Banner image for 2019 Financial Markets Conference: Mapping the Financial Frontier

Keynote Address: Simon Johnson

As concerns mount about growing inequality and obstacles to pursuing the American Dream, a professor and co-author discusses a proposal to spur U.S. growth that involves strategic investments to create next-generation technology hubs.


Raphael Bostic: Shhh. [pause] It's amazing; that really works. I like that. Well, good evening. My name's Raphael Bostic. I'm the president and CEO here at the Federal Reserve Bank of Atlanta, and I want to welcome everyone to the 24th annual Financial Markets Conference. This is my second one, so I'm really pleased to be here, and I'm really pleased to just be a part of the continuation of a conference that has been really a landmark—and an important—program for many, many years. This year, we're actually going to look at the next decade in finance—we're going to try to look forward, and ask a question of what's coming, and what are the things we need to be prepared for, both in terms of technology—in terms of institutions—and in terms of the risks that we might be having to face. And so for the next couple of days I think it's going to be a very interesting set of conversations. You're going to hear some really interesting speakers, and my experience last year was that it was extremely thought-provoking, and I talked about it for several weeks afterward—and I'm anticipating we will have the same experience this year.

Our speaker tonight is Simon Johnson. He's the Kurtz professor of entrepreneurship at the Massachusetts Institute of Technology, and he's also the former chief economist at the IMF, the International Monetary Fund. Simon's going to discuss a book that's called Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, and this is something that's actually really important in today's environment. You know, so many people—as I've gone across the Sixth District, and the country—are starting to lose faith in the American dream and the fact that if they work hard and if they are innovative and try things, that things are going to work out; they can advance and move forward. And hope is something that in many communities, is sorely lacking. And so, anybody who has thoughts or viewpoints on the American dream and on ways that we can revive that and make that real for more people, I think that's someone that we should try to hear, understand, and really wrestle with because this is really part and parcel for the future of our country.

Now, Simon has—in addition to this book—done a bunch of stuff, and I could talk for a long time. And you know, I have a long bio on our website, and it always bothers me when people read the whole bio, so I'm not going to do that. Let's just suffice it to say, he's got some best-selling books, and he has a blog that talks about economics, and he has some really interesting research that's going on at MIT on blockchain technology and teaching about the blockchain (which is actually quite interesting as well). He's a senior fellow at the Peterson Institute, and is an adviser to many important government institutions that are thinking about banking and its future.

And so, I'm just going to stop right now and ask Simon to come up. Simon, thank you for being here. [applause]

Simon Johnson: Thanks very much for those kind words of introduction. What a great honor it is to be with you this evening, and to discuss with you—I think, Raphael, "wrestle" was the word, which I think is a metaphorical wrestle that we're planning—with regards to these issues, mapping the financial frontier of the next decade. And what I'm going to push you on tonight is (I hope) a little bit of the real economy, and the impact on jobs, and who gets what kind of gains, and what kind of losses over the next decade and further out for the American economy.

In the fall of 2017, Amazon announced they plan to build what they call a second headquarters, creating roughly 50,000 well-paying jobs, somewhere in North America. They announced this possibility with a six-week deadline for replying—that's a pretty short deadline in this kind of location business. And 238 American communities raised their hand and said, "Yes; we want those jobs." That is basically everyone who could possibly be qualified to have those jobs, according to Amazon's criteria, plus about 50 or 80 other cities who were just beyond long shots. There was an excitement, there was an idea—you know, I'm not sure that Amazon originated this, but they didn't discourage it (at least for a while)—that this investment and these jobs could be transformative in some community.

And what, in the end, did Amazon decide to do? They decided to put the jobs in Washington, D.C.—well, Northern Virginia, just next to the national airport, just across the river from the capital—and in New York City just across the East River from Manhattan. Now, the New York story becomes more complicated; we can talk about that later, if you're interested.

But the main point is the disappointment, I suppose, that followed the Amazon decision should not have surprised anyone, really. If you're an innovative company—a big, innovative company—and you're looking to hire towns of people, where do you go today? You go to Seattle, San Francisco Bay area (including San Jose), Los Angeles, or you go to Boston, New York, Washington, D.C. Of, course there are lots of other towns and places around the country (and we're going to talk about that), but the innovation economy has been drawn disproportionately to these few places.

