New Geography

Category: Economics

  • The Cities Stealing Jobs From Wall Street

    When we think about American finance, the default image is of a pinstriped banker on Wall Street. But increasingly financial services is shifting away from the traditional bastions of money.

    In an analysis of recent and longer-term employment trends, we have identified the large cities –those with over 450,000 jobs – that are gaining jobs in financial services, a sector that employs 7.9 million people nationwide.  Overwhelmingly, the fastest growth has been in cities not associated with high finance, but largely low-cost Sun Belt cities, which account for seven of the top 10 large metro areas on our list.

    View the Best Cities for Manufacturing Jobs 2014 List

    In first place: Phoenix-Mesa-Glendale, Ariz., where financial employment has expanded 12.3% since 2008 and a remarkable 7.2% last year. Close behind in second through fourth are San Antonio-New-Braunfels, Texas, Austin-Round Rock-San Marcos, Texas, and Nashville-Murfreesboro-Franklin, Tenn. These metro areas have advantages beyond just warmer weather; all are places with affordable housing and no state income taxes.

    The three metro areas outside the Sun Belt in our top 10 also enjoy lower levels of taxation and housing prices. St. Louis, Mo. (fifth), Salt Lake City (seventh), and Richmond, Va. (ninth), have begun to bulk up on financial jobs, largely to the detriment of the traditional money centers New York (44th), San Francisco (48th), Boston (55th), Los Angeles (57th) and Chicago (61st). Despite the current stock market boom, and good times for large banks, financial services employment in these cities has been stagnant in recent years. Since 2008, New York has lost 3.8% of all its finance-related jobs, while Los Angeles’ financial sector has shed 7% of its jobs and Chicago 6.7%.

    Why Financial Services  Are Moving

    Current financial trends—accelerated By TARP and “too big to fail” regulations—have ledto a growing concentration of banking and financial services in the six largest money-center banks.  In the first five years of the Obama administration the share of financial assets held by the top six banks soared 37% to account for two-thirds of all bank assets.

    But as we have seen in other industries, that domination of market share don’t necessarily drive employment growth where the big banks are headquartered. Increasingly we are seeing the rise of what urban analyst Aaron Renn describes as the “executive headquarters,” where only elite employees and their support staff remain while the vast majority of jobs migrate to lower-cost places.

    Given the advances in telecommunications technology, many of the core functions of banks can be conducted anywhere. Why have a midlevel salesperson or mortgage loan processor occupy expensive Manhattan office space when they could function as effectively from much cheaper space in Phoenix, Saint Louis or Richmond?

    Pundits like to speak about “face to face” contact as critical in financial services. This may be true for putting together mergers or IPOs, or to concoct the latest derivative, but it doesn’t matter in taking care of customer questions, monitoring credit cards or administering offices in suburban strip malls.

    The People Advantage

    These smaller cities have advantages for both the financial institutions and their employees. For one thing, the cost of employees is much lower. According to salary reporting website Payscale.com, the median financial manager in New York or San Francisco costs $90,724 to $98,783, respectively; while one in Phoenix costs only $77,467.

    But this is not just good for the companies. Employees who make less in St. Louis, Phoenix or Dallas often live far better than their counterparts who earn higher salaries in the traditional money centers. One big reason is housing costs, which are a third to half cheaper in the top cities on our list than in places like Boston (2013 median home price of $375,900) New York ($465,700), or San Francisco ($679,200).  Compare that to $183,600 in top-rated Phoenix or $171,000 in San Antonio-New Braunfels.  Even in Austin, with its surging growth in technology and its role as state capital and home to a huge public university, the median home costs a relatively affordable $222,900, according to the National Association of Realtors.

    Sometimes it‘s not just lower costs. If you are servicing Spanish-language customers, for example, a location in San Antonio, Phoenix or Austin with their large Spanish-speaking workforces might prove convenient. If you are interested in trade finance, Texas, now the leading export state, might prove attractive. Firms concentrating on mortgages might also see advantages in locating in places like Nashville, Phoenix, Austin, Dallas and San Antonio, which are all expected to add many more households, according to a recent Pitney Bowes  survey, than much slower-growing locales in California or the Northeastern seaboard.

    And then there is the unique case of Salt Lake, another emerging financial powerhouse. Mormons’ linguistic skills have attracted loads of big international companies, such as Goldman Sachs, who need people capable of conversing in Lithuanian, Chinese and Tongan. Goldman has 1,400 employees in Salt Lake City, making it the investment bank’s sixth largest location worldwide.

    Future Trends

    People tend to see the growth of the biggest banks as confirming the notion that economic opportunity will continue to be concentrated in our elite, expensive cities. Yet in reality urban growth patterns seem to suggest that these cities cannot easily accommodate mid-skill or middle-management jobs. So even as decision-making remains ensconced in New York,  Boston  or Chicago, the flow of the vast majority of financial jobs should continue to head outward.

    This competition may become all the greater if, as Deloitte predicts, financial service employment begins to spike with a long-term economic recovery. Nor will the emerging financial states be satisfied long-term with the bottom end of the financial employment pool. Palm Beach, Fla., for example, has set up an office to lure hedge funds out of the New York area, touting warm weather and much lower taxes.

    Increasingly, some New York financial institutions are starting movemore critical roles to lower-cost areas, like investment advisory and technology jobs. Places like St. Louis, where the industry has grownand approaches critical mass, seem to be in position to make a serious bid for higher-end  jobs.

    Although no one expects Phoenix or Salt Lake City to overtake Manhattan as the financial center of the world, over time we can expect these cities to develop into important banking centers. Just as the move of automakers to the Southeast and tech companies to Austin, Salt Lake City and Raleigh remade the economic map of those industries, the shift of financial services to the new centers might eventually do the same in that sector as well.

    View the Best Cities for Manufacturing Jobs 2014 List

    This story originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Michael Shires, Ph.D. is a professor at Pepperdine University School of Public Policy.

    Photo: robotography

  • Dallas: A City in Transition

    I was in Dallas this recently for the New Cities Summit, so it’s a good time to post an update on the city.

    I don’t think many of us realize the scale to which Sunbelt mega-boomtowns like Dallas have grown. The Dallas-Ft. Worth metro area is now the fourth largest in the United States with 6.8 million people, and it continues to pile on people and jobs at a fiendish clip.

    Many urbanists are not fans of DFW, and it’s easy to understand why. But I think it’s unfair to judge the quality of a city without considering where it is at in its lifecycle. Dallas has been around since the 1800s, but the metroplex is only just now starting to come into its own as a region. It is still in the hypergrowth and wealth building stage, similar to where a place like Chicago was back in the late 19th century. Unsurprisingly, filthy, crass, money-grubbing, unsophisticated Chicago did not appeal to the sophisticates of its day either. But once Chicago got rich, it decided to get classy. Its business booster class endowed first rate cultural institutions like the Art Institute, and tremendous efforts were made to upgrade the quality of the city and deal with the congestion, pollution, substandard housing, and fallout from rapid growth, which threatened to choke off the city’s future success. At some point in its journey, Chicago reached an inflection point where it transitioned to a more mature state. One can perhaps see the 1909 Burnham Plan as the best symbol of this. In addition to addressing practical concerns like street congestion, the Burnham Plan also sought to create a city that could hold its own among the world’s elite. And you’d have to argue the city largely succeeded in that vision.

    The DFW area is now at that transition point. They realize that as a city they need to be about more than just growth and money making. They need to have quality and they need to address issues in the system. Much like Burnham Plan era Chicago, this perhaps makes DFW a potentially very exciting place to be. It’s not everyday when you can be part of building a new aspirational future for a city that’s already been a successful boomtown. The locals I talked to were pretty pumped about their city and where it’s going.

    How true this is I don’t know, but some people have attributed a change in mindset to the loss in the competition to land Boeing’s headquarters. Boeing ended up choosing Chicago over Dallas. In part this was because Chicago bought the business with lavish subsidies that far outclassed what Dallas put on the table. But it was also because Boeing saw Chicago as a more congenial environment for global company C-suite and other top executives to be, both from a lifestyle perspective and that of access to other globally elite firms and workers available in Chicago.

    Meanwhile, the cracks in the DFW growth model were becoming apparent, especially in the core city of Dallas. Ten years ago the Dallas Morning News ran a series called “Dallas at a Tipping Point: A Roadmap For Renewal.” This series was underpinned by a report prepared by the consulting firm Booz Allen. This report is well worth reading by almost anyone today as it is a rare example of a city that was able to get insight and recommendations from the type of tier one strategy firm used by major corporations. Booz Allen was direct in their findings, though perhaps with a bit of hyperbole in the Detroit comparison:

    Dallas stands at the verge of entering a cycle of decline…On its current path, Dallas will, in the next 20 years, go the way of declining cities like Detroit – a hollow core abandoned by the middle class and surrounded by suburbs that outperform the city but inevitably are dragged down by it.
    ….
    If the City of Dallas were a corporate client, we would note that it has fallen significantly behind its competitors. We would warn that its product offering is becoming less and less compelling to its core group of target customers…We would further caution the management that they are in an especially dangerous position because overall growth in the market…is masking the depth of its underlying problems. We would explain that in our experience, companies in fast growing markets are often those most at risk because they frequently do not realize they are falling behind until the situation is irreversible.

    Put into the language of business, we would note that Dallas is under-investing in its core product, has not embraced best practices throughout its management or operations, and is fast becoming burdened by long term liabilities that could bankrupt the company if the market takes a downturn.

    The city responded in a number of ways, some of which were similar to Chicago at its inflection point. Many of these involve various urbanist “best practices” or conventional wisdom type trends.

    By far the most important of these was adopting modern statistically driven policing approaches. As crime plummeted in places like New York during the 1990s, Dallas did not see a decline of its own. But with the expansion of police headcount and adoption of new strategies by new police chief David Kunkle in 2004 – and no doubt some help from national trends – crime fell steeply during the 2000s. The Dallas Morning News says that the city’s violent and property crime rates fell by a greater percentage than any other city with over one million residents over the last decade. In 2013, Dallas had its overall lowest crime rate in 47 years.

