Category Archives: Business and Economy

In economic terms, 1 baseball team = 1 midsized department store

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Following up on the academic consensus that sports do not economically benefit communities, one economist notes the economic impact of sports teams:

“If every sports team in Chicago were to suddenly disappear, the impact on the Chicago economy would be a fraction of 1 percent,” Leeds says. “A baseball team has about the same impact on a community as a midsize department store.”

The reason?

Economists say the biggest reason sports teams don’t have much impact is that they don’t tend to spur new spending.  Most people have a limited entertainment budget, so the dollars they are spending when they go to a game is money they would have spent elsewhere, maybe even at a restaurant or small businesses where more money would have stayed in the community. Plus, Matheson says, rather than draw people to a neighborhood, games can actually repel them.

Don’t underestimate the money generated by large retail stores. When I worked a short stint at a local Target at the end of high school, I remember seeing the board in our office that listed daily sales. The figure was typically around $100,000. That generates a lot of tax revenue through sales taxes and property taxes.

This is more evidence that the more important feature of sports teams in major cities is their social and cultural value. Teams provide something for a city to rally around and contribute to the city’s collective identify. In major cities with millions of people, it is difficult to find features or events that can bring large numbers of people together. Sports teams also provide opportunities for leisure, whether through enjoying the stadium experience or experiencing the game from afar. Now, if only we could find politicians that would admit the taxpayer money going to stadiums or teams was due to the interest in having a common sports identity and leisure experience rather than some grand economic impact…

Chicago named top metro area for business location

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For the second straight year, Site Selection picked the Chicago metropolitan area as its top metro of the year:

In fact, 385 companies either expanded or located in Chicago in 2014, resulting in the city being named Site Selection’s Top Metro in the US for the second straight year. The consecutive wins are a pleasant endorsement, says Jeff Malehorn, president and CEO of World Business Chicago…

Chicago’s appeal is hardly surprising. The city’s boasts outstanding transportation and logistical assets, including two international airports, a rail hub and seaport, and stands at the crossroads of major Interstates. Chicago and the region are home to a wealth of talent educated at some of the nation’s premier colleges and universities. Foreign companies looking for a US home are drawn to the city’s diverse ethnic population. “Any company outside the US can look to Chicago and see a home,” says Malehorn.

Project highlights for Chicago in 2014 include:

  • Valence Health — a health services company based in Chicago adding 500 jobs over the next five years;
  • Yelp — the online review and advertising site based in San Francisco, Calif., is opening an office in Chicago and plans to hire 300 employees;
  • Braintree — the global payments platform expanded into a 65,000-sq.-ft. (6,000-sq.-m.) headquarters on the eighth floor of the Merchandise Mart. The company is adding 360 new jobs by 2017.
  • ADM — the food services company opened its new global headquarters in downtown Chicago in August 2014…

In figures released in January, Chicago posted its lowest unemployment rate since April 2008, 6.2 percent. The number of city residents employed in December 2014 increased by more than 38,000. The jobs were mostly attributed to professional and business services, education and health service and transportation and warehousing. Malehorn says diversity is a theme in Chicago’s growth, but so is innovation and disruption.

I wonder how the city’s critics would respond. Even with a perilous budget, state issues, Chicago corruption, and cold weather, Chicago continues to be a desirable site for business. They might say that this all happens in spite of the problems..but how would we know? Regardless, this is another piece of evidence that Chicago deserves its lofty ranking among the top global cities in the world.

Public homebuilders increase their Chicago area market share in the last 15 years

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What kinds of firms have built homes in the Chicago region has changed quite a bit in the last 15 or so years:

Public companies accounted for nearly 60 percent of the contracts for new homes in the Chicago market last year, up from 54 percent last year and well above the 11 percent market share they held in 1999, according to Tracy Cross & Associates, a Schaumburg-based consulting firm.

The top five builders in the Chicago area all were public companies, led by D.R. Horton of Fort Worth, Texas, with 517 local contracts signed last year.

The growth of public companies partly at the expense of private builders—a trend playing out in many markets across the country—will likely continue for the next few years until conventional banks grow more willing to finance land purchases and development, said Tony Avila, chief executive of Builder Advisor Group, a San Francisco firm that advises and raises capital for homebuilders.

