I appreciate the column by Professors Ravenscroft and Quirmbach regarding growth in Ames. They reiterated my findings that historically, Ames has grown faster than average for the state but more slowly than comparable college towns in the Midwest and communities in Des Moines area. They argue that Ames needs to avoid explosive growth or else we will face more problems such as having to build new schools or upgrade intersections.

I must point out that Ames is in no danger of explosive growth. Our growth has been so slow as to necessitate school closings. There is a huge difference between explosive growth and the minimal growth necessary to maintain a stable population of children.

The professors also contend that the retail sector is less critical because it has a higher fraction of lower paying and part-time jobs. Half of our population is college students, and Iowa State sends students out into the world with one of the highest average debt loads in the United States. Certainly that population benefits from the presence of part-time jobs, and certainly that population is critical to those of us at the upper-tail of the income distribution. Recent weakness in the retail sector, so weak that aggregate sales are not even keeping up with inflation, threatens the ability of the community to offer part-time work to students.

I have never contended that growth is an end in itself, but growth is necessary for our community to sustain itself. I would hope our local political leaders will begin to appreciate that our more recent atypically slow employment growth, wage growth, retail sales growth, and population growth have a bearing on why we have both fewer clothing stores and fewer schools than we had seven years ago. If our local policies have aimed at retarding the forces that would cause us to grow too rapidly, might it now be time to acknowledge that those policies have worked too well?

Technical Comments

Most of the facts in Professors Quirmbach and Ravenscroft are actually initially presented in my pieces. I was very careful to indicate state averages in my analysis and to explain why Ames should be compared to cities of comparable size and economic circumstances. It is not hard to grow faster than average in a state that ranks among the slowest growing states in the country. However, if one compares Ames to more appropriate comparison groups, Iowa towns in the same Des Moines area or college towns in the Midwest, we find that Ames does not fare well. Ames is growing more slowly than other cities in the Des Moines market and more slowly than other college towns in the Midwest. See my very first pieces on relative growth in Ames and comparable cities and my presentation to the city.

As I point out in my piece on retail sales, Ames generates less retail sales than do Iowa towns of comparable size and income. Professors Quirmbach and Ravenscroft contend that Ames’ retail sales are strong because Ames generates more retail sales than average for the state. I will leave it up to the reader as to which is the better comparison group, towns of similar size and income or the average across all Iowa towns, two-thirds of which are losing population.

I will make two additional points regarding the strength of retail sales in Ames:

• Ames had 46 clothing stores in 1998 but only 35 by 2005.
• Since 2000, aggregate retail sales have not even kept up with inflation, and so the volume of sales in real terms has declined.

Are these marks of a healthy retail sector? If “[retail sales are] mainly a byproduct of income growth: when people make more, they spend more” as argued by Professors Quirmbach and Ravenscroft, then wouldn’t declines in retail sales be a bell-weather for what is happening to the local economy?

The professors also present some new analysis, but their work is clouded by errors.

Unemployment rates do not signal long-run strength of the labor market

Professors Quirmbach and Ravenscroft claim the local unemployment rate is the best indicator of the health of the local job market. In fact, unemployment rates are an equilibrium phenomenon, as was pointed out 30 years ago by Nobel laureates Robert Lucas and Edmund Phelps, and as pointed out by noted economists Robert Hall and Robert Topel, local unemployment rates tend to an equilibrium level as well. Larger cities tend to have higher equilibrium rates than smaller towns because there are more resources for the unemployed in larger cities. Unemployed people in small towns leave.

As a consequence, unemployment rates do not reflect the long run strength or weakness of the labor market. If the labor market is strong, employment rises and wages rise. If the labor market is weak, employment falls and wages fall. The long-run unemployment rate is the same. Consequently, no competent economist would use relative levels of the unemployment rate as an indicator of the long run strength of the labor market. As an example, for the past 40 years, unemployment rates have been lower in the Midwest than on either coast despite the weaker economic growth in the Midwest.

The best indicators of the growth of the labor market are growth of the overall wage bill and of its components, wages and employment. Ames employment growth is relatively weak compared to other commuinities in the Des Moines area and compared to other Midwest college towns. Since 2000, Ames’ employment growth is even weak relative to the average for the state as a whole.

The survey of satisfaction with government services is not a measure of satisfaction with economic growth in Ames

Professor Quirmbach and Ravenscroft claim that Ames residents are very satisfied with the community, but they use a very selective survey of satisfaction with local government services.  The survey deals only with public opinion of local police, fire, library, water, electricity, sanitation, parks, and bus services.  None of the satisfaction indicators have anything to do with local economic development such as job opportunities, wage growth, cultural amenities, or shopping. In the area of government services, the survey most glaringly ignores the issue of local schools.  With two school closings forced by the reduction in the school age population, does anyone believe that 95% of the population is satisfied? 

        A minor point, Professors Quirmbach and Ravenscroft exaggerate the high levels of satisfaction by excluding the individuals responding “Don’t Know”.  That fraction is as low as 7% and as high as 28% of the respondents, depending on the city service.

http://www.cityofames.org/CityManager/Documents/2006AmesRSSFinalReportNoComments.pdf