“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.” — Niall Ferguson, The Ascent of Money: A Financial History of the World
“I think it’s a myth that expansions die of old age… So the fact that this has been quite a long expansion doesn’t lead me to believe that… its days are numbered.” — Janet Yellen, Federal Open Markets Committee Press Conference, December 2015
“The trouble with thinking that expansions don’t die of old age is that they do.” —Robert Samuelson, Washington Post, February 2016
Something big is happening. As of this writing, the U.S. economy has been expanding for 82 months. And in the Bay Area, the story is especially remarkable. Since 2010, the region has added more than 640,000 jobs  — gaining in five years as many jobs as our regional plan predicted would be added in 20.  San Francisco and Santa Clara have consistently been among the counties with the fastest job growth in the entire country.
But the memory of the last few recessions is burned into all of our minds. After the dot-com bust, the region shed 370,000 jobs, almost 15 percent of our total employment and more than any other region in the country. Then, during the Great Recession of 2007-09, the region shed 260,000 jobs. 
Everyone knows there will be another bust, as there always must be. But underneath the cycle of boom and bust, might there be something more significant going on — a set of more enduring changes that are remaking our economy?
I. The Repetitive Crisis
“It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why?” — Karl Marx, The Communist Manifesto, 1848
All modern economies experience swings in economic activity — periods of growth and expansion followed by periods of contraction and decline. We call this ebb and flow of economic activity the “business cycle.”
We can observe the business cycle in different ways. In growth periods, economic output rises and unemployment falls. It’s easier to get credit for business investments and consumer purchases. Many different indicators of economic activity seem to rise in unison: retail sales, corporate profits and rates of new construction. Conversely, in a recession, all these indicators tend to reverse. Output decreases, companies downsize, unemployment increases, credit is retracted, stores close and construction slows.
Figure 1: The Current Economic Expansion Is One of the Longest of the Postwar Period
US gross domestic product per capita in 2016 dollars
What causes booms to turn to busts? For at least the last several decades, our expansions and recessions tend to be caused by “credit bubbles.”  In a growing economy, people accumulate wealth and invest it — in businesses or in assets like houses. But as the cycle proceeds, the opportunities for investment become diminished, i.e., they start to have lower rates of return or they are riskier. As more people place money in riskier investments, a “bubble” of overvalued assets forms in one or more sectors. When people realize it’s a bubble, prices collapse and value is wiped away. This is what happened nationwide in 2008 with the collapse of home mortgage valuations, and in 2000 with the dot-com crash.
Since the 1990s, the Bay Area’s business cycle hasbeen more magnified than that of the rest of the state and country, growing jobs and losing them more significantly. (See Figure 3) Over some months of this cycle, our nine-county region — which holds less than 20 percent of the state’s population — has been responsible for almost half of California’s job growth.  Coming out of the Great Recession, our region’s economy has expanded at double the rate of other American metropolitan areas. 
II. The Metropolitan Economy and the Geography of Industry Clusters
“… Most nations are composed of collections or grab bags of very different economies, rich regions and poor ones within the same nation.” Jane Jacobs, Cities and the Wealth of Nations, 1984
For our purposes, it’s useful to look at Jane Jacobs’ assertion that economies function at the level of the metropolitan region, rather than the nationstate. A region such as the Bay Area shares a labor market, a real estate market, infrastructure systems, and foundational inputs to the economy such as universities and specialized finance (angel investors and venture capital). The national economy is, in effect, a summation of all the different metropolitan economies within the country.
Economic clusters — concentrations of employees and businesses in related industries — exist at the scale of the metropolitan region. A cluster is a physical, geographic concept. Our language even uses the names of places to signify industries: Hollywood, Detroit, Wall Street and, yes, Silicon Valley.
Firms within a cluster attain numerous competitive advantages. In clusters, firms get to share (and compete for) a pool of potential workers who have specialized skills and expertise in that industry. The workers in a cluster have many options of firms to work for, which improves their prospects for career advancement or simply finding a new job if they get laid off. Clusters also draw on a pool of specialized inputs and suppliers — think of lawyers, designers, bankers or other suppliers — which, again, increases the competitive advantage of firms in that location.
Figure 2: Unemployment Rate as One of the Indicators That Reveals Business Cycles
US civilian unemployment rate
The observation that companies in related industries benefit from geographic proximity to one another dates back at least to 1890, when Alfred Marshall spoke of secrets of the trade “in the air” in urban industrial districts: When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its material. 
