Sunday, December 11th, 2011

Replay: Migration – Geographies in Conflict

It’s an interesting puzzle. The “cool cities”, the ones that are supposedly doing the best, the ones with the hottest downtowns, the biggest buzz, leading-edge new companies, smart shops, swank restaurants and hip hotels – the ones that are supposed to be magnets for talent – are often among those with the highest levels of net domestic outmigration. New York City, Los Angeles, San Francisco, Boston, Miami and Chicago – all were big losers in the 2000s. Seattle, Denver, and Minneapolis more or less broke even. Portland is the only proverbially cool city with a regional population over two million that gained any significant number of migrants.

Those who find this an occasion for a schadenfreude moment attribute it to tax and regulatory climates. Clearly, things like cost of doing business are clearly very important. And indeed this is often under-rated by cool city proponents. And other things equal, people do prefer low tax jurisdictions. Still, is this the only answer, or is there another explanation? Could it be that rather than high costs driving migration, both costs and migration are being driven by other underlying factors?

Perhaps the root problem is structural change in the economy in the age of globalization. As business became more globalized and more virtualized, this created demand for new types of financial products and producer services – notably in the law, accounting, consultancy, and marketing areas – to help businesses service and control their far flung networks. Unlike many activities, financial and producer services are subject to clustering economics, and have ended up concentrated in a relatively small number of cities around the world.

These so-called “global cities” serve as control nodes for various global networks and key production sites for these services, along with other specialized niches they long had. In effect, more distributed economic activities requires increasing centralization of select functions, particularly the most highly value-added functions. Yet these activities are not set in stone; for example, areas that were once centers for global business, like Cleveland or Detroit, are fading; others like Houston and Dallas are rising.

Yet unlike the Texas cities, which retain a strong middle-class and middle-echelon economy, many of the more elite, established urban centers – for example New York and London – increasingly create parallel economies and labor markets in those cities. These cities now generally contain two kinds of people and firms: those who are part of the global city functions and those who are not. Those who are engaged in global city functions operate in a world of very high value-added activities; specialized, niche skill markets; and rising demand conditions. Those skills are not readily acquired outside of global cities. Often, they are sub-specialized to particular places as different global cities specialize in different niches.

In many cases, these functions have not yet migrated to India or China or often even another global city. This tends to inflate salaries significantly for these specialized, niche skill jobs.

On the other hand, many people who once thrived in these cities have not benefited from these economic forces. They often are in occupations where labor arbitrage is feasible, and their jobs can either be off-shored, or readily transferred to lower cost locales in the US. This includes manufacturing work, but also important but less specialized white collar occupations like basic accounting, loan officers, corporate IT, and HR. In short, the routine side of the traditional monolithic corporate headquarters and services firm.

In effect, in these global cities, two economic geographies share the same physical geography – and those economic geographies are in conflict. One set requires catering to high skill, highly paid workers and firms where cost is a secondary concern. The other involves occupations and industries where cost is very much a concern. The occupants of these two geographies have very different public policy priorities. Which of them will win out?

In a global city, particularly a mature and expensive one, the elite geography wins. It is generating the most money, and with money comes power and influence. Additionally, the high wage workers in these industries are simply able to pay more for real estate and other items. Their mere paychecks are driving up costs in the city they live in. They are re-ordering the city in their own high income image, aided and abetted by a speculative financial fueled housing bubble.

The prestige of these industries burnishes the civic brand, making them attractive to civic boosters. What’s more, leaders in global cities feel that these are their businesses of their future. For them the attractiveness of concentrating in areas where you think you can create a “wide moat” advantage makes sense.

This is why cities like Portland, Minneapolis, Denver, and Seattle haven’t fared nearly so badly – they aren’t really full metal global cities and thus, while not always cheap, have remained relatively affordable versus places like San Francisco and New York.

At the same time it is not easy for these more expensive cities to adopt a low tax, low cost approach. For many reasons, places like San Francisco, New York, and London will never, no matter what they do, be able to match Atlanta, Houston, or Dallas, or even Chicago in a war on costs. That would be a suicide mission. Their logical strategy is to follow the law of comparative advantage, and specialize where you have the best competitive position in the market, and that’s global city functions.

Many other cities have followed this strategy, but with differing success. Fearing to end up like the next Michigan and Detroit pair, many states and cities have invested heavily to build up urban amenities to cater to the global city firms and their workers: transit systems, showplace public buildings, art and culture events, bike lanes, and beautification. Cost fell by the wayside as a concern, as did investments in priorities of the traditional middle class.

