Category Archives: Cities

Chicago: Tall and Striving

The autumn season brings full tilt to Chicago’s convention and tourism activity. Out on the sidewalks of downtown Chicago, office workers such as me find themselves dodging out-of-towners who are gazing upward at the tall buildings. This year, sidewalk hazards of this sort are especially abundant. The professional building gazers of the world, otherwise known as the Council on Tall Buildings and Urban Habitat, are meeting here in Chicago to contemplate the purposes, construction, and financing of tall building projects throughout the world. They have asked me to address their conference in October on the role of tall buildings in Chicago’s economy.

Economists have long analyzed the purposes and benefits of high density living and working. And since high density cannot be achieved without tall buildings, many of the reasons to why we build so high can be found by considering density’s relationship to urban productivity.

Looking back over human history, transportation of goods and people has presented a costly impediment to beneficial manufacture, trade and travel. For this reason, the land area surrounding natural “nodes” of easy transportation such as water ports and harbors, and later railroad hubs, became very prized. That is to say, the transportation costs of accessing transportation nodes could be economized by intensively using surrounding land. And so, land rents rose there; and buildings for warehousing, factories, trade, and finance mounted as far skyward as the building technologies would allow.

Chicago’s economic history reflects these forces in some very special ways. As documented in two books about Chicago’s economy in the nineteenth century, Nature’s Metropolis and City of the Century, wealth creation in the small area surrounding the mouth of the Chicago River literally exploded. Here, a unique node of transportation was developed at the nexus of two vast waterway systems, the Great Lakes-Erie Canal to the east and the Mississippi River Basin to the west. Later in the century, some timely investments in railroad added another important transportation hub to Chicago.

On Chicago’s land, markets were made in grain, livestock, and lumber. Materials were further processed, warehoused, manufactured, and shipped to markets, both domestic and abroad. Marketing and financing were arranged. Specialized retailers evolved to serve western farmers and ranchers, as did machinery makers.

A special Chicago role in building technology was spurred by its rapid economic growth and the intensity of activity on the land surrounding its ports and railroads. In response to the urgency and high cost of downtown land, many innovations in constructing tall buildings emerged here. The innovation of first iron, and later steel, frames and skeletons supporting skyscrapers allowed developers to build higher and stronger, as did the technologies of “floating foundations” that allowed construction of skyscrapers on Chicago’s soft and shifting soils.

Today, the importance of materials movement and manufacturing to Chicago have eroded somewhat [1]. Still, the tall buildings and the attendant high density of work, play, and residence remain and, in fact, they have multiplied to serve other economic sectors. For the most part, the high density and proximity that tall buildings facilitate serve to allow people to communicate in highly efficient and often creative ways. While advances in electronic and digital communication such as the internet and cell phone are very helpful to business communication, they are incomplete. The modern economy has become more “information intensive,” not only in the communication of bulk, digitized information, but also in the face-to-face transmission of ambiguous information. In business meetings large and small, in organized forums and in random networking and social activities, information is created, debated, and transmitted. Workers hatch ideas, learn new concepts, cut business deals, and organize initiatives through such interactions. The “office meeting” has not died. And arguably, the chance encounters from which new ideas often arise have become more important than ever.

The “globalization” of trade and commerce which has taken place in recent decades has also raised the value of inter-personal communication. Globalization has increased the complexity of business transactions as well as increasing the variety of human cultures in which trust and understanding must be established in order for business to flourish.

Certain large and diverse cities, often called global cities, help to meet the requirements of global service exchange and deal making. Chicago definitely fits the bill. Its dense urban core and other features have vaulted Chicago to prominence as a global business center[2] . The metropolitan area now hosts 29 Fortune 500 headquarters offices, and ten Fortune global headquarters. Chicago’s presence in professional and business service is both sizable and closely aligned with business headquarters. Prominent companies in advertising, financial exchanges, research and development, human resources, management consulting, accounting, law and logistics serve businesses in Chicago and around the world. Chicago ranks among the top three U.S. metropolitan areas in the hosting and staging of business meetings and conventions. Top-flight universities add to the mix, including two of the world’s top five graduate business programs at Northwestern University and the University of Chicago. There are over 1,500 foreign-owned firms in Chicago and 30 international chambers of commerce.

Economists usually refer to the added productivity that comes along with high density, large scale population, and a broad scope of (inter-connected) activities as “economies of agglomeration.” What this really means is that the whole of related activities amount to more than the sum of the parts; in Chicago, the co-location of the activities above add up to heightened economic productivity and wealth creation.

What are the interactions and transactions of co-location that give rise to heightened productivity? Some examples would be Chicago’s headquarters gathering superior and cost-effective services from local professional service firms; professional firms finding customers at the city’s many international trade shows; recruitment by local firms of graduates from Chicago’s outstanding universities; and ample continuing education opportunities for workers at all levels.

In addition, in contributing to agglomeration economies and a successful global city, businesses in the Chicago area also benefit from the city’s important and unique infrastructure, including an international airport. As more companies establish a global presence, they need more frequent face-to-face interactions with their counterparts and customers around the world. Chicago’s O’Hare and Midway airports offer nonstop or direct flights to 148 North American destinations and serve an additional 68 foreign destinations. This scale and reach of travel options are sustainable because of the extensive use of the facilities by (otherwise unrelated) local industries and, thanks to Chicago’s mid-country location, because of additional business from connecting traffic.

