We’re all familiar with how anchor stores work in a mall. They’re the marquee stores that make all of the rest of the stores in the mall viable by attracting the critical mass of consumers to the mall whose spending overflows into smaller stores in addition to benefitting the main attractions themselves. It’s a proven model, but in all likelihood, most readers probably have not considered how the concept of the anchor store might apply to the US economy at large. Yet, it does!
In the broader economy, anchor stores are the industries that create higher paying jobs, which in turn generate additional jobs as small and medium businesses position themselves to service the needs of the marquee companies in those industries as well as their workers who are typically well-off enough to have some extra spending money. Economists have long recognized the “anchor store industry” principle though they haven’t necessarily used that metaphor to describe it. What’s more, economic history has proven out that the principle works.
For example, automotive manufacturing was a longstanding anchor of the economy before its cataclysmic meltdown in late 2008. In its heyday, it was well understood that any substantial expansion of capacity in this sector would not only result in direct jobs for people in the industry but also result in byproduct jobs for people in related industries as well as in metropolitan areas surrounding plants. Typically the byproduct impact has been estimated at 2:1, with two byproduct jobs being created for each additional manufacturing job.
During the ’90s, the Information Technology (i.e., Y2K, Internet/Dot Com, and Telecom) sector anchored the economy. Analyses conducted at that time indicate that the byproduct impact of Information Technology as an anchor store industry was sometimes as high as 7:1. By calendar year 2000, the Internet Economy, just one of these three anchors, was generating around $830 billion in revenue. And, as bad as it eventually turned out to be, in the middle years of the Y2K decade, real estate was the anchor store in the economy. It fueled construction, home improvement, building materials, home furnishings and a host of other related industries. A more in-depth discussion of the anchor store concept can be found in my book, The Clinton Economic Boom (and Other Myths of the Clinton Presidency) released by Xulon Press.
Ever since the collapse of the real estate market, one component that has been conspicuously absent from the U.S. economic landscape is an anchor store industry. Government has attempted to fill the gap, but most would agree that this is outside the scope of government’s core mission and that fundamentally it represents a sub-optimum allocation of resources. What’s more, the results have demonstrated that government isn’t very good at the anchor store role. That’s because it doesn’t introduce new value-added goods and services into the economy. It only consumes what has already been created. As such, once government steps into the primary anchor store role, it signals that the economy is in decline.
The best thing government can do is to rapidly exit this role by creating conditions that are conducive for the creation of new anchor industries or revival of previously stalwart ones. And, there are proven practices that can be referenced for how this is done. For example, during the ’90s, government left the Internet Revolution to evolve on its own. That allowed creativity to flourish, and a whole wave of new goods, services, and business models was created as well as jobs. Similarly, we can learn from what cities and states do when they want to expand their tax base and attract new anchor industries. They put together packages of incentives including tax breaks and other inducements that minimize the risk to investors of locating their businesses there.
Ostensibly, the recent job growth numbers represent good news, and in this economy, any job growth is good news! Meanwhile, the fundamentals are still wrong, and the Obama Administration’s mindset is to double down on positioning government as the primary anchor store in the economy. Sooner or later fundamentals catch up with conditions on the ground so we are likely to see flashes of promise here and there, but over the long haul the country won’t achieve its desired results as far as the economy is concerned.