Financial Services and Inequality In New York

As global cities have mushroomed in significance, mounting concern has accompanied the visible inequality that such centers contain. Sassen’s influential dual city thesis maintains that the growth of the finance industry is largely to blame for inequality by generating an elite of well-paid occupations and large numbers of poorly paid ones. This approach, however, suffers from an inadequate explication of inter-industry linkages. This paper tests Sassen’s thesis in light of the growth of the securities industry in the New York metropolitan region in the 1990s using an input-output model. Its findings bring the dual city thesis into question and suggest other, more complex causes of inequality might be at work. INTRODUCTION Global cities are the command and control centers of the global economy, host vast complexes of skilled, high value-added activities with globespanning consequences (Taylor 2000). At the top of the international urban hierarchy, this handful of specialized metropolises are simultaneously: (a) centers of creative innovation, news, fashion, and culture industries, (b) metropoles for raising and managing investment capital, (c) centers of specialized expertise in advertising and marketing, legal services, accounting, computer services, etc., and (d) the management, planning and control centers for corporations and nongovernmental organizations (NGOs) that operate with increasing ease over the entire planet (Knox 1995). New York, London, and Tokyo, and to a lesser extent, secondary metropoles such as Paris, Toronto, Los Angeles, and Singapore, lie at the core of a worldwide chain of value-added linkages that have steadily fostered a pronounced concentration of strategic headquarter functions in a few conglomerations and a persistent dispersal of unskilled functions to the world’s periphery. This process reinforces the long-standing transition of employment in such regions from low-wage, low value-added, blue-collar occupations to high-wage, high valueadded, white-collar employment. At their core, global cities allow the generation of specialized expertise upon which so much of the current global economy depends. Numerous authors have pointed out the ways in which global cities are as much shaped by the world economy as they are shapers of it (Friedmann and Wolff 1982; Sassen 1991; Taylor 2000). New York holds pride of place among global cities. Since its inception, The Industrial Geographer Warf 111 worldwide economic shifts and forces have been so interpolated so deeply with New York that it is impossible to comprehend the metropolis without reference to its international ties. New York’s global standing is not new, having been shaped by decades of trade, finance, and immigration (Hackworth 1998), or in Castells’ (1996) famous phrase, the “space of flows.” Few locales offer such a stunning glimpse into the ways in which planetary-wide processes are telescoped into local contexts. Following the fiscal crises of the 1970s, during which the region tottered on the brink of fiscal bankruptcy, New York re-established its long-held role as a formidable juggernaut in the global financial system (Mollenkopf and Castells 1991; Fainstein, Gordon, and Harloe 1992; Fainstein 1994), rivaled only by London and, to a lesser extent, Tokyo. World trade in goods, which dominated New York’s global connections for centuries, has been eclipsed by transnational shifts in capital and information, activities in which New York enjoys a special competitive niche. Wall Street has long symbolized New York's dominant role in financial markets of the U.S., and Manhattan remains the headquarters of most of the largest money-center banks in the nation, including Citicorp, Chemical, Chase Manhattan, and Morgan Guaranty. In the securities markets, New York remains the unquestioned leviathan of the nation; a sizeable share of all stock sales in the U.S. (861 billion in 2002, or 43 percent) are traded on the New York Stock Exchange (NYSE), the world’s largest. By attracting the headquarters of many multinational corporations and by serving as both an importer and exporter of people, goods, information, and services, New York has been both producer and beneficiary of globalization, i.e., it has been both a generator and in turn constituted by international flows and forces. The analysis of global cities has been accompanied by growing concern regarding mounting inequality within them. Particularly in the U.S., with its increasingly frayed safety net of social services, cities such as New York exemplify sharp contrasts between wealthy elites and impoverished working class communities populated by immigrants and minorities. An oft-cited suspect for the creation of inequality is the financial sector, which is held to create “masters of the universe” and their counterparts toiling in dead-end service jobs, but few positions in between. The prevailing interpretation, put forth by Saskia Sassen (1991), holds that the external functions of global cities such as New York as repositories of highly skilled corporate functions, particularly in finance, engender internal labor markets marked by great degrees of social polarity. While a small elite earns millions buying and selling stocks, this argument holds, the spin-offs are to be found in lowpaying, unskilled jobs in retail trade, hotels, and personal services. Sassen’s argument has become widely influential, as we shall see, it is not The Industrial Geographer Warf 112 without criticisms. In particular, her claims rest upon anecdotal evidence, which while rich, may fail to capture the complexity of regional economic systems typified by high degrees of inter-industry dependency. The purpose of this paper is to test Sassen’s thesis of the dual city using a rigorous analytic methodology. It begins by reviewing the critical role of finance to the New York metropolitan region’s economy, focusing on the causes of the growth of the securities industry throughout the 1990s. Although investment banking suffered in the downturn following the year 2000, the 1990s boom had lasting effects on the city, and as the industry has recently returned to its former heights, is likely to do so again. Next, the paper turns to New York’s labor markets and the inequalities present therein, including a large underclass of poorly skilled minorities. Third, it offers a means to explore the relations between the growth of finance and inequality using input-output analysis. The evidence from this exercise suggests that the distribution of jobs and incomes among industries and occupations is much more complex than the dichotomy that Sassen suggests. The conclusion calls for a nuanced understanding sensitive to the multiple causes of inequality. FINANCE EMPLOYMENT CHANGE, AND INEQUALITY IN NEW YORK New York's hegemonic position in the international economy may be interpreted as an outcome of the postFordist global division of labor that emerged in the 1970s, which was marked by: the collapse of the Bretton-Woods agreement in 1971 and the shift to floating currency exchange rates; the oil crises of 1974 and 1979 and associated growth of Third World