Why Finance Shouldn’t Be Only Game in Town: Edward Glaeser

Every December, New York’s salespeople dust off the Chateau Petrus and the Mercedes-Benz AMG Roadsters in the hope that St. Nicholas, erstwhile patron saint of the city, will drop big bonus checks into the stockings of local financiers.

This year, the jolly old elf doesn’t seem to be spreading his largesse too widely on Wall Street. Yet the city as a whole seems to be weathering the financial decline better than one might have expected, and with luck, New York will emerge from this downturn as a more economically balanced city.

Historically, many of America’s great cities were dominated by one or two great industries. Detroit had cars; Pittsburgh had steel. For a few decades, these places flourished because of a potent combination of natural resources, such as coal and iron, hardy muscle and brilliant entrepreneurs, such as Henry Ford and Andrew Carnegie.

Yet while these industrial powerhouses were enormously productive in the short run, their economic model proved less robust over the long haul. When industrial conditions changed, those cities lacked the skills, economic diversity and new entrepreneurs that are the central ingredients of urban reinvention.

Education has proven critical for economic success, whether at the individual, country or city level, and human capital has been particularly important in the older cities of America’s colder regions. Entrepreneurship, measured by the number of small companies or the share of workers in startups, strongly predicts subsequent growth.

Photographer: Rick Friedman/Bloomberg

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Photographer: Rick Friedman/Bloomberg

Bureaucratic Empire

Ford may have been a quintessential entrepreneur, but he created a vast bureaucratic empire that bred company men, not startups. His legacy was a one-industry town. And when that industry faltered, there was little else for the city to do.

The urban-planning activist Jane Jacobs famously argued that new ideas are formed by combining old ideas, and that the industrial diversity of a city makes it easier for innovators to import insights from one sector into another.

Fifty years ago, the economist Benjamin Chinitz compared New York and Pittsburgh and argued that the former’s apparent resilience, even then, reflected its economic history. That’s because New York wasn’t dominated by a few companies in one industry. The garment trade, the city’s largest industry, specialized in small businesses and it usually accounted for just three-tenths of manufacturing employment.

Since anyone with a good idea and a few sewing machines could get started as a garment-maker, the industry proved a training ground for entrepreneurs, including A.E. Lefcourt, New York’s great pre-1929 skyscraper builder, and the father of the former chairman of Citigroup Inc., Sanford Weill.

New York’s economy was a child of its port. Blessed with a splendid natural harbor, a central location on the Eastern Seaboard and a deep river that cut into the American hinterland, the port of New York had risen to pre-eminence by the early decades of the 19th century.

The city’s three great 19th-century industries -- sugar- refining, printing and publishing and the garment trade -- were all offspring of that harbor. The financial-services industry, from its origins under a buttonwood tree at the foot of Wall Street, started with investing in Atlantic trade and grew as the connector between the U.S. and the outside world. J.P. Morgan was a human bridge across the ocean, linking English investors with American opportunities.

I was born in Manhattan in 1967, and the city at that time had an astonishing array of industries. Even then, globalization was causing clothing manufacturing to abandon New York, but the sector still represented 27 percent of the city’s manufacturing employment.

Manufacturing’s Legacy

My childhood was enriched by the legacy of immigrant- intensive light manufacturing. When I was five, I had a cigar- rolling octogenarian baby-sitter who would serve me coffee, after visiting her nephew’s garage and lighting a few candles in a local chapel.

I was blessed with childhood friends whose parents represented the wide range of industries clustered in the city. New York had its share of big company men and women and an army of lawyers who worked for those companies. Vast fortunes were made and lost in real estate, whose great land barons then looked down on the petty salaries earned in finance.

There were songwriters tied to Broadway and ad men producing television commercials. The city was packed with famous editors and publishers; in the 1970s, printing and publishing became New York’s largest manufacturing industry.

My parents initially worked for non-profits, and museums, universities and houses of worship remain among the city’s most enduring institutions.

Although we lived in a small rent-stabilized apartment, I was more than compensated by the benefit of being able to cause trouble upstairs in the penthouse of a friend, whose diplomat father represented Sweden on the United Nations Security Council.

In 1975, the fiscal crisis seemed to put New York in mortal peril, but the city was still defended by a remarkable amount of diverse human capital. Its comeback from 1975 to 2006 is one of the great urban success stories, a tale of endurance in the midst of enormous trial.

Many factors contributed to that achievement, including improved fiscal management and vastly reduced crime. Without safe streets, Manhattan could never have become a place of pleasure as well as productivity.

Yet there is one industry, above all, that deserves credit for New York’s rebirth: finance. At the same time, however, the very scale of that industry’s success has left the city vulnerable.

Finance Dominance

New York has never been a one-industry town, but in 2007, 42.8 percent of wages in Manhattan were earned in the finance and insurance sector, and 31.6 percent of wages ($66 billion) were paid by the sector that the U.S. Census calls “securities, commodity contracts, investments.”

The great rise of finance reflects the urban edge in speeding the flow of information, for that industry specializes in turning information into profit. Trading floors, where enormously rich people forgo the perquisites of privacy to be in the thick of the action, represent the ultimate urban tradeoff: space for knowledge.

Other industries remained, but finance became the leviathan of Midtown and Wall Street, and its demand for space pushed prices up for everyone else.

New York reaped enormous benefits from financial services, whose taxes paid for city services. The financiers’ ability to pay top dollar for Manhattan’s urban pleasures led to a proliferation of high-end retail, from restaurants to shoe stores, where employment increased by more than 20 percent from 1998 to 2007.

But when one industry succeeds, others are crowded out. The number of housing units in Manhattan increased by about 6 percent from 2000 to 2010, but that wasn’t enough to keep up with demand. I began worrying in 2005, as helpful as finance had been for the city, New York might be getting too much of a good thing.

The recession fixed much of that problem. From 2007 to 2009, payroll in “securities, commodity contracts, investments” dropped by more than 27 percent, and finance and insurance were below 37 percent of Manhattan’s payroll.

Earnings outside of finance and insurance dropped by only 5 percent from 2007 to 2009, and that modest decline hints at New York’s resilience.

The city is better off with finance than without it, no matter what you may have heard in Zuccotti Park. Yet New York would be stronger still if it had a broader industrial portfolio. As long as there is enough new building to moderate the growth in real estate prices, new industries will spring up.

New York City’s human talent and global reach may still ensure that its future is as varied as its past.

(Edward Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.” The opinions expressed are his own.)

To contact the writer of this article: Edward Glaeser at eglaeser@harvard.edu.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.

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