Why do so many people feel that they want to be in on that? There are lots of things you can do, obviously—lots of ways Americans have made a living in the past. But over recent decades, we've seen jobs lost consistently to automation, particularly in manufacturing (but maybe more broadly). We've seen jobs lost to globalization—that is a very real dimension of what has happened as we've traded more with the world, and of course we experienced a huge financial crisis in 2007–2008 that wiped out a lot of other really good jobs.

I think that, first and foremost, what Americans want is growth. They want higher growth, they want higher productivity growth, they want growth that comes with and through good jobs. And we know—we in this room, all of us know—how to get that. At least, that's the argument that we put forward in our book, Jump-Starting America. And the main point is that we've done it before.

But this is not what we're proposing in the book. What we think makes sense, and what we find resonates with audiences around the country, is not actually anything completely new or different. It's exactly what the U.S. did in the '40s, '50s, and '60s. You see, in the late spring of 1940, when the U.S. was a powerful country and a renowned center for engineering—but not a scientific superpower—a group of top scientists and top political figures, frankly on (very quickly) all sides of the political spectrum, realized that the enemies they were facing (particularly in Europe but also in Asia) had technologies and were applying science in ways that were extremely dangerous, potentially to the United States.

And in a great hurry, they put together a big scientific effort, funded by public dollars, to find technologies and apply them in ways that would help the U.S. (and Allied) war effort. This led to such remarkable breakthroughs as radar—which in a very short period of time went from a rather crude instrument to something that could actually spot the periscopes of submarines at a great distance—through all kinds of other innovations around weaponry, transportation, and of course, ultimately this effort led to the creation of the atomic bomb.

Those scientists and those politicians were well aware that they had created something—not just the weapons, not just the organizational structure—but an approach, a partnership, between the public sector, the federal government, universities (that had always actually been somewhat reluctant to embrace the federal government and its funding prior to 1940), and the private sector, including private finance (and, of course, private industry). And the question in 1945 was: What can we do for peaceful purposes to build a different, more stable economy than what we'd experienced in the '20s and '30s, to create more prosperity for more people (including for everyone returning from the war)? And the answer was switch that partnership over, provide federal dollars through universities with incentives and to some degree, pressure from commercialization.

And that became the basis for a great deal of prosperity—shared prosperity—in post-World War II. And in fact, it is hard to think of a major industry that was created in that period that didn't have its foundations in exactly this public-private partnership that was invented in America during World War II. We could talk about jet aircraft, civil aviation; we could talk about modern pharmaceuticals, and all the lives that they save; or we could talk about digital electronic computers, which entirely were funded and supported by this effort.

Of course, the private sector was really important. IBM went from being a well-respected, medium-sized company in the 1930s to being the most valuable company on the U.S. stock market in the early 1970s—a tremendous effort by the people running that company, but the U.S. government was its largest customer in the 1950s and paid for about half its research and development. IBM's contract to develop air defense system (which ultimately proved less useful as the world switched from bombers to missiles)—that technology was the basis of enormous commercial success that they experienced and enjoyed in the 1960s. It was a win-win, if you like, across the board.

In 1964, this country spent 2 percent of GDP on public support for research and development, an extraordinary number. Before World War II, that number was roughly zero. Today, that number is much lower as a percentage of GDP; it's actually about 0.7 percent of GDP. So if this public R&D push, if this science-based industry and job creation was so successful, why did we back away from it? I think there are three main reasons. One is, there was a considerable amount of overreach—frankly, by the scientists, but also by the people who were using the science. Rachel Carson famously flagged, for everyone, that pesticides had been used too much and without sufficient care—and that, by the way, was government-sponsored pesticide programs, government-promoted programs (so everyone was in on that).

There were growing concerns also about radiation, and the side effects of using and developing nuclear power. Secondly, the politicians and the scientists fell out. They were great buddies during the 1950s, when the Russians launched Sputnik—challenging American power. The Americans had a rocket that was ready to go, the Vanguard rocket they launched about six weeks later. It blew up on the launch pad, so to the media that became "Kaputnik"—Sputnik to "Kaputnik." And then the Russians launched a dog (who survived) into space; that became known as "Muttnik." So you can imagine the political pressure here.

