INSIGHTS: THE CORONA CRISIS COULD BRING A NEW ERA OF DECLINE FOR AMERICAN CORE CITIES
Guest Columnist: Ryan McMaken, Senior Editor at the Mises Institute. Reprinted with permission.
Manufacturing company 7-Sigma made headlines when it decided to leave Minneapolis as a result of the company’s plant being burned by rioters. “They don’t care about my business,” 7-Sigma owner Kris Wyrobek old the Star-Tribune. After more than thirty years in the city, the company isn’t staying, nor are any of the company’s fifty jobs.
But the costs of being victimized in protests is just one of many reasons homeowners and businesses may be realizing life and business in central cities has lost its luster. The ongoing threat of more business lockdowns, more riots, higher taxes, and failing schools may induce many Americans to flee, once again, to the suburbs as their parents or grandparents did.
This goes well beyond the fear of the disease many journalists have assumed is behind the observed beginnings of an exodus from cities. Yes, many in the upper classes have fled the cities for their mountain homes and yachts for “health reasons.” But these people are relatively few in number and their thinking quixotic. They can afford to drop everything and leave cities overnight.
But the larger impacts are likely to be felt as middle class homeowners and business owners conclude they’d simply rather avoid the edicts and neglect of mayors and city councils in central cities who think nothing of issuing job-destroying “stay-at-home” orders while allowing rioters and vandals free rein.
The real cost to cities is likely to emerge over time. It will come in the form of families and shop owners who decide it’s best to move their businesses ten miles down the road to a neighboring city that will actually do something about rioters. It will come in the form of families which decide their next home will be just a little bit farther from the urban dictator-mayors who have the heaviest hands in enforcing lockdowns and business closures. It will come in the form of potential new business owners and homeowners will be decide to never purchase property to start a business in central cities in the first place.
The Decline of Cities at Mid-Century
We may be seeing something reminiscent of what happened in America’s large central cities during the 1970s and 1980s. Many Americans concluded these cities had become unlivable and crime infested. Many concluded these were places that were quite inhospitable to doing business. So they left. (Forced busing for “integration” purposes was a factor as well.)
In some cases, there were dramatic events that illustrated the trend. The late sixties in New York saw several strikes by city workers. Transit and sanitation in the city became a disaster. The 1977 blackout in New York City ended in widespread riots that induced many businesses to pack up and never return. Many households followed.
But for the most part, cities saw an exodus that took many years and slowly hollowed out the finances and tax revenues of big cities. Areas of Detroit fell into ruin. By the mid-seventies, New York City was lurching from one fiscal crisis to another.
“Nearly half of large cities shrank by at least 10 percent” during the 1970s, according to the Kansas City Fed :
St. Louis, Cleveland, Buffalo, and Detroit each shrank by more than 20 percent. Vast stretches of urban land were left virtually deserted.
More than half of large cities lost population from 1950 to 1980.
There were other factors at work as well, of course. The central cities were often hit the hardest as the old Rust Belt went into decline after the region was destroyed by labor unions and city and state laws that made business in the region inefficient and uncompetitive. Business owners and workers who possessed any real ambition or entrepreneurial spirit had good reason to leave the region altogether.
City centers, built on an old manufacturing-based working class never recovered.
The situation today is a bit different. During the 1990s, core cities began to recover from their mid-century decline and many officials and intellectuals in these areas began cultivating the so-called “creative class” (also known as the “bohemian bourgeoisie”) with the idea that young artists, engineers, architects, and tech workers might be convinced to move into city centers and revitalize local urban economies. It appears to have worked in many cases.
But in 2020 America the hey day of the new techno-city may be over.
The case of the 7-Sigma closure in Minneapolis is just the most famous case of central cities’ hostility to businesses within their borders. We’re not hearing about the many small less-notable businesses that won’t re-open in the wake of the riots. In other cities, such as Chicago, city officials are now begging retailers to not leave the city.
Meanwhile, a number of small businesses now within the “CHOP” zone in Seattle are suing the city for abandoning businesses to the whims of the leftist mob.
As reported by the local NBC affiliate, local businesses have been threatened and harassed by the bosses of the “Capitol Hill Occupation Protest” (CHOP) zone in the city. The city government, the plaintiffs have concluded, essentially have abandoned these businesses to the new “government”.
The City’s decision has subjected businesses, employees, and residents of that neighborhood to extensive property damage, public safety dangers, and an inability to use and access their properties.
Minneapolis and Seattle aren’t the only cities with the prospect of continued civil unrest. With forty million new unemployment filings in recent months, the US faces a worrisome period of highly elevated unemployment. Many of the worst-affected workers will be lower-income populations living in core cities. This won’t help the prospect of a speedy return to placid city environments.
As government experts and media pundits emphasize growth in reported COVID-19 cases, the prospect of renewed lockdowns now looms, as well. This is a threat at the state level and in many suburban local governments. But experience strongly suggests that those political jurisdictions controlled by political leftists are likely to embrace the longest and harshest lockdowns. In many states, such as Texas and Colorado and California and Pennsylvania, local governments in big cities embraced lockdowns more enthusiastically than the surrounding regions and at the state capitols. “Regime uncertainty”—uncertainty about what business-killing regulations a government might embrace next—appears to be greater in central cities.
Business owners are likely to remember this. In the medium- and long-term, business owners and potential business owners will gravitate to those areas where the threat of harsh lockdowns is smaller.
