City Journal’s Aaron Renn on Chicago’s plight:
Many of Chicago’s woes derive from the way it has thrown itself into being a “global city” and the uncomfortable fact that its enthusiasm may be delusional. Most true global cities are a dominant location of a major industry: finance in New York, entertainment in Los Angeles, government in Washington, and so on. That position lets them harvest outsize tax revenues that can be fed back into sustaining the region. Thus New York uses Wall Street money, perhaps to too great an extent, to pay its bills (see “Wall Street Isn’t Enough,” page 12).
Chicago, however, isn’t the epicenter of any important macro-industry, so it lacks this wealth-generation engine. It has some specialties, such as financial derivatives and the design of supertall skyscrapers, but they’re too small to drive the city. The lack of a calling-card industry that can generate huge returns is perhaps one reason Chicago’s per-capita GDP is so low. It also means that there aren’t many people who have to be in Chicago to do business. Plenty of financiers have to settle in New York, lots of software engineers must move to Silicon Valley, but few people will pay any price or bear any burden for the privilege of doing business in Chicago.
Chicago’s history militates against its transforming itself into a global city on the scale of New York, London, or Hong Kong. Yes, its wealth was built by dominating America’s agro-industrial complex—leading the way in such industries as railroads, meatpacking, lumber processing, and grain processing—but that is long gone, and the high-end services jobs that remain to support those sectors aren’t a replacement. Chicago as a whole is less a global city than the unofficial capital of the Midwest, and its economy may still be more tied to that troubled region than it would like to admit.
And, in the same issue of City Journal, Edward Glaeser on New York’s plight.
New York City has become too dependent on the financial industry. In 2008, 44 percent of Manhattan wages were earned by workers in finance and insurance; the following year, even after the financial crisis and economic downturn had battered the industry, that share stood at a still-enormous 37 percent. And the track record of one-industry towns isn’t good. No matter how loudly Chrysler’s provocative Super Bowl ad heralded Detroit’s comeback, the Motor City’s population dropped by a quarter over the last decade and now stands at 39 percent of its 1950 peak. In Russia, Soviet-era monocities like Norilsk, a mining hub, are emblems of urban decline. Economic data, bearing out what those examples suggest, show a positive link between industrial diversity and long-run urban success. . . .
Finance has existed in New York for centuries, but its current dominance dates to the late 1970s, when it was a crucial component of the troubled city’s resurgence. Over the next few decades, Manhattan financiers pioneered innovations—quantitative approaches to evaluating risk; ever-larger leveraged buyouts; the securitization revolution—that made finance considerably more lucrative. Just as Henry Ford’s immense success had led automobile production to dominate early-twentieth-century Detroit, Wall Street earnings meant that finance played an ever-larger role in late-twentieth-century and early-twenty-first-century New York.
And just like Detroit’s auto industry, New York finance became concentrated in fewer, bigger firms. In 1998, Manhattan had 7,313 establishments in the narrower financial sector that the U.S. Census calls “securities, commodity contracts, investments,” and each employed an average of 22.4 workers. By 2008, Manhattan was down to 4,919 firms in that sector, with an average of 40.3 workers apiece. During the same ten-year period, the number of companies in that sector with more than 1,000 workers rose from 19 to 33.
As finance’s success drove up rents, many businesses in other sectors had to leave Manhattan. Between 1998 and 2008, the island lost more than 75,000 jobs in manufacturing, transportation and warehousing, and wholesale trade. Offsetting that decline was a gain of more than 100,000 jobs in consumer industries— retail, food and accommodation, and arts and entertainment—catering to well-heeled residents and tourists. (While that’s diversification of a sort, it’s hard to imagine that Manhattan can sustain itself primarily as an entertainment hub.)
Standard portfolio theory holds that since every sector has its ups and downs, you should divide your eggs into many baskets, and certainly not deposit all of them into a basket as volatile as finance. New York has ignored that principle. Between 2008 and 2009, the city’s payroll fell by $35 billion—and more than four-fifths of that decline was in Manhattan’s finance and insurance payrolls.
Is New York’s concentration in finance dangerous over the long term as well? Many economists would answer no; industrial concentration, they would say, enables the development of highly specialized skills. . . .
Other economists and urbanists, however, argue that a city’s long-term success depends on its hosting many industries, since real breakthroughs pull ideas from more than one field. More than 40 years ago, Jane Jacobs argued in The Economy of Cities that new ideas came from combining old ideas. Nighttime baseball combines baseball with electric lighting; graphic computer interfaces merge old-fashioned pictures with basic computing functions. Michael Bloomberg became a high-tech billionaire not in Silicon Valley but in New York, thanks to his firsthand knowledge of what technology a stock trader needed at his desk. To innovate, in Jacobs’s view, you often need to borrow the insights of another occupation—and since diverse cities contain many occupations, they should encourage more leaps of insight.
At its extreme, this view predicts that Silicon Valley will eventually resemble Detroit. In the short run, industrial concentration can lead to rapid leaps along a technological path. But progress along that path will eventually grow slower and yield diminishing returns, since an industrial monoculture will not encourage radically new discoveries.
To summarize: if you are not overwhelmingly dominant in a particular industry, then you are going to struggle with slow growth and, unable to extract rents from that dominant industry, you will be unable to finance the accoutrements of a “global city.” But if you are overwhelmingly dominant in a particular industry, you will drive out other industries because of high costs, and become an economic monoculture vulnerable to sharp cyclical downturns and even to Detroit-ification if your city’s dominant industry goes into a long secular decline.
I don’t mean to suggest there are no important lessons from either article, or that the two pieces together form what amounts to a Catch-22. Glaeser goes on to argue, for example, that the average cost to economic monoculture are relatively small (though the risk may be large). And what Chicago may be struggling with right now is actually the legacy of being the kind of dominant urban center that it was in the late 19th and early 20th century, when much of the national commerce passed through its rail yards. This is the period when its political culture was formed, and its current troubles may have more to due with its inability for many decades to extract its historic levels of rents than anything else. Moreover, Renn and Glaeser are both arguing for the same solution to different problems: making Chicago and New York respectively more entrepreneur-friendly, particularly by tackling regulatory barriers to business formation and expansion.
But I think it’s still important to recognize the tradeoffs that inevitably exist here. Chicago has a relative low GDP-per-capita – and it also has a relatively low cost of living. My nephews can live in Chicago on incomes that would leave them on the street in New York. That’s the up side of the down side of not being a global city – that people can actually afford to live there. If Chicago and New York had comparably business-friendly climates, that should make Chicago a more attractive destination for a business that isn’t tied to New York’s main industries of finance or media. In general, the best advice for mayors of either city is to focus on what the mayor is supposed to deliver – good schools, safe streets, working roads and subways, and stable credit ratings – and let the market sort out the rest.