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Navigating the Unprecedented Economic Transition into the Information Age

By June 30, 2016 No Comments

Navigating the Unprecedented Economic Transition into the Information Age

By LAEDC Staff

LAEDC’s focus is to raise standards of living for residents of Los Angeles County by increasing economic opportunity and regional prosperity, as measured by per capita incomes or more simply incomes per head.  As we often like to say, our only client is the L.A. County regional economy.

So the question is, “How do we achieve that most noble vision or purpose to increase overall prosperity for L.A. County?”

It is important to remember that the L.A. County regional economy is a proxy for the broader macro economy.  This requires us not only to understand where the broader macro economy is going, but also to deconstruct from where we have come.

Let’s start by looking at the last major sectoral transition more than 150 years ago, moving from agricultural-based economy to a production oriented one. As the Industrial Revolution began, we transitioned from the agrarian or subsistence economy to a production or industrial based one. This occurred gradually over time and somewhat seamlessly. The surplus supply of labor leaving the farm fields in the agrarian-based economy more or less matched what was needed in the production based economy.  And there were certain variables in place that made this happen.

IR 1

The Industrial Age 150 years ago

Opportunity costs back then were very low; a worker could easily leave the field and transition seamlessly, for example, onto a floor of a factory with little, if any, new skills, training or education.  Labor could be easily converted because the skills required for success in an agrarian based system adapted to what was required for success in a production based economy.

Labor on a per-unit basis is much more productive in a manufacturing-based setting than in an agriculture-centered one. This lead to significant productivity savings, which could then be re-invested, inciting capital growth and resulting in ever-larger, more labor intensive, denser and more highly specialized manufacturing based sectors. These specialized sectors could accommodate even more of the surplus supply of labor that wanted or needed to leave our agrarian-based economy, and enter or transition into a more production-oriented economy.  This came to its zenith or peak in the late 1970s or early 1980s, when close to 27% of all US non-farm payroll jobs were in manufacturing.

Fast forward to today. We find ourselves in a new dual-sector transition, moving from that production based economy to an information age oriented one, which, of course, is characterized by innovation intensive industries. What we see now is that the dynamics that held true during the last major sectoral transition (from agriculture to manufacturing) are no longer applicable or relevant today. The circumstances have changed dramatically, and the outlook has shifted profoundly.

information-ageToday we know that the surplus supply of labor leaving our production based economy is nowhere near equivalent to what is required or demanded by our information age oriented industries.  We know that opportunity costs today are sky high because a whole new and higher level of investment is required to upskill, retrain and better educate this population of surplus or excess supply of labor that wants – and needs – to leave the production based economy and enter or transition into the information age one.   We know that labor today  cannot convert easily to what we will ultimately be required for success in an innovation intensive economy; skills required for success or to be successful in a production based system do not adapt.

It is sometimes human nature to cling onto what has worked in the past, and our policy makers have focused almost exclusively or singularly on how we can protect our manufacturing based economy.  And that unitary public policy choice has produced some significant crowding-out effects. Indeed, many key innovation-intensive industries have been crowded out due to that public policy choice, which in turn has resulted in a multitude of destructive and distortive social and economic impacts.  Instead, we need to look forward to growing our information age economy.

So the net result or confluence of these factors is the current dystopia in which we find ourselves today. It is characterized by unemployment, underemployment, dis-employment large and growing underground and gig economies and the proliferation of low wage, low value service sector jobs.  L.A. County leads the nation in a number of other dubious distinctions including economic segregation, which is just another term for economic based residential polarization which begets economic based school segregation, and structural poverty.  We fare worst of all amongst the 3100 other counties in the United States in terms of income inequality.

So obviously, this is not sustainable. The direness of our economic situation causes us to believe it’s a near existential crisis for the L.A. regional economy, and for many other regional economies.  Yes, the L.A .County economy is strong, but prosperity is not widely enough shared, and as we move further into the information age we see these vexing challenges will grow in urgency unless we address them.

So, what do we do about this?  What do we do as a region to pivot our trajectory and more specifically what does LAEDC do as the economic development leadership organization for this nation-sized, $664B economy to redirect our current economic course?

We believe there are four primary economic development pathways out of this distopia which I just described. First, we need to invest in human capital, in our people from pre-natal all the way through post-career.  We need to upskill, retrain and better educate our entire L.A. County based population.  But most especially and immediately, we must focus on this entire population of surplus or excess supply of labor that wants or needs to leave the industrial based economy and enter or transition into the “new economy.”

Nowhere is this more important than in our economic region’s most highly innovation intensive industries with  job and occupational categories along the entire value chain, from skilled machinists, technicians all the way through to the researchers, designers, engineers and scientists who will develop and commercialize the next wave of disruptive innovations.

Unfortunately, however, this will not be enough.  Not even close. No matter how successful we are at upskilling, retraining and better educating this entire population of excess and surplus of labor that wants to transition into this new economy, there will not be the requisite demand in the innovation intensive industries with which to accommodate this surplus supply of labor without direct and targeted intervention on our part.

So, our second pathway deals with augmenting capacity within our economic region’s key innovation intensive industries, thus increasing their demand for labor, and thereby their ability to accommodate more of the workforce that leaves the production-based side of the economy, so these workers can enter into the information age-oriented one. So how do we do it?

To make this a reality, we need to actually capacity-build within our region’s key traded or export-oriented innovation-intensive industries.  We must take an “idea to export” perspective, examining the entire product-service value chain continuum associated with these industries, from research to design to create to build to market, all the way through to export, so that we understand this region’s key economic assets including networking, physical, R&D, capital, talent, education, and other economic development related assets that we have at our disposal here, but that perhaps we need a better align and deploy in a way that is more conducive to strengthening and growing these key traded innovation intensive industries, where we have productive advantage due to labor market pool, knowledge spillovers, and supplier specialization.

Our third pathway, which goes hand-in-hand with building industry cluster capacity, is to catalyze and accelerate our innovation capacities, so that we are not only strengthening the comparative advantages of our economic regions key innovation intensive industries compared to other economic regions (or nations for that matter,) and perhaps we are creating  entirely new industries that we don’t even know about today, whether through cross-industry or inter-industry cluster convergence or by re-combining older technologies into new or more productive and frankly innovative uses — the whole notion of recombinant technology.

And finally, our fourth pathway, we can increase demand and capacity within our economic region’s key innovation intensive industries by increasing our global connectedness and opening up new markets through trade facilitation and export assistance programs and services by increasing the number of export-ready firms here in L.A. currently.

Related reading: LA County Strategic Plan for Economic Development

Related reading: LA County Strategic Plan for Economic Development

Leveraging L.A.’s global connectedness also means attracting more foreign direct investment into our region within these key innovative intensive industries, and bringing along additional capital and investment, all of which produces ripple effects, lifting our entire economy.  Not only are we helping people who work in key industries in which we focus, those stronger local industries drive growth of the entire regional economy, and this serves to raise standards of living for all of us.

If we are able to collectively focus on these four priorities, we believe we can navigate this unprecedented economic transition, and increase overall prosperity in more of our communities, for all of our L.A. County residents.