Monday, November 12th, 2012

Chicago’s Northwest Indiana Advantage

This article is part of the State of Chicago.

Chicago is in effect a tri-state area consisting of parts of Illinois, Indiana, and Wisconsin. The lion’s share of the population is in Illinois. Also, the city is by far the largest municipality in the area – it’s bigger than a lot of states. This leads to a very Illinois-centric and Chicago-centric civic leadership and view of the world. Perhaps rightly so.

However, Chicago, looking for advantages where ever it can, should seek to find them in collaboration with the other states. Today I’ll examine the case of Northwest Indiana. The four county area that is technically part of Chicagoland – the Gary, IN Metropolitan Division – has over 700,000 people in it, which is pretty sizeable in its own right. It is also very culturally and aligned with Chicago, with significant Eastern European, Black, and Latino populations.

One advantage the area has is that Indiana’s entire approach to governance and economic development is very different from Illinois. Indiana has been implemented a “bare bones” model focusing on fiscal conservatism and seeking to be tax and regulation advantaged relative to the Midwest. Illinois has been grossly financially irresponsible, but has also been willing to invest in building a base in high-end and knowledge economy businesses, global connections, etc.

The types of high end firms that are in the Chicago Loop simply aren’t going to move to Indiana, likely not even to an Indianapolis. I never took seriously the CME’s threat to leave, for example. Northwest Indiana is also not likely to develop the type of entrepreneurial high tech cluster that Chicago has.

On the other hand, there are lots of businesses that wouldn’t touch Illinois with a ten foot pole. Some of these might be willing to locate in Indiana, however. My idea here is that Northwest Indiana should seek to find businesses for which proximity to Chicago and a Midwest is an advantage, but for which Illinois is particularly hostile in a legal/regulatory way, or in which Indiana has particular advantages.

Not only does Northwest Indiana need the investment and jobs itself, so do the South Suburbs of Chicago. And they are in easy proximity to NWI. Also, these suburbs, being outside of Chicago’s favored quarter type areas, are not well positioned to thrive from the Illinois strategy. Indiana jobs might benefit their residents quite a bit.

Additionally, Northwest Indiana has one of the largest heavy industrial zones in America. Despite the decay of Gary, plenty of steel is still made in the region. I believe Indiana is still America’s #1 steel producing state. I can’t imagine America will ever build many if any more areas like this. But we still have heavy industrial needs. So Northwest Indiana is one of the few places to put them.

A perfect example is BP’s $3 billion upgrade of its Whiting refinery. A lot of environmentalists opposed this. Unfortunately, America still runs on gasoline for now and we have to refine oil until we can replace it with something else effectively. Given the disappointing sales of electric cars to date, we’re not there yet. Transit is also not a realistic replacement at this time. If you are Northwest Indiana, why not work to build up this base? It won’t happen in Illinois. There’s a good reason there aren’t steel plants there any more. And the city and state would fight the development of any heavy industrial developments that did want in.

Gary would also be a logical place to put a third Chicago regional airport, though I’m not naive enough to believe that this will ever happen. Which highlights the benefits of the ideas above: Northwest Indiana doesn’t need cooperation from Illinois to make them happen. Yet, unless it involves cross-state poaching, Illinois would actually benefit. I do think some poaching is inevitable, but even here it might not be all bad. Some of the businesses that leave Illinois for Indiana might be ones that would be departing the metro entirely if they didn’t have the NWI alternative.

The key is to specialize and differentiate, taking advantage of your complementarity to be able to have a larger addressable market than if all parts of the region tried to be the same. This is easier to pull off when, as in this case, you’ve got multiple states who can have different fiscal and regulatory approaches.

Of course, for Indiana to take advantage of this it needs to have its act together. It’s the most politically fragmented part of the state of Indiana, and the various municipalities and counties have rarely worked to together. Congressman Pete Visclosky, who represents the area, has tried to use his regional mandate as a platform for bringing parts of the region together. This is especially admirable given that local governance is not part of his remit.

Other problem in the area is its heritage of corruption, as with Chicago. Sadly, rather than try to differentiate away from Chicago, NWI too often imitated it.

Northwest Indiana is also a Democratic political monoculture. Whenever you don’t have competitive elections, that is bad given the lack of real accountability to the voters. I’d say the same of various monolithically Republican suburbs.

Still, I believe that, despite serious challenges, especially with the decayed northern part of Lake County, there are plenty of economic opportunities to be had.

Oh, and Northwest Indiana is also home to America’s best brewery.

Friday, September 21st, 2012

Some Additional Chicago Fixes

This article is part of the State of Chicago series.

At this point in my series, I want to highlight a few areas I’ve mostly written about elsewhere in detail, so will not repeat in full as posts in their own right.

1. Fix the Fiscal mess. The changes at the city level are a nice start, but there’s a long way to go. The state of Illinois has done little to address the structural problems it faces. With the worst finances in the nation at present, this item is critical.

2. Changing the Culture. I’ve written before about Chicago’s culture of clout. That is, Chicago has a unitary power nexus centered around the mayor’s office, and personal influence – guanxi if you will – is how things get done. This has been a positive in some respects in that it enables the city to get things done. Unfortunately, it doesn’t just matter if you can get things done, it also matters what it is that you do. And how you get things done ultimately matters as well. Cultural change is an imperative here.

3. Professional Services 2.0. I believe that Chicago should seek to (at least in part) look to reframe its economic development around its structural advantages. Centrality is one of these, for example. The biggest plank here is Professional Services 2.0 – figuring out how Chicago can dominate the next generation of professional services.

4. Infrastructure. Addressing the region’s infrastructure gap is key. From a transport perspective this means most importantly 1) finishing off the Red Line L reconstruction on the North Side, 2) completing the O’Hare Modernization Plan in a timing consistent with market realities – and on no account building a new major greenfield airport and 3) finishing off the CREATE project among other things needed to unclog the horrible rail bottlenecks in Chicago. Also, I believe the Chicago River needs to be re-reversed, and the watershed systems re-separated. This is needed to stop the Asian carp invasion among other things. All of these are very costly and I won’t pretend to know where the money will come from. But they are long term major projects needed for the region.

Monday, September 17th, 2012

Rethinking Brand Chicago

This post is part of the State of Chicago series.

So many Midwest places flail around looking for a brand image or identity. Not Chicago. In fact, the identity and stories of Chicago overflow the page. They are too numerous to be written in a mere blog posting.

Yet Chicago has in effect decided to jettison that powerful, historic brand identity in favor of a type of global city genericism. This, I believe, is a mistake.

One trend you can’t help but notice if you travel is the increasing homogenization of the urban culture and standard of urban development. Global markets demand standardized commodities that can be graded and traded. This includes cities. This forces cities increasingly into a standard model of what one expects.

I’ve repeatedly noted in this blog the example of the Wallpaper guides to world cities. These travel guides, ostensibly a guide for the modern, sophisticated urban traveler to the best of each globally elite locale, often seem identical except for the name on the spine. One modern boutique hotel, one swank restaurant or bar, one fashion outlet, one bike share program, one piece of starchitecture is much the same as another in any city you visit around the world. The frosting might be different, but the cake is the same. And once you’re commoditized, you’re done.

