Threats to Financial Services and Information Industries

New York is really two cities. It is an international city. which is an equal to London and Tokyo, as well as a domestic city vying with Dallas, Chicago, and other regional centers. As an international city. New York has benefited by the immigration of foreign firms, and of American firms that want to have access to foreign banks. The movement out of firms in the late 1960s and 1970s has been more than compensated by the growth of international-based activities, some of which are domestic, and some of which are foreign. It is essential to recognize that firms moving out of New York is not a new phenomenon. Firms have been moving out of New York ever since the 19th century, when manufacturers went to Paramus and Brooklyn because it was too expensive to be in Manhattan. We've been fortunate to have these industrial colonies on the Hudson and East Rivers. Those areas are changing now. but for 150 years they have served as the location for activities which couldn't afford to be in New York, or which didn't want to be.

We have a long history of move-outs, but the pertinent question is. what do the recent ones mean? There have been two patterns of move-outs. On the one hand, we have the world pattern, where the move-outs have been replaced by foreign firms. But on the other hand, we have move-outs to other domestic cities.

New York has lost its monopoly position in many ways, first and foremost because we are no longer the single port of entry for ships or planes. Kennedy Airport is as much a liability as an asset in today's air transportation system; no one would rather fly from Los Angeles to London through Kennedy, than go directly. New York used to be the place people had to come through by ship or by plane. But with deregulation of air service, New York as the principle point of departure and entry has been diminished. This is important because it allows other cities to function internationally.

As a domestic city, we are more costly. Consequently, we are going to continue to lose a lot of firms which employ large numbers of middle-income workers. What New York has to offer the domestic firms is face-to-face activity for specialized services, such as finance, advertising, law. and accounting. New York has made "face-to-face" our principle activity, because more information can be purveyed in person. New York has done that through lunches and dinners and lots of other ways. As a domestic city, our only comparative advantage is bringing people together to facilitate the exchange of information. In contrast, most cities in America are designed to not do it. If you go to Dallas, there's no one on the street: it's a series of office buildings, and there's no pedestrian life. Most of the cities in the Southwest are designed so you never leave your car, garage, or office building, because the heat and the humidity are so severe. But it is the interaction of people outside their own workplace which allows people to learn about things. It is the density of contacts which gives New York its comparative advantage with regard to other domestic cities.

What does this mean for New York's long-term future? Some of the move-outs over the past decade are not going to be ones that can be retrieved or changed, because they are due to corporate restructuring. New York is not going to overcome corporate strategies and policies which have led them to establish locational sites in other parts of America.

What can the City do? First, realize that we really have no export except information. The three leading commodities which leave the port of New York are waste paper, waste products and garbage. We import a lot. but what we bring to the global economy is people with ideas and people with information. Most of our exports travel through people's bodies and over telecommunications lines. New York has to realize that the ability to bring people in from abroad is crucial to our long-term success. New York's preeminence is because it is a gateway to the rest of the country and an information hub for the rest of the world: not because it has any particular program to keep domestic firms here. The Mayor can entice a few hundred people from Chase Manhattan Bank and Morgan Stanley to work in Brooklyn, but that's irrelevant to the City's future. For every firm that moves to Brooklyn, five move to Jersey City, and they move there because they're able to get all the benefits of the New York labor force with none of the aggravation of the New York transportation system.

There will be a constant flow of firms in and out and we have to take our losses. The City couldn't work unless some firms left. When E.F. Hutton went under about a year ago, everybody said. "Oh, my God!" But within three months a German bank took over most of the lease. The idea that firms move out, and then there's empty space, is not necessarily the case. There is a gradual restructuring of who is occupying space.

Furthermore, Manhattan is no longer limited geographically to lower Manhattan and midtown. It's moved to the West Side, both because of the City's zoning policy, and because firms are trying to get huge office buildings which can accommodate their communications equipment. There has been a spatial reorganization of New York's activities in which foreign banks and foreign firms have taken over - just as foreign ghettos did a hundred years ago. I always recommend that people go down to Water Street: it looks like the British have landed there. You have Standard Charters, Barclays, National Westminster.

Public policies should recognize the role of New York in the world economy, rather than in a domestic economy. We must recognize that many firms will leave because this is a high-cost environment, and that efforts to subsidize that high cost are paid for by middle-income people or by small firms. There's only one NBC who'll get media attention to get that type of assistance: there's only one Chase Manhattan Bank to get that subsidy. Yet all those small firms that move out are just as important as many of the large firms.

Finally, maintaining a skilled workforce is crucial, because the information workers require higher levels of education. Schools have been failing in New York for two decades: there's nothing new here. The reason it's an issue today is that suddenly the economy cannot absorb the unskilled workers. Entry level skills are higher. The economy is imposing these workforce requirements on the school system, and this will continue. I'm shocked that Jersey City is booming despite the fact that its school system is worse than New York City's: it's almost on the verge of a state takeover. This indicates firms will move to areas where they don't have a good school system, if they can access a good labor market New York's ability to overcome its school system has been due to a transportation system that brings people in from many parts of the region.

 

Originally published in Citizens' Budget Commission Quarterly
Winter 1989