Friday, October 9, 2009

A NEW TALE OF TWO CITIES



Thinking Big: New York and London


New York/London—Comparable, Complementary, Competitive

By Daniel Rose


Current discussions of New York and London focus primarily on who can seduce from whom the lucrative fees from hedge funds, derivatives or Initial Public Offerings that enrich individuals and fill municipal coffers. The underlying assumption, perhaps mistaken, is that the halcyon days of 2002-2007 will soon return, that the financial services industry will once again be the “cash cow” of yesterday, and that attention should focus on topics like support for electronic trading, or on increasing available electrical supply.

London’s financial services sector is, of course, of great importance both to the City itself and to the U.K., employing over one million people (nearly half of whom work in London) and accounting for eleven per cent of the U.K.’s total income tax and fifteen per cent of its corporate tax revenues. In the U.S., financial services represent eight per cent of our GDP and more than five per cent of all U.S. jobs. Obviously it is in each nation’s interest for its financial sector to thrive.

Today, however, our problems are more complex than just those of the financial community. We face a slow and difficult economic recovery dominated by financial deleveraging and short-term deflationary risks, by massive public and private debt, high unemployment, frightened consumers and an aging labor force. Lack of trust—in government, financial institutions and civic leaders—is widespread.

The gross volume of financial transactions, the profits from the services provided and the numbers of those employed in the financial world are apt to be lower in the future than in the past. The worldwide eastward shift of global wealth and the surge of competitive financial centers in Singapore and Shanghai, and those nearer home like Dublin and Luxembourg and non-EU regulated Geneva, Zurich and Monaco present growing challenges. Hong Kong, Bermuda, Paris and Dubai also seek larger pieces of the financial pie.

In such a climate, steps that strengthen the financial services industry and also help maintain leadership standing in a globalized world are called for.

New York and London, both high cost-of-living cities, share problems—public safety and education, effective mass transit, appropriate middle class housing, sustainable development, improved air quality, new “green” energy sources, etc.—and solutions to these problems would benefit from continuing joint examination and review.

Like loving siblings who share values but eye each other competitively, we can agree to compete in some areas, cooperate in others and, above all, to learn from the other’s experiences.

First we should face our joint basic challenge: to be world-leading global cities in the 21st century. These cities are widely agreed to be centers that:

1) Attract, develop and nurture the human capital that generates economic value from ideas;

2) Have the physical and social infrastructure that supports the solid middle class that performs the work of society and an innovative, creative class that spawns new industries and modernizes old ones, that originates new products, new services and new ways of doing things;

3) Serve as both the repository and incubator of world class cultural achievement. (Ideally, these cities should also be safe, healthful, fun to live in and have a low cost-of-living; but Utopia awaits another incarnation.)

Attracting, nurturing and retaining the “best and the brightest” in all fields—financial services among them—requires a context of many components. For a rich society, the easiest component should be the physical, yet New York is the world’s only major city without effective mass transit to its airports; and Heathrow (already at 99% of capacity) is considered among the least efficient airports in Europe.

Education is an area in which New York and London should be pre-eminent, yet New York’s public elementary school system is generally considered poor, and London does not take full advantage of the superb universities on its doorstep.

Housing is an area in which a rich nation should be able to keep its major city well-supplied. In practice, the crucial middle class is seeping out of New York because of the cost and shortage of middle income housing, and London is only marginally better.

Although the problems are similar, each city must address them in its own way. Greater London’s newly-appointed Chief Economist, Bridget Rosewall, points out that, “London’s taxes go straight to the National Exchequer (the U.K.’s treasury department) and less than 10% is raised directly by the mayor. Money comes back to subsidize transport, economic development and so on, but only by negotiation with central government departments.”

New York’s mayor must deal with a difficult City Council and a dysfunctional New York State legislature whose antics would be suitable for Gilbert and Sullivan comedy if the economic results were not so painful. A classic example is the repeal of New York City’s lucrative and badly-needed commuter tax, which reimbursed the City for expenses related to urban workers living (and taxed) in the suburbs. That the repeal movement was led by a New York City-based State legislator to help the re-election campaign of upstaters defies logic. “Was it weakness of intellect, birdie, I cried,” or another reason? Londoners who recall Britain’s ancient “rotten boroughs” will understand what flows from the 98% re-election rate of New York State legislators.

London and New York are great international centers whose well being is of huge importance to their inhabitants, their respective regions, their respective nations and the entire civilized world. Let us explore the ways in which they are comparable, complementary and competitive, and how they can learn from each other.

I Comparables

At this moment of economic trauma, London and New York are each blessed with a mayor fully conscious of the short term, intermediate and long term economic challenges. Economics, “the science of the allocation of scarce resources,” is the key to how their respective administrations will be remembered. Each administration must consume less and invest more, think less “today” and more “tomorrow.”

Mayor Boris Johnson’s London Plan and Mayor Mike Bloomberg’s PlaNYC are major efforts to plan for emerging needs two decades ahead.

Each city has a population of eight million (London a bit less, New York a bit more) and each is expected to add a million in the next 20 years. The impact on housing, energy, water supply, waste disposal and infrastructure will be profound—difficult to implement and challenging to finance.

