Section » Michigan Cities
Conventional wisdom is the places with the lowest costs (so-called business friendly) have the best economies. Think again!
If that were true New York City–particularly Manhattan–and San Francisco should be collapsing. Instead they are surging. We explored Manhattan’s success in a previous post. Lets turn out attention to San Francisco, most likely the second most expensive place in the country. High real estate prices, high state and local taxes and high wages (strong unions too). The recipe we are told over and over again that leads to economic stagnation, if not, ruin.
But when you get off planet ideology, what you see in San Francisco is the kind of investment that every state and region in the country wants. This is detailed in a recent New York Times report entitled “Twitter Helps Revive a Seedy San Francisco Neighborhood”. And its not just Twitter that have chosen San Francisco as home. The article details the decision to locate there by tech start ups like Spotify, Square and Yammer, along with tech giants like Google, Amazon, Microsoft and Yahoo.
These companies could locate any place in the U.S.–actually anywhere on the planet. So why choose high cost San Francisco? As the Times reports: “The emphasis on San Francisco signifies how Silicon Valley, an area extending south from just below San Francisco to San Jose, Calif., no longer has a grip on technology companies. About 18 months ago, tech companies started moving or expanding here to be closer to their employees.” (Emphasis added.)
For profit companies are increasingly locating in high cost places because they get something for their money. In this case talent/human capital. The asset that Governor Snyder has told us matters most to economic success in the 21st Century. As he wrote in his special message to the legislature on talent: “In the 20th century, the most valuable assets to job creators were financial and material capital. In a changing global economy, that is no longer the case. Today, talent has surpassed other resources as the driver of economic growth.” (Emphasis added.)
Michigan has chosen to ignore talent as the main driver of economic growth. Instead choosing to focus on lower business costs. Big mistake! As I wrote in my Manhattan post:
“Turns out in the real world all those so-called liabilities are assets that lead to prosperity. A big city that works, a government that provides quality basic services and amenities, terrific alternatives to driving, density and welcoming to all. Combine those features with an entrepreneurial culture and you have a place where talent – from across the planet – wants to live and work. And where talent concentrates you get growth and prosperity, not decline and falling income and employment. To get back on the path to prosperity Michigan needs far more –not less–of what Manhattan (and San Francisco) has.”
In our 2006 A New Agenda for a New Michigan we wrote: “For many Michiganians, vibrant central cities are part of the past. No longer relevant or just something you visit in unique places like Manhattan, Toronto or Chicago. Think again! They are an important ingredient to future economic success. The pattern across the country is clear: high prosperity metropolitan areas have central cities with a concentration of knowledge workers. Michigan employers who are recruiting young talent from across the country understand this. Those we talked with for this project told us that the absence of a vibrant central city impedes their ability to attract talent.”
Today its even clearer that central cities are a major engine of economic growth. Unfortunately that reality is not reflected in Michigan’s policy priorities. Its another major area where we are pursuing 20th Century policy in a world that has changed fundamentally. As former State Treasurer Robert Kleine demonstrated in a terrific Detroit Free Press op ed the state has not made central cities a priority since Governor Milliken four decades ago. Big mistake.
Knowledge-based private sector employers increasingly get it. Think Quicken Loans here. The New York Times recently featured Amazon’s new headquarters in a formerly not great Seattle neighborhood. The Times writes:
The setting is significant. In casting its lot in the center of a congested, bustling city, Amazon has rejected the old model of the suburban company campus that is typical of Silicon Valley and the technology ring road around Boston. The old way is perhaps most vividly exemplified by Microsoft. Its offices, and most of its 42,000 local employees, are about 18 miles from downtown Seattle, in the suburb of Redmond. …
Other technology companies are moving into urban spaces. Twitter and Dropbox, the social networking and online storage services, have made San Francisco home, while Tumblr and Etsy, blogging and shopping sites, are in New York. Google has huge urban spaces from Paris to Pittsburgh. The appeal of cities to potential employees is part of the reason for the shift. An urban setting, with access to good restaurants, nightclubs and cultural attractions, has become as important a recruiting tool as salary or benefits for many companies. (Emphasis added.)
… Mr. Schoettler, Amazon’s real estate director, said environmental considerations were an important factor in the company’s decision to remain in Seattle, along with the type of employee that an urban location attracts. “The energy and excitement from employees being in an urban environment — I hear it daily,” said Mr. Schoettler, who walks to work. “A lot of people don’t even have a car. They want that urban experience right there.”
