Former chief of the Federal Reserve Paul Volcker doubted all the innovation and technology in the banking sector produced anything of value for the U.S. economy or significantly improved productivity in markets. He famously said that the only financial innovation he could think of that has improved society is the ATM, and he is particularly down on new products such as credit-default swaps and collateralized debt obligations. The jury is out on whether America’s more regulated and concentrated financial sector makes America’s economy stronger and less prone to crisis.
The jury has already reported, however, on whether this New York City–centered industry is still leading globally.
The United States undoubtedly has the deepest and most sophisticated capital markets in the world. Foreign capital still pours into the United States at higher levels than anywhere else because America remains the safest place to invest. American banks are better capitalized and have less exposure to risky assets than their foreign counterparts. Though the postcrisis recovery in the United States has been lackluster, the United States had a measurably better and more stable recovery than Japan and continental Europe, which have less developed and less indispensable capital markets.
Hollywood and New York are home to the entertainment, theater, movie, television, and recording industries, and these too are key to imagining the future. The entertainment industry added $500 billion to the U.S. economy in 2012 and accounts for nearly 30 percent of the $2 trillion in global entrainment revenue. Led by Hollywood movies, video services, advertising, and cable TV production, the industry is larger than even the U.S. tourism industry. The entertainment industry employs 1.9 million people, and 310,000 of these employees work in Hollywood and the video industry alone—and the industry is growing 3.4 percent a year. The United States will continue to dominate the global entertainment market thanks to new streaming services such as Netflix and Hulu, which will create more than $17 billion by 2017.59
American movies took in $25 billion of the $36 billion in worldwide box-office ticket sales outside the United States in 2013. That lead is being slowly eroded. Over a decade, English-language films’ share of the market fell 10 points, to 63 percent, and U.S.-based film producers’ share dropped 6 points, to 47 percent. Yet despite a flood of action films from Hong Kong and pressure from the Chinese government to screen them, U.S. films are shown on about 40 percent of China’s screens, and films such as Interstellar still make a strong run there.60
Hollywood’s global position remains impressive, and the entertainment industry is a major U.S. exporter. U.S. trade negotiators, as a result, now seem more intent on protecting intellectual property than on opening up markets for U.S. manufacturers. That is fairly revealing about how America’s national political leaders view the innovative entertainment industry and its role in America’s economic future.61
THE METROPOLITAN AND MILLENNIAL REVOLUTIONS62
“A metropolitan revolution is stirring,” Bruce Katz and Jennifer Bradley write, because America’s cities and metropolitan areas are now “the engines of economic prosperity and social transformation.” That aligns with studies by the McKinsey Global Institute which focus on the cities, not nations or states, as the real global building blocks because of “their economic size, population density, political dominance and innovative edge.” And what is transformative and exceptional is the return to urbanism; the clustering of innovative firms, universities, and research institutions; and the influx of immigrants, the younger generations, and the best-educated, producing a rich racial and ethnic tableau. The radical changes in the family, lifestyle, and culture feed on each other to promote innovation, attract the most ambitious and talented, and drive up America’s economic growth. The metropolitan revolution is host to dynamics that enhance America’s economic prospects and allow America’s multiculturalism to strengthen the country.63
The metropolitan revolution is working in part because mayors are working—indeed, they seem almost empowered by the example of national political dysfunction on display in Washington.
America’s growing concentration in cities makes them increasingly “the center of gravity” of the economy and a major factor in America’s leading the world in per capita GDP. A striking 80 percent of Americans live in large cities, compared to 60 percent in Europe; 85 percent of our country’s GDP is produced in large cities, compared to 65 percent in Western Europe. McKinsey Global Institute estimates that three-quarters of America’s lead over Western Europe is explained by the growing role of its large cities.64
The United States’ two global megacities, New York and Los Angeles, will remain among the top cities in the world by the size of their economies. Chicago, the third-largest American city by population, is first in the country and second in the world in direct foreign investment and will also compete globally.65
But what really sets America apart, according to McKinsey, is what they call the “middleweight cities”—metropolitan areas with populations over 150,000, excluding the megacities. America has 257 of these smaller, more dynamic cities, and they account for 70 percent of its economy. Compare this to the 180 middleweight cities in Europe that generate a little over 50 percent of Europe’s GDP. The middleweight cities with rising incomes and populations over the past decades include cities such as San Jose, Boston, Portland, Raleigh, Austin, Phoenix, Pittsburgh, Philadelphia, Minneapolis, Miami, Orlando, and Charlotte.66
A rich combination of ingredients is transforming these cities and raising their economic importance—clusters of high-tech companies and defense contractors, advanced research institutions and prominent universities, growing immigrant communities and Millennials looking for a higher quality of life, and new urbanism. The high-tech industries in Silicon Valley and Palo Alto and at Stanford and Berkeley, great research universities that attract global talent, along with magnificent environs, make San Jose and the San Francisco Bay Area centers of growth. Advanced manufacturing at Boeing, high-tech giants such as Microsoft and Amazon, the University of Washington campus, and the high quality of life around Puget Sound combine to make Seattle one of the fastest-growing cities. The concentrated Asian communities in San Francisco and Seattle have contributed to their integration into global trade.
