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Brighter Lights For Big Cities


Social Issues: URBAN AFFAIRS

BRIGHTER LIGHTS FOR BIG CITIES

The New Economy needs talent and wiring. Metropolis has lots of both

Publicis Technology Ltd., a creator of interactive Internet advertising, is a hot company on the frontier of the information economy. But its offices aren't in Silicon Valley or Redmond, Wash. Only in downtown San Francisco, says Executive Vice-President Andrew Hayman, can Publicis find the skilled, innovative workers it thrives on. "The lifestyle that the city provides for us, the input that spawns creative energy, is everywhere," he says. In San Francisco, "we are at the center of the universe for new media in advertising."

On the other side of the continent, Merrill Lynch & Co. is wrestling with internal telecommunications demand that has soared 300% since 1995. Its voice and data networks link 57,000 employees in 700 U.S. offices and dozens overseas, and provide online services to millions of customers. In New York City, where telecom suppliers are installing vast fiber-optic networks, Merrill gets plenty of capacity--and lower costs. "Telecommunications is the lifeline of our business, and our enabling technology globally," says Howard A. Shallcross, Merrill's chief technology officer. "Communications costs are becoming more important than real estate, and where you get the economies is going to be in the large metro areas."

These are tales of the remarkably changed fortunes of America's big cities. Written off as economic dinosaurs only recently, cities have rediscovered in the Information Age many of the attributes that gave them a competitive advantage for centuries, at least as far back as the booming city-states of northern Italy during the Renaissance. Today, big cities are developing into idea factories--tightly integrated combines that generate the information, the conversations, and the spontaneous innovations that are the lifeblood of a knowledge-based economy. They are epicenters of "creative destruction," to use economist Joseph Schumpeter's memorable phrase.CORE STRENGTH. Knowledge-based industries such as finance, entertainment, communications, and health care increasingly are clustered in cities. They depend on dense, capital-intensive information technologies located in geographically concentrated markets. They need access to the skilled workers, customers, partners, and investors, as well as the universities and cultural institutions, that abound in urban areas. "Cities are about information and skills, so it shouldn't be a surprise that cities are getting more valuable," says Edward L. Glaeser, economist at Harvard University. Adds Michael Porter, professor at the Harvard business school: "Cities are aligned with the nature of modern competition, with its emphasis on fluidity, information flow, and innovation."

In many ways, it is a stunning revival. In the years following World War II, companies abandoned their urban digs for cheaper space outside of town. Those with means followed the jobs. The poor stayed behind and, lacking work, grew poorer. As the tax rolls thinned, city services crumbled. Crime soared and retailing soured. Highways followed the people, and ever more business followed the highways. Cities became forgotten islands.

No more. The emergence of cities as centers of commerce in knowledge and entertainment has coincided with the best economic environment in decades (charts). With labor markets tight across the country, businesses are looking to cities for the workers they need to grow. Big-city offices are in vogue as suburban space fills up. Retailers, leery of putting up yet another outlet in crowded suburban markets, are seeking new opportunities in the inner city. A continuing flood of immigrants is providing cities with new workers, consumers, business owners, and taxpayers.SHOPS AND LOFTS. As a result, employment in the nation's 50 largest urban areas rose at a 1.9% annual rate from 1994 to 1997, up from flat growth in the previous three years and closing in on the national average of 2.7%. Gross domestic product for the same areas rose at a 2.2% rate, up from 1.9%. Cities' average unemployment rate dropped from 8.9% in 1992 to 6.4% last year, the lowest in decades.

The signs of vibrancy are unmistakable. Stroll around New York, where sidewalks teem and subway ridership is at record levels. Chicago bursts with commerce and tourism, and unemployment is at its lowest level in more than two decades. Louisville, hollowed by a business exodus in the 1970s, now offers a rich menu of theater, museums, sports, and other entertainment. Denver's LoDo district, once a skid row, has been transformed into a bustling area full of shops, sports bars, and residential lofts.

