Sunday, August 26th, 2012

Chicago As a Global City

This article is part of the State of Chicago series.

At this point in my series I’m looking at a couple of my frames on Chicago’s problems that are not commonly known or held. The first was Chicago’s lack of a calling card industry. I’m now looking at Chicago’s weakness as a global city and the excessive focus civic leadership has put on being a global city at the expense of everything else. (I will not be further reviewing well-known and uncontroversial problems such as the fiscal mess).

Ranking Chicago as a Global City

Last week I examined the question of what a global city is. Today I want to look at Chicago specifically. Looking at the various rankings out there, here’s how Chicago measures up on some of them:

  • On the GaWC Roster of World Cities, Chicago is an “Alpha” world city in the second grouping just behind New York, London, Tokyo, Paris, and Los Angeles.
  • In the AT Kearney/Foreign Policy reports, Chicago ranks as the 6th most important global city. As this is the highest ranking in any recent survey, this is the one locals are most likely to cite.
  • In the Economist Global Cities Competitiveness Index, Chicago ranks 9th
  • In the Knight Frank/Citi Wealth Report listing of most important cities, there were only 20 cities included and Chicago did not make the list at all.
  • In the Mori Memorial Foundation Global Power City Index Chicago was 26th
  • In a hot off the presses McKinsey/Foreign Policy ranking of most dynamic cities of the future, Chicago ranked 38th

As you can see, this is quite a spectrum of rankings, ranging from nearly the best to only so-so. Again, we have to look at the specifics of the rankings to see what is being measured.

My argument is two-fold. I would argue that Chicago is most certainly a global city however you define it, but:

1. Chicago has comparatively few “core” global cities functions, that is, it is not particularly strong in advanced producer and financial services vs. more generalized professional services.

2. If you define global city more broadly as the greater Loop economy and high end, elite functions as a whole, Chicago’s global city component is still too small to carry the city, region, and state.

Advanced Producer Services

This argument is basically a hypothesis based on my own experience as part of Chicago’s professional services community. It’s not something that I have the resources to research on my own, and I’ve yet to see a survey that really tries to dig into it.

Chicago has always been a key professional services hub. In fact, I’ve argued that Professional Services 2.0 should be core to the city’s future economic strategy. But what portion of those services are high end, specialized functions related to the global economy vs. traditional services updated for the global age?

Chicago clearly has some high end global functions. I generally like to cite the financial exchanges, the design of super-tall skyscrapers, and privatization contracting as examples. I’m sure there are many more.

But other than the exchanges and the financial center side of Chicago (which I see as stagnant to declining in some respects anyway), I believe most of these are pretty small niches. They don’t, in aggregate, employ that many people or generate that much wealth or value.

I believe that the vast bulk of Chicago’s professional services consists of traditional accounting, law, and the like. These bread and butter type firms employ lots of people, pay good wages, and deliver a lot of value. But they don’t create a “wide moat” business in most respects. Chicago’s a great place to staff people who need to fly, and has a compelling talent market, but isn’t the only game around. There are many other regional services hubs.

This I think is another part of the story on Chicago’s comparatively low GDP per capita and incomes per capita versus the top tier cities even in America. As with the lack of a calling card industry that generates super-sized returns, Chicago lacks a large quantity of the high end specialized global services functions as well. Both of these factor into its fairly average metro area value creation profile.

Again, this is just a hypothesis at this point.

Global City Chicago Is Too Small

Global, global, global. It’s pretty much all you hear in Chicago. Actually, this is a good thing in a lot of ways. Travel around America and you’ll find that it’s replete with places that have no concept of the reality of global competition. Chicago is not one of those cities. This is a city that understands it is competing in a vicious global marketplace.

But while everything you do should be underpinned by an understanding of the global competitive environment, Chicago has to too great an extent focused its response on being a global city. While I agree Chicago is to some extent a global city, the global city portion of Chicago is simply not big enough to carry the load.

