The truth about tech clusters: Start-up riches do not trickle down

I n April this year, LSE professor David Madden tweeted a provocative question: “Do professional urbanists bear some responsibility for the precarious state of urban life right now – for pushing the idea that cities should be filled with start-ups and ‘innovation districts’, and not prioritising public health, social welfare infrastructure and housing justice?”

Madden is the co-author with Peter Marcuse of In Defense of Housing: the Politics of Crisis, so while not referring explicitly to COVID-19, the timing of his post leaves little doubt as to its topical resonance.

Madden’s question deserves to be raised, not so much for its singling out of possible culprits but for the spotlight it shines on current urban priorities. Simultaneously, cities are the sites of the most virulent concentrations of COVID-19 cases and deaths, and the locations where the economic consequences of slowing capitalism to a crawl in a lockdown are most visible. The way to resolve this contradiction has been hotly contested; in March, London major Sadiq Khan called for a complete stop to work on construction sites across the city, only to be overruled by a UK government determined to maintain ‘business as usual’.

Local authorities and the NHS have struggled to respond to the pandemic, provide enough personal protective equipment and hospital and intensive care beds, deal with unprecedented increases in unemployment and financial precarity, tackle an exploding crisis in social care, alleviate food poverty, and secure accommodation for the homeless. Local government in the UK is in a parlous financial state after a decade of austerity that has seen central government funding to councils cut by 60%.

Speaking with tragic prescience in early February, Jonathan Carr-West, chief executive of the Local Government Information Unit, told the Financial Times: “Our social care system is no longer on the edge, it’s fallen off the cliff.” By mid-April the Local Government Association was warning that many councils were on the “brink of financial failure”, despite the promise of additional crisis funding from central government.

Cities are the sites of the most virulent concentrations of COVID-19, and the locations where the economic consequences are most visible

Cities across the UK have invested – in every sense – in the idea that one way to replace depleted funding and secure local economies is to support the incubation of innovation-based enterprises. Phrases like ‘innovation district’, ‘knowledge-based economy’ and ‘the clustering of technology and creative industries’ that pepper the London Borough of Hammersmith and Fulham’s industrial strategy echo many local authorities’ economic plans.

One of a series of controversial urban policies adopted by UK cities over the past four decades, including the privatisation of public spaces, business improvement districts and defensible space, the start-up/innovation ‘solution’ is a neoliberal-era import from the US. Innovators are incentivised to locate ‘disruptive’ start-ups in a city, forming networks of expertise, talent and money, and foster mutually supportive connections between their businesses, universities, sources of finance, landowners and local government to create a self-reinforcing ecosystem through a process of ‘agglomeration’.

One of the theoretical foundations of this policy was proposed by economist Enrico Moretti in 2010. His ‘multiplier effect’ is the idea that every high-tech job generates an additional five, “spurring a virtuous cycle of economic development and employment growth”. This lent legitimacy to the principle of ‘trickle-down economics’ developed by Ronald Reagan’s favourite economist, Arthur Laffer, which is the idea that lowering taxation rates for successful companies and wealthy individuals benefits the whole of society. The pervasive influence of Richard Florida’s 2002 book The Rise of the Creative Class helped embed the multiplier effect in urban policy.

A growing body of research has challenged Moretti’s theory over the past decade. Most of the jobs created by the multiplier effect are low-paid service positions, tech cities have obvious burgeoning income inequalities and the expansion of well-paid high-tech jobs escalates housing costs, pushing out the middle classes. A recent quantitative study of US cities by Enrico Berkes and Ruben Gaetani found that “the rise of an innovation-based economy is causally linked to the surge in income segregation” – in other words, innovation exacerbates inequality.

By 2019, the tide had decisively turned. Jordan Weissmann, Slate’s senior business and economics correspondent, was describing Laffer as ‘the worst economist in the world’ for inspiring some of the most destructive economic policies of recent times. Florida issued a grudging mea culpa for his contributions, acknowledging the blatant inequality engendered by policies that encourage the “creative destruction” of entire industries, housing and communities. Stratospherically successful investor Warren Buffett stated that “the tsunami of wealth didn’t trickle down, it surged upwards”.

Can support mechanisms oriented around ‘business needs’ benefit everyone? Or could support be built around the needs of citizens, the people of the borough?

In the UK, recent research by the LSE’s Neil Lee and the Resolution Foundation’s Stephen Clarke found that each new high-tech job only generates 0.7 jobs in its local labour market. Of the seven local jobs generated by 10 tech jobs, six are low-skilled, low-paid and depress average local wages.

However, job creation is only one piece of the puzzle. My own research on mapping capital movements in local economies incorporated multiple factors including: company ownership and domicile; the availability of properly affordable housing; wage levels in different sectors and strata; where workers in local businesses actually live; land ownership; the sources and destination of rents, interest, dividends, profits and taxes; and the financial flows of local production, manufacturing and consumption.

For example, a multinational real estate behemoth running co-working facilities and renting space to fledgling enterprises is more likely to be sequestering its profits in distant tax havens than reinvesting them in the local economy.

Similarly, the funding secured for start-ups in UK regions from the 57% of UK angel investors based in London and the South East is unlikely to trickle back to Sheffield or Belfast. That’s even less likely of profits generated from the $6bn of investments in UK start-ups by US and Asian investors
in 2019.

Nevertheless, councils throughout the UK continue to pursue multimillion-pound innovation hub projects predicated on the principles of trickle-down economics. These projects are often located close to areas of marked socio-economic deprivation on the peripheries of city centres, where land is comparatively cheap and substantial buildings left over from de-industrialisation can be redeveloped to create ‘cool’ spaces for innovator firms, such as Cardiff’s Tramshed Tech. Uplift in the value of under-priced land is one of the main sources of investors’ financial gain from innovation clusters.

The Glasgow Riverside Innovation District (GRID), one of the City Region’s three Innovation Districts, is situated in Govan, a formerly thriving centre of shipbuilding that is now one of the 10 most deprived areas in the UK – a community marred by poverty, drug addiction, gang culture and low life expectancy. GRID’s relationship with the residents of Govan appears to hinge on a strategy of ‘outreach, stakeholder and community engagement’, rather than a robust process of economic inclusion. As Kevin Rush, Glasgow City Region’s director of regional economic growth acknowledged in February, the “success” of recent investments across the region “has not been shared by all”.

Perhaps in a belated response to mounting evidence that refutes trickle-down theory, councils like Glasgow are becoming more nuanced in its strategies to disseminate the wealth generated by innovation hubs and clusters, its goal now tending towards a form of “inclusive growth”.