In a talent driven economy –– where talent increasingly wants to live and work in a vibrant, walkable central city neighborhood –– companies are moving to where the talent is. And its not just established companies like Amazon and Quicken its also venture capital backed start ups. In a terrific series on where venture capital is investing Richard Florida for Atlantic Cities is documenting this move of technology start ups from what he calls suburban nerdistans to central cities.
In an overview article for the series entitled The Connection Between Venture Capital and Diverse, Dense Communities Florida writes: “When all is said and done, venture capital and start-up activity today is associated with denser, more talent-driven, more diverse and innovative metros, reflecting the increasingly spiky nature of America’s economic landscape.” Be sure to check out his articles on San Fransisco –– which now is garnering more venture fund investment than Silicon Valley (amazing!) and the big east coast metros (New York, Boston, and believe it or not Washington DC) where the central city is becoming the big player in venture capital investments. You read that right DC is no longer just a government town (even more amazing).
As Florida writes: Long gone are the days when high-tech startups were overwhelmingly located in sprawling suburban nerdistans. The center of gravity for venture capital and startup activity in the Bay Area today appears to have shifted to central cities. “For all its power, Silicon Valley has a great weakness,” wrote legendary Silicon Valley investor Paul Graham, its “soul-crushing suburban sprawl.” But, he added, “a competitor that managed to avoid sprawl would have real leverage.” That “competitor” has turned out to be nearby San Francisco. … This is of course in line with what urban theory has long held: That it is dense, diverse and dynamic cities filed with flexible and reconfigurable old buildings that are the real font of innovation.
Whether its established companies like Amazon or technology based start ups this is the kind of investment that is central to every state’s economic development strategy. These are the investments everyone wants. Turns out to get them you need central cities that are attractive places for mobile talent to live and work. Not exactly the current Michigan economic policy priority. The sooner we learn this new reality the better off we will be.
Just finished reading the End of the Suburbs by Leigh Galagher, assistant managing editor at Fortune. Highly recommended.
She details, with data and stories, the new reality that more and more Americans want to live in high density, walkable, mixed use neighborhoods. Where walking and transit are as important as driving. That the odds are that we have a big over supply of housing, retail and everything else in what we think of as the typical suburb and exurb: big lot, big house, in single use neighborhoods where you have to drive long distances for anything and everything. And an equally big under supply of housing in walkable neighborhoods in both the suburbs –– predominantly inner ring and with good transit –– and central cities.
Talk about an area where we have politics –– on a bi-partisan basis both in Michigan and across most of the country –– that are designed to recreate the 20st Century. Not sure if this out-of-touch framework is worse when it comes to housing and neighborhoods or transportation (as we explored here). They are linked. And together help saddle Michigan with a preponderance of places where people increasingly don’t want to live. Not smart! And because mobile talent –– particularly college educated Millennials –– moves to where they want to live, they take the future of the Michigan economy with them when they move to those regions that offer them the walkable quality of place they increasingly are demanding.
My friends, many of whom have kids that have left Michigan for Chicago, New York and other big cities, are always astonished at the high prices their kids pay for central city housing. What I tell them is that their kids are not dopes, they know they can get the same house or apartment in Michigan for less –– in many cases far less –– but they are paying high prices –– normally rent for a generation that is increasingly renting before they have kids –– for the neighborhood, not the house.
They are looking –– and pay more –– to live in neighborhoods that look entirely different from the ones they grew up in in the suburbs. Where you can walk, bike or take transit to what you want or need to do, rather than drive. Where you can rent, not own. Where your neighbors and lots of other folks are nearby, not far away. Where their is an exciting and diverse nightlife nearby that you can enjoy everyday, not miles and miles away which you have the time to get to only every once in a while. Where houses are oriented to the front porch, not the back yard. And on and on and on.
Unfortunately our politics are far behind these trends. (As Galagher writes even far behind the big suburban/exurban housing developers, who increasingly are building walkable neighborhoods in both the suburbs and central cities.) Where our policies and politics in taxation; zoning and other regulatory areas; housing finance; transportation; etc. still greatly favor what Chris Leinberger calls drivable suburbanism over walkable urbanism. This is another area where we are having a hard time learning that what made us prosperous in the past, won’t in the future.