So it is too with Chicago. I noted in my review of the city’s street lighting what appears to be a deliberate downplaying of the city’s rough-edged, masculine past in favor of a feminized, generic, even suburban motif. You see this repeated throughout.

It’s truly incredible. Travel anywhere in the world in mention that you’re from Chicago, and immediately the other person will mime a couple of pistols with their fingers and say, “Bang! Bang!” This is a sore spot with many local leaders, who hate the notion that it is still known more for gangsters than glitter. The city over the years has so tried to suppress its Al Capone heritage that it has obliterated many historic sites related to the mob. It’s like the city that wants to pretend it doesn’t exist.

This sadly makes Chicago like all too many smaller cities that suppress their strongest brand assets out of embarrassment and a desire to be taken seriously by members of the cool kids club. Go talk to urban boosters in Indianapolis, and you probably won’t hear much about the Indy 500, for example. So too it is with Chicago. It’s as if to prove it’s a member of the club – i.e., is exactly like every other cool city – Chicago has to ignore its gritty past and essential culture.

A friend of mine likes to say that “Chicago is a city that runs on testosterone.” It’s a rugged, manly city, a place where it was said high culture was just the ransom rich men paid to their wives. A place where people wore their shoe leather out trying to make a buck. The land of the hustler. A place of bellowing blast furnaces and brawny immigrants. A place where pedigree didn’t matter and crazy newcomers, dreamers, schemers, and gamblers could win or lose big. A place with audacious ambition and a relentless determination to demolish rivals, whether that be Cincinnati, St. Louis, or Milwaukee. A place that once dreamed to dethroning New York. A place of limitless imagination and inventiveness that brought us everything from the skyscraper to the futures market. A place with music like the blues made for and by the hard luck working man. And yes, a place of gangsters and crooked politicians.

None of that is part of new Chicago, at least not the image the city wants to portray. The iconic architecture remains, but it has been drained of its cultural content. Listen to what the city tries to project of itself and see what it says. It says that Chicago has become just another way-station along the global city parade. Starchitecture (no longer architecture made in Chicago for the most part), microbrews and microroasts, culinary delights, high culture, boutique hotels, great shopping, bike infrastructure, digital startups (the exact same type every other “hub” is bragging about), music festivals by and for the high end educated hipster, global conferences, etc. Almost every box is checked, with a few exceptions like fashion and media as I highlighted earlier.

All of this is good in a way and proof of a transformation in Chicago that is in many ways for the better. But something has been lost along the way. These items are all disconnected from the city in which they happen to reside. It’s as if they descended on the place out of the heavens like that flying saucer on top of Soldier Field. Drawing Room mixologist Charles Joly may have a Chicago flag tattooed on his arm, but his bar could be located anywhere.

Saskia Sassen has written that the economies of global cities are not generic but are inherently linked to their histories. Chicago in the past was a great center of manufacturing, for example, and today is expert at providing global services to manufacturers. But where in underlying economic reality there may be distinctiveness, on the surface there is more homogenization. This may explain why people tend to assume all global cities are alike. To a visitor staying in the central core, the experience may well be quite similar in many ways.

What’s more, the aspiration seems to be generic. The idea, again, is to demonstrate that you are part of the club by focusing on replicating all the same stuff everybody else is already doing and talking about yourself in much the same way. I’ve seen little in Chicago’s branding or global city rhetoric that is much different from anywhere else.

Yet the differences remain, especially outside the rarefied precincts of the global elite. And much of that continues to inspire embarrassment to this day. Corruption and cronyism seem to continue unabated, for example.

Yet there is good as well. Ask yourself what more than anything epitomizes Chicago. To me, it is none other than former Mayor Richard M. Daley. Listen to him speak. Barack Obama he is not. But character he had, lots of it, and what’s more, a fanatical dedication to making Chicago the best city it could possibly be. Was there a lot of corruption in Daley’s Chicago? No doubt. Did he desire to have maximum power over politics in his city? Of course. But nevertheless I get the impression of, as I said in my last piece, a guy who every morning wakes up and asked himself, “What can we do today to make Chicago a greater city?” This is a quality of leadership all too lacking in most Midwestern cities. The character of Chicago and the character of Mayor Daley himself seem to me to have so much in common.

Ironically, under Mayor Daley, the city pursued that policy I mentioned of abandoning its past, of abandoning the image of the city as evidenced by the mayor himself. You walk down Michigan Ave., through Millennium Park, around the newly thriving neighborhoods, and you expect that city to be led by a Dr. Smooth type character, not a blunt, plainspoken man like the Mayor. But if only he had seen the value in a city that presented a face like his own. A city not ashamed but proud of its rough and tumble edge, of the fact that it was where generations of ne’er-do-wells and hustlers came to wear out their shoe leather trying to make it big, a city that both Al Capone and Paddy Bauler thought not ready for reform, a city that drew generations of farm boys off to its earthly delights, a city from Bridgeport not the Gold Coast. That’s Chicago. Not a genteel, refined metropolis, not a swank, sophisticated type of town, not a city on a hill. No, but a city of dreams nevertheless, where people came to get rich, to reinvent themselves, to change the course of world history. That’s Chicago.

No, Chicago will never be the Chicago of Cyrus McCormick and Philip Amour and Aaron Montgomery Ward and all the rest. You can’t live off the past. That’s nostalgia and there’s no more corrosive force known to mankind. But you can know who you are, what you stand for, what your heritage is, and how it fits into the future. Not a clinging to the past, but letting your essential character be a guidepost to the future.

The fifth Frank Gehry titanium Bilbao clone, the n-th swank restaurant or shop, the latest in Italian furniture – ultimately none of them will make Chicago Chicago. It’s going to take the real city, an expression of its own terroir and primal identity to do that.

I happen to think Chicago can do it. If it changes course and gets way from following the trends to creating its own future. If it steps up and makes sure the world knows that Chicago, and not just yet another generic world city, is here, and determined to claim its rightful place.

Chicago will only realize its potential for greatness if it is willing to let go of its insecurity and desire to be a member of the club, and dares once again to think of itself as it did back in the days of the Burnham Plan as a city destined to be the greatest in the world, a city proud of itself and not afraid to boldly chart its own course into the great unknown of the future.

Is Rahm Emanuel is the person who can pull this off? He’s from the North Shore. He was a ballet dancer. He’s a man clearly most comfortable dealing with the elite. Yet he’s also got a rougher side. He’s supposedly Captain F-Bomb. He hates to lose. He mailed some dead fish to a someone once to show his displeasure with some polling. I’d say there’s more than a streak of authentic Chicago in there.

Maybe the bigger question is whether he wants any change of course. The NATO Summit play suggests not. But it’s still early.

I would strongly urge the city to rethink its brand and what it wants to be in the marketplace. Bottle up some that classic Chicago heritage and apply it liberally. This is a huge opportunity in the marketplace. With the vast bulk of cities trying to convince you they are all the same, this is in opportunity for Chicago to seize the advantage and stride forth with classic boldness and braggadocio, making other cities take real notice for a change. Want to actually put Chicago on the brand consciousness map? That’s the way to do it.

