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America is replete with struggling post-industrial cities. Massive efforts have been made, and huge amounts of money spent, to try to bring them back.
Yet these have basically all failed.
What will it take to bring these cities back?
Let’s look at the case studies of cities that actually have come back, including many of the largest ones like New York, London, and Boston. In the 1970s, the future looked very bleak for them. New York nearly went bankrupt.
Today their problem is that they are so in demand that housing prices have gone through the roof.
What changed?
It’s tempting to subscribe to the “great man” theory of history and suggest that it was simply superb leadership that brought them back. But did all of these cities suddenly happen to get great leadership at the same time? That seems dubious.
What fundamentally changed for these cities was the market. Big cities came back into fashion again. And especially these large traditional financial centers.
Saskia Sassen literally wrote the book on this. It’s called “The Global City.” She documents how globalization allowed many functions like manufacturing to be distributed all over the world. But at the same time, it created demand for new types of financial and producer services to help firms manage these complex, globalized networks. These new services required highly specialized skills that were subject to agglomeration economics. Those skill pools were found only in select locales. She called the global cities, and gave New York, London, and Tokyo as the paradigmatic examples.
Michael Bloomberg. Image by Flickr/Rubenstein – CC BY 2.0
But what about leadership? Doesn’t that count for something?
Yes, leadership most definitely matters, but it needs to be seen in the context of the market. I like to think of it as related to the finance concept of Alpha. I’m simplifying here, but Alpha is a measure of portfolio return relative to a benchmark index. So if I’m the investment manager of an actively managed mutual fund, Alpha is the return I’m able to generate over and above the S&P 500 Index.
If my portfolio returns 8%, but the market also returned 8%, I’m really contributing no value as a portfolio manager. It’s only if I beat the market that I’m showing that I’m worth something.
It’s the same with cities. Leadership needs to be judged relative to the performance of the market.
In the case of New York, many like to point out that crime declined nationally. Yes, that’s true. But in New York it went down a whole lot more than the nation. It outperformed the market. That’s the measure of leadership. We see this especially clearly when contrasting New York with what’s going on with the Chicago police right now.
So New York benefited from two things: market change and high Alpha leadership in the form of Giuliani and Bloomberg.
Had Giuliani or Bloomberg been mayor in 1976, New York’s performance may well have been better that it was, but it’s highly unlikely that it would have seen the performance of the 90s and 2000s. Because the 1970s were a bear market for cities.
We can see this in the case of Indianapolis. Indy had top caliber leadership for about 30 years from 1968 to 1999 in the form of mayors Richard Lugar, Bill Hudnut, and Steve Goldsmith. During their era, Indy earned the label “Diamond of the Rust Belt” for its surprising vitality relative to the rest of its battered region. This shows leadership can make a different in terms of outperforming in a weak market too.
Yet even after three decades of effort by these guys, very few people lived in downtown Indianapolis. It wasn’t for lack of trying. But the market wasn’t there yet. Today downtown Indy has a residential building boom underway. Unsurprisingly, we see the same in virtually every regional peer city. Even great leadership couldn’t completely overcome marketplace forces.
Which brings us to many of these Rust Belt cities that haven’t yet come back. If we apply this framework, what we see is that these cities aren’t likely to come back until the market changes. They are simply not in demand in the marketplace today. That’s the cold reality.
That means any efforts to attempt to bring them back in defiance of the market is likely to fail, no matter how good the leadership or how much money is spent.
In short, we need to be patient for the market to change.
Will that ever happen? Nobody can predict the future. Certainly few would have predicted New York’s resurgence back in the mid-70s.
Today we already see signs of renewed life in cities like Pittsburgh, Cleveland, and even Detroit. This is not to say that those cities don’t have big, big problems. But for at some people and businesses, they are a much more attractive product than they used to be. My study on their brain gain makes this clear.
If you look at where these signs of life are, it’s generally in cities with critical mass: over a million in regional population, a major airport, a deep enough talent pool and thick enough labor markets, and a sufficient quantity of amenities.
Smaller cities, apart from select college towns, are not nearly yet in the same place. Again, we can’t say for certain if they ever will be, though we should not give up hope either. But we also most likely can’t bring them back with some master civic strategy and a bunch of subsidies.
Assuming a current bear market for smaller Rust Belt cities, and a high Alpha leadership in place in them, what then would be the best policies to pursue?
This is an area I will be devoting some ink to in 2016. But to give you a tease, the key is to do your best to be ready for when the marketplace change comes. Cities should do this by addressing legacy liabilities (pensions, environmental, etc) and restructuring core services.
City leaders can’t control the marketplace, so they need to look to what they can control and what is directly within the scope of what they should be doing, like delivering public services.
