The Center Must Hold

For the city's economy, critical mass matters more than ever

New Yorkers have always been proud to live in the nation's biggest and most densely packed city. But September 11 stirred a sickening realization: The bigger and denser a city is, the juicier it is as a target for terrorists. Skyscrapers? Targets. Bustling train stations? Targets. Crowded theater districts? Targets.

Suddenly, many New Yorkers are pondering whether they might be more tranquil across the river in Jersey City, up the train line in Stamford, Conn., or off in some picturesque part of Arkansas. Margaret Ann Thomas, a 29-year-old graphic designer in Manhattan, says her grandmother offered her a car and a downpayment on a house if she agreed to live anywhere but New York. She's thinking it over carefully. "If I wait for the next [attack] to happen to see what it is, what if I've waited too long?" asks Thomas. "What if I'm part of the next thing that happens?"

New York City has forever done battle with forces that could disperse its people, its companies, and its energies far and wide. High costs, congestion, crime, and troubled schools have at various times in the past called the city's future into question.

But the September 11 attack was the single worst blow New York has ever sustained. In an Oct. 4 report, New York City Comptroller Alan G. Hevesi estimated that the attack caused $34 billion in property damage. The amount of Class A office space destroyed--about 13 million square feet--was equal to the entire office-space inventory of Atlanta or Miami. The loss of life not only sapped the city's spirit but also destroyed about $11 billion in "human capital," the productive power of those killed.

Now, New Yorkers are asking whether the forces of dispersion will gain the upper hand, just as gravity seized its chance when the Twin Towers were weakened by air attacks. "Terrorism is posing a threat to the fundamental character of cities such as New York," says Mitchell L. Moss, director of the Taub Urban Research Center at New York University. "It's going to be more difficult, more costly, and more time-consuming to do business here."

But there is a powerful force counterposed to dispersion, just as there has always been in New York's history. It's the force of agglomeration, a kind of economic and social gravity that pulls people together. The best and the brightest from around the world are drawn to New York because it's where they can do their finest work and reap the highest rewards. Despite its drawbacks, New York is an indispensable global center not only for finance but also for media, advertising, and the arts, among other fields. Measured by payroll, the city, with less than 3% of the country's workforce, accounts for 37% of the U.S. securities industry, 20% of advertising, and 18% of book publishing.

TRUE BELIEVERS. That's why businesspeople in many fields can't imagine being anywhere else. "If I were in Indianapolis, this industry would not run as efficiently," says Paul R. Charron, chairman and CEO of women's apparel maker Liz Claiborne Inc. (LIZ ) "Italian pattern makers, the tailors, they all live in New York. I have a standing order with two or three search firms looking for great athletes in the design arena. They all come from New York."

With a solid core of true believers like Charron, New York will almost certainly survive its latest trauma. Its staying power and adaptability for nearly 400 years have been enormous. Still, in the short run, the September 11 attack will hammer a nearly $500 billion city economy already stumbling from the bear market on Wall Street and the nationwide slump. More than 100,000 New Yorkers will eventually be thrown out of work by the attack, according to New York State Labor Dept. estimates. Economy.com Inc., a forecaster in West Chester, Pa., calculates that the New York economy will end up contracting at an annual rate of 9% in the second half of 2001 and won't return to its pre-September 11 level of output until the middle of 2003. All told, Economy.com estimates, New York City will lose about $90 billion in output over the next three years. Even though the economy will eventually accelerate, "there is a lot of output that will never be made up," says Celia Chen, a senior economist at the firm.

More worrisome, the attack could push some wavering companies to leave the city or at least shift out some operations. The nearly two-thirds drop in New York's violent-crime rate over the past decade was crucial to the city's revival. Now, fear is back. Many companies are deciding that it is prudent to spread operations over multiple locations on different electrical grids and telephone networks--and seamless communications make it much easier to do so.

