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City on the Skids

Chicago is in deep, long-term economic trouble. How did it happen? What can we do?

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Growing up in Minneapolis, I thought of Chicago as the center of the world--the Great American City. But by 1984, when I came "home to the midwest" to work as an economist, things had begun to go wrong, badly wrong. Mainstays of the city's economy were falling to the wrecking ball, and not enough people were worrying about what would take their place. On the coasts, where things were thriving, Chicago became synonymous with rusty, shuttered plants and a conflict-ridden industrial society that spanking-clean, high-tech enterprises wished to escape. Silicon Valley, the economic success story of the 80s, became Chicago's antithesis.

Economically, Chicago has always been among the most cosmopolitan of the nation's cities. While Los Angeles sells movies and military equipment to Americans, and New York sells fashion and financial services to the same, Chicago has been the center of an enormous exporting hinterland, shipping agricultural produce, processed foods, farm and mining equipment, and construction and industrial machinery around the world. Chicago has also been at the heart of the American consumer-durables economy, pumping out appliances, consumer electronics, and autos for a formidable domestic market. When New England faltered in the 1950s, and New York in the early 1970s, Chicago chugged along, relatively immune to the structural changes decimating cities to the east. In its prolonged glory days, Chicago made what the nation, and the world, wanted.

But all that changed in the mid-1970s. Chicago's rate of economic growth began to fall behind the nation's. In the 80s, the city's economy went through the floor. Fewer people were working in the state of Illinois by the end of 1986 than had been in 1979, and Chicago bore the brunt of this decline. The labor force had grown, but jobs had not. Despite journalistic brouhaha about Chicago being world class, the city has been sliding down the ranks of the American--and world--urban hierarchy. It has been humiliated in particular by the rise of Los Angeles, which has displaced it as the nation's second city.

I came to Chicago to head up the research effort for Mayor Harold Washington's Task Force on Steel and Southeast Chicago. The notorious closing of most of South Works had just been announced, on the heels of the Wisconsin Steel slaughter. At the time, the view among business leaders was that Chicago was just bearing the brunt of another unavoidable recession. Workers, too, clung to the belief that the lines would start up again and those good, dependable paychecks would be back any day. These were not unreasonable hopes. In the past, Chicago's economy had always been more cyclical than the nation's. When the country slid into recession, Chicago plummeted. But each time the nation got going again, Chicago boomed vigorously, wiping out intervening losses. So in the trough of 1983-'84, optimists counseled waiting out the recession for the boomlet to follow.

But this time it didn't happen. When the national economy began to recover in 1983, Chicago's economy continued to inch downward. It became clear that the city was indeed partially "deindustrializing." Since then things have gotten a bit better, but even in 1988, despite a much discussed manufacturing revival, Chicago's output growth lagged the nation's, and jobs were even further behind. Many people, disproportionately young, left the area altogether. (Among other bad side effects of this out-migration, Chicagoans have good reason to fear the 1990 congressional reapportionment.)

As the gap grew between Chicago's performance and that of other big cities--Boston, New York, San Francisco, Miami, Washington, D.C., and Seattle--a chorus of voices began to blame the city's "business climate," a climate that turns out to be even less measurable or predictable than the meteorological one. High on the list of villains were labor unions, utility rates, the state's workers' compensation system, and city taxes. If we could only lower these costs of doing business, the argument went, Chicago would bounce back as robust as ever.

But the more I studied the situation, the clearer it became that Chicago's problems were much more serious than that. Indeed, the most successful cities in the 1980s all had labor, tax, and cost structures not unlike Chicago's. Somehow, we were betting on the wrong horse.

When I first arrived, it was hard to find out how bad things really were from the city's newspapers. With the exception of Dick Longworth, Carol Kleiman, and Merrill Goozner, business writers and their editors preferred to herald every tiny upswing in any indicator while ignoring the more prevalent downers. Individual plant closings, like Wisconsin Steel, might get some press, but they were treated as isolated cases creating social problems for a few.

As a newcomer, I was fascinated with Chicago. It is an enormously understudied city as economies go, and it is arguably the pivotal American city of the decade. What actually happened to the United States economy in the 80s is best reflected in what happened to this city; Chicago too has had its distressing, unprecedented trade and budget deficits. As my work on the steel task force continued, I found I loved working with the trade unionists, community activists, and small business groups who were energetically seeking solutions to "deindustrialization." I resigned my job as professor at Berkeley and switched to Northwestern. For five years, I dedicated the bulk of my research to understanding the Chicago economy. And what I found was a city in deep, long-term trouble.

Yet despite its many problems, a number of hardy misconceptions about the city's economy have taken deep root. They might be put as follows: One, Chicago is the industrial capital of the nation, a position of preeminence it will never lose because it serves deep domestic and international markets. Two, with the country's second-largest concentration of national corporate headquarters, Chicago has a business leadership that will carry it forward into the international economy of the future. Three, Chicago is the Manhattan of the midwest, a postindustrial city successfully making the transition from manufacturing to services. Four, Chicago is in a unique position to benefit from the homegrown prescriptions of the "Chicago School" of economics--the laissez-faire, free market, deregulating federal government policies of the 1980s. Five, improving Chicago's educational system, both as a skills trainer and as a source of new ideas for industry, will ensure Chicago's economic revitalization. Each of these notions contains some truth, but all are dangerous to cling to in this era of dramatic economic change. Let's examine each in turn.

I. The Industrial Capital of North America

Chicago was indeed cast in a unique role in the national economy, one it has played with great distinction for more than a century. If any region has been responsible for making the American market strong and deep, the market so highly sought after by exporters from other nations, it is the midwestern heartland of which Chicago is the capital. To begin with, it had extraordinarily productive agriculture, which in turn fueled the demand for farm machinery, rail cars, grain elevators, and tools. Relatively high incomes and wages in midwestern agriculture and the basic industry that served it in turn created a dynamic internal market. Well into the 1950s, American farmers and workers soaked up radios, refrigerators, cars, and processed food, and Chicago responded with enthusiasm. Retailers like Sears and Ward's sold the goods, and manufacturers like Zenith, Motorola, Schwinn, Kraft, and International Harvester produced them, using steel and machine tools also made in and around Chicago.

