Friday, June 25th, 2010

Replay: The Decline of Civic Leadership Culture

Cleveland’s leadership has no apparent theory of change. Overwhelmingly, the strategy is now driven by individual projects. These projects, pushed by the real estate interests that dominate the board of the Greater Cleveland Partnership, confuse real estate development with economic development. This leads to the ‘Big Thing Theory’ of economic development: Prosperity results from building one more big thing.
– Ed Morrison, “Cleveland: Reconstructing the Comeback

Ed Morrison wrote the above about Cleveland, but he could have been describing any number of other cities. Why is it that so many cities have turned to large real estate projects to attempt to restart growth, turning away from strategies that previously made them successful?

The answer possibly lies in structural economic changes resulting from the nationalization and globalization of industry. Up until the 1990’s, many businesses, such as retailing, utilities, some manufacturing, and especially banking operated on a regional or local basis. The meant that the civic leadership of a community was heavily dominated by businessmen, again, especially bankers, whose success was dependent on the overall macroeconomic health of the particular city or region they were located in.

But with banking deregulation, we saw large numbers of hometown banks merged out of existence. Industry after industry was subjected to national or international level roll-ups as changes in the economy and regulatory environment gave increasing returns to scale.

Why is it that “real estate interests” dominate in a local economy like Cleveland? Because, to a great extent, they are among the only ones left. Consider the local industries that were not as subject to roll-ups. Principal among these are real estate development, construction, and law. This means the local leadership of a community is now made up of executives in those industries, and they bring a very different world view versus the previous generation.

Consider the difference between a banker and a lawyer. Banks make money on the spread between what they pay for deposits or wholesale funding, and what they charge for loans. This means the CEO of a bank is making money while he plays golf at 3. He’s got a cash register back at the office that never stops ringing.

By contrast, lawyers get paid by the hour for work on specific matters and transactions. The law partner is only making money on the golf course if he is closing a deal. It’s similar between many other “operational” businesses that were previously prominent in communities, and the “transactional” businesses that are now often dominant.

Additionally, even where the hometown bank or company did not get bought out, it likely escaped that fate by getting big itself and making large numbers of acquisitions or otherwise expanding. This means those institutions are less dependent on the health of the particular local market they happen to be headquartered in than they are overall macroeconomic conditions. While no doubt they want the headquarters town to be successful, not least of which so they can effectively recruit talent, they can afford to take a portfolio view of local markets.

Not only has the drying up of local and regional operating businesses led to a business leadership community unbalanced in favor of transactionally oriented firms, the loss of those local and regional operating businesses robbed many of the transactional companies such as law and architecture firms of their principal local client base. Large national businesses employ national firms for advertising, law, architecture, etc. If they use local firms, it is in a subsidiary role. (Or, if a smaller firm is fortunate enough to land a contract, it is servicing a client on a national, not local basis).

Richard Florida described this in his Atlantic Monthly article on the financial crash. “As the manufacturing industry has shrunk, the local high-end services—finance, law, consulting—that it once supported have diminished as well, absorbed by bigger regional hubs and globally connected cities. In Chicago, for instance, the country’s 50 biggest law firms grew by 2,130 lawyers from 1984 to 2006, according to William Henderson and Arthur Alderson of Indiana University. Throughout the rest of the Midwest, these firms added a total of just 169 attorneys. Jones Day, founded in 1893 and today one of the country’s largest law firms, no longer considers its Cleveland office ‘headquarters’—that’s in Washington, D.C.—but rather its ‘founding office.'”

Where then is the source of transactions these firms can turn to in order to sustain their business? The public sector, of course.

I would hypothesize that many local transactionally oriented services companies have seen the public sector take on a greater share of billings than in the past. With the old school bankers and industrialists mostly out of the picture, the leadership in our communities consists increasingly of the political class and a business community dominated by transactional interests.

When you look at the composition of this group, it should come as no surprise that the publicly subsidized real estate development is the preferred civic strategy. Politicians get to cut ribbons. Cranes always look good on the skyline. Local architects, engineers, developers, and construction companies love it. And there is plenty of legal work to go around.

This is not to say these people are acting nefariously. And nor were old school bankers and industrialists always acting purely altruistically. Rather, the difference comes from the world view and “theory of change” that people steeped in transactionally oriented businesses bring with them. But regardless of intent, their personal interest and long term community health are no longer so strongly linked. Which is why where once local business/civic leaders put money into the community, today they are more likely to be taking it out via these types of projects.