(For those interested in learning more about this topic, in addition to the End of the Suburbs, I also recommend reading Chris Leinberger’s The Option of Urbanism and Alan Enrehalt’s The Great Inversion.)
What concerns me most about Michigan’s politics is how much of it, on a bi-partisan basis, seems designed for the 20th Century. We seem to be having a hard time learning what made us prosperous in the past, won’t in the future.
Our fixation on trying to once again make Michigan a factory-based state is at the center of our last century politics. But so is our approach to transportation. In some ways its even worse. As many of our policy makers seem to be ok with returning to 19th Century gravel roads rather than raise the gas tax even with across the board support from the business community for this user fee approach to road funding.
One of the reasons we need a gas tax increase is people are driving less. And this started before the Great Recession. This is not about we can’t afford to drive, its above changing consumer preferences to live in denser communities where they can walk, bike and use transit, rather than drive everywhere often for what seems like forever. Rick Haglund in a MLive article is one of many who has written about the Millennials, among others, driving far less than their parents. Haglund writes: “A new University of Michigan Transportation Research Institute study found that by most measures, driving miles peaked in the United States in 2004, several years before the Great Recession and high gas prices hijacked consumers’ wallets. Michael Sivak, who authored the study, said the decline in miles driven is mainly a result of more telecommuting, increased use of public transportation, people relocating to cities and a decline in young drivers.” (Emphasis added.)
The trend is clear that 21st Century transportation systems are going to need to more balanced. Not just designed for cars, but for walking, bikes, and transit, transit, transit. As we have written before (here and here), in big metros like Detroit that should include rail. Places with this less car centric transportation systems are going to do better at retaining and attracting mobile talent. And places where mobile talent concentrate will be the most prosperous. End of story!
And yet Lansing, if they can cobble together the courage and votes to fund transportation, is proposing to spend nearly all the new funds on fixing and, even worse, expanding roads and doing it in a way that favors rural roads over the roads where people live. If we are serious about building a 21st Century transportation system there are four steps we should take in whatever transportation funding initiative emerges in Lansing:
- Fund roads on the basis of population, not road miles.
- Increase the funding for transit to the state constitutional maximum
- Adopt complete streets as the basis for transportation design rather than the current policy of ever wider and wider roads to move cars faster and faster
- Stop major road expansion projects like the widening of I94 and I75 in metro Detroit.
For those interested in learning what a 21st Century transportation system should look like and how to build it I highly recommend Walkable City by Jeff Speck. As Speck makes clear, we know what 21st Century transportation looks like because leading edge communities across the country are building it. Its time for Michigan to join them.
In two recent New York Times posts Paul Krugman has explored the economic benefits dense regions enjoy compared to those characterized by sprawl. They are worth checking out.
The first looks at the Detroit bankruptcy. Its entitled “A Tale of Two Rust-Belt Cities“. Krugman asks: “Here’s a question: is the crisis in Detroit simply a function of the industrial decline of the U.S. heartland, or is it about internal developments within the metro area that have produced a uniquely bad outcome?” He looks for the answer by comparing metro Detroit to metro Pittsburgh. As he notes one declining, the other expanding. Krugman writes:
“… Obviously, however, Detroit’s central city has collapsed while Pittsburgh has had at least something of a revival. The difference is really clear in the Brookings job sprawl data (pdf), where less than a quarter of Detroit jobs are within 10 miles of the traditional central business district, versus more than half in Pittsburgh. At this point, … Pittsburgh is showing a lot of resilience; it seems to have managed to diversify its economy, and in fact is more than matching national employment performance. Detroit, despite the auto rescue, isn’t — and, of course, its center did not hold. It’s hard to avoid the sense that greater Pittsburgh, by taking better care of its core, also improved its ability to adapt to changing circumstances. In that sense, Detroit’s disaster isn’t just about industrial decline; it’s about urban decline, which isn’t the same thing. If you like, sprawl killed Detroit, by depriving it of the kind of environment that could incubate new sources of prosperity.” (Emphasis added.)
Krugman also explores the connection between density/sprawl and economic mobility. This is based on the must read new study from the Economic Mobility Project of economic mobility –– the ability of those who grow up at the bottom to move up the economic ladder. (A great summary, with terrific interactive graphs, from the New York Times can be found here.)