Let’s look at this by comparing payrolls in the Chicago Central Area (basically the Loop plus surrounding fringe areas) with Manhattan South of 59th St.. And we’ll throw in Cook County for good measure:


Annual private sector payrolls, 2009, thousands of dollars. Source: County/Zip Code Business Patterns

As you can see, New York’s core generates more payrolls that even all of Cook County, and vastly more than Chicago’s Central Area. And this doesn’t even include investment income. Actually, the data is probably even worse than this as I’ve never gotten the zip code data to fully sum up to the countywide totals. If you look at Manhattan as a whole, you get about $180 billion in payrolls. This is 55% higher than all of Cook County.

There are some similar types of statistics around jobs. Here’s a chart I’ve posted before showing jobs in Cook County vs. Manhattan:


Total Employment, Source: Quarterly Census of Employment and Wages

Manhattan, with only 8.4% of the metro area population, has nearly as many jobs as all of Cook County, which accounts for 54.9% of the metro area population. Manhattan accounts for 28.9% of metro New York jobs. Interestingly, there are as many jobs in Manhattan North of 59th St. as there are in the Chicago Loop. (The Loop jobs pay much more, however).

The average Manhattan job also pays more than the average Cook County job as you can imply from the previous charts. In fact, the average job in Manhattan pays 79% more than the average job in Cook County.


Average Weekly Wage, Source: Quarterly Census of Employment and Wages, 2011

Chicago is a cheaper place to live, so the gap probably isn’t quite this dramatic. Nevertheless, I think the data are clear. New York, along with London considered to be the paradigmatic global city, has a vastly larger core than Chicago, has an economy more concentrated in its core than Chicago, and generates far greater wealth from that economy than Chicago.

Because of that, New York can plausibly rely on its global city component to pay the bills for the entire city, region, and state (and even part of Connecticut and New Jersey). Given that a large proportion of that comes from finance – too large – New York may yet rue its over-concentration there.

But just because New York may run into big problems in the future doesn’t change that Chicago and Illinois have big problems in the now. Part of the fiscal issue is mismanagement plain and simple. But part of it is that Chicago has decided it wants to be a global city, but global city Chicago isn’t big enough to pay the bills, not even for the city, much less a region of ten million or a state of 13 million.

How then do other places besides New York get away with it? I haven’t studied them all in detail. But I suspect that other tier one cities in America harvest outsized returns via calling card industries like tech in the Bay Area. They also utilize restrictive housing policies to keep access exclusive. And they are smaller than Chicago regionally, so don’t need as much money to keep it all going. And I’m not convinced all of them are getting away with it. Los Angeles, the other big city often compared to Chicago, has huge problems. The city of Los Angeles may even go bankrupt.

I believe the takeway for Chicago is clear: it cannot continue to focus on simply the elite greater Loop economy as the growth platform for future prosperity. It must diversify beyond that. The road to doing so is difficult, but that doesn’t mean it doesn’t need to be taken and that there aren’t things that clearly are within the city’s power it can do.

In a couple follow-on installments this week, I’ll highlight some additional aspects of the global city problem, notably Chicago’s continuing tie to the Midwest and national manufacturing cycle, and some key gaps in the global city fabric.

Discussing Global Cities

In the meantime, I was on a couple of Chicago radio programs this week talking about Chicago as a global city.

The first was an appearance on WBEZ’s Afternoon Shift, which was driven by the new Foreign Policy study that ranked Chicago only 38th for future dynamism. The audio is embedded below. If it doesn’t display for you, click here.

The first portion of this is Isaac Stone Fish of Foreign Policy magazine talking about his recent survey and the rise of Chinese cities. The second segment I am on with Andres Mendoza Pena of AT Kearney to talk about Chicago.

I also did a segment with Outside the Loop radio talking on the same topic. Here’s the embedded audio, and my segment starts at about 19:00. Again, the player lets you skip ahead. If the player doesn’t display for you, click here.

Enjoy!

16 Comments
Topics: Economic Development, Globalization, Public Policy
Cities: Chicago, New York
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16 Responses to “Chicago As a Global City”

  1. Ron says:

    Lol,that intro basically threw out any credibility these guys had. Using a silly, worthless forbes article to measure Chicago’s rank? The same article that ranked Houston as America’s coolest city ahead of NYC, San Francisco, LA, and many more other cities that people have always considered cool. Houston isn’t even the coolest city in Texas, lol.

  2. Ron says:

    Btw, I predict I will be the world’s richest billionaire by 2025.

