Employment expanded in the San Jose Metro Area by 23.7% from its lowest point in July 2009 and in the San Francisco Metro by 17.6% from its low in August 2010.3 Together, these two metro areas make the Bay Area one of the five fastest growing economic regions in the country4—a product of the region’s diverse technology-driven economy and strong global ties.
The Need for a New Approach to Regional Economic Strategy
The Regional Economic Strategy Roadmap aims to lay the foundation for building the vital feedback loops, resilience, and agility the region requires for securing broad-based prosperity in our communities going forward. The recommendations presented in this Roadmap reflect thoughtful discussions among business and other leaders in the region over the course of a 12-month engagement process. These individuals brought their unique perspectives from their industries and areas of expertise. They also brought their added perspectives as neighbors, colleagues, and parents with a vested interest in supporting the growth of shared opportunity in the Bay Area.
The Bay Area’s diverse businesses drive the regional economy and global innovation. They also employ the vast majority of the region’s workforce, support local universities and schools, and engage in philanthropic efforts in the community and globally. Many of the region’s employers are deeply integrated into the global economy, giving them valuable insight into the quick pace of change taking place in global markets. For example, they see how infrastructure needs (such as transportation systems) are not being met in the Bay Area and how they are in other places in the world.
Bringing together the perspectives from the Bay Area’s business community and the public sector is critical for maintaining the Bay Area’s economic vitality. Employers are on the front end of recognizing changing skills needs in the workforce. Given the strong economy, Bay Area employers are currently experiencing a recruitment crisis that is deeply exacerbated by the region’s housing crisis. As employers expand in the region, transportation systems have not kept pace with growing volumes of commute and other traffic or widening geographic demand.
The Bay Area benefits from enviable economic strengths with its world-class companies, talent, and quality of life. And yet, the Achilles’ heel to the region’s success is the mix of institutional barriers that inhibit the region from making the investments it needs to support the current growth cycle and future prosperity. In the context of a quickly changing global economy, there is much to be done to address the growing crises in housing, transportation, workforce, and infrastructure. Given the regional nature of these issues, viable solutions must reflect a regional perspective.
The Bay Area must also prepare for the quickening pace of change. Advances in technology are upending industries, spawning entirely new industries, and reshaping our work and home lives. Demographic changes are driving new needs and attitudinal shifts. Our integration with the global economy is also picking up speed. Growth driven by emerging economies is increasing demand for all natural resources, and climate change is threatening communities around the world and around the Bay Area.
As uncertainty and volatility increase, how do we grow our economic, environmental, and social resilience? Resilience is an ability to recover from or adjust easily to misfortune or change. Accepting that change is normal is the first step to being able to recognize the new opportunities that are emerging and to adapt to a new context. The alternative is to remain in a reactive mode, which resigns the region to a highly vulnerable position.
This section briefly describes some of the current strengths, growing pressures, and drivers of change in the Bay Area economy. It lays out the context of other regional efforts underway in the Bay Area and the complementary value this Roadmap brings. Finally, this section presents a framework for approaching a regional economic strategy that aims to develop agility and adaptability in the economy.
The Quickening Pace of Change and Increasing Volatility
Technological advance is driving change across the economy, disrupting markets and entire industries, promising new opportunities, and adding to the growing skills gap. The Bay Area economy has experienced one of the fastest growth rates in the US coming out of the last recession. Since 2010, Bay Area employment has grown at 3.2% annually, double the rate of peer US metropolitan areas.1 Over the last several decades, the Bay Area has not made the necessary investments to support normal population and job growth, and during periods of economic expansion, this becomes painfully clear around housing, transportation, and workforce needs. These issues, if not addressed in a meaningful way, threaten the region’s current growth cycle and its ability to rebound into the next growth cycle.
Technological advances are disrupting entire industries and also presenting exciting new opportunities for improving lives and creating new economic opportunities.
Much of this transformational technology is being driven by companies and individuals located in the Bay Area. These developments spur new businesses and jobs, as well as entirely new business models.
We are currently witnessing the reinvention of all industries through smart mobility, cloud computing, social networking, big data analytics, and accelerated technology adoption. This process will continue with billions of sensors covering our landscapes, buildings, homes, clothes, and even bodies. Communication will take place between infrastructure and cars, between machines and people, and between machines.
A massive revolution is also taking place in how we make things. 3D printing is now used by artisanal makers spawning new businesses as well as by large-scale manufacturers for the production of sophisticated components. Robotics and human augmentation are changing the factory floor as well as the operating rooms of hospitals. Breakthroughs in nanomaterials are resulting in tiny batteries for tiny devices and paper-thin armor and solar cells. Biology is now programmable: bacteria and yeast are being altered to produce products they would not normally make, such as fuels or drugs.