debt; the deindustrialization of much of Europe and North America and the concomitant rise of the East Asian newly industrializing nations; the steady growth of multinational corporations and their ability to shift vast resources across national boundaries; technological changes unleashed by the microelectronics revolution; the global wave of deregulation, privatization, and the lifting of government controls, all of which reflect the hegemony of neoliberalism worldwide; the integration of world financial markets through telecommunications systems; and the initiation of new trade agreements and trade blocs and agreements that accelerated the freedom of capital to transcend national borders. These changes produced a highly volatile, deregulated, globalized form of capitalism that greatly accentuated the position of global cities in the world space-economy (Knox 1995; Taylor 2000). New York’s position as a global city is closely bound up with the ability to move vast quantities of money and information rapidly (Wheeler 1990; Mitchelson and Wheeler 1994). Financial firms utilize an extensive worldwide web of electronic funds transfer networks that form the nervous system of the international economy, allowing them to move The Industrial Geographer Warf 113 capital around at a moment's notice, arbitrage interest rate differentials, take advantage of favorable exchange rates, and avoid political unrest (Warf 1995; Solomon 1997). Such networks create an ability to move money – by some estimates, more than $3 trillion daily (Solomon 1999) – around the globe at the speed of light: subject to the process of digitization, information and capital became two sides of the same coin. A global web of fiber optics lines firmly links New York securities traders to their counterparts in London and elsewhere (Longcore and Rees 1996), allowing money to be switched in enormous volumes. The world's currency markets, for example, trade roughly $800 billion every day (Solomon 1999). Every two weeks the sum of funds that passes through New York's fiber optic lines surpasses the annual product of the entire world; Salomon Brothers, which routinely buys 35% of U.S. government bonds, runs the equivalent of the nation's total bank holdings through its computers every year, while the New York bond market trades on the order of $150 billion daily (Cohen 1998). The volatility of trading, particularly in stocks, has also increased as hairtrigger computer trading programs allow fortunes to be made (and lost) by staying microseconds ahead of (or behind) other markets. In the 1990s, New York’s stock markets experienced a pronounced "bull market." Deregulation, a booming national economy, and a wave of corporate mergers, takeovers, and leveraged buyouts propelled the Dow Jones Industrial Average to new heights. Between 1990 and 2000, the total average volume of shares traded per day on the NYSE rose from 170 million to 1.2 billion, a 705% rise, and total capitalization in 2000 surpassed $7.2 trillion. Although the New York region has lost some of its dominance in securities, its 150,000 jobs in this sector still account for almost 30 percent of the nation's securities employment. Several reasons explain the recent surge in stock prices and trading volumes. First, the U.S. economy underwent a sustained period of rapid GNP and productivity growth. Following the recession of 1990-1991, a booming economy, low interest rates, and a global glut in raw materials (particularly cheap petroleum) combined to fuel a highly profitable boom. In the wake of the deindustrialization and restructuring of the 1980s, U.S. manufacturing, bolstered by the microelectronics revolution, regained its competitive strength internationally, fueling the demand for investment capital. National productivity growth, boosted by the microelectronics revolution, averaged more than three percent annually in the 1990s. Meanwhile, a wave of corporate downsizing and layoffs constrained the growth in labor income. (Note there is some dispute as to whether current measures of productivity reflect real productivity gains accurately; some observers point out the discrepancies between rising returns to capital and constant returns to labor as evidence that marginal productivity gains have been exaggerated by official statistics or The Industrial Geographer Warf 114 that the link between the marginal cost and productivity of labor has been annulled). These factors raised corporate earnings and profitability, if not wages, to record levels. Second, the financial industry witnessed widespread deregulation, including the removal of numerous federal and state government restrictions in savings, commercial and investment banks. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, and in 1982, the Garn-St. Germain Act, which permitted thrifts to compete directly with commercial banks and eliminated geographic limitations on Savings and Loan lending. For investment bankers, key issues included the abolition of fixed commissions on stock market transactions and the approval of foreign memberships on stock exchanges. Simultaneously, new sources of investment capital, particularly mutual funds and pension funds, for which controls had been abolished, were introduced. Deregulation unleashed an enormous wave of investor-driven demand for investments, most of which found its way into commercial real estate and the stock market, particularly in the form of large investors who buy and sell enormous quantities of stocks, enhancing volatility and marginalizing small traders. The relaxation of interstate banking restrictions also heavily favored New York, whose money-center banks penetrated local markets around the nation (Lord 1992). Other changes included the removal of restrictions governing pension and mutual fund portfolios, the abolition of fixed commissions on stock market transactions, the approval of foreign memberships on stock markets, and the current debate over the repeal of the Glass-Steagall Act, which separated commercial from investment banking since 1933. Third, demographic changes, i.e., the economic behavior of the enormous baby boom generation, accentuated these trends. Entering its prime earning and savings years, this generation continues to pour resources (primarily via mutual and pension funds) into the stock market as well, viewing it as the best long-term investment. The growth of Internet banking also encouraged numerous small investors to play the market. Accordingly, the proportion of American households that own stock directly has risen to almost 50 percent, and millions more own them indirectly. Of course, after 2000 the stock market bubble burst in a classic “market correction” that initiated a period of decline. In the wake of the dot com crash and national recession, the Dow Jones dropped from its high of 11,000 in 2000 to 8,500 in 2002. The attacks of September 11, 2001 accentuated this decline, spurring rounds of panic among the financial community in lower Manhattan. However, in 2003 most of the ground lost since 2000 has been recouped. Such swings indicate that volatility has become The Industrial Geographer Warf 115 institutionalized within the market.