End of the Road for Cities’ ‘Eds and Meds’ Sectors

End of the Road for Cities’ ‘Eds and Meds’ Sectors
September 26, 2012

In the last few decades, as suburbanization and deindustrialization devastated so many cities, they turned to two sectors that seemed not only immune to decline but were actually growing: universities and hospitals. The so-called “eds and meds” sectors, often related through university-affiliated hospitals, became a great stabilizer for many places.

For example, the fabled Cleveland Clinic cushioned the blow of manufacturing decline in that city. Après steel, a city like Pittsburgh practically saw itself as defined by an eds and meds economy, with the new economic pillars being the University of Pittsburgh Medical Center and Carnegie-Mellon University.

Perhaps unsurprisingly, these sectors have come to dominate many cites' economic development strategies. It’s harder to find a major city that isn't touting some variation of a life sciences “cluster” as a strategic industry than one that is, and local medical schools and hospital complexes feature prominently in this.

Similarly, technology transfer from schools is supposed to power startups, while in many cities growth in the number of students itself is supposed to be an engine of growth. For example, there are 65,000 students in the so-called “Loop U” collection of colleges in downtown Chicago, and education growth has been a bulwark of the Loop economy.

Problematic Overreliance

Yet in reality, overreliance on eds and meds is problematic. These tend to be nonprofits, and thus reduce the tax base in cities that depend on them. In danger of bankruptcy, Providence, Rhode Island was forced to ask for special contributions from Brown University and Rhode Island School of Design, for example. Also, as quasi public sector types of entities, eds and meds are seldom a source of dynamism in communities in and of themselves.

But for cities hanging their hat on eds and meds growth, a more fundamental problem now looms: These industries are at the end of their growth cycle. Spending on healthcare and college tuition costs has been skyrocketing at rates greater than inflation for years.

As sectors such as manufacturing went into decline or stagnated, eds and meds have continued to increase, accounting for an ever-larger portion of total growth. For example, between 1990 and 2008, eds, meds, and government accounted for about 50 percent of all national job growth.

Unsurprisingly, with growth in jobs exploding, costs have followed. Medical costs and tuitions have been growing at twice the rate of inflation and at an increasingly divergent rate.

About to Trend Down?

Some cities with unique strengths, such as Boston with its many specialized biotech firms, or Houston with the world’s largest medical center, may thrive in this environment, but the vast majority of cities are likely to be disappointed in where eds and meds growth will take them.

The problem with health care is most obvious. Aggregate spending on health care has been exceeding the inflation rate for many years. According to a report by McKinsey, spending on health care has consistently grown faster than GDP:

The net result is a sector that has been consuming an increasing portion of the national economy. Health care spending is projected to consume fully 20 percent of the entire US economy by 2021.

Doubts About College Value

Skyrocketing tuition has driven the cost of many colleges through the roof. This traditionally didn't bother students, who were assured a college education is the key to a good job that would easily allow loans to be repaid. In a global age where even knowledge economy jobs are subject to offshore competition, and a recession that's kept many young people—including many now deeply in debt—unemployed or underemployed, that assurance is not necessarily true. There is now about $1 trillion of student debt outstanding, much of it non-dischargeable in bankruptcy:

This student loan spike was created by many of the same dubious forces that led to the housing crisis. Some even say student loans are the next subprime crisis, with commentators such as Glenn Reynolds talking of a higher education “bubble”.

The overall economy will come back at some point, but it's clear he nation is reaching the point where it can no longer pile more debt onto the backs of students. This by itself will serve to moderate tuition increases at most institutions.

There is also a significant amount of reform the current system obviously needs, and if implemented, this would also tend to moderate tuition increases. For example, it doesn't seem unreasonable to suggest colleges ought to have some skin in the game for these loans being repaid. Or that cheaper online education might substitute for physical classrooms in some cases.

Is the End Near?

However it plays out, it's clear increases in health care and higher education spending cannot continue at current rates. This means it just isn't possible for all the cities out there dreaming of eds and meds glory to realize their dream. The nation simply can't afford it.

Whether the end of the great growth phase in eds and meds comes one, five, or 10 years from now can't be predicted. But it will happen in the reasonably near future, and the bulk of the cities that put all their chips in those baskets will receive a very rude awakening.

Aaron M. Renn (arenn@urbanophile.com) is an independent writer on urban affairs and the creator of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile.com, where a version of this piece originally appeared.