Philadelphia -- from Liberty Bell to bellwether: where Philadelphia wants to go says a lot about the U.S. economy
July 3, 2008
Greg Robb, Market Watch
PHILADELPHIA (MarketWatch) -- As Americans celebrate the birth of the nation this week, the city that was at the center of the historic events 232 years ago is facing new challenges that reveal much about the U.S. economy and its promises and perils.
After years of struggling with an industrial economy in long-term collapse, Philadelphia has fought back and transformed itself in many ways. A brand new 58-story Comcast Corp. headquarters overlooks a thriving Center City, with world-class restaurants, music and art.
But city leaders realize these gains are fragile, and that they must grapple with tough problems like crime, poverty and a gordion knot of tax and spending challenges in order to put the improvements on a sustainable level.
"The Philadelphia story embodies all the promise and tough challenges faced by an American economy trying to go global, and at the same time lift the fortunes of its lower income and less-educated citizens," said Mark Zandi, chief economist at Moody's Economy.com.
Simply put, Philadelphia wants to be mentioned in "the conversation" about "world-class regions," said Steve Wray, executive director of the Economy League of Greater Philadelphia.
"The field is wide open for us in terms of economic development," said Mayor Michael Nutter in an interview. See our interview with the mayor.
If successful, Philadelphia could be a roadmap for other older industrial cities.
The first capital of the United States and the cultural and financial center of the new nation, Philadelphia also saw an early arrival of the industrial age in the 1800s in the form of the Baldwin Locomotive Co. and ship-building yards. Factories sprung up along the waterfront and the rail lines.
By 1900, Philadelphia led the nation in such diverse industries as the production of locomotives, streetcars, saws, hosiery, hats, leather goods, and cigars, while it ranked second in the manufacture of drugs and chemicals and in the refining of sugar and petroleum.
Unlike other big industrial cities like Pittsburgh, Detroit or Chicago, the city relied on a skilled or semi-skilled workforce. Factories in Philadelphia were small and produced specialized products, including textiles, carpets, sweaters and knit products.
Some historians now believe that the industrial economy of Philadelphia peaked in early 1900 and has been in a long-term collapse ever since. The deterioration simply gained speed after World War II.
"New things didn't replace old things," said Morris Vogel, a professor of history at Temple University.
The city was an early victim of low-wage competitors in the South. In addition, consumers in the 1950s developed a taste for mass-produced products, eschewing specialized goods.
Also, the offspring of the factory owners sought to escape the unglamorous work and enter into the middle and leisure classes.
"The sons decided to go to dental school," said Vogel.
By World War II there were about a half a million manufacturing jobs in the city. This sector has now down-sized to a little over 147,000 jobs. Philadelphia's unemployment rate jumped to 4.6% in April from 3.9% at the same time last year.
The city, which at its peak in 1950 had a population of 2.5 million, has shrunk to 1.5 million.
Mirroring a broader national trend, Philadelphia's economy has over the last 25 years adapted into a service economy loosely called "eds, meds and government."
The city has 83 colleges and universities within 23 miles, second only to Boston, and boasts 29 hospitals and health centers.
These sectors employ about 200,000 workers, up 19% in the past decade.
The center city region has become the desired living area for young people and empty nesters, and the business district is vibrant, dominated by a gleaming new 58-story headquarters of Comcast Corp., the tallest building in the city.
The city has also redeveloped the former federal Navy repair yard. Urban Outfitters has moved its headquarters into this development at the southern edge of the city, and the Tasty Baking Co. also plans to move there.
This new service economy has proved to be somewhat recession-resistant.
The service-nature of the economy "helps us in the downtimes because we don't drop as much as some other places," Mayor Nutter said. But, on the other hand, the city also misses out of "really good times," he said.
Evidence suggests the city's housing sector is having a soft landing, Nutter said.
In 2007, the city had the lowest foreclosure rate among the 10 largest cities. Real-estate tax receipts are off a bit - a sign of danger on the horizon, but business tax receipts are holding up well, he said.
Although housing prices in the region have slid back to levels not seen since the first quarter of 2006, not many residents "were in the group going too fast and furious" into risky mortgages, Nutter says.
Nutter maintains that the center city area is growing in every direction. But the area is almost surrounded by neighborhoods in abject poverty. The city's poverty rate now hovers around 25%, one of the highest in the nation, and half of Pennsylvania's poor live within the city borders.