So the politicians—we love the scientists. When President Eisenhower wanted to make a bold gesture that he was understanding the issue and going to deal with it, he hired the president of MIT to be his main science adviser; the president of MIT said in his memoirs, "Nothing to do with my talents, he just wanted the brand association." But by the 1960s—and the Vietnam War definitely played a role in this—there was growing tension between what the politicians thought they wanted to do with technology (they wanted to build civilian supersonic aircraft to operate over land; it is very, very loud). And when the scientists pointed that out, they were not popular.

There were other high profile disputes, both with Democrats in the White House and with the Republicans in the White House, culminating of course with Richard Nixon firing his chief scientific adviser and refusing to appoint another one.

And the third thing that happened, of course, is that budgets became tighter. We had the Great Society, we had a turn against taxation. There was a squeeze on domestic discretionary spending, which on and off has continued over the last nearly five decades. So that combination has led to us backing away from the public commitment to research and development.

Now, one absolutely obvious and totally legitimate question at this point would be: OK, Simon, so what? So you had this post-war period, you created some things, NASA went to the moon, all right. But now we have a much bigger private sector, with regards to research and development, and it is true that total research and development, if you look at the statistics, has not come down. Public went up, public came down; private has risen and stayed up.

But here's the problem with relying exclusively (or excessively) on private research and development—and look, I love private support of science. Don't get me wrong, I'm happy to have more of this from any dimension. But nobody in the private sector, with whom I am familiar, is willing to support the kind of basic breakthrough science that gives you those brand new industries.

And that's for a very simple reason. Breakthrough science is all about spillovers; it's all about creating knowledge that you cannot, as the inventors, the innovator, as the company making the investment—you cannot capture the full benefits. It's general knowledge; it spreads broadly. Human Genome Project would be a good example. Human Genome Project was originally proposed by scientists who were tops in their fields, won the Nobel Prize. They were looking for $10 million to map the human genome, couldn't get it from any private investor in the 1980s—not interested.

You can't capture the benefits; once you make a map, everyone's going to see the map—what's in it for us? Public sector took that on, put in $3 billion over 13 years, created an industry that now employs about 280,000 people at an average wage of $70,000. So the private sector is great, and we want more of it, and more engagement and more commercialization—but it's not going to do the basics, it's not going to do the breakthroughs. And we know that the public sector can, did in the past, has done recently, and we would argue based on a lot of the research and the empirical studies that we talk about in our book, we argue that absolutely the public sector can do that again.

So one idea for boosting growth, and for more good jobs, would be let's just spend more on research and development—public R&D—and encourage the public sector to commercialize that. But there's another dimension that I want us to think about tonight, which is geography. So think back to my Amazon story. So we now have about 55 million people that live in these six major innovation hubs. They're quite incredible, nothing like it ever seen in the world—a tremendous success.

But if I take my federal money and I put that money into Kendall Square—right next to MIT campus, which the place has been transformed by the development of biotechnology industry over the past two decades—one of the things that's going to happen is, it's going to get a lot more crowded and congested. The rents in Kendall Square, which are already very high—close to, or by some estimates perhaps above, Midtown Manhattan—those rents are going to go up even more.

Driving more money into those concentrated places seems like kind of a strange thing to do, and in addition, these other large cities, much more broadly, are already incredibly congested. I mean, try driving around Silicon Valley, if you want to waste some time, or who here has flown into LaGuardia recently? Exactly. Don't do it—no, really. Take the train, drive, walk, anything other than do that. Really difficult.

And these big cities actually, interestingly enough, despite the success of the innovation economy, and despite the fact that they are pulling talent towards them—this is what Amazon said when they said why we picked D.C. and New York; they said "that's where the talent is." If you talk to graduates from leading universities (which I have the opportunity to do, in different parts of the country), I suggest you can ask them what I asked them, which is: "Where do you plan to go work after you graduate?" It is remarkable. Ninety-five, 98 percent of the answers I hear are one of those six major innovation hubs on the east and west coast.

And yet the populations there are not increasing. Because it's so crowded, because it's so expensive, a lot of people can't break in. In fact, a lot of people feel they're getting pushed out of those big cities. And it's true; the percentage of people with only a high school education is declining in major cities like New York.

So one answer is—and this is a mainstream economic proposal, not our proposal; some people say, "Well, you should just allow more people to live in these innovation hubs. Change the zoning in Boston, for example—or Silicon Valley—to allow the construction of multifamily housing." The economics of that are absolutely impeccable; the politics are impossible. There is no way you're going to change the zoning in Silicon Valley. They won't even put high density housing next to Metro stops. We can talk about why, if you're interested—but that's not going to happen.