In short, it’s time to stop aspiring to global city goo and instead give the world a punch in the face with a little old school Chicago.

This article contains material that was published in previous posts.

Sunday, September 9th, 2012

Fixing Chicago: Rahm’s Work in Progress

This article is part of The State of Chicago.

As I continue with my Chicago series, I’ll turn now to the matter of how to fix what’s wrong with Chicago, hopefully without damaging the things that are already right and going well.

This first piece is to highlight what Mayor Rahm Emanuel has already been doing. The timing’s risky, as at midnight tonight the teachers’ union might go on strike. But I’ll take my chances.

I voted for Rahm for mayor, for three major reasons:

1. I see him as like his mentor Bill Clinton, namely someone to whom getting elected and staying popular is more important than pushing any ideological agenda. In short, I see him as a pragmatist, not someone with a policy ax to grind.

2. Rahm has spent a lot of time outside of Chicago. He’s got a global perspective and a global network that’s critical in this era. He’s also got the gravitas to interact at the highest levels of power in America, which is something few mayors can say.

3. Rahm has no natural constituency in Chicago. So if he wants to be re-elected, he needs to perform. He clearly has future political ambitions, and flaming out as mayor wouldn’t be helpful in pursuing them.

Having been in a office a bit over a year, Chicago’s problems are far from fixed, but I have seen a number of good thing’s he’s accomplished or started, so let’s take a look.

Fresh Blood and Re-Energizing the Civic Elite

Unlike some, I am not a Richard M. Daley hater. Of course he made some bad decisions, did things I didn’t like, etc. But one thing you could never take away from Daley was his fierce passion for the city. Here’s a guy that you get the feeling woke up every morning and asked, “What can we do to make Chicago a greater city today?” That’s a quality of leadership seldom seen in America. While Chicago had the wind at its back in the 1990s, you have to give at least partial credit for Chicago’s turnaround from Rust Belt malaise to the man at the helm.

Yet by the end it was clear that Daley had been in office too long and was running low on ideas – good ones at any rate. The high water mark of the Daley administration was the opening of Millennium Park, one of his great legacies in office. But I think we can assign a very specific date to when it became very clear all was not well: March 21, 2003, the day Daley demolished Meigs Field airport in the middle of the night.

Rahm came onto the scene like a breath of fresh air. The city needed new blood, new ideas, new energy, and Rahm delivered. He really put a focus on hitting the ground running and delivering some “first 100 days” type results. This made it appear he was rapidly going to deliver on his promises.

One impact of this was to re-energize the civic elite, which had been feeling dispirited. You can definitely tell they’ve gotten a bit of confidence and swagger back about the city, and there’s a more optimism in the air. One key example of this is the series of reports from World Business Chicago and the OECD with a number of negative findings about Chicago. In the later Daley, maintaining a facade of all-is-well was paramount. Today, Chicago’s elite has enough confidence in their city that they can openly admit the things they believe aren’t quite right yet.

This shift in the overall civic sentiment is very important. Both optimism and pessimism are infectious. Changing the mindset of a place can be very hard. Re-establishing a bit of the can-do spirit may not be something that can be quantified in stats, but is very important nevertheless.

Economic Development

Another area we’ve seen Rahm hit hard is economic development. Initially this has consisted of transactional econdev. I call it economic development via “Rahm’s Rolodex.” Since Rahm has a powerful rolodex and isn’t afraid to use it, this is the logical place to start. He basically started dialing every CEO he could to pitch them on bringing jobs to Chicago. And it has been working. He’s managed to announce something like 20,000 new jobs since taking office. Now a good chunk of these are suburban relocations, and some are merely promises for the future. But hey, it’s the same everywhere. No matter how you slice it, there have been and will be real jobs created. And the drumbeat of announcements reinforces the positive civic dynamic in the city.

Rahm also, as I noted, put out an economic development strategy in conjunction with World Business Chicago that frankly acknowledged the problems the city has been facing. Rahm also led the restructuring of the agency and has brought in a couple of corporate heavy hitters to lead up the economic team in his own office. He also took some first steps around red tape reductions for small business.

Unfortunately, the recommendations of the WBC plan seemed a bit weak. It’s hard to imagine this initiative really driving transformational change. I’ve yet to see the mayor outline a real vision of the city’s future economy that isn’t more or less based on more of the same that’s already in the Loop. And as I’ve demonstrated, the Loop economy just isn’t big enough to carry the load. Even growing it at a rapid clip, that will still be the case.

But while I think there’s a grade of Incomplete on this to be sure, Rahm has made a lot of progress so far, particularly on the transactional side.

Keeping Up With the Joneses

As I said, one advantage of having Rahm in office is his global perspective. The average Chicagoan who doesn’t know much about what’s been happening in New York, London, San Francisco, Portland, or DC may be impressed with what Chicago was doing, but in critical areas like transportation design, Chicago had fallen very behind.

As somebody who got around, Rahm knew this, and set about shoring up some of the city’s weak spots. For example, he brought in John Tolva from IBM as Chief Technology Officer to spearhead getting Chicago up to speed on things like open data. He also made a big push behind technology generally, trying to put Chicago over the top as a technology hub.

Most notably in my view was bringing in Gabe Klein to run the Department of Transportation. Klein was running transport in Washington, DC, but lost his job in a change of administrations right about the time Rahm was elected. Klein quickly set about switching to things like protected bike lines, making a push on bike share, and other matters. Pretty much Klein has followed what I would have recommended as a starting strategy for Chicago transport, starting with low hanging fruit and lower cost items.

Transport is a good example of the next phase of the challenge. Rahm’s been pushing hard to catch up with the market in areas where Chicago had fallen behind. So far, so good. That’s step one. The harder thing to do is start innovating and driving the agenda to get ahead of other cities.

So I’d put the challenge out to Gabe Klein and Rahm Emanuel to do that on transport. Don’t just be a fast follower and deployer of best practices. Do that, but also look to innovate.

Fiscal Restructuring

Without a doubt, Rahm inherited a huge financial mess in the city. He’s taken some steps to tackle it. Spending was cut 5.4% last year. And the projected deficit for next year is about half of his first year in office. Daley had used gimmicks like privatization transactions to paper over deficits. Rahm has avoided that so far.

Rahm also took steps to start addressing old infrastructure. He raised water rates, which were ridiculously low, to fund badly needed upgrades of the system. He’s pushed forward on the O’Hare modernization plan, though at this point there are real questions about how fast the city should move. And he’s managed to make a number of announcements around the transit system, particularly investments in the Red Line, by far the most important in the system. (To be fair, I believe the state capital bill really funded most of this). I do not support a casino in downtown Chicago, but Rahm is pushing it hard as another source of tax dollars for infrastructure. His signature initiative in the space is new Chicago Infrastructure Trust, a type of off balance sheet financing entity, though the specifics of what that will actually end up doing are unclear.