Sea-level rise may send population inland. Easier perhaps to rehab the larger inland cities than move coastal infrastructure inland. Three hundred years is not a very long time.
My community is not located in the Rust Belt area, however, with cap limitations on property taxes that can be collected we are reviewing the use of a Fire Fee to diversify our revenue base and then lower our millage rate.
This piece is spot on. You might be aware that I’ve been trying to make this very point as it relates to Rust Belt cities — the early stages of their rebound are evident, but they aren’t what our coastal cities are right now, by a long shot.
In terms of housing this is a matter of demand. Coastal cities solved the demand problem they once had, or globalization solved it for them. Their future sustainability now requires a supply response. Rust Belt cities that have yet to solve the demand problem would be foolish to implement the supply solution; it would exacerbate problems.
You are correct in saying that continued patience is necessary. Rust Belt cities should be heartened by the turnaround of the coastal cities, Chicago’s revitalization, and the current and ongoing rebounds of Pittsburgh, Cleveland and Detroit. New York’s and Boston’s loss (they can’t keep everything) are now Cleveland’s and Detroit’s gain. Maybe when Cleveland and Detroit reach a critical mass of revitalization (a funny notion to many, but look at how quickly other cities rebounded, within a generation), what they lose becomes Toledo’s or Akron’s gain.
In this way it might be best to see that revitalization flows downward.
pete, I suspect you are into something; perhaps a sort of “trickle down” theory of economic outflow descending through city tiers as each preceding tier approaches its peak capacity.
So far, this theory does seem to be holding up, with Cleveland, Pittsburgh, Buffalo and Detroit, etc–the second tier of cities–gradually benefitting from the spillover outflows of top tier cities like NYC, Chicago, Boston, San Francisco, LA, etc. I agreee that we probably still have a ways to go yet before we will see steady spillover from the second tier into the third tier, consisting of Akron, Toledo, Youngstown, Dayton, Canton, Erie, Flint, etc.
But who knows? 10 or 15 years ago, people had written off Detroit for dead, and the rest of the Rust Belt wasn’t far behind off as people and business fled in droves out of the region to the Sun Belt. Now, Pittsburgh, Cleveland, Cincinnati, and Buffalo are all finally starting to reemerge with a new spirit and outlook. And even Detroit for all of its woes is at least showing that it still has a pulse, even if the body it resides in is destined to take on a much different and probably much leaner form than the one it had during its industrial heyday.
I suspect in another 10 or 15 years that Pittsburgh, Cleveland, etc. will have reached a collective new zenith for the 21st century, and may then face challenges of capacity similar to what NYC, Boston, etc. now face. The best thing that Akron, Toledo, Dayton, Flint, etc. can do today is to start positioning themselves to benefit in the next 10-20 years from the eventual spillover outflows from a revitalized second tier.
Couldn’t help but laugh when I saw the featured image. It’s actually being restored for housing! (http://urbanmilwaukee.com/2015/10/02/friday-photos-old-bottling-house-becomes-student-housing/)
I actually think Milwaukee is in a great place to thrive (and in some respects is). The pension is 100% funded. Infrastructure issues are consistently addressed. Large employers that could choose to flee have recently chosen to reinvest in the city (Northwestern Mutual, Johnson Controls). The city government is digging itself out of the foreclosure crisis. Numerous brownfields have been redeveloped (including the one pictured above).
Now all of that said, there are great challenges. The big city public school system is struggling. The voucher/charter system has a few shining starts, but is littered with issues. Political battles between city and state prevent sound policy decisions at both levels. There is a huge black/white achievement gap that is tied into segregation issues, schools, transit, policing and public health.
Milwaukee is a perfect example. It’s certainly in the mix with those other regional 1M+ metros where the market is coming back around.
Looking forward to hearing your thoughts on leadership in Milwaukee, especially versus other cities of its size.
Think this is a great topic to explore.
I don’t have a lot of insight into Milwaukee’s leadership. Right now my thinking is oriented around trying to identify things leaders might do in cities in a tougher position, say Flint, Michigan or Dayton, OH.
Isn’t it all about comparative advantage in the end?
Sure, but identifying the next comparative advantage before it becomes evident is tough. Did anyone really project the transformations of New York and Chicago, or what the drivers would be? In hindsight it is pretty clear.
I’ve been suggesting for years that the next big-metro advantage will be adequate/guaranteed freshwater supply, but it might also be isolation from sea-level rise. Both are comparative advantages for Cleveland, Detroit, Chicago, and Milwaukee.