So what else could we do? I think—I know, based on the data we presented in our book, that this idea that all the talent is just in six places is fundamentally wrong. It's a fashion, it's an idea that people have got. We look for large cities—over a 100,000 people population, reasonably low house prices ($265,000 is our threshold), more than 25 percent college graduates in the working age population, and good universities, patenting activity. And we find 102 potential cities in 36 states, with 80 million Americans that meet those criteria, that have the potential to become what we call "next-generation technology hubs."

So here's an idea: if you agree that we should be spending more on public R&D—and you can plug that into any direction of science you want; some people want to talk about green energy, some people want to talk about next-generation nuclear power, we talk about synthetic biology in the book, and other technologies—I don't think it matters. That is an important political decision, but once you've made that decision (if you want), if you believe that more science is going to give us more good jobs and higher productivity growth, then you need to think about where do you want to put those dollars.

We propose to run a competition—not like the Amazon HQ2 competition; the problem with those Amazon ...look, Amazon is just doing their job—this is not criticizing Amazon at all. This is what the private sector does. They put out these investments for bid. State and local governments pay $50 billion a year to the companies to attract that investment. The studies show that almost all of those investments take place exactly where they would have taken place anyway, without the subsidies. It's a pure transfer from your pocket as taxpayer to the shareholders of those companies. Some people call that "war between the states." That undermines your local school systems, that undermines public safety. I really don't think that's the best way forward for the next decade.

So we propose a competition, but it is not a race to the bottom. It's a race to the top, where the federal government says, "We're going to build new tech hubs for the technology that we're prioritizing, and here's the criteria that we're using." Sure, you've got to have the basic elements that makes sense—there are a lot of countries that fit that, a lot of cities that fit that bill, as we say in the book. You need to make enough land available for this development to happen; that's clearly very important, enough commercial development. You should think about affordable housing. Seattle is a remarkable success, in terms of technology development—actually it transformed, the transformation triggered by Microsoft's decision to go there—but it hasn't worked out well for a lot of people in Seattle. The gentrification issues are very real. People are getting pushed out of the big cities.

So you need to be able to build enough high-density housing—that's where the zoning point comes in. So you run a competition, you put these out for bid, you encourage people to make co-investments with you, and do this in a transparent, open way. And, at the same time I would recommend a third piece: spending more on research and development, spreading it around the country—using the advantage of the United States, which is a massive geography, and has a huge number of talented people who are not in those megacities and don't want to go live in the megacities.

But here's a piece I think we missed before, and that the geniuses of World War II—and they were geniuses—didn't think enough about, which is participation in the upside. Now, we propose to structure this competition, to structure these bids, in such a way that the local government would either own some of the real estate that's going to appreciate in value—because that's what happens in hubs—or have a surcharge on the rent that's based on the success of that specific geography, just like a mall owner charges extra on the rent if the mall generates more traffic.

So upside participate: we suggest you take that upside participation, put that into an endowment fund like Alaska does with its oil revenues. so Alaska's oil royalty fund pays out between $1,000 and $2,000 a year, on average. That may not sound like a lot of money to some people, but that lifts, on average, 20,000 Alaskans out of poverty every year. So upside participation distributed as cash to all Americans—that's our proposal.

And I made this pitch to a group of investors recently, and one of them said, "Simon, I like the public R&D piece; I agree with that. We, the private sector, are not going to do that; that's fine. It's complimentary. We'll hire the post-docs, build the industry that comes out of that. And I have no problem with the geography spreading around, sharing the wealth, because you're right: Silicon Valley has become a bit too crowded. But I'm not in favor of this upside participation," he said. "When we're successful, we'll just pay taxes." And I looked at him, and I said, "Good. But what I was thinking was, a successful American technology company does not pay taxes." That's the reality; I'm sorry.

Now, I'm all in favor of adjusting our tax system, but let's be honest—and let's be honest with ourselves. Why are so many people angry, and disbelieving in many dimensions of how this country's run, including public support for science funding? It's actually not very high. You can get funding for the National Institutes of Health—which is a remarkable success, and has tremendous positive impact; you should really double NIH funding, if you want to cure the diseases that you want to cure. The rest of the science funding budget is under great pressure, is depleted—the latest proposals are to cut it even further.