But as the postwar period progressed, things began to go very wrong. Between 1972 and the mid-'80s, Illinois lost almost one in four of its manufacturing jobs, while states like Massachusetts and California added them by 11 and 33 percent respectively. In industries such as steel and machinery, the losses hit as high as one in three, in some cases even one in two. As farms fell into bankruptcy, farmers stopped buying tractors, particularly big ones. Fewer tractors meant shrinking orders for mills like Wisconsin Steel and Republic on the city's south side. Service workers lost their jobs too, as closings shuttered such Chicago institutions as the Daily News, Goldblatt's, and Wieboldt's.

A major cause of this slump has been the enormous role of the postwar military-industrial complex in remaking the American economy, bypassing Chicago and the rest of the midwest. In the "hot war" of the 1940s, and even during Korea and Vietnam, Chicago and other midwestern cities churned out hundreds of thousands of tanks, ammunition rounds, and the myriad parts needed for manpower-intensive warfare.

But the A-bomb changed all that. Designed and fashioned by a few hundred scientists in remote locations like Los Alamos, New Mexico, it was dropped in August 1945 by six pilots in two bombers. As war became increasingly nuclear, automated, and "cold," the midwestern assembly lines that cranked out gear for a blue-collar Army were shut down. In their place rose brand-new aerospace giants in places like Southern California and Seattle, huge defense-oriented electronics complexes in Boston and Silicon Valley, and fancy air and space defense installations in Colorado Springs, Huntsville, Alabama, and Melbourne, Florida.

From Korea on, the flow of dollars from the Pentagon to Chicago dried up. Just below the national average in 1952, Illinois' military receipts fell to 20 percent of it by the mid-1980s. President Reagan's military buildup, with its emphasis on glitzy new weapons systems and reductions of manpower, did nothing to help. Most of the big defense contracts that Chicago does get go for things like Quaker Oats, Swift meats, Amoco oil, and tickets for soldiers on United Airlines, not for the high-tech weapons topping the Reagan-Bush wish list.

In the critical area of research and development, where the Pentagon doles out the dollars that end up contributing to commercial technologies such as computers, semiconductors, lasers, and new materials, this region has the lowest per capita receipts in the nation. For instance, Illinois companies received only $154,000 of the more than $1 billion spent on SDI research in 1985. When you consider the tax contribution that Illinois citizens made to SDI, the state comes in dead last in the SDI lottery.

Why did Chicago lose its chance to parlay its considerable engineering and consumer-electronics skills into big cold war defense contracts? After all, Boston had an industrial past like Chicago's, yet it managed to regenerate itself as a diversified military- industrial and military-educational complex. The comparison is instructive:

After World War II, Boston's economy faltered as its industrial mainstays --textiles, shoes, and apparel--fell to cheaper products from the south and overseas. Politicians and commentators were alarmed; if you look in a library card catalog, you will find half a dozen books written on the depressed New England of the 1950s. In response to the downturn, Boston boosters, bankers, and universities went after Pentagon dollars in a major way, nursing an emerging defense-electronics complex. With the cold war demand for radar, communications equipment, computers, and aircraft engines, Boston- and Hartford-area companies like Raytheon and United Technologies flourished. Boston exported blue-collar and poorer people for decades, as it remade itself into yuppie heaven, siphoning off top students from around the country and setting them up on graduation as high-tech entrepreneurs on Route 128.

Chicago, in contrast, lost out precisely because its economy had been so robust for so long. In the crucial 1950s, Chicago was hustling to equip consumers with the accoutrements of postwar posterity, and to make the steel, machines, and parts for companies elsewhere to do so. Exasperated with government red tape and preferring their mass markets to the more specialized world of defense contracting, the big Chicago companies dismantled their wartime plants and built factories, suburbs, and shopping malls in their stead. Bell & Howell, for instance, got out of military optics to concentrate on home movie cameras and video tape. Ford City, once a thriving wartime manufacturing complex, was transformed into a suburban residential haven. No one had time or reason to contemplate the very iffy future of missiles or satellites, and few dreamed that there would ever be limits to their markets, or worse, better products from abroad. So Motorola, Western Electric, Swift, and plants of many other corporate giants churned out the consumer goods and raked in the profits.

Even when the big Chicago companies got into making military products, they didn't do it here. Chicago-based Motorola, for instance, made the transition from consumer electronics into semiconductors, but it did so by setting up a separate facility in faraway Phoenix in the late 1950s. The manager in charge at the time, Dan Noble, was an asthma sufferer who preferred the arid climate there. But he also found the entrepreneurial climate stifling in Chicago and was anxious to leave. When individuals spun off of Chicago's defense contractors to start their own businesses, they didn't stay here either. Morton Klein, vice president for business development at Illinois Institute of Technology's Research Institute (IITRI)--Chicago's version of MIT and a big military contractor to this day--reports some 50 spinoffs since IITRI's start in the 1930s. Only a handful of them ended up in Chicago; most went to the southwest.

Yet old memories die slowly. Ask a manufacturer or a labor leader and he'll tell you that much as he might be for peace, war is good for this economy. For years on the Chicago speaking circuit, whether talking to business or labor, I found eyes glazing over as I went into my rap on the absence of cold war defense dollars in the midwest and the depressing effect it has had on Chicago's economy. No one wanted to believe it. Recalling the hum of the full-capacity wartime production lines, they longed for any new weapons system that might trickle down to the midwest.

How could Chicago's congressional delegation let this happen? Why did the military pork barrel disgorge so heavily toward the defense perimeter of the nation? Why didn't Everett Dirksen or Dan Rostenkowski do for Illinois and Chicago what Tip O'Neill did for Massachusetts? Well, members of Congress are the reflections of their business cultures, after all. In that crucial decade of the 1950s and on into the present, Chicago and other midwestern cities have sent politicians to Washington who would get onto the agriculture and commerce committees, who would worry about tariffs, investment tax credits, labor laws, and other such things that civilian-oriented industries saw as in their interests. Rostenkowski with his prestige as a tax man is a contemporary example. Southerners, Texans, and Coloradans sent members like Mendel Rivers, Lyndon B. Johnson, and Ken Kramer--representatives who gravitated toward armed services and appropriations committees where weapons systems were approved and bases opened and closed.

