The Economic Future of The Berkshires – A Reconsideration

January 14th, 2017
in macroeconomics

by Elliott Morss, Morss Global Finance

Editor's note:  While this analysis is specific to the Berkshires, it has elements in common with many rural areas in the U.S. that are experiencing economic retrenchment and population declines.

Follow up:

Introduction

Last October, I wrote a piece on the economic future of The Berkshires. Many have pointed to declining populations as a troubling sign. I concluded:

  • Manufacturing has left and will not return. This conclusion is buttressed by the all-pervasive political opposition to new natural gas pipelines, thereby insuring high energy prices for the foreseeable future.
  • The well-educated young people of The Berkshires leave for the bright city lights.
  • The Berkshires will not become the next Silicon Valley. Spending monies to attract any of these groups will for the most part be wasted.
  • But there is hope. Wealthy middle age and older people from all over the world like the region. Some just visit while end up moving here. They are attracted by the outdoors, the arts, adequate medical facilities and the “wellness” industry

Since then, several things have changed my view. I read two excellent pieces on technology futures and interviewed six entrepreneurs who work and live in The Berkshires. I conclude there are a number of reasons to be hopeful. In fact, I believe the population of at least part of this region will start growing again in the not too distant future.

Technology Futures

a. The Bain Study

We are all aware that as a result of the information revolution, technological change is occurring at an accelerating pace. Consider first the Bain & Company study Spatial Economics: the Declining Cost of Distance. In essence, Bain’s conclusions, summarized in the graphic below are that the rapidly declining costs of distance make it possible for many workers to live wherever they want. They note that surveys show people increasingly would like to live in rural areas.

Until now, the cost of distance has been minimized by using less of it. How? By locating in dense urban hubs. But times are changing. I quote from the Bain study:

“[In the future]…many cost-based constraints on businesses will diminish, creating new opportunities. Advances in technologies such as robotics and 3-D printing will allow companies to run small, efficient manufacturing units closer to the customer, tailoring products more quickly to evolving local tastes. Alternatively, firms may outsource the final production of goods to neighborhood 3-D printers. As they embrace these technologies, companies will become less dependent on concentrated workforces to optimize production.”

Bain points out that declining distance costs will allow workers to live in rural areas “at the expense of the traditional compromise of the more inner suburbs.”

One problem of rural areas is the high costs of providing services. In comparison to cities, the low densities have made service delivery problematic. This is particularly true for places like The Berkshires where seasonality means there are going to be high and low volume times. Bain predicts that with automation reducing fixed costs, restaurants and other retail institutions will be able to make profits in low-density areas. And for people living in rural areas, the ability to buy online reduces the need for retail located nearby.

Bain also sees changes coming in manufacturing:

Applications of 3-D printing have become increasingly sophisticated and now rival traditional manufacturing processes. As costs come down, 3-D printing will accelerate the growth of local manufacturing, which looks likely to take off around the start of the next decade…. Already, UPS offers a 3-D printing service at 60 store locations across the US, where customers can print a self-designed custom iPhone case, an architectural model or a functional prototype. Reduced economies of scale and scope, in turn, will open up opportunities to live in more places. Companies may opt for smaller manufacturing units that are closer to the customer, so they can tailor products more quickly to evolving local tastes. Alternatively, they may outsource the final production of goods to neighborhood 3-D printers.”

For all of this to work, rural areas will need to have access to high speed broadband. Bain estimates that by 2025, all Americans will need Internet connectivity of 100 Mbps. With the MA state-sponsored broadband program, The Berkshires should have no problem in exceeding this goal.

I quote again from Bain:

Total connectivity will enable new digital service models across many sectors, including advanced two-way energy management systems and remote healthcare monitoring and delivery. Instead of getting on a plane to visit world-class clinics and physicians, for example, patients will go to local satellite clinics where they can connect to the same medical experts for a virtual diagnosis and treatment.

b. The McKinsey Study

For a number of years, The McKinsey Global Institute (MGI) has done extensive research on automation and its effects. Following on these studies, the Institute just completed a report on independent work and how it is likely to grow over the next decade.

MGI surveyed more than 8,000 respondents across six countries on who participate in independent work, why they do it, and whether they are satisfied with their careers. They concluded that while only 15 percent of the independent workforce has earned income through digital matching platforms, but these online marketplaces could eventually facilitate a larger share of independent work:

Anyone who has ever felt trapped in a cubicle, annoyed by a micromanaging boss, or fed up with office politics has probably dreamed of leaving it all behind and going it alone. The intensifying demands of corporate life are making this option more appealing for millions of workers around the world. Today, potentially transformative new digital platforms such as Airbnb, Uber, and Upwork are creating larger, more transparent, and more efficient marketplaces to connect freelancers with buyers of their services.”