    This is critical because nothing else matters without safe streets. I’ve had many a jousting match with other urbanists on discussion boards about where crime falls on the list of priorities. In my view it’s clearly #1 – even more so than education. It’s simply a prerequisite to almost any other systemic good happening in your cities. Students can’t learn effectively if they live and attend school in dangerous environments, for example. NYU economist Paul Romer made this point forcefully in his New Cities keynote, saying that fighting crime is the most important function of government and that if you don’t deliver on crime control your city will go into decline. Fortunately, Dallas seems to have gotten the message.

    But there’s been attention to physical infrastructure as well. The area has built America’s largest light rail system (which was in the works since the early 1980s).



    Dallas Area Rapid Transit (DART) light rail train. Source: Wikipedia

    Both the city and region remain fundamentally auto-centric, however, and this is unlikely to change.

    There’s been a significant investment in quality green spaces. A major initiative called theTrinity River Project is designed to reclaim the Trinity River corridor through the city as a recreational amenity. This is underway but proceeding slowing. Among the aspects of the project is a series of three planned signature bridges designed by Santiago Calatrava. The only one completed is the Margaret Hunt Hill Bridge.



    The Margaret Hunt Hill Bridge in Downtown Dallas. Designed by Santiago Calatrava. Source: Wikipedia

    The single bridge tower is quite an imposing presence on the skyline. However, the size of the bridge creates an awkward contrast with the glorified creek that is the Trinity River. It looks to me like they significantly over-engineered what should have been a fairly straightforward flood plain to span just so they could create a major structure.

    Another green space project – and the best thing I saw in my trip to Dallas – is Klyde Warren Park, which is built on a freeway cap. About half the cost came from $50 million donations. I’ll be going into more detail on this in my next installment, but here’s a teaser photo:



    Klyde Warren Park. Source: Wikipedia

    The Calatrava bridge shows that Dallas has embraced the starchitect trend. This was also on display in the creation of the Dallas Arts District. Complementing the Dallas Museum of Art are a billion dollars worth of starchitect designed facilities including Renzo Piano’s Nasher Sculpture Center, IM Pei’s symphony center, Norman Foster’s Winspear Opera House, and OMA’s Wyly Theatre.



    Dee and Charles Wyly Theatre. Designed by OMA’s Joshua Prince-Ramus (partner in charge) and Rem Koolhaas

    This arts district – which naturally Dallas boasts is the world’s largest – along with the other major investments that were funded with significant private contributions show a major advantage Texas metros like DFW and Houston have: philanthropy. These are new money towns on their way up and local billionaires are willing to open their wallets bigtime in an attempt to realize world class ambitions, exactly the way Chicago’s did all those decades back.

    By contrast many northern tier cities are dependent on legacy philanthropy, such as foundations set up in an era when they were industrial power houses. This is a dwindling inheritance. What’s more, what wealthy residents they do have are as likely to be taking money out of their cities through cash for cronies projects than they are to be putting it in. Thus they can be a negative not positive influence.

    This shows the importance of wealth building in cities. Commercial endeavors can appear crass or greedy at times, and deservedly so. But without wealth, you can’t afford to do anything. There’s a reason Dallas could build America’s largest light rail system – it had the money to do so. Similarly with this performing arts district. To be a city of ambition requires that a place also be an engine of wealth generation.

    I’m sure that Dallas’ moneyed elite are well taken care of locally and exert outsized influence on decision making. I don’t want to make them out to be puristic altruists. But they’ve shown they are willing to open their wallets in a serious way, something that’s not true everywhere.

    This is a flavor of what Dallas has been up to. It’s too early to say whether the city will make the same transition Chicago did. Its greatest challenge also awaits some time in the future. When DFW’s hypergrowth phase ends and the city must, like New York and Chicago before it, reinvent itself for a new age, that’s when we will find out if DFW has what it takes to join the world’s elite, or whether it will fade like a flower as Detroit and so many other places did.

    Toyota did just announce it’s moving 3,500 jobs to north suburban Plano. But corporations have long seen Dallas a place for large white collar operations. Boeing was what I call an “executive headquarters” – a fairly small operation consisting of only the most senior people. I haven’t seen Dallas win any of these as of yet.

    The Dallas Morning News takes a somewhat mixed view on the city itself. They just did a special section called “Future Dallas: Making Strides, Facing Challenges,” the title of which sums it up. Dallas has put a lot of pieces on the board and made major progress on areas like crime, but it’s failed to make a dent in others, such as Booz Allen’s call to make the city more attractive to middle class families. Poverty is actually up since then, and the city is increasingly unequal in its income distribution. Dallas is not unique in that, but that’s cold comfort.

    Despite gigantic regional growth, the city’s population has been nearly flat. Despite the vaunted Texas and DFW jobs engine, Dallas County has lost about 100,000 jobs since 2000. The core is clearly continuing in relative decline, and the Dallas County job losses are particularly troubling. I’m no believer in this idea that everybody is going to abandon the suburbs and head back to the city. But as former Indianapolis Mayor Bill Hudnut put it, you can’t be a suburb of nowhere. If the core loses economic vitality, the entire DFW regional will take a hit to its growth.

    Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile, where this piece originally appeared.

    Dallas photo by Bigstock.

  • Enterprising States 2014: Re-creating Equality of Opportunity

    This is the executive summary for the U.S. Chamber of Commerce Foundation’s 5th Annual Enterprising States report, authored annually by Praxis Strategy Group. View the interactive map with state-by-state data and download the full report here.

    The growing skills gap is one of the most persistent challenges affecting thriving and lagging state economies—the disparity between the skills companies need to drive growth and innovation versus the skills that actually exist within their organizations and in the labor market. This disconnect, expected to grow substantially as the boomer generation retires, causes workers and companies to miss out on realizing their full potential. A sizable skills gap impacts virtually every aspect of the economy, thereby affecting our national competitiveness and, in turn, causing the economy to fall short of its potential.

    The nature of the skills gap that employers face varies by geography. Each state has its own economic DNA with varying levels of growth and specialization for each industry. The energy-related skills gap in Texas or North Dakota, for example, is different from a manufacturing-driven gap in Michigan, aerospace in Washington, information technology in Utah, or the chemical industry in Louisiana.

    Businesses and the public sector must work side by side to identify where there is a deficit of talent, reskill incumbent workers, and skill new entrants into the workforce to close the gaps within their communities. This is not a problem that can be solved quickly, but it can be solved. Strengthening America’s science, technology, engineering, and mathematics (STEM) and middle-skills pipeline will require public-private partnerships as well as collaborations across federal, state, and local governments.

    States as a Focal Point for Action

    States and their governors play a pivotal role in filling the talent pipeline, providing critical leadership to link businesses with the education, workforce, and economic development systems. Solutions will vary by state of course, but there is an emerging framework built on a foundation of both basic education and an employer-responsive workforce pipeline.

    Economic development starts with strong schools focused on 21st century skills. For the past three decades, efforts by U.S. businesses, government, and educational organizations focused on retooling K–12 science, mathematics, and reading education and on addressing persistently high dropout rates in inner cities. Progress has been slow to remedy the looming skills shortage, but there is a growing sense of optimism that industry sector partnerships, greater attention to career pathways, and the implementation of integrated education and training will help to close the gap.

    An employer-responsive talent pipeline requires aligning education, workforce development, and economic development. Postsecondary education institutions now get a considerably lower percentage of their funding from state sources than just a decade ago, but states continue to make significant financial investments in higher education. Yet, a common refrain is that postsecondary offerings—at both two- and four-year institutions—are not sufficiently aligned with the skills needed in the workforce. For years, knowledge creation, research and development, and technology transfer have dominated higher education’s economic development role. However, higher education’s most important contribution to state economic competitiveness in the future might be teaching and talent production because states with the most high-level talent will have a leg up in the future economy of decentralized global networks.

    Investing in people is perhaps the most effective long-term economic growth strategy. Training and education offer the best chance for workers to find well-paying long-term employment, while providing businesses and employers in every sector with the talent they need to grow.

    Coordinating education, workforce development, and economic development has proven to be challenging among the states because the three fields are historically separate systems, with separate cultures and perspectives. States that are successful in navigating program integration and facilitating collaboration between these traditionally separate institutions will put themselves in the forefront of meeting one of the primary challenges to building a 21st century economy.

    Because of these complexities, a governor serves the issue best by playing a leadership role in forming partnerships – particularly between business and education – and creating the structure to ensure effectiveness and efficiency in a demand-driven education to workforce pipeline. Often this involves a decentralized approach so that more decisions can be made at the local level.

    Enterprising States 2014

    Now in its fifth edition, the Enterprising States study measures state performance overall and across five policy areas important for job growth and economic prosperity. Those five areas include:

    • Talent Pipeline
    • Exports and International Trade
    • Technology and Entrepreneurship
    • Business Climate
    • Infrastructure

    The 2014 report relates these policies and practices to the need for collaboration between education, workforce development, and economic development to positively combat the nation’s growing skills gap.  

    Top Performers

    Utah lands in the top 6 in each of the five policy categories and 3rd in overall economic performance. It is the only state to finish in the top 10 on all six lists.

    Colorado appears on 5 top 10 lists, Texas on 4, and Washington is in the top 15 of five lists.

    North Dakota is another strong performer, leading by a large margin in economic performance and ranking 1st in talent metrics and 9th in business climate.

    Florida and Nevada rank well on many policy measures, a sign that the economies of those states may be ripe for a turnaround.

    Virginia ranks 5th in technology and entrepreneurship, and talent metrics, helping it land just outside the top 10 in economic performance.

    Minnesota ranks 10th in economic performance, partly due to its second place in talent pipeline. 

    See how your state ranks by viewing our interactive map. Or view a PDF of the full report.

    Enterprising States is authored by Praxis Strategy Group along with Joel Kotkin. Praxis Strategy Group is an economic research, analysis, and strategic planning firm. Joel Kotkin is executive editor of NewGeography.com and author of the forthcoming The New Class Conflict.

  • Is Brazil Still the Country of the Future?

    Not long ago, Brazil was riding high. It was feted as one of the “BRIC” nations destined to be the next world economic powers. The commodities boom had its natural resources and agricultural sectors humming. The press – for example, Monocle magazine’s swooning over Brazil’s push to boost its diplomatic presence – was adoring. And Rio was awarded the 2014 World Cup and the 2016 Olympics, two events that were intended to both serve as a catalyst for further development, and also as a coming out party of sorts for the country.