The result of all of this has been to shift the center of industrial gravity in the U.S. toward Los Angeles and away from Chicago. Notwithstanding the veneer of Hollywood, by the mid-1960s 40 percent of the entire Los Angeles economy was dependent upon defense dollars. Enormous defense expenditures propelled Los Angeles right past Chicago to the number two position among American cities--literally, Los Angeles, not Chicago, is now the nation's Second City. By the 1980s, a clear division of labor between these two competitors had been established. Chicago specializes in nonmilitary-oriented manufacturing. It lost 160,000 industrial jobs from 1978 to 1986. Los Angeles is the world's single biggest aerospace-electronics enclave, heavily dependent on government largesse; it added 25,000 manufacturing jobs in the same period, despite a nationwide decline of more than 8 percent. Across the nation, cities like Minneapolis, Boston, and San Jose, favored by early defense contracts in electronics, communications, and computers, have become the new centers of industrial capacity, while Chicago's mechanical-era skills and consumer electronics languish amid mass business nostalgia for the 1950s.

II. Chicago's Corporate Leadership

A second major cause of Chicago's industrial slippage has more to do with losses to Japan, Sweden, and Germany than to Los Angeles, Seattle, and Dallas--losses that can be laid at the feet of indigenous business leadership. While the cold war economy considerably accelerated the rate of Chicago's decline over the postwar period, much of the problem lies deeper, in the city's peculiar industrial and political cultures.

At the turn of the century, Chicago was propelled toward national leadership by the dynamism of industrialists such as Cyrus McCormick, George Pullman, Philip Armour, Gustavus Swift, and William Wrigley--men who had "better ideas" and made them stick. They were business heroes--respected, romantic, and headily optimistic. Entrepreneurship was rife in Chicagoland, well through the first few decades of this century. It was an art form all its own.

The young, hardworking, and future-oriented immigrants who came to work at Chicago's stockyards, factories, and building sites from the 1880s on also contributed to Chicago's industrial miracle. They labored to buy homes, to bring over their European relatives, and most of all to provide an education for their children. Sons and daughters of workers became salespeople, shop owners, teachers, nurses, and secretaries. Together men and women built lovely and stable neighborhoods, and fought for the eight-hour day. In place of the squalor of early steel towns and the 70-hour work week that killed men and created widows with young children, they fought for and won the American dream. Several decades later, as blacks and Hispanics arrived to fill the factories' need for labor, they too worked assiduously for homes, schools, and a future for their kids.

But in the midst of all this prosperity, something extraordinary was happening. Factories got bigger, markets became saturated, and prices began to fall. To avoid cutthroat competition, companies began to consume each other as early as the 1890s. In the midwest, where scale economies favored massive plants with expensive equipment, the merger movements were more intense than elsewhere. By the 1920s, U.S. Steel had swallowed up a number of independent Chicago mills and controlled 70 percent of the market for steel. In oil, farm machinery, industrial equipment, autos, and pharmaceuticals, firms fell by the wayside until only a handful were left. And then, their practices began to change.

Instead of making products better and more cheaply, they turned their attention to managing their markets. Gentlemanly agreements were struck whereby companies parceled out the markets, restricted output, and hiked up prices to achieve superprofits. To avoid the trust busters, they developed price-fixing into a precise and subtle art. To ensure that no one shaved prices, they turned their eyes away from their customers and toward their competitors. They stopped anticipating what innovations their users might want next. As one steel buyer put it to me a couple of years ago, the big companies still "just want to sell their steel on the golf course." They became increasingly out of touch with their customers, especially the smaller ones. In the mid-1980s, Bethlehem Steel's Chicago regional marketing manager decided to lop off the bottom half of his customer list--some 500 small steel purchasers just weren't worth serving anymore.

Over time creative energies went more and more into advertising, superficial product design, and enforcing illegal market-sharing arrangements, and less and less into the innovative technologies and quality product development that had made midwestern companies great to begin with. Investments in new plants and equipment tended toward not the bold and risky, but the tried and once true, such as the outdated open-hearth furnaces that the steel industry was installing as late as the 1950s. To this day, a common response to the inevitable entry of foreign products and plants is to shut down more factories to keep prices up. The steel industry's first public policy initiative researched at Northwestern's new Steel Research Center is a project on "removing barriers to exit." The industry is paying business professors to tell them how to close plants without having to honor contractual obligations to their workers and moral or legal commitments to their host communities. That's what's passing for innovative private-public partnership these days.

With an embarrassment of profits, the cartels also became preoccupied with disciplining labor. Aware that their companies were flush, the unions fought for a fair share. In response, management created large industrial-relations departments whose function was to contain worker gains, including everything from hours to pay to working conditions. At first profits were so lavish that it was easy to share with the unions. So up through the 1960s, Chicago workers won good benefits and steady wage gains, and were fairly sure their jobs would last. But as profits dwindled thereafter, companies flexed their muscles by threatening to close plants or move to cheaper sites, and by stepping up their efforts to wrest concessions from the unions. Some did both--U.S. Steel won two rounds of wage cuts from the steelworkers before deciding not to build a rail mill at South Works; instead the company shut down 80 percent of its remaining Chicago mills in 1984.

The big companies got concessions, all right, but at a hidden price. Management and labor faced each other with growing enmity and distrust. When new and better production processes arrived in the 80s, requiring greater worker input and cooperation, it was nearly impossible for companies to switch gears and improve their labor relations sufficiently. Instead, most tried to shift the profit squeeze back onto the work force, claiming that their major difficulty lay in high labor costs. In trade associations and commercial clubs, lowering wages became a "business climate" priority. Amid the carnage of the 1980s, the Illinois Manufacturers' Association remained almost ludicrously indifferent to the challenges of international competition and new ways of doing things. Their top two priorities as of mid- decade remained the insurance liability "crisis," and beating down workers' compensation levels.

