Keeping New York Competitive

Julia Vitullo-Martin, January 2007

While New York is still the world leader in finance, London is gaining fast—and other cities are not far behind. Mayor Bloomberg, who has no intention of going down in history as the man who presided over the dissolution of New York's empire, last year commissioned the consulting firm, McKinsey & Company, to analyze the sustainability of New York's leadership in global financial services. In their Jan. 22 letter introducing the 134-page report, Mayor Bloomberg and Senator Schumer announced what they called "a chilling fact": If New York and the federal government do nothing, within 10 years New York will lose its status as the financial capital of the world, though it "will remain a leading regional financial center." Seldom has the word "regional" been used in such a patently pejorative sense.

New York's world preeminence is crucial to its image, of course, but the substantive picture is a little more complex. As the Financial Times wryly noted, "But before the panic selling of plush apartments on Park Avenue begins, the report needs to be put in context."

As new capital markets develop abroad, New York's relative share of the pie will necessarily decline, even as its individual piece grows. Far from being in a slump, Wall Street has just closed a year of record profits. Large American companies still raise their money in New York; it is the Russians and Chinese who have sent their business to London.

The financial services sector is the city's second largest, right behind real estate. It creates approximately one in every nine private-sector jobs in New York, provides 15% of the city's real gross product, and contributes about 36% of business income tax revenues. And despite the competition from abroad, financial services is the city's fastest-growing sector, registering 6.6% growth between 1995 and 2005, says McKinsey.

QUALITY OF LIFE MATTERS
Nonetheless, the McKinsey report makes some very interesting points. As one of the world's oldest, loveliest, and most civilized cities, London starts with advantages that its far younger rival lacks. Yet, says McKinsey, for the 50 CEOs and 300 top executives it interviewed, London and New York are "neck-and-neck in terms of quality of life." This really matters, say the executives, because they rank "talent" (a high-quality workforce) as the most important factor among the 18 elements that define the success of a financial center. Because talent can move wherever it likes, it will choose an attractive city over a disagreeable one. On talent, New York is winning over most other places, because talented people want to be here.

This is a far cry from the situation in the terrible days of the 1970s and the better but still bad days of the 1980s, when New York was dirty, dangerous, and broke. As late as 1993, the Commonwealth Fund commissioned Louis Harris & Associates to survey New Yorkers on their perceptions of the city—and found that only 34% thought New York was a good place to live, in contrast with 60% of city dwellers nationwide. And while 50% of urban Americans said their cities were good places to raise a family, only 21% of New Yorkers said the same. Nearly half rated the city as "poor." In polling former New Yorkers who had voluntarily left to live elsewhere, Harris found that 55% sought a better house or neighborhood, and 59% wanted "a better lifestyle," particularly for their families. In addition, 39% wanted to reduce their costs of living and 26% specifically mentioned taxes.

Though those days are long gone, New Yorkers need to be ever vigilant about their possible return. In 1993, two-thirds of New Yorkers said graffiti reduced the quality of life, 63% mentioned homeless people, 62% complained about noise, and 59% cited panhandling. Keeping the city's quality of life high has been a painstaking top priority of the two post-1993 mayoral administrations—Giuliani and Bloomberg—but it could always slip again.

COST OF LIVING MATTERS
Interestingly enough, McKinsey's respondents say London is markedly more expensive and therefore less competitive than New York. London's office space is the most expensive office space in the world, pricier even than Hong Kong's, and the city has some of the most expensive residential real estate as well. The CEOs don't care about cost of living for themselves—they can afford any level. Their worry is recruitment—excessively high housing costs become a barrier to entry for young professionals.

That's why the Bloomberg administration should push very hard on an issue it's been studying—New York's high construction costs. Over the past quarter century, the cost of construction increased 300% in New York City—far above the cost increases in any other large American city, according to a December 2006 study for the Manhattan Institute by Urbanomics. In recent years, the cost curve has accelerated, rising from 6% in 2004, to 9% in 2005, to 1% monthly in 2006. Land prices have accelerated beyond all other factors. So far, the administration's main policy response to high costs has been to subsidize housing costs through its affordable housing programs that benefit limited groups. A far better policy would be to benefit all housing markets by analyzing (which the administration is doing) and then combatting the factors making New York construction so much more expensive, including work rules and contractual restrictions, the effects of traffic congestion on material costs, and excessive and duplicative governmental regulations, such as environmental reviews.

IMMIGRATION MATTERS
Immigrants stimulate every level of New York's economy, including its top echelon. While politicians rail about Mexican laborers (also needed by New York), talented, educated foreign professionals are kept out by caps on crucial H-1B work visas. Educated foreign professionals are discouraged from even meeting in New York by the discretionary application of rules on visitor visas. London, on the other hand, receives foreign workers so warmly that it has the highest proportion of non-national professionals of any city in the world. New York could well beat London on this, were the federal government not impeding it with destructive visa restrictions.

McKinsey sensibly recommends that Congress reexamine and eliminate barriers that deter or prevent skilled foreign professional workers from coming to the U.S. to work. Immigration reform would help New York retain its position as the world's largest employer of financial services talent. Fortunately, New York Senator Chuck Schumer, now one of the most powerful men in Washington, may be able to push serious immigration reform through newly cooperative committees—and eventually through both houses of Congress. (Still, Manhattan Institute senior fellow Tamar Jacoby warns that "for every member trying to pass reform, there will be another relishing the prospect of a partisan blame game, fully expecting the process to run off the tracks before any bill becomes law.")

WHAT’S NEXT
Most of the attention on the McKinsey report has focused, not wrongly, on the destructiveness of American financial regulations accompanied by the country's litigious environment—two factors that affect every city and every region. But the report is equally interesting on a factor that disproportionately hurts New York City—the federal government's destructive immigration and visa policies. New York is and always has been an international city. Foreign visitors and workers have always contributed to its life, culture, and economy—and New York cannot triumph without them.

But McKinsey does not simply bemoan the forces of darkness it sees beyond New York's borders. It also raises the old issue of New York's quality of life—something well within the control of New Yorkers to maintain. Mayor Bloomberg has kept crime down, making New York a safer city than London. He has initiated compassionate but firm programs to get street people into housing—a matter in which London excels. And he is about to tackle traffic congestion, even though, as McKinsey notes, New York’s is far less serious than London’s.

What remains is that perennial and troubling local issue: New York's excessively high costs of construction. If Mayor Bloomberg could do something about this, he would truly become the greatest development mayor the city has ever had.