Many private builders rely more on banks, which have clamped down on financing home construction since the financial crisis, while public companies have other options, such as issuing bonds or shares, Avila said.

Quite an increase since 1999. This reminds me of the shift from really small builders – often just a few homes a year – before World War II to the larger-scale construction afterward (often said to be illustrated by Levitt and Sons). Then (big housing need, new innovations) and now (economic crisis leading to new lending guidelines), broader economic and social conditions contributed to these changes.

With that said, how does this affect the average homebuyer and resident? Large-scale firms may offer economy of scale and therefore lower prices but they also might have fewer options in their housing designs and interiors and be able to construct larger developments, contributing to sprawl. Does the quality increase? Do homebuyers have a better experience in one versus the other?

Cities get creative in finding ways to resolve bankruptcy

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As more cities face dire financial straits, here is a quick overview of the means by which different American cities have escaped bankruptcy:

When Bridgeport, Connecticut filed for Chapter 9 in 1991, they received help from a state oversight board, and also convinced Chase Manhattan to keep its Connecticut headquarters in Bridgeport which helped. There were other approaches, too, one part of which was arranging for Donald Trump to buy out 100 acres of publicly owned property to develop an amusement park and motor race track, though that never came to pass. In 1992, The New York Times reported that there were also “measures including a plan to recover delinquent property taxes by selling tax liens to a private collection agency,” as well as acquisitions for aid from the state, and “concessions from the city’s unions.”

Among the more colorful approaches in recent years was Harrisburg, Pennsylvania’s. In 2011, having been huckstered by a corrupt company to build an up-to-code (and ultimately faulty) trash-to-energy incinerator, the Keystone State’s capital city petitioned for Chapter 9. They sold the incinerator for $130 million, as well as auctioned off a collection of Wild West artifacts owned by a former mayor which brought in nearly $4 million. It also monetized its parking assets, which included privatizing garages, in effect doubling the price of city parking which, for virtually the first time, they began enforcing…

[Jefferson County, Alabama’s] exit from bankruptcy? They cut their payroll, as well as almost a quarter of the workforce. They shut down many of their satellite courthouses in the suburbs, in addition to a number of “nonessential” services: A nursing home sold to a private operator (to the tune of $8.3 million), a public hospital shut down, and the closing of a massive county laundry facility. Patrick Darby, who represented Jefferson County in its bankruptcy filing, said “I have to say in all fairness, what we did here is easier than it would’ve been in California or up north because we don’t have unions… we don’t have public sector unions and so we don’t have to fight that if we want to lay people off.”

So what does this all mean? Every municipality comes up with its own unique solution, and in the case of Jefferson County that meant shutting down a “charity hospital;” in New York that meant laying off 6,000 school teachers who’d leveraged their pensions; and in Vallejo that meant making it possible for the courts to compel unions to break their collective bargaining agreements, a ruling which now extends to the rest of California, and, having some of the strongest labor unions in the country, seems plausible that it could extend to other states, too. And if we’re going to talk about rhetoric, unions are the group often identified as the primary problem behind fiscal insolvency—when, rather, it’s other underlying fiscal crises that make it impossible for those municipalities to fund the pensions they’d committed to long ago. As Marc Levinson says, “It’s just that we’ve made these promises to people who’ve given their lives in service based on this promise and now we can’t afford it!”

As the article notes, “the leniency of the U.S. bankruptcy code” helps allow this creativity. But, I wonder if this kind of creativity ever runs out – what if there is a bankruptcy that is simply too big (though it is hard to imagine one bigger than New York City in the 1970s) or there are too many at once (imagine three or four major cities going through bankruptcy at the same time or within a single state, like California) or creditors and local groups are simply unwilling to budge? What happens then? We haven’t reached that point yet…

Indiana moving away from “Illinoyed” campaign to attract businesses?

