Creative Class

Over at Where Blog, Brendan writes:

Without Pittsburgh, in the literal sense, Chicago would not crumble and blow
away; to think so would be naive. But Pittsburgh is a part of a group of cities
that, together, have allowed Chicago to experience its recent — and rather
stunning — revival over the past two decades. As post-industrial Western
mega-cities like Chicago, New York, or London began to try to pick themselves up
after losing manufacturing jobs in the 1970s and 80s, they began to rely on what
you could call innovation-intensive fields like biomedicine, design, information
technology, and (of course) the arts. These are highly specialized fields, and
ones that many traditional middle class workers were not trained or educated to
participate in. Megacities, then, needed to draw in new talent from surrounding
smaller cities.

The entire post is on point; Jim Russell responds here. Brendan is onto something.  What globalization has done is to globalize and integrate the the city-system.  Once upon a time, city-systems were national. They had  core cities like New York,  London, Paris or Tokyo and then a set of second, third, fourth and so tier cities all organized around industries and geographies.  As production and innovation has spread around the globe, the city-system has been stretched out, and national systems have given way to an increasingly global one. Technically speaking, these national systems have always followed a rank-order or Zipf distribution; that distribution, our research suggests, is now taking shape globally, forming a global rank-order distribution of cities.

Functionally, what is happening is that certain key functions of the old national city-systems have been shifted up the chain. Chicago has indeed taken over financial, service, and professional functions from a whole host of second and third tier cities – Pittsburgh, Cleveland, Detroit, Milwaukee, Toledo, and so on.  Washington DC has benefited from the same sort of trend, and is some ways has become a “suburb” of New York in providing these functions.  Atlanta plays a similar role in the southeast.

But, as Brendan adds, the real question is that competition is growing throughout the global city-system.  In other words, the same kind of dynamics that have confronted Pittsburgh and Detroit in the past several decades may some day come home to roost for Chicago.  My team’s analysis suggests that Chicago may have some real vulnerabilities.  In contrast to New York, LA and San Francisco, which have real locational advantages in key economic sectors, our analysis of occupational clusters suggests that Chicago has few if any, other than those associated with O’Hare and air transport.  For the time being, it has found a reasonably comfortable niche, providing regional services to its mega-region and serving as a regional talent magnet. But the laws of motion of global capitalism leave little doubt that sooner or later the ante on both of these fronts will be upped.

Chris Dillow has a fascinating post on this issue (pointer via New Economist):

Start from the premise that talent is initially unknown, and can only be
revealed by working with expensive equipment. So, for example, we can
only find out if a manager is any good if he’s in charge of a big
venture, or if an actor has box office appeal if he’s in a mega-costly
film. It is, therefore, very expensive to learn who’s got talent and
who hasn’t.

What’s more, people with talent cannot offer to share this cost
with employers, either because of lack of cash or risk aversion: people
don’t pay for the chance to become bosses or film stars. In these conditions, what’s scarce isn’t talent, but revealed talent. There might be loads of people with the ability to be film
stars or bosses, but only a handful get the chance to show what they
can do.

This study by Berkeley’s Marko Tervio shows why.

Click here to download and listen to Rotman School Dean, Roger Martin discuss leadership and his new book, The Opposable Mind on CBC Radio(h/t: Ken McGuffin).

Commenting on a previous post, Tracey writes:

And Montreal! A very cool city, low housing prices, incomes that are
not that great, but a superb creative class! Lots of bricolage, great
dressers, fun place, joi de vivre, superb place to eat at affordable
prices and people walk in and love their city. They also have an
excellent Metro that is full of public art and was designed with people
in mind. …I would love to hear you do both a qualitative and quantitative analysis
of Montreal!

And the home of Cirque de Soleil; the fantastic Arcade Fire exemplifies the city’s thriving music scene; and so much more.

This request I can oblige.  A couple of years ago, I was part of a major project on Montreal with colleagues Lou Musante and Kevin Stolarlick. Here’s a link to one of our papers. I hope to be doing a Globe and Mail visit to one of Montreal’s neighborhoods sometime soon.