Many respondents in the MGI survey—both people in traditional jobs and those who are currently not working—say they would prefer the chance to be their own bosses. Technology makes it conceivable that the old model of a corporation with employees organized in an elaborate hierarchy of digital marketplaces are transforming independent work by instantly connecting workers with customers who want their services.

MGI concludes:

If all of our survey respondents were able to pursue their stated desires, our results indicate that the independent workforce could grow from around 27 percent of the US working-age population today to as much as 30 to 50 percent in the future. In the United States, this corresponds to 76 million to 129 million individuals.”

The Berkshire Interviews

Stephen Boyd is the President of Boyd Technologies (BT), a supplier and advisor on materials to customers worldwide. Stephen grew up in The Berkshires but like many, spent his early years in cities – New York and Boston – working in finance. After marrying, Stephen returned to The Berkshires to work for BT. The company was started by Boyd’s father Bronly Boyd as a company that made paper filters. One of their major clients was Mr. Coffee.  Now, 36 years on, the company has evolved into a materials sourcing, product development and advanced manufacturing supplier to biotech and medical device OEMs.

The company, located in Lee MA, has clients all over the world. Because of the nature of Boyd’s work, nearly all its workers have engineering or other high-tech degrees. Stephen said they have recruited most of ≈50 employees from RPI, WPI or schools like Western New England University. He said very few employees leave for an urban life and suggested it’s because individuals attending those universities have a proclivity as outdoor enthusiasts for a more rural quality of life and a rewarding work experience. Stephen is very aware of the technological change potentials described above – he sent me the Bain study. He also is the Chairman and acting president of the Berkshire Innovation Center, a partnership of companies, institutions and research partners trying to implement technology changes in here in The Berkshires.

Scott Shortt – Scott grew up in Canada working on information technology in banks and insurance companies. Scott became interested in cooking and consequently attended the Culinary Institute in New York City. He always wanted to be in the hostelry business. Consequently so he looked at 19 sites in the US ended up buying The Kemble Inn in Lenox. Scott says that most of his clients live in cities. They have very little spare time but love to get out of the cities on weekends. He believes a lot more work can and should be done to market The Berkshires to such people. Scott sees the promotion of The Berkshires as far more than a zero sum game: he believes that if we get people to The Berkshire for any reason, they will find other venues to enjoy.

David Neubert – David worked for a number of years in investment banking (in cities). After marrying and having children, he decided to explore places to live. Lenox came out at the top of his list. His business involves managing investments for clients. He mentioned that all of his clients live at least 100 miles away.

Natalie Neubert – Natalie has a full time job as development director at Shakespeare. She has worked on theater projects directing/producing/consulting around The Berkshires since she moved here with David, her husband.

Natalie and David said their most important reasons for moving here included good schools, the large number of cultural/arts options year-round, and easy access to big cities and airports.

Terri Menendez is a Senior Technical Staff Member at IBM.  As a Software Engineer, she does most of her work from home with occasional trips to technical conferences or troubleshooting IBM client issues.

Tony Vitto is a neurologist. He also works out of his home as an independent contractor. He has an unusual business: he performs emergency neurology on patients throughout the US using advanced video conferencing.  He is able to see and speak to the patients, as well as access to all the diagnostic data online. There is a large demand for free-lance medical specialist people like him, especially from smaller hospitals that do not have the volume to justify full-time specialists. He said that even now, some operations being done by off-site surgeons hooked up to robots that actually perform the operations.

Terri and Tony are married. Because Terri loves horses, historic homes, and the New England “experience”, The Berkshires are a good fit. Both also enjoy the large number of live music and theater performance available year-round.

Kathy Morss, a licensed investment manager for 34 years, advises clients across the US and in several foreign countries. Kathy and I moved here in 2011 from Newton Center, a suburb of Boston.

Revised Conclusions

I earlier concluded manufacturing has left The Berkshires and will not return. The Boyd Technology case suggests this is not true. The “declining cost of distance” and the ability to communicate on Broadband will increasingly make The Berkshires an appealing locale for high-tech manufacturers.

I also concluded the well-educated young people of The Berkshires leave for the bright city lights. True, but the quality of schooling in The Berkshires is a real draw to parents such as Natalie and David Neubert. Parents want their children to be well-educated, even if they “fly the coup” after their schooling.

The Berkshires will certainly not become the next Silicon Valley. But it has the potential to appeal to numerous individuals and firms in high tech businesses.

I conclude the best way to attract these industries is to simply “carry on.” Keep supporting the arts and good schools. Scott believes, and I agree, that some additional targeted marketing will be useful. Just get people to visit. The natural beauty and the quality of life in The Berkshires will do the rest.

 









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