To worsen matters, just when the big companies should have been putting their houses in order, diversification and takeovers became the fashion of the day. Companies began to drop from their corporate titles words that connoted real products. As they slid out of their traditional specialties into more lucrative fields like oil and financial services, and began to buy and sell business units as if they were commodities, they adopted acronyms or synthetic labels whose meanings were hard to fathom. In the mid-1980s, International Harvester became Navistar, leaving a slew of unemployed steelworkers and machinists in its wake. And U.S. Steel x'd out the steel to become USX, as its South Chicago works dwindled from more than 5,000 jobs to 700.

Unfortunately for Chicago workers, the new jobs in finance and oil didn't end up here. In a reversal that many workers still find hard to believe after generations of activity, large tracts of industrial land now lie idle around the city. In 1984, a subcommittee of prominent Chicago industrial real estate folks looked into the possibility of rehabbing old steel properties on the far south side for the Mayor's Task Force on Steel. They came back perplexed and dejected. "Forget it," they said. "There's no industrial market for this land." The only prospect in the offing for the shuttered Wisconsin Steel property is a waste recycling facility. A once-vibrant factory will now be a smoking dump--and perhaps not even that if the community has its say.

There have been important exceptions, companies that decided to stick it out doing what they do best. Chicago-based Inland Steel is one of them. Unfortunately, Inland makes only its decisions in Chicago--the factory jobs affected are all in northwest Indiana and farther afield. Perhaps a better example is Acme Steel, a small integrated producer on the south side that has defied all the truisms about economies of scale to make better steel in small, aging facilities.

Overall, however, the corporate leadership that once took pride in Chicago as the nation's industrial capital has dissipated. Such corporate characters as Wrigley and McCormick and their sons have been largely displaced by a new breed of managers, often highly mobile across companies and regions. Few big industrial corporations, despite their considerable presence here, take an active role in charting the city's, or the region's, economic future. Inland Steel, despite its Chicago headquarters, declined to serve on Mayor Washington's Steel Task Force, and Pittsburgh-based USX refused to be interviewed by our Task Force researchers. The big companies that do exert leadership, like Borg-Warner and FMC, have few production workers left in the Chicago area, so their priorities tend toward great civic projects like the ill-fated world's fair. There are welcome exceptions, especially among medium-sized firms. Helene Curtis's Ron Gidwitz and Acme Steel's Brian Marsden are examples. But they are few and far between.

The big new glossy facades that harbor the expanded headquarters of Chicago's multinational corporations are indeed carrying Chicago into the new international division of labor. They are doing so by extending their empires internationally, or presiding over their slow shrinkage, and at most adding a few thousand service jobs to the downtown area. Part and parcel of this vision are far-flung plants and marketing operations across the globe, which are synonymous with the closure of plants in the immediate environs. The industrial establishment of Chicago has been stunningly silent on the questions of international competitiveness and basic industrial strength in the 1980s. While academics and microelectronics executives in Texas and California press for a new industrial policy, the steel, machinery, and food-processing industries are divided, indifferent, or even hostile to suggestions for investment tax credits, national capital funds, intraindustry cooperation, and regional jobs authorities.

III. The Myth of the Service Economy

To the extent that there is an indigenous big business leadership today, it is found in the commercial and real estate sectors, among the Rubloffs, Wislows, and Klutznicks who were born and raised in Chicago. Indeed, the "business community" in Chicago has come to mean chiefly those who have a stake in the downtown office-tower environment: the headquarters buildings, banks, and exchanges, and the commercial real estate interests that thrive off them. The prevailing view is that industrial jobs are dead anyway, so why not fall in with the trend and concentrate on service-sector jobs?

Those who welcome the "Manhattanization" of Chicago argue that we are shifting from the manufacture of goods like machine tools, TVs, and steel to the production of services like accounting, finance, and data processing. They argue, correctly, that Chicago benefits by virtue of its concentration of corporate headquarters and the specialized financial exchanges rooted here. They point to rapid growth rates in service jobs, from 7 to 10 percent in the 1980s, as evidence.

But that's misleading. Service jobs are growing everywhere, but the Chicago area's service industries are growing only half as fast as those in the rest of the country. Even nationally, the U.S. is not a postindustrial economy yet. Indeed, much of the hoopla about services stems from a difference in productivity growth in the manufacturing and service sectors. Manufacturing output still accounts for the same share of national output that it did in the 1950s. But manufacturing has made such large productivity gains recently that fewer people work to produce that output; meanwhile the productivity growth in service industries has been miserable, so relatively more jobs, the bulk of them low paying, have been created in the service sector.

Chicago's service-sector growth lags the nation's because service jobs are in large part dependent upon manufacturing jobs. Though it might seem that service jobs are replacing industrial ones, a good chunk of the increase in services is a statistical artifact--factory jobs simply reclassified into the service sector due to formal ownership or subcontracting arrangements. In steel, for instance, as many as one-third of the Chicago jobs "lost" over the past decade were simply shifted from industrial to service categories through subcontracting or "outsourcing." Bricklayers who used to line steel furnaces as employees of the mill are now lining them as employees of outside construction firms. They now qualify as service workers, even though they are doing the same job. Janitorial and lunchroom services, machinery maintenance, trucking, warehousing, accounting, and even industrial engineering are now subcontracted to outside firms. Their employees may still be working inside the same mill, but they are now counted by the census as service workers. If the mill shuts down, these workers will lose their livelihoods. Their "service" jobs are dependent on basic manufacturing, not substitutes for it.

Across the nation, the cities growing fastest in services are places where manufacturing is simultaneously doing well. And the converse holds as well, especially in Chicago. Here, where industrial job loss has been double the national rate, service-sector growth has been only half that nationally. Chicago's once-great wholesaling, transportation, and distribution services mean much less now that imports account for a very large share of new purchases. Japanese and Korean goods come in through totally mechanized container ports in Oakland or Seattle, and are unbundled for shipping in Reno or Wichita. As a result, jobs in Chicago railroad yards, warehouses, and wholesaling firms are dwindling.

In banking services, Chicago's record is also less than impressive. Despite the city's historic position as banker for the fruitful midwest, Chicago now has fewer banking jobs for its size than the average large city in the nation. Through conservative lending practices and a remarkable readiness to ship homegrown capital out of the region, the city's banks have lost their command of the heartland economy to major money centers like New York.