    The World Cup is underway, but otherwise things haven’t quite worked out as Brazil thought they would. The average citizen of the country is upset at the vast sums being spent on international events that don’t benefit them. The last two years have featured riots, strikes, and various other expressions of unrest. Economic growth in the country has collapsed. In a special section last September, the Economist asked, “Has Brazil Blown It?”

    Late last month the McKinsey Global Institute issued a major report on the country called “Connecting Brazil to the World: A Path to Inclusive Growth.” At 104 pages, it’s massive, but a must read for anybody interested in South America’s giant.

    And it’s a somewhat depressing read as well. Though there are immense strengths and opportunities for the future, Brazil has big problems too, most of them longstanding, and which hobble its aspirations.

    Brazil is the 7th largest economy in the world and the 7th leading destination for foreign direct investment. But it’s 95th in per capita GDP, 114th in the quality of its infrastructure, and 124th in its level of ease in trading across borders. Its export sector is also heavily commodity dependent, particularly oil. Ranked only 43rd in global connectedness on McKinsey’s index, they estimate a potential boost of 1.25% (presumably percentage points) to annual GDP growth from improvements on that measure alone.

    Three particular items jumped out at me from the study. One is the “custo Brasil” – the Brazil cost, so notorious it gets its own Wikipedia entry. A variety of factors from bureaucracy to the tax regime to an uncertain legal climate, poor infrastructure, crime, and corruption make the cost of doing business in Brazil very pricey indeed.

    The second is the very low rate of investment in the economy. Brazil’s gross investment rate as a percentage of GDP is 18%, compared with 26% in Chile, 29% in Mexico, 40% in India, and 49% in China. Conversely, government consumption is at 22% in Brazil vs. 12% in Chile and Mexico, 13% in India, and 14% in China. Private consumption is similar in the countries except for China, which is notably lower. This probably helps explain the poor state of the infrastructure in the country.

    The third is something I have personal experience with, namely protectionist trade barriers designed to create and sustain domestic industries in sectors like autos and computers. I suspect these rules were modeled on Japan, and more lately China, which used rules and business practices to build successful local champions. But in Brazil this has rendered its industry sclerotic. In effect, cars sold in Brazil have to be made in Brazil, ditto for computers, etc. This is where my personal experience comes in. When we were doing global PC procurement, Brazil was always a special case and our vendors had to have special Brazil made PCs for domestic use. This may not be an actual rule, but tariffs produce a de facto barrier. While this technique may have worked in Japan, it’s clear that it failed in Brazil. As the exception that proves the rule, McKinsey uses the example of regional jet manufacturer Embraer as a counterfactual. That company was privatized and opened to global competition. The result is that its got tough itself and is now an industrial champion for Brazil.

    There are tons of statistics in the study that are worth scanning just to see. Brazil is consistently benchmarked against Chile and Mexico in Latin America, as well as fellow BRICs India and China. The comparisons aren’t pretty.

    Reading a lot about the country in the last year, I put its problems into three categories: poor governance, geographic disadvantage, and scale disadvantage.

    1. Poor Governance
    Most of the issues pointed out by McKinsey fall squarely under the heading of poor governance. The contrast with nearby Chile could not be more plain across every dimension: corruption, the rule of law, investment, public sector debt, tax burden, infrastructure, regulation, etc.

    Latin America seems to prefer two sorts of governments these days. One is a right wing nationalist heir to the military juntas of the past, best exemplified by the Kirchner regime in Argentina. The other are left wing populist-nationalist movements like Venezuela that tend to feature a streak of anti-Americanism. Both of these have produced pitiful results.

    Brazil is a sort of lite version of the latter. Lula da Silva was a charismatic labor activist who led strikes and was jailed by the previous military dictatorship in his youth. Post-democratization, he went into politics. After moderating some of his more radical views, he was elected president on a reform agenda. While he had some success and was arguably and improvement on his predecessors, he ultimately failed to deliver on material changes in governance. His hand picked successor Dilma Rousseff has not been as effective and is in an electoral struggle for another term.

    In line with the nationalist streak of this governing type, one of Da Silva’s primary concerns was Brazil’s amour-propre. As one of the world’s largest countries, he found it self-evident that Brazil should be treated as a great power. He lobbied for Brazil to have a permanent seat on the UN Security Council. He and others responded in kind to any affront to the nation’s pride, such as requiring American and only American visitors to be finger printed after the US imposed a fingerprinting requirement on foreign visitors. He sought out diplomatic coups where ever he could find them, which included cozying up to unsavory characters like Mahmoud Ahmadinejad who thinks Israel should be destroyed and that Iran has no gays (presumably because he has them executed when he can find them).

    Da Silva forgot that there’s more to being a great power than being a big country – you’ve got to earn it. And as a very popular politician he did not seize his moment of opportunity to truly grasp the nettle of reform.

    Meanwhile nearby Chile is one of the Latin American governments that’s followed a different model. It’s been run by center-left governments more or less the entire time since the restoration of democracy, and they’ve delivered on a good governance model that has taken them to effectively developed country status. Chile is now even a member of the OECD. Chile is basically the Minnesota of Latin America, and the results demonstrate it. This should show Brazil the size of the prize if the get their act together.

    2. Geographic Disadvantage
    Brazil is simply a long way from major developed markets. This puts it at a geographic disadvantage versus many other countries. Current airplanes cannot make a non-stop flight from Brazil to East Asia, arguably the most important emerging part of the world. It’s even a long haul from the United States, with relatively few gateway cities vs. say major European capitals. Brazil is time-zone advantaged with the US, however. It also speaks Portuguese instead of Spanish, which imposes a linguistic handicap.

    3. Scale Disadvantage
    Brazil is a big country, geographically and in population. Size can be an advantage, but it also makes reform difficult as it’s hard to turn a battleship. Brazil’s population of 200 million is more than ten times that of Chile.

    Brazil’s two principal cities, São Paulo and Rio de Janeiro, are also megacities. São Paulo in particular is huge, and at north of 20 million people (more than the entire country of Chile) is the 10th largest city in the world. I recently wrote that it’s unlikely the world’s emerging megacities will turn the corner in eliminating dysfunction. Their problems are just too huge and their national growth rate too low. Though I’d consider this more hypothesis than conclusion at this point, my rule of thumb is that a megacity can only achieve escape velocity from pervasive dysfunction if they are a major city in a country that is the world’s current rising economic (or historically imperial) power.

    Brazil is not that country, and two mega cities will be a drag on growth. Although São Paulo is an important emerging global city – 23rd in the world in a forthcoming report I helped create – I’m told that both São Paulo and Rio are growing more slowly than secondary cities in the country. A previous McKinsey study threw cold water on the idea that megacities are an advantage, noting their under performance by saying:

    It is a common misperception that megacities have been driving global growth for the past 15 years. In fact, most have not grown faster than their host economies, and MGI expects this trend to continue. Today’s 23 megacities—with populations of 10 million or more—will contribute about 10 percent of global growth to 2025, below their 14 percent share of global GDP.

    In contrast, 577 middleweights—cities with populations of between 150,000 and 10 million, are seen contributing more than half of global growth to 2025, gaining share from today’s megacities.

    So I’m not surprised that it’s Curitiba, not one of the megacities, that’s where the innovative BRT revolution was begun. If I were looking to invest in Brazil, I’d be looking at this next tier of cities. Nor is it surprising that Santiago, Chile (population 5.4 million) has had great success in modernizing given its more moderate size.

    Plain and simple the degree of difficulty is higher in Brazil because of the size.

    Brazil is also a very racially diverse country with a number of challenges resulting from its history of oppression. Brazil had more slaves than any other country in the world and was the last New World colony/nation to abolish it. If slave reparations are on the agenda in the United States, how much more so similar issues in Brazil? Again, contrast with Chile, which never had very many slaves and abolished slavery in 1818. With the exception of a relatively few indigenous peoples on reservations, Chileans largely perceive themselves as ethnically homogenous, though with some skin tone based status (moderately sized…historically racially homogenous…Minnesota?)

    Which is to say that it’s tough to entirely fault Brazil for not living up to the example of Chile. Its degree of difficulty is much higher. And its geography hamstrings its global interaction.

    Nevertheless, solving the governance challenges to address the real issues Brazil faces remains the top agenda item. McKinsey has laid out a number of good suggestions, the real question is whether or not Brazil’s socio-political system can produce the ability to implement them.

    Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile, where this piece originally appeared.

    Photo: Ponte estaiada Octavio Frias – Sao Paulo by Marcosleal

  • America’s New Industrial Boomtowns

    David Peebles works in a glass tower across from Houston’s Galleria mall, a cathedral of consumption, but his attention is focused on the city’s highly industrialized ship channel 30 miles away. “Houston is the Chicago of this era,” says Peebles, who runs the Texas office of Odebrecht, a $45 billion engineering firm based in Brazil. “In the sixties you had to go to Chicago, Cleveland and Detroit. Now Houston is the place for new industry.”

    With upward of $35 billion of new refineries, chemical plants and factories planned through 2015 for Houston and the surrounding Gulf Coast, companies like Odebrecht, which runs chemical plants and is working on a new freeway in the area, have converged on the nation’s oil and gas capital. They are part of the reason why the Texas metropolis ranks first on our list of the best large cities for manufacturing.

    Houston, with 255,000 manufacturing jobs, is not yet the country’s largest industrial center; it still lags behind the longtime leaders Los Angeles, with 360,000 manufacturing jobs, and Chicago, home to 314,000. But it is clearly on a stronger trajectory. Since 2008, Houston’s manufacturing workforce has expanded 5% while Los Angeles has lost 13% of its industrial jobs and Chicago’s factory workforce has shrunk 11%.

    View the Best Cities for Manufacturing Jobs 2014 List

    Why Manufacturing Matters

    Whether America is on the path to a sustainable industrial expansion or is just seeing a weak bounce back has been widely debated, but the recent numbers are impressive. Since 2010 the U.S. has added 647,000 manufacturing jobs. New energy finds have led to the construction and expansion of pipelines and refineries, and has sparked foreign industrial investment reflecting electricity costs that are now well below those in Europe or East Asia. Besides Houston, also ranking high on our big cities list are two other energy towns, No. 5 Oklahoma City and No. 10 Ft. Worth, Texas. Our mid-sized cities list is led by Lafayette, La., with nearby Baton Rouge in 11th place.