While Rahm has made progress, there’s a very tough road ahead. There are no easy choices. Chicago’s citizens, already among the most harassed and nickel-and-dimed out there, will be facing a blizzard of speeding cameras soon, this on top of the red light cameras and the locust plague of parking ticket enforcement agents. On the expense side, the police force is down in strength while the murder rate gains national attention. Other city services like libraries are also being affected. Either way, raising taxes/fees/fines or cutting services, reduces quality of life for Chicago’s residents. When you see more Department of Revenue workers than you do cops, firemen, or other public employees, you know something’s gone badly wrong.

There are opportunities to save money through restructurings that wouldn’t affect service delivery. The city is rolling out the “grid” garbage collection system, for example. The fire department also needs rationalization. And some agencies might be merged with Cook County. But these are politically daunting. Chicago also faces a major pension crisis that could send property taxes soaring.

Rahm should be applauded for the progress he has made tackling a very major problem. But clearly fiscal issues are going to remain front and center for some time to come.

In fact, I believe the financial stress is so high that Rahm will change in mind on some things. My prediction is that the temptation to privatize Midway Airport will prove to strong to resist, for example.

In Conclusion

In short, I think Rahm’s done a pretty good job in a very tough situation in a number of areas. I think ultimately he’ll figure out a way to mostly get a handle on the types of areas I highlighted.

Unfortunately, two items I didn’t list could end up undermining his entire administration: the spike in crime, especially murder, and problems at CPS. Rahm is defending his public safety record, which is understandable, but trying to spin the statistics when it’s clear there’s a very serious problem with shootings makes it seem he’s out of touch with reality. Also, even if the strike situation is resolved, there are big problems at Chicago Public Schools, financial and otherwise. A long time employee I greatly trust tells me he’s never seen the central office in worse shape.

I suspect Rahm knew the schools would be challenge. But he was probably surprised by the murder problem. Both of these are the types of challenges mayors have to deal with. If he successfully sees the city through them, it will cement his reputation for leadership and strengthen his hand for implementing further difficult actions. But failure would undermine much of the good work he’s already been doing. Which is a shame. I hope for the city’s sake Rahm is able to pull it off.

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!

Sunday, August 19th, 2012

What Is a Global City?

This is both a standalone general article and part of my “State of Chicago” series.

We hear a lot of talk these days about so-called “global cities.” But what is a global city?

Saskia Sassen literally wrote the book on global cities back in 2001 (though her global cities work dates back well over a decade prior to that book). She gave a definition that has long struck with me. In short form, in the age of globalization, the activities of production are scattered on a global basis. These complex, globalized production networks require new forms of financial and producer services to manage them. These services are often complex and require highly specialized skills. Thus they are subject to agglomeration economics, and tend to cluster in a limited number of cities. Because specialized talent and firms related to different specialties can cluster in different cities, this means that there are actually a quite a few of these specialized production nodes, because they don’t necessarily directly compete with each other, having different groupings of specialties.

In this world then, a global city is a significant production point of specialized financial and producer services that make the globalized economy run. Sassen covered specifically New York, London, and Tokyo in her book, but there are many more global cities than this.

The question then becomes how to identify these cities, and perhaps to determine to what extent they function as global cities specifically, beyond all of the other things that they do simply as cities. Naturally this lends itself to our modern desire to develop league tables.

A number of studies were undertaken to produce various rankings. However, when you look at them, you see that the definition of global city used is far broader than Sassen’s core version. Wikipedia lists some of the general characteristics people tend to refer to when talking about global cities. It cites a very lengthy list, but some of them are:

  • Home to major stock exchanges and indexes
  • Influential in international political affairs
  • Home to world-renowned cultural institutions
  • Service a major media hub
  • Large mass transit networks
  • Home to a large international airport
  • Having a prominent skyline

As you can see, this is quite a hodge-podge of items, many of which are only tangentially related to globalization per se. In effect, many of them seek to define cities only in term of global prominence rather than functionally as related to the global economy. That’s certainly a valid way to look at it, but it raises the point that we should probably clarify what we are talking about when we talk about global cities.

To clarify our thinking, let’s look at how various ranking studies have defined global city for their purposes.

One oft-cited such ranking was a 1999 research paper called A Roster of World Cities. The authors, Jon Beaverstock, Richard G. Smith and Peter J. Taylor, explicitly reference Sassen’s work, seeking to define global cities in terms of advanced producer services.

Taking our cue from Sassen (1991, 126), we treat world cities as particular ‘postindustrial production sites’ where innovations in corporate services and finance have been integral to the recent restructuring of the world-economy now widely known as globalization. Services, both directly for consumers and for firms producing other goods for consumers, are common to all cities of course, what we are dealing with here are generally referred to as advanced producer services or corporate services. The key point is that many of these services are by no means so ubiquitous; for Sassen they provide a limited number of leading cities with ‘a specific role in the current phase of the world economy’ (p. 126).

They took lists of firms in four specific service industries – accounting, advertising, banking, and law – and determined where those firms maintained branches and such around the world in order to determine the importance of various cities as production nodes of these services. This has some weaknesses in that it doesn’t necessarily distinguish whether say a particular accounting firm is doing routine type work of the sort accountants have always been doing, or performing advanced work of a type specific to globalization, but it at least tries to derive lists related to the production of services.

As the global city concept grew in popularity, various other organizations entered the fray. Most of these newer lists take a very different a much broader approach closer to the Wikipedia type lists of characteristics rather than a Sassen-like definition.

One example is AT Kearney’s list, developed in conjunction with the Chicago Council on Global Affairs. Their most recent version is the 2012 Global Cities Index. This study uses criteria across five dimensions:

  • Business Activity (headquarters, services firms, capital markets value, number of international conferences, value of goods through ports and airports)
  • Human Capital (size of foreign born population, quality of universities, number of international schools, international student population, number of residents with college degrees)
  • Information Exchange (accessibility of major TV news channels, Internet presence (basically number of search hits), number of international news bureaus, censorship, and broadband subscriber rate)
  • Cultural Experience (number of sporting event, museums, performing arts venues, culinary establishments, international visitors, and sister city relationships).
  • Political Engagement (number of embassies and consulates, think tanks, international organizations, political conferences)

The Institute for Urban Strategies at The Mori Memorial Foundation in Tokyo published another study called “The Global Power City Index 2011.” This report examined cities in terms of functions demanded by several “actor” types: Manager, Researcher, Artist, Visitor, and Resident. The functional areas were:

  • Economy (Market Attractiveness, Economic Vitality, Business Environment, Regulations and Risk)
  • Research and Development (Research Background, Readiness for Accepting and Supporting Researchers, Research Achievement)
  • Cultural Interaction (Trendsetting Potential, Accommodation Environment, Resources of Attracting Visitors, Dining and Shopping, Volume of Interaction)
  • Livability (Working Environment, Cost of Living, Security and Safety, Life Support Functions)
  • Environment (Ecology, Pollution, Natural Environment)
  • Accessibility (International Transportation Infrastructure, Inner City Transportation Infrastructure)

Another popular ranking is the Economist Intelligence Unit’s Global City Competitiveness Index. They rank cities on a number of domains:

  • Economic Strength (Nominal GDP, per capita GDP, % of households with economic consumption > $14,000/yr, real GDP growth rate, regional market integration)
  • Human Capital (population growth, working age population, entrepreneurship and risk taking mindset, quality of education, quality of healthcare, hiring of foreign nationals)
  • Institutional Effectiveness (electoral process and pluralism, local government fiscal autonomy, taxation, rule of law, government effectiveness)
  • Financial Maturity (breadth and depth of financial cluster)
  • Global Appeal (Fortune 500 companies, frequency of international flights, international conferences and conventions, leadership in higher education, renowned think tanks)
  • Physical Capital (physical nfrastructure quality, public transport quality, telecom quality)
  • Environment and Natural Hazards (risk of natural disaster, environmental governance)
  • Social and Cultural Character (freedom of expression and human rights, openness and diversity, crime, cultural vibrancy)

Note that these were not all equal weighted. Economic strength is paramount.

