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Summer 1996
   
Why L.A. Is Bouncing Back
Joel Kotkin
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When Mayor Rudolph Giuliani of New York announced that the 1997 Grammy Awards would take place at Madison Square Garden after being held for several years in Los Angeles, he seized the opportunity to demean the nation’s second-largest city. New York, he declared, was “the real city,” while Los Angeles merely existed “on tape.” New York would now be not only the “capital of the world” but the “music capital of the world” as well.

Angelenos are used to such disparagement from New Yorkers, but perhaps it’s time for Giuliani and other Gothamites to wake up and smell the cappuccino. In contrast to New York’s weak economy, Southern California’s long-simmering economic resurgence is now truly building up steam after a half decade marred by the loss of over 100,000 aerospace jobs, a major riot, and a devastating earthquake, as well as assorted fires and floods. It is a recovery that holds vital lessons for cities—lessons about the critical importance of entrepreneurship, economic diversity, and decentralization to healthy urban economies.

The best evidence of the recovery lies in the job statistics. During 1995 Los Angeles County, the heart of urban Southern California, created nearly 93,000 jobs—a hefty 2.5 percent increase in employment over the previous year, a rate roughly 50 percent above the national level. Suburban Orange, Riverside, San Bernardino, and Ventura counties enjoyed similar rates of growth, creating another 50,000 jobs.

By contrast, New York City over the same period could point to only 1,700 new jobs, according to the Bureau of Labor Statistics, many of them in government-funded social services; adding the immediate suburbs brings the total to barely 5,000. Indeed, since January 1994 urban Los Angeles County alone has produced more jobs than all of New York State, which has more than twice Los Angeles County's population.

True, Southern California, which vied with New York for the nation's worst decline during the early 1990s, has not returned to the boom conditions of the late 1980s. Although employment is now back to or above pre-recession levels in outlying areas, most economists predict it will take another two years for L.A. County to recover all the jobs lost in the 1990-94 period. And the region, particularly the urban core, continues to be plagued by serious (albeit declining) levels of crime, weak schools, and troublesome racial politics. Yet L.A.'s economic future looks brighter than New York’s. “Los Angeles has been beaten up a lot the last few years, and New York has been promoting itself,” observes David Birch, president of Cognetics Inc., a Cambridge, Massachusetts, firm that tracks small-company growth. “But look at the numbers and the pattern is clear.”

What's fueling the recovery? Above all, the existence of a vibrant entrepreneurial economy in the Los Angeles area. Take, for example, the comparative strength of Los Angeles on the Inc. 500 roster of the nation's fastest-growing small private firms—precisely the companies creating most new jobs. In 1995 Los Angeles County had 15 companies on the list, compared to only three for New York City; the five-county Los Angeles region boasted 33, versus greater New York’s 17. Of course, this is only the tip of the iceberg: along with these 33 of the fastest-growing are thousands of the merely fast-growing.

These small, fast-growing firms have become especially important to Southern California in the wake of the defense industry's massive downsizing. Since 1979 the percentage of Californians who worked in companies with fewer than 100 employees grew from 42.1 percent to 51.5 percent of the workforce. Companies with over 1,000 employees lost more than 700,000 jobs, while the smallest firms—those with fewer than ten workers—gained well over 1 million. The statewide rate of new business incorporation rose 7 percent last year, far above the nation’s 5 percent level.

The shift to smaller, newer companies was even more profound in Los Angeles itself. A 1993 study by economist David Friedman found that nearly 45 percent of all jobs in L.A. County were in companies under 15 years old. The growth of these firms through the recession rebuilt the Southern California economy from the ground up.

