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Spring 1992
   
The Competitiveness Debate: How New York Stacks Up Against Tokyo and Parsippany
Thierry Noyelle
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Thierry Noyelle is deputy director of the Eisenhower Center at Columbia University.

Since the summer of 1989, New York City has lost nearly 200,000 jobs. Observing that the rate of decline had slowed markedly since the first half of 1990 when it was at its steepest, many analysts concluded in early fall 1991 that the recession had bottomed out. Limited losses were expected in the months ahead, mostly in the government and commercial banking sectors. November and December 1991, however, saw a sudden increase in the number of job losses.

While the seriousness of the current crisis should not be underestimated—200,000 jobs is an awfully large number to lose—I do not accept the most pessimistic views expressed by some in recent months. Clearly, as a center of service industries, New York has suffered more than other cities in this service-led recession. In my view, however, we are not dealing with a repeat of the structural and economic crisis of the Seventies.

The city still has enormous economic advantages. With 260 of the 1,400 largest publicly-held industrial, publicly-held service, and privately-held companies headquartered in the city and its suburbs, this area retains, by far, the largest concentration of such facilities in the nation. Furthermore, New York’s role as the nation’s premier financial center remains largely unchallenged, and the city is still an exceptionally fertile ground for the creation of new businesses.

New York does face difficulties, however, in retaining the businesses it creates, a problem that typically hurts the city more during recessions than expansions. New York leaders who want to buoy the city’s quality of life by ensuring that the city continues to offer high paying jobs in abundance, would do better to address the problem of why young, vigorous companies leave the city, than to worry over more widely publicized problems that may actually be less important and over which local policy has little influence.

During the 1980s, New York City’s economy was powerfully affected by three trends: the increasing challenge to its role as a national and international headquarters center, external challenges to Wall Street’s status as a premier national and international financial center, and the growing competition between New York and its suburbs. All three are problems, but the first two are often overestimated, and the last usually misunderstood.

New York as a Headquarters Center

One trend that is emphasized repeatedly by those who worry about the decline of New York as a national and international business center is the steady departure of the headquarters of the largest U.S. industrial corporations. Indeed, while 128 of the nation’s 500 largest publicly-held industrial corporations (the Fortune 500) were headquartered in New York in 1965, by 1990 that number had dwindled to 41.

Headquarters are important to New York’s economy because they generate a substantial demand for specialized advanced business services, a domain in which the city has excelled. But those who dwell on the departures partly miss the point, namely that very large publicly-held industrial corporations are not quite as important to New York as they once were.

The rate of annual headquarters losses among large industrial firms has changed little from the 1960s through the 1980s: The city averaged a net of 3.8 Fortune 500 headquarters losses per year from 1965 to 1975 and 3.4 per year from 1979 to 1990. But the reasons for the losses have changed. During the earlier period more than half (38) of the total number of gross losses (66) were due to relocations to New York’s suburbs or to other metropolitan areas. (Note that over time, gross losses are partly made up by gains, so the net decline in headquarters is never as large as the gross decline.) By contrast, in the 1980s, less than one-quarter of the losses were the result of relocations (14 of 62). Rather, New York “lost” industrial headquarters because the firms disappeared from the Fortune 500 industrial lists due to mergers, acquisitions, privatization, or because they were reclassified to the Fortune Service 500 list.

This particular observation is important. Indeed, if we no longer focus exclusively on the headquarters of the Fortune Industrial 500, but also include the Fortune Service 500 and the Forbes 400 largest privately-held companies, we find that the importance of New York as a national headquarters center changed very little during the 1980s. Partly this is because New York seemed to attract large service corporations and large privately-held companies. (Both Beatrice and RJR-Nabisco, two of the largest leveraged buy-outs of the 1980s, moved their headquarters to New York late in the decade.) And partly it is because a number of the disappearing “industrial” companies were simply companies that changed status.

A total of 150 Fortune Industrial 500, Fortune Service 500, and Forbes Private 400 companies were headquartered in New York City in 1989 and 1990, as against 164 in 1983 and 1984, a relatively small decline. Furthermore, if we add those headquartered in the New York suburbs, the total number of such firms headquartered in the metropolitan area remained virtually unchanged during the 1980s, as shown in Figure 1. Put another way, the New York metropolitan area retains, by far, the largest concentration of headquarters of large firms in the nation. Furthermore, the Fortune Service 500 and Forbes Private 400 rankings do not include a number of billion-dollar specialized business service firms in areas such as law, accounting, advertising, and media that have grown up in New York in recent years.

