Ed Glaeser on New York City

The Very Smart Edward Glaeser on New York City:

Edward L. Glaeser (2005), "Urban Colossus: Why is New York America's Largest City?" (Cambridge: NBER Working Paper 11398).

Abstract: New York has been remarkably successful relative to any other large city outside of the sunbelt and it remains the nation's premier metropolis. What accounts for New York's rise and continuing success? The rise of New York in the early nineteenth century is the result of technological changes that moved ocean shipping from a point-to-point system to a hub and spoke system; New York's geography made it the natural hub of this system. Manufacturing then centered in New York because the hub of a transport system is, in many cases, the ideal place to transform raw materials into finished goods. This initial dominance was entrenched by New York's role as the hub for immigration. In the late 20th century, New York's survival is based almost entirely on finance and business services, which are also legacies of the port. In this period, New York's role as a hub still matters, but it is far less important than the edge that density and agglomeration give to the acquisition of knowledge.

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...the distribution of employment in Manhattan in 2002. 28 percent of the payroll of the city is in a single three digit industry: "security, commodity contracts and like activity." This level of concentration is higher even than the commitment of the city to the garment trade during the height of that industry. Another 28.5 percent of total payroll is in three other industries: business, scientific and services (mostly lawyers and accountants), credit intermediation and company management. Together, these four industries account for 56.6 percent of total payroll in the isle of Manhattan. When Benjamin Chinitz (1961) compared agglomeration in New York and Pittsburgh, he emphasized the remarkably diverse nature of the New York economy. This is no longer the case. Manhattan employment is remarkably depended on finance, business management and business services.

This is not true in the outlying boroughs that are primarily in non-traded service sectors... health care, for example... these are both much smaller economic areas and are much more oriented towards providing services towards the residents of the greater New York area.

New York’s move into finance and management is not really paralleled by any of the other older cities. Perhaps the closest parallel to New York is Chicago which, during the last decade, has somewhat remade itself around business services. Boston’s post-1980 renaissance is completely different and should be seen as the result of small scale entrepreneurship in a number of disparate, high human capital sectors. The other large cities are still in decline and cannot be said to have found any meaningful replacement for the manufacturing firms that once employed thousands of their citizens.

The success of New York as a financial city suggests three questions. How did New York become the financial capital of the world? Why has New York’s dominance managed to expand in the modern era? Will New York manage to continue to survive on the basis of its financial industries?...

Comments

[Ken Houghton]

NYC became the financial capital of the world (sorry, London) in the same way that Detroit became the capital of the car industry--by offering the greatest variety of potential employment opportunities.

I have a few mates at N/C/N/B/ BofA who proudly declare that Charlotte passed Chicago (even before the MBNA announcement) in terms of financial assets controlled. But the amount of the assets doesn't matter as much as the variety of the options. In Charlotte, a financial services professional can work either for N/C/N/B/ or for WalkAllOverYa.

In NYC, even a desultory search of the want ads produces three or four possibilities.

Yes, you can only work one job at a time. But being downsized or having a bad trading day eliminates 50% of your options in Charlotte, while it may just be a bump in the road in NYC.

[John Emerson]

When Hilary was running for the Senate, Republicans tried to make a stink about her being a carpetbagger, as though NYC were Mississippi. (Just a few days ago the idiot Debra Sanders tried to raise the issue again). It didn't work.

But the whole point of NYC is that it's a destination -- "If you can make it here, you can make it anywhere". The best of the best end up in NYC. Not only are many New Yorkers (or their parents or grandparents) from somewhere else, even native New Yorkers love the place as a cosmopolitan, championship place where things are happening all the time.

Paris is like that too. A high proportion of the leading lights of Paris have always come from somewhere else, but Paris was where they want to be.

[A. Zarkov]

“Freddy Ferrer, is proposing to raise billions by putting a transaction tax on stock and bond market trades that take place in the city markets.”

NYC had a stock transfer tax that raised $258m the year it was phased out in 1979. Former New York mayor Edward Koch says the exchanges threatened to leave the city unless the tax was rescinded. I remember when the tax was imposed in the early 1970s because a whole of brokerages opened offices in New Jersey. Koch is now proposing a national tax on stock transactions as well as a national sales tax on Internet purchases. He doesn’t think the exchanges could move off shore.

Ken Auletta wrote a book about the demise of New York in 1979 called “The Streets Were Paved with Gold.” While Ken himself is a liberal, he was realistic about the over spending by city government when he wrote: “New York is Liberalism’s Vietnam.” I lived in New York for 30 years, and I recall that everybody with any awareness knew the city wasted gigantic amounts of money. We joked about it all the time. It was a perfect example of the Beatle’s song “Tax Man.”