This explains why, for example, not only have taxes gone up, but things like schools and other basic services have declined so badly in places like California. Traditional primary and secondary education is not important to industries where California is betting its future. Silicon Valley, Hollywood, and biotech draw their workers from the best and brightest of the world. They source globally, not locally. Their labor force is largely educated elsewhere. Basic education and investments in poorer neighborhoods has no ROI for those industries. With the decline of high tech manufacturing in Silicon Valley, even previously critical institutions such as community colleges are no longer as needed.

The same goes for growth and sprawl. They are playing a game of quality over quantity. They specialize in elite urban areas and elite suburbs or exurbs. For example, San Francisco also has Marin, Palo Alto and Los Altos Hills. New York has, in addition to Manhattan, Greenwich and northern Westchester. The only thing they need size for is sheer scale in certain urban functions, and they already have it. Growth is unnecessary for them and only brings problems.

It also explains the highly pro-immigration stance of these cities, as a large service class is needed for globalization’s new aristocrats. Immigrants are needed as low cost labor in the burgeoning restaurant and hotel business. In America’s global cities immigrant housekeepers, landscapers, and nannies are common. They may not dress like His Lordship’s butler, but that doesn’t make them any less servants.

Lastly, it explains why we have seen the same polarizing class pattern so consistently despite broad geographic and socio-political differences between places like Los Angeles, Boston, and Chicago, to say nothing of overseas locales like London. A common global phenomenon probably has a common underlying cause.

The traditional middle class, feeling the squeeze, is simply moving to where its own kind is king and its own priorities are catered to. In a battle of conflicting economic geographies, the one with higher value added wins, displacing others in what Jane Jacobs termed the “self-destruction of diversity”. First, an attractive environment draws diverse uses, then one becomes economically dominant and, through superior purchasing power, displaces other uses over time. The story ends when that dominant economic activity exhausts itself – the true danger facing global cities, though fortunately they are generally not dependent on just one small niche. It’s basic comparative advantage.

If you are just an average middle class guy, why live in one of those global cities anyway? Unless you have roots there that you value, take advantage of something you can’t get anywhere else such as by having a passion for world class opera, or are one of globalization’s courtiers – a hanger on like a high end chef, artist, or indie rocker, perhaps – why put up with the high cost and hassles? It makes no sense. You’re better off living in suburban Cincinnati than suburban Chicago.

And frankly, the folks on the global city side prefer it if you leave anyway. Immigrants are unlikely to start trouble, but a middle class facing an economic squeeze and threat to its way of life might raise a ruckus. That won’t happen if enough of them move to Dallas and rob the rest of critical mass and resulting political clout.

Many of those leaving are college educated, especially, when they get older, get married, and start having families. A relatively large number of these people could be replaced by a smaller number of elite bankers, biotech PhDs, and celebrity chefs. In that case, both “narratives” could hold simultaneously. One type of talent moves in, while a greater number of a different kind moves out. As with trade generally, this could even be viewed as a win-win in some regard.

Again, it is easy to blame the costs and public policy. Clearly there is room for improvement in governance such as reigning in out of control civil service pay and pensions in places like California and New York. But what is more pernicious is the rising income gap in America, and the likely outcomes it drives when a city acquires a small elite economic class with incomes that far outstrip the average, and lacks strong economic linkages to the rest of the city other than for personal services. It sets in motion economic logic that undermines the traditional middle class, which then starts leaving, exacerbating the gap.

For years we worried that a large, stable middle class with a permanent, largely minority underclass constituted an unjust order. As it turns out, the alternatives are sometimes worse. Ultimately some American cities have come to take on the cast of their third world brethren, a perhaps somewhat less extreme version of Mexico City or São Paulo, where vast wealth and glitter exist side by side with the favelas.

This explains why America’s global cities often feel more kinship with their international peers than with many of the places in their own country. The global cities, which now enjoy something of a political ascendency, are also sundering the American commonwealth. Taking steps to prevent a further widening of the income gap may be the only way to save these cities’ middle class – and maintain the solidarity of the country.

This post originally appeared in New Geography on November 23, 2009.

Topics: Demographic Analysis, Economic Development, Globalization, Public Policy, Talent Attraction

13 Responses to “Replay: Migration – Geographies in Conflict”

  1. stlplanr says:

    Wendell Cox let you post something positive about Portland?

  2. Huh? Wendell Cox doesn’t have any input into what I post unless I ask him for his take on something, which I sometimes do. Why would you think that he did?

  3. Matthew Hall says:

    Any thought about how this will affect specific u.s. cities? Will this affect older cities or sunbelt cities more, less, or equally? If you are leaving the northeast,what looks better, pittsburgh or charlotte?

  4. George Mattei says:

    Great post. I see a lot of truth in it.

    This describes Columbus perfectly:

    This includes manufacturing work, but also important but less specialized white collar occupations like basic accounting, loan officers, corporate IT, and HR. In short, the routine side of the traditional monolithic corporate headquarters and services firm.