Contrary to the rhetoric of conventional class-warfare politics, many of these jobs are in high-paying sectors. Last year Los Angeles County added some 20,000 jobs in motion picture and television production, compared with 3,200 in New York. Employment in engineering and management services, another key high-wage area, rose by roughly 18,000 jobs in the five-county L.A. area. At the same time, the long-battered industrial sector also began turning around, led by such small firms as apparel maker French Rags (with 92 employees) and credit-card producer Western Badge and Trophy (with 300 employees), as well as larger companies such as wheel manufacturer American Racing, part of a conglomerate that employs 2,000 people in Los Angeles. The growth of such firms has driven the county’s industrial vacancy rates down to single digits.

L.A.’s entrepreneurial economy is largely the creation of immigrants. Southern California attracted 2 million immigrants in the 1980s, more than any other North American region and half a million more than New York. More important than their numbers has been the immigrants’ work ethic and entrepreneurial culture. Asians and Latinos in California are, on average, one-fourth to one-third more likely to be self-employed than their counterparts in New York. Latino males have the highest labor participation rate of any ethnic group in the region, while poor Mexican immigrants have a rate of welfare recipiency one-third that of low-income Dominicans in New York.

Roughly two-thirds of all production workers in Los Angeles County are Latino; they are the linchpin of the local industrial economy, staffing everything from low-paid sewing shops to more upscale metal bending, electronics, and medical instruments firms. “People come here for a new life,” observes Anthony Munoz, a native of Spanish Harlem and international sales manager for American Racing, 84 percent of whose 2,000 workers are Latino. “I find that the immigrants here are tremendously motivated and driven, and have an enormous pride in doing the job right,” Munoz says.

Immigrants are reviving even parts of riot-torn south Los Angeles, now sprinkled with thriving businesses. This area, along with Compton and a string of industrial cities south of downtown, is home to an industrial economy that employs over 300,000 people, including 95,000 commuters—dwarfing the entire manufacturing sector in New York City. These are mostly smaller factories producing everything from textiles and garments to bicycle parts and biomedical and electronic goods. Food processing alone, a traditional Los Angeles industry, employs 30,000 workers in this region.

Though the riots were the last straw for many Anglo businessmen, immigrant entrepreneurs like Wesley Ru saw them as just another bump in the road. On the second day of rioting, Ru opened the doors early as usual at Western Badge and Trophy in the Pico-Union district. His workers arrived punctually as usual. But by 11 that morning, the madness was beginning to surge inexorably northward, toward Pico-Union. With several bus lines cut off, Ru began shuttling his workers by car. Then he returned to the factory with a handful of supervisors, ready for the worst. “We stood by and watched the street fill with people,” the Taiwan-born Ru recalls. They were “rioting and looting. But we stood our ground.” The angry mob simply passed them by.

Four years later Ru is still standing his ground—and then some. Western Badge and Trophy has spawned a series of related businesses, including the largest credit-card manufacturing business on the West Coast. The dying trophy company he bought in 1985 with $50,000 borrowed from relatives has blossomed into a small industrial powerhouse with 500 employees and clients that include Price Club, Coldwell Banker, and Walt Disney Studios.

Ru suggests that this immigrant-led recovery is invisible to many L.A. residents—including members of the Anglo establishment—who have not participated in it. “They don't drive through the stuff I see,” Ru says. “There are thousands of Guatemalans, Salvadorans, and Koreans with small businesses. It’s different, for sure, but it's the basis of something very vibrant.”

The resurgent, immigrant-dominated industrial economy in south Los Angeles is sparking a renaissance in retailing throughout the area. For the past decade developer Jose de Jesus Legaspi has been bringing investors—from Latino, Asian, and Middle Eastern as well as Anglo backgrounds—into heavily Latino areas such as Huntington Park, a small industrial city abutting Los Angeles. Fifteen years ago Pacific Boulevard, Huntington Park’s main street, was derelict, with vacancy rates as high as 50 percent. Today it competes with downtown’s Broadway and Beverly Hills' Rodeo Drive for the region’s highest sales volume per square foot.