The judicious and well-planned configuration of tall buildings in Chicago’s downtown is a necessary condition for co-location of the aforementioned activities. And it is well worth noting that ground transportation and easy circulation are equally necessary to achieve a density that works well[3]. In most instances, the intent of vertical infrastructure is to economize on horizontal transportation costs. Overly congested roadways or poor public conveyance could easily undo these vertical advantages. While average travel times to work in the Chicago area are among the highest in the nation, six-hundred thousand workers do converge on Chicago’s central area each working day, of whom 55 percent of whom use mass transit [4] .

The conference attendees of the CTBUH will be considering such issues of tall buildings and urban habitat as they meet in Chicago. These issues may even provide welcome relief from a business environment which has, in many instances, left the financing of extant and prospective tall building developments in precarious condition.


[1] Although Chicago’s manufacturing concentration registered one-third greater than the nation during much of the twentieth century, that sector is now about on par with the nation. However, owing chiefly to national railroad convergence in Chicago, the metro area remains the nation’s premier location for inter-modal surface freight transportation. (Return to text)

[2] It is Chicago’s core area that is most notable for its density of tall buildings. Over 50 percent of the metropolitan area’s office space can be found in the central area. Nonetheless, employment sub-centers with dense commercial configurations are an increasing phenomenon in large cities. In the Chicago metro area, Dan McMillen’s study finds that such sub-centers grew from 15 in 1990 to 32 by year 2000. (Return to text)

[3] While we tend to associate tall buildings with large and densely populated cities, it is interesting that we sometimes see tall buildings in rural areas where horizontal travel costs are low (and land rents are cheap). As analyzed by urban economist Arthur M. Sullivan, the logic of such buildings owes to their specialized functions in which people circulate frequently within such buildings to designated sites so that a single multi-story building becomes optimal. For this reason, we may see tall hotels, dormitories, and hospitals even in rural areas. (Return to text)

[4] The central area also houses extensive retail and educational activity. Per World Business Chicago, 65,000 students attend class there. (Return to text)

Waukegan’s Economy and Development

By Emily Engel, Senior Associate Economist and Britton Lombardi, Associate Economist

Waukegan, IL, has responded to the challenges of a diminished manufacturing base by looking to its assets and opportunities. Over the past decade, the U.S. has experienced steep declines in manufacturing jobs, especially in Midwest towns—the heart of the industrial belt. Many of these same towns have come to recognize that manufacturing may never be what it once was for them. Therefore, while continuing to tend their remaining industries, they have also been making plans to integrate themselves into the growing knowledge-based economy. In developing workplace and residential amenities, these towns are now targeting a new “creative class” of workers who can possibly revitalize these once manufacturing-dependent areas.

Waukegan, IL, with a population of 92,066 [1], lies 40 miles north of Chicago, on the coast of Lake Michigan in Lake County. Over the past 40 years, Waukegan has seen a sharp decline in its manufacturing sector. In 1972, Waukegan had 10,100 manufacturing jobs; approximately 15.5% of its total work force. By 2002, manufacturing employment numbers had dropped down to 4,780, making up only about 5% of Waukegan’s work force [2]. During the 1970s and 1980s, Waukegan experienced a number of plant closures, for example U.S. Steel’s mill, which took away a few thousand jobs. Another plant closure was that of Johns-Manville—at the time an asbestos manufacturer. Another local manufacturer, Outboard Marine Corporation (OMC), began downsizing its operations over the past few decades until it filed for bankruptcy in 2000, laying off 7,000 employees from all of its plants. While OMC’s assets were acquired from the bankruptcy court by Bombardier Corporation which moved manufacturing operations north to Pleasant Prairie, Wisconsin, the research & development operations are still located on Waukegan’s lakefront.

Such economic changes have meant, not only diminished employment opportunities, but stresses on the local tax base to finance school and municipal services. At the same time, public service requirements have grown along with the city’s swelling population. Waukegan’s population expanded by 27% in the 1990s decade alone. As seen below, the most significant change has been the rapid growth of its foreign-born population, which increased 148% between 1990 and 2000. Most of these immigrants are recent arrivals to the U.S. (within the last ten years).

In appraising its opportunities for redevelopment and growth, it appears possible for Waukegan to link its economy to the surrounding prosperity. Towns in Lake County and in nearby Kenosha County have generally enjoyed rising prosperity. As seen below, Lake County has registered consistently higher annual per capita personal income relative to that of the Chicago metropolitan area. The trend seems to show a continued growth in the income gap, as it widened to just over $12,000 in 2007. The second chart below shows that the pace of total employment in the Lake County/Kenosha area has been positive on a year over year basis since 2002, whereas the pace of total employment in the Chicago Metro area only turned positive between 2003 and 2004. The Lake County/Kenosha area’s growth rate reached a plateau in 2005 at 2.0%; although this fell to 0.8% in 2006, it has been steadily rising since then. Even with its own decline in manufacturing jobs, Lake County, between 2001 and 2007, has seen a consistent growth in the number of total jobs; its manufacturing job losses have been offset by new jobs in other sectors.

Accordingly, some Lake County towns are actively transforming themselves by expanding their residential amenities for the workers who occupy emerging jobs throughout the broader region. Nearby towns with a similar manufacturing heritage to that of Waukgean (e.g., Kenosha, WI) have already started implementing development plans emphasizing such amenities—e.g., by building condominiums on the lakefront (namely, HarborPark) and creating city parks along the lake. Besides the growing job base in Lake County itself, Waukegan and other towns throughout the county may be able to attract workers from Chicago and Milwaukee. Waukegan is situated between these two large and prosperous job markets. With appropriate development, greater numbers of new and existing Waukegan residents could one day find themselves commuting to these larger job centers.