The Rise of the “Work-at-Home” Trend
If the work-at-home trend persists, core cities will have lost one of their main draws: namely, the prospect of a shorter commute for those who can afford a home close-in to the employment centers. Even if daily commutes are just reduced—say, to a three-days-per-week schedule—the commute-time cost of a home in the suburbs falls dramatically. Without the need to sit in traffic five days per week, more expensive city homes and the congestion and crime of city centers becomes far less attractive.
Declining Tax Revenue and Urban Blight
On top of it all will come big cuts to city budgets as COVID lockdowns decimate tax revenues. All cities and states will be impacted, but if the most productive taxpayers move out of the core cities, it is these areas that will feel the brunt of revenue shortfalls. In other words, a shift of productivity toward the suburbs and small cities will hollow out big city budgets and school district budgets as well. This will only encourage businesses and families to stay away in even larger numbers. Families will seek to avoid poor-performing school districts, and employers won’t want to become part of a shrinking tax base where tax increases are frequently eyed by politicians as a way out.
The Beginnings of a Trend?
All of this will take time to play out. Yes, we’ve started to see those with means leave big cities already. The New York Times has reported on numerous former residents of New York City who have left for the surrounding regions. The Times asks “is New York City worth it anymore?” and points out “the pandemic send young New Yorkers packing.”
Meanwhile, some real estate agents report a “mad rush” of wealthy buyers to get out of the city center and into the wealthy suburbs of San Francisco. These are just the early movers. The exiles of more modest means will come later. Not surprisingly, the median rent in San Francisco for a one-bedroom apartment dropped 9.2 percent in May, compared year-over-year.
But these remain a small percentage of the overall population. Most homeowners, families, and business owners need time to move their businesses, sell their properties, and be convinced it’s time to move on.
None of this should be interpreted, however, as a trend away from metropolitan areas overall. There appears to be little risk that large numbers of Americans will be quitting metro areas for rural villages and towns. Some will. But most will notice that metro areas still have most of the jobs, most of the cultural institutions, and most of the health care services. What can’t be said is that core cities have a monopoly on these resources. In recent decades, suburbs and small cities have increasingly become places that host a wide variety of sports teams, museums, convention centers, hospitals, and more. Metro areas are still a good place to be. But old core cities? Not so much.
ON THE ECONOMY: THE FORECAST (CALLS FOR PAIN)
John Dunham, Managing Partner, John Dunham & Associates
Coffee for my breakfast, shot of whiskey on the side. It’s a dark and dreary morning, with the clouds covering up the sky. The forecast calls for pain. The forecast calls for pain. My baby’s turning cold, and the forecast calls for pain. So begins the first track from the album Midnight Stroll, a blues album by Grammy Award winning blues guitarist and singer Robert Cray, and featuring the Memphis Horns. The song was written by David Plenn and Dennis Walker.
As I have often stated in the Monthly Manifesto, economists are great at forecasting, they are just not so great at establishing exactly when their forecasts will occur. Now, with the Great Suppression upon us, most economic models have entered a no-man’s land outside of their limits. This means that all forecasts should be taken with a grain of salt, and frankly, so should all data releases. The recent Jobs Report is no exception. While the headline number showed a small decrease in unemployment, a deeper dive into the data suggests that the headline rate should have been near 20 percent. This is not a dig on the good people at the Bureau of Labor Statistics, who do wonderful work, but rather on the ability of models to work with outlying data points.
Even though Gross Domestic Product (GDP) is actually a terrible indicator of the actual size of the economy, it is the benchmark, and there is a long series to use for comparisons. That said, the worst change in annual GDP since modern records have been kept was a 12.9 percent year over year reduction in 1932, the height of the Great Depression. To put this in context, the so-called great recession of 2009 led to an annual reduction in GDP of 2.5 percent. And as most can recall, that was pretty bad. The year over year loss in 1982, probably the worst recession of my lifetime was just 1.8 percent.
Today, there is obviously a lot of variability in the economy and forecasts are difficult to make, however, one thing is certain, this will be a very rough year for not only the US but for the world economy.
Forecasts for 2nd quarter GDP growth are all over the map, but are consistently grim. The current consensus is that GDP for the quarter is likely to fall by at least 33 percent. Put another way, the US normally produces roughly $6 trillion per quarter in economic activity. The consensus is that $2 trillion has been lost over the past three months. That alone is equal to a 9 or 10 percent reduction in annual GDP for the year – almost as bad as the worst year of the Great Depression.
Most forecasters; however, suggest that the downturn will not be as grim in the next two quarters, mitigating the annual decrease substantially. Depending on who you believe, 2020 forecasts range from about -5.7 percent (Conference Board, Bloomberg, Reuters), to about -6.5 percent (Federal Reserve). The IMF is somewhere in between at -5.9 percent. Of course, all of these forecasters are using the same basic model, so one would think that their forecasts would mirror each other. Our own forecast for the year pegs GDP growth at -5.5.
No matter what the actual outcome is, it is going to be terrible, more than double the effect of the 2008-2009 downturn. And things could get much worse if the violence in America’s cities continues, if states go back into lockdown, or if workers and consumers continue to be too scared to come out of their houses. Thing is, no forecaster really knows what is going to happen to the economy in the coming months, because all of the data are well outside the statistical boundaries of their models. In effect, we are all just winging it. None of us really know when or if the passenger transportation sector will recover, we can guess that travel and entertainment activity will be marginal at best over the course of the year, and its pretty much a given that bricks and mortar retail will be terrible. But we really don’t know if service businesses will be able to reopen or stay open if they do. Office workers may continue to work, but one can almost guarantee that commercial real estate is in for a difficult time.
So maybe the downturn will be sharp and quick and only as bad as in 2009, but there is really nothing to stop the economy from falling further and faster. One thing is certain though, the forecast calls for pain.