Today we might describe those secrets in the air as serendipitous encounters, specialized skill building and knowledge spillovers.
The metropolitan Bay Area is home to multiple industry clusters. These include software, social media, advanced manufacturing, biotech and life sciences, tourism, food and wine, plus a large and diverse set of business and professional services.
But the most famous brand for the region’s economy is the technology-related industries referred to as Silicon Valley. The underpinnings of this innovation cluster include major R&D activities in universities, research institutes and private companies; a highly educated workforce with specialized skills in engineering, coding and design; the wide variety of risk capital from angels to venture capital; experienced entrepreneurs who can take an idea to market; a workforce with cultural and linguistic ties to the entire world; and a quality of life that is attractive to many different kinds of people.
There are also cultural factors: a lack of hierarchy, an entrepreneurial outlook, a celebration of diversity and new ideas, an openness to failure and a comfort with people switching jobs frequently, all of which serve to speed up the process of sharing information and iterating through collaboration and competition. 
Finally, the Bay Area is a region with a comparatively dense urban fabric, making it more efficient for people to meet face-to-face for collaboration of all kinds. Without denying the obvious fact that Silicon Valley grew up in auto-oriented suburbia, there is at least some evidence that certain parts of the modern innovative economy are thriving in more walkable urban areas.
Together these factors have contributed to the Bay Area becoming among the world’s best place to invent things, get funding, hire talented people and grow an innovative company. 
Roughly one-third of the job growth during the region’s recent expansion has been driven by firms we could classify as “tech” (31 percent, as opposed to 12 percent for California and 9 percent for the U.S.). For the purposes of this article, we define the “tech sector” using a definition taken from the Marin Economic Consulting report, Bay Area High Tech Industry Evolution. This definition includes internet business and IT services as well as engineering and manufacturing firms dealing with computers and telecommunications equipment.  The tech employment concentrated in the West Bay accounts for nearly 20 percent of the region’s jobs and has a major influence on the rest of the economy.  Tech is one of our key export sectors (in economic terms, also called the “traded sector” or “basic sector”), meaning the part of our economy that brings new wealth into our region by selling goods and services to customers outside the Bay Area. Each job in the export sector supports many more jobs in the localserving sector.
III. From Business (Cycle) as Usual to Economic Transformation
“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.” Joseph Schumpeter, Capitalism, Socialism and Democracy, 1942
For the long-term fate of regions, the business cycle is important because it can reveal or accelerate structural change. Economists like Joseph Schumpeter perceived long cycles of economic change in the bursts of innovation, which would then be developed over the next half-century. Booms and busts appear as the process of moving the economy from one stage to the next one, as new innovations are adopted and transform society. 
It’s hard to perceive the big economic transitions while we are in the middle of them. Richard Florida, in The Great Reset, argues that the Great Recession that began in 2007 is the equivalent of the Depression of the 1930s, not in terms of the extent of job loss or the length of the recession, but in terms of what was going on beneath the surface: a dislocation caused by the end of one era of economic life, and the emergence of a new one. The Great Depression marked the emergence of the “Fordist” manufacturing economy, a social formation that included the New Deal social protections, high rates of unionization and decades of investment in building out suburbia. The Great Recession, through this lens, signals the end of a previous economic era and the emergence of something new, including a new set of political and institutional supports that are struggling to come into being. Florida argues:
It’s a cycle that unveils itself in five distinct phases: In the first stage, as crisis sets in, old institutions break down and business and consumers cut back their spending. But eventually, in the second stage, new innovations emerge and begin to be introduced into the market. Third, those new technologies are forged together by entrepreneurs into bigger and better technological systems. As we get to the fourth stage, new public and private investments in energy, transportation, and communication infrastructure provide the broad skeleton of a new economic landscape and increase the speed and velocity of urban life. Ultimately, in the fifth stage, a new spatial fix emerges creating a new economic landscape that is more closely in sync with the improved productive capacities of the underlying economy. 
When we figured out how to produce all the food we needed without requiring very many workers, agricultural jobs were eventually replaced with new jobs. The 19th-century industrial economy was eventually replaced by a knowledge economy. And even within the modern era of Silicon Valley there have been many reincarnations: defense manufacturing, hardware, software, consumer tech and internet platforms. As old forms of work go away, new forms of work have to be created. Regions, just like people, reinvent themselves.