I do not, of course, argue that nothing has changed. New York has become less attractive as a headquarters city for nationally oriented companies, and more specialized as host to internationally oriented firms.

Another dimension of New York’s versatility during the 1980s had been the arrival of many large and small foreign companies that have found in New York an appropriate beachhead for their entry into the huge North American market. We still know far too little about the size and durability of the presence of such firms. Nevertheless, a 1990 New York Chamber of Commerce and Industry survey of foreign companies in New York City found 1,800 companies from 63 countries with locations in the New York metropolitan area.

The question remains: Will the foreign, privately-held, or service headquarters that were a boon to the city’s economy during the 1980s depart for the same reasons that caused so many headquarters of large U.S. industrial companies to depart earlier?

The Challenges to Wall Street

Wall Street also has changed during the 1980s. However, one should not overestimate the negative effects of these changes.

Some observers note with alarm that financial firms have been moving offices out of New York. As I will show below, however, most such relocations have involved lower-skilled “back office” employment. In the case of the securities firms, as Mitchell Moss and Joanne Brion have shown, there has been rather little relocation outside the city, except for some computer centers that are capital- rather than labor-intensive.

Others point to the decline of New York’s commercial banks—the result of the decline of wholesale banking and of interstate regulations that kept New York-based banks out of fast-growing consumer markets—as another sign of local weakness. As in the case of the headquarters analysis, however, excessive emphasis on one segment of the industry is misleading. Focusing on commercial banking misses the importance of the shift to capital-market banking and the resulting rise of new players. This is another area in which New York has shown a good deal of versatility.

In 1973, commercial banks held 41 percent of the assets held by all financial institutions in the nation; by 1988, that share had declined to 30 percent. Meanwhile, the share of assets held by “other” financial institutions (mutual funds, pension funds, securities firms, etc.) had grown from 21 to 35 percent.

If we examine not just commercial banks but all these financial institutions based in New York, we find that the share of the nation’s financial assets held by New York firms has actually changed little between the early 1970s and the late 1980s. Of the nation’s fifty largest commercial banks, fifty largest savings-and-loans, fifty largest life insurance firms, and two hundred largest institutional investors, New York-based institutions captured 38 percent of the nation’s financial assets in 1989 compared to 40.8 percent in 1974 (see Figures 2 and 3). These two tabulations are not perfectly comparable, however, because this group of financial institutions accounted for a much larger share of the nation’s financial assets in 1989 than in 1974: 79 percent as compared to 62 percent in the earlier year. Using different data, I have shown elsewhere that during the 1980s the concentration of financial activity in New York actually increased at the expense of other financial centers in the country.

During the late 1980s and early 1990s, New York may actually have strengthened its position relative to London and Tokyo, at least for the short term. The purging of the U.S. financial system, including New York’s, following the go-go years of the 1980s has been far deeper and more rapid than in Tokyo, where the regulators are still trying to figure out how to absorb the excesses of the previous decade, particularly in the real estate and stock markets. After years of being shunned by potential Japanese clients and securities firms in Tokyo, New York’s securities firms have finally begun to make major headway there, chiefly on the strength of their capacity to innovate, especially in the derivatives markets. Their Japanese profits and market share have steadily grown at a time when Japanese securities firms have been forced to retrench from New York.

In London, there is still fat to cut following the huge increase in capacity from Big Bang. Europe 1992 no longer seems to be the watershed event that it was once deemed to be.

Meanwhile, New York is showing signs of life. The junk bond market has begun to recover. Many former borrowers are deleveraging by retiring debt with equity, a development made easier by the fresh inflow of savings into the stock market from individual consumers reinvesting bank CDs whose interest rates have dropped. The Resolution Trust Corporation seems to have done much better than anyone had anticipated just a few months ago, having already recovered more than half of the $350 billion it has had to put out so far to clean up the S&L mess. The New York stock market has recovered more swiftly than London’s or Tokyo’s—the latter still languishing about 40 percent below its peak. The securities firms are poised to have one of their most profitable years ever, despite the turmoil at Salomon.

New York Suburbs: Competition or Complementarity?