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Indiana continues campaigns to catch the attention of Illinois firms but it may soon take a different tone:

For three years, in an economic development strategy aimed squarely at jobs and revenue in higher-tax states, Indiana has been trying to poach Illinois businesses. While they say the tactic has succeeded wildly, officials in Illinois say the impact of cross-border moves largely has been a wash, more political theater than anything substantive…

Kelly Harrington Nicholl, head of marketing at the development corporation since 2009, is the woman behind Indiana’s most memorably catty catchphrases: “Illinoyed” and “Stillinoyed.” But after years of poking fun at its fiscally challenged neighbor, Indiana is about to soften its tone. “We’re not going to beat up on Chicago anymore,” Smith says.

This means that a cluster of billboards along I-90 cautioning northbound drivers that higher taxes lie ahead will come down soon, Nicholl says. “It’s time to play nice,” she says. She declines to say whether Illinois’ newly elected Republican governor, Bruce Rauner, has anything to do with it. “There is a sunset to everything.”…

Despite Indiana’s bravado, the number of state-to-state moves are increasing in both directions, according to an analysis of preliminary data by the Chicago Metropolitan Agency for Planning. The data, supplied by New Jersey-based research firm Dun & Bradstreet, show 70 companies in Illinois relocated their entire business or branches of their business to Indiana in 2013, up from 40 in 2012. During the same period, 48 companies in Indiana moved all or portions of their businesses to Illinois, up from 39 in 2012.

The shift in political theater is noteworthy. Did everyone in Indiana get the political things they wanted? While the shift may be due to Rauner’s election, I wonder if it could also be due to (1) the Illinoyed campaign wearing out (marketing campaigns have a limited shelf life before people stop responding and (2) recognition that, according to the data, the campaign has been a wash (even popular lines can’t hold up forever if not supported by evidence). The competition between the states is likely not completely over but it is interesting to consider how Illinois and Indiana might cooperate to enhance the economies of both states…

Bob Crachit as the oppressed, modern office worker

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Bob Crachit may be irrepressible but his condition mirrors those of many a modern office worker: bad boss, long hours, and a small and cold office. While the book A Christmas Carol was published in 1843, Crachit’s position reminded me of the modern office as described in Cubed. A quick description of Scrooge’s building from A Christmas Carol (the Project Gutenberg version):

The door of Scrooge’s counting-house was open that he might keep his eye upon his clerk, who in a dismal little cell beyond, a sort of tank, was copying letters. Scrooge had a very small fire, but the clerk’s fire was so very much smaller that it looked like one coal. But he couldn’t replenish it, for Scrooge kept the coal-box in his own room; and so surely as the clerk came in with the shovel, the master predicted that it would be necessary for them to part. Wherefore the clerk put on his white comforter, and tried to warm himself at the candle; in which effort, not being a man of a strong imagination, he failed.

It doesn’t exactly resemble the modern office park but does hint at what we know today. Scrooge and Crachit presumably work within walking distance of work but home and work life has clearly been separated. (Scrooge regularly eats at a tavern on his way home.) Scrooge is fixated on the bottom line while Crachit hopes the job can (barely) support his family. The conditions inside the office are all about maximizing the profit: not too much space, not very warm, a boss who controls the setting. This is the white-collar employee laboring for the capitalist within a controlled office.

Of course, Scrooge reverses course at the end of the book and I wonder if his change of heart would extend to a different kind of office. When visiting Bob Crachit and family, Scrooge suggests: “I’ll raise your salary, and endeavour to assist your struggling family, and we will discuss your affairs this very afternoon, over a Christmas bowl of smoking bishop, Bob!” The second to last paragraph suggests his demeanor certainly changed. But, would this extend to having a brighter, warmer office with a more ergonomic setting for Bob?

Bringing sociology and understanding culture to Wall Street

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A sociologist argues for the value of bringing a sociological perspective to Wall Street after noting how the president of the Federal Reserve Bank of New York recently used the term culture repeatedly and defined the term:

“Culture relates to the implicit norms that guide behavior in the absence of regulations or compliance rules—and sometimes despite those explicit restraints. … Culture reflects the prevailing attitudes and behaviors within a firm.  It is how people react not only to black and white, but to all of the shades of grey. Like a gentle breeze, culture may be hard to see, but you can feel it. Culture relates to what “should” I do, and not to what “can” I do.”