People are not excited about it. Why? Because it looks like an elite spending item. It looks like a perk. It looks like something that keeps university professors happy. I don't get any funding from the NIH, by the way. Jon Gruber does, and he discloses that in our book; I do not.

Look, this post-World War II model created by Republicans and Democrats was a brilliant breakthrough. It was an accident forced upon us by war and by the pressure of war. And it was applied to the problems of the peacetime economy in a very creative and sensible way, and it was ramped up anew during the Cold War. And you could argue a little of that "did it go too far in the military direction, was it a little too feeding into what Eisenhower called 'the military industrial complex'?" Perhaps, but it also generated a lot of good new jobs; we created the satellite industry—two-thirds of the jobs in the satellite industry worldwide today are in the United States.

We created a big part of the modern pharmaceutical industry jobs in the United States. The biotech industry—most of the jobs in the biotech industry are in the United States. If you create it first, you get to keep more of the good jobs. And you know what? Other countries have figured this out, because it's open source. We didn't even have to write our book, they read plenty of the history by themselves. They have thought about this, and as they become richer, and as they become more innovative, and as they've educated their people, they've built labs, they've thought about commercialization, and there are plenty of countries that do this in Europe and in Asia. But of course, the country that is most in the news right now, and also the country that we should think about the most over the next ten years in this regard, is China.

Now, there's nothing in this book that is about bashing China; we regard this kind of innovation competition as a potential win-win. We will invent more things, they will invent more things; we can all do fine. But if we don't—if we sit back, if we continue actually where we are now with our percent of GDP, I'll tell you what's going to happen in the next decade and beyond, which is more of those good jobs from creating new industries will be created in other countries, such as China, and we will be struggling to catch up. And we will fall back in terms of where we are on the value chain, where we are in terms of innovation, where we are in terms of creativity and science.

This is a tremendous opportunity, and a good moment; and I find lots of people on the left and the right are happy to have this conversation right now. It's a very positive conversation. But I have a question for you. I promised to speak for a half an hour, then we'd have 10-15 minutes of questions—but let me put a question to you first. And you're exactly the right set of people to ask this question. And the question actually comes in two parts: the first is, why don't we have more venture capital today in the United States? It's a puzzle. The rates of return on venture capital, as far as you can see in Silicon Valley today, are high—so one question is, why doesn't more capital go to Silicon Valley? You can answer that one if you want.

Another question is, why don't we see more capital looking for these fantastic innovative ideas in our 102 tech hubs, for example? I spoke to a couple of people in Chicago recently who have a company they founded using some financial, some fintech mathematics (an apparently sensible approach; and of course Chicago has a lot of experience with financial markets—a reasonable place to start this kind of company). And they said to me, "It's a real struggle in Chicago because we can't get the capital." Now, that is extremely strange; these are entrepreneurs testifying—and I believe them—but that's a really strange statement because: Chicago? The third-largest city in the country, with his huge depth of knowledge and business experience, and capital in any aggregate sense—and not willing to take those kinds of risks? Strange.

The second part of the question is this: so if the government is going to make this science—look, creating science and spreading around the scientific opportunities, spreading them around the country, is actually pretty straightforward. There's a lot—you know this—there's a lot of really good universities, away from the coasts—including top science departments, which we profile in our book. The distribution of really good undergraduate science programs is much broader than the distribution of top science programs—graduate programs. And the graduate programs are not all on the coasts, either.

So creating more science, building labs, attracting scientists—Texas did this with oil money in the 1980s, for example: great idea. Doing that with government money: not hard at all. But, there is a harder piece (and this is where you guys come in), which is when you build that science and when you develop those products, and when people start to build those companies, will the capital come to them? Will the capital be there, can they build the company in those places? Or do they have to—this is what happens right now, for example, in Orlando, which we profile in our book. Orlando's had a really successful push on computer simulation, and there's an interesting story about that.

But companies that do well out of their industrial part, which is a close relationship with a university (and the department of defense has been very helpful). Many of those companies moved to other cities; they moved to New York, or they moved to Silicon Valley. If you tell me, "Simon, that's just the way it's going to be forever," well, you know—I'm not really going to be believing that, but you know I guess I just have to walk away with that. I want to push you, though; I want to push you on: why not more capital taking these kinds of risks for the real economy, developing good jobs all around the country? Why not? Why not more capital taking risks—now—all across America, to help build the next generation of the American dream?