Perhaps more worrisome for the city’s future is the continuing transformation of its relationship to its suburbs. During the 1980s, while employment increased by about 425,000 jobs in New York City, it rose by nearly 850,000 jobs in a 16-county surrounding area of New Jersey, New York State, and lower Connecticut, according to data from the Bureau of Economic Analysis.

The question of whether the suburbs grew at the expense of the city is a difficult one which cannot be fully settled here. Nevertheless, examining the evidence can uncover what may be the most fruitful arena for local economic development policy.

Recent research by Stephen Leshinski of the Port Authority, comparing the creation of new firms with relocated firms as a source of jobs growth in New York City and its suburbs, sheds light on the nature of employment growth. Between 1976 and 1986, new firms created 464,000 jobs in the city, compared to 757,000 jobs in the surrounding suburbs of New Jersey and New York. More than three-fourths of the jobs created by new firms in New York City were in the FIRE (finance, insurance, and real estate) and service industrial classifications; in the suburban counties less than two-thirds fell into these categories. As for business relocations, Leshinski found that between 1976 and 1986, New York City lost nearly 163,000 jobs as a result of relocation, and gained a mere 37,000-or less than 25 percent of those lost. Of those jobs gained, 24,000 were from firms relocating into the city from outside the region; of those lost, more than 91,000, or 56 percent, were due to New York City-based firms relocating to the suburbs.

The implications of these findings, when combined with our earlier statistics on overall employment growth in the city and its suburbs, are fairly clear. Most of the city’s employment growth is due to its ability to give birth to new firms. This is also true of New York’s suburbs, but they also benefit from substantial relocations from the city. Put another way, New York City’s biggest problem is not employment creation, but rather the retention of firms—and, for that matter, mostly small firms. A survey of New York-based computer services and data processing firms that two colleagues and I conducted in 1988 further confirms this.

To say that firms are moving from the city to its suburbs, however, does not actually settle the question of whether the suburbs’ job growth is primarily competing with or complementing the city’s. One might argue that any employment growth in the suburbs, even from firms created there, competes with growth in New York City. But there is an important distinction to be made. The suburbs may be creating jobs by adding or expanding firms that are similar to, and therefore in competition with, those existing in the city. On the other hand, the suburbs may be adding firms in industries that the city is abandoning or that provide support for more specialized firms in the city. In other words, the city and its suburbs might be developing a symbiotic rather than a competing division of labor.

One way to test whether suburban development has been symbiotic or competitive is to examine whether wage and salary levels in the city and its suburbs have grown closer or farther apart. We should pay particular attention to those industries in which wage and salary levels are relatively high, suggesting that they employ larger numbers of skilled, specialized personnel. A narrowing of the gap between city and suburban salaries in those industries would suggest that the same relatively well-paid jobs as those found in the city are being added in the suburbs—in other words, that the city and suburbs are increasingly competing. A widening of the gap would suggest that suburbs are adding different, mostly lower-paid jobs of the sort that principally complement the city’s work force.

Figures 4 and 5 present the relevant evidence. Figures 4 shows “location quotients” for employment in various industries for Manhattan and the seven largest suburban counties for both 1978 and 1987. A location quotient is the ratio of two localities for a given year: a county’s employment in a particular business sector, divided by the county’s total employment, divided by the same ratio for the nation. A ratio greater than 1 indicates that the county is overspecialized in the industry relative to the nation; less than 1, that it is underspecialized relative to the nation. A large change in the location quotient is an indication of a change in a county’s specialization. Comparing the figures, we can see that in virtually every FIRE or service category for virtually every county, the location quotients went up over time. In other words, the economy of the whole region is shifting toward FIRE and services.

But are the new FIRE and service jobs in the suburbs high-wage jobs from firms that compete with the city, or lower-wage jobs from firms that complement city firms? Figure 5 answers that question, and the news is mostly good so far.

Figure 5 shows indexes of earning levels (wages and salaries) for the suburban counties relative to Manhattan for the same two years and the same employment sectors. An earnings level index higher than 1 means that workers in the sector are paid better, on average, than in Manhattan; less than 1, the opposite. A narrowing of the earnings gap suggests that the jobs in the suburban county are becoming more like those of Manhattan and, thus, becoming more competitive. A widening of the gap suggests that the jobs in the suburban county are becoming increasingly different and, thus, more complementary.