The Washington, D.C., metropolitan area is one of the richest in the country. It is home to the federal government, prominent research institutions such as the National Institutes of Health, numerous universities, large defense and telecommunications companies, NGOs and nonprofits, and the professional services associated with politics and governing. Though who knew that Washington would top Forbes’s list of America’s coolest cities in 2014? It got to the top because of its museums and high culture, and also because of the concentration of bars and local nonchain restaurants and farmers’ markets. The city is racially and ethnically diverse and so connected that there is a good chance a resident will meet someone of a different race. Millennials are 30 percent of metropolitan areas’ population and there is a growing influx of educated, younger, and innovative workers, according to Forbes.67
Research universities along with many of the 4,500 American colleges and junior colleges find ways to partner and create clusters of innovation in places such as the Research Triangle Park near Raleigh and Durham, or the Cambridge University Park around MIT, or in Austin, Texas.68
Some cities, such as Dallas, Atlanta, and Salt Lake City, have made the most of their affordability; others, such as Portland, Oregon, have stressed their quality of life; in Denver and Boulder, their high quality of life combined with their major research universities and diversity.
And while Seattle demolished Denver, 43–8, in Super Bowl XLVIII, The Wall Street Journal posed a more important challenge: Which city is more attractive to people looking for a job? According to the job search Web site Simply Hired, the unemployment rate is comparably low in both cities and job seekers in New York, Chicago, and Los Angeles give them comparable attention. Seattle struggles more because it experiences only 71 sunny
days a year, compared to Denver, where the sun shines for 115 days. Despite that handicap, Simply Hired gives the edge to Seattle because the average salary is $65,000, though those job seekers are probably looking over their shoulder at the $239,000 average price for a home in the Denver area.69
Miami has become a magnet for new immigrants from Colombia and Honduras in Central America, from Peru in South America, and from the Dominican Republic and Haiti in the Caribbean. Anglos are now just 15 percent of the population. Miami is also being shaped by the most affluent families from Venezuela, Brazil, and Argentina who are buying up properties for their holidays and shopping trips. Miami has become the corporate home for Latin American companies, and it is home to Miami International Airport, the largest airline hub for Latin American flights to the United States. The cranes of the building boom dominate the skyline, with the old, declining city a fading memory. The city elite was once dominated by the Cuban upper classes who came in traumatic waves after the Cuban Revolution, but the younger generations of leaders are more ethnically diverse and focused on America and Miami.70
When Brazil hosted the World Cup in the summer of 2014, Miami hosted the Colombian, Brazilian, and Argentinian car caravans blasting samba music, with fans rooting in their national soccer jerseys. However, “it was less a commentary on soccer,” Lizette Alvarez wrote in The New York Times, “than a tableau vivant of the new Miami,” one that “is increasingly turbocharged by a surge of well-educated, well-off South Americans in the last decade.”71
So the dynamism and growth of the inner cities is challenging the traditional path to the American Dream, including America’s unique attachment to the suburbs, homeownership, and owning a car. Each wave of new Americans over the past century made their way from the inner cities to seek opportunity elsewhere in the country. After World War II, the new middle class bought homes and cars and moved out to Levittown-like suburban developments, followed by the strip malls along the crowded four-lane highways and then by big enclosed malls, and followed inexorably by the move to the exurbs at the outer limits of the metropolitan areas. With the delayed breakdown of racial barriers, African Americans in the past decade have been moving in large numbers to the suburbs of Washington, Atlanta, and Chicago. Apparently they did not get the memo. Most other Americans have dramatically reversed course during the past decade and started moving back into the cities seeking an urban environment. The Millennial generation has abruptly changed where and how they want to live, and employers are following them. In recent years, companies have created more jobs in the city center than in the suburbs.72
The deindustrialization and stunning drops in crime rates in the cities a few decades ago contributed to what Alan Ehrenhalt calls “the great inversion,” and what Leigh Gallagher describes as “a powerful tectonic shift.” America’s cities are increasingly the center for a mobile, broad, and growing population of people working in services, small businesses, technical and professional occupations, the most highly skilled, and the entrepreneurs—who are passing over the suburbs and opting for inner cities. As a result, public transport and walkable communities are increasingly important. Companies are finding that their employees want to live in urban areas and close to work. Now, two hundred of the Fortune 500 companies are headquartered in the fifty largest American cities.73
For every decade since the advent of the automobile, building in the suburbs exceeded construction in the inner cities. In 2011, that was reversed. People are not buying single-family homes in the suburbs, but rather looking for more density, smaller homes, rentals in multifamily buildings, and proximity to public transportation. So when the housing bubble burst in 2007, housing prices and values crashed in the suburbs, though not in the cities. In the aftermath, poverty increased in the suburbs at twice the rate of the cities. This is not the America we once knew.74
The revolution in the cities is also a revolution in the family. Driving the inversion more than anything else are the profound changes taking place in marriage, child-rearing, and women.