Cities are far from regaining the glory of their manufacturing heyday, of course. Many are still losing population, and joblessness and poverty well exceed national rates. The next national economic downturn, moreover, will have an outsized effect on urban areas. But cities should survive the challenge, because they are competing in an economy that works to their advantage. "The prospects for cities are better than they have been any time in the post-World War II era," says Mark M. Zandi, economist at Regional Financial Associates.

Ironically, the Information Age was supposed to be the final nail in urban America's coffin. Just as lower transportation and property costs induced manufacturers to move to the suburbs decades earlier, advances in communications technology, beginning in the 1970s, let companies locate back-office operations far from corporate headquarters. Little wonder Alvin Toffler, Roger Naisbitt, and other seers in the 1980s predicted that fax machines, the Internet, mobile phones, and similar high-tech gear would eliminate the need for the face-to-face interaction inherent in cities.

It turned out, though, that knowledge-based services thrive in cities, much as manufacturing once did. Cities offer first-rate telecommunications infrastructures, because the geographical concentration of customers allows vendors to invest more in fiber optics and other equipment. New York City is a compelling case in point. A leading center for banking, securities, accounting, and advertising, Manhattan has more fiber-optic cable linking buildings than any other city in the world.

New York's city government is trying to capitalize on that infrastructure to encourage a thriving high-tech industry and revitalize lower Manhattan. It helped establish the $42.5 million Discovery Fund, which has invested in nine "Silicon Alley" startups and has set up "smart" buildings wired with high-speed communications lines and other digital amenities rare in older New York buildings.

Similarly focused investments in technology are driving business formation in other cities. Media One is building a $250 million fiber-optic system to support Los Angeles' entertainment, health-care, financial-services, and information industries. The University City Science Center, a consortium owned by 29 universities, will break ground this fall on a $30 million, 200,000-square-foot facility in west Philadelphia aimed at incubating fledgling information-technology companies.BUS STOPS. In fact, most Internet activity is concentrated in the nation's major urban centers, according to a study by Mitchell L. Moss, director of the Taub Urban Research Center at New York University. "The largest amount of fiber optics is in densely populated city environments," says Lawrence T. Babbio Jr., president and chief executive of the network group at Bell Atlantic Corp. "Cities have the most modern equipment that we have."

Cities also have dense populations of potential workers, drawing in employers at a time of widespread worker shortages. Yes, city schools still underperform national averages, and many urban residents lack education and skills as a result. For many companies, though, there's no alternative. And relocating an office to the inner city often is easier than negotiating suburban public transportation systems to get workers to far-flung offices.

USA Group Inc. moved from Fishers, Ind., 20 miles north of Indianapolis, to downtown Indianapolis a year ago. The nonprofit company, which offers education and financial products and services, consolidated several scattered operations. That way, it could lure employees from a wider geographic area, all of whom could link up with the citywide bus system. Felicia Moore, a 26-year-old mother of seven, was one. "I've had other prospects for work before this, but I couldn't take public transportation," says Moore, whose job at USA was her first in 10 years. "Because USA Group is downtown, I can take a bus to work. It's $1 each way, and drops me two houses from my house."

Labor availability is also why Triton Industries Inc., a privately held metal stamper, fabricator, and assembler, has stayed in downtown Chicago. President Brent Wortell says it's difficult to get die-setters, tool and die makers, prototype model makers, and other skilled workers in the suburbs. Besides, Chicago remains a big trucking and rail hub, lowering Triton's cost of shipping to Mexico and the Southeast.WEALTH EFFECT. Indeed, manufacturing is making something of an urban comeback, mostly in the form of small and midsize companies with high-tech equipment and processes. Computer-based systems for the design, control, and tracking of production processes have sharply reduced the amount of physical space required for many manufacturers, says New York University's Moss. Hillerich & Bradsby, maker of the famed Louisville Slugger baseball bats, returned to Louisville's Main Street in 1996, 22 years after it left for the Indiana suburbs. Lower demand for its wooden bats, combined with new materials and just-in-time delivery, allows it to do in 50,000 square feet what once required 300,000 square feet.