I have highlighted the counties in which the earnings level for a FIRE or service sector is 85 percent or more of the Manhattan level. Only in Fairfield is there evidence that the county has become competitive with Manhattan, offering, in many sectors, jobs at earnings levels roughly comparable to those of the city.

In Figure 5, I have also underlined the commercial banking, security, and insurance location quotients in the counties where there is evidence of a sizable build-up of jobs during the 1980s (based on the location quotients presented in Figure 4): commercial banking in Fairfield and Nassau; the securities industry in Fairfield, Nassau, and Morris; and insurance in Westchester and Morris. Only in the Fairfield securities industry do we observe both an increase in employment and an increase in earnings levels relative to Manhattan. In all other cases earnings levels have decreased relative to the city, suggesting that employment growth in those sectors was mostly complementary rather than competitive.

The conclusion is that the suburban counties were attracting mostly lower-paying jobs, rather than the higher-paying jobs found in Manhattan. These jobs are likely to be local service sector or support-type jobs, including “back office” jobs. Whether the mostly symbiotic relationship between city and suburb suggested by the data for the 1980s will persist in the 1990s remains to be seen. The pattern suggested by the limited transformation in Fairfield may, or may not, be a warning of things to come.

Short-Term Threats

In addition to the long-term structural developments reviewed thus far, New York faces a number of short-term structural threats, largely national in scope but with powerful local implications. The first is the crisis in the commercial banking industry, a still disproportionately large sector of the New York City economy.

The second short-term threat is a structural crisis in what might be called the “consumer sector”—those industries that produce mostly for final consumption by individuals. With the maturing of the baby boomers and the aging of their parents, the U.S. economy is being affected by demographic changes of a magnitude comparable to those of the early 1970s when the baby boomers entered the labor market. Consumer demand is shifting sharply and rapidly. This is affecting the city, which traditionally has been a leader and trend-setter in a number of crucial consumer areas (including media, advertising, retailing, and restaurants).

The third threat is the fiscal crisis of state and local government, a phenomenon no longer unique to New York City. Growth of the local public sector is likely to remain sluggish for years to come, since little relief can be expected from the already overextended Federal government.

Yet important as these factors may be, New York policymakers have limited influence over national economic developments. However, New York can take steps to improve its economy by addressing developments that are clearly local in nature. Three issues seem central to shaping the agenda in the 1990s: local taxes, business retention incentives, and infrastructure.

Local Taxes

In April 1991, New York City’s Office of the Comptroller issued a report on the impact of the local tax burden on New York City’s economy. The report created quite a stir. Going back to 1950, it purported to demonstrate a number of important points: first, that since the early 1960s the local tax burden had increased faster in New York City than in the rest of the nation; second, that the gap in the local tax burden between New York and the rest of the country tended to grow faster during recessions than expansions; and third, that while increases in the gap during expansionary periods seem to have limited impact on the growth of private-sector employment in the city, increases during recessionary periods seem to hurt private-sector employment.

The report was attacked on a number of grounds. Many argued that its estimates of the impact of tax increases proposed by the Dinkins administration were unrealistic and overly pessimistic. Others argued that the local tax burden was not the only cost factor that prompted businesses to shut down or to relocate. (It is true, however, that in recessionary environments, during which commercial rents often decline and utility costs may change little, taxes are usually the only major direct business cost that increases.)

The report did bring out a point that many seemed eager to forget, namely that the more the city taxes its residents and businesses, the more it undermines its competitive advantage as a center of business. This is especially true in an era in which New York can no longer rely on its “uniqueness” to attract talent and manpower, as it did during the 1950s and 1960s, but instead must compete with other fast-growing regional business centers, many of which are cheaper and equally attractive.

In addition to the very high overall tax rate, some of the specific taxes the city levies discriminate particularly harshly against individuals or businesses it needs to retain. To show his willingness to address this issue, the Mayor should appoint a panel mandated to take a broad and sweeping look at the city’s local tax system, in order to determine whether the city could eliminate or reduce some of its most destructive taxes. But trying to address the issue of the high local tax rate alone does not address the question of whether the money is needed for city services. It is here that a second but equally important issue must enter the public debate: public-sector productivity. The current administration has been slow to move on this front. Yet this is clearly an area in which the city can act to take control of its own future.