[A. Zarkov]

From dictionary.com:

Carpetbagger: “An outsider, especially a politician, who presumptuously seeks a position or success in a new locality.”

How does that not exactly describe Hilary Clinton?

[spencer]

Zarkov -- your definition of a carpet bager describes many people, including our governor here in Mass. So maybe the next Presidential race will be between two carpetbaggers.

But from someone that grew up in the rural south and remembers when Robert E. Lee's birthday was a state holiday I give carpetbagger a somewhat different connotation.

[Joe S.]

WTF? New York was the 19th-century hub in a hub-and-spoke system? That doesn't parse. NY did not have a rail connection across the Hudson in the 19th century, and still does not have a freight rail connection today. I see how NYC could have been a shipping-mfg hub in the first few decades of the 19th century, when it had the Hudson and the Erie Canal. But once the railroads were built, you would have thought that Baltimore or Philly would become #1 city in the second half of the 19th century. They were the ones with a direct connection to the Midwest.
It is worth noting that NYC was the financial hub of the country beginning in the early 19th century, when it took over from Philly. This was still the (end of the) mercantile era, not the industrial revolution. Of course, as some of the posters have suggested, NY's status as financial hub is brittle, given modern high-bandwidth telecommunications. I can see why the dealmakers continue to stay in NY--they need to be in close physical contact. But the traders with their screens?

[Tim]

Financial capital of the world? New York is very concentrated on the stock market, the far bigger FX & bond markets are periferal to New York and the major risk takers such a the Hedge funds tend to be outside the city. The fragmented nature of American baking means that many large lenders are outside the city as well. That said one can't but admire the vibrancy of such a beautiful city.

[A. Zarkov]

“Zarkov -- your definition of a carpet bager ...”

Not my definition, it’s from the American Heritage Dictionary. New York State’s election laws permit an essentially new resident to run for office immediately. RFK was also described as a carpetbagger when he ran for the Senate from New York in 1964. And like Hilary he was. No one really believes either of them had a burning desire to represent the people of New York State. Mitt Romney on the other hand has had more contact with Mass than either Hilary or RFK. He attended Harvard from 1971 to 1975. He also founded Bain capital in Boston 1984. So while born in Michigan he has had substantial contact with Mass for a number of years. Compare to Hilary who virtually never set foot in the state until 2000 when she ran for the Senate. RFK could claim a scintilla of NY contact as he attended Riverdale Country Day School (in the Bronx) circa 1927. Does anyone doubt New York is anything other than a stepping-stone to the presidency for Hilary?

“.. still does not have a freight rail connection today.”

An astute observation. The Port Authority of New York was supposed to just that—build a rail line across the Hudson to alleviate traffic congestion. But the project was abandoned in favor of building the World Trade Center. The PA was supposed to be ports and transportation, not real estate. The WTC caused a glut of office space in lower Manhattan for many years.

[Richard Green]

Ed's point:

"In this period, New York's role as a hub still matters, but it is far less important than the edge that density and agglomeration give to the acquisition of knowledge..."

is incredibly important, and is supported by the aftermath of 9/11. Crocker Liu and colleagues at NYU have a terrific paper that shows, remarkably, that the vast majority of the employment that got physically pushed out of Manhattan because of 9/11 has returned. If that isn't evidence of the important of agglomeration economies, I don't know what is.

It is also the case that people move from one Wall Street firm to another all the time, thus giving a very well defined mechanism for knowledge spillovers.

Perhaps even more remarkable is the case of Tokyo. After it was leveled in WWII, the Japanese could have started over with less economic concentration in one place. But Tokyo almost immediately renewed its role as the economic collossus of Japan, and as a metropolitan area remains far larger than any other in the World.

[anne]

Richard

Agreed. I too was thinking about Tokyo, and imagine no less importance for New York from here. New York srtikes me as remarkably vibrant with each visit. Why should we be surprised, as culturally we would have it so.

[Big Al]

Wasn't the port at Baltimore, closed, during the war because so much was being stolen, from the cargoes? Did it ever come back?

[LeislerNYC]

JoeS, two of the main commodities shipped through New York were sugar and cotton. NYC was the sugar refining center for North America (the old Domino plant, the last of its kind just closed in Brooklyn last year I believe); as for cotton, it was shipped by sea, not by rail, to New York and on to Europe; hence New York's ambivalence about the Civil War and Staten Island's antibellum architecture & conservative atmosphere (planters maintained summer homes there). Plus, the New York bankers kept the always cash-poor plantation society afloat.