So what types of projects is Waukegan undertaking to attract knowledge-based workers? For starters, Waukegan is currently in the process of a large multi-million dollar downtown and lakefront revitalization project. Waukegan seemingly has a myriad of opportunities to build up the community by enhancing currently underutilized resources. The town has 1,400 acres of property and 3.5 miles of Lake Michigan coastline to work with—one of the last remaining underdeveloped lakefront areas in the Chicagoland area. The city already has established assets, too. It boasts two harbors—one built as recently as the mid-1980s and substantially upgraded within the last year. Together, these harbors can hold nearly 1,000 boats of a variety of sizes, and both are relatively quiet and peaceful. Other marina-based businesses nearby offer further amenities for recreational boaters. In addition, the Genesee Theatre, which was the start of the city’s plan to transform the downtown area, finished its renovation in 2003, after being vacant for more than a decade. The total cost of the renovation was $23 million, but now the Genesee Theatre has become a destination spot, drawing attendees from both Illinois and Wisconsin.

In the process of its revitalization, Waukegan has created a master plan to guide its development, which focuses on two main things: being a great city and having great places. The master plan’s guiding principles include an emphasis on transit-oriented development; connections between the downtown and the lakefront; protecting, restoring and enhancing the ravine and park system; ecological restoration to create recreational amenities; improving the transportation framework to provide clear access and establish civic places. As part of its redevelopment effort, the city plans to build up to 3,700 new residential units along the lakefront to take advantage of this vital asset which has been long underutilized. They are looking to restore the facades of the historical buildings in the downtown to bring back the ambiance they once provided; for the most part, Waukegan will maintain their distinctive appearance, but also retrofit their facilities to modern use. The town plans to use tax incremental financing (TIF) dollars to help subsidize these changes, and several projects have already been completed. Along with the buildings, Waukegan has begun improvements to the downtown area by adding 16 blocks of streetscape, and Waukegan Park District has developed a new veteran’s memorial park as a public open space in the downtown. In addition, Waukegan plans to enhance its lakefront area that gives it a distinctive advantage over other cities, especially since it boasts a commuter rail, Metra stop, within walking distance of the lakefront and downtown. Rather than build up all the area around Lake Michigan, the city wants to design a large open space for community use and entertainment similar to Chicago’s Millennium Park, but on a smaller scale,as well as maintaining a public open space along much of the lake shore.

In conjunction with the city’s revitalization, steps need to be taken to clean the Waukegan Harbor further. The harbor was classified as an area of concern (AoC) in 1975 when toxic polychlorinated biphenyls (PCBs) were found in the sediments of the water related to the past industrial uses along the lakefront. During 1993, OMC completed environmental remediation by cleaning up the sediments in and around its property, removing about 1 million pounds of contaminated sediment. According to the environmental protection agency (EPA) website, OMC is not alone as other major remedial actions have been undertaken at Waukegan Manufactured Gas and Coke, Johns-Manville Company, Waukegan Paint and Lacquer, North Shore Gas North Plant, and the Waukegan Tar Pit.” If such actions continue, the goal would be to get the harbor off the AoC list, which would help advance Waukegan’s plans to revitalize the lakefront.

In sum, Waukegan’s city planners want to revitalize and transform Waukegan as a place for people who desire the amenities that a lakefront offers, but perhaps at a more affordable price. Their efforts might make Waukegan also appealing to those who prefer the quieter suburban lifestyle or those who can commute easily to jobs in Lake County, Milwaukee, or Chicago. Waukegan is hoping to rebuild its community and bring residential interest, commercial activity, and people back into a once booming industrial town.


[1] 2006 Census Estimate (Return to text)

[2] Census of Manufactures Geographic Series 1972 and 2002 (Return to text)

City-Suburban Population and the Housing Bust

Demographer William H. Frey calls to our attention a striking turnaround in population growth in the central cities of metropolitan areas. Since the 2005-06 peak of the housing construction boom in the United States, the growth rates of central cities have begun to gain ground on surrounding suburban areas. Beginning with 2005 and ending with population estimates reported by the Census Bureau for mid-year 2008, Frey illustrates a convergent city-suburb trend for U.S. metropolitan areas having a population over one million. These trends hold for all four major U.S. regions—North, Midwest, South, and West. (The 12-state Midwest population performance is shown below).

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Similarly, Frey reports that these gains “are not confined to the very largest American cities. Among the 75 cities with populations exceeding 200,000, 41 grew faster in 2007-08 than in the preceding year, and 54 grew faster than in 2004-05.” We show the population trends for such cities by region below. Once, again, we can see that the turnaround has taken place, on average, in all Census regions of the U.S.

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Within the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin, growth has also tended to rebound in cities over 200,000 in population (below). For the year ending in the middle of 2008, six of seven cities exhibited positive population growth. However, the City of Detroit is an outstanding exception with an accelerated decline in the mid-year ending 2008.

On average, Seventh District cities shifted from zero or negative growth in 2005 to an annual growth rate of 0.5 percent for 2008. The largest swings in performance were registered by Des Moines, with a swing from minus 1.3 percent in 2004 to plus 1.2 percent in 2008, and Chicago, with a swing from minus 0.7 in 2005 to plus 0.7 for 2008.