The Infrastructure

In the 1970s, under the burden of the economic crisis, the city and key local public authorities cut off all substantial capital investment for nearly a decade. This was a costly mistake. Beginning in the early 1980s, the city launched major investment programs to rebuild the bus and subway systems. New investment programs were also launched to begin rebuilding the region’s suburban commuter railroad system. Much more is needed, including a major program to repair the region’s roads and bridges. The city, state, and region (primarily via the Port Authority) must resist the temptation to reduce capital investment as they did during the 1970s. In the short term, any new investment will boost employment in the construction sector; in the long term, a quality infrastructure is an essential strategic asset.

Two aspects of the infrastructure deserve particular attention in an economy that has become increasingly specialized in the advanced services and has turned more toward international markets: air transportation and telecommunications.

The city and the region have been hurt by the decline of locally headquartered airlines (Eastern, Pan Am, TWA) that failed to adapt to the new world of deregulation. But the regional market is too important for major domestic and foreign airlines to abandon, unless the city and the Port Authority fail to capture the opportunity. Despite the industry’s current recession, air transportation is poised to grow significantly during the 1990s. Both JFK and Newark airports have considerable potential to expand as hubs to European, Latin American, and Asian markets. As the United States is forced to open more of its domestic market to foreign airlines, some of those airlines will need to develop mini- or even full-blown hub-and-spoke operations in the United States. The two New York international airports are logical places to host such hubs. New York also has a major competitive advantage as a customs clearing port for air freight. The city and the region must do all they can to preserve and strengthen those advantages. The Port Authority has committed itself to major construction programs at both JFK and LaGuardia. It would be reasonable to examine how these programs could be both expanded and accelerated so that New York will be ready for the next surge of air traffic activity.

Some observers feared the deregulation of the telecommunications industry and the resulting increase in competition might lead to a sharp reduction of profits and investment. This has not been the case. Indeed, attempts by newcomers to seize market share from the Bell Operating Companies and AT&T have led to large new investments which greatly benefited New York City. By almost every measure, New York is the telecommunications mecca of the late twentieth century; no other city anywhere in the world can match both the density and diversity of network services available here. Though there is no indication yet that this trend is about to change, the city must keep alert and make sure that its telecommunications network retains its lead into the twenty-first century.

Business Retention

Finally, the city must seriously reexamine its business retention policy in light of these economic realities. We have seen that New York’s problem may be not so much the loss of the headquarters of very large corporations, but rather the tendency of smaller firms that are born here to leave. Though the data used here do not absolutely prove the point, one suspects that these firms are largely the service firms that have been showing up in the nearby suburbs. Business retention programs should focus on these young service firms. Under the Koch administration, an extensive system of incentives (including real estate tax and utility cost abatements), along with hands-on intervention, were used to retain large firms, especially large service firms. Above and beyond the immediate gains from retaining the jobs of the particular companies, the goal was to shore up the agglomerations of businesses that ferment the creation of myriad small new firms in New York every year. The other idea behind the policy was to use these incentives to turn the outer boroughs into strong alternative locations for white-collar offices. It remains to be seen whether the practice of handing out incentives to large companies on an ad hoc basis is as efficient as an across-the-board reduction of the tax burden.

A second element of the city’s business retention policy has been a package of incentives geared at retaining small manufacturing firms. This policy is based in part on the goal of rebuilding certain depressed areas such as Hunts Point in the South Bronx or the Brooklyn Terminal.

But while manufacturing is becoming more marginal to the city’s economy, the city has done little to retain the small service firms that will continue to grow in importance. It is likely that a retention policy for small service firms would not only be more effective but cheaper than the one for manufacturing firms, especially considering how much less capital-intensive service firms are.

Much more emphasis should be placed on understanding the pressures that push small and medium-sized service businesses to leave the city and on designing policies that address some of these pressures. I have no blueprint for such a policy, but in earlier research on the computer service industry in New York I was struck by the fact that much could be done by the city for service firms at a relatively low cost by cutting through administrative red tape, assisting with real estate brokers, negotiating with NYNEX and other utilities on behalf of those firms, and so on. The dynamics of the growth, expansion, and relocation of new service firms in New York City is a poorly understood topic, but one on which a good part of New York’s future rests. The research by the Port Authority on this issue has opened up important issues. The city must pick up from there and move forward to address the needs of this long-neglected but growing sector of the economy.

 

 

 
The bad news about New York's economy has been exaggerated, but the city still faces important challenges in the 1990s
City Journal Spring 1992.
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