As many older, Anglo-owned businesses and their owners have left town, immigrants have stepped into the breach. Over the past decade the number of Latino- and Asian-owned firms in Los Angeles has more than tripled. Some 1,200 Chinese electronics firms, most in the heavily Asian San Gabriel Valley, have created a local computer industry with over 5,000 employees and combined annual sales well in excess of $3 billion. Since 1993 Legaspi and a client, Iran native Darioush Khaledi, have opened 14 major supermarkets in largely Latino areas south of the Santa Monica Freeway. “These areas have been underserved for years,” Legaspi says, inspecting a potential new supermarket site in a decrepit but busy strip mall on Long Beach Boulevard. “When a shopping center like this one is still successful, imagine what it could do if you fix it up.”

L.A.’s immigrant-fueled vibrancy even extends to downtown. Get a few blocks away from the high-rise districts, where office vacancy rates remain in the low to mid-twenties, and you'll find a thriving industrial, warehouse, and distribution economy run by immigrants. “The people who own the high-rises haven’t faced the music yet, but we are already developing new properties for where the future is,” says Doug Hinchliffe of Lowe Development, a major builder now developing a 23-acre import/export center on downtown’s Alameda Street. “It’s the importers, the garment people, the immigrants, the Asian entrepreneurs who are driving things.”

Perhaps the most influential of these new immigrant entrepreneurs is Hong Kong native Charlie Woo. Stricken by polio as a child, he walks with crutches as he surveys his empire. Taking advantage of cheap real estate and easy access to the Los Angeles harbor, Woo started a toy distribution business in the early 1980s in a largely abandoned warehouse district east of downtown. City planners, dreaming high-rise dreams, yawned. “They didn’t understand what I was doing and didn't know why I wanted to be there,” Woo recalls. “It was totally dead. No one wanted to be there.”

The planners were wrong. Where they saw no future, Woo and a handful of other entrepreneurs envisioned a global center for the toy trade. Today the area is home to more than 500 toy distributors, employing 6,000 workers and boasting an estimated $1 billion in revenues. The success of Toytown, as the area is called, is also breeding new opportunities for local manufacturers and designers. Woo, for example, contracts out to local freelancers who design toys to be manufactured in China. And the Otis Art Institute, a division of Parsons School of Design, is starting a new program for toy designers in Los Angeles’s Westchester district, near Mattel’s facility in the city of El Segundo. Ten Otis graduates already work for Mattel, designing, among other things, fashions for the company's ageless icon, Barbie.

Buyers from around the world and from other parts of the U.S. crowd the area, looking for new products. “L.A. is becoming the ultimate middleman, not only for Asia but for Mexico, the Midwest, and the South,” Woo says. He describes Los Angeles as “the new Hong Kong,” with its scattered, dense, specialized commercial zones.

Downtown Los Angeles and the east side warehouse district might be terra incognita for much of Anglo Los Angeles, but for Woo’s customers, they are ideal locations. “If you say we’re in downtown L.A., people from Mexico are comfortable,” Woo says. “The same is true for people from China or Taiwan. All you say is, we’re near Chinatown or Monterey Park—in these places you are really closer to the world. This is where the information comes together.”

The resurgence epitomized by Toytown, the rapid growth in the entertainment industry, the continued vibrancy of the L.A. garment district, the new interest among developers in south Los Angeles: all these trends reflect the vibrant economic potential of central cities. Los Angeles's economic recovery makes clear that even poorer urban precincts possess enormous economic promise.

Surprisingly, a key factor promoting Los Angeles's recovery is Southern California’s polycentric, sprawling model of development, which has proved far more conducive to the emergence of small businesses than the old, heavily centralized model New York perfected. Though the Los Angeles area has long been derided as "suburbs in search of a city,” this decentralized structure has proved a blessing.