Thank you very much. [applause]

So I'm authorized to take 10-15 minutes of questions—or pushback, or wrestling (metaphorical wrestling; [laughter] that's fine, too). I've got a question up here—Doug Elliott. I think they want to use the microphone, because they're webcasting it, Doug.

Doug Elliott: That makes a lot of sense. You make a quite compelling argument, but it sounds like the big obstacles here are more likely to be political than anything else. What's your overall view of the path to make that happen?

Johnson: So, it's a fair question. Perhaps we win on the economics; I'd be very happy. And there are obviously political concerns, and political obstacles. There are many people in the political sphere—let's call them that—who are interested in what's next. I do think the topic of this conference is well-chosen. People want to look forward and say, "OK, where do we go now? What are the alternatives that are available?" And this offers a pretty positive alternative, that actually can be—you could shape this more to the left or more to the right of the political spectrum.

Will people take it up, and find ways to use it? I think "yes;" I think some version of this is going to be done, because we're leaving a lot of money on the table right now, Doug. We have this enormous scientific capability; we're not fully utilizing it, we're not fully commercializing what can come out of that. And we're watching our competitors move ahead, including China, with some very public, strategic moves in this space. We have some big opportunities, big advantages, China doesn't have. The Chinese are not as good as we are at innovation; but they're really trying hard to catch up and surpass us—and I think this point starts to get through to people.

And another one here...

Questioner #2: How do opportunities on legislation fit into the plan you have here?

Johnson: Yes, that's a great question, and something we're looking at pretty actively. So the opportunities on legislation, which came with the tax cut (reform) of two years ago, is providing a tax advantage to people who invest in some disadvantaged census tracts. And particularly, it lets you defer or maybe avoid completely capital gains that you might have accrued from some other investment.

It is very expensive, as a tax expenditure program—I have to say that—in terms of what you're giving up. We haven't yet seen evidence on the benefits, and when I looked at the materials, being put out there to investors, you do see things highlighted like, "Buy into this tract in Oakland, because it's really close to the rest of that Silicon Valley-San Jose area, and it therefore is going to have appreciation in the real estate."

That's not a bad thing; it might be part of the gentrification issue. I think if we could find a way to tie the opportunities on approach to this science push, job creation push, in the rest of the country, away from the big tech hubs, I think you could have a lot more impact, a lot more positive impact.

Questioner #3: Hi. You made some original comments about how a lot of the people want to concentrate living in certain cities. So what could the people who live in the old industrial cities, in flyover country—what can they do to bring their economies and their systems to adjust to what's happening currently?

Johnson: Many people in lots of cities have worked really hard on the issues related to this. So we did an event recently, Jon Gruber did an event, in Rochester—which they called "Jump-Starting Rochester"—and we talked about the book, and we linked it to what they're trying to do with regard to optics and photonics in Rochester. It's a good story. We're speaking in Detroit on Tuesday, at the Detroit Economic Club, about what is being done and what can be nationally, but I think there'll be a conversation there about Michigan, and a conversation about the fact that the University of Michigan - Ann Arbor is one of the world's leading technical universities, by any measure. The rebuilding of Detroit has got huge potential and is attracting a lot of interest and a fair amount of capital.

So I don't—absolutely do not—want to create the impression, or reinforce the idea, that somehow there's nothing happening in most parts of the country. I think there's a lot of attempts to grapple with the future of work, and to worry about how do we create more good jobs in our city, and to think about strengthening the relationship between the university and the private sector as part of doing that, with the local government maybe playing a role.

But the fact of the matter is that there's no entity—and philanthropists also play a role in some places—there is no entity other than the federal government that has the financial capacity to move the needle on this. You could have some individual successes—particular cities might rise or fall—but if you really want to boost growth (which is where I came in), raise productivity growth, in the way that it was raised after World War II, you need to make a major commitment.

We propose that to do this at scale would cost $100 billion a year. So we're at 0.7 percent of GDP, now—that's the public R & D support; we don't want to go back to 2 percent (1964), we want to go back to where it was in the 1980s under Ronald Reagan: that will be $100 billion per year spending on that (research and development)—which is a lot of money, when you talk to people in the political sphere.

