New York City is right to worry about being too dependent on the financial industry.
In 2008, 44 percent of Manhattan wages were earned by workers in finance and insurance; the next year, even after the financial crisis and economic downturn had battered the industry, that share stood at a still-enormous 37 percent.
Yet the track record of one-industry towns is grim. No matter how loudly Chrysler’s 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. Across the world, economic data show a positive link between industrial diversity and long-run urban success.
Indeed, such diversity was a key to New York’s success over the centuries. For, while finance has existed in the city for centuries, its current dominance dates to the late ’70s.
Over a 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 auto production to dominate Detroit early last century, this more recent Wall Street success meant that finance played an ever-larger role in 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 US 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. Meanwhile, the number of companies in that sector with more than 1,000 workers rose from 19 to 33.
Finance’s success was vital to New York’s post-’70s resurgence, but at a cost. As it drove up rents, many businesses in other sectors had to leave Manhattan. From 1998 to 2008, the island lost more than 75,000 jobs in manufacturing, transportation and warehousing, and wholesale trade.
And the sheer size of the financiers’ salaries means that the success of other industries, from restaurants to real estate, is now tied closely to the fortunes of finance. Just look at the doldrums that the whole city enters when Wall Street bonuses fall short.
About 20 years ago, three co-authors and I examined industrial clusters within cities and found that high levels of industrial concentration within the clusters in the mid-1950s were associated with less income growth from 1956 to 1987. More recently, I studied 300 metropolitan areas over the period since 1977 and found that more industrially concentrated areas experienced less population growth in subsequent decades.
In other words, both population and income growth decline steadily with industrial concentration.
New York City should wish nothing but success for its traders and investment bankers; to encourage a more diverse local economy, it should seek not to hurt finance but to expand entrepreneurship in other sectors.
But which sectors? Probably from the sector that the Census calls “professional, scientific, and technical services,” in which the number of Manhattan employees rose from 257,000 in 1998 to 285,000 in 2008. These industries are a natural fit for New York, whose comparative advantage is density — a particularly valuable asset for information-intensive industries.
But the cost of Manhattan real estate is a serious problem for potential start-ups: They must pay for pricey office space and pay higher wages to employees looking at pricey residential space.
Building on a long, narrow island will always be expensive, but it could be less expensive if there were fewer rules deterring new construction. A little more freedom would let more start-ups locate in New York.
The city should worry, too, about the many other rules that limit start-ups. To open something as simple as a restaurant or bar, you have to apply for a bewildering variety of permissions from various agencies and organizations: health and building permits; a license from the State Liquor Authority, which promises an answer within six months; community approval, after community members have pored over your proposed menus.
The mayor’s office has tried to help by creating a New Business Acceleration Team, but the city should go further, organizing all necessary approvals in a single office and guaranteeing applicants a decision within, say, 30 days.
And finally, New York must continue the hard fight to lower its tax burden without substantially reducing the quality of life.
The city has recently made a wise-looking, bold bet to support industrial diversity: encouraging a new applied-science campus on Roosevelt Island. After a tough international competition, the city awarded the land for the campus, plus $100 million worth of infrastructure support, to Cornell University.
The connection between education and metropolitan success is empirically robust; Berkeley’s Enrico Moretti has shown that an area with a land-grant college before 1940 is more likely to enjoy economic success today. And New York needs industries other than finance, and applied science seems promising.
For hundreds of years, the city has derived strength from its wide proliferation of different industries and sectors. New Yorkers should hope that the science campus kicks off the latest episode in that centuries-long story.
Edward L. Glaeser is a professor of economics at Harvard University
and a Manhattan Institute senior fellow. Adapted from the forthcoming issue of
City Journal, where he’s a
contributing editor.