New platforms are emerging in the region that enable new business and work models. Sharing platforms like Airbnb and ZimRide allow individuals to generate new revenue streams from their own assets, such as an extra room or car. Maker spaces like TechShop and mobile payment systems like Square offer new options for artisanal and freelance activity. Local city governments are creating new systems for providing public services such as waste removal and paramedic services more efficiently,2 thus also spurring new business activity. Cities such as Palo Alto and San Francisco have hired Chief Innovation Officers who look for ways of opening up municipal data to business in order to improve the delivery of public services.
The expanding application of technology has the potential for increasing productivity and creating new economic opportunities. On the other hand, the spread and development of technology also expands the skills gap and the potential for individuals to be left behind. There is a fundamental need to prioritize the provision of relevant training opportunities that are also accessible in terms of cost and scheduling.
Many things are going well in the Bay Area.
Businesses have taken advantage of technological advances and a robust investment landscape to grow their output and employment.
The Bay Area’s economic growth is outpacing other parts of the state and nation.
The San Jose Metro gross domestic product increased 6.7% from 2013 to 2014, reaching $214 billion. The San Francisco/Oakland Metro generated economic activity of $412 billion in 2014, increasing 5.2% over 2013. Both metro areas outpaced the Los Angeles area, and the 2.3% increase average for all U.S. metros.5
The Bay Area economy benefits from diversity and a high concentration of technology industries. The region is home to headquarters of global companies in retail, finance, health care, energy, and many technology and social media giants. Technology is a major driver of the global economy and local job growth. For every job at a technology company, 4.3 new jobs are created across the economy.6 Highly concentrated, the tech sector accounts for 30% of San Jose Metro employment and 14% of San Francisco Metro Area jobs. 7 Nationally, tech accounts for less than 9% of all employment. Unlike most technology hubs, the Bay Area is not dominated by a single large tech company or sector. In addition to being highly concentrated, the Bay Area’s technology industry is highly diverse, spanning hardware, software, biotech, clean tech, communications, and social media. This diversity helps drive innovation as different technologies come together to create entirely new products, and it creates resilience despite major shifts in specific technology areas.
Venture capital investment is robust.
Although venture capital investment remained moderate between 2002 and 2013, total dollars invested in 2014 nearly doubled from the prior year, returning investment levels to the lofty heights last seen in 1999. In 2014, venture capital investment in the Bay Area reached $24.7 billion on the heels of large funding rounds for Uber, Lyft, Airbnb, and Dropbox. By the first half of 2015, investment reached $15.2 billion. The Bay Area currently accounts for nearly 50% of total US venture investment. This represents a growing concentration of venture capital activity in the region, rising steadily since the 1990s. Ensuring that this rich resource of venture capital remains in the region requires a committed investment in the region’s innovation ecosystem and foundations for sustainable economic growth, such as transportation, housing and workforce development.
At the same time, significant pressures are rising that endanger the region’s current growth and competitiveness going forward.
As jobs and population increase and the housing crisis worsens, traffic congestion is growing, and the severity of the region’s infrastructure crisis is becoming evident.
Bay Area housing costs and rent prices are at an all-time high.
This is in part the result of building cycles that have experienced lower peaks and deeper valleys over the last decades. Nearly half of Bay Area renters are considered burdened by housing costs: the percentage of Bay Area renters spending more than 30% of their income on rent increased from 28% to 49% from 2000 to 2013.8 Average rental prices across the nine counties exceeded $2,000 per month in 2014.
While housing permits have witnessed a recent uptick, the mid-2000s marked the start of two trends in the Bay Area—a shift from majority single-family to multi-family permits and a slowing down of annual housing permits. These shifts have been most acutely felt in San Francisco, where average rents have increased by nearly 50% since 2010. This steep increase reflects a supply and demand mismatch, as the Bay Area region permitted just 193 housing units per 1,000 new residents from 2012 to 2013; the national average over this period was 384 new units per 1,000 new residents.9
Finally, the region is experiencing growing pressure on the middle class.
Over the last 15 years, GDP growth has not translated into growth in middle incomes in the US. The Bay Area is experiencing the same trend. Median household income in the region dropped 9% from 2008 to 2011 and has stagnated since. Statewide, median household incomes are 10% below 2008 levels.
