A few years ago, I came across an article in Vice that told the story of an investor who lost nearly everything on a single stock option purchase. The investor was convinced that he had discovered an undervalued stock that was destined for growth, so much so that when the stock price declined precipitously, he doubled down and invested more. The stock option soon lost all of its value, leaving the investor with a complete loss.

This story interested me because it demonstrated the importance of having a diversified investment portfolio, ensuring that you do not risk everything on a single stock that is ultimately unpredictable. And while this validated my personal (unprofessional) investment strategy, it also made me consider how this approach might apply to local economies. Investors who diversify typically do so as a hedge against risk because no one knows with certainty how an individual stock or industry will perform over time. And the longer the timeframe for making a prediction, the less reliable it becomes.

This is true in economics, climatology, biology, and virtually any other field of study because the variables that influence outcomes become less predictable as a model is scaled further into the future. In simpler terms, we can predict next week’s weather with some confidence, but predicting the weather 100,000 years from now would be considerably more challenging.

An Investment Strategy for Cities

The point here is that diversification ensures that you do not have all of your eggs in one basket, so to speak. If one stock loses value, you have an array of stocks, bonds, and other assets available to offset it. I think the same idea applies to local economies, meaning that a diversification of local industries is necessary to sustain long-term growth and mitigate the risk of economic downturn. Dependence on one or two sectors may work in the short term, but becomes extremely precarious in the medium to long term as technology, culture, and economic preferences change.

Diversification, on the other hand, allows for much greater adaptability. A city or region that relies almost exclusively on manufacturing, for example, may do extremely well during an industrial era featuring robust demand for manufactured goods. This was true for countless cities in the “Steel Belt” (before it was pejoratively renamed the “Rust Belt”) until the second half of the twentieth century, when massive cultural and economic changes led to the relative deprioritization of domestic manufacturing in the United States.

The percentage of American workers employed in factories fell from nearly 40 percent to below 10 percent between 1943 and 2010. This decline coincided with the rapid growth of numerous other industries; a process famously described as “creative destruction” by economist Joseph Schumpeter. Many towns were decimated by the loss of their factories, losing not just manufacturing jobs, but the social and economic stability that accompanied them.

Timothy Carney spends much of his book, Alienated America: Why Some Places Thrive While Others Collapse, describing how the decline of manufacturing subsequently caused the widespread closing of churches, schools, libraries, and other civic institutions, followed by soaring rates of homelessness, drug addiction, and, perhaps most alarming, hopelessness. The reasons that some of these places have never recovered are complex and innumerable, but their lack of economic diversity is undoubtedly a major factor.

While the events that cause extreme economic downturns are often unpredictable and may be indiscriminate in terms of which industries are affected (the Great Depression famously spared very few), having numerous vibrant business sectors helps mitigate the severity of the impact and accelerate the recovery. This was true following the Dust Bowl, the aforementioned industrial bust of the twentieth century, and most recently, the COVID-19 pandemic. Our cities may not be able to fully anticipate such dire events and circumstances, but they can certainly prepare for them through economic diversification.

Why Some Cities Recover While Others Don’t

An interesting study was published by the National Bureau of Economic Research last year, which analyzed how cities around the world have recovered (or failed to recover) from the deindustrialization of the latter part of the twentieth century. The authors found “a strong negative relationship between a city’s share of manufacturing employment in the year of its country’s manufacturing peak and the subsequent change in total employment, reflecting the fact that cities where manufacturing was initially more important experienced larger negative labor demand shocks. But in a significant number of cases, total employment fully recovered and even exceeded initial levels, despite the loss of manufacturing jobs.”

The main reason why some former manufacturing hubs recovered while others did not: The percentage of the local labor force with college degrees, as cities with higher shares of college graduates experienced significantly faster employment growth, with the effect partially explained by “faster growth in human capital-intensive services, which more than offsets the loss of manufacturing jobs.” Cities with a more educated workforce had a much easier time transitioning to new industries as the demand for manufacturing decreased. Put another way, some places successfully adapted to economic disruption through industry diversification, which was possible because of their advantage in workforce education and development.

Assessing the disparate recoveries of Rust Belt cities through the lens of this study provides additional clarity. Many of the Rust Belt cities that have fully recovered and are now thriving feature excellent universities that are preparing students for success in the modern economy, which is extremely important for cities since a significant percentage of graduates remain local as they begin their careers. Here are just a few examples of flourishing Rust Belt cities with renowned universities: Pittsburgh, Pennsylvania; Madison, Wisconsin; Buffalo, New York; Cincinnati, Ohio; and South Bend, Indiana. These cities have found ways to diversify and modernize their economies since the decline of their manufacturing industries, and deserve immense praise for doing so. They have provided a model for other cities and regions, which should be modified with prudence to ensure that diversification strategies implemented elsewhere are appropriately tailored to a municipality’s particular history and circumstances.

