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Economix: Tom Potiowsky on economic clusters

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Saturday, December 01, 2007

{safe_alt_text} BY TOM POTIOWSKY

With the holidays rapidly upon us, my wife and I are reviewing recipes. We have our favorite standbys for turkey, stuffing, appetizers and desserts. We are always on the prowl for new dishes to try out on unsuspecting guests.

The world, too, is always searching for the best recipes for economic development. Literally hundreds of local economic development departments throughout the country start each day trying to figure out the right recipe for success. On the Economic Development Directory website, Oregon has 19 listings that cover the state and represent only a handful of the agencies devoted to economic development.

Many attempts to find the right economic development plan have been met with mixed success, but the focus today is quite clear. With the likes of Richard Florida and Michael Porter as champions, we have the creative class and economic clusters. These two ingredients dominate the plans of economic development offices across the United States and in Oregon. And the hot economic cluster of the day for Oregon is sustainability. To this we add innovation and measurement tools like indicators, benchmarks and dashboards to gauge the progress over time. But have we finally found the perfect recipe?

Economists generally acknowledge the efficiencies of the market system. Any talk of economic clusters and creative class is fine as long as government is not trying to direct the action. Markets will find their most efficient use of resources. Let the markets do the cooking; no recipe is needed.

So what is Oregon to do? Are economic clusters and the creative class the right ingredients for economic development? Should the market be left on its own to move resources to their greatest return?

Porter describes economic clusters as: “…geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standards agreements, and trade associations) in particular fields that compete but also cooperate.” It’s an obfuscated sentence that would make Alan Greenspan proud, but dig underneath it and you find some truth.

There is much to like about leveraging what an area already has in terms of clusters and avoiding the costly and risky route of forming a new one. For Oregon, the sustainability cluster seems like a natural fit. The state is attracting people to move here, including the “creative class.” Highly educated and talented individuals are the seeds for future entrepreneurs and civic leaders.  

What about the market forces that are efficient in moving around scarce resources? This is where the proponents of economic development need to keep in mind the powers of the market. Policies need to be aligned with market returns in mind. We may want more green building industries in Oregon, but we need to document that they are economically viable and then direct policies that complement the market forces. Top on my list would be investment tax credits to support the expenditures in capital infrastructure for continued growth of firms in this industry. In the end, if the economic returns are not there, you’ll have a tough time creating them through government policy.

Which economic clusters to pursue? No one has the crystal ball to see the next breakthrough. But by having a region where people want to live, attracting a creative class and having policies that work with the market forces to support the growth of clusters, you have a fighting chance that economic growth will continue to happen here in Oregon.

Former Gov. Tom McCall proclaimed that people should come visit but not stay — probably the greatest marketing slogan to promote the state. And who knows, “Keep Portland Weird” may be an economic marketing magnet. We don’t know the perfect recipe, and the search will continue. We have to be aware of market forces and work them into policy.

For now, in a large bowl, put 2 cups economic clusters, add 3 tablespoons creative class, a dash of innovation incentives…

Tom Potiowsky is an economics professor at Portland State University. In January, he returns to his post as state economist, a position he held for six years until 2006, when he returned to PSU.

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