What Will It Take to Bring Back Struggling Rust Belt Cities?

Image via Shutterstock

Image via Shutterstock

America is replete with struggling post-industrial cities.  Massive efforts have been made, and huge amounts of money spent, to try to bring them back.

Yet these have basically all failed.

What will it take to bring these cities back?

Let’s look at the case studies of cities that actually have come back, including many of the largest ones like New York, London, and Boston. In the 1970s, the future looked very bleak for them. New York nearly went bankrupt.

Today their problem is that they are so in demand that housing prices have gone through the roof.

What changed?

It’s tempting to subscribe to the “great man” theory of history and suggest that it was simply superb leadership that brought them back. But did all of these cities suddenly happen to get great leadership at the same time? That seems dubious.

What fundamentally changed for these cities was the market. Big cities came back into fashion again. And especially these large traditional financial centers.

Saskia Sassen literally wrote the book on this. It’s called “The Global City.” She documents how globalization allowed many functions like manufacturing to be distributed all over the world. But at the same time, it created demand for new types of financial and producer services to help firms manage these complex, globalized networks. These new services required highly specialized skills that were subject to agglomeration economics. Those skill pools were found only in select locales. She called the global cities, and gave New York, London, and Tokyo as the paradigmatic examples.

Michael Bloomberg. Image by Flickr/Rubenstein - CC BY 2.0

Michael Bloomberg. Image by Flickr/Rubenstein – CC BY 2.0

But what about leadership? Doesn’t that count for something?

Yes, leadership most definitely matters, but it needs to be seen in the context of the market. I like to think of it as related to the finance concept of Alpha. I’m simplifying here, but Alpha is a measure of portfolio return relative to a benchmark index.  So if I’m the investment manager of an actively managed mutual fund, Alpha is the return I’m able to generate over and above the S&P 500 Index.

If my portfolio returns 8%, but the market also returned 8%, I’m really contributing no value as a portfolio manager. It’s only if I beat the market that I’m showing that I’m worth something.

It’s the same with cities. Leadership needs to be judged relative to the performance of the market.

In the case of New York, many like to point out that crime declined nationally. Yes, that’s true. But in New York it went down a whole lot more than the nation. It outperformed the market. That’s the measure of leadership. We see this especially clearly when contrasting New York with what’s going on with the Chicago police right now.

So New York benefited from two things: market change and high Alpha leadership in the form of Giuliani and Bloomberg.

Had Giuliani or Bloomberg been mayor in 1976, New York’s performance may well have been better that it was, but it’s highly unlikely that it would have seen the performance of the 90s and 2000s. Because the 1970s were a bear market for cities.

We can see this in the case of Indianapolis. Indy had top caliber leadership for about 30 years from 1968 to 1999 in the form of mayors Richard Lugar, Bill Hudnut, and Steve Goldsmith. During their era, Indy earned the label “Diamond of the Rust Belt” for its surprising vitality relative to the rest of its battered region. This shows leadership can make a different in terms of outperforming in a weak market too.

Yet even after three decades of effort by these guys, very few people lived in downtown Indianapolis. It wasn’t for lack of trying. But the market wasn’t there yet. Today downtown Indy has a residential building boom underway. Unsurprisingly, we see the same in virtually every regional peer city.  Even great leadership couldn’t completely overcome marketplace forces.

Which brings us to many of these Rust Belt cities that haven’t yet come back. If we apply this framework, what we see is that these cities aren’t likely to come back until the market changes. They are simply not in demand in the marketplace today. That’s the cold reality.

That means any efforts to attempt to bring them back in defiance of the market is likely to fail, no matter how good the leadership or how much money is spent.

In short, we need to be patient for the market to change.

Will that ever happen? Nobody can predict the future. Certainly few would have predicted New York’s resurgence back in the mid-70s.

Today we already see signs of renewed life in cities like Pittsburgh, Cleveland, and even Detroit. This is not to say that those cities don’t have big, big problems. But for at some people and businesses, they are a much more attractive product than they used to be.  My study on their brain gain makes this clear.

If you look at where these signs of life are, it’s generally in cities with critical mass: over a million in regional population, a major airport, a deep enough talent pool and thick enough labor markets, and a sufficient quantity of amenities.

Smaller cities, apart from select college towns, are not nearly yet in the same place. Again, we can’t say for certain if they ever will be, though we should not give up hope either. But we also most likely can’t bring them back with some master civic strategy and a bunch of subsidies.

Assuming a current bear market for smaller Rust Belt cities, and a high Alpha leadership in place in them, what then would be the best policies to pursue?

This is an area I will be devoting some ink to in 2016. But to give you a tease, the key is to do your best to be ready for when the marketplace change comes. Cities should do this by addressing legacy liabilities (pensions, environmental, etc) and restructuring core services.

City leaders can’t control the marketplace, so they need to look to what they can control and what is directly within the scope of what they should be doing, like delivering public services.

from The Urbanophile
http://www.urbanophile.com/2015/12/13/what-will-it-take-to-bring-back-struggling-rust-belt-cities/

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