The corollary effects were the complete infrastructure for required for shipping -- brokers, insurance, scheduled sailings and the like which were necessary for export and lacking in places like Baltimore or Philly (which was not a deep-water port at any rate). Plus, the incoming trade, and the brokers, wholesalers, the whole distribution system.

And don't forget that store owners or plantation owners could come to New York once a year to see to their business, shop, take in the amusements, partake in fine dining, sin a little, see all that THE city had to offer, pleasures that Baltimore could hardly offer.

The industrial products of the midwest -- steel & later cars, were primarily for domestic consumption & weren't exported until the 20th century, from Cleveland and Chicago, so rail access wasn't important. In the late 19th Cent we still couldn't compete with the Germans & the Brits on manufactured goods, and indeed had to rely alot even on foreign capital and technology.

Don't forget,though, the trade hub still exists, at JFK for airborn goods.

As for the future, I share your anxieties, with such a narrow, easily relocated base.

[burritoboy]

No, I would disagree - New York was not the definitive financial hub until well into the 19th century - until just before and after the Civil War.

The groundwork had been laid by Alexander Hamilton's construction of the national securities market by funneling the new US government bond sales through the New York markets (i.e. the ones he himself had grown up in and was already a major player in). However, financial activity in Boston, Philadelphia and Baltimore was only somewhat below that of New York until 1850 and later. The initial boost provided by Alexander Hamilton's activity was only built into an absolutely dominant New York (versus the other competition) when 1. Augustus Belmont and Henry Villard became the primary agents for Continental capital investment in the US and operated out of New York, 2. JP Morgan (the person) became the primary agent for British capital investment in the US and moved from London to New York and 3. JP Morgan (the person) took the leading role in reorganizing American industry into the corporate form we recognize today.

It's notable that JP Morgan's firm in New York was the descendant of George Peabody's originally Baltimore-located firm and JS Morgan's Boston firm, and both the Morgans and Peabodies were originally Boston families.

It was only when JP Morgan (the firm and the man) became so dominant in American finance, that the capital markets were definitively shifted towards a New York focus. We can see this in previously Boston-located firms (such as Paine Webber/Kidder Peabody, First Boston) gradually shifting to being New York-focused firms starting in the very early 20th century, other Boston firms declining to irrelevance (Lee, Higginson), Philadelphia firms (Drexel & Co.) also shifting to having large NY offices, and most of the pioneering entrepreneurial firms (JW Seligman, Lehman Brothers, Kuhn Loeb, Dillon Read, Goldman Sachs) transfering from other cities to being in New York from the 1860s-1880s onward. Very few of the entrepreneurial firms transfered from those other cities (which included such places as San Francisco, Cleveland, Montgomery and New Orleans) to Philadelphia, Boston or Baltimore.

JP Morgan had the lock on the big-scale industrial firms, Lehman and Goldman gradually built up a lock on retailing, Dillon, Read and Kuhn Loeb built up a dominant position in takeovers, M&A and risky bonds, and Salomon and Bear Stearns as institutional trading houses (somewhat later).

Also, since JP Morgan had the dominant role in most of the major corporate reorganizations, the New York service providers he favored (Cravath and Simpson and Milbank as law firms, the several NY-based commerical banks and insurers he prefered, etc.) also became identified as the "go-to" firms throughout the US for high-level corporate work.

Very little of this was based particularly on New York's transportation system, but more upon multiple, idiosyncratic decisions (Alexander Hamilton being a New Yorker himself, Belmont/Villard/Morgan moving to NY in the 1850s/1860s, and JP Morgan as a person becoming the dominant force in American finance for many decades.) Some of the later reinforcements to New York's financial dominance was likely due to New York's financial industry being a bit more open to non-WASPs rather than Boston or Philadelphia's financial societies, which were notoriously exclusive. Even Joseph Kennedy, who was a Harvard man and married to the daughter of the mayor of Boston, eventually operated his business activities out of New York rather than his actual native city of Boston. Charles Merrill was educated in Mass. (at Worcester Academy and Amherst) and originally worked in Mass, but moved to NY to begin his investment career.

[John Emerson]

"From dictionary.com:

Carpetbagger: “An outsider, especially a politician, who presumptuously seeks a position or success in a new locality.”

How does that not exactly describe Hilary Clinton?"

Jesus, Zarkov, you're an idiot.

It doesn't describe Hillary because, **as I said**, NYC is not a shithole of fearful people the way Mississippi is. New York is a destination which draws talented people, and most New Yorkers (many of whom are talented people originally from elsewhere) know this and are happy with this.

The term "carpetbagger", like a lot of other invidious terminology too nasty to type here, is Mississippi dialect. Not New York dialect.

Anytime you're confused about something, just ask me and I'll explain it clearly.