Bankers are always skeptical of new ideas, but entrepreneurs in Chicago complain more than they do elsewhere of bankers' indifference to new enterprises. Northwestern engineering professor Al Rubenstein remembers serving on a civic task force on the electronics industry back in the early 1960s. According to Rubenstein, the group introduced "a couple of exciting young firms" to the big Chicago banks, to no avail. Banks were quite content to confine their lending to their big corporate clients. Venture-capital firms are a similar story. According to Richard Florida, a professor at Carnegie-Mellon University who has studied the industry, Chicago has a major concentration of such firms, but they have a remarkable record for financing growth elsewhere while shutting out local firms. Indeed, in most segments of the city's financial community, a new idea is apt to be met with the demand "Show me where else it has worked!" Chicagoans have taken the "venture" out of venture capitalism.

But what about those services that are not tied to regional markets? Take, for instance, the indisputable role of Chicago as an international financial center. The Chicago exchanges and stock market are major international players, helping to mobilize capital here and elsewhere, moving it from dollars into commodities into stock, or into future options on any of the three. In the process they do create jobs. But the exchanges, according to their own figures, employ fewer than 4,000, a minuscule part of the Chicago-area work force. Even considering associated brokers, dealers, and messenger boys, we're talking about a mere 1 percent of the city's jobs. And although some 14,000 new exchange-related jobs have been created in recent years, the Chicago area lost 200,000 manufacturing jobs in the same period. In other words, for every ten jobs lost in industry, less than one was created by the exchanges.

Furthermore, the malaise in manufacturing may be closely connected to the hyperactivity in downtown financial services. In the 1980s, the financial industry became bloated with the dollars milked out of manufacturing, in Chicago and nationwide. Money that should have gone into upgrading equipment or research and development has been squeezed out through takeovers, mergers, and prohibitively high interest rates in markets where its only use was to make more money.

The future does not look unambiguously bright for the financial sector as a whole, and Chicago's in particular. The savings and loan crisis is a harbinger of more financial difficulties to come, certainly in banking, probably in asset markets like stocks and real estate too. The proliferation of junk bonds is already coming home to roost. And Chicago's exchanges face the troublesome specter of competition from New York, London, and Tokyo, as computerization of financial markets makes them increasingly mobile.

Nor is it reasonable to think that Chicago's service sector as a whole can expand jobs indefinitely. The pressure is now upon the service sector to cut costs and increase productivity. By the early 1980s, the insurance industry had started to shrink, and the banking industry is not far behind. The same forces that attracted industrial jobs to lower-cost nonunion locations are now beginning to affect the "back office" jobs as well--they are moving to the suburbs, to Kansas and Oklahoma, and as far as the Bahamas.

This is not good news for those who think that downtown growth is an inexhaustible source of regeneration for the Chicago economy. Former economic development commissioner Rob Mier points out that the skyscrapers constructed in the 1980s have added no net new jobs to downtown Chicago, just shifted their locus toward the North Loop. Now, in the aftermath of the Sears Tower drama, the city is forced to face the issue of plant closings even in the heart of downtown. Because so many real estate interests are in jeopardy, it is easy to get the business community to rally behind an incentive package. But how many more companies will line up to feed at the public trough? And how can the city prevent more big-ticket flights to suburbia or beyond, especially with the state paving the way?

City government has not shown much leadership in this regard. Consider the long tenure of the late Mayor Daley. Even when the stockyards and International Harvester closed in the 1960s, and some pressure was put on him to do something forceful about economic development, he demurred. As David Moberg argued in Inc. magazine last year, "Daley's preoccupation was with the highway, the urban-renewal bulldozer, and the skyscraper, and his focus was single-mindedly on the downtown Loop." From it, he got construction jobs and tax revenues, and that seemed like enough. He was long indifferent to the migration of jobs to the suburbs and the Sunbelt. Not until 1975 did he finally set up the Economic Development Commission.

Mayor Washington made a fresh and surprising start with his Steel, Apparel, and Printing task forces. And recently the Economic Development Commission under Ron Gidwitz's leadership has taken some important first steps toward a strategic economic plan. But under the new Mayor Daley these gains may be lost. In his campaign, Rich Daley was blunt: "Who wants to have factories in their neighborhoods?" he queried at one point. Maybe none of us. But if K marts, low wages, and foreclosed mortgages are the alternatives, maybe Chicagoans will have second thoughts.

IV. How the "Chicago School" Failed Us

Not all of Chicago's economic troubles can be laid to the cold war, entrenched corporate practices, or wishful thinking about the postindustrial future. National economic policy, especially in the 1980s, has become increasingly prejudicial to the industrial heartland. As financiers and conservative economists came to dominate the Washington agenda, and the Treasury Department and Federal Reserve Board rose in stature over the Department of Commerce, any chance of a midwestern revival was thwarted. Ironically, the gurus of the new movement for hands-off economic policy, deregulation, and unrestricted financial machinations reside on Chicago's south side, in that venerable institution that produced the "Chicago School" of economics. David Hale of Kemper Financial Services notes that a disproportionate share of top Reagan-era economists were trained down in Hyde Park, the "freshwater" economists of Chicago displacing the "saltwater" ones from Harvard and Yale.

Have Chicago-trained practitioners of the dismal science done well by us? What did they do? Reagan's economists, along with the bankers and Wall Street whiz kids who dominate the Treasury Department and the Federal Reserve Board, engineered a recession in the early 1980s to bring down inflation, cranking up interest rates through their control of the Fed's prime lending rate. Real interest rates rose from around 3 to 8 percent in a few short years. Incidentally, or perhaps not so incidentally, banks reaped higher profits as businesses and consumers paid more for loans and mortgages. As William Greider argues in his Secrets of the Temple, such extraordinarily high profits had not been enjoyed by banks since the late 19th century, when they ignited the populist Greenback ferment across the nation. In Greider's view, the 1980s is a time when financial interests have risen once again to dominate industrial interests, placing jobs and stability in some jeopardy.

