Tuesday, July 3rd, 2012

Will New York’s Economy Strangle Itself With Success?

Big cities have been on a bit of a roll in recent years. But sometimes you can have too much success, as we may be seeing in the case of New York. This week the New York Times reported that finance firms are moving mid-level jobs away from Wall Street to places like Salt Lake City and Charlotte.

There’s a lot going on here. First, a lot this is driven by New York’s success, not its failure. New York is increasingly valuable as a site of high end production. As a result, lower value activities get squeezed out and replaced with higher ones. Despite the exodus of Wall Street jobs, New York City has been booming, and a stat from last year showed that the city was within 60,000 jobs of its all time employment high. This sort of churn is somewhat normal when high value and lower value economic geographies come into contact within the same physical space, as I noted regarding California in “Migration: Geographies in Conflict.”

It might be tempting for city leaders to actually celebrate this, but they shouldn’t. In a city that is desperate for middle class jobs, these are white collar middle class positions that are being lost. New York has stunningly high levels of income inequality – Joel Kotkin has noted it is the same as Namibia’s – and this can’t be making it any better.

Also, is there any precedent for a city being successful and dynamic, over a longer term purely as a production center for ultra-high end activities (with perhaps an associated servant class)? Sure, places like Aspen can do it. Imperial capitals seem to have been able to do something of the sort. Perhaps that’s how New York’s leaders like to see their city, but they are taking an awful risk.

New York is too concentrated in high end activities already, notably the high end of finance, as Ed Glaeser noted in his article “Wall Street Is Not Enough.” This renders it extremely vulnerable to downturns in that sector.

It might seem like exporting finance jobs would be part of that re-balancing, but when they are lower end positions, all you are doing is re-concentrating finance at more elite levels. Because to these types of businesses cost is almost literally no object, they have driven the cost of New York real estate through the roof.

When one industry becomes super-dominant in a neighborhood, Jane Jacobs noted it could lead to a situation she called “the self-destruction of diversity,” where a particular type of user – generally banks – gobble up the land and ultimate sterilize what formerly drew them to the area.

I wrote about this in regard to Chicago in a speculative piece called “Preventing the Self-Destruction of Diversity” in which I worried that redevelopment of lower rent Class B and C buildings in the Loop as condos or something would end up pushing out all but high end uses by destroying lower priced office space. It’s easy to imagine something similar in New York. It’s interesting that the new industries the city is targeting – like high tech – are also high end businesses, which can afford finance type rents and/or don’t need much space.

Maybe New York thinks it’s ok to specialize purely as a high value production center. Bloomberg took a lot of flak for calling New York a “luxury city” but it’s a simple statement of fact. No one will ever choose to do business there because it’s low cost.

On the other hand, often even high end businesses don’t always start out that way. New firms and industries often need moderate rent zones to get off the ground, and/or access to an ecosystem that relies on mid to lower value businesses, such as legacy craft industries. (Think American Apparel and other fashion businesses in LA and to a lesser extent New York that take advantage of the fabrication capabilities in those places). Jacobs also noted the advantage of big cities in having the most diverse set of industries and suppliers, which isn’t an advantage if you no longer have them because they can’t afford to be in business. A lot of the great cultural movements in New York were likewise enabled by neighborhoods with cheap rents – neighborhoods that are long gone from much of the city.

If I were New York I would not be sanguine about losing middle class jobs and people, or take too much comfort in the flourishing of ultra-high end business. There’s clearly a lot the city can do to broaden the economic base, even if they are politically challenging in practice. For example, making it easier to build in New York is something that economists like Ryan Avent have been pounding the table on for some time. Clearly with prices up, the market is signalling a need for new supply. Another thing might be fixing New York’s notorious small business climate, where the regulatory environment may well be the worst in America.

Another thing this article highlights is how smaller cities are viable locations for much higher end activities than many would ever have believed possible. It is now possible to do almost anything but the highest end activities in places like Charlotte, Salt Lake City, Nashville, Austin, Indianapolis, Kansas City, Cincinnati, etc. They have upgraded their workforce, infrastructure, and amenities such that they can compete at a level few would have thought possible 20 years ago. And they do it while still delivering rock bottom pricing and a general lack of big city traffic and taxes.