IV. The Future of the Bay Area’s Tech Cluster
“No one goes there anymore. It’s too crowded.” Yogi Berra, 1962
As we think about the prospects for the Bay Area’s economy, we must ask about what the future holds for the set of industries that are grouped together under the label “tech.” Is the Bay Area in danger of becoming too reliant on tech? Is tech even a meaningful category anymore? And how long do competitive industry clusters last, anyway?
It’s possible to imagine a range of versions of the future: optimistic, pessimistic and somewhere between.
The Optimistic Version
In the optimistic version, tech includes many distinct industries, so the regional economy is in fact quite diversified already. Tech in the Bay Area includes globally competitive firms in transportation (Uber, Lyft, Tesla); life sciences (Genentech, Chiron); consumer products (Apple, Fitbit); media (Facebook, Google, Twitter); finance (Square, Paypal); and many others. Furthermore, tech firms are transforming every aspect of the economy, so their products and services will be inputs to virtually all firms.
It may not make sense to isolate “tech” as a category in the future, because technology will encompass such a big part of our economy. An analogy can be found in the growth of non-agricultural classes 200 years ago. In 1800, 75 percent of the U.S. workforce worked in agriculture, and people who worked in manufacturing, trade or other professions (merchants, mechanics, mariners, etc.) were distrusted by thinkers like Thomas Jefferson, in whose case the feeling was joined with a mistrust of cities:
I think our governments will remain virtuous for many centuries as long as they are chiefly agricultural; and this will be as long as there shall be vacant lands in any part of America. When they get piled upon one another in large cities as in Europe, they will become corrupt as in Europe. 
But that 25 percent who worked in something other than agriculture grew to be 98 percent of the economy. Perhaps that’s what will happen with the category of “tech” as well: it will grow in ways we cannot today imagine to be a much larger share of the economy.
The optimistic version of the story reminds us that successful places tend to stay successful, as they attract the highest-skilled people and the most innovative companies, which then reinforce the competitive advantage of the place. This “lock-in trajectory” is hard for other regions to overcome.
Finally, the optimistic scenario argues that successful places are able to reinvent themselves over and over. As old industries move away or die, the region is able to form new industries based on the underlying ecosystem of capital and talent and innovative culture. New York and London are versions of this story, reinventing themselves through many social changes. The Bay Area’s history of reinvention demonstrates that this may be possible for us.
The Pessimistic Version
The pessimistic version of the Bay Area’s longterm economic future asserts that we are overly concentrated in a single industry. Successful industry clusters only last for so long, the pessimists remind us. Sooner or later, the magic is learned by other actors in other places.There is continuing and permanent competition from other regions around the world: U.S. tech hubs like Seattle and Austin; major cities like Los Angeles and New York, which offer more of everything by virtue of their scale; European tech hubs like London, Stockholm and Berlin; Asian cities like Bangalore, Shanghai and Seoul; and many other places, some of which we don’t even know about yet.
The Detroit metropolitan region was once the nation’s leading center of innovation, with the highest rate of patents per capita, and a seemingly unchallengeable hegemonic lead in the auto industry.  But despite keeping the headquarters for the “Big Three” automakers, the region has lost both its innovative edge as well as hundreds of thousands of jobs. Various factors led to its downfall, from cultural sclerosis within the leading firms to the emergence of new competitors around the world. The parable of Detroit haunts everyone who does economic development work in a successful region: What will be our undoing? How long do we have? Where are we most vulnerable?
Figure 3: The Bay Area Has Added Jobs at a Faster Rate Than California or the U.S.
Change from previous year in total non-farm jobs by region
Source: US Bureau of Labor Statistics: Quarterly Census of Employment and Wages: http://www.bls.gov/data/ Data compiled by Jon . Graph created by Sarah Jo .
In addition, the pessimists point to our failures to build up the housing supply and transportation infrastructure commensurate with job growth as a fatal problem. Largely because of these failures, firms in industries such as financial services, manufacturing and warehousing have been moving out of the region, and we have watched long-time Bay Area employers transfer their employees to other locations. Many of the larger tech firms are also growing their presence in other places, driven by the enormous savings on labor costs possible elsewhere, which is the direct consequence of housing costs.
Some problems caused by the high costs in our region could be solved with resources, which we have. If we were to make massive, generational reinvestment in transit to build out a truly great regional transit network, we could solve this major infrastructure problem, which is a drag on our economy and quality of life. It would take time and money, but this problem is solvable.