Across the country, the percentage of households with incomes under $35,000 has grown since the last recession. The widening income gap is exacerbated by the lack of skills in the workforce necessary for successful employment in the 21st century economy. In California, middle-skill jobs—those requiring education beyond high school but not a four-year degree—account for 50% of California’s labor market, but only 40% of the state’s workers are qualified.13
This growing income disparity is a problem around the world, as some individuals acquire the skills to compete in the global economy and many others do not. This has serious implications for both the economy and society. According to Christine Lagarde, managing director of the International Monetary Fund, “Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the long term. It leads to an economy of exclusion, and a wasteland of discarded potential.”14
The development of the Bay Area’s workforce begins in the region’s K–12 schools. The Bay Area has been successful in preparing youth for success in comparison to statewide averages, with a high school graduation rate of 84% and 46% of graduates meeting UC/CSU entrance requirements in the 2013–2014 school year. Statewide, those averages are lower at 75% and 42%, respectively. However, these educational outcomes are not widely shared across income levels or ethnicity. Roughly 30% of Hispanic and African-American students meet entrance requirements for UC and CSU systems, well below Bay Area averages.15
The Current Context of Regional Efforts Underway
In 2012, the Bay Area Council Economic Institute produced The Bay Area: A Regional Economic Assessment, a detailed economic analysis of the region, at the request of the Bay Area’s regional agencies—the Metropolitan Transportation Commission, the Association of Bay Area Governments, the Bay Area Air Quality Management District, and the San Francisco Bay Conservation and Development Commission—as well as the region’s leading business and economic development organizations.
While the region enjoys many economic strengths, issues such as housing cost and availability, congestion, regulatory efficiency, and a lack of strategic focus on regional economic priorities surfaced throughout the analysis. The Regional Economic Assessment found that these issues point to the need for both a more effective partnership between business and government on economic issues and a stronger sense of shared purpose surrounding the region’s growth and development.
Several ambitious regional efforts have been launched in recent years that address a range of important issues facing the Bay Area. The Bay Area Council Economic Institute has been engaged in several of these efforts, including Plan Bay Area and the U.S. Department of Housing and Urban Development grant-funded Regional Prosperity Plan. Many valuable sub-regional economic development strategies have also been developed by diverse stakeholder groups.
The regional planning and visioning efforts to date have focused primarily on bettering the environment through reduced vehicle miles traveled and smarter land use patterns, and they have approached the Bay Area’s economy through the specific lens of improving career pathways for low and moderate income workers. While these are important and revealing documents, the Bay Area still lacks a clear strategy for supporting economic growth and expanding economic opportunity.
Set within the context of these regional efforts, the intention of the Bay Area Council Economic Institute in the development of the Regional Economic Strategy Roadmap is to bolster the economic leg of the “Three E” stool: Environment, Equity, and Economy. At the core of the process for developing the Regional Economic Strategy Roadmap are discussions with business and other leaders about identifying where they, as employers, see opportunity to grow jobs and the economy in the region, and what is required to achieve success. The strategy presented in this document is the product of many in-depth conversations with business leaders and others from the public and independent sectors. The result of this 12-month effort is a series of cohesive policy recommendations to strengthen the Bay Area’s economy and identify tangible actions for regional agencies as they approach the next iteration of Plan Bay Area and other regional strategic efforts.
A New Approach: Building Regional Economic Resilience
A healthy economy is one in which things flow easily: people, goods, money, and ideas. It is a dynamic system with diverse elements and actors, each contributing in different ways to growing the benefits to the community and evolving the output and processes of all activities. Essentially, a healthy economy is one that is undergoing a constant state of adaptation to an ever-changing environment. It is evolutionary.
In a context that is always changing, constrained information flows represent a major vulnerability. From any given vantage point in a diverse system, information is limited.
In order to better weather volatility, anticipate change, and prepare for it, the Bay Area needs to develop critical feedback loops across different segments of the economy and community. These diverse information flows provide early warning of change as well as a platform for collaborative action among different stakeholders.
As Nassim Nicholas Taleb eloquently explains in Antifragile (2012), volatility can generate losses, but it can also generate wins: “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty.” The result depends on the adaptability of the system to improve from each shock and disturbance. Developing robust feedback loops in a system provides the information for directing adaptation, which builds resilience and drives evolutionary development.
The Bay Area’s technology industry has been described as “protean” in its ability to reinvent itself with each major disruptive shift over the decades. In her comparison of the region’s tech industry with that of Boston’s Route 128, AnnaLee Saxenian, professor at UC Berkeley, described Silicon Valley as a “protean place” (Regional Advantage, 1996), setting it apart from other places that have been less able to adapt to major disruptions. The diversity and dynamism of the Bay Area’s tech industry has continually enabled it to change its form and adapt to changing circumstances.