The biggest cities can no longer rely on keeping the bulk of employment just because they have the headquarters. And increasingly this even goes for professional services business, where a lot of the routine work is outsourced either overseas or to near-shore domestic locations. (I wrote a bit about this phenomenon in a piece called “Chicago: Corporate Headquarters and the Global City” in which I note a flow of corporate headquarters back into global cities, albeit reconstituted executive headquarters only).

This puts the bigger cities in a tough spot. They have to continue to go up the value chain because smaller cities are rapidly eroding their competitive advantage at lower ends. Ultimately we’ll see where this leads but I don’t think it’s healthy in the long term at all. Figuring this out is just one piece of the rebuilding our overall economy for the 21st century that needs to be accomplished.

12 Comments
Topics: Economic Development
Cities: New York

12 Responses to “Will New York’s Economy Strangle Itself With Success?”

  1. DBR96A says:

    But if New York brings more middle-class people back, then how are they going to win all the economic and lifestyle dick-swinging contests? The middle class is banal, and a city can’t be cool if it has even a modicum of banality in it. Even worse, people can’t pat themselves on the back and pretend that their personalities don’t suck if the city they live in or near isn’t cool. Let the rejects settle for Charlotte, Pittsburgh or Kansas City. At least they won’t be getting in the way of those who are actually good enough to make it in New York. Accessibility and value are for people who aren’t worthy of quality or prestige.

    (DISCLAIMER: This post is sarcasm.)

  2. Alon Levy says:

    The USA’s Gini index is 0.47. The New York metro area’s is 0.5. Let’s not get carried away pretending there’s some enormous difference there.

  3. Rod Stevens says:

    I think the most salient points here are why it is becoming a center for all but the most high-end jobs. If it’s purely a market function, then who knows how “high end” these industries may become? Maybe we are still in the mid-stages of the evolution of the finance industry.

    The first question that comes to my mind is why these jobs are moving so far away, instead of to New Jersey and New Haven. The simple answer is that the people living in these places are not well enough educated. So there may be a “supply” side reason for the specialization, that New Yorker, with its peakier peaks, cannot spread out and form a wider base of regional employment because the support structures (education) for that base are simply not there.

    It’s your corrective actions that really intrigue me. Maybe only the largest industries can flourish there because of the overhead of locating and operating there. A friend who works for a media monitoring firm right on Times Square told me that her office couldn’t move the furniture around and plug in new lighting without calling in union-scale help from the building itself! That’s the kind of union restriction that drove conventions out of the Javitz center. Big firms like Merrill Lynch might be able to afford the overhead of doing business there, but certainly not the small ones.

    Setting aside the permitting issues, the staging costs of construction alone are incredibly high. A really efficiently run city might create a permanent yard area for this. Union costs are so high that some developers are by-passing them with pre-fab construction. The new apartments in Brooklyn’s Atlantic yards will probably be built in modules elsewhere and trucked in. Those day jobs in construction will be replaced by night jobs in trucking.

    I want to see New York get more populace and healthier economically. There’s a certain maintenance of the status quo middle class through these union jobs, but that’s simply trading off jobs in one industry- construction- for those in others that might bring real money into the economy.

  4. Rod Stevens says:

    My first sentence read wrong. That should have been “I think the most salient points here are why it is becoming a center for only the most high-end jobs.”

  5. Matthew Hall says:

    I regularly meet professional ‘refugees’ from California and the Northeast in Cincinnati these days. When I push the subject a little and suggest Cincinnati’s shortcomings, they usually confide something to the effect that ‘I never imagined in a million lifetimes that I would live in a place like…..(contorted/disgusted face) Cincinnati!’ usually in a hushed and embarrassed voice. Still they are here and getting to like the idea of spending only a third or even a quarter of their income on their housing and that old fashioned thing called the week-end.

  6. Eric says:

    “It is now possible to do almost anything but the highest end activities in places like Charlotte, Salt Lake City, Nashville, Austin, Indianapolis, Kansas City, Cincinnati, etc. They have upgraded their workforce, infrastructure, and amenities such that they can compete at a level few would have thought possible 20 years ago.”

    I’m not sure this is something they did. How exactly has Cincinnati changed in the last 20 years? I would ascribe this mostly to the effect of modern communications (internet, video conferencing, etc.).