And we don't want to do one or two of these new tech hubs—we also don't want to do 50, by the way; it's not the case that everybody gets one. We're proposing that one would launch between 20 and 30 of these tech hubs—that's a big undertaking. Only the federal government could take that on. And look, you may decide to pass; I understand. Perhaps this is the age of caution, perhaps this is the age of pessimism in the United States. But when you sit back and you pass, just keep in mind that other countries are taking a version of this, and already applying it—not based on my advice, based on their own analysis of what it takes to move ahead in the global economy.

Questioner #4: So it was 10 or 15 years ago now, but there was a paper on the power couples. And then there was a flurry of research on the colocation decisions of well-educated married couples and even since then, the trends of a sort of mating have not ebbed. How much of Amazon's decision might have just simply been, "You need to attract spouses, too?" And when you have high-educated spouses marrying high-educated spouses, how do you satisfy a dual-career couple?

Johnson: It's a very fair question. The dynamic in this book, which I think has been identified correctly by a number of people, including Enrico Moretti from Berkeley, is that in the talent economy—which, some people thought (if you look back at people writing about the future of technology in the '70s and '80s) they thought that as it became cheaper to transmit information, we would live in a more dispersed pattern. Actually, we don't. We live more concentrated now, and towns of people tend to want to get closer to other towns of people. I know companies in Boston that are reducing their presence on Route 128 (so, 45 minutes from Cambridge), and increasing the number of people in Kendall Square, which is already extremely crowded, because they want their towns and people to very close to other towns and people, particularly so they can figure out who's doing what, and hire them when they want to expand.

So there's a shortage of matings. People want to live together; people want to date other people like themselves, so that draws them to a certain locality. There's also a corporate dimension to how you manage people and how you attract people. has got really interesting hiring data—Tara's sitting next to me here—and that shows the pattern of which cities are hiring what kind of people, and it's exactly this pattern that we're talking about.

This is why we're arguing for a jump-start; we think that incremental adjustments, or the kind of changes made by states by themselves, or this or that city, don't move the needle in part because towns and people are being drawn toward where other towns and people are, in a big way. If you're making big commitments to science, it makes sense to spread that around because land's a lot cheaper. You will pull people towards you, just like they did in Texas when they ramped up medical—just like actually happened in Seattle (although that was more from a private sector set of decisions, over a longer period of time).

If you want to move the needle, if you want to impact the overall issue of good jobs and productivity growth, you need to needs to be the federal government. That's all you've got.

All right; one more question. Is that okay? Last question.

Questioner #5: Thank you.

Johnson: Yes.

Questioner #5: Simon, you asked for some pushback, so let recount the history of government investment the way I recount my day at the track to my wife: I say, "Well, I had a winner in the second, the seventh, and the ninth." I don't say what happened in one, three, four, five, six. What is this history of the efficiency of the use of government money in this regard? And just because we spent more then and grew then, doesn't mean that that spending lead to that growth, and that's the most efficient use of say, a nation's capital.

Johnson: Yes, that's a very fair question. And of course, a sharper one would be to say, "All right; in the past, you had some good results—but that was with a particular set of technologies, a particular set of opportunities, including coming out of World War II and converting to peacetime. What about today?"

So this has been studied extensively, the papers are referenced in the book—happy to give you a copy of the book—and the answer is the social rates of return on public R&D are enormous. Now the rates of return of private R&D are actually pretty high, and there's an interesting question why the private sector doesn't do more R&D, but the social rates of return—because that's the spillovers. The problem is—and this is the key point, which is-- we didn't make this up at all, this is based on a lot of research—the key point is that you get those very high rates of return, but you don't capture them in any one corporate entity, or any one individual; they're spread across society.

So high social rates of return, and the evidence—including the latest evidence, by John Van Reenen, my colleague at MIT—is that these higher social rates of return continue today. However, there is a very important point, which is also perhaps implied by where you were going with this question, which is—and I think this is the biggest [inaudible] 19 of them were successful, and one was a failure. One thing you might say to him or her would be, "Well, you didn't take enough risk." Venture capital model is, no more than three out of ten are successful; in fact, one home run out of ten pays for everything, and the rest of them might break even, they don't really care.

If the government makes 20 investments and 19 are successful, and one is Solyndra, that becomes the story. And our political process is such that we are not good at dealing with failure, and not good at thinking of failure in the context of an overall portfolio, which is what you need to do in order to make this work.