Journalists, urban politicians, and planners tend to dislike polycentric cities understandably—for their lack of focus and grandeur. With development dispersed throughout a region, such cities lack arresting skylines, spectacular entertainment districts, and throbbing train stations. In 1979, when sociologist John Kasarda of the University of North Carolina presented his findings on the advantages of polycentric cities to HUD officials in the Carter administration, he was, he says, virtually “booted out of town.”

Yet here’s the record since then: nearly all the fastest-growing metropolitan regions of the country—Atlanta, Charlotte, Dallas, Denver, Houston, Orlando, Phoenix—follow an essentially polycentric model, with the bulk of their economic activity scattered throughout different urban mini-centers and what author Joel Garreau calls “edge cities.” In 1970 downtowns accounted for about 80 percent of all office space nationwide; today they account for roughly half that.

In many polycentric cities, downtowns are the weakest link in the regional economy: according to Garreau's newsletter, Edge City News, vacancy rates for the central districts in Atlanta, Cleveland, Dallas, Los Angeles, Miami, and San Diego are five or more percentage points higher than those in the surrounding office districts. Downtown L.A.’s vacancy rate is over 20 percent; the rate in most suburban areas ranges from 9 to 15 percent. Dallas has a 35 percent vacancy rate; the Dallas suburbs, only 13 percent.

Polycentric regions like L.A. are laboratories for discovering what kind of municipal policies work best to encourage economic growth. Around the central city, dozens of smaller municipalities have developed their own distinct styles of urban governance, some more successful at attracting and nourishing business than others. In L.A. County, strong pro-business administrations in cities like Burbank, Glendale, and Culver City have enabled businesses from financial services to costume jewelry manufacturing to germinate, take root, and spread. All this clearly visible competition for business forces these smaller urban centers to stay friendly to entrepreneurship and resistant to the business-killing burdens imposed by an expanding municipal welfare state, excessive regulation, and politically powerful public-sector unions—burdens that all too visibly encumber the central city.

Consider in this regard the development of the L.A. region’s entertainment industry. Roughly 90 percent of its expansion has occurred outside of Hollywood, the city of Los Angeles’s historic movie district. This is not so much because the studios have moved as that more and more of the industry’s workers are freelancers or are employees of firms with fewer than ten individuals, working under contract for the major studios. Most such firms prefer low-rise buildings in nondescript neighborhoods near one of the studios in municipalities that are less hostile to business than the city of Los Angeles.

Burbank, for example, is closer to downtown Los Angeles than are many parts of L.A. itself. But the Burbank city government charges developers of office space a maximum of $6.38 per square foot in fees, less than half of what Los Angeles charges. Burbank's benefits are greater still for companies that occupy existing space. For the average provider of business services using 30,000 square feet, fees in Burbank average around $12,000, compared to $116,000 in Los Angeles; an electrical equipment manufacturer in Burbank must pay roughly $8,980 per year, his Los Angeles counter-part $23,860.

This disparity, suggests consultant Larry Kosmont of the L.A.-based consulting firm Kosmont and Associates, reflects the higher costs imposed by Los Angeles's expansive bureaucracy and larger welfare population. Equally important, says Kosmont, who has served as Burbank's director of community development and Bell Gardens' city manager, is that smaller cities have more responsive governments. No wonder, since most have populations under 100,000, compared with 3.5 million in L.A. proper. They don't suffer from the paralyzing balkanization that affects the Los Angeles city government, dominated by a 15-member city council whose constituents live in far-flung and wildly differing districts. Councilmen from the east and south sides of L.A., for example, oppose growth in the entertainment industry, since it doesn't directly benefit their districts. By contrast, Kosmont says, the councils in smaller cities, for obvious reasons, have “an easier time focusing on the whole picture.”

As a result, cities like Burbank can accommodate relocating or expanding businesses with remarkable promptness. Decisions that take the L.A. bureaucracy years can be made by Burbank in weeks. “I have windows of opportunity that open and shut in a matter of weeks,” explains one entertainment executive, who decided to move his 150-person firm from Los Angeles to Burbank. “I don’t have time for L.A. city hall to make the deal.”