  7. Matthew Hall says:

    There is a diversity of social and cultural offerings in Cincinnati today that would have been hard to imagine even 10 years ago that has little to do with the internet. While I understand that much of this in driven by people who can now operate from Cincinnati because of the internet, the life they live in cincinnati is different from that lived by anyone here ten years ago. It is a new model for others of how to live and work here. More than a billion in public/private investment in downtown, OTR, and several other neighborhoods have made their urbane lives here possible.

  8. George Mattei says:

    Rod, I grew up on New Haven and now live in Columbus, OH and can shed some light.

    First, Columbus has 18,000 Chase jobs now. They have grown substantially in the past 10 years to be the biggest private employer in the area, and keep adding more. Jamie Dimon of Chase has said that he “Loves Columbus” because of its highly educated workforce and low business costs. In fact Chase’s last annual meeting was held here.
    The question is why?

    New Haven is cheaper than New York, but still a lot more expensive than Columbus. There are lots of banking jobs in Stamford and around Bridgeport, but the closer you get to NY, the more expensive it gets, so those also tend to be the higher-ups. New Haven has worse access to air travel (although far superior rail service and proximity to NY) and a much smaller office market, land is much scarcer and construction and labor costs much higher. Yale is there, but how many Yalies want to stay to get middle-level jobs when they can be high-level Chase execs someday? Ohio State produces tons of college-educated grads that might stay in a city near there home, that’s much more vital and offers a lot more than New Haven (Sorry hometown folks!). You can live a much better life on a lower wage, with less congestion and more job prospects if Chase happens to lay you off someday.

    Those are just a few reasons I see.

  9. Rod Stevens says:

    George,

    Interesting you are from Columbus. A friend of mine consulted with rust belt cities that were using their higher ed to try to hold onto their young people. He’s worked in Boston, Philadelphia, Pittsburgh, Cleveland, Columbus and other places. He spoke extremely highly of Columbus, saying he thought is was going to be one of those “winner places” that do very well in the future.

    I haven’t been there, but because my wife’s family lives there, I’ve been to New Haven about once a year for the last 15 years. Urbanistically, I love the place, but it has no jobs base, and the dependence on Yale is making its decision making even more constrained than it used to be. When I was in high school in the 1970s, we watched films on urban poverty, New Haven being the case study, along with New Orleans. Neither city seems to have put these deep problems behind it. And I get what you’re saying about airports. It’s a fair distance to Bradley. So I can see why firms move to Columbus. It just seems that if there were a well-educated work force in New Haven, and you had your headquarters in mid-town Manhattan, there would be some reasons to stay within the region with the back office operations. Obviously those base conditions are just not strong enough.

    By the way, UBS moved its trading floor out to Stamford about five or ten years ago. There was a NYT article last year that mentioned they were going back to mid-town with it. Seems that there are talent attraction issues that go beyond compensation rates and travel times.

    Rod Stevens

  10. Stlplanr says:

    What about the demographic impact? Will a grayer New York still be as creative and cool? Millenials and Gen-Xers are more likely to work the “mid-level jobs” leaving NYC.

  11. OhioDwight says:

    In addition to George Mattei’s excellent reasons for the current large Chase presence in Columbus, there is an important historical one.

    In 1933, John G. McCoy’s father became president of City National Bank and Trust of Columbus. After his father’s death in 1958, he became president and began buying additional Ohio banks. In 1979 he created the Banc One Corporation. John B. McCoy took over the leadership from his father, and after interstate banking was instituted, bought (or merged with) First Chicago Bank. Jamie Dimon took over leadership from the third McCoy in 2000.

    Even though Banc One HQ was moved to Chicago from Columbus after the First Chicago merger, most of the decades-old, very large back office and support infrastructure of the original City National/Banc One was still in Columbus. In 2004, JPMorgan Chase took over Banc One and kept Columbus as one of its larger support locations.

    It wouldn’t surprise me if most cities have similar stories, although maybe not on this scale. I just know this one because I’ve lived through most of it.

    http://www.nytimes.com/2010/04/06/business/06mccoy.html?_r=1&dbk
    http://en.wikipedia.org/wiki/Bank_One_Corporation

    [Banc One was the corporate entity; Bank One was the brand name]

  12. Rod Stevens says:

    Excellent post. We sometimes forget that places develop based on the strength of individual entrepreneurs and businesses. This doesn’t mean that those strengths go away when those people die or move away, just that there are sometimes very specific reasons for the accumulation of human capital.

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