As one might expect metro Detroit is one of the laggards. A place where those at born at the bottom have a small chance to move up the economic ladder. In a post entitled “Stranded by Sprawl” Krugman explores why metro Detroit and metro Atlanta –– two very different metros –– both are near the bottom of the economic mobility rankings. He writes:
“Yet in one important respect booming Atlanta looks just like Detroit gone bust: both are places where the American dream seems to be dying, where the children of the poor have great difficulty climbing the economic ladder. In fact, upward social mobility — the extent to which children manage to achieve a higher socioeconomic status than their parents — is even lower in Atlanta than it is in Detroit. And it’s far lower in both cities than it is in, say, Boston or San Francisco, even though these cities have much slower growth than Atlanta. So what’s the matter with Atlanta? A new study suggests that the city may just be too spread out, so that job opportunities are literally out of reach for people stranded in the wrong neighborhoods. Sprawl may be killing Horatio Alger.”
(By the way race did not turn out to be a major contributor to the differences between regions. As Krugman writes: “When the researchers looked for factors that correlate with low or high social mobility, they found, perhaps surprisingly, little direct role for race, one obvious candidate.”)
Incubating new sources of prosperity and improving economic mobility are both outcomes that metro Detroit desperately needs. That more density –– particularly a dense/vibrant central city –– and far less sprawl are an important part of the recipe to get both is a lesson metro Detroit needs to learn. The sooner the better.
The best commentaries on the Detroit bankruptcy I have read are a Forbes article entitled “The Unions Didn’t Bankrupt Detroit, But Great American Cars Did” and a Robert Samuelson column for Real Clear Politics entitled “Reinventing Detroit”.
Both make the point that the chief cause of Detroit’s collapse is the region (not just the city) not moving away from the economy of the past for way too long. That its over reliance on the auto industry –– and particularly auto factories –– dooms the region to slow economic growth. And slow economic growth makes almost inevitable financial woes not just for the industry but also for local governments particularly those where the poorest in the region are concentrated.
This analysis is that the fundamental challenge for the city and region is economic, not political. Yes corruption, mismanagement, legacy costs, state budget cuts, white flight, etc. contributed to the bankruptcy. But at its core the region and city are not going to have prosperous citizens and local governments, schools, etc. until and unless metro Detroit becomes a competitive 21st Century economy rather than relying (more like wishing and hoping) on the old auto factory economy that made us one of the most prosperous places in the last century.
Forbes writes: “Put simply, Michigan and its city most known for the rise of the automobile clung to a business – car manufacturing – that was long ago rendered yesterday’s commercial news. And just as Silicon Valley would be destitute too if its companies used limited U.S. labor to manufacture computers that anyone can make, Detroit is bankrupt because its biggest employers still manufacture – as opposed to simply design – cars that anyone can make. The mainstream punditry will talk about unions, crime and high taxes as the causes of Detroit’s bankruptcy, but the real answer is rooted in something far more basic: cars are easy to make, and Detroit’s biggest employers make cars. Detroit will revitalize itself once its biggest employers migrate toward that which isn’t so simple.”
Samuelson writes: “In the countless Detroit post-mortems, many potential villains have emerged: the ineffectiveness of Coleman Young, mayor from 1974 to 1994; white flight (from 1970 to 2008, the white portion of the city’s population fell from 56 percent to 11 percent); costly government workers’ pensions. But at bottom, Detroit’s failure resulted from its success. It became a prisoner of its dependence on the auto industry. … But what made short-term sense spelled long-term suicide — for companies, workers, Detroit and Michigan.”
Samuelson goes on the explore the way out. Once again its primarily economic, not political. He interviews Edward Glaeser, the author of the terrific Triumph of the City. Samuelson continues:
“What cities do is transfer information,” says Glaeser. They’re incubators for new ideas and industries. This describes the Detroit of the early 1900s, when dozens of car companies formed annually (peak year: 1907 at 82). Though it doesn’t mirror post-war Detroit, it does suggest what the city and state need to become. They aren’t alone in suffering economic dislocation. In 1971, two Seattle realtors posted this funny-dreary billboard: “Will the last person leaving SEATTLE — Turn out the lights.” Employment at Boeing had plunged from 100,800 in 1967 to 38,690. In the late 1960s and early 1970s, New York City lost more than 300,000 manufacturing jobs, led by the garment industry, reports Glaeser. But the losses weren’t fatal. The Seattle area now has Microsoft, Amazon and Starbucks; New York has recovered, led in part by a resurgent (and maligned) financial industry.
