By James
Pethokoukis and Mark Muro

Prior to the pandemic, America’s tech sector was largely concentrated in a few urban areas like San Francisco and Boston, but COVID-induced remote work has led some to speculate that the tech industry will be more decentralized going forward. To investigate that possibility, Mark Muro turned to job postings data, and on a recent episode of “Political Economy,” he explained his findings and made the case for the benefits of a more dispersed tech sector.

Mark is a senior fellow at the Brookings Institution,
a think tank in Washington, DC, and the policy director of Brookings Metro. He
and Yang You recently authored “Superstars,
rising stars, and the rest: Pandemic trends and shifts in the geography of tech”
for Brookings.

Below is an abbreviated transcript of our conversation.
You can read our full discussion here.
You can also subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet.

Pethokoukis: Why
has the American tech sector remained so concentrated in so few places,
particularly San Francisco and the Bay Area?

Muro: The first descriptive fact is all of these places
had really high BA attainment in 1970, so they are high human capital places.
And then they had early-mover or first-mover advantage. And then my part of the
thesis or the theory here is that there are particular things about digital
that angle it towards winner-take-most dynamics and superstar dynamics.

And nobody’s doing anything wrong. These are how the
technology works. And these are issues around network effects. That’s a huge
one. They’re centers of big platforms, the way these industries have joined, so
they’re command-control centers. And then the most obvious one that is talked
about most is the huge power of conglomeration effects in human capital around
skills acquisition. And being big and being identified center early has made a
huge difference for those places. There are a limited number of what we call
superstar hubs. And I would say, they’re not going anywhere.

There are
other cities which are rising. What are those cities and what do we know about
why they seem to be doing better as far as attracting this kind of talent?

We see a fairly large number of places of all different
sizes seeing some upticks during the pandemic. But you’re exactly right. There’s
a list of fairly sizeable, often Sunbelt metropolitan areas ranging from the
Atlantas and Dallases of the world to a Denver, for instance, that are actually
quite sizable so they can replicate some of the virtues of size that the
superstars enjoy. They are almost all anchored by a substantial research
university, having pretty decent climate seems to be showing up as something
here, and then having pretty rich pools of technical talent.

And so not for all activity, but it’s beginning to look
like those are very attractive places for a lot of activity in tech. And we’re
beginning to see either moves into them by firms or just organic growth in
these places. And so I think there are a number of things going on, but we’re
beginning to develop a next tier that has been quite formidable and challenging
for superstar status.

Did the
pandemic change anything?

It did. I think it’s a two-track reality. There’s no doubt
that those big superstar centers on the coast remain entrenched, remain dynamic
in many cases, and actually slightly increased their share if you look at the
eight biggest ones. So that remains. But we do see a very vibrant performance
by these rising stars, these sizeable, often Sunbelt, bigger places.

And then I think quite interestingly, dozens of medium-size
and smaller places, often quality of life meccas or college towns, actually
started growing in a new way. And we see growth at least for a year and with
some further signals through the pandemic. We count something like 60 places
that grew faster during the pandemic than before it. Now, I think this is
evidence of some of the remote work effect. These might be the Zoom towns that
people are wanting to talk about that are supported or gain from foot-loose
tech workers arriving with their laptops but working for elsewhere.

So what is
the durability of that phenomenon? If we don’t see big deadly waves of COVID,
do things begin to drift back to the way they were?

I think that the open questions are around remote work for
one, and then whether there’s a substantial change in the siting posture of big
companies. But the remote work question is interesting. To the extent that we
drift into a kind of hybrid—and that seems to be the leading candidate right
now: more hybrid work, more people doing some work remotely but some in the
office—that will limit the extent of this remote work, Zoom town piece of this.

But we don’t know what’s going to happen. I think there
are signals that we’re going to pull back a bit, but I think most people agree
that things will not be the same and there’ll be substantial amounts of remote
work. Nick Bloom in Stanford is talking about two to three days a week in
an office. That’s substantial.

Why is
decentralization a good thing? Clearly these companies still find a lot of
value being where they’re at. So the concentrated nature is passing the market
test.

We now have too much tech in too few places with
incredible accumulating side effects, externalities of costs, real estate
costs, transportation costs, and some would argue problems of group think in
the industry, narrowness of the industry. I think the talent-matching process
seems to be breaking down. We can’t rely on mobility and migration from the
interior to these coastal, expensive metropolises.

And meanwhile, though this is our most dominant industry
globally, we actually have relatively few truly significant hubs. I think we
need more of them to compete, even with China’s depth. China has created dozens
of centers, scores of them really. So I think we need more of these in a broader
array of places.

I think also there’s a political economy dimension: I
think we’re losing a sense of consensus about innovation and about even tech
because so much of the country feels it is extremely remote, feels it’s a
coastal elite activity. And so for all these reasons, I think we do need more.

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” Mark Muro is a senior fellow at the Brookings Institution and policy director of Brookings Metro. He and Yang You recently authored “Superstars, rising stars, and the rest: Pandemic trends and shifts in the geography of tech.”

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