These small cities constitute “urban villages”—dense agglomerations without big-city bureaucratic roadblocks. “This is small-town America in the middle of a big city,” boasts Bob Tague, Burbank’s present community development director. To preserve its small-town ambience, this predominantly middle-class city of 98,000 has worked to keep its streets clean, to wipe out graffiti, and to spruce up its once-desolate central area—the much-maligned “beautiful downtown Burbank”—into a pleasant, mildly busy shopping district. Tague and other city officials have worked closely with Burbank’s two major anchors, Warner Brothers and Disney, each of which has added upwards of half a million square feet of space, including Disney’s new animation center. They have also lured hundreds of smaller specialty movie industry firms, particularly in multimedia and post-production (the editing and dubbing of completed films and television shows). Firms like these have occupied another 750,000 square feet of new space. Future plans call for as much as 6 million more square feet just from Disney and Warner. Largely as a result of this expansion, Burbank’s unemployment rate—despite the loss of Lockheed and 14,000 aerospace jobs since 1989—is just 5 percent, 2 to 3 points below the county average.

Because of all this growth, Burbank’s revenues are surging, enabling it to begin keeping libraries open over the weekend, just as Los Angeles County is cutting back and contemplating closures. Burbank has also appropriated new funds to help fix schools, maintain roads, and finance other amenities crucial to media firms.

Other examples of booming urban villages abound. Nearby Glendale, which previously had almost no entertainment industry presence, now counts entertainment and multimedia as the largest employers in this city of 198,000. That presence will soon swell with the opening of a new Dreamworks animation facility and the arrival of a large administrative unit of the Walt Disney Company, which will occupy seven floors of a 14-story tower. Demand for space is so strong that a Korean developer has announced plans to build a new 24-floor office tower in the city.

It’s not just conservative middle-class urban centers that are showing renewed economic life, but also predominantly minority ones like Compton, Inglewood, and Southgate, which are far more business-friendly than Los Angeles. Even left-wing officials in cities like Santa Monica and West Hollywood realize that anti-business policies would drive out the firms that pay for such social programs as they have.

The success of these urban villages has spurred L.A. proper to try to improve its own business climate. “It really comes down to the competitive environment,” observes Gary Mendoza, Los Angeles’s deputy mayor of economic development. “Competition drives improvement in the private sector and also in the public sector.” Mayor Richard Riordan formed the Los Angeles Business Team, a 15-person “strike force” that tries to identify and work with firms contemplating expanding or leaving the city. The team assigns an individual caseworker to a firm to help it get through the bureaucratic process—a matter of course in places like Burbank. The team has persuaded such firms as Brenda French, a West Los Angeles knitwear maker, and Carole Little, a major apparel firm near downtown, to stay in the city. “They helped us with the permits so everything could go very smoothly,” says French, whose firm employs 92 people and has annual sales of $6 million. “And on top of it, they were very nice. It was not like working with the city.”

More recently the city has begun reforming its fee structure—still the region’s highest, usually by a large margin. The City Council has reduced utility taxes for telemarketing firms and has slashed sewer hookup fees—which can run into the millions of dollars—by two-thirds. In a move to stem the flight of businesses to Burbank and Glendale, the city this year approved a cap on business license fees at roughly $25,000 for entertainment-related companies in the adjacent, rundown North Hollywood area. Formerly these licenses could cost upwards of $100,000.

Both Riordan and Mendoza admit that these changes have been far from sufficient to compete with the peripheral cities in terms of either amenities or taxes. But market conditions may soon give L.A. a boost. With soaring rental rates and tightening vacancies in the smaller cities, languishing districts like Hollywood—a neighborhood of Los Angeles, not a separate city—are becoming competitive again for the first time in decades. There are now 37 new projects and 27 expansions on tap for Hollywood, up from zero three years ago. These include upscale restaurants, office-building renovations, and two new entertainment-oriented museums on Hollywood Boulevard, both scheduled to open this fall.