Costs are rising, too, at the same time that the quality of life is worsening. With the Holland Tunnel beneath the Hudson River closed to inbound traffic and some commuter train lines out of service, commuting times into the city for many New Jerseyites have risen by 20 minutes to half an hour. The destruction of downtown office space has pushed up rents. New York's next mayor may need to raise taxes along with cutting services to balance the budget. Even insurance is getting more costly. Commercial-property insurers, worrying that New York will continue to be singled out by terrorists as their No. 1 target, are boosting quoted rates for building owners in Manhattan by about 100%, according to Jacques Gordon, international director for research at Jones Lang LaSalle Inc., a Chicago property manager. That's compared with 30% to 50% increases in other cities, he says.

In the long run, the attack might well make Manhattan--the engine of New York City's economy--into a more concentrated version of what it already is, the information city par excellence. As costs and inconvenience rise, the businesses that choose to locate in New York's core districts will be ones that absolutely must be at the very heart of it. For them, the rewards will be rich. Density creates tremendous advantages. By locating close to their competitors, businesses have access to the largest pool of top-notch talent. They can share essential support services: costume and prop makers in the case of Broadway, specialized lawyers and accountants for Wall Street. And they can participate in the creative ferment that generates the best ideas. New York will specialize in cutting-edge jobs, says Saskia Sassen, a University of Chicago sociologist, that require "evaluation, judging, inferring, guessing, forecasting, making the most of what you don't really know."

SILICON ALLEY. New York's future specialties will be not only in finance but in consulting, accounting, health care--and technology, a field in which New York is often underestimated. Already, the New York area has a larger communications and computer-services workforce than any other major metro area, according to the Citizens Budget Commission. And the Silicon Alley boom of the 1990s created a network of New York venture capitalists able to take advantage of the next tech upturn. Although Silicon Alley is severely shrunken from a year or two ago, "we still have a better, more vibrant VC community than we did in 1996," says Fred Wilson, managing partner of Flatiron Partners, a techie venture-capital firm. Adds Bruce Bernstein, president of the New York Software Assn.: "Silicon Alley can be a motor of rebuilding, just like we were a motor for the city's growth during the '90s."

That is for the future. Over the next year, New York's fate partly hinges on the national economy and the stock market. Intensely specialized regions like New York and Silicon Valley depend on exporting their products and services to the rest of the country and, indeed, the world. That makes them more vulnerable when there's a national or global downturn. American Economics Group, a Washington-based consulting firm, calculates that even if the terrorist attack had not occurred, New York City, because of its mix of jobs, would have lost 2.5% of its employment in the current downturn, vs. a loss of 1.8% for the nation as a whole.

The city's last dark age, in the early and mid-1970s, coincided with stagflation, followed by a deep national recession and a bear market on Wall Street. From 1969 to 1977, the city lost 600,000 jobs, a sixth of the total. Then, after a decade of strong growth, the city fell into another slump, from 1989 to 1993, when it lost nearly 400,000 jobs.

URGENT NEEDS. Today, the city's economy is more closely tied to cyclical industries such as finance, media, and advertising than ever before. In particular, employment in the securities industry rose 42% from 1991 to 2000 (charts). In 1999, the latest year for which data are available, Wall Street accounted for 17% of the city's payrolls. So a long slump would hit New York harder than the rest of the country.

If the problems of New York's industries are strictly cyclical, then a return to rapid growth of the national economy would quickly benefit it. But there are troubling signs that New York's anchor, the securities industry, faces deeper problems than merely the current bear market. For years, New York-based brokerage firms have racked up enormous profits--and paid enormous bonuses--by controlling the underwriting of stock and bond issues and dispensing advice on mergers and acquisitions. Now, commercial banks are trying to muscle in. The market-share war is eroding margins and forcing cuts in payrolls, which account for about half of investment banks' costs.

