Wall Street Isn’t Enough: Finance-heavy New York must recapture its economic diversity.
April 25, 2012
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.
New York shouldn’t try to hold finance back, of course, but it should try to reduce the cost and regulatory barriers that limit the growth of other sectors. If Gotham hopes to keep playing its historical role in leading the world’s economy, it needs to welcome companies in other fields—most likely, technology, business services, and a broad range of information-intensive industries.
I spent my childhood in Manhattan, from 1967 until 1984. New York’s economy was far more diverse then than it is today. My friends’ parents were hardly a proper cross-section of the city, but they nevertheless represented a remarkable array of different industries: there were editors and philosophers, art dealers and jewelers, judges and doctors. Show-business parents, including Broadway composers and a character actor best known for a modest role in Shaft, added glamour. Developers and landlords added grit. I can’t recall a single investment banker in the bunch.
But then, the city had been diverse for centuries. New York’s first big industry, back in the eighteenth and nineteenth centuries, was sugar refining. But sugar was never going to dominate the city the way steel came to dominate Pittsburgh, because refined sugar couldn’t be shipped very far, which limited the size of the market. Similarly, printing and publishing—New York’s second big nineteenth-century industry—could grow only so much, since demand for the printed word in frontier America was limited. No such barriers limited the expansion of New York’s third and greatest industry, garment production, since clothes are portable and represent a significant share of household budgets. But even then, New York’s economy remained diverse: in 1950, at the height of its power, the garment industry represented only 8 percent of city employment.
The most important reason for New York’s continuing economic diversity was the city’s massive scale, which generated plenty of homegrown entrepreneurship and attracted entrepreneurs from elsewhere as well. New York was an early hub of automobile production and the film industry, for example, and though they eventually left town, they helped make the city diverse during their early years. Even when companies were born in the Midwest, their chieftains often moved their headquarters to New York to be part of a great agglomeration of business services and financiers, as John D. Rockefeller did with Standard Oil in 1885. The oil industry’s presence in New York infused the city with a little prospecting swagger and gave the oil industry a taste for culture, explaining why Mobil financed Masterpiece Theater programs for years.
Most of America’s older ports—Boston, Philadelphia, Baltimore, San Francisco—shared New York’s industrial variety. America’s inland cities were another story. Most of them exploded in the nineteenth century because they offered a huge natural advantage that couldn’t be ignored, such as nearby coal mines or cornfields. St. Louis, Cincinnati, Chicago, and Minneapolis, all in the grain business in a big way, were dominated by agriculture-related firms.
These inland cities became even less diverse in the early twentieth century, when the country moved to manufacturing. Industry located in the inland metropolises for several reasons: sometimes to be near local entrepreneurs, like Henry Ford; sometimes because the older ports were too pricey for the acreage-intensive manufacturing of large industrial products; and sometimes because industry needed local inputs that were easily available in the Rust Belt. The steel industry in Pittsburgh, for example, relied on nearby coal mines. So did Buffalo’s steel industry, which also took advantage of iron ore from Minnesota shipped along the Great Lakes. Michigan’s abundant forests provided the wood for Billy Durant’s Flint Road Cart Company and later for his car company, General Motors.
The twentieth century’s heavy industries faced few natural limits to growth, and falling transportation costs meant that their products could be sold throughout the country, if not across the globe. By 1950, the midwestern cities found themselves heavily dominated by one or two large industries. Automobile production boasted 28 percent of Detroit’s total employment; metal and machinery manufacturing claimed 20 percent of Cleveland’s. Again, New York’s garment industry, massive though it was, represented less than 10 percent of the city’s total employment.
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.)…