    Evangelists of the “information economy” may think that industrial jobs are passé, as epitomized by a recent Slate article that recommended that working-class people from places like Detroit should move to areas like Silicon Valley or Boston where they can make money cutting the hair and walking the dogs of high-tech magnates. But the notion that U.S. manufacturing is doomed, and that the jobs are of lower quality than those in high-tech centers, is largely bogus; even in Silicon Valley the majority of new projected jobs are expected to pay under $50,000 annually. In contrast manufacturers pay above-average wages, in some cases due to unionization, but in many others because of the increasing sophisticated skills required by today’s factories.

    Although we will likely never see a boom in factory employment on the scale experienced in the last century, the demand for blue-collar skills is projected to increase in future years. Among all professions for non-college graduates, manufacturing skills are most in demand, according to a study by Express Employment Professionals. By 2020, according to BCG and the Bureau of Labor Statistics, the nation could face a shortfall of around 875,000 machinists, welders, industrial-machinery operators, and other highly skilled manufacturing professionals.

    Southern Comfort

    Our research suggests that much of this growth will be in metro areas in the South and the Great Plains that are known for friendly business climates. New industrial investment is tending to go to places that are largely non-union, and feature lower taxes and light regulation. Epitomizing this trend is the No. 2 city on our large metro area list, Nashville-Murfreesboro-Franklin, Tenn., where manufacturing employment is up 6% since 2008. Nashville has become a hotbed for foreign investment in manufacturing, with the expansion of the Nissan facilities in nearby Smyrna, as well as a host of suppliers.

    This is occurring, in part, because some large companies are shifting production to America from China in response to rising Chinese wages as well as sometimes unpredictable business conditions there.

    Investment inflows, both from overseas and domestic companies, have boosted other standout southern industrial hubs, as well as the smaller metro areas on our mid-sized city list, notably Mobile, Ala. (third place), with its expanding industrially oriented port, and No. 14 Charleston-North Charleston-Summerville, S.C., which has been a beneficiary of major new foreign investment as well as the expanded presence of U.S. aerospace giant Boeing. The South also is home to our No. 1 small manufacturing city, Florence-Muscle Shoals, Ala.

    The Resurgence of the Rust Belt

    The progress is not confined to the Sun Belt. The resurgence of the U.S. auto industry has revived the economy of Warren-Troy-Farmington Hills, Mich., also known as “automation alley.” The home to many parts suppliers, engineering and tech support for the car industry, this area has enjoyed an impressive 12.7 percent growth in manufacturing jobs since 2008, placing it third on our big cities list.

    Detroit, the center of the auto industry, ranks a respectable 16th on our big city list, but the big improvements in the Rust Belt are occurring in mid-sized cities such as Lansing-East Lansing, Mich. (eighth), Grand Rapids (ninth) and Ft. Wayne, Ind. (10th).

    But arguably the strongest Rust Belt recovery has occurred in Elkhart-Goshen, Ind., third on our small cities list. Since 2008 Elkhart’s industrial employment — much of it in the recreational vehicle industry — has expanded 30%, one of the most dramatic employment turnarounds of any place in America. Unemployment has fallen to 5% from a recession high of 20.2%.

    Western Exposure

    The South and the Great Lakes may be America’s industrial heartland, but there are several strong pockets in the West. One region that is doing particularly well is the Pacific Northwest, led by Seattle-Bellevue-Everett, which has experienced 11% manufacturing employment growth since 2010.

    Boeing is key here, but the Pacific Northwest’s industrial expansion has also been fueled by low electricity rates, largely due to the area’s strength in hydroelectricity. Portland-Vancouver-Hillsboro OR-WA (11th) is usually associated more with hipsters, but manufacturing growth has taken off, particularly with the expansion of Intel’s large semiconductor facility in suburban Hillsboro.

    Another Western industrial hotspot is Utah, a state with low energy costs and business friendly regulation. Salt Lake City, 12th on our large metro area list, has enjoyed a 5.7% increase in industrial jobs since 2010. Growth has been even stronger in two other Utah cities, Provo -Orem and Ogden-Clearfield, which rank fifth and seventh, respectively, on our mid-sized cities list.

    One surprising place where manufacturing is making a mild comeback is in the Bay Area, which for years has exported high-tech manufacturing jobs to places like Utah as well as the rest of the world. Despite ultra-expensive electricity, high labor costs and some of the world’s most demanding environmental laws, San Jose (13th on our big metros list) San Francisco-San Mateo-Redwood (15th) have posted solid industrial growth after years of decline. Yet both remain below their 2008 levels, and may find new growth difficult once the current tech bubble collapses.

    Laggards

    Two of the worst performers on this list are the big metro areas that have for decades been the country’s largest industrial hubs, Los Angeles-Long Beach-Glendale (55th) and Chicago-Joliet-Naperville (56th). It appears they lack the cost competitiveness and specialized focus of America’s ascendant industrial regions.

    Another clear loser is the Northeast, which accounts for seven of the eight lowest ranked big metro areas. Since 2008, Philadelphia (62nd) has lost 21% of its once-large industrial job base, while New York City, which has been losing industrial jobs for decades, ranks 45th. Here, too, high costs and regulation are a factor, as well as the loss of industrial know-how resulting from long-term erosion of their manufacturing bases.

    Of course, some information age enthusiasts may argue that losing such jobs is something of a badge of honor, since “smart” regions do not focus on the gritty business of making things. Yet if you look across the country, you can see that many of the strongest local economies, from Houston and Nashville to Seattle, have taken part in the U.S. industrial resurgence. It seems this is one party more worth joining than avoiding.

    View the Best Cities for Manufacturing Jobs 2014 List

    This article first appeared at Forbes.com.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Houston skyline photo by Bigstock.

  • The Ugly City Beautiful: A Policy Analysis

    When it comes to the future, Detroit and San Francisco act as poles in the continuum of American consciousness. Detroit is dead and will continue dying. San Francisco is the region sipping heartily from the fountain of youth. Such trajectories, according to experts, will go on indefinitely.

    Harvard economist Ed Glaeser has a grim outlook for the Rust Belt. “[P]eople and firms are leaving Buffalo for the Sunbelt because the Sunbelt is a warmer, more pleasant, and more productive area to live,” he writes in City Journal.

    Glaeser echoes this sentiment in a recent interview with International Business Times, saying “[s]mart people want to be around other smart people”, and the Rust Belt has a long slog ahead given that “post-industrial city migration is dominated by people moving to warmer climes”.

    But is this true? Is there a “brain drain” from the Rust Belt to the Sun Belt and Coasts? In a word: no. But Rust Belt leaders have bought this narrative hook line and sinker, and the subsequent hand-wringing has led to wasteful public investment.

    “Michigan’s cities must retain and attract more people, including young knowledge workers, to its cities by making them attractive, vibrant, and diverse places,” reads a 2003 memo from the National Governor’s Association about Michigan’s “Cool Cities” campaign.

    But the campaign struggled. “Government can’t mandate cool,” reflected Karen Gagnon, the former Cool Cities director. “As soon as government says something is cool, it’s not.”

    What’s worse, “cooling you city” with talent attraction expenditures can exacerbate economic disparities on the ground. Cities, like Chicago, are increasingly becoming bifurcated cities based on faulty assumptions that “trickle down urbanism” works. That said, the challenge of the day—for not only Rust Belt cities, but all cities—is not “brain drain”, but “brain waste”. Those cities who can best rebuild middle class communities tied to emerging markets will be the future of investment, like they were in the past.

    Through Rust-Colored Glasses

    When a people fall from grace, the sentiment of decline tends to stick. The Rust Belt’s demise is cemented. Meanwhile, the future is elsewhere. Like toward the sun. For instance, from 2000 to 2010, the Sun Belt metros of Houston, Dallas, Atlanta, Riverside, Las Vegas, Miami, Orlando, and Phoenix experienced the largest population growth. The biggest losers? It’s a “who’s who” of Rust Belt metros, led by Detroit, Cleveland, Pittsburgh, and Buffalo.

    America is a country governed by growth: big cars, big belt buckles, big houses, and big populations. Shrinkage is weakness. It is a sign of place failure. The problem here is that population growth is an ineffective, broad-brush measure when trying to understand regional underlying dynamics. A new study by Jessie Poon and Wei Yin in the journal Geography Compass called “Human Capital: A Comparison of Rustbelt and Sunbelt Cities” details exactly that.

    In it, the authors compare human capital levels between the Sunbelt metros in California (including San Francisco and L.A.), Nevada, New Mexico, and Arizona with Rust Belt metros in Michigan, Ohio, Indiana, Pennsylvania, and upstate New York. When it comes to share of population with a college degree, the authors find that the Rust Belt is experiencing a brain gain equal to their Sun Belt peers from 1980 to 2010. Poon and Wei also found that skill ratios of immigrants is higher in the Rust Belt than Sunbelt. The authors note that despite population decline, the Rust Belt continues “to be important sites of human capital accumulation”.

    The study coincides with recent work out of the Center for Population Dynamics that shows Greater Cleveland’s number of 25- to 34-year olds with a bachelor’s or higher increased by 23% from 2006 to 2012, as well as Pittsburgh economist Chris Briem’s work that shows the metros of Pittsburgh, Detroit, and Cleveland rank 1st,, 6th, 7th in the country respectively when it comes to the number of young adults in the labor force with a graduate or professional degree.

    Beyond human capital, the Rust Belt continues to produce and export wealth at a massive pace. The “Chi-Pitts” mega-region, which mirrors the Rust Belt boundaries with the addition of Minneapolis, generates $2.3 billion in economic output, second only to the “Bos-Wash” mega-region that makes up the Northeast Corridor.

    Also, using IRS migration data from the 2009-2010 period, a team of researchers led by Michal Migurski showed that Los Angeles County, New York County, and Cook County sent the most people and money to the rest of the United States. Detroit’s Wayne County was fourth. Cleveland’s Cuyahoga County was 9th, one spot ahead of San Francisco County. Speaking to Esquire, which published the work in a visual called “Where Does the Money Go”, Migurski explains the findings:

    "We realized that if you look at the biggest ‘losers,’ essentially what you’re looking at are the biggest cities in the U.S.," Migurski says. One of those losers: New York County, which lost $1,306,548,000 and 15,100 people. "But does that actually mean New York is a big loser?" Migurski asks. "One of our ideas was that, you’re not a loser if you’re losing money. You’re an exporter." The sort of exporter, he says, that boosts the rest of the U.S. economy. Traditional Sun Belt retirement areas comprise the gainers; areas like South Florida and Southern California in particular, create what Migurski calls "money sinks."