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At this point in time, the reasons for this shift toward central cities remain open to speculation. But given the timing, there are strong reasons to believe that the housing bust lies behind much, if not most, of the reversal. A general rise in demand for housing, such as that which occurred earlier in this decade, exerted a magnified impact on the fringe of urban areas. Given the lower price of land on the fringe and the ease with which larger single family homes can be constructed there (rather than tear-downs closer in), both population and housing generally shifted towards the periphery. Construction jobs related to fringe development likely bolstered the trend, as some households followed job opportunities to the suburbs. And now we may be seeing a reversal of such trends as home demand and employment have fallen off.

William Frey also attributes the urban population resurgence to the nature of the urban economies, citing “broad economic diversity at a time when smaller cities … are vulnerable to economic shocks” and the “resiliency of large urban centers that are economically and demographically diverse.” There may be some wisdom in thinking that this is so. In pursuing economic development, central cities have been trying to attract and grow “Eds and Meds,” (education and health care). As measured by George Erickcek and Tim Bartik of the Upjohn Institute, health care and hospitals, along with colleges and universities have been a bulwark of the economic base of many cities. These sectors of the U.S. economy have tended to grow and expand consistently, and cities have benefited. From the 2000 Census, Bartik and Erickcek report that earnings derived from the education sector are, on average, 36 percent more concentrated in the principal cities of the nation’s 283 metropolitan areas. Health care earnings are 12 percent more concentrated.

Nonetheless, with the release of the next mid-year Census estimates (for 2009), it will be interesting to see if central cities are able to sustain their momentum of population growth in relation to suburban areas. Beginning with 2009, the influences of the sharp U.S. recession and related job declines may become important. [1] Favoring central city economies, the education and health care sectors are steady performers even in recessions. So too, many central cities no longer host manufacturing production, which tends to be hit particularly hard during recessions. However, in many cities other elements of the economic base are both concentrated and highly sensitive to economic downturns. Such sectors include professional and business services, law, tourism/business travel, and especially the financial sector, which has been buffeted by the recent financial crisis.

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Little evidence is available so far concerning the differing impact of the two national recessions, 2001 and the current one, on city versus suburb. However, in a recent report by the Metropolitan Policy Program at Brookings, Elizabeth Kneebone and Emily Garr report on year-over-year unemployment rates for city versus suburbs in the nation’s 100 largest metropolitan areas. They find that “in contrast to the last recession,” when city unemployment rates rose more sharply versus their suburbs, “unemployment has increased at nearly equal rates in cities and suburbs.” [2] The table below excerpts the year-over-year rise in unemployment rates for cities and their suburbs for several Seventh District cities and their suburbs and for the four major regions of the United States.

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Note: Thank you to Emily Engel and Matt Olson for assistance.


[1]To some degree, people tend to locate their residences in proximity to their jobs, so that job locations would tend to drive population growth as well.(Return to text)

[2]The difference in the gap between the two recessions is not large. Year over year changes in unemployment rates in cities rose by 1.9 percent in primary cities versus 1.4 percent in suburbs from May 2001 to May 2002. For May 2008 to May 2009, year-over-year rates rose by 3.9 and 3.7 percentage points, respectively, for cities and suburbs. However, city/suburb unemployment rate differences in level are wider currently than in the 2001-02 period.(Return to text)

What are the opportunities in central cities?

Since at least the 1960s, central cities of large metropolitan areas have experienced challenging times. In many cases, large shares of the population and jobs have shifted from these central cities to their suburbs. More recently, over the past two decades, central cities’ travails have eased somewhat; the declines in the number of households and jobs have abated, and in some instances, these negative trends have reversed. Understanding the reasons behind these trends can be helpful in fashioning public policies to encourage the redevelopment of central cities.

The Chicago metropolitan area’s experience may be especially helpful in informing policy throughout the Midwest states. While the Chicago area has shared a common course of development with its neighbors in the Great Lakes region, its central city has outperformed its counterparts over the past 20 years. The population of the Chicago area’s central city has grown by an estimated 1.9%, or 53,000, since 1990. In comparison, the central cities of the eight remaining largest Great Lakes metropolitan areas have clocked a 9% loss[1]. As for employment located in the central cities, from 1990 through 2004, the Chicago area’s city lost 4.6%, while those of the other areas lost 6.5%.

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Why have central cities such as Chicago and the Twin Cities experienced some rebound? Two major reasons have been advanced. For one, it is clear that there has been a reawakening of interest in living in central cities that relates to their unique amenities and features. Gentrification in many cities has focused on those neighborhoods that contain interesting architecture and history—not to mention lively entertainment scenes. In addition, big city mayors have capitalized on renewed interest in city living by lavishing attention on amenities such as outdoor recreation, lively shopping and arts districts, scenic streetscapes and waterfronts, and urban festivals.

In a recent study of residential location in the City of Chicago versus suburban areas, Bill Sander and I document the specific characteristics of urban denizens versus suburbanites for both 1990 and 2000. The importance of city services to households is apparent from our findings concerning their demographic characteristics. For example, with an eye on the quality or reputation of city schools, household adults with children of school age are much more likely to choose the suburbs over the city. As for the general importance of amenities, diversity, and built environment, we find higher educational attainment to positively affect households’ decisions to choose central city residence. In 1990, those with a four-year college degree were no more likely to live in the city; by year 2000, such householders were 4% more likely to live in the city rather than the suburbs.

