Originally Published October 1, 2020 on the “On Global Leadership”
Tags: Economic Development, Economics, Sustainable Capitalism
By Andrew E. Olson
Companies strive for agility, moving swiftly and staying ahead of risk. Those aren’t traits commonly associated with cities and states, which are often mired in bureaucracy and weighed down by the slowness of the political process and government bureaucracy. What can they do to plan for or even steer themselves out of the economic downturn they're facing at this point in time? Like a dinghy facing a tidal wave, is the best chance they have to turn into the wave and take it head on?
This question is more than rhetorical today. Jurisdictions are reeling from the fallout of COVID-19, overwhelmed by spiking business closures, unemployment claims, and home evictions. In August, the National League of Cities reported that nearly 90 percent of U.S. cities will be less able in FY 2021 than in FY 2020 to meet the fiscal needs of their communities.
The main problem, not surprisingly, is a lack of revenue. Personal income tax and sales tax collections are estimated to be down by $500 billion over the next two years. Local budgets are facing shortages of a similar magnitude. Why does it matter? State and local governments account for 9% of the U.S. GDP. Florida alone has already cut $1 billion from its education and social services programs.
All of this matters because Congress is looking for a fast fix to the economic problems facing cities, counties, and states. House Democrats have put forward a nearly $500 billion financial package for local government (Senate GOP favors $250 billion), and the National Governors Association has asked the U.S. Senate to put aside at least $500 billion in unrestricted funding for local and state governments. President Trump has been reluctant to award “poorly run states” with a bailout, and jurisdictions may be forced to find a more creative path forward on their own. The hope is that the looming election may prompt legislators to move forward sooner rather than later.
Pending that, there are a multitude of things that jurisdictions can do to ensure they bounce back from this current tidal wave--and do so quickly and efficiently. There will always be another pandemic, and another crash that accompanies it. The public sector needs to develop the resilience necessary to weather shocks and thrive in the face of change. There are many things that can be done to make jurisdictions more resilient in how they respond.
Being able to survive and make the most out of a bad situation is quite possibly the most important feature of any jurisdiction’s economy. Resilience, in this context, comes from adaptability and not some abstract factor. Adaptability that serves as the basis for resilience comes from concrete, measurable, and quantifiable metrics. Here’s the key question for all of it: How quickly can land, labor, and capital be reallocated within the jurisdiction?
Resilience is about how quickly and effectively you can adapt your resource allocation for new circumstances. For companies, reallocating your people, your financial resources, and your property use, even ownership, is essential for adaptation. It is the cornerstone of resilience. For a jurisdiction, the same is true both of the entity itself and in creating an economy where businesses can do the same.
As the Chief Strategy Officer of a San Francisco-based startup, I am in constant awe of how easily what was being done yesterday is dropped wholly for something new today. There are no sacred cows. People and processes are ephemeral. Startups are like water seeping through the cracks to find the water table. They have no form, they search for market fit, and they change as frequently as they can to find a home. Certainly, many get caught and fail along the way; but given equivalent resources, timelines, and constraints, startups are ruthlessly efficient in their willingness to change and their rate of change in search of success.
Obviously, there are trade-offs that come with every economic decision, but there are immense benefits and resilience that comes with the ability to reallocate resources that swiftly. That’s why some nonprofit organizations are trying to give cities the resources to plan for the trade-offs and prepare for the choices. The 100 Resilient Cities (100RC) network, a global association of cities such as Washington, D.C., Paris, New York, Bangkok, and Buenos Aires, has been lobbying for years for cities to develop and implement resilience strategies for handling natural and man-made challenges.
Looking at companies, certain industries are less adaptable than others. An easy comparison would be a technology startup and a farm. The farm has a lot of long-term investments, the technology firm has few. The farm’s core business is agricultural products that typically play out on annual cycles that are expensive if not impossible to change, while the technology firm can switch easily to new market segments with little to no notice.
Consider an interesting example: baseball and peanuts, specifically Virginia peanuts. Peanuts are grown during the spring and summer, harvested in the fall then processed, stored, and sold the following year. (If you’re lucky, your playoff peanut may be from that year’s crop, but your opening day peanut was near certainly from last year.)
When COVID-19 shut down the baseball season, the peanuts were already grown, processed, and likely in storage when baseball stadiums canceled their orders. There were a lot of peanuts with nowhere to go. At the same time, peanut farmers were in the difficult position of considering what and how much of it to grow for next year and looking at other options since peanut prices were likely to stay low. For those farmers, that may mean painfully expensive investments in different equipment, soil products, fertilizers, and seeds. It’s very hard to build resilience into farming because of these long and capital intensive endeavors, very different from my technology startup.
So, what does this mean for jurisdictions? It guarantees that every jurisdiction is different, has a different composition of businesses and inhabitants, and their economies are different, meaning the needs are for that ecosystem to be tailored to reflect their flavor of resilience.
For a land-use intensive agrarian economy, resilience may come in the form of local investments in agricultural diversification, developing community-overflow capacity handling, and making investments in shipping infrastructure to increase market access.
For some labor-intensive manufacturing jurisdictions, the best investments may be cross-training institutions of higher learning that let people in auto-manufacturing move more easily to producing durable medical equipment and visa-versa. Even the signaling for a jurisdiction to invest in supporting those industries would have value for recruiting or retaining new firms.
Of course, each jurisdiction will be different, specific, and need an assessment of tools to deploy and how comparatively valuable they are. This will allow jurisdictions to invest their resources wisely, but again there are no easy commonalities across all systems for those looking for a magic bullet. The more readily adaptable the use of land, labor, and capital are in the jurisdiction, the more resilient the economy will be in the face of exogenous shocks like pandemics. If the jurisdictions have complex rules, regulations, processes, and if the time, effort, and resources required to reallocate resources are high, the economy cannot adapt to new circumstances easily. And even the best intentions of elected officials and the resources from outside efforts to plan for resilience could fail.
Andrew E. Olson is currently the Chief Strategy Officer and Vice President of Finance for Enter Inc., a venture-funded healthcare financial technology company headquartered in San Francisco CA. Having started in consulting, Andrew’s expertise in strategy, finance, economics, and data-science have driven the development of multiple data-science intensive software applications, the development of automation and data-driven operations, as well as building one of the largest sell-side social-impact bond portfolios in the United States.
With Special Thanks to Sarah Kellogg for comments, contributions, and edits - I would have put her as a coauthor but she’s too modest to accept.
Editorial Notes: At On Global Leadership, we are interested in ideas that challenge the status quo, or in looking with new eyes at solutions that have been around for decades. This moment in time, ravaged by the coronavirus pandemic and a global recession, requires innovative solutions that can tackle problems across cities and nations. This Future of Sustainable Capitalism piece looks at the importance of resilience for public sector institutions, and how cities, states, and regions can rebalance their economies by adopting the tools of agility, strategic decision-making, and risk management that have been employed so decisively by the private sector. The OGL Editorial Team