Podcast
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The Role of Anchor Institutions in Regional Economies
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Deborah Diamond and Adam Scavette discuss how anchor institutions such as universities and hospitals fit into the economic life of communities. Diamond is director of the Anchor Economy Initiative at the Federal Reserve Bank of Philadelphia and Scavette is a regional economist at the Baltimore office of the Federal Reserve Bank of Richmond.
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Transcript
Tim Sablik: My guests today are Deborah Diamond and Adam Scavette. Deborah is the director of the Anchor Economy Initiative at the Philadelphia Fed, and Adam is a regional economist in the Baltimore branch of the Richmond Fed. Thank you both for joining me.
Deborah Diamond: Thanks for having us.
Adam Scavette: Always a pleasure to join the show.
Sablik: Our topic for discussion today is anchor institutions and how they affect the economic resiliency of communities. I think a good question to start with is, "What is an anchor institution?"
Diamond: At the Anchor Economy Initiative, we refer to hospitals and universities in communities as anchor institutions, and we do that for a number of reasons. They are often the largest employers in a region. They don't pick up and move like a corporate headquarters or a manufacturing facility might and they're typically nonprofits, so they're also investing in the local communities. In all of these ways, they literally and figuratively anchor a regional economy.
In lots of regions, anchor employers or anchor institutions include other large nonprofits, cultural institutions, philanthropies, sometimes even for-profits. But for the research and community engagement that we do out of the Anchor Economy Initiative, we talk about the "eds and meds" — hospitals and universities.
Sablik: Eds and meds, that's a good one to remember.
Maybe now you can tell us a little bit more about the Philadelphia Fed's Anchor Economy Initiative and the Fed's interest in this subject.
Diamond: As I mentioned, universities and hospitals are often the largest employers, so they're often involved in economic development conversations in their communities and community development conversations. But one thing we noticed was there was really an absence of a fact base around what their impact was in a regional economy. An individual hospital or an individual university might do an economic impact study that shows how many jobs they support and what their economic activity is in the context of their city or region. But as a sector for both eds and meds, there really wasn't any metrics around what they meant in regional economies and in the U.S. as a whole.
So, we launched the Anchor Economy Initiative in 2022 with an Anchor Economy Dashboard that you can find on philadelphiafed.org/anchoreconomy. The dashboard shows what the economic impacts of universities and hospitals are for 524 regions throughout the U.S. So, whatever city or region you're in, you can go to the dashboard and see what your eds and meds support is in terms of jobs, in terms of income, and in terms of GDP in your regional economy.
We added one more dimension to the Anchor Economy Dashboard and that's the Reliance Index. One question we got was, "It's really interesting to see how many jobs are supported by eds and meds, but how dependent is our region on these institutions for jobs, for overall economic activity?" The Reliance Index shows how dependent your region is relative to the U.S. as a whole. The U.S. is 1 in the Reliance Index. If you over-index in your dependence on anchor institutions, you're above 1.
Philly, which is a really eds and meds town, we're 1.4 on the Reliance Index. I looked up Richmond, which is a state capital, so it's got a lot of other things going on in its economy besides higher eds and hospitals, which certainly have a presence. Richmond is 1.1 on the Reliance Index. But if you were to look at a college town in Virginia, say Charlottesville, Charlottesville is 1.7.
Sablik: Speaking of college towns, that's something, Adam, that you've done some recent research on. How can having an anchor institution like a college or university or even a hospital positively affect a region's economy?
Scavette: The presence of universities tends to draw in as well as produce high-skilled workers. Research universities, in particular, tend to result in higher levels of productivity, industry agglomeration through clustering of firms from the same industry, as well as local knowledge spillovers which come about when, for example, inventors exchange ideas in informal settings. The United States has observed prominent examples of this through high-tech industry clusters you're probably familiar with like Silicon Valley and the San Francisco Bay area. Those have interplayed with Stanford and University of California, Berkeley to help foster shared research efforts, as well as the hiring of skilled graduates from these local universities.
Additionally, there's been some recent work suggesting that universities guard regions against long-term economic decline. Recent research by Luisa Gagliardi, Enrico Moretti, and Mikhail Serafinelli suggest that higher shares of college graduates provided resiliency for manufacturing dependent Rust Belt regions when manufacturing began to decline in most of the rich industrialized nations in the second half of the last century. There's another paper by Greg Howard, Russell Weinstein, and Yuhao Yang finding that regional universities roughly offset the negative effects of manufacturing exposure, in part through the local consumption by faculty and students.