The education-related aspect of urbanization is evident in the changing composition of Chicago’s residents. In 1990, 19% of all working age adults living in the city had attained a college degree. By year 2000, this proportion had grown to 26%. Gains among the younger adults were most striking. As shown below, for adults aged 25–34, the college attainment share had grown to 39% by 2006. Growth since 1990 in college attainment of young adults living in the city reversed the suburban advantage of 1990. On average, by 2006, college attainment of young adults in the city exceeded that of their counterparts in suburban areas. The number of those with a bachelor’s degree residing in the city grew by over 50% over the 1990s (not shown) [2].

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It is a mistake to attribute too much of the rising urbanization of college-educated householders to the siren call of city lights, museums, and lakefront parks. That is because job location also strongly pulls along residential location (and vice versa). Through a job channel, the rising importance of information exchange in the U.S. economy may be the second vital large force that may be reviving central cities. New ideas, their dissemination, and the coordination of a complex worldwide economy have come to dominate economic output in developed nations; therefore, the siting of jobs and meetings of workers in dense configurations, some have argued, augments productivity and value generation. Central city location of work has become more desirable, which has pulled some jobs back toward the center of metropolitan regions.

There is some evidence of this renewed role of central cities. At the same time that many central cities have shed some types of routine production jobs, gains have been made in occupations and industries that are steeped in workers who engage in information exchange and interaction. While the City of Chicago has been shedding manufacturing jobs—one of its historic mainstays—it has largely replaced such jobs with those in nonmanufacturing sectors. As shown below, city job losses are largely accounted for by the manufacturing sector alone; in fact, the city has experienced overall growth in employment net of manufacturing. More specifically, (not shown) over the period from 1991-2002, central city Chicago realized strong job gains in such industry sectors as business services (+34.4 percent), securities and commodities brokers (+61.8 percent), educational services (+25.1 percent), and engineering and management services (+13.6 percent).[3]

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In our recent investigation of household preferences for city versus suburban residence in the Chicago metropolitan area, we account for the proximity of households to their place of work. Once we statistically account for those city residents who also have found employment in the city, our estimates of the importance of educational attainment on household location in the city are somewhat smaller than we originally estimated. More importantly, “place of work” statistically explains much of the central city residential location decision. For this reason, we should not put too much emphasis on the importance of household amenities to central city living, nor perhaps should policymakers; jobs and job-attracting features continue to be important.

At this point, not much is known about the extent to which the changing economic structure of central cities is actually generating new jobs in related fields and transforming economic bases. And so, leaders and analysts in other Great Lakes cities are looking at the Chicago experience for insights as Chicago pursues policies to refashion itself as a “global city,” in both its residential amenities and in its attractiveness to highly skilled service industries that trade in world markets. Research initiatives that can discern the importance of the city as a job location from a residential location will be especially helpful to city mayors and other policy makers.


[1]Cities with elastic boundaries—namely, Columbus, Ohio, and Indianapolis, Indiana—are excluded. (Return to text)

[2]Not all of these gains reflect shifting preferences toward the city. Gains in overall educational attainment of the general population, especially young adults, enlarged the population of those adults that were, in turn, more likely to choose urban residence. (Return to text)

[3] See U.S. Dept. of HUD, SOCDS County Business Patterns Special Data Extracts, (Return to text)

Growth and Great Lakes Cities

For half a century or more, the industrial belt of the Great Lakes and Midwest has lagged counterpart regions in much of the South and West. Large midwestern metropolitan areas arguably offer the best prospects for relief from this historical pattern. The reasons are rooted in a fundamental restructuring of the global economy that favors cities. In underdeveloped countries, rapid urbanization and the emergence of large cities have gone hand in hand with economic growth and progress. And in developed countries on all continents, two factors have lifted growth opportunities for large cities. Foremost, technological gains in transmission of information have intensified the productivity of cities because of their role as meeting places. Face-to-face communication complements digital information flows. As business people can more easily transmit and receive information via electronic devices, their time has been freed so that they can engage more intensely and broadly in in-person dialog and social interaction. In other words, carrying one’s office in the palm of one’s hand allows one to leave the physical office to better explore opportunities and ideas. Cities tend to maximize these encounters in person. Enhanced and cheaper air travel lends a helping hand.

A second factor, the opening of global trade and capital markets, has increased the possible scale and opportunities for large cities. Cities tend to function best in managing and administering far-flung markets. More open and intensive global trade has tended to broaden the reach and scale by which successful cities can perform such functions in finance, advertising, research and development, law, and company management. For this reason, some analysts believe that they can identify the emergence of “global cities” that have succeeded in such opportunities.

To date, large cities of the Great Lakes have not fully benefitted from these “new economy” trends. Migration to regions with warmer climates has slowed these cities’ work force and population growth—a trend also reflected throughout the remainder of the region. But more fundamentally, many if not most of the region’s large urban economies were built not on the service industries that benefit from the ongoing global changes, but rather on the manufacture of goods and associated freight transportation. These cities’ transition to services and knowledge-based economies has proven difficult because manufacturing-oriented places must overcome and replace larger portions of their economic base. Manufacturing-oriented income in the region has withered because of global competition, falling real prices for manufactured goods, and technical advances that have allowed goods to be produced with less labor. To these obstacles, technical changes in the production processes themselves may be added: Such changes have made the more-densely populated parts of large cities especially difficult places in which to manufacture, compared with those far suburban and rural places, where land is cheap and the transportation of materials is more convenient. The growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Edward Glaeser.