Economic Diversification in Practice

I spent some of my time during the pandemic living in the Las Vegas area, where I now work as a county planner. It was apparent to me that the local economy was far too dependent on the tourism industry, which is admittedly easy to see when hotels, restaurants, clubs, and other entertainment venues are forced to reduce operations — if not close their doors entirely.

However, this economic uniformity also plagued the region during the Great Recession, with Nevada arguably being the state that suffered the most and experienced the longest road to recovery. Nearly half of the Southern Nevada region’s gross economic output is related to tourism, according to the Las Vegas Convention and Visitors Authority (LVCVA). This statistic is something of a Rorschach test as one may interpret it as illustrating the vitality of the region’s tourism industry, while another may conclude that the local economy is overdependent on tourism. The truth is that both perspectives have merit. The region endured a 20-percent decline in visitor spending, falling from $36.9 billion in 2019 to $29.6 billion in 2020.

The financial pain for local residents who work in tourism-based occupations was severe, as over 225,000 total jobs were lost in just three months. While the region was particularly impacted because of its reliance on tourism and hospitality, these industries recovered swiftly as the pandemic subsided, which one might expect given the unique allure of Las Vegas. The more interesting part of the story — and perhaps the primary reason why the post-pandemic recovery was so much smoother than the years following the Great Recession — is because of the increased economic diversification in the Southern Nevada region and across the state.

In recent years, Southern Nevada municipalities have made economic diversification a key feature of their long-term vision, and they are reaping the benefits as a result. The economic and workforce development section of the Las Vegas 2050 Master Plan calls for “promoting and attracting occupations in target industries, including gaming and tourism, technology, healthcare, global finance, clean energy, logistics, and light manufacturing.”

The neighboring city of Henderson’s economic development strategy explicitly commits to economic diversification through the targeting of five industries as priorities for business development and recruitment: advanced manufacturing and logistics, technology, healthcare and life sciences, headquarters and global finance, and hospitality, tourism, and retail. The Clark County Master Plan encourages diversification of the economic base to enhance resilience, striking a balance between emphasizing existing industries that are successful (tourism, conventions, and gaming), while expanding emerging sectors such as healthcare, technology, autonomous vehicles, green energy, and manufacturing.

The industry that may stand out most here is manufacturing, given its decline in other parts of the country and historically limited presence in Nevada. In recent years, the Las Vegas Valley has become a national leader in industrial development, with much more planned in the near future. The trend holds true statewide, as Nevada’s manufacturing labor force has increased by nearly 17 percent since 2019. The emergence and evolution of Nevada’s manufacturing industry is not coincidental, but the product of a concerted effort with coordination between the private sector, local municipalities, and the state government. The expansion of non-tourism industries in the Southern Nevada region was a decisive factor in the robust recovery following the pandemic, and has positioned the Las Vegas Valley for sustained success in the decades to come.

There are a variety of ways to increase economic diversification, in addition to those already mentioned. Nevada has offered tax abatement programs to incentivize manufacturers to relocate to the state, including Tesla, which developed a lithium-ion battery factory in Northern Nevada that has transformed the regional economy. The tax abatements featured conditions that businesses must meet to be eligible, such as capital investment, minimum wage, and job creation requirements.

In the 2010s, South Bend, Indiana, made a conscious effort to reconceptualize its local economy under the leadership of Mayor Pete Buttigieg. A town that had struggled for decades to recuperate from deindustrialization suddenly became a hub for innovation and technology. Through a collaborative effort involving businesses, the University of Notre Dame, and other governments (including other cities in the region and the federal government), the city was finally able to turn the corner on revitalization. The establishment of the South Bend - Elkhart Regional Partnership has crystallized this progress for the region, which has brought new industries and opportunities for residents.

Pittsburgh, Pennsylvania, is another city that excelled during the industrial age, but struggled to rebound from the closing of many of its factories. After decades of economic disarray, the city has successfully rebranded itself as a science and engineering powerhouse. Some have described this as a transition from the Rust Belt to the “Brain Belt.”

These places have a new economic outlook as a result of their upstart industries, but maintaining their newfound diversification will be imperative moving forward. There are plenty of other success stories — in the United States and around the world — with the commonality being diverse local economies that have become stable, resilient, adaptable, and prosperous. Let’s learn from their investment strategies.

MICHAEL HULING is a county planner in Clark County, Nevada, USA, and an advisory council member at the Davenport Institute for Public Engagement and Civic Leadership.