Yet another ranking comes from the Knight Frank/Citibank Wealth Report. This ranking is purely subjective and was based on surveying wealth advisors as to which cities they felt would be most important to their clients today and in the future based on four areas: economic activity, political power, knowledge and influence, and quality of life.

It’s worth noting that Sassen contributed to various of these surveys.

Looking at the newer surveys versus the Roster of World Cities, it’s clear that the game has changed. Rather than attempting to look at specific global economic functions, the global city game has become effectively a balanced scorecard attempt to determine, as I like to put it, the world’s “biggest and baddest” cities.

There are quite a few differences in methodologies, which is inevitable. But a few things jump out at me. First the focus on aggregate measures in these surveys. For example: total GDP, total foreign population, number of headquarters. There is a remarkable lack of attention to dynamism variables such as growth in various metrics, though the Economist survey includes a couple.

The focus on static totals versus dynamism tends to reward large, developed world cities versus rapidly growing or emerging market cities. (The AT Kearney survey has a separate emerging cities list). In a sense, these rankings are biased in favor of important legacy cities.

It’s also interesting to see what was included vs. not included in quality of life type ratings. For example, items like censorship, media access, the rule of law, and the environment are listed. But measures of upward social-economic mobility or income inequality or not.

Lastly, a number of the rankings suggest a self-consciously elite mindset, such as shopping and dining options. As with many quality of life surveys, these seem to orient them towards expatriate executive types rather than normal folks.

Looking at these, I can’t help but think that the criteria were the product of an iterative process where the results were refined over time. Thus in a sense the outcomes were likely somewhat pre-determined. That’s not to say that the game was rigged necessarily. But I suspect if anyone were doing a global city survey and London and New York did not rank at the top, the developers would question whether they got the criteria right. In a sense, a global city is like obscenity: we know one when we see it, but we don’t necessarily have a widely agreed upon objective set of criteria to measure it by.

I sense that these rankings attempt to look at global cities in four basic ways:

1. Advanced producer services production node. This is basically Sassen’s original definition. I think this one remains particularly important. Because the skills are specialized and subject to clustering economics, the cities that concentrate in these functions have a Buffett-like “wide moat” sustainable competitive advantage in particular very high value activities. For cities with large concentrations of these, those cities can generate significantly above average economic output and incomes per worker.

2. Economic giants. Namely, this is a fairly simple but important view of that simply measures how big cities are on some metrics like GDP.

3. International Gateway. Measures of the importance of a city in the international flows of people and goods. Examples would be the airport and cargo gateway figures.

4. Political and Cultural Hub. An important distinction should perhaps be made here between hubs that may be large but of primarily national or regional importance, and those of truly international significance. For example, there are many media hubs around the world, but few of them are home to outlets like the BBC that drive the global conversation.

There may potentially be other ways to slice it as well. The fact that these various ways of viewing cities can often overlap can confuse things I think. For example, New York and London score highly on all of these. And there are surely underlying reasons why they do. Yet trying to sum it all up into one overall ranking or score, while making it easy to get press, can end up obscuring important nuance.

So when thinking about global cities, I think we need to do a couple of things:

1. Clarify what it is we are talking about at the time.
2. Relative to the definition we are using, seek to identify the specific parts of the city in question that generate real above average value at the global level.

Sunday, July 29th, 2012

State of Chicago: Lacking a Calling Card Industry

This article is part of The State of Chicago.

I now want to transition from a look at historical and current conditions in Chicago to a defense of a couple of my more controversial diagnoses that attepted to explain the problems behind Chicago’s weakness in recent years. These were my observation that Chicago lacks a “calling card” industry, and my claim that Chicago, while a global city, is weak enough in this dimension that it cannot rely on that alone to sustain it.

Today I’ll look at the former. In some rankings I’ve seen, Chicago has the most diverse big city economy in the United States. The flip side of this is that unlike with New York and finance, DC and government, LA and entertainment, etc., Chicago lacks a signature industry that is capable of generating significantly above average returns. That helps explain why on various quality measures (like GDP per capita) it greatly underperforms. Chicago is simply not the epicenter of any important 21st century macro-industry that is capable of generating super-sized returns. I gave a more detailed treatment of this some time ago in a post called “Chicago and the Epicenter” should you be interested. (You’ll note from that post I was already thinking about this series over two years ago).

Pros and Cons

Now being diverse vs. being concentrated in a particular industry has both pros and cons. If you are overly concentrated in a single industry, then you are vulnerable if that industry nose dives – just ask Detroit. Really the big difference between Detroit and Silicon Valley is that the latter’s signature industry is still going strong. Also, excessive specialization in one high value function can actually drive everybody else out as the highest value use bids up real estate into the stratosphere. Perhaps we might say that it operates with positive reinforcement, which isn’t always a good thing.

Very diverse areas, by contrast, aren’t as vulnerable (in theory) to big collapses. It’s slow and steady wins the race, with fewer boom and bust cycles. So there’s definitely value to diversity. Of course the flip side is that you don’t have that unique magnet for talent. No one has to do business in your city. You generally create average level returns and incomes. Indeed, we see all of this in Chicago. And having a diverse economy did not protect it from severe consequences in this downturn.

Does Chicago Want to Just Have a Diverse Economy? No

Some folks touted the diversity of Chicago as a great strength in response to my article, but deep down I don’t believe anybody really believes it. Everything every civic and economic development person is doing every day is predicated on the desire to be specialized.

Consider the trivial example of the culinary arts. Chicago likes to view itself as a rival to anyone when it comes to cuisine. Is this just a matter of Chicago being big? That is, that It has exactly as much fine dining as it is “supposed to” for a city of its size? Is this how locals sell the food scene? No. The entire idea is that Chicago is a special place, where it not only has a great food scene because of how big it is, but because it has something special that let’s it punch above its weight.

We see a similar dynamic at work in the tech sector. Chicago is determined that it wants to be a major American tech hub. Does this mean that it simply wants it’s “fair share” of tech for a city its size? The rhetoric doesn’t sound like it.

For example, at Tech Week Rahm Emanuel noted that Chicago is known as the Second City, but that “three years from now it’ll be known as the startup city if we do everything right.” The recent announcement of Google moving Motorola’s operations from Libertyville to downtown is also portrayed as boosting Chicago’s tech ambitions. Clearly, talk to any tech booster in town, and you won’t here how Chicago is mere “average” in tech for a city of its size – or that ranking as such is their ambition.