    Still, the notion of “loser” for Wayne and Cuyahoga County sticks, despite evidence to the contrary. But why? Why the constant “poor post-industrial people” sentiment, if not a low-grade captivation that comes with “ruin porn” rubbernecking?

    Well, if an ideal exists—you know, the experts beckon: be the “new” city, the “hot” city, the “creative” city—then a study in contrasts is necessary. The Rust Belt, with its connotations of smoke stacks and demographic decline, fits the bill.

    “[Richard] Florida suggests that Rustbelt cities’ high concentration of less creative blue-collar workers also produces unhappy residents,”Poon and Wei conclude in their Rust Belt/Sun Belt study. “We suggest that such a doom and gloom picture of urban and regional development for the uncool industrial Rustbelt needs to be tempered with a trend of brain gain that is growing across cities in the region.”

    But for this tempering to happen a clearer understanding of the importance of accumulating human capital needs to be ascertained. More exactly: Is it to put your city to work, or to “live-work-play”?

    Build it and they will…what?

    In his 1921 work Economy and Society, social scientist Max Weber details a city’s raison d’etre. Cities can be producer cities, wherein importance is derived from industries that demand national and international trade. Think Detroit and cars. Additionally, cities are consumer cities, in which growth is tied to how much is spent consuming goods and services in the local economy. Think eating, drinking, and buying houses.

    The cities that are the most economically robust have wealth generated from global production, which in turn enables local consumption. San Francisco’s tech economy drives it real estate market and artisanal toast scene. That is, if the question was “What came first, the farm-to-table chicken or the egghead?” The answer is “the egghead”, hands down.

    But this logic—i.e., in order to go to a restaurant, you need a job, and your job prospects are tied to the viability of your region’s global industries—is often turned on its head in economic development. Here, the goal is growth, no matter the rhyme or reason.

    “Like in many Sun Belt cities,” writes a Seattle Times columnist and Sun Belt expat, “Phoenix’s economic plan devolved into merely adding people, no matter the enormous long-term costs”. The columnist goes on to note that while the population has boomed, the city lags on most measures, such as per capita income (see Figure 1 below).

    Moreover, the Phoenixes of the world exist partly because of retired Baby Boomers and the disposable income that comes with it. The Sun Belt feeds off the legacy of production in the Northeast and Midwest. Other cities, like Portland, are fed by a not dissimilar dynamic. But it’s not the retired who come, rather the pre-retired.

    “The Portland metro area’s young college-educated white men are slackers when it comes to logging hours on the job,” lead’s a piece in the Oregonian about a study conducted last year, “and that’s one reason people here collectively earn $2.8 billion less a year than the national average.” Figure 1 demonstrates Portland’s sluggish income gains compared to Rust Belt peers Pittsburgh and Cleveland.

    Similarly, in a paper circulated by the Federal Reserve Bank of Atlanta, the author analyzed the top 86 “brain gain” metros in the nation to determine whether or not a region’s increase in human capital was paying off in terms of per capita income, labor force participation, poverty rate, and unemployment. The author found Portland was one of twelve metros that experienced zero economic outcomes. Pittsburgh scored 4 for 4. The authors suggest that talent attraction and retention—when untethered to production capacity—“may be largely inefficient, a kind of traditional economic development ‘buffalo hunting’”.

    Portland is perhaps America’s consummate lifestyle city. No doubt, the city has experienced a significant brain gain over the last decade. Portland is a talent attraction model. But it is not a talent producing or refining model. Rather, Portland is producing a scene that is run by the consumption of the scene’s aesthetic. Writes one young worker who left:

    “I can’t stay too long because I know if I stayed a day too long in Portland, I’d suddenly be happy to embrace the slow pace of the city and stop working… I’d end up getting sleeping real late every day, drink some coffee, maybe write some poetry on my porch (or not), and then find a part time job selling cigars like I had in college.”

    The lesson is that accumulating talent is not enough. There has to be something for the talent to do, or a context that fosters “doing”. It is also a warning for cities investing in the lifestyle game. Spending on creative class amenities ensures nothing. Creating a field of dreams won’t pay the bills. But it will run up the tab.

    The Ugly City Beautiful

    In 1998, the Chicago Sun-Times ran a piece called “Building the City Beautiful”. “The mayor of the city of Chicago, Richard M. Daley, is a big admirer of Martha Stewart,” it begins, before describing Daley’s plans to begin the "Martha Stewart-izing" of Chicago. The article goes on to quote a University of Illinois at Chicago professor who said Chicago is turning from a producer city to a consumer city. "The producer city was the industrial city — the smoke and the noise and the industrial jobs,” noted the professor. “The consumer city is the city of Starbucks, boutiques and so forth.”

    The professor was only partly right. By the 1990s, Chicago was indeed becoming brainier. But its emerging knowledge economy was an outgrowth of its “big shouldered” manufacturing base. Columbia University professor Saskia Sassen recently noted that pundits overlook this when examining the city’s transformation, with the bias being that “Chicago had to overcome its agro-industrial past, [and] that its economic history put it at a disadvantage”. Notes Sassen:

    [I]n my research I found that its past was not a disadvantage. In fact, it was one key source of its competitive advantage. The particular specialized corporate services that had to be developed to handle the needs of its agro-industrial regional economy gave Chicago a key component of its current specialized advantage in the global economy.

    Similar economic transformations from legacy cost to legacy asset are found throughout the whole of the Rust Belt. Pittsburgh, for instance, no longer provides the muscle for steel making, but it does act as the “brain center” for the world’s steel frame. How this came about is detailed in the article “Pittsburgh’s evolving steel legacy and the steel technology cluster”.

    With the arrival of the new economy also came “new economy” tastes. Sassen noted that when she arrived in to study in Chicago in the 90s she was greeted by “old lofts transformed into beautiful restaurants catering to a whole new type of high-income worker—hip, excited, alive.”

    In other words, local consumption patterns began setting up around the emergent worker demand. Going was the Italian Beef and arriving was pickled beets. This demand also impacted housing, with the attraction to urban living setting the stage for gentrification. This, in a nutshell, is the dynamic driving the transformation of urban neighborhoods nationwide: a new economy demands new workers which in turn demand a new kind of lifestyle. The problem, though, is that leaders have the causality backward, or that creating a new lifestyle will incur new worker supply and then poof: new industries. But as we see with Portland, it is not that easy. The industrial DNA and social history of your city matters more than the cosmetics atop the topography.

    Still, from a policy and strategy standpoint, it is easier just to make your city “cool”. And that’s exactly what Chicago has been doing at a significant pace. In a recent piece entitled “Well-healed in the Windy City”, author Aaron Renn details Mayor Rahm Emanuel’s policy of using tax-increment financing (TIF) to create geographic “winners” and “losers” across Chicagoland. “The true purpose of Chicago’s TIF districts—which now take in about $500 million per year,” writes Renn, “appears to be tending to high-end residents, businesses, and tourists, while insulating them from the poorer segments of the city.”

    The strategy was spelled out explicitly by Mayor Emanuel during a recent ribbon cutting for a bike path in Chicago’s Loop. Said Emanuel: “I expect not only to take all of their [Seattle and Portland’s] bikers but I also want all the jobs that come with this, all the economic growth that comes with this, all the opportunities of the future that come with this.”

    Notwithstanding the faulty logic in the strategy—e.g., if Portland lacks the jobs for its residents, how can it supply jobs for Chicagoans—the real problem is the costs associated with such bifurcated investment. In West and South Chicago, the byproducts of the City Beautiful approach are downright ugly. But they are not unexpected. They are the long-documented economic and social effects of concentrated poverty and segregation. Continues Renn:

    Safety levels in Chicago can no longer be plotted on a single bell-shaped curve for the entire city. Today, that curve is split into two—one distribution for the wealthy neighborhoods and one for the poor ones. A lack of resources is part of the problem: the police department is understaffed… While the city budget is tight, failing to increase police strength during a murder epidemic is a profound statement of civic priorities.

    Urban priorities flow from a perception of what is at stake. For long, the push for human capital accumulation has pitted city versus city amidst the backdrop of an urban popularity contest in which the “winner” is assured nothing outside of popularity. But victory in the vanity game is fleeting. The young and the restless are exactly that, and many people who come to New York or San Francisco, or for that matter Portland, leave as they get older and seek out affordable places to raise a family. What remains on the ground is the reality of brain waste. Without the prioritization of equitable, integrated middle-class neighborhoods a city’s progress will be always be disparate, if not illusory. Talent attraction is but part of a redevelopment process. So is talent refinement for those arriving and talent production for those in place. After all, neighborhoods are factories of human capital. Building people, not places, is what a successful city is all about.

    But to know this is to “know thyself”. The Rust Belt has been dying for some time now, so say the experts. The region has absorbed the projections, and given that desperate times call for desperate measures investment has been wasted. “[Creative class theory] is bad because it distracts from what’s important,” says Sean Stafford, author of Why the Garden Club Couldn’t Save Youngstown.

    Regaining focus entails removing the rust-colored glasses. Rust Belt leaders will see there are assets to work with, not to mention feel the freedom that comes with no longer being a study in contrast for those touting a future that really isn’t.

    Richey Piiparinen is Senior Research Associate at the Center for Population Dynamics at the Maxine Goodman Levin College of Urban Affairs at Cleveland State University. The Center for Population Dynamics at Cleveland State University’s Maxine Goodman Levin College of Urban Affairs aims to help partner organizations competitively position the region for economic and community development. It will do so through the lens of migration, applied demography, and culture.

    Lead photo courtesy of bctz Cleveland

  • What We Earn

    Discussions about housing affordability focus almost exclusively on the price of the real estate, movements in which are monitored by multiple organisations on a seemingly daily basis. There is comparatively little discussion about people’s incomes, which are equally as important as prices in determining what can and can’t be reasonably afforded. The income profile of what most Australian’s actually earn paints a sobering picture which could more often be taken into account in debates about housing and affordability.