The term “protean” comes from the name of a sea god from Greek mythology, Proteus, who could change his form to suit his circumstances. Proteus could also tell the future. So, the metaphor with the region is apt: the more adaptable and dynamic a company, industry, or region can be, the better prepared it will be for the future.
Faced with multiple pressures that jeopardize the region’s quality of life and potential for expanding prosperity, the Bay Area must harness its protean resources and take on a sustained adaptive approach to supporting the region’s economic success.
Building an Adaptive and Resilient System
The economy is a dynamic system consisting of diverse actors, activities, and interactions. People, goods, money, and ideas move around the system with the purpose of creating new qualitative and economic value. Some economic systems allow for more ease of movement and exchange than others, and some are more adaptive to change and disruption.
Sudden Shocks can impact the system:
- A natural disaster such as an earthquake or flood can mete out an abrupt blow to economic activity, damaging or even destroying critical infrastructure and other public and private property. In such situations, resources and economic activity are redirected to rescue, safety, and construction while much other economic activity goes on hold.
- An economic downturn can hit abruptly, as was the case in the last two downturns in the Bay Area. Within 24 months, 300,000 jobs were lost across the region’s economy: key industries, their suppliers, population-serving sectors, and the public sector.
- Similarly, periods of rapid economic growth can reveal longer-term investment shortfalls in infrastructure in a region, as job and population growth can outpace the capacity of public infrastructure and the construction of new housing. The inability of the Bay Area to build enough housing and infrastructure over the last few decades has become clear in rising housing costs and roads and transit systems packed beyond intended capacity.
- Downturns tend to speed structural changes lingering under the surface. In the case of an economic downturn, jobs are lost unevenly across industries and occupations; some will return and others will not.
Stresses to the system can build over time:
- Population growth;
- Rising housing costs and lengthening commutes;
- Increasing traffic and travel times;
- Aging, inadequate road and public transit systems in need of repair and expansion;
- Climate change resulting in rising sea levels, more frequent droughts, and disruption of agriculture;
- Zero-sum thinking among stakeholders that inhibits systemic approaches to addressing the needs of the region as a whole.
Multiple factors contribute to growing the Resilience of a regional economy:
- Open communication and collaboration among diverse stakeholder groups;
- An understanding of national and global trends that are reshaping the competitive landscape;
- A positive view of opportunities on the horizon;
- The willingness to make strategic investments;
- The ability of decision-makers to act in a deliberative manner and look beyond immediate self-interests;
- Decisions based on reliable evidence and metrics for tracking progress;
- Openness to change and creative problem solving;
- Public prioritization of workforce development in order to cultivate resilience at the level of the individual and family;
- An inclusive and protean view of place, community, and the economy: “Change is constant, and we’re all in it together.”
Feedback loops can be put into place (and reinforced) to heighten the capacity of a regional economy to better adapt to changing circumstances and withstand the impact of sudden shocks. An ongoing, iterative approach to economic strategy allows for making informed adjustments along the way. This also requires flexibility within institutions and collaboration among stakeholders.
For individuals, businesses, and communities, resilience develops as we grow, gain more knowledge, and develop better thinking and self-management skills. Collaborative exchange has been a driver of human evolution and, as Matt Ridley describes in The Rational Optimist (2010), continues today to be a source of growing prosperity. Maintaining a highly interactive system with dense networks of information exchange creates the foundation for this prosperity. Taking an evolutionary view of the economy will help drive adaptability and the qualitative growth of the region’s development.
A Resilient Regional Economy
This table outlines five key areas of action for building an adaptive and resilient regional economy. The action described in each area is intended to be ongoing and iterative, with adjustments informed by changing circumstances.
Overcoming Legacy Barriers to Building Regional Resilience
The Bay Area is both blessed and burdened by the diversity of its distinctive towns, neighborhoods, and wider geographical areas. Its urban centers, wine country, and suburban areas offer different lifestyles and reflect a variety of economic circumstances. Even with this diversity, there is a high level of interdependency. For example, nearly half of Bay Area workers cross at least one county line when going to and from work. As job tenure continues to decline, commutes shift around the region at a far faster rate than people change homes. In many cases, wealthy suburbs are largely reliant on the high wages earned in the urban cores. Many suburban-based companies depend on young talent living in vibrant urban centers.
The regional character of the Bay Area economy is sometimes lost on its residents. In a region made up of nine counties and 101 cities, perspectives are sometimes narrow, and political and institutional balkanization is evident in what is otherwise a highly interdependent regional economy.
Looking beyond the nine counties, the successful development of the Bay Area economy impacts the success of the wider Northern California mega region as well as the state as a whole.