Dudley has a doctorate in economics, and spent a decade as chief economist at Goldman Sachs. But in his remarks he sounded more like a sociologist than an economist. His many mentions of “culture” could be significant. I’m hoping they mark the beginning of a change in how regulators think about reining in law-breaking and excessive risk-taking at banks. I’m also hoping that I had something to do with them…

So I studied sociology, and for my doctoral dissertation focused on the organizational culture of Goldman Sachs. The dissertation became a book, titled What Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and Its Unintended Consequences (HBR Press, 2013). One of the changes I document in the book is how Goldman drifted from a focus on ethical standards of behavior to legal ones — from what one “should” do to what one “can” do.

After the book was published, Dudley got in touch. I met with him and his people, and discussed what I had learned in my study of sociology and, in particular, my in-depth study of Goldman. I made recommendations on how to improve regulation. Also, I sent him two pieces I wrote for HBR.org, one on the importance of focusing on organizational behavior and not just individuals, the other asserting that culture had more to do with the financial crisis than leverage ratios did.

One of the key conclusions I drew from my study was that to achieve sustained success and avoid firm-endangering risks, a firm like Goldman has to cultivate financial interdependence among its top employees.

Employees that can make big financial decisions on their own means that many will take big risks and a lot of money could be lost. This reminds me of some of the arguments of Nassim Taleb who suggests losses should not be shared, especially in unpredictable areas like the stock market or with innovative and cutting-edge financial instruments. Instead, there could be organizational cultures that promote more prudent financial decisions that may still be innovative and profitable but limit the possibility of major black swan losses.

Supermarket chains suffering in wealthy countries

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Supermarkets in numerous wealthy countries are having a hard time competing with the wide range of choices offered to consumers:

As they scramble to maintain market share, the big four British grocers can take comfort from the fact that at least they are not alone. The global supermarket industry has its share of epic competitive scraps, too. In Europe alone, the discounters that have wrought havoc for Tesco, Morrisons, Asda and Sainsbury’s have an even more powerful grip on the industry. While Aldi and Lidl control around 8% of the UK market, according to figures from market research group Kantar the share controlled by discounters in France is 10% and in Germany – home of Aldi and Lidl – it is 37%. In the UK, two-thirds of the market is controlled by four players; this is the same as in Germany, while in France 56% of the market is controlled by the top four and in Spain just under 50%. A look at these markets, plus some of the biggest outside Europe, shows that every territory poses challenges for big grocers…

As in the UK, discounters and supermarkets in Germany are faced with shoppers who are less and less willing to drive out of town for their weekly shop, and more likely to do small, frequent trips in urban areas. In recent years, the trend has led to a revival in big cities like Hamburg and Berlin of the traditional Tante Emma Läden or corner shops, which have been able to be much more flexible in reacting to trends or food scandals than their bigger rivals…

Between the discount stores, supermarkets and hypermarkets there is a constant battle going on to woo the increasingly cash-strapped consumer. “Supermarkets are really the only sector [in Italy] where competition has worked out,” said Liliana Cantone of Italian consumer association Altroconsumo. “The players are doing their best to offer lower prices, and consumers can really benefit from this.”…

The market is far from impenetrable, however. Walmart, the only “everyday low pricing” operator in Japan, has forced domestic rivals to keep their prices low where it operates stores. Costco, with 20 stores nationwide, has proved a success, offering prices comparable to those found in the US. Tesco’s foray into Japan was frustrated, in part, by consumer idiosyncrasies.

Sounds like some contradictory forces at work. On one hand, increased globalization means food can travel all over the world. It might seem that such a global market would be controlled by some major players in the grocery industry who could use their size to their advantage. Yet, that same globalization allows other players to get into the game and gives consumers more low-priced options, usually something seen as a good in free-market economies. Throw in debates about subsidizing food production, getting healthy food to places that need it, and genetically modified food and you have a retail sector that is experiencing a lot of flux.

