Monday, November 23rd, 2009
My latest post is up over at New Geography. It is called “Geographies in Conflict“. I examine the curious case of why there is so much net domestic out-migration from supposedly booming “world cities”. Some attribute this to high taxes driving people out. I have a different take. Yes, taxes are higher there, but generally higher costs and the public policy choices they make result from macroeconomic changes. Notably, bifurcation of the city into two economic geographies and labor markets and the resulting two-tier wage structures. Cost structures and public policy clearly follow the more economically high value group, resulting in an outflow of those losing out in this new world. There’s a lot more to it than this simplified summary, so please check it out.
I am increasingly taking a much more negative view of the rising income gap in America. I think the focus on the “top 1%” is a red herring. We’ve long had a handful of plutocrats in almost any city. What we see now is what we might think of as the development of an “overclass”. I’m not sure how big it is. Maybe 5-10% of the people, perhaps more in elite core cities. There are so many of these people that their mere purchasing power drives up real estate and other costs significantly, displacing others – not just new immigrants, but also the traditional middle class – from large areas of cities.
Thinking about this in terms of the Midwest, clearly we see that Chicago is experiencing this effect and other places aren’t. When I started work at my first job out of university at Andersen Consulting in Chicago in 1992, I made less than the median income. Today, brand new employees at Accenture (the Firm’s current name), make more than the median income. I noted before the widening gap between new law firm associate salaries in Chicago and Indianapolis. Once the gap was 30%. Now a partner at a top tier Indianapolis firm tells me it is 100%. When I previously gave that stat, someone else said it was really closer to 60%, but that is still a doubling of the gap in recent years. That shows the salary inflation that has taken place in Chicago.
Think about this in terms of housing costs. A $100,000 annual salary is not uncommon for Chicago professionals. Couple with another $100K professional and you’ve got a $200,000 annual household income. Using a rule of being able to buy a house 3x your gross annual income, that means this couple can buy a $600,000 home without any gimmicks at all. And there are thousands and thousands of people with approximately that purchasing power. Unlike in places like California, the run-up in home prices in Chicago, at least in upscale urban neighborhoods, is fully supportable by incomes. This is why housing is unaffordable there for so many and will remain so.
They dynamic unleashed by this large upper-middle overclass creates a two-tier economy and unbalances public policy in its favor, leading to the exodus of the traditional middle class from the city and region. That doesn’t mean top talent can’t still be coming in. There’s just fewer of them. This dynamic features a positive feedback loop whereby more top talent raises overclass wages even higher, more squeeze on the middle class, more migration, etc.
Still, Chicago remains among the cheapest if not as the cheapest Tier One type city in America. I attribute this to the fact that, while a powerful business services center and secondary financial hub, it is not the epicenter of any major 21st century macro-industry the way Silicon Valley is for technology, LA for entertainment, NYC for finance and media, DC for government, Miami as a Latin American gateway, or even Boston with its educational complex. And I’d argue that partially a result, Chicago is notably more pro-growth and pro-business than many other Tier One cities. I will have more to say on this topic at a future date. For now, let us just note that while the problem of a two-tier economy are present in Chicago, a lot of the symptoms of unaffordability are moderated in comparison with say NYC or California. Can Chicago figure out have the best of both worlds?
As for other Midwest cities, rather than moaning about not being Chicago, they should look on the plus side and take comfort that they don’t share this problem of a two-tier economy and major wage gap between an overclass and everyone else. Of course, the downside is that most of them also don’t have as much economic dynamism as they want. The challenge is to ramp up the economic engine without leaving a good chunk of the region behind. Since their economies are much more dependent on industries and competitive positions that aren’t subject to clustering economics, these places do need to keep an eye on the bottom line as they look to upgrade themselves.
That’s the challenge for them. How can they become more attractive to talent needed to power 21st century cities while not undermining their broad based economic attractiveness to the middle class? It’s not an easy path to walk. Again, more on that in a future post.