Also, if you look at Emanuel’s own economic plan you’ll see that the #1 item in its analytical framework is “Economic Sectors and Clusters.” What is a “cluster” except an industry where a city has a higher than average concentration (i.e., specialization) in that industry? Indeed, the plan uses location quotient, a standard measure of jobs concentration, as a tool to identify areas where Chicago is specialized.

The challenge is that these specialties are pretty weak and pretty general. It would have been nice had the various recent analytical looks at Chicago’s economy looked at how it differs in terms of a lack of high value specialization vs. other tier one cities.

Now, of course Chicago does have some specialties – logistics (particularly around rail/intermodal) for example at the macro level and say the design of super-tall skyscrapers at the micro. However, these either don’t necessarily generate significant high end returns or simply aren’t that big in aggregate.

In any case, it’s certainly not valid for Chicago boosters to cite economic diversity as the city’s key strength on the one hand while everything they do is designed to create specialization on the other. I’d like to see the rhetoric remain consistent.

Why a Calling Card Industry Matters

If you look at how businesses behave, you start to see why a calling card industry is important, especially for a city like Chicago. For example, former GE CEO Jack Welch said he only wanted to be in a business if he could be #1 or #2 in that market. Warren Buffett likes to talk about what he called “wide moat” businesses like Coca Cola – ones that have built barriers against competitors such that they retain significant competitive advantage over the long term and thus can generate superior economic returns.

It’s difficult for a city to generate those types of returns if it has no real competitive differentiator. If there’s nothing that enables a particular industry to thrive in your city better than somewhere else, then really you are just playing a commodity game. Those types of businesses tend to be brutal, low margin, and dominated by producers who have the lowest costs and most operational efficiencies, Wal-Mart for example.

Clearly cities like Dallas have mastered that market. Chicago is not a low cost producer and hardly as business friendly or efficient as many other places for Joe Average type businesses. So why are businesses going to locate there? There really isn’t a great answer to that question right now. The entire focus seems to be on global city/talent magnet/Loop. That’s an important piece of the puzzle to be sure – and not to be neglected. But as I’ll demonstrate in subsequent pieces, it’s not enough.

Often cities carve out a specialized basis of appeal based on the unique agglomeration environment in a cluster or major signature industry. If Chicago doesn’t have that, and isn’t the cheapest place to do business, it has to find another basis of competitive advantage to build its fortunes on.

I won’t rehash this since I already addressed some of this in a piece I called “Chicago’s Structural Advantages.” The idea is to look at structurally unique factors about Chicago and attempt to find ways to leverage them. The biggest advantage Chicago has it that it’s the only large, traditionally urban type city in the US interior.

Now, the city would no doubt say that it’s current talent/Loop/global city strategy is based on this, but I really don’t think it is. For example, the push into tech is basically a me-too type effort and I don’t see Chicago as well placed to punch above its weight in digital type startups. I’m sure it can do well to some extent, but it should. Chicago is the third largest city in America after all. That alone dictates it should be big on an absolute basis in most things. But I don’t see it as Silicon Valley II. For all the economic development “usual suspects” like tech, life sciences, and green industry, I suggest Chicago’s best strategy really is to get a “fair share” of these and not worrying about trying to build a fortress franchise.

My biggest recommendation instead is to focus on creating what I call “Professional Services 2.0″ That is, the next generation of professional services in America. As I noted previously, Chicago may be the best place in America to fly people around the country. Why not leverage that?

Indeed, we are seeing an uptick in professional services, but I see this as a natural revival, not as a result of any particular strategy on Chicago’s part. Which is fine, actually. But I also see weak spots. For example, the Indian outsourcers like Infosys, Tata, etc. don’t seem to see Chicago as their main US hub (or at least they didn’t last time I worked). Newer models of onshore consultancy seem not to be coming out of Chicago, but out of traditional innovation hubs. For example, firms like Slalom and Point B are both based in Seattle.

This suggests Chicago has work to do, but it doesn’t seem to be really focused on this. Professional and business services is part of Emanuel’s economic plan, but is clearly subservient to headquarters attraction. There needs to be much more focus on services for its own sake – Chicago should absolutely OWN the space.

In any event, that’s one example of how Chicago might move forward.

Diversity and Specialization Not Necessarily Opposed

Lastly, one final note on diversity vs. specialization. Sometimes diversity and specialization are posited as opposites, but in some cases it isn’t necessarily true. You can have a diversity of specialties, for example. That is, your city has multiple areas in which it has a dominant type position. I supposed you could call it a specialization conglomerate, though that’s a corporate approach that’s a bit out of favor.

I’ll illustrate this using a dusted off 2×2 matrix I put together a while back called the “Diversity-Tradeability Matrix.” It doesn’t look at specialization per se, but rather tradeability, or the ability of an economic activity to be performed elsewhere (such as offshore), which we might view as really the core of what we’re hoping to get at through specialization – the wide moat position.

Here’s the matrix with the resulting four typologies of cities:

And here’s how I mapped example cities into the grid:

So in a sense you can have the best of both worlds, though I’d argue New York is overly specialized in finance. (Please keep in mind this is but a rough cut take. For example, a true global city would have non-tradeable services that are in some way related to servicing globalization, for example).

For Chicago, I’d argue the city most belongs in the Regional Business Center category. It’s mostly a diversified regional capital like Atlanta moreso than a global city like New York, though of course it has global city parts to it. But it’s a Regional Business Center with a high cost profile, which creates the challenge.

Friday, July 20th, 2012

State of Chicago: The Risks of Recovery

This article is part of the State of Chicago.

In comments to previous installments, some folks have highlighted recent positive news for Chicago – job announcements, the decline in unemployment rate, some indications of a housing market uptick, and improved hotel occupancy – as evidence that perhaps I spoke too soon or was wrong about Chicago.

Well, if I’m wrong, I’d happily take that. If Chicago starts back up on a 90s-like upward trajectory, that would clearly be something to celebrate.

On the other hand, there are risks that come with recovery. Few cities go straight down – not even Detroit did that. The national economy has been in the dumps for quite a while. It probably won’t stay there forever. Recoveries in the national economy will no doubt lift Chicago.

The risk is that, if things improve, leaders in Chicago will simply say, “Whew! Glad we made it through that.” And go back to business as usual. It’s not like Chicago was in an absolute sense ever going down the tubes anyway. But what happened is that it was increasingly falling behind other big cities. This is what could easily happen here. A return to a modest upwards trajectory that means things are better than they used to be locally, but on a comparative basis the city is actually falling behind.

As for the recent uptick, I think you can attribute a lot of it to the view I advance that Chicago is not primarily a global city, but instead Capital of the Midwest. Its performance is heavily linked to the performance of the Midwest and the manufacturing industry overall.