    It’s becoming fashionable again for business lobbies to complain about Australia’s high wage structure. It explains, they’ll argue, why we lost Holden, Ford, Toyota, and (almost) Qantas, among other things. And yes, Australia’s wages are high by competitor standards – but so are our costs. One of the most fundamental of needs, along with food and clothing, is shelter. And it’s the cost of shelter relative to incomes which has been stretched to beyond reach for a large proportion of young Australians.

    Reducing minimum wages or reducing wage growth further, if at the same time allowing housing costs to further escalate, will only make this situation worse. Arguably, if we could substantially reduce the cost of supplying new housing, this would relieve upward pressure on wages and work towards improving our global competitiveness – along with repairing living standards for working and middle class families, rather than eroding them.

    First, here are some of the facts on the infrequently discussed income side of the equation. (I am again indebted to the team at Urban Economics for making these available. These are top line numbers only: if you want more detailed analysis, please contact Kerrianne Bonwick).

    Nearly two in three of all Australians earn less than $52,000 per annum. It doesn’t much matter whether it’s Brisbane, Sydney or Melbourne; the proportion is roughly the same.  It’s not much. Slightly more than another one in every eight earn from $52,000 to $78,000 per annum. Roughly eight in ten Australians earn less than $78,000 per annum.

    Personal Incomes

    Brisbane

    Sydney

    Melbourne

    < $52,000

    64.4%

    62.8%

    65.4%

    $52,000-$78,000

    15.0%

    13.8%

    14.1%

    $78,000 to $104,000

    7.0%

    7.2%

    6.4%

    > $104,000

    6.3%

    8.2%

    6.5%

    Not Stated

    7.2%

    8.1%

    7.7%

    Source: Urban Economics

    Problem? It is if you’re trying to buy into the housing market. Take a modest house of say $400,000 (very modest depending on location). A worker on $50,000 – and these represent nearly two thirds of all workers remember – is facing a price multiple which is 8 times their gross pre-tax income.  Basically, two thirds of us are stuffed in terms of affording even a modest $400,000 property if we weren’t already in the market. A more reasonable price multiple of say 5 times income would require an income of $80,000 per annum or more. But there are less than 15% of Australians who fit this category.

    But wait, shouldn’t we count household, as opposed to personal, incomes? A good point, particularly for younger families and young couples, where dual incomes are the norm due to necessity.

    But even based on combined household incomes, a third of all households earn less than $52,000 per annum. Another 14% to 15% earn between $52,000 and $78,000 and another 11% or 12% earn between $78,000 and $104,000. A reasonably healthy 30% of all households bring in a combined $104,000 per annum or more, but seven in ten bring in less than that.

    Taking our modest $400,000 home again, and  roughly half of all household incomes fall short of the $80,000 mark required for a price-to-income multiple of five. For one in three of every households, their combined income means a price to income multiple of eight times. They are pretty much stuffed, still.

    Household Incomes

    Brisbane

    Sydney

    Melbourne

    < $52,000

    32.8%

    32.2%

    34.3%

    $52,000-$78,000

    15.5%

    14.1%

    15.5%

    $78,000 to $104,000

    12.3%

    11.3%

    11.8%

    $104,000 – $156,000

    18.1%

    18.0%

    17.1%

    $156,000 – $208,000

    7.7%

    8.7%

    7.3%

    > $208,000

    3.6%

    5.5%

    3.8%

    Not Stated

    10.1%

    10.3%

    10.4%

    Source: Urban Economics

    Hang on, isn’t it more relevant to focus on the demographic that’s more likely to be trying to get into the property market, because older people and retirees, who already own or are paying off homes, may skew the figures? Absolutely: this is the key demographic, especially if you’re a developer of new detached housing product – which is what this cohort mainly wants to buy to raise a family in (as opposed to the apartment they might rent while pre-children).

    Personal income profiles of the 25-34 year old age group are pretty much in line with the Australia wide picture. More than half earn less than $52,000 and roughly eight in ten earn less than $78,000 per annum, which means eight in ten of this age group – who are at the peak of their family formation potential – would be faced with a price multiple of more than 5 times incomes on a $400,000 property, and more than half would be faced with a price multiple which is eight times their income, or more.

    Personal Incomes 25-34 year olds

    25-34year olds

    Brisbane

    Sydney

    Melbourne

    < $52,000

    55.2%

    52.9%

    56.2%

    $52,000-$78,000

    23.1%

    21.7%

    22.9%

    $78,000 to $104,000

    9.3%

    10.0%

    8.4%

    > $104,000

    5.6%

    7.4%

    5.4%

    Not Stated

    6.8%

    8.0%

    7.0%

    Source: Urban Economics

    None of this is great news. For developers trying to provide affordable new housing in new greenfield estates in urban fringe locations, the reality of these income profiles can’t be escaped. I had the privilege of visiting one such estate in south east Queensland recently and what I saw was absolutely first class product at very good entry level prices in a very well designed environment. No ‘McMansions’ here – just quality new detached three and four bedroom homes, on small lots, priced from around $350,000 – and in some cases less.

    But even at $350,000, only around 15% or so of the target 25 to 34 year old demographic could afford to get in with a price multiple of less than 5 times an individual’s income. That proportion would rise taking into account combined incomes for this age group, but it won’t rise beyond around a quarter or a third.  The reality is that more than half this age group would find an entry level $350,000 home would be six times their combined incomes or more. It would be tough going.

    Granted, interest rates are currently very low and some governments are offering stamp duty and other concessions to first time buyers. But these are having next to no impact on this market. Rates of first home buyer activity are at generational lows.  And interest rates won’t stay this low forever. A significant rise in variable home loan rates could tip a substantial number of families in this age group from the ‘just making it’ basket into the ‘we’re stuffed’ basket.

    Since the ‘do nothing’ policy approach doesn’t seem to be working, what could be done to turn the situation around? Basically, it’s a simple formula between incomes and prices. You either increase incomes or reduce prices. The first probably isn’t an option unless incomes can gradually creep up with inflation and with productivity gains over time.

    But what could also happen is the cost of supplying new housing (not referring to existing stock) could be reduced. New housing is heavily taxed and over regulated (the same cannot be said of existing stock). Something like a quarter to a third of the cost of the new home in an urban fringe location is due entirely to various taxes, charges and compliance costs (which do not apply to existing stock). It is also affected by the rapid escalation in land costs due to policy induced supply constraints in areas of ample available land (the same can’t be said of existing stock in mostly built-out inner or middle ring areas). Most of these additional costs of supply owe themselves to policy changes made since the early 2000s – precisely the time when the affordability gap began to widen.

    It does seem a compelling place to start.

    We should aspire to a more competitive Australia but this policy effort cannot just focus on labour costs because our incomes, while high by competitor standards, are now generally insufficient to cover one of the basic necessities of life: shelter. We have made this happen because policy makers have deliberately increased the cost of delivering new housing with new taxes, charges and compliance costs, all justified on esoteric planning or sustainability principles but impossible to justify on social equity or economic grounds.

    These policy changes were made to suit political agendas at the time: they were not needs-based or market-based policy changes. (It also has to be said the political agendas at the time were in the hands of Labor State governments, starting with Bob Carr in NSW but which spread rapidly to other jurisdictions. Why Labor Governments introduced policies which hurt people on working wages is as mystifying to me as to why Liberal Governments have continued to maintain the same policy positions, with minimal amendment).

    The gap between the cost of supplying even relatively basic housing on the urban fringe, and the incomes of the people who in past generations could afford it, will continue to widen unless regulators and policy makers begin to grasp the wider economic consequences of policy-inflated costs for new housing supply.

    Footnote: why a five times multiple? There is no strong reason. The authors of the global housing affordability report Demographia will argue that affordable housing should be around three times incomes. Moderately unaffordable they define as between 3 and 4, and between 4 and 5 is defined as ‘seriously unaffordable.’ The multiples of 7 or 8 times incomes, which we’re seeing in Australia, are off the scale. But for the purpose of argument, if even relatively high (by international standards) multiples of 5 times incomes seems like a utopian dream, it illustrates how far incomes need to rise or costs of new supply should fall before we get even close to the situation that prevailed for most of our history. It’s a big challenge.

    Ross Elliott has more than 20 years experience in property and public policy. His past roles have included stints in urban economics, national and state roles with the Property Council, and in destination marketing. He has written extensively on a range of public policy issues centering around urban issues, and continues to maintain his recreational interest in public policy through ongoing contributions such as this or via his monthly blog The Pulse.

  • Shaking Off The Rust: Cleveland Workforce Gets Younger And Smarter

    In virtually every regional economic or demographic analysis that I conduct for Forbes, Rust Belt metro areas tend to do very poorly. But there’s a way that they could improve, based in large part on the soaring cost of living in the elite regions of California and the Northeast. And one of the rustiest of them appears to be capitalizing on the opportunity already: that perpetual media punching bag, Cleveland.

    Between 2000 and 2012, the Cleveland metro area logged a net gain of about 60,000 people 25 and over with a college degree while losing a net 70,000 of those without a bachelor’s, according to a recent report from Cleveland State University. The number of newcomers aged 25 to 34 increased by 23 percent from 2006 to 2012, with an 11 percent increase from 2011 to 2012 alone. Most revealingly, half of these people came from other states. When it comes to net migration, Atlanta, Detroit, and Pittsburgh were the biggest feeders for those arriving with a bachelor’s degree, while Chicago, Manhattan, Brooklyn and Pittsburgh sent the most net migrants with a graduate or professional degree.

    The picture of Cleveland that emerges from the Cleveland State University study is a very different one from that to which we are accustomed. Rather than a metro area left behind by the information revolution, Cleveland boasts an increasingly youthful workforce that is among the better educated in the nation. In 2009. notes University of Pittsburgh economist Chris Briem, some 15% of Cleveland’s workforce between 25 and 34 has a graduate degree, ranking the area seventh in the nation, ahead of such “brain centers” as Chicago, Austin and Seattle. Old Clevelanders as a whole will remain undereducated, but likely not the next generation.

    What is driving this migration? Some of it has to do with a 25% expansion of STEM employment from 2003-13, much of it in health care tied to the region’s prestigious hospitals. This has helped spark a healthy increase in per capita income, from $33,359 in 2003 to $44,775 in 2012, a gain of 34%.

    This growth has animated many neighborhoods, not only in the “cool” central cores but in a host of inner and outer ring neighborhoods. This process, note researchers Richey Piiparinen and Jim Russell, is even more evolved in a Rust Belt city that has been on the rise for some time now, Pittsburgh. Migration trends there first turned favorable in 2007 after decades of decline, and have remained positive.