Diamond: One other thing that I would add to what Adam described in terms of the impacts are the way that universities and hospitals also want to make investments in their neighborhoods. One thing universities especially recognized was that their surroundings impacted faculty that they wanted to attract to the university [and] students that they wanted to attract and enroll. A lot of especially urban universities were in neighborhoods that had seen decades of disinvestment in an urban core and so you see more universities, and hospitals too, investing in neighborhood economic development, whether it's housing or amenities [or] infrastructure.
This has been, in some cases, a double-edged sword. There have been long-term residents who have seen these changes in cities like Philadelphia and Baltimore and New York and Chicago and have said "This neighborhood is getting gentrified by this institution and we can no longer afford to live here" or "This doesn't feel like the kinds of amenities that are for us." So, there has been pushback.
Sablik: We'll dig into some of those concerns a little bit later on.
But first, Adam, I wanted to ask you more about the findings of your recent working paper, which we'll include a link to. I should have mentioned, Deborah, we'll also include links to that dashboard you mentioned earlier. But in your paper, Adam, you and your co-author examined whether having a flagship research university protects counties from the effects of economic downturns. What did you find?
Scavette: I worked on this with Robert Calvert Jump who is at the University of Greenwich in the U.K. We wanted to look at how college town economies behaved over the past three recessions. We looked at the dot-com recession in 2001, the Great Recession from 2008 to 2009 as well as the COVID-19 recession in 2020.
We did this by comparing the unemployment rates in counties that contain state flagship universities to a control group of counties that don't include research-intensive universities but look similar along other features. So, industrial composition would be the same. They would have a similar population as well as pre-recession unemployment levels matched up. The statistical technique is called difference in differences, since it takes the difference in outcomes between the treated and control groups before and after an event. In our case, each of the past three recessions — the dot-com, Great Recession, and COVID-19. This allowed us to see whether the unemployment rate of these college town counties were less sensitive to the national shock of a recession than the control group.
We ended up finding that there was little difference in the unemployment rates between the flagship counties and the counties without flagship universities after the dot-com recession. However, the unemployment rates in flagship counties were more than 0.5 percentage points lower after the Great Recession, suggesting that they offered a little bit of a buffer. On the other hand, the COVID-19 induced recession was entirely different. After that recession, flagship counties had unemployment rates more than 0.5 percentage points higher than their control, suggesting the opposite or a negative resiliency effect.
Our hypothesis is that any recession proofing effect from these flagship universities on the region will be driven by stable consumption demand for local goods and services. So, our small and insignificant finding for flagship counties during the dot-com recession isn't really that surprising given that U.S. consumption only slowed and never declined then. so there really wasn't any negative consumption shock that could be absorbed. However, the Great Recession was characterized by a broad decline across consumption categories. This was likely absorbed through local consumption by flagship university students, whose enrollment tends to be countercyclical, as well as faculty and staff.
If we look at that last recession, counties that were heavily reliant on higher education were badly affected by the COVID-19 recession. Nationally, we had a really large decline in consumption in spring of 2020 but then a quick bounce back by the end of the year. However, as you might remember, most universities were closed to students in 2020 and even much of 2021 due to social distancing requirements. This absence of students further compounded the negative consumption shock from the national business cycle downturn.
Sablik: That's really interesting. So, universities can provide some extra resilience, but depending on the type of recession, that could actually make a region less economically resilient.
Deborah, are there any other potential downsides to tying a region's economy to anchor institutions?
Diamond: One reason we really wanted to create the anchor dashboard is because we were seeing that there were going to be changes in higher ed and in healthcare that might actually affect the role that they played in a regional economy. There's been a lot of media coverage of challenges in higher ed from declining enrollments. They refer to the demographic cliff — a shrinking pool of 18-year-olds headed to college — changing attitudes about the value of higher education that's linked to increased cost and student loan debt. All of those trends were potentially going to impact places that had colleges, usually smaller colleges, who might be challenged financially and we've seen an increase in college closures and consolidations.