Have the relative growth rates of midwestern metro areas coincided with the degree of their original manufacturing orientation? The charts below display employment concentration in manufacturing for the eleven largest metropolitan areas in the industrial belt on the vertical axis. The horizontal axis displays each metropolitan area’s total job growth on the first chart and real per capita income growth on the second chart. The inverse correlation of economic well-being with initial manufacturing concentration is quite evident. A simple correlation between job growth from 1969 through 2006 and the manufacturing orientation in 1969 is a strongly negative 0.8. Similarly, the correlation between manufacturing and per capita income growth is -0.7.

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What might be some other reasons behind varying performance of these metropolitan areas? For one, even within the manufacturing sector, industry mix (and related performance) varies markedly. For example, the Twin Cities’ manufacturing base included emerging medical instruments and computer equipment during this time period, while Detroit hosted sagging domestic auto production.

Other observers wonder about the role that the metro core or central city has played in its relative growth and development. Due to marked suburbanization within metropolitan areas, and fixed central city boundaries, some cities such as Cleveland and St. Louis became relatively small islands of population; today, the city population accounts respectively for only 20.9% and 12.5% of these two metropolitan areas. As such, cities such as these were left largely alone to provide public services to low-income populations—and to do so with a rapidly diminishing tax base. Accordingly, some researchers speculate whether growth and development suffered as a result of this trend—not only in the city but in the entire metropolitan area. In contrast, central city Columbus and Indianapolis began with a broader geography and richer tax base with which to provide public services and development-oriented infrastructure.

While Midwest cities have many challenges to overcome, there are also assets on which to build. As widely shown and increasingly recognized, the most important overall determinant of regional growth performance has been the educational attainment of its population and work force. This is not surprising given the structural changes that have taken place in the emerging economy—changes which place a greater emphasis on information exchange and the development of creative ideas. For Midwest metro areas, and as discussed by Timothy Dunne in a recent Economic Commentary, educational attainment may be more important than for other regions. To succeed in overcoming the shocks that rocked their industrial bases, educational attainment in Midwest metro areas may have been most helpful in adaptation and re-invention. Tim Dunne displays charts similar to those above which indicate a weaker correlation between educational attainment and growth in warm weather metro areas as compared to cold weather climes. In considering educational attainment of the populations, the table below displays the ranks of Great Lakes metropolitan areas among 118 metropolitan areas in 1970 and 2006. The two local leaders in 1970 college attainment, Columbus, Ohio, and the Twin Cities also experienced the fastest employment growth. While Pittsburgh ranked low in college attainment in 1970, its gains in this metric since then have been the most rapid. Perhaps not accidentally, Pittsburgh’s growth in per capita income also outpaced other cities in the region.

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As for policy, while the region’s goods-producing industry mix has left behind a legacy of a slow-growing industrial base, the region also boasts top-notch colleges and universities. With regard to elementary and secondary education, the region maintains a healthy income base with which to support its schools. Similar to most other parts of the country, the region’s educational challenges are to have its students to perform much better, especially in central cities and lower-income communities.

Note: Vanessa Haleco-Meyer contributed to this weblog.

Supplemental Information:

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Chicago Business Cycles–Now and Then

Downturns in economic conditions often come as a surprise. In fact, time lags between statistical releases and the conditions that they reflect can mean that economic slowdowns are not known until months after they have begun. Statistical information covering individual reasons tends to be worse in this regard.

Today there is, however, a widely held view that the U.S. economy has slowed sharply and that economic conditions will not immediately improve. Broad-based measures of national economic activity, such as the Chicago Fed National Activity Index (CFNAI), indicate that U.S. economic growth is well below its historical trend. As a result, observers in regions such as the Chicago metropolitan area are preparing for hard times. And they are asking whether they are likely to feel the worse for this apparent slowdown—and how long it will last.

In the Chicago area, memories are becoming dim of those days when the pace of the local economy fell sharply in response to national economic downturns. However, the chart below should remind us or inform us anew of the fact that Chicago’s economy often experienced sharp swings in employment. In the past (especially before 1990), Chicago’s employment base had been steeped in durable goods manufacturing industries, such as machinery and steel, which experienced layoffs and downsizings when the national economy turned downward. Twice during the 1950s, Chicago area payroll job declines approached 5 percent on a year-over-year basis as national job declines reached 3 and 4 percent on those two occasions. Chicago fared little better during the recessions of 1970–71, 1974–75 and 1981–82.

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Given this track record, it may seem pointless to ask how the region’s economy will fare in the months ahead. However, the question is well considered both because the economic structure of our economy is always changing and because no two economic downturns are alike with respect to their causes and impacts on industries.

Chicago’s economy is continuing to restructure in several important ways. Most dramatically, the region’s employment structure no longer concentrates directly in manufacturing. As recently as 1969, 30% percent of the Chicago metropolitan statistical area’s employment could be found in manufacturing in comparison with 24% for the overall U.S. By 2005, manufacturing’s share of employment had fallen to 9% percent and it had converged with the U.S.’s percent share. At least this element of sensitivity to national business swings seems to have partly abated.

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At the same time that manufacturing has waned, the Chicago area has also restructured into higher-order professional services, business meeting and travel, and financial services. (The chart below indexes the Chicago area payroll employment by major industry sector. An index value greater than 1, for example, indicates that Chicago’s employment base in that sector exceeds the national average.) Especially during the 1990s, the metropolitan area experienced very rapid growth in these industry sectors. This expansion was thought to have been accompanied by geographic changes. In particular, while Chicago’s services industries had historically grown and developed through its local trade linkages with Midwest goods producers, business and financial services were now thought to have strengthened and lengthened their ties with international and U.S. cities and regions. If this were actually the case, the traditional patterns in which Midwest manufacturing production declines are strongly transmitted through Chicago’s services industries would have weakened.