Household size is declining. There are fewer children, young people are delaying marriage, and fewer people are getting married, period. Indeed, barely half of American adults are married, and among those under thirty years of age that drops to a mere 20 percent. In 1960, 60 percent of that age group was married. The scale of the changes at home becomes even more real when you consider that in some cities, 40 percent of the households include only a single person. Within a decade, single-person households will equal the number of households made up of families.75
The Millennials are in the vanguard of all these transformative changes. Born between 1981 and 1997, their numbers reached 75 million in 2015, now equal in size to the baby boomers. And the Millennials have chosen their own unique path. To start, they have opted out of the traditional American suburban lifestyle. More than three-quarters of Millennials want to live in an urban area, and a majority eschew interest even in a car. In 1980, two-thirds of seventeen-year-olds had a driver’s license, but that has dropped now to less than half. People are acting on these views and moving to be in greater proximity to retail shops, restaurants, street life, and public transportation. Of those living within a mile of work, 40 percent walked or biked there. Who would have thought that divvy bikes would be one of Mayor Rahm Emanuel’s big accomplishments in Chicago or Mayor Michael Bloomberg’s in New York City?76
The Millennials armed with four-year-college or postgraduate degrees are highly mobile and moving in stunning numbers across state lines and into cities. Two-thirds of college-educated Millennials already live in the fifty-one largest cities and are moving into the close-in neighborhoods.77
You get a sense of the change when you read Mark Oppenheimer’s fascinating New York Times Magazine account of our urban public spaces. In it he describes the differences between videos shot in 1975 by famed sociologist William H. Whyte and videos shot three decades later for Rutgers professor Keith Hampton. Both captured the same four public spaces: Bryant Park behind New York’s main public library, the steps of the Metropolitan Museum of Art on Fifth Avenue, Chestnut Street in Philadelphia, and Downtown Crossing in Boston. Professor Hampton reports there are more people using the spaces as meeting places, and above all, more women in these public spaces. The number of women increased by 33 percent on the Met stairs and by 18 percent in Bryant Park. Public spaces are coming to reflect the changing demographics and culture of America’s cities.78
These videos give you a visual sense of the change in public spaces, but that space is part of an appetite for urbanism, the change in families and immigration, and the clustering of institutions, assets, and talent that are changing our way of life but also making America more economically vibrant.
THE HEALTH CARE REVOLUTION AND THE DEFICIT
The national debt and the federal deficit are at the heart of the declinist judgment about America’s bleak future—what allows China to hold the United States on a tight leash. A big swath of the political class—from Alan Simpson and Erskine Bowles to the editorial writers of The Washington Post and The Wall Street Journal to presidential hopefuls Ted Cruz and Marco Rubio and former House Budget Committee chair Paul Ryan—says the biggest problem facing the country is the growing deficit, driven above all by unsustainable entitlement spending. Today “we face the threat of a debt crisis,” Ryan states at the outset of the 2014 Budget Committee report. “Without reform, entitlement programs will overwhelm all other items in the federal budget. And the resulting national debt will overwhelm our economy.”79
The point of all their focus on the “debt crisis” is unashamedly to justify cuts to Medicare, Social Security, and Medicaid.
The United States also faced lectures from Eurozone bankers committed to austerity and from the International Monetary Fund when its budget deficit hit $1.4 trillion and exceeded 10 percent of the GDP at the height of the Great Recession.
So what has happened since?
America’s deficit spending has been slashed in
half, to $680 billion in 2013, and it fell to $514 billion in 2014. That is about 3 percent of the GDP, which is considered a sustainable level by economists. “Oh, by the way,” Paul Krugman uncharitably observed in May 2013, “it is now 26 months since Bowles and Simpson predicted a U.S. fiscal crisis within two years.”80
What reduced the anticipated deficits was a decision to raise taxes, first on those earning more than $450,000 and then by eliminating the payroll tax paid by ordinary workers. A faster-growing economy with lower unemployment reduced outlays for unemployment benefits while increasing tax revenues. A very ugly, ongoing congressional impasse has slowed the growth of discretionary spending. And guess what? The deficit has contracted significantly because of an unexpected slowdown in rising health care costs. The last has huge implications for the whole “deficit crisis” narrative and the future strength of the American economy.
Freed from the shrill urgency of the financial crash that produced surging deficits and legitimated austerity policies, what is the real level of risk ahead? Social Security is not and never was in crisis. Just as happened under President Reagan, a bipartisan commission can and will make proposals to secure the program well into the future. Any future plan will include the most popular solution: lifting the Social Security payroll cap so higher salaries get taxed as well.81
Medicare and Medicaid, the government’s main health care programs for seniors and the poor, are genuinely at risk because the long-term and inexorable rise of health care costs could put the programs in fiscal jeopardy by 2030. Understand that the “entitlement reforms” proposed by the bipartisan commissions and Republican balanced budget plans reduce the risk by simply cutting benefits. They get health care spending off the government’s books by offloading it onto the poor and seniors.
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