-rate institutions should not lull us into complacency. Even as we look to reap further rewards from the information-age economy of today, there’s no time like the present for laying the groundwork for Boston’s next rebirth.

Edward L. Glaeser is a professor of economics at Harvard University. This article is drawn from a forthcoming report by the Rappaport Institute for Greater Boston at Harvard’s John F. Kennedy School of Government.