Wall Street Journal - May 15, 2006

COMMENTARY

The Ersatz Urban Renaissance

ven amidst a strong economic expansion, the most recent census data reveal a renewed migration out of our urban centers. This gives considerable lie to the notion, popularized over a decade, that cities are enjoying a historic rebound. The newest figures are troubling on two accounts. Not only are the perennial losers -- Baltimore, Philadelphia, Cleveland and Detroit -- continuing to empty out, but some of our arguably most attractive cities, like Boston, San Francisco, Minneapolis and Chicago, have lost population since 2000. Even New York, where foreign immigration has managed to counteract large scale outmigration, seems to be slowing down.

Equally troubling may be the reasons why this population shift is occurring, and how profoundly clueless most mayors and city officials around the country seem to be about addressing the problem. Almost everyone notes that skyrocketing housing prices in urban areas, particularly on the coasts, have both masked and contributed to this phenomena. Cities with the highest rates of loss of domestic migrants -- San Francisco, Chicago, Los Angeles, New York and Boston -- have also enjoyed (or suffered) some of the highest rates of housing appreciation in the nation.

To some urban boosters, this appreciation alone suggests the overall vitality of cities. Academic theorists like Richard Florida claim the outmigration stems from a surge of affluent, well-educated small households -- his much vaunted "creative class" -- pushing out middle-class families and others among the less gifted. This may be partly true, particularly in some coveted neighborhoods, but overall Dr. Florida's notion seems to me a play on Yogi Berra's remark about a place being so crowded nobody goes there any more. Cities now can claim to be successful since they are losing their people.

Part of this may be explained by the tapering housing bubble, which has created a false notion of an "urban renaissance" driven by, among other things, empty-nesters returning to the city. The outmigration numbers suggest this may not be as true, or as permanent, as the boosters think. In many urban cores, from New York to San Diego, large numbers of condo units, in some cases upward of a third, have been bought not by new urbanites but by speculators. Many others have been purchased by part-time residents. Much the same has occurred in other cities around the world -- from Toronto and Sydney to London and Paris -- where pied-à-terres and speculative buyers increasingly have influenced the trajectory of urban housing markets. So we have the odd phenomena of more housing units, at higher costs, but fewer full-time residents.

Extreme urban housing prices are also in large part the product of political constraints. As Harvard's Ed Glaeser has pointed out, regulatory restraints, neighborhood "nimbyism" and "smart growth" policies have played a large role in driving up housing prices by restraining supply, particularly outside favored downtown districts where, after all, there are few neighbors around to object to new construction.

Far more important, the notion that the upper income residents are to blame, or perhaps should take credit, for middle-class flight can only be applied to a handful of cities. After all, it's hard to credit yuppies for the continuing outmigration from places like Cleveland and Detroit. As the Brookings Institution's demographer William Frey suggests, "There aren't enough yuppies around to save Detroit."

Then there's the economy. Comparatively little has been said about the economic underpinnings of urban outmigration, particularly among the middle class. Yet the facts since the beginning of the decade are pretty plain. In virtually every region of the U.S., economic growth has been far more robust in the suburbs than in the cities. Take Philadelphia, whose "center city" renaissance has become the stuff of urban legend. Over the past decade, the city, according to the Bureau of Labor Statistics, has lost 4.4% of its jobs. In contrast, the surrounding south Jersey suburbs have gained 23.2%. Even more disturbing, these job losses in Philadelphia and other urban centers have included those very fields -- finance, professional business services and information -- which ostensibly would employ the erstwhile members of Dr. Florida's "creative class." Since 2002 professional business service jobs in Philadelphia have dropped 2% and financial services by roughly 8.5%. In contrast, the south Jersey suburbs have enjoyed an 18.7% jump in professional business service jobs and a 10% increase in finance employment.

As a result, the gain in an affluent population in center city has clearly failed to revive the economy of Philly's core. Some estimate that since 1990 the number of jobs downtown has actually dropped as much as 15%. So central city residents increasingly "reverse commute" to where the jobs are, the surrounding suburbs.

The Philadelphia story is not unique. Other long-established elite business centers, including Boston, New York and San Francisco, have seen little or no growth in either financial or professional business services since the national recovery began to take shape three years ago. This is in sharp contrast to the late 1990s dot-com boom, which created a sizable, albeit ultimately fleeting, surge in high-end employment. Nationally the economic outmigration also parallels the demographic one. Like people, jobs are shifting from the high-tax, expensive Northeast and coastal California to relatively affordable locales such as Phoenix, Reno, Las Vegas, Ft. Myers-Cape Coral, Fla., Boise, Idaho, and Provo, Utah.

Housing prices appear to have played an important role here as well. Executives in places like greater Boston or the San Francisco Bay area now complain they cannot staff firms locally since well-educated workers, particularly those in their 30s, can no longer afford to buy houses in these traditional tech centers. Instead, they often opt to expand further out, to areas where a middle-class lifestyle is still within reach. This also explains the movement of professional service companies, for example, from San Francisco to Las Vegas, where not just the slots are ringing. Professional business service employment in that desert city has risen by a remarkable 30% since 2002.

Tony Hsieh, founder of online retailer Zapos, explains that he moved his company out of San Francisco in large part because he could not find qualified service representatives in a city where median housing prices top $700,000. In contrast, he found in Las Vegas, where he moved in 2004 and now employs some 350 people, a large pool of willing workers for whom a customer service job was "not a way station but a career." Other factors such as tax and regulatory costs have also contributed to the shift to cities like Las Vegas. City officials in San Francisco, Philadelphia or Los Angeles often seem to view businesses as sheep to be fleeced; in Vegas, Phoenix and other growth areas, a successful entrepreneur or relocated company is more often likely treated as a local hero.

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One good thing that can come out of the new census numbers would be a shifting away of urban priorities. Since the dot-com boom, many big city mayors -- such as Baltimore's Martin O'Malley and San Francisco's Gavin Newsom -- have placed their faith on selling their cities primarily as "hip and cool" for the "creative class." By luring talented singles, gays, artists and well-heeled empty-nesters, they hoped, their cities would prosper even as hoi polloi exited for the bland suburbs and exurbs. This explains the widespread enthusiasm among urban boosters for the construction -- often with city subsidy -- of concert halls, museums, fancy restaurants and boutique hotels.

The evidence we have today should suggest that a different approach may be in order. Instead of luring the "hip and cool" with high-end amenities, cities need instead to address issues that concern businesses as well as working- and middle-class families. These include such basic needs as public safety, maintenance of parks, improving public schools, cutting taxes, regulatory reform -- in other words, all those decidedly unsexy things that contribute to maintaining a job base and the hope for upward mobility.

Given the growing challenge posed by the emerging boomtowns as well as the suburbs and exurbs, wannabe "hip cool" cities need to realize they can't thrive merely as amusement parks for the rich, the nomadic young and tourists. To remain both vital and economically relevant, they must remain anchored by a large middle class, and by families and businesses that feel safe and committed to the urban place.

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