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To the contrary, the subsequent experiences of the recessionary period of 2001 and its aftermath tend to suggest that Chicago’s restructuring into business and financial services has not buffered it from national business downturns. As measured by total payroll jobs, the Chicago area’s decline of 3 percent in 2001 was at twice the pace of the national average (see chart below). And if the professional and technical services sector has become Chicago’s new bellwether, its performance during the past downturn is not encouraging. From a year-over-year growth peak of 7 percent in 1999, Chicago jobs in the professional and technical sector fell by over 8 percent during 2002. Though we may not think of these services as being sensitive to the general level of business activity, their responsiveness to business swings is much like producers of investment goods and capital equipment. That is, firms tend to expand their purchases of professional services such as advertising, marketing, business meeting travel/convention, and management consulting when they are expanding their markets and investing, but they tend to retrench their purchases of such services when they are retreating.

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More generally, although Chicago has broadened and diversified its economy, many of its hallmark sectors remain sensitive to swings in the overall economy. According to the chart above, Chicago remains concentrated in manufacturing. So, too, Chicago remains a goods transport and distribution hub for manufactured goods that are both domestically produced and internationally traded. While many of the area’s services such as education and health are somewhat impervious to general slowdowns, many of its business services are volatile, depending on the fortunes of Midwest goods-producing sectors and, increasingly, on the prosperity of national and international customers.

Chicago also maintains high job concentration in financial and insurance sectors. Unlike the job bases of the New York and Los Angeles metropolitan areas, Chicago’s job base is not greatly exposed to the most adversely affected subsectors of financial services—namely, investment banking, securities dealers, and mortgage finance companies. That said, the remaining financial services subsectors are not expected to be sources of net job growth in the months ahead.

Note: Thanks to Emily Engel for assistance.

University Cities

By Graham McKee and Bill Testa

It’s very clear by now that wages and incomes have risen sharply for U.S. workers who have attained greater education. One recent study indicates that the premium of hourly wages of college graduates over those with only a high school diploma has climbed from just over 30% in 1950 to over 60% today. This lesson has not been lost on recent high school graduates. The U.S. Bureau of Labor Statistics reports that in October 2007, 67.2% of the class of 2007 high school graduates were enrolled in a postsecondary educational program.

So, how have rising returns to education affected the economic growth and well-being of places? Not surprisingly, eminent scholars have proffered that those local economies having highly educated work forces have outperformed as measured by relative income and employment growth. In particular, research papers by Edward Glaeser (and others) provide documentation that a large initial work force share having a college degree in a metropolitan area tends to give rise to strong subsequent growth in jobs and income.

Metropolitan areas and other local areas in the Northeast and Midwest have taken especial note. Here, the economic performance of many cities has been hampered by an industrial composition steeped in traditional manufacturing. While the skill and educational requirements of factory jobs have been notably climbing as of late, the economic structure of many Midwest places has not developed from a strong base—that is, one having the advanced business, finance, and professional services that tend to employ highly educated and highly compensated workers.

One place in the region where we still might expect to observe the propulsive power of educational attainment would be in the Midwest’s college and university towns. Both nationally and regionally, colleges and universities have enjoyed rising demand for their services—both research and teaching. Per the graph below, enrollments as a share of the U.S. population continue to rise during the current decade, reaching almost 6.5%—a level of 18 million by October 2007 (versus 8.2 million in 1970). So, too, research and development (R&D) performed by colleges and universities has also climbed over same period, rising from a 9.2% share of all U.S. R&D in 1970 to a 13.7% share in 2006. More recently (measured in nominal dollars), university R&D rose by 50% over the period 1999–2006.

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Such trends have driven direct employment in academia higher. According to surveys conducted by the American Association of University Professors, over the past three decades, “while the number of tenured and tenure-track faculty has grown 17 percent, the ranks of contingent faculty (both part and full time) and full-time nonfaculty professionals have each tripled, and the count of administrators has doubled.”

In addition to direct employment, university research has often acted as a catalyst for growth in the private sector. Technology transfer from university labs to start-ups and early stage firms has become a growing activity. Moreover, many such firm start-ups take root locally in university towns themselves. The emergence of industrial research parks adjacent to or close by universities offer testament to this phenomenon—with those in proximity to Stanford University and the Massachusetts Institute of Technology (MIT), as well as the Research Triangle Park in North Carolina, being the prominent prototypes.

To identify those Midwest metropolitan statistical areas (MSAs) in the Great Lakes region where universities make up a large share of economic activity, we look at the R&D expenditures of all universities in each MSA in seven states—Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, and Wisconsin. On a per capita basis, the top ten metropolitan areas by R&D expenditures for 1979 are reported in the graphs below (by rank from highest to lowest). How did these metropolitan areas subsequently perform as measured by population growth and per capita income?

In answering this question, it must be recognized that much more than university activity has transpired in these metropolitan areas. Even metropolitan areas that we tend to associate with major universities (e.g., Lafayette, Indiana, with Purdue University) are major manufacturing and commercial centers in their own right. And so, we cannot then simply attribute their relative demographic and economic growth over the past few decades to university presence with much confidence. Nonetheless, on the whole, it is interesting to note that these metropolitan areas outperformed the seven-state region, on average, over the 1979–2006 period. As shown below, average population growth of university towns (see black vertical line below) has easily outgrown the average population growth of all metropolitan areas in the region (see horizontal maroon bar). The per capita income performance of university towns has not been as sharp (below).

