Paul Krugman: The New York Paradox

I live and work in New Jersey, but I've always loved the energy and variety of the city that's just an hour's train ride away.
So I was happy to read in The New York Times about a New York success story: the surprising resurgence of Manhattan as a site for corporate headquarters.

What's interesting about the corporate return to Manhattan is that it flies in the face of today's conventional wisdom, which says that modern technology is making geography irrelevant.

Since work can now be done anywhere, the story goes, jobs move wherever the wages and other costs of doing business are lowest. And this should mean trouble for a high-wage, high-cost location like New York.

But somebody forgot to tell New York about the new rules: in spite of high costs, the city's economy is thriving.

And the report on the headquarters boom suggests that New York may, paradoxically, be doing well precisely because technology has made it possible to move many jobs away from high-cost locations.

During the 1960's and 1970's, New York lost much of its historical role as a headquarters city, as companies moved out to suburban campuses around the country.

"But in the last several years," the Times article declares, "New York has regained its magnetic force": there are more than twice as many headquarters and subsidiaries in the city as there were in 1990.

Why are corporations moving back to New York? Manhattan's appeal is obvious: the Big Apple is the best place for top executives to "network face to face with their peers in the hub of the financial, legal and communications industries," as the article puts it. But that's an advantage New York has offered ever since it became America's largest city.

In the past, however, this face-to-face communication came at a high price: in order to keep their top executives in Manhattan, companies also had to pay the rent on large office buildings and fill those buildings with thousands of lower-level employees, paying those employees wages high enough to compensate for New York's high cost of living. Many companies decided that the benefits of a New York headquarters weren't worth the cost.

Now, however, it's possible for many of the people who would formerly have worked at corporate headquarters to work somewhere else instead, communicating with management electronically. And that makes it worthwhile to move top executives back to the center of things.

The same thing may be happening in the financial industry, which these days is New York's principal "export" — that is, New Yorkers sell all sorts of things to each other, but they mainly sell financial services to other Americans and the rest of the world.

If you looked only at the employment numbers, you might think that New York's export base is in trouble.

A recent report by the Federal Reserve Bank of New York points out that over the past 30 years, finance-sector employment has been shifting away from New York City toward lower-cost locations, both in the outer parts of the New York metropolitan area and in places like Dallas and San Antonio.

But what seems to be happening is that only relatively low-paid finance jobs are moving out of New York, while highly paid jobs are actually moving in.

The Fed study shows that New York's share of U.S. financial industry earnings, as opposed to employment, is actually higher now than it was in 1970.

And it's a good guess that financial firms, like corporate headquarters, find it easier to put their top people in New York now that the back-office work can be carried out someplace cheaper.

The story of the New York economy isn't entirely a happy one. The city has essentially lost all of its manufacturing, and it's now in the process of outsourcing both routine office work and many middle-management functions to other parts of the country.

What's left is an urban economy that offers a mix of very highly paid financial jobs and low-wage service jobs, with relatively little in the middle. Economic disparities in New York, as in the United States as a whole, are wider than they have been since the 1920's.

But for once, let me focus on the positive: the world's greatest city, a city that a generation ago seemed to be in irreversible decline, seems to be doing O.K.