  3. the urban politician says:

    I generally agree.

    But I think the shift from “global Chicago” to a more realistic assessment is already starting to happen. Ever since the crash of 2008, Chicago has come off of its high and realized that it isn’t going to become New York 2.0 any time soon. Rahm seems to get that, and once he runs out of companies to lure downtown that should hopefully continue to be his focus (ie creating an environment that attracts more bread and butter jobs).

    Now if you could make more intelligent posts like this I would appreciate it. Titling posts “The Second Rate City?” is not only distasteful, but suggests that you are more interested in getting attention or gaining some sort of notoriety than having an intelligent discussion about Chicago’s challenges.

  4. the urban politician says:

    Okay, the more I study your arguments, the more I see a recurring problem. In a sense, you are contradicting yourself and remain locked in a repeating cycle, hence the appearance of your arguments regarding Chicago sounding like a broken record. On one hand you think Chicago is too diversified, yet on the other hand you think it needs to not put too many eggs in one basket (ie the whole “global city” thing). For example, above you said this (in quotations):

    “I believe the takeway for Chicago is clear: it cannot continue to focus on simply the elite greater Loop economy as the growth platform for future prosperity. It must diversify beyond that. The road to doing so is difficult, but that doesn’t mean it doesn’t need to be taken and that there aren’t things that clearly are within the city’s power it can do.”

    Yet, you then also say this (also in quotations):

    “I believe that the vast bulk of Chicago’s professional services consists of traditional accounting, law, and the like. These bread and butter type firms employ lots of people, pay good wages, and deliver a lot of value. But they don’t create a “wide moat” business in most respects.”

    So, in a sense Chicago shouldn’t just focus on being a global city, but should develop other aspects of its economy that are not “global city-like”. Fine. But then in this second quote you complain that these other industries really aren’t good enough for Chicago.

    You really aren’t giving Chicago a path here. You are simply complaining about the status quo, and your fix is for Chicago to do….well….what it is already doing. It continues to have massive bread and butter industries that don’t have a wide moat, but it also has many global city-like functions as well. I’m just not sure what you are prescribing here to fix what ails Chicago. The only solution that you seem to be offering is for Chicago to develop a “calling call industry”, but then nobody can really create that for Chicago, that is something only the market can really develop on its own.

  5. timfry says:

    As a current Chicago resident (relocated here 3 years ago from DC), I have enjoyed your series and your discussion of ways that Chicago can and must improve. But I do not understand this piece and the suggestion that Chicago cannot afford to be a “global city.”

    You state, “But part of it is that Chicago has decided it wants to be a global city, but global city Chicago isn’t big enough to pay the bills, not even for the city, much less a region of ten million or a state of 13 million.”

    But you never identify a single expense of this global city that we are unable to afford the bills for that we could get rid of if we abandon the global city project. I am not an expert in the city’s expenses (Chicago doesn’t make it easy to see where we spend since it splits it based on the revenue source); yet, even my limited understanding seems to indicate the biggest city expenses are: employee wages, health care costs, and pensions. These are for services, such as: public safety, transportation infrastructure, parks, library, sewers, etc. Where would you suggest we cut? From reading the Chicago’s Annual Financial Analysis (http://www.cityofchicago.org/content/dam/city/depts/mayor/supp_info/budget/7.31.12AFA.pdf) page 84, the biggest problem we seem to face fiscally is that our pension deals are going to cripple us in 2015 (increasing three-fold because of state requirements that pensions are fully funded). The Mayor appears to want to tackle this problem. But its tricky politically (state struggling too) after years of inaction. Looking at these figures, I think it is much more likely for someone to decide that Chicago’s problems have more to do with being union friendly, not some type of global interests (whatever those are).

    However, maybe you do not mean the city government cannot afford it. Maybe you mean regionally we cannot afford it. OK, then what should we cut? And who is going to do that? Should we get rid of the Art Institute? Surely, that is an expensive canard that only some place that thinks of itself bigger than it really is would try to maintain. Perhaps we could sell American Gothic and use that to invest in a calling card industry. Never mind that the talent you would want to attract would likely be upset to see the AI go. Or maybe we should not worry about architecture when we allow new buildings in the city. The city is right now debating whether Bernard Goldberg’s 1970s Prentice Hospital building can be torn down to make way for a Northwestern research tower. Perhaps, global cities worry about things like architecture history. But a struggling city should not. Next to go should be the Wrigley Building. Surely in that prime location, someone will build bigger.