    The cost of living in Cleveland is considerably below the national average, not to mention that of the ultra-expensive coastal regions. Indeed, when cost of living is taken into account, per capita income in both Cleveland and Pittsburgh are now well above the national average.

    Piiparinen and Russell also see a gradual movement of educated young people to other lower-cost, family-friendly places in the Rust Belt, including Indianapolis, St. Louis and Minneapolis.

    These phenomena suggest that Rust Belt cities need to adopt new approaches to economic development. For years, civic boosters in places such as Cleveland fixed hopes on attracting the much ballyhooed “creative class” by building such things as the Rock and Roll Hall of Fame, art galleries, trendy restaurant and even a massive downtown chandelier. This tactic recalls the old lite beer commercials: everything you want in a city, but less.

    Yet, as Piiparinen and Russell point out, this approach simply expands consumption opportunities, and when it comes to consumption, Cleveland, Detroit and Pittsburgh can never top the U.S. capitals of excess: Manhattan, San Francisco, Los Angeles, or even Seattle. It’s hard to see hipsters moving en masse to any of these places without some degree of economic opportunity.

    Piiparinen sees the current migration trends as reflecting “the Rust Belt’s productive economy versus its consumptive economy.” He proposes the focus should be to accelerate talent migration based on economic advantages natural to the region, such as medical services, advanced manufacturing and logistics.

    These industries have high economic impact. Manufacturing, he traditional core of the local economy, adds 50 cents of GDP for every dollar in output, considerably more than information employment and almost three times the multiplier for retail jobs.

    Despite the hopes to emulate post-industrial Boston, New York or San Francisco, Rust Belt states remain dependent on manufacturing; it accounts for 18 percent of Ohio’s GDP and 14 percent of Pennsylvania’s, more than twice as much as in New York and well above that in California. Increasingly, manufacturing will not provide many jobs for unskilled workers, but rather for trained technicians, certified crafts workers as well as highly educated college graduates. Ohio has established an extensive network of skilled training facilities to fill this need.

    Critical to the process are the current manufacturing rebound, in which Ohio has added 50,000 industrial jobs since 2009, and the energy boom tied to the development of shale in both Ohio and Pennsylvania. Since 2001, energy employment in Pennsylvania has more than doubled, with much of the action in western part of the state abutting Pittsburgh.

    Does that mean that Cleveland, or Pittsburgh, are about to experience Houston-like growth? Don’t hold your breath. The weather is too harsh, and the cities too small to compete with the vast opportunities presented by the burgeoning Sun Belt economies. Nor do they rank high as destinations for foreign immigrants, who have provided a boost to many larger local economies but as of yet have not “discovered” the Rust Belt in large numbers.

    Yet not achieving hyper-growth does not mean continued decline. As older, less educated workers retire or leave the region, often for warmer climes, there is an opportunity for the Rust Belt to replace its current labor pool with one more attuned to the emerging economy and enjoy strong boosts in GDP growth.

    The key here is melding the “legacy” strengths of these regions with shifting demographic and economic forces. The region is not only home to abandoned steel mills, but also six of the country’s top top 20 graduate engineering programs, according to U.S. News & World Report. The intellectual capital is there.

    And economic forces could soon make these cities more attractive to newcomers from the rest of the country and abroad. The “spiky” cities embraced by urban boosters such as Richard Florida – who famously dissed Pittsburgh on his way out of town — increasingly are too expensive for even the educated middle class. This is why we are seeing young people who flocked to the Bay Area leave in their 30s or 40s. Places like San Francisco and Manhattan are great to the well-educated (and well-heeled), but as you get older, and look to buy a house or start a family, they are not ideal, unless you are extraordinary successful or have the right parents.

    In contrast, the Rust Belt offers a vastly better value proposition. Housing in Cleveland is about one-fourth the cost, based on income, as in San Francisco. Not only that, but the choices are fairly broad, from new and old suburban to charming, single-family dominated urban neighborhoods.

    These choices are encapsulated by the turn of phrase “Pittsburgh rich,” which essentially means that people settling there simply have better options than in places like New York or San Francisco. “We have an old housing stock that is very affordable,” notes University of Pittsburgh’s Briem. “Places like Pittsburgh and Cleveland offer a lot of areas that are very attractive at a low cost.”

    Of course, such a transition will require some major rethinking among regional leaders and the abandonment of their traditional wannabe approach. Rather than apologizing for not being San Francisco, they should look at the prospects for a revival of energy and manufacturing. It’s working out for Pennsylvania and Ohio, which were among the largest recipients of new investment in 2012, ranking third and fourth among U.S. states. They were behind Texas and Louisiana, but well ahead of both California and New York.

    Over time, this transition in the Rust Belt could prove a boon for the entire country. It does little good for either the resurgent Sun Belt or the sophisto havens on the coasts to have to subsidize a region along the Great Lakes in permanent decline. The Rust Belt retains many natural resources — oil, gas and, perhaps most importantly, water — that position it to be a major contributor to national growth. If the opportunity is recognized by a new generation, the future could prove surprising bright in what has long been seen as a fading region.

    This article first appeared at Forbes.com.

    Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

    Creative Commons photo “Cleveland Skyline from the Flats” by Flickr.com user Erik Drost.

  • Will the World’s Emerging Megacities Turn the Corner? For Most of Them, Probably Not

    Two distinct expressions of urbanism, the global city and the mega city, are often conflated in the public’s mind. This can lead people to implicitly link the future fortunes of megacities (urban regions of more than 10 million people) with the success of global cities (defined roughly as a very important node at the high end of the global economy), especially as there’s overlap between the two types. They can then assume that the world’s emerging megacities will ultimately be successful, maybe even very successful. Places like São Paulo and Istanbul are held up as global cities in the making. Even more clearly struggling megacities like Jakarta and Lagos are sometimes portrayed as up and coming hip.

    But in reality most emerging megacities likely will never turn the corner to developed status and achieve a decent standard of living and quality of life for their residents. They may be important national centers of aspiration, but most of them will never become influential global cities.  Their huge size and vast problems will leave them with perpetual entrenched poverty, poor infrastructure and public services, and low quality of life by global standards.

    The general rule seems to be that a megacity can only achieve escape pervasive dysfunction if they are a major city in a country that is the world’s current rising economic (or historically imperial) power.

    Rank

    City

    Population

    1

    Tokyo-Yokohama, Japan

    37,555,000

    2

    Jakarta, Indonesia

    29,959,000

    3

    Delhi, India

    24,134,000

    4

    Seoul-Incheon, South Korea

    22,992,000

    5

    Manila, Philippines

    22,710,000

    6

    Shanghai, China

    22,650,000

    7

    Karachi, Pakistan

    21,585,000

    8

    New York, USA

    20,661,000

    9

    Mexico City, Mexico

    20,300,000

    10

    São Paulo, Brazil

    20,273,000

    11

    Beijing, China

    19,277,000

    12

    Guangzhou, China

    18,316,000

    13

    Mumbai, India

    17,672,000

    14

    Osaka-Kobe-Kyoto, Japan

    17,234,000

    15

    Moscow, Russia

    15,885,000

    16

    Los Angeles, USA

    15,250,000

    17

    Cairo, Egypt

    15,206,000

    18

    Bangkok, Thailand

    14,910,000

    19

    Kolkata, India

    14,896,000

    20

    Dhaka, Bangladesh

    14,816,000

    21

    Buenos Aires, Argentina

    13,913,000

    22

    Tehran, Iran

    13,429,000

    23

    Istanbul, Turkey

    13,187,000

    24

    Shenzhen, China

    12,860,000

    25

    Lagos, Nigeria

    12,549,000

    26

    Rio de Janeiro, Brazil

    11,723,000

    27

    Paris, France

    10,975,000

    28

    Nagoya, Japan

    10,238,000

    29

    London, United Kingdom

    10,149,000

    Table 1: World’s Megacities, 2010, based on urban agglomeration size. Source: Demographia World Urban Areas, 10th Edition (May 2014)

    This is the case with most developed world megacities. Moscow was the capital of the Soviet Empire. New York and Los Angeles came of age when America was the rising, and ultimately dominant, economic colossus. It’s the same for Paris and London, two borderline megacities, which rose as imperial capitals. London remains arguably the premier global city in the world.

    But it’s also true of other megacities you might not consider. Tokyo only achieved its fully developed state when Japan was the rising power. Until fairly recently, much of Japan’s capital was backwards by developed world standards. For example, despite Japan’s famously high tech toilets, even in the inner 23 wards of Tokyo it was only in 1995 that 100% sewer service was achieved. In the second edition of Peter Hall’s landmark book The World Cities, he describes a 1970s Tokyo in which the night soil pickup industry was alive and well.  Only in an era of national economic hyper growth – culminating in the 1980s – was Japan able to fully modernize its urban infrastructure and clean up the massive environmental problems resulting from its rapid industrialization and urbanization. This was the time when Japan seemed destined to become the world’s leading economic power, and America was fretting as Japanese investors bought trophy assets ranging from Columbia Pictures to Rockefeller Center.


    Image from 2011 presentation by Takatoshi Wako, “Night Soil Management and Decentralized Wastewater Treatment Systems in Japan”

    We are witnessing the same today in China. It’s no accident that cities like Beijing and Shanghai are becoming fully modernized at the same time that China is the world’s rising economic power.  Even there, serious problems with social integration, pollution, and low quality development remain. China had best hope its economic growth continues until such time as it’s rich enough to solve those problems too.

    Apart from the developed West, Japan, and China, only one world megacity has ever pulled off the transition to full modernity is Seoul. Seoul, however, followed a similar trajectory to Tokyo. Destroyed in the Korean War, it was rebuilt with the help of massive foreign aid. As dictatorship gave way to democracy, South Korea emerged as the leading “Asian Tiger” economy, a sort of mini-Japan. Yet it’s only recently that Seoul has begun to transcend its soulless apartment towers and focus on building a quality of life to match its advanced subways and broadband networks, for example, by uncovering a stream previously channeled underground into storm sewers to create an attractive greenway.