Arnold Kling (one of my favorite econ bloggers) points to this analysis of high housing price to income ratios in a number of US metros and writes that:

California has five of the top six. Outside of California, New York
City, and Miami, most housing markets may not be far from equilibrium.
Remember that my ceiling for a price/income ratio is six, while others
peg it at four. But the median price/income ratio might be higher than
the ceiling, because median income includes a lot of renters. Overall, it looks as if prices may have to fall almost 50 percent in the top 7 markets, but in many other markets they don’t have to fall at all.

Here’s the top ten metros on Housing Tracker’s housing price to income ratio: The whole list is worth a look.

1.  Los Angeles, Ca.  10.5
2.  San Francisco, Ca. 9.8
3.  New York City, NY.  9.4
4.  Orange County, Ca. 9.2
5.  San Jose, Ca. 9.2
6.  San Diego, Ca. 8.8
7.  Miami, Fl. 8.5
8.  Riverside, Ca. 6.7
9.  Boston, Ma. 5.4
10.  Sarasota, Fl. 5.4

I agree with Arnold’s point about most markets being in “equilibrium.”  But there are a couple of other things that are worth thinking about. My research with Charlotta Mellander shows how housing prices are becoming disconnected from regional productivity and wages.  Overall, the connection with income is stronger, but we also that measures of amenity and openness have a strong association with housing prices.  My hunch is that real estate prices in many of these markets are being driven by accumulated wealth rather than income per se.

The list above has several different kinds of real estate markets. For example, in San Jose, wages make up about 90 percent of income, while in Sarasota, it’s about 25 percent. Sarasota and Miami are classic speculative markets and which have been and will continue to experience significant declines. Several other of these markets are being shaped by the globalization of real estate – LA, NY and San Francisco stand out here, which is helping drive prices substantially out of line with local incomes.

But the bigger point is that real estate markets in what Joe Gyourko calls superstar cities may be driven by something other than income – accumulated wealth from stock, royalties, previous real estate earnings and what not. In these markets, real estate prices are  increasingly disconnected from conventional measure of income and even more substantially disconnected from wages and productivity. If this is the case, could price to (local) income ratios be a  more or less permanent feature of some these markets? And if this is true, will we see more of a split or segmented real estate market?  Clearly, in many of these regions the American dream of homeownership will becoming less and less achievable for huge segments of the population. That’s why, people I meet from California tell me how concerned they are that their kids will never be able to buy homes where they grew up.

Our friends at CEOs for Cities have a pointer to the detailed work of William Nordhaus and his G-Econ team at Yale.  Have a quick gander at this globe graphic. More on this in Who’s Your City?

For years and years now, I’ve carried around this thought in my head that in part what distinguishes Britisher rockers from their American counterparts is that they are better ethno-musicologists (Keith Richards and Eric Clapton for example) with a deeper knowledge of and passion for the music they play. I’m also always trying to locate musicians who can write and situate music in its broader and social context. This piece by Steely Dan’s, Donald Fagen’s piece in Slate blew me away.  BTW, I’m a huge Steely Dan fan and would rate them as one of America’s truly great bands. Here’s just a snippet.

Most all the musicians of my acquaintance know the legend of Robert
Johnson, the great Delta bluesman. At a crossroads at midnight, Robert
meets the devil (or Eshu or Papa Legba) and, in exchange for his
immortal soul, comes away with supernatural skills as a singer and
guitarist. Many versions of this Faustian story put the crossroads at
Clarksdale, Miss., where Highway 49 meets Highway 61. Muddy
Waters was raised in Clarksdale. John Lee Hooker and Sam Cooke were
born and grew up there. Ike Turner was a Clarksdale boy, too. This was
the 1930s in the Deep South. Real bad stuff happened. Nevertheless, by
the time he was a teenager, Ike could bang out a boogie on the piano
and play the guitar with an authentic Delta twang. But, in truth,
talented as he was, there wasn’t anything really supernatural about
Ike’s skills as a musician. His singing was always spirited, but,
relative to the wealth of local competition, no big deal. What Ike
excelled at was leadership: conceptualization, organization, and
execution. It’s intriguing to think: If Ike walked down to the
crossroads one moonless night, what exactly did he ask for?