    Yes, Chicago is not as big or as wealthy as New York. That does not mean Chicago cannot afford what Chicago wants to be (or is). Maybe Chicago can but needs to raise taxes. Maybe Chicago cannot and so X,Y, and Z must be cut. But without identifying X, Y, and Z or even what you mean by Chicago wanting to be something it is not, this piece adds nothing to the conversation or what you said before.

  6. Mario says:

    I’d say Chicago has 2 very important calling card industries, steel and railroads. If your in freight you have to be in Chicago. I read 2/3 of shipping containers entering or exiting the united states pass through Chicago. This produces direct employment in the rail yards but also numerous spinoff supporting logistics firms for RFID tags, software and materials handling, all very high tech. Steel, while not the great job creator it once was is still a highly technical and important commodity that needs many smaller firms to support massive steel mills like those on the south shore of lake Michigan.

  7. the urban politician says:

    Timfry,

    Very well put. I think you make a very good point, and I think your observations about what is lacking in Urbanophile’s “Chicago thesis” kind of complement my above comment

  8. Ziggy says:

    I think what Aaron is trying to do here is understand and articulate Chicago’s macro strategy for moving forward in a global marketplace. The fact that such as strategy is not clear to anyone else who is a local advocate of all things urban is quite telling.

    Not that there isn’t any such thing. It could be that the mayor is simply holding the cards close to his vest as he firmly establishes his power base. If that’s true, then it’s useful in the interim to look at and understand the mayor, his beliefs and his past works.

    My take is that Rahm has been committed generally to neo-liberal economics and the highly highly destructive nature of its real world application. He has been described as the “godfather of NAFTA.” I posit that his reign as mayor is his own personal purgatory – a chance to show how the leader of a major city can improve the quality of life for the great majority of citizens while the rest of the country engages in an economic race to the bottom that he helped to create.

    “Rahm’s Chicago” will be a compelling show to watch. One could argue that the mess he has inherited presents insurmountable obstacles. The Illinois way of things – so aptly named by John Kass years ago as “The Combine” – has certainly been a harbinger of our country’s current pay-to-play system of governance. Rahm is both a product of the local Combine, and an experienced dealer who supported the practice at a national level… a Democrat with whom mainstream Republicans could appreciate doing business.

    If Rahm is smart, he’ll do some highly visible public improvements that demonstrate that he’s on top of things, all the while working to reduce the financial overhead of maintaining a patronage machine. It won’t be easy. When it comes to basics – food, shelter, clothing, health, security, education and jobs – many disadvantaged Chicago neighborhoods will be increasingly on their own. That’s the neo-liberal economic way. These neighborhoods will be fodder for a rapidly increasing private sector prison system, another win for the neo-liberal economic enthusiasts. As will be the ongoing war with public unions such as the Chicago Teachers Union (http://www.huffingtonpost.com/kenzo-shibata/the-battle-of-chicago-tea_b_1812729.html). I’m not a die hard fan of the union but I recognize the out of state effort to bring down public sector unions in general, something that Rahm appears to support.

    The question for Chicagoans three years from now is not whether they think they’re a global city but simply whether or not they are better off with the Purgatory Mayor. I doubt they will be, but I hope I’m wrong.

  9. Joe says:

    I think urbanophile’s essays are logically consistent in context. He isn’t proposing any specific budget cuts, because that isn’t the big issue (even if that is the main focus of the near-term). He is saying that Chicago dosen’t have enough revenues to spend like NY or London or other top-tier global cities. Most all of Chicago’s industries are proportional to population, with no big revenue generating “calling card” industries like NY, Silicon Valley, Houston, etc.. This makes Chicago just a big population city, not a global destination for any industry. This is not something that can be changed quickly, or even in a decade, which is why urbanophile is writing so extensively on Chicago, and not about Silicon Valley’s cost-of-living or environmental regulations.