Riordan’s efforts to make L.A. competitive with the peripheral cities represent a break with the policies of his predecessor, Tom Bradley, who dreamed of transforming the long-declining downtown area into something more akin to midtown Manhattan. Bradley's expansive vision included a multi-billion-dollar subway system, new high-rises, and new cultural institutions. His plan couldn't stand up to the economic shocks of the early 1990s. Today, despite the recovery, downtown struggles with 20 percent or higher vacancy rates. The push to turn downtown into a bustling cultural center has failed; the subway has become a laughingstock.

Sensibly, Riordan has abandoned many of Bradley’s grandiose centralized visions. The mayor's main goal now is finding ways—given a tight budget situation—to lighten the tax and regulatory burden for smaller firms. Major overhauls of the city’s permitting and tax programs are expected later this year. “Everything is being reconsidered,” Mendoza says. “We recognize that the L.A. economy is changing dramatically.”

What can New York learn from Los Angeles? The two cities have much in common. They are America's premier centers for international trade, culture, communications, fashion, tourism, and business services. Each is in the midst of a radical demographic transformation, driven by an inflow of immigrants—roughly 100,000 annually in Los Angeles and 80,000 in New York—and by a record out-migration of native-born residents. Each suffers from high costs, an aging infrastructure, dysfunctional bureaucracies, and the usual array of urban social scourges.

Los Angeles is rebounding from the enormous setbacks of the past five years. New York could too—but its leaders need a change of attitude. Above all, they must stop looking at New York as simply Manhattan and start recognizing the enormous economic potential of the outer boroughs, with their concentrations of immigrants and entrepreneurs. Just as in Huntington Park and the San Gabriel Valley, immigrants are revitalizing neighborhoods like Astoria and Flushing in Queens.

But they, too, will flee New York unless the city drastically reduces the costs of doing business. Only by lightening the burdens of taxation and regulation that drive entrepreneurs away—as Burbank has done and Los Angeles is belatedly trying to do—can New York mount a real, lasting economic comeback. Such a step will require a change in New York's governmental culture. “New York has historically been oriented to the Fortune 500—it’s a system set up for large companies and has disincentives for smaller companies,” says John Kasarda of the University of North Carolina. “New York will offer $100 million for a large firm to be in Manhattan, but it maintains impossible regulatory and tax burdens on small companies. The orientation is to go for the trophy rather than to open to entrepreneurs.”

Such an approach is profoundly misguided in today's economy: since 1980 the Fortune 500 have reduced employment by 5 million workers. Tax concessions to large companies force smaller firms to pick up more of the tax burden. Barring a cutback in the extravagant costs of city government, the breaks the Giuliani administration and its predecessors have given to large firms such as Conde Nast can be made up only by keeping taxes crushingly high for the smaller firms that in Los Angeles account for virtually all new employment gains.

Another important step in reviving New York would be to decentralize decision making. The city would have to devolve real power—over taxes, fees, and zoning— to officials elected at the borough or neighborhood level. A poorer neighborhood, for example, should have the freedom to adopt policies that would enhance its advantages as a location for warehousing or light distribution without imposing Manhattan-like costs on business. Under such a regime, parts of New York could see Burbank- or Glendale-style economic expansion.

New York's future lies not in boasting about being the "capital of the world" but in facing the economic challenges of an ever more competitive environment. That's a lesson Mayor Riordan is learning. "We are seeing a shift to a new wave of business leaders who are used to dealing with a different kind of economy," the Los Angeles mayor says. "L.A. has the best future of any major American city. It will be dominated by small companies, ethnic business, international trade. It will be very good—but also very different."

 

 

 
New York can learn a lot from a recovery that immigrants, small business, and decentralized government made.
City Journal Summer 1996.
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