I wholeheartedly agree with you on this, Chris. Both ample freshwater supply and sea-level rise security could bring people back to the Rust Belt. I think the freshwater supply component will happen first as businesses, then people, relocate to take advantage of the supply. We’ll have to wait a little longer to see the impact of sea-level rise on American coastal cities, but international cities impacted by sea-level rise may send climate change refugees to Rust Belt cities.
Sounds far-fetched, but plausible.
What about identifying CURRENT comparative advantages? Isn’t that were any failing metro should start?
Comparative advantage is a difficult concept to apply practically to cities. The classic example is the lawyer and the secretary, but those are individuals, not cities. In terms of trade between locations, basic comparative advantage examples implicitly assume immobile populations. Also, it may well be that the thing a city has highest comparative advantage in is something where it is, on an absolute basis, disadvantaged.
Interesting discussion about comparative advantage for cities. I note Aaron’s example about the lawyer and the secretary, but (in applying this legal example), the analysis for comparative advantage at the city level is regarding their respective legal markets overall. In a pure hypothetical, let’s assume that New York City has the most in-depth, talented and efficient attorneys across the board in every practice area. The Detroit legal market might have 85% of the efficiency of NYC in labor law based on talent and cost factors, but only 25% of the efficiency of NYC in mergers and acquisitions. Therefore, Detroit has a comparative advantage over NYC for labor law (even though Detroit is still at an absolute disadvantage). (Note that those numbers are just for hypothetical demonstration purposes.)
I agree with others that actually identifying comparative advantages is fairly tough. It’s much easier to see absolute advantages, such as high concentrations in specific industries (i.e. Bay Area for tech, LA for entertainment, Houston for energy), natural factors that are generally thought of as more attractive (i.e. Denver, Portland and Seattle for access to outdoor recreation, Sun Belt for warm weather) or leveraging universities and highly educated populations (i.e. Boston, Austin and Raleigh-Durham). This is what has been difficult for a lot of Midwestern cities (outside of Chicago and college towns), as the absolute advantages that they used to have (such as concentration in manufacturing) have become liabilities and the ones that could become absolute advantages (such as access to freshwater that others have mentioned) might not come to fruition for decades.
As a result, I think most Midwest cities have to look at more of an “overall comparative advantage” that’s all-encompassing (instead of focusing on one industry or natural resource) where they need to be able to argue that the proverbial whole is greater than the sum of its parts. The primary Midwest example of a city using an overall comparative advantage is Chicago. Chicago doesn’t necessarily have an absolute advantage over New York City in any particular area (whether it’s the financial industry, legal market or cultural amenities), but it comes pretty close in a lot of areas with much lower real estate costs (which is the one place where Chicago has an absolute advantage over NYC). Essentially, Chicago’s overall value proposition is that you get, say, 85% of what you’d find in NYC for 50% of the cost.
Note that cost in and of itself isn’t the determining factor (as that’s already an absolute advantage of most Rust Belt cities over their coastal counterparts) – it’s really about what you’re getting in return for those costs. A city that costs 50% of NYC but only delivers 25% of the value of NYC isn’t looked upon as a good deal and is going to be struggling. A city that costs 50% of NYC and delivers 50% of the value of NYC is effectively treading water. A city that costs 50% of NYC and delivers 85% of the value of NYC has an overall comparative advantage to sell. Of course, that’s all a lot easier said than done (as pointing out what cities need to do is relatively easy compared to the implementation).
When you spend over a half century promoting a government policy that favors the suburban single family home as the summum bonum of housing, and subsidizes suburban living with generous government tax and housing policies, why do we act surprised that urban populations up and leave city apartments for suburbs where the living is better and safer, schools are vastly better (and safer), the government builds a highway network making it easy to get to city jobs (if any), and thanks to those policies, in time your family home becomes a giant piggy bank as well as a tax-advantaged investment that also provides a roof over your head? Add to that the fact that old urban manufacturing plants grow obsolete, and industrial jobs are shipped offshore where labor is cheaper and often better, and don’t forget decades of a welfare system that made older cities a repository of people unable (or unwilling) to grasp whatever tools a society provides to better their condition, and what do you expect?
And let’s not forget the profligate and ultimately disastrous management practices of city politicians, what do you expect?
Is it any wonder that older cities have been abandoned en masse by their more enterprising inhabitants able to make the city-to-suburbs move? Not the least of which has been urban redevelopment that in its heyday displaced hundreds of thousands of low cost city dwellings. You put all that together and what do you get?
And by the way, do you know that Detroit Mayor Jeffries (after whom a freeway is named) predicted in his congressional testimony in the 1940s that creation of urban freeways would be the ruination of Detroit and lead to its bankruptcy? Why? Because those freeways not only made it convenient for people to commute to their urban jobs, but also convenient to head out to the suburbs where many employers relocated.