Samuelson concludes: “What Detroit teaches is that those who deny economic change often become its victims.“
As we have seen Minnesota has better economic outcomes on every metric that matter to families trying to pay the bills and save for their retirement and their kids college education. Its not close. The main reason for the out performance is that Minnesota is over concentrated in the knowledge-based service industries that have faster employment growth and higher wages. Indiana is under concentrated in those industries.
The main ingredient that allows Minnesota to participate more in the knowledge sectors of the economy is human capital. As Governor Snyder says: “Today, talent has surpassed other resources as the driver of economic growth.” Specifically the proportion of adults with a four year degree or more. Which now is the best predictor of a state’s per capita income. Here again Minnesota is one of the leading states, Indiana near the bottom.
Here are the details:
- Minnesota is 10th in proportion of adults 25 and older with a four year degree or more at 32.4%
- Indiana is 43rd in proportion of adults 25 and older with a four year degree or more at 23.0%
- Minnesota is 8th in the proportion of 25-34 year olds with a four year degree or more at 37.2%
- Indiana is 33rd in the proportion of 25-34 year olds with a four year degree or more at 27.0%
As we have explored extensively, 25-34 year olds are the mobile young talent every state has made an economic development priority. There is a strong case that where they settle will determine whether or not a state will be prosperous or not in the future. If that is true Minnesota is going to continue to be prosperous, Indiana not.
- In 2011 there were 276,000 young professionals in Minnesota compared to 224,000 in Indiana
- From 2006 to 2011 the number of young professionals in Minnesota grew 17.7% in Indiana 6.1%
- Minnesota is 21st in total population and 17th in population of 25-34 year olds with a four year degree or more
- Indiana is the reverse, 16th in total population and 20th in population of 25-34 year olds with a four year degree or more
As is true in most states the difference is in the concentration of college educated adults in their big metro and its central city.
- Metro Minneapolis four year degree attainment rate is 37.2%, metro Indianapolis is 29.2%
- For 25-34 year olds its 42.9% compared to 34.3%
- Metro Minneapolis is home to 226,000 young professionals, metro Indianapolis 100,000
- Minneapolis and St. Paul combined have 62,000 young professionals, the city of Indianapolis (which is a county) 40,000
As we explored in my last post, 25-34 year olds with a four year degree or more are concentrating in big metros, with a high proportion living in their central cities. Seventy four percent of young professionals are living in one of the 54 regions with a population of one million or more and in those metros one third live in the central city(s). The concentration is even greater in the top ten where 42% live with 35% of them in the central city.
The top ten are:
New York | Los Angeles | Washington DC | Chicago | San Jose/San Francisco | Boston | Philadelphia | Dallas | Atlanta | Houston
But the clear winner is the New York City CSA. This now four state region has more than 1.3 million young professionals living there. That’s 10% of all young professionals in the country. This compares to 7% of the total population in the country living in the region. Even more astonishing is that New York City has home to more than 650,000 young professionals. That’s 5% of the young professionals in the country choosing to live there. Double its share of the total population of the country. Forty eight percent of the region’s 25-34 year olds with a four year degree or more live in New York City.
That means that New York City alone has roughly double the young professionals residents as the entire state of Michigan: 650,000 compared to 333,000.
So what is it that attracts so many young professionals to the New York City region and city? Certainly not low costs (taxes, housing, cost of living, etc. are among the highest in the country). It isn’t the weather. Nor is it necessarily just a job. Although that matters. The region ranks 39th among the 54 metros with populations of one million or more in the proportion of those with a four year degree or more that are working.
Mayor Bloomberg in a Financial Times column provides an explanation of what matters most to attracting young professionals. He wrote:
The most creative individuals want to live in places that protect personal freedoms, prize diversity and offer an abundance of cultural opportunities. A city that wants to attract creators must offer a fertile breeding ground for new ideas and innovations. In this respect, part of what sets cities such as New York and London apart cannot be captured by rankings. Recent college graduates are flocking to Brooklyn not merely because of employment opportunities, but because it is where some of the most exciting things in the world are happening – in music, art, design, food, shops, technology and green industry. Economists may not say it this way but the truth of the matter is: being cool counts. When people can find inspiration in a community that also offers great parks, safe streets and extensive mass transit, they vote with their feet.
Protect personal freedoms, prize diversity, offer an abundance of cultural opportunities and offer great parks, safe streets and extensive mass transit. That is the priority list if Michigan wants to be competitive in retaining and attracting young talent.