Similarly, on the healthcare side, we've seen a significant rise in rural hospital closures. We've seen more community hospitals affiliate with health systems, which changes the economics of a community hospital into one associated with a larger health system.
Anticipating that these changes in health care and higher ed weren't going to have an effect just on the institutions themselves, but also on the locations that these institutions were in, was another reason we wanted to create the dashboard. We have data from 2004 [and] data from 2019. Now we have the potential to measure this again in the future to see if impacts are changing and if reliance on eds and meds is a positive or a vulnerability for a region.
Sablik: For policymakers that are in these communities that are more reliant on anchor institutions, what lessons would each of you highlight from your work and research for them? Deborah, we could start with you.
Diamond: One thing that we've seen since we've launched the Anchor Economy Dashboard is that it can function as a catalyst for leaders of these institutions to come to the table with economic development planners and regional planners and have a conversation about the current role that higher eds and hospitals play in a regional economy and how that might be changing in the future, and also sort of acknowledge that they're part of an economic ecosystem. They're not siloed institutions. What we've seen is a trend of hospital institution leaders and higher ed institution leaders participate in conversations around what job opportunities exist at these institutions, what entry level positions can lead up to pathways to higher paying and higher skilled jobs.
Scavette: The lesson I've [taken] away from my research is that perhaps universities matter less in guarding regions against the effects of shallower recession events like the dot-com episode in 2001. It appears that they're much more consequential for major destabilizing events like the Great Recession or the industrialization over the second half of the 20th century.
The research in our paper certainly highlights the resiliency the college towns had in withstanding the Great Recession in particular. But if you look at longer-term economic trajectories, the benefits of hosting a major research university become pretty apparent, even without formal statistical analysis.
Let's take Youngstown, OH, and Pittsburgh, PA. [These] are two cities that weren't too different in terms of the reliance on manufacturing 50 or so years ago. They both lost thousands of steel jobs in the latter half of the 1900s. Youngstown fell and never recovered from the steel industry collapse and, to this day, consistently has one of the highest poverty rates in Ohio, if not the country. However, Pittsburgh took a hard hit from the steel collapse but then recovered. It has had a resurgence as a leading tech hub over the past few decades. This reinvention could never have happened without leading research universities like Carnegie Mellon University and the University of Pittsburgh.
Diamond: I'd like to add just one more thing to what Adam mentioned. When you see in the media concern or even crisis language around higher ed, one thing that's really important to distinguish, as Adam has done in his work, is different places are affected very differently by these phenomena. Large research universities, state flagship universities, [are] likely to continue to be anchors of their regional economies. There are so many forces that support their growth and development.
When we talk about challenges in communities based on changes in higher education or dependence on a college or university, it's more likely to come in a place with a small liberal arts college that might be challenged. There are regions of the country, like the Northeast and the Mid-Atlantic states, that are more challenged by the higher ed vulnerability than the Southwest.
Sablik: I imagine those variations and differences are part of what makes this such an interesting topic to study. What questions are you both researching in this space now?
Scavette: I'm currently working on a project with Daniel Centuriao and Heather Stevens from West Virginia University on the economic impact of college closures. We've seen this become a major problem since COVID-19. Since March of 2020, at least 64 public or nonprofit colleges have closed, merged, or announced closures. Using a similar difference in differences approach that I described earlier, we're planning to examine the impacts of these college closures on local labor and housing markets within these college towns.
Diamond: One question we got asked when we released the anchor dashboard that had data from 2019 is, "How has this changed in our region or city over time? Were we more dependent on eds and meds years ago or less dependent? Are they growing or shrinking?" We added data from 2004 to the dashboard just this past spring, and then president of the Philly Fed, Pat Harker, and Sisi Zhang, a researcher in the Community Development Department, and I published a research brief that shows how reliance on anchor institutions has changed over time in different places throughout the country, and tried to understand a little bit more about what that means for general economic conditions. You see a place like Philadelphia that's gotten more dependent on eds and meds, and you've seen that sector grow a lot, whereas a region like San Francisco has gotten less dependent on eds and meds over those past 15 years. So, that paper examines how those phenomena are related to other economic measures in regions.
Sablik: Yeah, both are really interesting. Well, Deborah and Adam, thanks so much for joining me today to discuss your work.