January 17, 2018

A Dayton for the 21st Century

In a new paper I examine the economic history of Dayton, Ohio. From 1900 to 1950 Dayton was one of the most innovative and successful cities in America. For years its residents produced more patents per person than any other large U.S. city. The airplane, the electric starter for automobiles, and the electric cash register are just some of products invented in Dayton during this period.

But since then, Dayton has fallen on hard times. And while it may never attain its former glory, policies aimed at recapturing the city’s innovative past can help it succeed in the 21st century.

Cities grow by being attractive places to live and work, and it’s especially important to attract high-skill workers. The most consistent predictor of American cities’ growth over the last 60 years is their proportion of adults with a bachelor’s or advanced degree.

Educated workers provide the innovation cities need to adapt to changing economic circumstances. Yet of the six largest metro areas in Ohio, Dayton has the second-lowest proportion of adults with a bachelor’s degree or higher (figure below). Without a workforce that can routinely create new products and services, any city will stagnate.Cities attract high-skill workers by improving their quality of life or their business environment. Unfortunately, many of the things that affect a city’s quality of life are hard to change. A warm climate with lots of sun and a strategic location, perhaps near an ocean or a lake, is difficult to reproduce. San Diego or Miami have some natural advantages that Dayton lacks.

Since Dayton can’t change its location, officials need to focus on improving the city’s business environment. Differences in taxes and the costs of doing business across locations affect economic growth, and Dayton’s residents and businesses face a larger tax burden than nearby communities. This makes it easy to leave or avoid the city.

In addition to taxes, regulation and red tape stifle entrepreneurship. A 2016 survey conducted for the National Retail Federation found that nearly 70% of small businesses feel overwhelmed by government regulation. Small businesses are an important generator of employment growth, but local ordinances often make it difficult for them to open or expand and this hinders Dayton’s ability to compete in the global economy.

Beyond being mindful of red tape and taxes, how can Dayton recapture a culture of entrepreneurship?

Start by implementing a policy of “permissionless innovation”—the notion that experimentation with new technologies and business models should be permitted by default. This is an alternative to many city policies that rely on the “precautionary principle,” which insists that innovators make their new products and services fit into a regulatory framework largely written in a bygone era.

New products and services will always have kinks that need to be worked out, but preemptively regulating for worst-case scenarios means that many best-case scenarios will never come about. Imagine what today’s regulators—often skeptical of hailing cabs with phones—would have thought of the Wright brothers’ plane.

Dayton has been better than many cities in this regard, welcoming innovative companies like Uber and Airbnb with open arms. Such light-touch regulation should be the standard across all industries, and would be a clear signal to entrepreneurs that Dayton welcomes them, and the jobs they hope to create.

Too often cities look outside in their quest for growth, dangling favors in front of specific companies. This leads to wasteful tax breaks that rarely lead to meaningful long-term growth, such as the $9.7 million worth of tax incentives given to local glassmaker Fuyao Glass America in 2014. After all, if a company can be attracted by a tax incentive package, it’s also likely to leave when the incentives dry up.

Instead of hinging its economic hopes on large, footloose companies, Dayton needs local entrepreneurs to plant a thousand seeds. And if home-grown companies do leave, a culture of innovation can replace and replenish them. Dayton once had such a culture, and with the right mix of policies it can get it back.