"The poor neighborhoods are going to be hard to lift, at least quickly. These are problems that developed over decades and it is going to take a long time to fix, particularly at a time when the economy is struggling and the national fiscal situation is not at its best," said Zandi of Moody's Economy.com, which is located in the Philadelphia suburbs.
An economy with no middle class
At the same time, the middle class has vanished from the city.
The picture emerges is one of a three-tier economy described by Roger Kubarych, chief US economist at Unicredit Global Research.
At the narrow top of the pyramid are the well-paid employees of high-tech and other globally important businesses. In the vast middle are the employees of service companies whose earnings generally fall below middle-class levels. At the bottom are a class of people who are only occasionally employed and the first ones to be hurt in a downturn.
Like many cities, Philadelphia is also trapped in a Gordian knot of contracts with public service unions. Past mayors kept the peace in the heavily unionized city by including benefits that exploded in out-years. But if unchecked, by 2012 benefit costs could consume almost 30% of the city's $3.5 billion budget, according to a new report.
At the moment, there are more retired city workers than current city employees and the retirees have very good benefits.
To pay for this, Philadelphia has a series of taxes that don't make much sense to outsiders - a 3.5% tax on wages from non-residents and a .14% tax on gross business receipts whether or not a firm earns a profit.
The city is committed to gradually lowering these taxes but a 2006 study found that Philadelphia had the second highest tax burden in the nation for a family earning $50,000 per year.
These taxes have served to keep businesses and people out of the city.
Back to the future
The goal of the city leadership is to change Philadelphia into a global city.
"New York and Chicago have been able to reinvent themselves as global cities - they have been able to take advantage of agglomeration economics," said Richardson Dilworth, a professor of history and politics at Drexel University, and the grandson of one of the city's most famous mayors.
In agglomeration economics, firms or related businesses benefit from being close to each other, as being in the proximity of the New York Stock Exchange in New York or in Chicago the big commodity and financial exchanges.
"You want to be viewed as one of those places where companies and people want to be. We haven't always been the first thing that comes to mind, but increasingly we're getting into the conversation," Wray of the Economy League said.
Nutter said he will be satisfied if Philadelphia is able to attract more workers than it loses -- saying he hopes to eventually attract a net 70,000 workers.
But analysts say this is an ambitious goal.
"I think he has set himself a very laudable, but lofty objective, but it might be tough to achieve. Even if he would stem the outflow of people, that would be great," Zandi said. But the economist notes that the tax structure is a "significant headwind" to the goal of increased population because the tax burden for a city resident remains higher than surrounding communities.
A new report completed by the liberal think tank Brookings Institution believes that Philadelphia could attract more residents with prudent federal investment.
It called for a "sea change" in how urban areas in America are viewed, saying that they could become juggernauts of growth.
"After decades of painful economic restructuring, the time is now for these cities to seize upon new trends and attitudes that have begun to revalue their special qualities," the report said.
For Philadelphia, the report called for the federal government to improve the nation's train service. This would allow workers to live in the city and commute out to jobs.
Philadelphia has a favorable cost-of-living. A resident in Center City earning about $83,000 would have to earn 9% more in Boston, 11% more in Washington, and 73% more in New York City to enjoy the same standard of living, according to the Center City District & Central Philadelphia Development Corp.
And as the price of gasoline skyrockets, Philadelphia is attractive because it is such a walkable city, Wray said.
Brookings also recommended federal funding of a plan to bury a major highway that blocks access to the waterfront.
Most important, the report called on the government to create a National Innovation Foundation to work with industries, universities and governments to spur innovation by helping research be turned into local production.
But federal government spending is not likely to be plentiful in the near-term -- in Philadelphia or any major city - and there is not much talk of a return to the specialized manufacturing of the last century.
This lack of emphasis on workforce development was one negative factor in the city's outlook, according to a report by the Pew Charitable Trust.
Nevertheless, Brian Roberts, the chairman and chief executive of Comcast, said he had no doubts that Philadelphia would succeed.
"Philadelphia is a great region for business - we have access to a strong and diverse talent pool, the city is located in close proximity to the financial and political hubs on the Eastern seaboard, and we enjoy strong partnerships with government and civic, charitable, and community organizations," Roberts said.