So on social rates of return, I'm standing on the shoulders of giants; well, I look good. But I do agree that we have to have a very long, heated political conversation and change how politicians view what happens if we have one failure in the midst of a portfolio with a lot of success.

Bostic: Can we thank Simon? [applause] So I have five reflections, and then he's answered the last question—and then I added one, so that's six.

The first is that in Simon's book, he has 102 metro areas that are the "jump-start" places; 23 of them are in the Sixth District alone. So that is 22.5 percent of all the jump-start places are in the Sixth District—so this is something that is very relevant and very important for the Atlanta Fed. So we're one-twelfth of the Reserve Banks, but we're almost a quarter of the jump-start places; and this is something that has struck me as I've gone around—Doug, your first question was: Is this a political problem? I actually don't think this is a political problem. I was talking with Dave, and I think this is a social problem. I think this is a psychological problem.

So a couple of weeks ago, I was in Meridian, Mississippi; and they're doing a bunch of business development stuff. And they talk to investors all the time, and investors say, "I'm just not going to invest in Mississippi; it's Mississippi." That's not political; that's in our heads about what happens in Mississippi, or what happens in Atlanta, or what happens in all these places.

I moved from Los Angeles to Atlanta; I had no idea what happened in Atlanta. I had ideas about what happened in Atlanta, but until you're there, and you know—you don't know. That's a social problem, that's a psychology problem, that's a preconceived notion that you kind of get locked in to where opportunity and possibility is. It's something we all need, we all have this, right? Each of us has that neighborhood: "I'm not going to that neighborhood; I'm not going to that city."

But how many of us were there to know what actually happens? And it's a deeper question: so why not Mississippi? Opportunity's always the same sort of thing; these neighborhoods, people have kind of preconceived notions of what happens in these places—without ever having been there, and without ever having talked to the people who live there, to know whether there are interesting things going on, and that's a mindset we all have to get around.

I could talk about this for a long time; I'm going to shut this down, know, with workforce development, it's the same space, right? We know we have shortages of electricians and plumbers and carpenters, and when I go around and I ask people, "How many people want their child to be a plumber?" Nobody says they want their child to be a plumber. So that's in our heads; that's an "us" issue, and this is very much in that line.

There was a question about what other places are doing. So Tulsa, Oklahoma—I don't know if you've seen the stories, but Tulsa is paying $10,000 for anyone to move to Tulsa for one year. They're just going to give you ten grand! And their expectation is that when people go, they're going to discover Tulsa's interesting, there are neat things there, things they never imagined—they could live there for a long time. And so it's about how do you open awareness to introduce the possibility of investment in ways that are quite interesting?

Two—I guess three—other points. One is, you gave me a flashback to when I was interviewing for my first job as a professor. So I'm an urban guy, and I was at the University of Maryland, and I was interviewing and the professor said, "Why are you studying urban places? With all this 'freedom of information,' easy communication, cities are going to disappear. You could live anywhere; you don't need to be near anyone." And exactly the opposite has happened. And it's really interesting that it speaks to a fundamental question about how do we think the world works, as compared to how the world actually works, and what are we missing in how we think about our places that is not allowing us to be informed in ways that can create policies and incentives that really work?

The last two questions...last two points. One, this issue about incentives for failure; having worked in government for many years, most government officials, they view their job as to avoid being in the headlines, and avoid being the "Solyndra," even when there are interesting things that might actually make us all better off. Taking risks can pay off. Risks don't pay off in the public sector, and that's an "us" issue.

If we allowed risk to pay off, then people might take more risks, but as long as we buy the newspapers when they identify the scandals, then no one's going to take those risks—and we're going to be in a much worse place, because innovative people won't be innovative.

Then the last thing I would say is, ultimately, this is really a question about our collective commitment to sacrifice, to take chances, to invest in places and in people who we may not know, or may not be familiar with—but be hopeful. And in my introduction, I talked about hope. We have an issue of hope that we might want to examine as well because there are many people in this country who really want to do great things, and we should help them do that.

So, I'm going to stop there. This was very provocative—as you can tell, he talked for half an hour, I could talk for like two hours. But please, enjoy your dinner, and we will continue these conversations for the next couple of days. Thank you. [applause]