Just one quick thought: I’ve been in supermarkets in England, France, and Japan and they all seem more similar to each other than to the American version. Even not looking at Walmart or other big box stores with groceries, the American supermarket is an amazing size with tremendous variety. In contrast, stores in the other countries are smaller, something that may be cultural as well as economic due to higher rent and land prices.

American manufacturing jobs “stepped off a cliff” in the 2000s

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The loss of manufacturing jobs was particularly significant in the 2000s:

Manufacturing job loss has been a fact of American life since the 1970s, but in the 2000s manufacturing stepped off a cliff, shedding 5.8 million jobs, or about one of every three—most of them before the Great Recession began at the end of 2007. Illinois alone lost 320,900 manufacturing jobs, or 36.6 percent of its total, in the 2000s. Good jobs for those without a college diploma disappeared in the 2000s and generally did not come back. In December of 2000, the ratio of unemployed job seekers to job openings had been 1.1 to 1. At the end of the decade, it spiked to 6.1 to 1. The 2000s was the first recorded decade of zero job growth…

There are still more than 12 million manufacturing jobs in the U.S. and output is as high as ever, and just behind China’s. In an overlooked story, the United States added manufacturing jobs for 12 months in a row in the past year. The gains are modest, but such a winning streak has only happened four times in the last 30 years. Some business elites have shifted their thinking. General Electric’s CEO Jeffrey Immelt wrote in 2012, “Outsourcing that is based only on labor costs is yesterday’s model.”

As the article suggests, the 1970s get a lot of attention for a downward slide in manufacturing jobs but this pattern has held up in other recent decades – until this past year or so. The initial downward slide was certainly important; it led to the work of sociologists like William Julius Wilson who noticed the negative effects on poor urban neighborhoods. But, the loss of manufacturing jobs also has long-term consequences that may still be hard to imagine.

“The Real Reason the Poor Go Without Bank Accounts”: relationships

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A public policy professor worked four months at a check cashing business and found check cashing services offer several features that banks do not:

At commercial banks, the account itself often maintains the relationship between the customer and the institution. I might not be satisfied with my bank, but it’s an enormous inconvenience to switch everything over to a new one, and there is no guarantee any other bank will be more efficient or better…
The glue at RiteCheck is the customer/teller relationship. I interviewed 50 RiteCheck customers after my stint as a teller and, when I asked them why they brought their business to RiteCheck instead of the major well-known bank three blocks away, they often told me stories about the things the RiteCheck tellers did for them. Nina, who has lived most of her life in Mott Haven, told us that her mother had been very ill and that the RiteCheck staff had called to ask about her. “So we can be family,” Nina said. “We know all of them.”

Being a regular at the check casher also brings more tangible benefits. Marta, another regular, came to my window one afternoon with a government issued disability check to cash. When I input the number from her RiteCheck keytag into my computer, the screen indicated she owed RiteCheck $20 from every check she cashed. I didn’t know what to do, so I turned to Cristina for advice. I learned that Marta had cashed a bad check awhile back, and that RiteCheck had worked out an arrangement in which she could pay RiteCheck back in installments…

Many factors—cost, transparency, convenience—go into the choice consumers make between a bank and a check casher.  Atmosphere and the attitudes of the staff are only one component, but this piece of the puzzle may be more important than we thought. Like the famous TV song goes, “You want to go where everyone knows your name.” If policy efforts to move the unbanked to banks are to be successful in the long run, banks need to remember they are a service industry involved in one of society’s most important and basic relationships.

It sounds like the check cashers serve as a kind of community institution that customers can count on for social support as well as ongoing relationships. It isn’t just about the ability to access money; it also includes the flexibility to have give and take, whether that means helping someone get by when money is tight or celebrating big moments (like births) together. Many large corporations don’t offer this kind of personalization, even as they might offer cheaper prices or certain goods. And what incentive do banks have to lend money with people with lower incomes? That is not where the big money is to be made.

At the same time, it would be interesting to see an attempt to quantify just how much this customer service is worth. Does this apply to other industries as well? For example, there has been a lot of talk recently about the surge of dollar stores who offer goods cheaper than Walmart. Why might relationships matter more with financial institutions than dollar stores or fast food restaurants?