But the pessimists point out that housing costs may be harder to solve. The cities in the Bay Area have under-produced housing for decades, and have built up a hyper-complicated system of local regulations that make it virtually impossible to add supply in sufficient quantity to bring down housing costs in the region. Housing costs are experienced by firms as salary costs: how much is it necessary to pay people to be willing to locate in the Bay Area? As housing costs rise, so too does the cost of each worker, and it becomes ever more difficult to add jobs here.
There is real evidence that housing costs in places like the Bay Area are actually putting the brakes on national economic growth. In a paper last year, Enrico Moretti and Chang-Tai Hsieh estimated that the U.S. gross domestic product has been lowered by 13.5 percent over the last 50 years by constraints on housing supply typified by Bay Area cities:
Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. These constraints limit the number of U.S. workers who have access to the most productive of American cities. In general equilibrium this lowers the income and welfare of all U.S. workers. 
In theory, because development regulations are almost entirely local, we have the power to solve this problem. It is not something we need to wait for Washington to do for us. However, the pessimists worry that the economic success of the region may lead to a self-reinforcing political dynamic that locks us into perpetual high costs: as the voters get wealthier, they may become less willing to tolerate infill development in their neighborhoods. We could become like an overgrown Aspen, a town that votes for liberal politicians, but doesn’t allow high-density development — in effect, a carefully guarded and preserved playground for the elites. If the Bay Area is dominated by voters who are more interested in protecting their neighborhoods the way they found them than in fostering an openness to newcomers, then the economic success of Silicon Valley could prove its own undoing. If people with ideas from around the world cannot come here, then we cannot be the place where the future is invented.
Figure 4: The Percentage of Bay Area Jobs That Are “Tech” Has Grown Dramatically
Percent of Bay Area tech and manufacturing jobs
The Middle Path
A third potential narrative has elements of both the optimistic and pessimist ones. In this middle scenario, we continue to have a strong economy, and the tech cluster remains rooted in the Bay Area, but over time we lose our diversity and cultural dynamism.
It’s a scenario that might be OK if the only goal were to have a lot of jobs and companies that are globally competitive. But we have other goals as well: we want cities that are open and diverse, not closed off to all but the wealthy. We want cities where people can raise families, or devote themselves to art or start new political movements — in other words, where people can spend time on things other than making lots of money. We want people from all walks of life to be able to be part of this amazing place, and we want to show the rest of the country how to use a strong economy to build a socially just and inclusive society. The middle path, which seems like the most likely path, is not good for any of these goals.
The Bay Area will probably remain a good place to grow high-tech companies for a long time. The core engineering talent, as well as the people with experience starting other successful companies, can afford the high cost of housing and choose to cluster here. The essential skills, inputs and relationships for growing new companies will probably continue to be concentrated in the Bay Area.
But in this story we could lose more and more middle-income jobs to other regions that don’t have such a prohibitive cost structure. Our decision to not allow significant expansion of our housing supply will not kill our economy, but it will make it more exclusive. It will make it harder for people to move to opportunities here. It will increase inequality locally and undermine the social progressivism that the Bay Area was once known for.
One of the great tragedies of this middle-path scenario is that we will see the separation of economic creativity from other kinds of creativity, as the only people who will be able to afford to be here will be those doing things that pay a lot of money. For more than a century, cities have combined technological and economic innovation with cultural and political innovation: places like New York and San Francisco gave birth to new companies and new political movements and new forms of art — every kind of cultural experimentation. If we let the places with strong knowledge-based, creative economies get hyper-expensive, the cultural ferment that has defined city life will have to exist somewhere else.
This final scenario is where we are going to end up if we don’t change our ways. More than anything else, that means opening up the cities of the Bay Area to more physical change to allow the housing stock to expand.
Of course, all of these scenarios deal with the internal workings of the Bay Area economy and our own decisions about housing and transportation policy. National forces could upend all of this: if the country moves in the direction of a “walled” economy and Bay Area firms lose access to world markets; if we fail to regulate the financial system in intelligent ways; if we stifle innovation through changes to patent law; or any one of a hundred other decisions that will be made at the national level. Even if the “real economy” exists at the scale of metropolitan regions, many of the institutions that structure our economy exist at the national scale.
Popular culture sometimes uses the metaphor of a “gold rush” to describe economic booms: a momentary opportunity for a lucky few to get rich, and a dream that entices many more people to try their luck. But the wealth engine of the Bay Area today is built on something more enduring: a cluster of talent, firms and institutions, along with a culture that is supportive of inventing things and commercializing them. Just as successful cities have done for hundreds of years, it is this “agglomeration economy” that enables us to make things that other places want.