Right now, New York City's most urgent needs are to rebuild its damaged transportation infrastructure downtown and to plug a gaping hole in the city budget. Mayor Rudolph Giuliani has frozen hiring and is asking many city agencies to trim as much as 15% from their spending to close a gap in a budget that until recently was expected to be in surplus. On top of that, on Oct. 9, Giuliani and New York Governor George E. Pataki asked Washington for $54 billion in incentives, tax breaks, and subsidies, beyond the $17.5 billion granted last month. But they'll probably get only a fraction of what they're seeking. Further cuts in parks, schools, sanitation, and other services will make the city a worse place to live, exacerbating the flight the city is trying so hard to arrest.

Should the rest of the country worry about what happens to New York City? Yes, for several reasons. The city is a powerful generator of federal tax revenue, for one thing, typically sending $9 billion a year more to Washington than it gets back in aid. More important, the world-class products and services that emanate from New York City--from TV shows to advertising campaigns to books to intricate new financial instruments--might be a bit less world-class if the city loses its critical mass. That's a case New York State Comptroller H.Carl McCall is trying to make. "There would be so much dispersion that these industries would be less effective. They would become so scattered they would lose their impact," he says. "That is a very important issue for New York and the country."

In fact, the feared flight of business has already begun. Even companies like American Express Co. (AXP ) that remain committed to Manhattan are moving parts of their staffs to New Jersey, Westchester County, N.Y, and Connecticut. Some are doing it temporarily because their offices were damaged or destroyed, but others are signing long-term leases. On Oct. 8, Morgan Stanley Dean Witter & Co. (MWD ) announced it would sell a nearly completed office tower in midtown Manhattan rather than make the building its new headquarters. Although Morgan Stanley will remain based in New York, several thousand employees will be moved out.

The suburbs and beyond remain a powerful lure for many New Yorkers. While the city's population grew in the 1990s, it was due mainly to immigration from abroad. In spite of popular stories about bright-eyed newcomers from Kansas, New York City loses far more people to other parts of the U.S. than it gains from domestic migration. The nearly 5% net loss in the late 1990s was the biggest of any major city, according to Census Bureau data. Taxes are a big factor. Families earning more than $100,000 a year pay far higher taxes in New York than in any other major city, according to the Citizens Budget Commission. And relatively few wealthy families send their children to public schools.

"VERY RESILIENT." Of course, those factors have existed for years. The new challenge is terrorism. Believers in New York's future say cities have rebounded from far worse than the World Trade Center attack. Columbia University economists Donald R. Davis and David E. Weinstein point out in a new research paper that Japanese cities recovered quickly after the U.S. bombing in World War II--and, moreover, that the biggest cities stayed the biggest, regardless of how bad the damage. New York's own financial district recovered from a fire in 1835 that leveled 700 buildings around Wall Street.

Terrorism differs from those disasters because it is an ongoing threat. Still, New Yorkers don't seem ready to quit. "We are very resilient people," says Brooklyn-born Richard Parsons, co-chief operating officer at AOL Time Warner Inc. (AOL ) The grit New Yorkers showed in the aftermath of the Twin Towers attack--including the reopening of the New York Stock Exchange just six days later--impressed the world. "That's just pure brain and pure muscle," says Paul O'Connor, executive director of World Business Chicago, an economic development outfit. Although O'Connor makes a living recruiting businesses to move to Chicago, he says, "there's nothing on earth like New York City."

In the end, the September 11 attack probably did tip the balance in New York toward dispersion and away from agglomeration. Some analysts say dispersion is not only inevitable but healthy. "New York is going to become more multipolar, like Los Angeles. It will find out it can't shove everything into an area as dense as possible and think that it's going to work," says Joel Kotkin, a professor of public policy at Pepperdine University in Malibu, Calif., and author of The New Geography: How the Digital Revolution is Reshaping the American Landscape.

Fair enough. But even the suburban real-estate executives who are trying to lure businesses away from Manhattan agree that New York City--like the sun--must continue to have a white-hot center. "We only exist as a function of New York," says Edward Tonnessen, executive vice-president of Albert B. Ashforth Inc., a commercial real estate firm in Stamford. The essential city will go on, as it must.

By Peter Coy

With Michelle Conlin, Louis Lavelle, and Spencer Ante in New York and bureau reports

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