With the current financial crisis, bigness, as a strategy, is out of favor for the moment. Also, the gimmicky financial transactions that underlie much of the crisis are calling the entire transactional model into question. There’s an increasing alarm at the precipitous decline of manufacturing, particularly the auto sector. And people are questioning whether we as a country can survive simply through services, or whether we need to revitalize the concept of the operational business and actually making things. Plus, real estate deals are tougher to get done because of tight credit, and it seems unlikely that the go-go days of recent years are coming back soon.

We’ll see where this leads. But if we see more local and regional scale operating businesses start to emerge again, then perhaps the urban development pendulum will start swinging the other direction again. In the meantime, large scale real estate development will likely continue to be preferred.

This article originally appeared on July 12, 2009.

Topics: Economic Development, Public Policy, Urban Culture
Cities: Cleveland

15 Responses to “Replay: The Decline of Civic Leadership Culture”

  1. Curt says:

    It’s funny that you choose to repost this now Aaron. There were a couple of items in the Star recently talking about new real eastate developments in the Indy suburbs. One was of Cincinnati homebuilders taking over halted developments in Indy, and the other was the new of Symphony in the Westfield area.

    Apparently, some people are still clinging to that model

  2. Pete from Baltimore says:

    I hate to be cynical. But in my own hometown of Baltimore our Mayor had to resign this year as part of a plea bargin to stay out of jail[she kept her pension]. She was basicly taking money and gifts from real estate developers.

    Im sure that in the old days a lot of politicians took money from the steel mill and auto factory owners.

    But i would think that real estate developers would be more inclined to give money to politicians.Whether legally , or illegally.

    After all there are a lot of zoning laws to deal with and a lot of contracts to be given out by the Cities. There is a lot more motive and a lot more potential for curruption

  3. Wad says:

    I don’t mind being cynical myself. :)

    Mayhaps we’re nostalgic for a time and place that had never really existed.

    The old civic barons’ interest in their community was to the extent that they could enrich themselves from it. You know, just like now.

    The old operational sector gave way either because it could no longer compete with larger, better capitalized organizations. Or, the remainder saw the writing on the wall and decided that if they can’t beat ’em, they’d rather join ’em.

    Also, FIRE-based capitalism assumed such a primacy that the fiduciary duty was financially and legally more important than community reputation. Investors care about a company to the extent they can make money from it. So, they see the corporation the same way the corporation saw the cities.

    Maybe our generation is affixing an altruistic and noble narrative onto behaviors that in their time were as crass and cynical as we see businesses now.

  4. John Morris says:

    Really well thought out. Great post.

    “The old civic barons’ interest in their community was to the extent that they could enrich themselves from it. You know, just like now.”

    I don’t know, the proof is in the pudding and the long term results of their actions and investments.

    There does seem to have been some kind of shift between the old builders of London, NYC, Chicago and the classic lasting assets in so many older cities and the results we seem to get today.

    Of course one had huge damage at heavy industrial sites, or polution, but now one just seems to be getting so many things of no lasting value, where it just doesn’t look like anyone cared.

    There really is a big difference between long term “greed”, in building lasting win, win relationships and deal making profits.

    What we have today is a lot more like a stockbroker churning our account. A great post.

  5. Alon Levy says:

    By the standards of Gilded Age and Progressive Era corruption, this is mild stuff. Even in the 1950s, there was plenty of corruption, but unlike today or in the 1910s it was institutionalized and legal: “what’s good for GM is good for the USA and vice versa.”

    In some cases, you can avoid corruption by not regarding being pro-business as the be all and end all of policy. But even then, nothing is guaranteed, because the only institutions powerful enough to rein in big corporations, big labor and big government, are as corruption-prone.

  6. John Morris says:

    I don’t know if corruption is the only problem here. It’s that one has a system in which the incentives are targeted towards the deal, the fee and the ribbon cutting over the lasting value or lasting investment.

    Obviously, a huge factor in that process has been the government itself and the very common use of eminent domain, government grant money, or government guaranteed loans in one form or another.

    Heads I win, tails the taxpayer loses. how could that go wrong?

  7. the urban politician says:

    Interesting post. Thanks as always for spinning the cogwheels in my head into action.