With the higher real costs of capital, industrialists interested in responding to the "Japanese threat" couldn't afford to borrow to install new equipment or upgrade their factories. So new domestic plants, to the extent they were built, were Japanese and German, and much of the machinery installed in them was not made in America either. Inland Steel built a new blast furnace with Japanese finance, technology, and imported engineers. U.S. Steel's new continuous caster at its Gary works is Japanese-made as well. Unfortunately, as Japanese finance became central to new American manufacturing capacity, few of the new auto or steel-finishing plants were built in cities like Chicago or Detroit. The Japanese favor places like Tennessee and California.

High interest rates also led to an influx of foreign capital, which led to a severely overvalued dollar in the early 1980s. Up through 1984, a Chicago plant trying to sell machinery abroad had to lower its price by about 30 percent to match foreign competition, because of the overstrong dollar. And to sell cars or machine tools here at home, Chicago businesses had to do the same or lose to imports. In such straits, it's difficult to have the confidence to build a new production line or computerize a plant, never mind getting a bank loan to do so. Instead companies spent three, four, and five years in the red, and along the way some decided to hang it up. LTV, for instance, its bold effort to merge three large steel companies a failure, filed for bankruptcy in 1987. Workers at the former Republic works on Chicago's south side are still paying the price.

Then there was the big financiers' dearest project--deregulation of banks, S & Ls, and other financial institutions. The Chicago School economists promised it would increase efficiency. Deregulation ushered in "financial restructuring" as it is politely called, but what it really means is that the big guys can now devour the smaller ones and penetrate markets that had been off limits before. If your bank didn't change its name in the last five years, it's out of step. Mine switched from being National State Bank of Evanston to the acronymic NBD, which after much poking about I discovered stands for National Bank of Detroit. Savings and loans, in the name of "efficiency," were driven away from their historic mission--to pool local household savings and lend them back within the community to finance moderate-income home ownership. Instead, they were driven into risky investments that in hindsight seem only to have enriched real estate interests and profligate managers.

Deregulation fed a boom of speculation, as short-term profits were milked from the wholesale buying and selling of financial institutions. The financial drive was also fueled by extra cash from Reagan's mostly-for-the-rich tax cut. That's because the rich save more than the rest of us. Recently, John Callaway posed the following question to a group of us on the Chicago Tonight show. "If your great uncle gave you a $10,000 windfall, how would you use it?" Chief economist Bob Dederick of Northern Trust, Richard Sandor of Drexel, Burnham, and another financial industry guest each detailed how they would spread it across stocks, bonds, and money market funds. I was shocked. When it came my turn, I said I wasn't as rich as these guys (I could tell that from the cars we drove into the WTTW parking lot). I really need a new car, I said. Only 5 percent of all Americans are net savers, I pointed out--the rest of us are deep in debt to buy houses, cars, and monthly credit. It would simply not occur to most people to save the entirety of a windfall like that.

Anyway, the Reagan top-of-the-line tax cut went mostly into the pockets of people who indeed did pump it into asset markets, raising the prices of everything from stocks to urban housing. Little of it went into new factory investment, despite the fact that the cut was touted as a supply-side means for creating new jobs. Supply of money capital does not create its own demand, and in this decade, all of the other policy signals to industrial managers said "stop."

With deregulation also came the softening of securities oversight and antitrust practices. My old prof at Michigan State, Walter Adams, used to argue that Republican Departments of Justice were always tougher on antitrust than Democratic ones, because the latter were preoccupied with civil rights issues. Reagan proved him wrong. Everything from hostile takeovers to junk bonds was now treated permissively, paradoxically in the name of competition. Investment banking became the hottest career in the country. Companies with large industrial plants and heavy equipment, the kind that need long-term and expensive investments, found themselves beleaguered by hostile takeovers. To stave them off, and to save face, they took on additional debt, bought back their own stock, and put off long-term plans for a new steel caster or a top-of-the-line computerized manufacturing system.

And then there was the Treasury's attitude toward Third World debt. Rather than counsel banks to write off bad debts, which they will eventually do anyway, the financial powers-that-be continue to insist on brutal repayment schedules. As a result, the debtor nations have been unable to get on with the project of industrialization in the 1980s. Austerity and falling living standards in the Third World are a disaster for Brazilians, Peruvians, and Mexicans. But they hurt Chicago workers and businesses as well, because this region specializes in machinery and parts that are in high demand when industrializing countries are growing rapidly.

Had the Treasury, the banks, and the International Monetary Fund written off bad debt faster, the entire world economy would have been more buoyant, orders for Chicago equipment would have boomed, and wages in developing nations would have risen toward American standards rather than vice versa. Instead, countries such as Brazil and Mexico put off their plans to buy industrial machinery, tractors, and road-making equipment from the Chicagoland economy. Compared to the nation, Chicago's industries were hurt relatively more, dollar for dollar, by the stagnation of export markets in the 1980s than they were by import penetration.

As austerity was imposed upon them, these Third World nations were forced in turn to lower workers' wages. Instead of developing an internal market based on rising incomes in their cities and on their farms, they had to target markets like the U.S., where spending power was greater. Their development strategy became one of penetrating American markets on the basis of their extra-cheap labor. What investments these countries did make, then, went not toward making goods to be consumed within their own borders but toward building auto plants or steel plants or apparel factories whose products were aimed at American buyers. Brazilian iron ore is being diverted from domestic steel mills, where it would employ Brazilian steelworkers and go into goods for Brazilian consumers, to be shipped directly from the mine to American mills, where it displaces iron ore, and workers, from the Mesabi Range. And when Brazil does process its own ore, the steel is increasingly aimed at the U.S. market. The newest Brazilian steelworks, Tubarao, dedicated in 1984, is located not in the interior of the country, like the previous generation of Brazilian mills, but on a straight shipping lane to the United States. Similarly in Mexico, low-wage, export-oriented growth imperatives have caused border plants called maquiladoras to proliferate; they make auto parts, consumer electronics, and apparel--all once robust Chicago industries.