    As for an actual policy proposal, many cities are in a similar position to Chicago, so any strategy they implement will copied, so it needs to play to Chicago’s strengths. I propose that Chicago embraces Big-Food. Many big-food companies are in the Midwest, and they need to grow to fit the new global economy. Chicago has the manpower needed. Battle Creek (MI) has Kellogg and most of Post’s operational staff. They could be enticed to move to Chicago. Advertising dollars would come with them, as would legal etc.. Chicago is already prominent in the commodities markets for grains and food that are so important to the big-food industries. Another important aspect of Chicago, is that the people like to eat, and don’t shame you for having a belly. Don’t underestimate this. Oil-men are looked down on as polluters or worse in NY and San Francisco, but in Houston you get respect and the attention of girls. Chicago should embrace its food loving ways.

  10. uffy says:

    Well there are other ranking, so this is by no means an authoritative list. I like PwC’s list, as it covers an incredibly large number of metrics; they have Chicago as 7th, but whatever. The Economist is certainly considered an authority in the business world, so their ranking also seems credible and it is included here.

    Secondly, I don’t think anyone would argue that Chicago is more globally important that NYC. It proves little to show that we are weaker than the most important city in the world. Let’s see some comparisons with LA or Houston or DC and then judge where the city stands. Are we arguing that a country with 312 million people that also happens to have the world’s reserve currency, most powerful military, and largest economy can only put one name in the pantheon of “global cities”?

    Anyways, Chicago, and the Midwest in general, should focus on their core strengths in logistics and manufacturing while also acting as a lower cost alternative for the vast array of professional services that can now be done remotely. The entire regions is due for a resurgence as labor costs rise in Asia and automation lessens the need for labor in general.

  11. Thanks for the comments while I was off visiting Philadelphia.

    @Ron, I don’t recall citing any Forbes articles

    @TUP, let me try to explain. Chicago is diverse and doesn’t have a calling card industry that generates huge financial windwfalls. Global city Chicago in aggregate isn’t that industry either, so you can’t just act like it is. You have to go beyond it. That doesn’t mean that you ignore global city. I think you continue to try to build up the Loop economy but luring companies, building Professional Services 2.0 as I noted, and other things. I just think you’ve got to go beyond this. I think the crime problems have been a wake up call to Rahm that there’s a huge city out there that is completely left out of global Chicago.

  12. @timfry, I think you almost sort of make the point I was trying to.

    The idea of not being able to afford a global city isn’t so much the cost side of the equation, but revenues. Global city Chicago isn’t spinning off enough economic growth, jobs, wealth, and yes, taxes, to even pay for the services city residents need, much less carrying an entire metro or state. Global city Manhattan does generate that kind of wealth. (Other cities like DC, San Francisco, and Boston have similar dynamics).

    While revenue is the main problem I was trying to point out, there is a cost issue as well. The fickle global elite (think of the CEOs for Cities “young and restless”) demand a non-stop stream of high end, innovative amenities and great services. Think Millennium Park. Chicago’s ability to provide those is coming into question because of the fiscal problems.

  13. @Mario, I’ll grant you that those are important industries (steel and rail). However, they have not proven to be big job generators or wealth creators. But you bring up something I’m always amazed by. Everyone gives lip service to rail as a critical part of Chicago, yet the city can’t get CREATE finished. It can build Millennium Park no problem, but fix the horrific bottlenecks in America’s top rail hub? That’s just not high on the priority list.

  14. My take is that Chicago ranks high on these lists because the criteria measure mostly static total size (as in the “What Is a Global City?” post), and since Chicago is the third largest city in the world’s biggest economy, that right there sends it near the top in those surveys. When measures of dynamism are included, Chicago drops like a rock as in the McKinsey survey.

  15. the urban politician says:

    Aaron,

    Your comments about CREATE are unfair. Firstly, as we speak funds are flowing into that project and one of its largest and most important components (the Englewood Flyover)is about to begin construction.

    Secondly, difficulties in securing funding for heavy rail infrastructure versus high profile, sexy projects such as Millennium Park is not a Chicago problem, but more of an American one. If I was a Crowne or a Pritzker I would be much more willing to shell out $75 million to have my name on a hospital than on a set of train tracks near Joliet.

  16. Peter says:

    @TUP, lol so true.

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