Thursday 25 December 2014

Thomas Molloy: Minister has swallowed controversial theory whole

Published 24/12/2013 | 02:30

Jobs Minister Richard Bruton
Jobs Minister Richard Bruton

TRADE Minister Richard Bruton has been busy quoting economist Enrico Moretti's theories on wealth creation to back his calls for tax cuts for the rich.

Mr Bruton is not the only fan of the good-looking professor of labour economics; Prof Moretti's book, 'The New Geography of Jobs', was an unlikely bestseller in the United States last year and has kicked off a fresh debate about job creation and taxes.

Prof Moretti is interested in an important topic; why are some parts of the United States booming while others are in a deep recession?

His basic conclusion is that brain hubs like California, where there are clusters of innovative employers and highly educated workers, spell success. By examining data dating back as far as 1980, he concludes that the economic success of a region has been increasingly defined by the number of highly educated workers. Cities with many university-educated workers and innovative employers are drawing further and further apart from regions or countries that depend on traditional manufacturing.

In Seattle, for example, Boeing employs many more people than Microsoft but the research suggests that the software giant's employees pour far more money into the local economy.

That's a radical theory in Europe where countries with a strong manufacturing history such as Germany are currently doing much better than technology-dependent countries such as Ireland, but Prof Moretti's theories are all about the long term rather than the short term.

He argues that regions reach a tipping-point dynamic when they have enough innovative companies. San Francisco, which has companies such as Twitter and Yelp!, is one example. Dublin's so-called Silicon Docks, which is thriving despite our problems, is another. Hi-tech companies increase a city's appeal to other hi-tech entrepreneurs, and make them more likely to locate their companies there despite high salaries.

Using data on nine million workers in hundreds of US metropolitan areas, Prof Moretti concludes that each new innovation job in a city creates five additional jobs. That sounds strange, but technology company employees need lawyers, doctors, waiters, hairdressers and other basic services.

Of course, most industries have a multiplier effect. Many Irish towns have benefited for generations from the surrounding farmers, but no industry has a bigger one than the innovation sector, according to Prof Moretti's research.

This is why Mr Bruton is so anxious to bring in technology workers to Ireland and create the sort of clusters described in 'The New Geography of Jobs'.

Still, not all Prof Moretti's conclusions are likely to be popular with the Fine Gael rank and file. The professor has little time for manufacturing jobs and urges political leaders to stop promoting them. He is also dismissive of small businesses, arguing that small companies are dependent on large businesses for their existence.

He is also against tax breaks for home ownership because they reduce labour mobility. Lastly, he is indifferent to income inequality which he believes to be an inevitable consequence of technology clusters.

In short, Prof Moretti believes that rich businesses like Facebook and Microsoft are the backbone of an economy. That is a big leap of faith but it is clearly one that Mr Bruton has made.

Irish Independent

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