In turn, as midwestern companies lost on both the export and import sides of the trade balance, wages were forced down here at home and many workers lost their jobs. Income inequality worsened everywhere in the U.S. in the 1980s. But as economists Barry Bluestone and Ben Harrison show in their new book, The Great U-Turn, the phenomenon of the disappearing middle class was most prominent in industrial cities like Chicago. As jobs evaporated at Chicago's International Harvester, LTV, Zenith, Sunbeam, Playskool, and Schwinn plants and at the hundreds of small plants making parts and equipment for them, and as remaining workers' wages were whittled down by wage concessions wheedled out of them by the threat of imports, middle incomes in Chicago plummeted. Unlike Los Angeles, here no B-1 bomber contract moved in to offset such blue-collar losses, and modest increases in the higher-paying downtown services were not enough either.

Add all of this up--high interest rates, a volatile dollar, deregulation and merger mania, severe debt repayment schedules--and it amounts to the most regionally unbalanced national economic policy of the century. While the coasts and the Sunbelt thrive on financial windfalls, defense dollars, arms sales, and the commercial spin-offs they beget, cities like Chicago suffer from high interest rates, the absence of a coherent trade or exchange-rate policy, the ravages of deregulation, the continued depression in Third World markets, and the absence of public investments comparable to those that the aerospace/communications/electronics complex enjoys from the Pentagon. Far from healing the ailments of its hometown economy, the Chicago School's prescriptions have compounded them.

V. Will Education Reverse Chicago's Slide?

The slump has brought chaos to the lives of many. Since the late 1970s, tens of thousands of Chicagoans have lost their jobs in the heavy industries that were once the pride of the city. Stories of how they have suffered and coped have been written over and over again, perhaps best in Roberta Lynch and David Bensman's book Rusted Dreams. We know that some retired early, often succumbing to tremendous loss of self-esteem and sometimes to early death. Some found blue-collar jobs, but generally they earned only 60 to 80 percent of what they had earned previously, and often they were forced to make hour-long commutes to distant suburbs. Their sons and daughters found the factory doors closed to them for good, blocking well-rutted paths of upward mobility.

In the early 1980s, some moved off to Houston or Los Angeles or Colorado, where for a few short years before the energy bust and the defense build-down they could find welding, mining, or construction jobs. Others, particularly minorities and women, were not even that lucky. They found themselves forced down into the service sector, where wages were far less, job security unpredictable, and benefits few if any. Some, like the Wisconsin Steel Save Our Jobs Committee, under the leadership of steelworker Frank Lumpkin and attorney Tom Geoghegan, fought back by taking companies to court for breach of contract and fraudulent sales. Many have remained without work. With thousands of new entrants into the labor pool and no net new jobs, it has been a tough time for a job loser or a new high school grad, and even for some college graduates.

To address this appalling human aspect of the slump arose a new, and badly needed, interest in education. Observing that the skills of redundant blue-collar workers did not fit the new jobs in finance and business services and computerized machine tooling, and noting that many high school graduates lacked the analytical and conceptual skills needed for new occupations, proponents of improved education have argued that the key to resurgence of Chicago's economy lies on the human resource side. In many quarters, better ideas for improving human capital have begun to reshape Chicago's institutions of learning--from literacy training for displaced workers, to tough new standards for the schools, to techniques for technology transfer from universities to area businesses.

But once again, supply does not necessarily create its own demand. Some argue, quite reasonably, that the deterioration of the educational system is itself a product of the evaporation of good jobs--why should teachers or students take schoolwork seriously if there are no jobs for high school graduates anyway? Despite popular theories that stress culture and neighborhood as the essence of the underclass problem, a basic cause is the drying up of industrial jobs. The underclass hasn't always been with us--only since the 1950s postwar boom began to dissipate. North Lawndale residents were thrown out of work because Western Electric's huge Hawthorne plant closed, and took with it many other smaller shops in the environs. The closing of the stockyards eliminated another source of minority jobs. When the big steel mills like South Works and Wisconsin Steel shut down, thousands of minority workers were displaced and had a tougher time than their white coworkers finding an alternative. Where fathers and grandfathers once brought home good industrial paychecks, their sons and daughters no longer have that option.

Another problem is the exit of Chicago's better-educated youth to more dynamic regional economies elsewhere. This is particularly true in the science and engineering fields. It costs Illinois taxpayers more to train an engineer than a teacher or a plant manager, due to expensive labs and higher salaries. But every year more than half of the state's college graduates in these fields head off into the sunset, the majority toward defense-related jobs in Los Angeles and other new military-industrial cities. Would-be entrepreneurs, too, have disproportionately chosen to emigrate with their ideas, because the banking and venture capital communities have been indifferent or hostile, and because the Sunbelt, or rather gunbelt, seems to be where it's all happening. Chicago's biggest export is human capital--and we're giving it away free.

The renewed interest in education is quite welcome, indeed urgent. Racism has played a none-too-subtle role in permitting an alarming disinvestment in education and social services that might otherwise have helped minority groups to weather deindustrialization and firms to respond to new technologies. Illinois' rank among states in commitment to education and social services took a dive over the past couple of decades, despite the state's continued high ranking in per capita wealth and income. In no other city in the nation does this show up so dramatically, especially in the growing complaints of businesses regarding the shrinking of a qualified work force. Better reading and math skills will certainly help Chicago retain and attract industrial jobs, especially for those businesses that are finding Sunbelt and overseas educational deficiencies a barrier to productivity. But in the end, better education is no guarantee that jobs will exist or that the educated will stay put in Chicago.

Three Paths to a Future Chicago

So plants continue to close; metalworkers, retail clerks, and stockbrokers alike lose their jobs; and Sears deserts the downtown for the suburbs. Yet there is little agitation for a strategic economic plan. Of all the nation's cities, Chicago is economically the least self-conscious. Denizens of a cosmopolitan city--diversified, robust, looking outward to markets sprawled across the globe--Chicagoans never had much need before the 1980s to ponder their own economy. The great Chicago slump has changed all that for good.

The slump was not inevitable, at least not in the depth and duration Chicago has suffered in this decade. It was very much the product of business cultures, politics, and policy decisions at both the local and national levels. Steel, machine tools, pharmaceuticals, and consumer electronics are far from dead here, but they have been threatened by unnatural causes. Could things be different? Yes.