And how is the region doing? Pretty well right now. Last year (May over May, seasonally adjusted) Michigan added 47,500 jobs. Ohio added 75,700. Indiana added 61,300. Only Wisconsin lost jobs in the region. Even extremely troubled metros like Detroit managed to add jobs last year (May over May, not adjusted). Detroit added 33,800 jobs or nearly 2% – pretty strong growth. Between 2010 and 2011, metro Detroit grew manufacturing employment by 7.8% – by far the highest of any large city in America. Unemployment rates have dropped sharply in the region. There has also been an energy boom in places like North Dakota and Western Pennsylvania that are sort of in the fringe areas of Chicago’s primary zone of influence.

With the Midwest rebounding thanks to a manufacturing resurgence, and possibly a bit of the energy boom, Chicago is benefiting. It benefits because of the services it provides to manufacturing and other industries in the region (what’s good for Detroit is good for Chicago). It also benefits in other ways such as tourism. The 92% hotel occupancy in June was attributed to more aggressive marketing in the Midwest. That’s no doubt part of it, but also more of those Midwesterners have jobs now that allow them to indulge a visit to Chicago.

So part of the question is: Is the Midwest comeback sustainable? It’s hard to say. Manufacturing is pro-cyclical, so often leads into and out of recessions. Previous strong manufacturing comebacks have been illusory. Some analysts like Richard Longworth suggest that we shouldn’t celebrate too soon. I personally don’t think we’re in for an era of strong and sustained manufacturing growth at good wages in the Heartland, though the energy boom would appear to be the real deal. This should especially help Chicago as the Ohio shale fields come on line.

In any event, as Rahm himself understands, a crisis is a terrible thing to waste. If Chicago doesn’t take this chance to reform now, in the way that governors and mayors or pushing reform across America, it would be a shame.

So my overall view would be this: let’s celebrate successes and good news along the way, but not let that devolve into just using them to develop a marketing spin story about how fantastic things are in Chicago. And above all, don’t take the foot off the gas on reform and the changes that need to be made.

This concludes my discussion of current conditions. Next I’ll turn to addressing a couple of my unique analytical frames that have generated controversy, namely having a diverse economy vs. a specialized one, and the degree to which Chicago is a global city.

Sunday, July 15th, 2012

State of Chicago: Explaining the 1990s Versus the 2000s

In my article “The Second-Rate City?” I noted Chicago’s very strong economic and demographic performance in the 1990s and contrasted it with the very poor performance in the 2000s. Then I outlined several problems with Chicago I thought helped drive the struggles. A few people asked a very fair question, saying, “All the negative factors you cite about Chicago (e.g., clout, business climate) were equally as true in the 1990s as in the 2000s, so what really made the difference?” I want to try to respond to that today.

First, let’s ask ourselves, why did Chicago decline into its Rust Belt malaise? Was it some unique to Chicago factor? No, clearly not, as a broad swath of the industrial United States experienced a similar collapse. Likewise, lots of big cities (I mentioned New York before) seemed to be on the fast track to oblivion in the 1970s. In a sense, the city was a victim of outside macro-economic forces and secular trends.

Next, why did Chicago come back? Saskia Sassen helps us understand why. Globalization, which enabled the global distribution of many functions of production, also simultaneously created the demand for new types of functions to help control and manage these far flung networks, especially new types of financial and producer services. These require very specialized, high skill workers operating in dense knowledge networks, which led to agglomeration effects and the emergence of so-called “global cities.”

So, in a sense, the rise of global cities is simply an emergent property of the new global economy. The global transformation that renewed Chicago, New York, London, etc. had little to do with good leadership or great mayors, and everything to do with a historical context that was ripe for repositioning in a new world economy that demanded it. In other words: outside forces again. This includes other secular changes like the start of a new wave of people who prefer urban to suburban living. These forces laid the cities low and they brought them back.

So as I’ve said before, when it comes to Chicago’s transformation, the city was the artifact, not the architect.

The 1990s were a great decade nationally. Combine that with these forces I mentioned, and Chicago really had the wind at its back. It’s easy to do well in that environment. However, when the national economy took at turn for the worse in the 2000s and we experienced a “lost decade,” things were very different. It’s when the tide goes out that, as Warren Buffett likes to put it, you get to see who’s been swimming naked.

In a sense, the 2000s tough times exposed the weaknesses of Chicago in the same way that the financial meltdown blew up so many Ponzi schemes.

Also, I believe there were some particular characteristics about the way the markets changed in the 1990s and 2000s that particularly benefited Chicago in the 1990s and hurt it in the 2000s. I can’t claim to have done a rigorous study on it (though I think there is some good research to be done), but working in the industries affected and living it myself – and having some personal knowledge of various firm employee counts during the period – I feel somewhat qualified to state this as a hypothesis.

I’ve outlined this before, particularly in a very extensive post called “A Better Tomorrow” but I’ll restate it in part here.

There were two main forces that converged on Chicago in the 1990s: the tech revolution and the nationalization of industry. Note that I consider the 1990s really the prelude to globalization, which was the dominant force of the 2000s.

Consider the technology world of 1990. It was an era dominated by staid mainframe shops. By the end of the decade, the world was completely transformed. Just think of some of what we went through: the client/server revolution, the emergence of the web and the dot com boom, the ERP revolution, the Y2K retrofit problem, and the emergence of mobile telephony and laptops as ubiquitous. These were all huge, gut wrenching changes that required not just incredibly large numbers of people skilled in new technologies themselves, but also with tremendous business, functional, and people skills so they could be deployed effectively.

At the same time, the 1990s was the Great Rollup era. Back in the 1980s most cities had their three big local banks, their local electric and gas companies, their local retailers, even their local manufacturers. Only AT&T seemed to be a true national player of the type we know today. Fast forward through the 1990s and industry after industry was subject to national rollups. First was the emergence of “super-regional” banks, which led to today’s huge giants. (It was also when Glass-Steagall fell, arguably to our chagrin). Utilities merged, department stores merged, and major big boxes and category killers like Wal-Mart, Target, Walgreens, Best Buy, and Home Depot developed national footprints. Integrating these businesses, and building scalable processes and technology to manage these huge enterprises, was another gigantic effort.

Both of these worked enormously to Chicago’s benefit. Chicago had always been the dominant location in the interior for professional services, with core sub-industries including: management consulting (e.g., McKinsey), technology consulting (e.g., Accenture), IT/business process outsourcing (e.g., TCS), accounting (e.g., KPMG), and law (e.g., Mayer Brown).

Both the technology and nationalization trends generated huge amounts of demand for new people to manage them, which drove a huge increased demand generally for consultants and other service providers. What’s more, unlike the old back office “data processing” mainframes, the new technology was directly embedded into the fabric of the business. This meant that people working with it needed industry knowledge like never before. Clearly, to help executives merge and manage large national firms, consultants and such needed a lot of industry expertise as well, and needed to be able to serve their clients on a national, not just local basis.

This led to a sea change in the organization of professional services firms. Historically they had been organized by local office practice. But in the 1990s they reorganized along industry lines, with national practices. Instead of a Chicago consultant serving Chicago clients primarily, you’d have, for example, a retail consultant serving retailers where ever they might be nationally.