In Tokyo for an event tomorrow. I’m struck by how much the city has changed since I was last here about a decade ago, we actually had to leave Saturday to beat the storm and flew in via L.A. Looking out my window, I notice density of the skyline which stretches over the horizon in every direction and the relatively low level of car traffic and congestion.

On the plus side, Tokyo is the world’s largest mega-region in economic terms. Japan as a whole is second on the creativity index behind only Sweden, with high rates of corporate innovation. The economic system remains challenged by the need for greater flexibility, relatively low rates of entrepreneurship, and, most of all, the need for greater openness – all issues we’ll be discussing over the next couple of days.

Here’s a terrific paper by sociologists Kuniko Fujita and Rick Hill on “Innovative Tokyo.” The Economist has an interesting piece on the country’s fascination with robots which asks the question: “Will Japan build rather import new citizens? and another which argues that Japan’s model evolving onto a hybrid it calls JapAnglo-Saxon capitalism. Airoots has a marvelous post on innovative retail design in Tokyo (the pictures are a must).

It’s long been commonplace in regional development to use job growth as a baseline measure of economic performance. I’ve argued that both job growth and population growth are poor measures for regional development. It’s the quality not the quantity of jobs that matter. Now, a new breakthrough study from economists Robert Gordon of Northwestern University and Ian Dew-Becker of Harvard (via the always terrific New Economist) shows that productivity growth is negatively correlated with job growth at the national level. Countries that are more productive generate fewer jobs comparatively speaking.

We document this tradeoff in the raw data, in regressions that
control for the two‐way causation between productivity and employment
growth, and we show that there is a robust negative correlation between
productivity and employment growth across countries and time.

Since thriving cities are productivity machines ala Robert Lucas and Jane Jacobs, we now have substantial evidence that shows what a big mistake it is to use job growth as a proxy for productivity improvement and development. It may well be that the most productive cities generate jobs at a considerably slower rate than their less productive (and less developed) counterparts. In other words, job growth may actually be picking up the opposite of what some people think.

The Financial Times’ John Gapper, one of my favorite columnists and bloggers, zeros in on the struggles and opportunities being created by the evolution of the creative economy:

The best-rewarded workers in recent years have not been those with a
union on their side but those who can bargain for themselves, or employ
an agent or lawyer to do it. The chief executive, the sports star, the
actor or actress – anyone who comes under the mantle of “talent” –
stands a much greater chance of being well-paid than a union member.

How, then, to account for the sudden upsurge in labour militancy in the
unlikely quarter of the television and film industries? For the past
six weeks, 12,000 film and television screenwriters in the Writers
Guild of America have been on strike to get, among other things, a bigger share of online revenues. In the past couple of weeks, another dispute has erupted in the television
industry. Hundreds of young people employed on long-term freelance
contracts by MTV Networks in New York – so-called permalancers –
protested after Viacom, MTV’s parent company, changed their contracts to reduce their entitlement to health and pension benefits.

Strange as it sounds, I think these disputes hold lessons for workers in many
industries, not just for New York’s “creative class” of media
professionals. But they must do more than hark back to the glory days
of 20th century unionism.

Collective bargaining has a role in this world – to set standard contract terms or percentages
for royalties and residuals – but individual negotiation is where the
big money lies. Many technicians and writers are freelancers because it
suits them: they get greater freedom to work across the industry and
earn more. Where collectivism could bring unadulterated rewards
is outside the workplace – by providing health and pension benefits
that freelance workers do not get.

Gapper is onto something here. The struggles that will define the creative age are just emerging. Right now we have a system rigged to benefit superstars and winners. In terms of historical analogies, the current creative class movement bears some resemblance to the early organizing struggles of old American Federation of Labor? But, later we say the rise of mass production unionism with the rise of the Congress of Industrial Organizations? Is a similar divide emerging between creative and service workers? What institutional solutions are needed to include and reward more and more of the growing ranks of creative workers – and what about the broader issue of the service class? What would a new movement and structure for building a workable creative economy look like?