To chart its future, the city will first have to decide what its mission in the larger world economy is. Chicago faces three possible scenarios. One is to accept its declining importance and shrink gracefully, becoming a regional service center--what I call the Cleveland model. Another is to concentrate the city's energies on becoming a world financial center, creating a small core of "gold collar" jobs whose incomes will trickle down to the working class as low-wage salaries in restaurants, housekeeping services, and upscale consumer goods--the Manhattan model. A third is to refurbish the city's capacity to make high-quality producer goods as well as consumer goods reaching mass markets here and elsewhere--a Tokyo model.

There are many reasons why this third alternative is the city's best bet for maintaining its standard of living and its viability as a diverse cultural center. In all likelihood, producing fabricated metals, machine tools, industrial equipment, pharmaceuticals, high-quality consumer products, processed foods, and printing is what Chicago can reasonably expect to be best at in the future. Other places can specialize in space shuttles, Stealth bombers, semiconductors, and junk bonds--Chicago probably can't. But Chicago has an enormous reservoir of skilled, experienced blue-collar workers, a central location with good distribution, a considerable management and professional pool upon which to draw, good commercially oriented corporate laboratories, and several first-rate universities and colleges. Surely all of that can be harnessed up to a strategic plan that charts a long-term course for the city's economy.

Of course, if national policies are a big culprit in Chicago's downward slide, then they are one front in the battle. From the heartland could come a different voice on national development strategy, one that eschews the Pentagon budget as the major instrument of high-tech industrial policy and offers an alternative, commercially oriented strategy. We are rich enough as a nation to dedicate some portion of our national wealth to public investment. Why shouldn't the steel industry be given the $15 million it wants for development of "leapfrog" steel-making technology, as just one alternative to the $30 billion Star Wars research effort? At no time in the postwar period have the prospects for dismantling the cold war been so promising, and no region stands to benefit as much as Chicago's from the resources that a military build-down would free up and the civilian markets it would favor. Similarly, gains on troubling issues like interest rates, financial crisis, and Third World debt settlement may only come with leadership from the heartland.

But that will take time. What can be done here, at the local level? Many things. Hundreds of small and medium-sized industrial companies need help finding and adopting the best technologies and business practices. Several pilot efforts have been launched to provide that help. Groups like CANDO, the Chicago Association of Neighborhood Development Organizations, aid small businesses in finding space, financing, and markets. The Chicagoland Enterprise Center provides technical assistance to small manufacturers, while the Jane Addams Resource Center helps metalworking firms upgrade their technologies cooperatively. UIC's Center for Urban Economic Development and the Midwest Center for Labor Research have undertaken studies of key industries and done analysis to estimate the full social and public cost of plant shutdowns. The Inventors' Council tries to link up idea people with small firms that need product innovations.

New cooperative research and development endeavors among competing firms have been suggested for industries from steel to printing to pharmaceuticals, like those that have been set up in semiconductors and high-definition TV elsewhere in the country. The city's Steel Unit, part of the Department of Economic Development, is designing a steel technology center that could place Chicago back on the leading edge in that industry. A youthful project spearheaded by Ready Metal is exploring joint product development for a group of metal fabricators. Considerable gains are possible from such joint ventures.

Prospects for cooperative marketing also exist but have been poorly exploited. Nor have public export-promotion programs been well-directed. For instance, despite the growth in international markets, the American domestic market is still the largest source of earnings for Chicago business. Yet most of the state's development effort goes into trade delegations and offices abroad, perhaps because governors and other politicians like to go there. As Morton Klein, vice president of IIT's Research Institute, puts it, "Why not close our state export-promotion office in Kuala Lumpur and open one up in Los Angeles?" Not a bad idea.

And there should be something for the big, mature factories, too. Novel institutional arrangements for managing ownership turnover have been engineered to keep plants open elsewhere--at McLouth Steel in Detroit, Weirton Steel in West Virginia, and via the Steel Valley Authority in Pittsburgh. The Bush administration owns the Wisconsin Steel works--why can't we ask them to give it to the city and do something innovative with it? Why shouldn't Envirodyne, the company that bought and then closed the Wisconsin Steel plant, be asked to invest something in that site as part of a settlement in the suit brought against it by the Save Our Jobs Committee? LTV is on the verge of selling its Chicago Republic Works to the steelworkers, along with its entire bar division. What can the city do to help ensure the new worker buyout a bright future?

For my own part, I can't seem to stop working on these issues; they form the core challenge facing the nation, not just Chicago. Historically new problems call for new solutions, and in this case some of the most exciting solutions are those proposed by veterans of plant closings, with some help from academics and researchers like myself. Chicago is the headquarters of the three-year-old Federation for Industrial Retention and Renewal, an umbrella for some 18 community and union-based plant-closing groups around the country. Our agenda is to retain and improve industrial jobs in existing communities. Nationally, we have proposed a development bank to offer low-interest capital to struggling plants, a workers' superfund to enable back-to-college retooling for displaced blue-collar workers, a system of regional jobs authorities to manage the process of industrial turnover, strengthened plant-closing legislation, and a managed trade policy with performance requirements for benefiting industries.

These types of initiatives are not as flashy as world's fairs or bids to keep Sears from leaving the Loop. They don't make the front pages. Their benefits are more highly dispersed throughout the area economy, making them harder to trace and monitor. Yet if one thinks about the so-called "Massachusetts Miracle," no one big company or demonstration project comes to mind either. Chicago still has enormous resources at its disposal; they just happen to come in small and medium-sized bundles.

It will take a deep cultural transformation to set Chicago's economy on the path to a prosperous future. Vested interests will have to stop defending old turf, and the can-do attitude that once made this city famous will have to be restored. The ferment among small firms and nonprofit economic-development groups is a fine start, but hard questions have to be put to the big guys as well. Chicago has to believe again that it can be a pioneer, that it can try new ideas and risk failure, rather than acquiesce passively, a la Rich Daley, to a shrunken service economy. Otherwise, the embers of deindustrialization will continue to smolder, and Chicago will keep slipping down in the ranks of great American cities.

Art accompanying story in printed newspaper (not available in this archive): illustration/Ralph Creasman.

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