Each has over one third of its population foreign born. London, with 40%, thinks of itself as cosmopolitan; New York, with 36%, thinks of itself as an American city with many foreign born who are becoming American. Helping immigrants to enter the mainstream as quickly and effectively as possible is a continuing challenge. (Half the students in New York’s elite public high schools—Stuyvesant and Bronx High School of Science—are now Asians.)

Each has a theater district with over twelve million tickets sold annually. Broadway specializes in expensive, blockbuster musicals (which make their way to London), while the West End, in addition to imports, features smaller offerings often flowing from a subsidized National Theatre. An increasing number of plays travel from London to New York, since a production costs four to five times as much to launch on Broadway as on the West End. A growing “off Broadway” reflects the need to cater to lower budget audiences.

Each has wonderful museums of modern art. New York’s MOMA, with a fine permanent collection, attracts 2.7 million visitors annually, many of them tourists. London’s Tate Modern, with imaginative shows, attracts 3.9 million, many of them locals.

In the three F’s (film, fashion and food) each is a world leader. New York’s film activity has been significantly greater but London’s is rising rapidly; the fashion palm goes to New York; but food is important in both. Star chefs are now major celebrities on both sides of the Atlantic. In London, “name” chefs charge high prices in smaller restaurants; New York stars charge somewhat less and make it up in volume in larger settings. (In both cities, great chefs today serve dazzling original creations, but some of us miss the dowdy old Hotel Connaught, with its excellent traditional Grill, or New York’s Careme-inspired Le Pavillon.)

Billionaires are attracted to both cities. Before 2008, New York had 71, largely American, while London had 36, largely foreign.

Each city boasts fine art galleries and auction houses. New York has been pre-eminent but London has made great strides in the past decade, and it is too early to forecast the full impact of the current downturn.

Both cities have outstanding museums, opera houses, concert halls, athletic stadiums, great parks and libraries which attract the creative class, as well as tourists.

“Climate change” threatens to become a real-world problem for both cities, which Londoners recognize but most New Yorkers do not. For older New Yorkers, the term “ecology” refers to vanishing Bengal tigers and snow leopards, and the term “flood plain” refers to New Orleans. Younger New Yorkers are more alive to the problem.

London seeks to reduce its carbon emissions by 60 per cent by 2025. Most New Yorkers are not sure what carbon emissions are.

The world’s leading financial institutions have offices in both cities. London’s top income tax rate is now 50%, as is Manhattan’s total of federal, state and local charges; Switzerland, Singapore and Hong Kong have rates half as much, and in Dubai (where few want to live) the rate is zero.

London has twice the percentage of its population engaged in manufacturing than New York does, but both are low compared to other cities. New York’s energy costs (60% higher than the national average) are a factor. Manufacturing wages are higher than wages in health care and personal services, which are growing in both cities.

As a general rule, provision of infrastructure should precede economic demand, while provision of office space and highest quality housing should follow economic demand. Vacant offices and unsold condos help no one.

Economic diversification is crucial, all agree; its implementation merits highest priority for both cities. History has many stories of “one company towns” or “one industry cities” that came to grief, and the reliance that both London and New York place on financial services is unhealthy.


II What Each Can Learn From the Other

In some ways, of course, “we are what we are.” New York prides itself on its fierce energy, a sense of “now-ness” and openness to all possibilities, London on its appreciation of “high culture” and history and its openness to foreign influence. And, of course, London is its nation’s capital, while New York is not even capital of its State.

Some of my older British friends believe the introduction of “American breakfast meetings” to London was an act of barbarism. Some of my younger American friends cannot understand why their London counterparts consider vacations sacrosanct even when business “emergencies” arise. New York audiences regard “standing ovations” as mandatory; Londoners feel most are undeserved. Broadway audiences are sober at curtain time; West End theaters have bars.

London and New York can both learn from Singapore’s public toilets, which are the world’s best, and from the bicycle provisions in many world-class cities.

More importantly:

New York crime-fighting strategies under Mayors Rudy Giuliani and Mike Bloomberg, implemented by their Police Commissioners Bill Bratton and Ray Kelly, have proved their validity beyond question. Murders here are down from 2,200 in 1990 to some 500 this year and even graffiti has disappeared. These tactics, if introduced to London, could dampen that city’s soaring crime rate.

An American equivalent of the Financial Services Authority, England’s sole regulator of financial services, should be considered.

London’s new Forensic Audit Panel, to review critically municipal expenses and operational efficiencies, is an excellent step New York can take, too.

London’s sophisticated traffic controls could be applied in New York, just as London’s varied use of its waterfront has stimulated New York thinking.

London has exorbitant taxi fares (for better taxis) and an Underground system that stops at midnight. New York has an excessively litigious business climate and onerous post 9/11 restrictions on talented immigrants. London’s “congestion pricing” has stimulated debate in New York; and London’s competitive bidding for municipal bus services would work well in New York.