When employers move in, the gains trickle down throughout the urban economy. Every manufacturer, every financial-services colossus, and each tiny multimedia outfit supports a dense network of suppliers and specialized services throughout the city and its surrounding metropolitan area--from banks, lawyers, and consultants to transportation fleets, cleaning services, and temporary workers. Employment rises, incomes jump, and poverty ebbs.

The new wealth helps drive home-ownership, which solidifies communities. The proportion of all households that own their own home has risen only slightly in central cities, from 48.4% in 1985 to 49.9% in the first quarter of this year. But that measure masks a broad improvement in the quality of available housing and an increase in the number of middle- and upper-income families that are making their homes in inner-city neighborhoods.INFLUX. The Abyssinian Development Corp., a not-for-profit community organization spawned by the famed Abyssinian Baptist Church in New York City's Harlem, is using funds from the Enterprise Foundation to convert 49 abandoned brownstones into moderate-income homes, all of them contracted to sell for $175,000 to $238,000. It's also set to build market-rate homes, priced up to $400,000, later this year; initial newspaper ads have drawn 2,000 inquiries.

As the demographics turn upward, Corporate America appears to be rediscovering the long-neglected commercial power of urban areas. Harvard's Porter estimates that households in America's inner cities have more than $85 billion a year in retail spending power. And community capitalism is thriving in many areas as major banks, foundations, local activists, and governments learn to work with one another to create housing and rebuild commerce. "Ten years ago, everything was tremendously fragmented and balkanized," says Bruce Katz, director of the Brookings Institution Center on Urban & Metropolitan Policy. "Now, people have been at it for a while, they have been innovating, and they tend to collaborate."

Immigrants are rebuilding communities, too. Some 13.4 million newcomers have arrived in this country between 1981 and 1996--the greatest influx since the turn of the century. Concentrating in "gateway" cities such as Boston, New York, and Miami, they are sinking deep roots in neighborhoods by buying homes, shopping at the local grocery store, and, perhaps most importantly, setting up their own businesses. "Immigrants are the steroids of economic growth," says Glenn Yago of the Milken Institute in Santa Monica, Calif. Adds Edward G. Rendell, mayor of Philadelphia: "We have small businesses in neighborhoods of the city that would have no businesses" without immigrants.

Surely, the urban revival remains a fragile one. In some sections of Chicago and New York, unemployment rates are at Great Depression levels. Racial tensions and divisions remain high in some cities, such as Miami. Welfare reform could prove an enormous fiscal drain on local governments that already are underfunding inferior school systems. Gangs and drugs plague urban America, despite a remarkable 20% drop in violent crimes in the nation's 10 largest cities from 1990 through 1995.

While a generation of pragmatic mayors, such as Rudy Abramson in Louisville and Stephen Goldsmith of Indianapolis, have been lauded for reining in municipal budgets and improving city services, damaging urban politics persist. Dense government regulations, hidebound union agreements, periodic corruption scandals, and patchwork tax systems continue to discourage investment and slow recovery.

The durability of cities' key role in the information economy is crucial. If urban areas flourish, they create powerful, efficient engines of growth. Jane Jacobs, the iconoclastic urban thinker of the postwar generation, captured it best: "Whenever and wherever societies have flourished and prospered rather than stagnated and decayed, creative and workable cities have been at the core of the phenomenon; they have pulled their weight and more. Decaying cities, declining economies, and mounting social troubles travel together. The combination is not coincidental." When cities win, the nation does, too.By Christopher Farrell in St. Paul, with Peter Galuszka in Louisville, Ann Therese Palmer in Chicago, Amy Barrett in Philadelphia, and bureau reportsReturn to top


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