If you need to fly consultants all over the country to work with clients, where do you want to do it from? The two best options are Chicago and Dallas. So Chicago, with its huge labor market, its urban environment hitting at the emerging youth trend, its status as a major air hub, its central location, and its head start through its already robust professional services sector, became the best location in America for professional services overstaffing. That is, hiring people into a city with the idea that they’ll fly around the country servicing clients coast to coast. I believe this explains why Chicago boomed like nobody’s business during the 1990s. I suspect most major professional services companies doubled or tripled employment in Chicago in this period.

The 2000s were very different. First, the dotcom bust deflated demand for tech generally and Chicago as a hub got blasted. Second, the 2000s really didn’t see the same sorts of technology revolutions that we saw in the 1990s. I believe that things like Web 2.0 were mostly evolutionary. (Smart devices and such may be leading us through another fundamental revolution, but that wasn’t mostly a 2000s phenomenon). Third, the rise of the global age led to the emergence of offshore software development and business process delivery. Thus, much of the new demand, and existing demand, could be satisfied offshore, and didn’t require an army of expensive onshore consultants anymore. This new competition caused traditional firms to have to revamp themselves to become much more efficient internal business operators. (Law seems to be the last holdout, and is in the early stages today of a major shakeup in how legal business gets done).

This hurt Chicago badly. You didn’t need to overstaff in Chicago because you could do it in India. When there was recovery from the dotcom bust, much of it was offshore. I suspect that even 12 years later, there isn’t a single technology consultancy that employs as many people in Chicago as it did in 2000, new companies excepted. Consider that major firms like Arthur Andersen and Whitman-Hart don’t even exist anymore. Many smaller sized internet era firms also experienced the same fate, and Chicago’s “Silicon Prairie” ambitions more or less got wiped out, which cost a huge number of telecom jobs. Also, industries like finance have been subject to increasing centralization in global hubs. Chicago went from being #2 nationally as a financial hub to something further down the chart in a global hierarchy. Chicago retains great strengths in derivatives and risk management generally, but second tier financial hubs like Chicago and Boston have been feeling the pinch.

This, in a nutshell, is what I think explains the difference in performance. The general “wind at the back” of Chicago and big cities in a boomtime economy papered over a multitude of civic sins in the 1990s that the lean years of the 2000 exposed. And the tech/nationalization era of the 1990s particularly benefited Chicago, helping to explain why it rated so highly in that decade.

I’ve got one more piece in my “current conditions” segment of State of Chicago. Then I’ll turn to articulating my rationale for some of the structural weakness factors I outline in the article, then move on to a series of proposed fix-its.

This article is part of the “The State of Chicago.”

Tuesday, July 10th, 2012

Chicago, Summer Crime, and the Slide Towards Detroit by Mark Bergen

[ Mark Bergen writes a blog called Econometro at forbes.com. He wrote this piece about the rising murder wave there. I’m including it as part of my State of Chicago series, but I should note that it was written independently and is not intended to endorse any of my particular views regarding Chicago – Aaron. ]

Here in Chicago we are fretting about crime. Philadelphia is hosting a jump in violence, with an 86 percent rise in homicides in June alone. But, otherwise, we are mostly alone. Other major cities are continuing the decades-long decline in crime rates, while Chicago has seen a nearly 40 percent spike in murders this year. (You can see a nicely visualized breakdown of the city’s crime, by ward, with this newly released interactive tool.)

The crime spike recently spread to the Magnificent Mile, the squeaky clean shopping district downtown. It led one Alderman, granted anonymity perhaps to escape the wrath of Mayor Emanuel, to suggest that these shootings in safe areas mark “when we start becoming Detroit.” That taps into a huge fear here—turning into the gutted city up north. Lines like that, though, are usually associated with simple, sensationalized ideas about urban violence.

One person who has spent much of his career dispelling these easy notions of crime is Jens Ludwig, a researcher at the University of Chicago. He has an op-ed in Crain’s this morning laying out three reasons why Chicagoans should be concerned with crime. One, in particular, has enormous implications for business in the city:

Third, no one should want Chicago to turn into Detroit — but that’s the direction that violence leads cities. Research by my University of Chicago colleague Steve Levitt and Julie Cullen of the University of California, San Diego, showed that for every homicide that occurs in a city, total population declines by 70 people. The 2010 census showed that Chicago had shrunk by 200,000 people in the past decade. If Chicago had New York’s success in controlling violence (that city’s homicide rate is about one-third ours right now, even though our rates were similar in the early 1990s), Chicago’s population would have held steady or even grown the past 10 years.

This, I believe, is the research he cites. Crime isn’t the only factor pushing city residents out; for that decade of Chicago loss, violent crime rates were steadily falling. But it is a factor, and population loss certainly is a drag on a city’s economic prowess.

That parlays nicely to New York, where the city continues to suppress its crime and expand its economic force. The legal scholar Franklin E. Zimring has a lengthy, nuanced article titled, tellingly, “How New York Beat Crime”:

Once again, the simple explanations are not of much help. Some of the authorities’ more prominent campaigns were, in fact, little more than slogans, including “zero tolerance” and the “broken windows” strategy — the theory that measures such as fixing windows, cleaning up graffiti and cracking down on petty crimes prevents a neighborhood from entering into a spiral of dilapidation and decay and ultimately results in fewer serious crimes. For instance, the NYPD did not increase arrests for prostitution and was not consistent over time in its enforcement of gambling or other vice crimes.

But other campaigns seem to have had a significant effect on crime. Had the city followed through on its broken-windows policing, it would have concentrated precious resources in marginal neighborhoods rather than in those with the highest crime. In fact, the police did the opposite: they emphasized ‘hotspots’ a strategy that had been proved effective in other cities and that almost certainly made a substantial contribution in New York.

Despite the myths of a tough crackdown on crime, pushed by, among others, one-time mayors, New York’s imprisonment rate fell relative to other cities. A sharp fall in illegal drug use in the city helped quite a bit. Zimring also touches upon the role of aggressive, stop-and-frisk policing in the violence decline, though he notes its impact is small, its costs potentially large. Like every other factor, it eschews simple explanations. For those interested in crime policies, the whole thing is worth a read.

Following Ludwig, Zimring does arrive at a simple, cost effective recommendation: “First of all, cops matter.” In loads of studies, more police seem to be the only factor neatly correlated with reduced crime. Facing red budgets, both Detroit and Chicago have shrunk their forces. Unlike leadership in the former city, Emanuel seems to be avoiding the broken windows tactic, opting, according to the Times, to strategically target gangs with the statistical approach of Superintendent Garry McCarthy, the police chief who oversaw much of New York’s decline. McCarthy’s current department, though, has roughly 450 uniformed positions unfilled.

That Times article ends with a Chicago resident lamenting that “we’ve lost our way.” It’s a natural expression for someone at the center of truly depressing violence, and a fine capstone about a subject, city crime, bereft of easy answers. But the idea that a kid in Chicago is locked into a criminal path, or that the city is on some unstoppable decline, isn’t necessarily true. Here’s Zimring:

Perhaps the most optimistic lesson to take from New York’s experience is that high rates of homicides and muggings are not hardwired into a city’s populations, cultures and institutions.

Chicago need not become Detroit, and Detroit need not remain itself.

This post originally appeared at forbes.com on June 26, 2012. Reprinted with permission of the author.

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