What we don’t know is how long this competitive advantage can last. As our high housing costs make it increasingly difficult for companies to be here, and as other regions around the world form their own innovative clusters, the Bay Area economic miracle will be tested.
At the same time, we always have to remember that our current economic success is incomplete because so many people have been left out. The need to achieve greater diversity and to build more accessible paths for people who didn’t graduate from engineering programs and don’t have high-demand skills,
remains our great unfinished project.  Still, if we truly care about inequality and opportunity, it is far better to be in a region with a growing economy than one with a shrinking economy. The Bay Area’s economic engine at least gives us a chance to spread prosperity to more people. This is the great work that unites everyone from teachers and union organizers to people starting new companies. It’s not an easy task, but we are starting to understand what it would take to build a truly inclusive workforce development system that creates pathways for people to build their skills and be able to make a decent living. We have a unique opportunity to address these issues in the Bay Area because we have the luxury of being able to take for granted the underlying strength of our economy.
In a gold rush, when the boom is played out, and the gold has been mined from the ground, the bust follows. But in a modern economy, a bust is more complicated: a time when weaker firms die and unemployment increases, but also an opportunity for new things to be started. Sometimes longer-term trends accelerate or reveal themselves through the bust’s destructive impact.
The Bay Area has reinvented its economic base over and over. As we consider the prospects today, it is striking how many of the problems we face are old and self-inflicted. We have so much going for us. But if we cannot act together now to invest in a better transit system or to expand the housing supply, we are going to severely constrict our ability to function as an open, dynamic, innovative region.
1 Data from the California Employment Development Department (seasonally adjusted by Marin Economic Consulting.
2 Based on Plan Bay Area projections for 2030 (4.19 million) compared with Association of Bay Area Government’s estimate of 2015 year-end total actuals (4 – 4.1 million).
3 Data from the CADD (see #1)
4 California Employment Development Department. News Release. November 20, 2015. http://www.edd.ca.gov/about_edd/pdf/urate201511.pdf
5 “A Roadmap for Economic Resilience: The Bay Area Regional Economic Strategy,” Bay Area Council Economic Institute. San Francisco, CA, 2015. http://www.bayareaeconomy.org/report/a-roadmap-foreconomic- resilience/
6 See Alan Greenspan, The Age of Turbulence: Adventures in a New World. (New York: Penguin, 2007).
7 Alfred Marshall, Principles of Economics. (London: Macmillan & Co, Ltd, 1890).
8 The “cultural” explanation for Silicon Valley’s sucess was developed by Anna Lee Saxenian. See: Anna Lee Saxenian. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. (Boston: Harvard University Press, 1994).
9 The Bay Area received more than 25 percent of the total venture capital funding in the world – still a good indicator of the strength of the start up sector. See: Richard Florida and Karen M. King, Rise of the Global Startup City: The Geography of Venture Capital Investment in Cities and Metros Across the Globe. (Martin Prosperity Institute, January, 2016). http://martinprosperity.org/media/Rise-of-the-Global-Startup-City.pdf
10 Some other common definitions of the “tech” sector confine it to a narrower slice of internet, software and IT businesses.
11 Mark Muro, “Multiplier Effects: Connecting the Innovation and Opportunity Agendas.” (Brookings Institution, August 23, 2012). http://www.brookings.edu/blogs/the-avenue/posts/2012/08/23-multiplieref…
12 See: Peter Hall and Paschal Preston, The Carrier Wave: New Information Technology and the Geography of Innovation, 1846–2003. (London: Unwin Hyman, 1988).
13 Richard Florida, The Great Reset. (New York: Harper Collins, 2010), 39–40.
14 Thomas Jefferson to James Madison (1787). Papers 12:442. http://press-pubs.uchicago.edu/founders/documents/v1ch18s21.html
15 See: Enrico Moretti.The New Geography of Jobs. (Boston: Houghton Mifflin Harcourt, 2012.)
16 Chang-Tai Hsieh and Enrico Moretti. “Why Do Cities Matter? Local Growth and Aggregate Growth” (April 2015). http://www.nber.org/papers/w21154
17 Economic Prosperity Strategy: Improving economic opportunity for the Bay Area’s low- and middle-wage workers. SPUR Report. October, 2014. http://www.spur.org/publications/spur-report/2014-10-01/economic-prospe…