  8. Thanks, TUP. This is one where I’d definitely defend Chicago. Its banks were always nationally oriented, so losing them didn’t change much. Also, Exelon is still locally based and they are hugely involved in various civic initiatives. The corporate and civic community of Chicago is still willing to write major checks to invest in the community, whether that be paying off the massive overruns at Millennium Park or funding the Olympic bid or getting behind a major cultural institutions fundraising drive.

  9. Alon Levy says:

    John, what you’re saying about ribbon cutting isn’t really new, either. New York has been building megaprojects for the sake of megaprojects for nearly a century, including Moses’s bridges and expressways and the IND.

  10. Alon, do you believe projects like the Moses public works were undertaken because of influence from politically connected construction, engineering, and legals interests who hoped to profit from them?

  11. Wad says:

    John Morris wrote:

    There does seem to have been some kind of shift between the old builders of London, NYC, Chicago and the classic lasting assets in so many older cities and the results we seem to get today.

    There definitely was a shift in architecture, driven by both economics and societal attitudes.

    The major economic shift corresponded with the rise of Taylorism and Fordism in the industrial workplace. It ported over to architecture as well. Projects had to be economical and as easy to knock down as they are to put up. Designs and labor were standardized and regimented.

    You lost that monumental feel in architecture as the art itself gave way to commoditized projects, much in the way specialty stores gave way to superstores. As a consequence, that art was left to atrophy as the market vanished.

    The other attitude, specifically in the U.S., was an aversion to urbanism. Industrialization was fast and furious, and it absorbed immigrants from abroad and the domestic countryside. It’s the latter that had a harder time with adjusting to urbanism, especially with a long-standing antagonism between the country and the city.

    The antagonism didn’t go away in the new city, and rural transplants regarded city life with fear and loathing. Architecture was a subset of city life.

    Rural values emphasized simplicity, thrift and purpose. City values allowed for frippery, ostentation and indulgence. The size, style and scale of early cities served as a reminder of values that mocked and even intimidated them.

    What happened in the U.S. was that prosperity allowed residents to flee cities into suburbs, which allowed a return to rural values by going to a country atmosphere while disguising the yoke of being bound to an urban economic sphere.

    Most U.S. cities were deprived of going through the “urban phase,” of transitioning from country life to city life. Every city region in human civilization went through it, and it is a rough, traumatic process. If you look at the great cities of the world, most of them went through the urban phase centuries ago, and have become so thorougly urbanized that you wouldn’t know there had been a phase.

    The U.S. fortuitously had the suburbs to escape that pattern, but many cities were deprived of the learning experience. As a result, you didn’t have the forces to allow great cities to happen during that time.

  12. Wad says:

    Note, only the first graf in my last post was John’s. The remainder is mine. The italics didn’t close properly.

  13. Alon Levy says:

    Alon, do you believe projects like the Moses public works were undertaken because of influence from politically connected construction, engineering, and legals interests who hoped to profit from them?

    The first few were not, but after World War Two, construction unions were instrumental in pushing for more highway building.

    However, even Moses’s early road projects, as well as the pre-Moses projects, were undertaken because of political ribbon-cutting influence. What I was talking about in my comment was firstly about legacy-seeking, and only secondly about rent-seeking.

  14. John Morris says:

    I think Alon is right. Remember that Moses, lot’s of his proposed projects were never built. We can add to this things like the World Trade Center.NYC barely survived this era and Caro, wisely linked it to the fall of New York.

    The thing with New York, is that it did have enough urban fabric left with enough people fully invested in their neighborhoods and local social and small business networks to fight back.

    I really think the metaphore of a broker churning an account with no interest in the long term result works well.

    This is the thing about a place like Cleveland. Clearly, some of the interests involved in this stuff are not just hanging on, they are actually thriving as life in so much of the city gets worse.

    It’s like every Cleveland institution is playing the too big to fail card and playing on the city’s low self image.

  15. Scott says:

    After reading this I came to think of the civic and cultural consequences suffered by Atlanta when 136 members of its “highest of high society” were killed together in a plane crash in Paris in 1962.

    I couldn’t help but wonder whether Atlanta’s relative lack of cultural or civic “substance” could be as much a consequence of that crash as is Atlanta’s status as a regional “back-office” for huge businesses headquartered elsewhere?

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