    Chase Bank, for example, has increased its employment by over 6,000 people in the region over the last decade, most of it back-office type work. Jamie Dimon has said he loves Columbus, because of its educated workforce, work ethic and lower costs.

    Over time, do you think even these type of routine jobs may be offshored?

  5. M. O'Donnell says:

    Great piece, but “Seattle…more or less broke even [in the 2000s” is not true. Census data show Seattle’s population grew 8% (45,286) in the 2000s, reaching a new all-time peak of 608,660. In contrast, Portland, which is geographically much larger, but smaller in population, grew 10%, or 54,665 over the same period.

  6. George Mattei says:

    Here’s a good article that goes right to the world class cities issues mentioned above. I grew up in this area and can say it’s more or less an accurate portrayal of the area.

  7. M, O’Donnell, I was not referring to total population, but domestic migration. Cities can still grow in total population, even with domestic migration loss, through natural increase and international immigration.

  8. George, all I can say is, tons of white collar jobs are vulnerable to offshoring, but there is a sensitivity around financial info that is less acute in other sectors.

  9. Matthew Hall says:

    Back office cities and start-up cities are very different. Those cities that can combine the two really could establish a source of growth over time. Austin+ Columbus= real growth.

  10. George Mattei says:

    Interestingly, Columbus and Austin BOTH have the skills to become that city. They are both smaller and highly educated with lower business costs and large university anchors. They are more similar than dissimilar in many ways. It’s suprising they aren’t more alike.

    In fact, with a little luck, Columbus might have been Austin. CompuServe (remember them?)was founded and grew here in the city, and if it had fared a bit better and bought AOL, instead of the other way around, that might have been our Dell.

    I wonder if Austin has a “back office could-have been” moment? Are they growing back-office jobs now? Or are those going to Dallas or Houston?

  11. CityBeautiful21 says:

    You state:

    “…cities have invested heavily to build up urban amenities to cater to the global city firms and their workers: transit systems, showplace public buildings, art and culture events, bike lanes, and beautification. Cost fell by the wayside as a concern, as did investments in priorities of the traditional middle class.”

    For all the attention & drama that has accompanied the bike/ped improvements in NYC, they have been extremely nominal investments in terms of the city’s transportation budget. There are far more people in NYC who use their feet instead of a car as primary transportation, especially among those with modest incomes. How this is a step away from middle class priorities rather than a full embrace of them is beyond me.

    But are the cities that are investing in bike lanes shredding public education budgets? Are they giving up on their public housing and letting it fall into ruins? What priorities are those cities leaving behind for transit projects and arts/culture? I’d encourage you to try to track data on this with per capita spending in appropriate categories that interest you.

    Last time I checked, Cincinnati is working on a streetcar, Milwaukee paid Calatrava to design an art museum, and tons of cities host culture festivals. Maybe you think they are wrong to be doing these things, and that’s fine. But they’re not global cities, and they’re still doing them. Maybe some of their middle-class global city decampees actually consider those quality-of-life enhancements?

    To me, saying that pursuing urban policy ideas which were not in vogue 10-15 years ago that are more current today is abandoning middle class priorities is a big stretch.

    Some national political figures pained many citizens in recent years with talk of “Real Americans,” by making it clear who they excluded. While you are consistently too thoughtful a writer to have meant it that way, the “traditional middle-class” moniker suggests that there is a valid set of “true” middle class concerns and if you’re a middle-income person who is interested in any of the policy initiatives you mention, something is wrong with you or you’re a “hanger-on.”

    There are competing geographies in many metro areas, including those beyond global cities, but at the same time, perhaps the middle class is changing “traditions,” and that is discomforting to some, and local government leadership is trying to manage that change in fits and starts.

  12. Agree generally with this essay. The Portland, Denver, Seattle class of cities don’t have large groups of extremely wealthy citizens connected with global elites controlling policy decisions.
    Agree completely that “America’s global cities often feel more kinship with their international peers than with many of the places in their own country.”

    Elites in these global cities strive to increase the income gap between themselves and the “peasants” that they live among. Elimination of a middle class reduces threats to the established order.

  13. Stephen Przybylinski says:

    Minneapolis lost 40 people from 2000 to 2010; not 39, 40. With the large Somali and Latino resident influx, how is this possible? The Twin Cities highway system, third longest in mileage in U.S. Metro areas, allows for this ease of sprawl. Minneapolis’ core decline was much worse over the last ten years. Even the first-tier suburbs are being abandoned for second and ultimately third. The growth in Minneapolis is there, however, the elites this article speaks of are moving as far away as they can get from the City. It will be interesting to see Minneapolis can continue core growth.

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