    Cheonggyecheon stream in Seoul, daylighted in 2005. Image: Wikipedia

    The world’s other megacities, sadly, are located in countries on a less positive trajectory.  Many of them are in impoverished developing countries in South and Southeast Asia and Africa. Others are in economies like the BRICs once touted as emerging powers, but many of which , have badly stumbled.  India and Brazil are not following the path of Japan and South Korea – not even that of China. Their economies are large and in a sense important, but face massive structural challenges.


    Pavãozinho favela, Rio de Janeiro. Photo: Wikipedia

    Brazil is planning a coming out party with the World Cup and Olympics. The city of São Paulo has even established its own foreign ministry to develop direct diplomatic and other ties with countries overseas to flex its global muscles.  Yet the social reality is less impressive: Paulistanos rioted last year in response to transit fare increases. Income inequality in São Paulo is stark, and public safety very questionable.  Rio has numerous favelas where military style units are trying to establish basic security, albeit with heavy handed tactics.  Rowers training for the Olympics have described Rio’s waterways as the most polluted they’ve ever seen, with one of them telling the New York Times, “I’ve never seen anything like this before.” In next door Argentina, once wealthy Buenos Aires continues to decay along with the nation, the consequences of lengthy misrule.


    Dharavi slum, Mumbia. Photo: Wikipedia

    But problems in Latin America’s megacities pale next to those elsewhere. In India’s financial and commercial capita of Mumbai, over half the population lives in slums. Delhi was recently noted as having the world’s worst air pollution. Dhaka, Bangladesh is both impoverished and has extreme flooding problems. Karachi, Manila, and Jakarta suffer severe poverty and infrastructure problems.  Large African cities like Lagos can’t overcome the basic development problems of the continent.


    Shantytown in Manila. Photo: Wikipedia

    Some argue that these megacities are actually opportunities zones for their country and even that their slums should be praised – or might eventually, as one article claimed, save the planet. After all, people are voting with their feet to move there. Perhaps that’s true in some sense, though some of the advantage of cities stems from a decline in the viability of rural life. 

    But the problem is that there’s no clear path to prosperous maturity for these megacities.  They are so huge, and their problems so immense that they are difficult to even conceptualize, much less do something about.  The amount of needed infrastructure provision alone – water, sanitation, drainage, transport, telecom, electricity, parks, schools, etc. – is staggering. And that doesn’t even touch arguably more difficult problems like corruption and good governance. Absent national hyper growth – a la Japan or Korea – of a level that creates a plausible claim to being the world’s rising economic power, or the proceeds of empire, it seems unlikely any of these cities will ever succeed. By contrast, smaller cities have a much more addressable problem space.

    Megacities may have their virtues and short term advantages, but unlike yesterday’s imperial or economic capitals like New York and Tokyo, today’s emerging world megacities will have a hard time even achieving the basics of urban quality of life, much less succeed in rising to join the world’s elite.

    Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile.

    Lead Photo: São Paulo City by Julio Boaro

  • Are America’s Rich More Generous?

    In 2009, the two richest men in America organized a confidential dinner meeting of billionaires in New York City, hosted by David Rockefeller. Guests included George Soros, Michael Bloomberg, Ted Turner, and Oprah Winfrey. The topic of discussion was philanthropy. Each billionaire was asked to describe his philosophy of giving. CNN-founder Ted Turner told the story tale of how he had made a spur-of-the-moment decision to donate $1 billion, most of his future, to the United Nations. During this dinner, Bill Gates and Warren Buffet started the biggest fundraising drive in history. Setting examples though their own charity, Gates and Buffet initiated “The Giving Pledge”, a campaign encouraging billionaires to commit the majority of their wealth to philanthropic causes. So far around 113 billionaires have agreed to the pledge.

    Billionaires are targeted because Gates and Buffet believe that only they have sufficient funds to make a dent into the world’s major problems. The United States was initially chosen in part because the nation has a stronger culture of donating. The social contract in the United States puts stronger emphasize on giving back something to society by those fortunate enough to have acquired wealth. Bill Gates has already donated close to $30 billion dollars of his own wealth. He has further pledged to donate his remaining wealth of about $60 billion (leaving his three children $10 million each). Omaha billionaire Warren Buffett was inspired by his friend Gates’ example and also pledged all of wealth to charity. Leaving only a small endowment to his children, Buffet stating “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing”.

    On average, the wealthy in the United States tend to donate a higher share of assets to charity than those in other countries. There also appears to exist an international correlation between charitable donations and billionaire entrepreneurship. The Johns Hopkins Comparative Nonprofit Sector Project cites data about cross-country differences in charitable donations. The 2004 book “Global Civil Society: Dimensions of the Nonprofit Sector” contains charitable donations as a share of GDP in 36 countries. According to this source Americans donated 1.9% of GDP to charity, compared to 0.3% of GDP in continental Europe.

    In the publication “SuperEntrepreneurs – and how your country can get them” we recently examined the circa 1000 self-made men and women who have earned at least $1 billion dollars and who have appeared in Forbes magazine’s list of the world’s richest people between 1996 and 2010. There is a very strong correlation between the per capita number of SuperEntreprenures in different countries and donations to charity as a share of GDP. This relationship holds also when controlling for per capita GDP and tax rates. Other than the United States, countries with a high count of SuperEntreprenures and high charity as a share of GDP includes Israel (1.3 percent of GDP), Canada (1.2 percent) and the United Kingdom (0.8 percent). Several British Superentreprenurs have joined the Gates and Buffet Giving Pledge to donate half their wealth to charity, including Michael Anthony and Richard Branson.

    It may be that the strong correlation between charity and the number of SuperEntreprenurs is not causal and reflects cultural differences, such as Anglo-Saxon countries donating more to charity and having more entrepreneurship. To some extent, there may be an interplay between Anglo-Saxon capitalist culture and Anglo-Saxon prescription for charity, especially for the fortunate. Tocqueville has argued that Protestant norms such as industry, frugality, charity and humility were important for American development. The Calvinist Puritan settlers brought with them strong norms of charity from England, which also influenced Canada and Australia. Interestingly, a similar norm towards expectations of charity from the wealthy exists in Jewish culture, which may in part account for the high rate of charity in Israel. The lower rates of charitable giving is found in poorer countries such as Mexico (0.04 percent of GDP) and India (0.09 percent) but also in Germany (0.13 percent) Austria (0.17 percent), Korea (0.18 percent) and Japan (0.22 percent).

    American capitalism differs from other societies in its historical focus on both the creation of wealth and the reconstitution of wealth through philanthropy. In 1957, Historician Merle Curti argued that “philanthropy has been one of the major aspects of and keys to American social and cultural development”. The implicit social contract allows rich Americans to retain most of their wealth from taxation. In return, they voluntarily give much of it back to society, in projects of their choosing. The notion exists that wealth beyond a certain point should be invested back in society to expand opportunity for future generations. In this way John D. Rockefeller, the richest man in American history, gave back 95 percent of his wealth before he died.

    The legitimacy of American capitalism has in part been upheld through voluntary donations from the rich. Social norms regulating donations differ markedly between Europe and the United States, not only for the rich. In the United States, around 2 percent of GDP is donated to charity each year; about ten times higher the ratio of European countries. Based on tax data, Fortune Magazine estimates that the 400 highest earning Americans donate $15 billion to charity each year, or around ten percent of their annual income. Compared to other donors, wealthy Americans are more likely to donate to education and the arts but less likely to donate to religion.

    Much of the new wealth created historically has thus been given back to society. This has had several feed-back effects on capitalism. For one, the practice has limited the rise of new dynasties. Another positive feed-back mechanism is that the donations to research and higher education in particular has allowed new generations to become wealthy. In his lifetime, Rockefeller alone established many important institutions, including the University of Chicago, Spelman College, The General Education Board, National Bureau of Economic Research, Brookings Institution, and the Rockefeller Foundation. The University of Chicago is not the only great private research universities created through individual philanthropy. The same is true for Stanford, MIT, Johns Hopkins, Carnegie-Mellon, and Duke.

    Lastly the practice of philanthropy creates legitimacy for capitalism among the public. Bill Gates, the richest man in America, accumulated his wealth using famously sharp elbows. Yet his is one of the most popular people in the country. In one public Pew poll, he was viewed favorably by 69 percent and unfavorably by only 15 percent of the public, the best numbers of any public person polled. Similarly according to Gallup Bill Gates in the most admired man in America who is not a current or former President.

    Scholars Asc and Phillips have disused the “entrepreneurship-philanthropy nexus” at length, arguing that “[m]uch of the new wealth created historically has been given back to the community, to build up the great social institutions that have a positive feedback on future economic growth.” Asc and Phillips describe the importance of these norms in American economic history: “For Carnegie, the question was not only, ‘How to gain wealth?’ but, importantly, ‘What to do with it?’ The Gospel of Wealth suggested that millionaires, instead of bequeathing vast fortunes to heirs or making benevolent grants by will, should administer their wealth as a public trust during life”. Charitable instincts amongst highly successful entrepreneurs is relevant for economic development, in a time where there is global concern that rich dynasties will dominate capital ownership by investing inherited wealth. The combination of opportunities to create new wealth and philanthropy has so far ensured that Anglo-Saxon societies are characterized by new wealth, compared to countries such as France where inherited wealth plays an increasingly important part in the economy.

    Dr. Nima sanandaji is a frequent writer for the New Geography. Dr. Tino Sanandaji is a full-time researcher at the Research Institute of Industrial Economics (IFN) in Stockholm. They have co-authored “SuperEntrepreneurs – and how your country can get them” (Center for Policy Studies) which has received considerable media impact during recent weeks.

    Bill Gates photo by PauloHenrique. 

     

    Acs, Z.J., and R.J. Phillips (2002). “Entrepreneurship and philanthropy in American capitalism”. Small Business Economics, 19;3:189-204.

    Curti, M. (1957). "The History of American Philantropy as a Field of Research", The American Historical Review, 62;2:352-363. De Tocqueville, A. (1966), reprint from original 1835 publication. “Democracy in America”, New York, NY: HarperCollings.

    Fortune Magazine and CNN Money (2010). "The $600 billion challenge", 2010-06-16. Blog post availiable on http://features.blogs.fortune.cnn.com/2010/06/16/gates-buffett-600-billion-dollar-philanthropy-challenge/ when last checked 2013-12-31.

    Lester, S., W. Sokolowski and Associates (2004). “Global Civil Society: Dimensions of the Nonprofit Sector, Volume Two”, Bloomfield, CT: Kumarian Press.