Effective private, non-profit entities such as the Central Park Conservancy ($70 million annual budget), the Prospect Park Alliance and Friends of the High Line have been a boon to New York and could be replicated. (The time has come for Britain to realize the importance of a philanthropic, non-profit sector, especially when the government is broke. This will require a change in public consciousness, but it is long overdue. Boris Johnson’s new Mayor’s Fund for London is a promising start.)

Government subsidized operations like the National Theatre run against the American grain (as our naïve discussions of national health care reveal), but they merit consideration. Much of off-Broadway’s best work is supported by non-profit groups.

“Jane Jacobs thinking” and “Robert Moses thinking”—maintaining the fabric and character of a city on the one hand while providing necessary infrastructure on the other—are both necessary. In New York today the excessive power of “community” and “single issue” groups working against the general public interest often stymie important university, hospital and other expansion. The defeat of the immensely important Westway underground highway still rankles.

London, Warsaw, Dresden and other cities rebuilt wonderfully after WWII. After 9/11, New York’s model could have been Pericles’ rebuilding of the Acropolis, instead of our currently planned embarrassment.

PlaNYC, the Bloomberg administration’s vision of New York in 2030, is imaginative and far-ranging. What the city really needs, however, is a comprehensive reconsideration of its out-dated zoning concepts (floor area ratios, air rights transfers, etc.) to stimulate the kind of development, especially in housing, New York needs and can have.

The failure of the U.S. Embassy in London to pay its large and overdue congestion charges is a national embarrassment.

Terrorist threats are always with us. The New York Police Department’s intelligence and counter-terrorism unit, called “the gold standard” by other U.S. police departments, should be emulated. Britain’s ubiquitous closed-circuit television cameras seem destined to be applied here as well.

Continuing self-examination and examination of the experience of others should be ongoing exercises.

III Joint Challenges

Each city should focus on its regional, as well as its metropolitan, problems. New or improved subway, bus, commuter rail, light rail and ferry projects are needed, especially for dense areas with inadequate mass transit, high poverty levels and low auto ownership.

New York’s population density is twice London’s, and 55% of New Yorkers use public transportation vs. 37% of Londoners. London’s Tube costs three times what New York’s subway does. New York’s air conditioned subway cars are cooler in summer than London’s, but air conditioning is scheduled for the Tube in 2010.

Each city must demand vastly greater efficiency from its public sector, to assure better services and lower—not higher—taxes. “Doing more with less” would be an excellent motto.

Each city must press its national government for appropriate taxation and financial regulation practices that achieve legitimate public goals but do not strangle the financial sector to the benefit of foreign markets.

New York’s powerful public sector unions must be brought back into the real world, and their off-the-scale pension and health benefits and overtime payments should reflect the practices of the federal government and the other states (which also have 40-hour work weeks rather than New York’s 35-hour week).

Defined Contribution pension plans should replace Defined Benefit pension plans for all new government employees, and 401(k)’s should be encouraged, as they are for everyone else.

Offshore tax avoidance by rich Britons and Americans should be faced frankly.

Both cities face governance issues, but New York State’s chaotic conditions are of mythic proportions.

Calls for a constitutional convention to reform New York State government have come from former governors Mario Cuomo and George Pataki and former mayor Rudy Giuliani, among others.

Substantial cuts in State spending, wage freezes for all public employees, caps on local property taxes, term limits for elected State officials, non-partisan political redistricting, major legal tort reform and re-thinking of the operations of the state’s autonomous public authorities like the M.T.A. call desperately for open discussion and review.

Governor Paterson should be encouraged to submit without delay legislation for an early convention.
IV Financial Services

Recent studies by McKinsey and others detail the steps London and New York must take to improve their competitive positions in regard to each other and to the rest of the world.

Commissioned respectively by Mayors Boris Johnson and Mike Bloomberg, these studies spell out the micro and macro steps needed; and informed, involved citizens of each city should enthusiastically support their constructive suggestions.

Lowering New York’s strangling taxes (which, per capita, are roughly double those of America’s other large cities) is mandatory if the city is to thrive. The cutting of public expenditures which must accompany such tax cuts requires a degree of political courage not normally apparent in New York.

Conclusion

Neither London nor New York can rest on its laurels or assume that the past will automatically be reflected in the future. Each must vigorously capitalize on its strengths, address its weaknesses and “run scared.” And each must restore public trust in the character and competence of public leadership.

Difficult trade-offs (Heathrow’s third runway vs. environmental impacts, New York’s current public services vs. the need to cut expenditures, etc.) must be presented to the public frankly and clearly in order to gain public support for painful but necessary choices. Everyone loves Santa Claus (Father Christmas) but we shouldn't lose Scrooge’s email address.

The encouragement of small and medium-size business enterprises and the creation of “start-ups” are crucial. Financial services are important, but they are but one of many components of a diverse economy and vibrant society in a globalized world.

That London and New York will each retain a pre-eminent international role seems certain; but, as Oliver Wendell Holmes, Jr., one of America’s wisest jurists noted, “The mode by which the inevitable comes to pass is called effort.”

An aroused citizenry in each city must make that effort.



Talks by Daniel Rose can be found on www.danielrose.org
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