The New-Economy has Created a Trade Deficit in Small Cities and Towns. Healthcare Spending is the Bulwark

I recently drove through Lewiston, Maine.  It’s no longer the flourishing city it once was, though until the early 20th century Lewiston (seen in the drawing above) was a booming American mill town.  Its factories, hydro-powered by the Androscoggin River, were linked by rail to Boston and other large cities.  Like many mill towns in New England, Lewiston’s factories shipped woven cotton, shoes and dyes that were then sold around the country.  This exchange of business– between big cities and local mills– kept the region economically vibrant.


Today, many mills remain shuttered

Today, even though there has been some economic revitalization (best symbolized by the repurposing of a couple of mills into micro-breweries and craft businesses) Lewiston, like most secondary New England cities, shows nowhere near the degree of economic activity found a few hours away in central Boston.  There, like Seattle, San Francisco and other innovation cities, the economy is on a tear: Boston’s Seaport district and Kendall Square are exploding, filled with new businesses fighting for talent.  It’s a huge contrast.  Given Lewiston is 130 miles from Boston and a relatively easy drive, the obvious question is why Boston’s prosperity has not extend to its peripheral secondary centers.

In a recent and important NYT article, Emily Badger argues the reason is that there has been a fundamental shift in the relationship and flow of dollars between urban centers and secondary cities.  Her first point is that the new economy doesn’t rely on secondary centers to serve as producers in the supply chain.  She describes San Francisco:

The companies that now drive the Bay Area’s soaring wealth — and that represent part of the American economy that’s booming — don’t need these [secondary] communities in the same way. Google’s digital products don’t have a physical supply chain. Facebook doesn’t have dispersed manufacturers. Apple, which does make tangible things, now primarily makes them overseas.

Badger argues that regional inter-dependencies have disappeared and that major urban areas are now more reliant on other global innovation cities than they are on on regional areas.

“These types of urban economies need other major urban economies more than they need the standardized production economies of other cities in their country,” said Saskia Sassen, a sociologist at Columbia who has long studied the global cities that occupy interdependent nodes in the world economy. New York, in other words, needs London. But what about Bethlehem, Pa.?  Such a picture, Ms. Sassen said, “breaks a past pattern where a range of smaller, more provincial cities actually fed the rise of the major cities.” Now major cities are feeding one another, and doing so across the globe….

“The hinterland for Silicon Valley is Shenzhen,” said Timothy Sturgeon, a senior researcher at the M.I.T. Industrial Performance Center.

This decreased demand for goods from secondary markets obviously reduces the money transferred into these secondary economies.  This is bad enough: but worse, Badger argues, is that secondary centers are still buyers of the innovation products sold by companies in innovation cities.  Even as demand for its exports fall, Lewiston’s appetite for imports (like iPhones) from Boston and San Francisco continues.   A major trade deficit is the consequence.  

Uber’s innovation eventually reaches smaller cities in Texas and Ohio.“But the economic benefits of it are at Uber headquarters,” said Michael Storper, an economic geographer at U.C.L.A. “The people who got rich off of it are not going to be in the small area. They’re going to be where it’s invented.”

To put it more harshly, when global cities need other communities today, Ms. Sassen said, it’s often to extract value out of them.

Now here is the interesting things about healthcare: it remains a local, high touch service business.  It turns out that the largest employers in many regional communities are healthcare delivery systems.   Around Lewiston, for example, the first and third largest employers are healthcare companies.  Here’s the list of largest employers by county in Maine.  First is Androscoggin county (around Lewiston)

Screenshot 2017-12-31 12.28.59.png

There is nothing low-end about these facilities.  The two main Lewiston hospitals, Central Maine Medical Center and St. Mary’s Regional are modern and well-kept.


Further South, near Maine’s largest city, Portland, the pattern is similar: MaineHealth is the largest employer in the county and numbers 1, 5, 6, 12 and 13 are all direct healthcare providers.

Screenshot 2017-12-31 12.29.44.png

This is an interesting dynamic.  Given that the largest purchaser of healthcare services is the federal government (via Medicare, Medicaid etc.) what we’re seeing,  I think, is in effect an “export” of local services to “buyers” from “away”.   This time the flow of dollars is from highly taxed (and young) urban areas into healthcare systems in (older) places like Lewiston.  And, since the largest expenses at most healthcare systems are salaries, these dollars stay in the community.   It’s an interesting antidote to the trade deficits found in secondary markets in the innovation era.

As we enter a national dialog about the future of “entitlement” programs, we have to be clear-headed about the importance of federal healthcare spending, not just to patients and families, but also as an economic bulwark for entire communities like Lewiston.  America’s decision to extend universal healthcare coverage to seniors has provided an important dampening effect on the economic decline of many American small cities.