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The comparative growth of these Midwest university towns, as shown in the graphs, perhaps reveals the local benefits from higher educational activity. Still, the questions and issues related to the economic development of such places remain difficult. How can university locales best leverage local universities for growth? Host cities have been active along a number of fronts. To name a few, localities have developed complementary real estate adjacent to campus to stimulate retail and residential attractiveness. Universities have also partnered in commercial parks and ventures to stimulate private business investment and further research activity, and in some instances, the region has partnered with a local university to train the local work force in specialized areas or to develop technology and know-how into a local industrial specialty.

Given these observations, more challenging questions remains. How can the positive effects of university R&D spillovers benefit states and even multistate regions? (That is, how can such spillovers in university towns spill over more widely?) And even if such spillovers were realized, how much and what types of public support should be proffered to colleges and universities? And if colleges and universities are to receive subsidies based on the impact of their economic development on broad regions, how should the costs of public support be allocated among the various subregions who share in the subsequent benefits?

Energy Prices and Where We Live and Work

For those of us who are aged 50 and older, it is easy to forget that younger generations did not experience the energy crunch of the 1970s nor the many (often failed) public policy responses to the OPEC oil price run-ups. With today’s similar developments in energy markets, it is fascinating to compare the two eras. In some ways, history repeats itself. In other ways, it does not.

The auto industry upheaval appears to be repeating the 1970s. As then, domestic automakers (and their fuel-consuming fleets) are suffering dearly from the sudden hike in gasoline prices; foreign-domiciled automakers, not so much. In both the 1970s and today, the vehicles of Asian automakers tend to be smaller and more fuel-efficient. Unlike the 1970s, however, today even Toyota is paying for its lurch toward large vehicles such as its large pickup truck, the Tundra.

Another apparent similarity between the eras is that some analysts are predicting that rising fuel costs will reshape our patterns of living and working toward more compact urban forms, to the detriment of far suburban and rural areas. However, the actual shifts that took place in the landscape of America surprised us somewhat during the 1970s and early 1980s.

The U.S. was already well-suburbanized by the mid-1970s. But in response to higher fuel prices, it was commonly thought that beleaguered central cities were in store for some respite from the population flight that they had been experiencing. With their denser housing patterns, high job concentrations, and well-developed public transit systems, large cities would offer shelter from high gasoline prices. In suburban and rural areas, where driving distances were long, residents would pay the price. The pace of suburban sprawl would slow, the pace of rural shrinkage would accelerate. For those of you too young to remember, these predictions did not come to pass.

These same predictions are being made today as gasoline prices have doubled. In a recent study, Joseph Cortright offers evidence that shifts toward more compact cities are already underway, as households eschew housing on the urban fringe where commuting distances are long. Indeed, in large metropolitan areas like Chicago, housing prices in closer-in neighborhoods have been holding up relatively well over the past year. The era of urban sprawl has been pronounced dead, with households and employers expected to favor greater density as a way to economize on energy-related travel costs.

However, the contrast between expectations in the 1970s and what actually came to pass may give us pause in assessing today’s predictions. Just the opposite took place in the 1970s era. Central cities of large metropolitan areas, especially in the Northeast and Midwest, experienced their worst decade of the century. Population tended to flee to the suburbs, especially middle and upper middle income residents. The apparent reasons for flight included rising crime, school desegregation, and the near-completion of an interstate highway system that funneled homeowners to cheap and abundant housing on the perimeter.

While rural areas in some areas of the U.S. did continue to decline, on the whole the 1970s was hailed as the decade of the “urban to rural turnaround.” The charts below indicate population growth over past decades for metropolitan versus nonmetropolitan counties. Though energy expenditures were higher on average for rural households, rising energy prices for coal, natural gas, and petroleum raw materials spurred a boom in exploration and mining in many parts of the U.S. Rural rebound was also spurred by a resurgence in prices and exports of agricultural commodities and processed foods. The falling exchange value of the dollar against world currencies following the dollar’s detachment from gold in 1971 was accompanied by favorable prices for U.S. foodstuffs on global markets. Faltering agricultural production in some foreign nations such as the former Soviet Union contributed to rising U.S. farm income. So too, thanks in part to the interstate highway system, some types of manufacturing began to discover rural areas as hospitable sites for production.

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Will these surprising patterns repeat themselves in the current era of high prices for energy materials? Rural areas are once again finding themselves amidst an energy and food commodity boomlet. Surging agricultural demand from developing nations has contributed to rising U.S. exports and commodity prices. The falling value of the U.S. dollar since 2002 has also contributed, as have the U.S. legal mandates and subsidies for the use of corn-based ethanol as a transportation fuel. In the Seventh District, the growth pattern in farmland prices looks much like the late 1970s and early 1980s, rising at double digits annually through the decade.

In other regions, coal mining and energy exploration activity are buoyant.

However, this time around, conditions would seem to favor central cities versus rural and far suburban areas more than in the 1970s. Rates of crime declined over the 1990s in most major U.S. central cities. Central city schools continue to struggle to educate and graduate low-income students, in particular. Yet, most such school systems enjoy greater financial stability, and many have innovated and expanded their offerings to serve populations who are diverse culturally, as well as economically. Rather than shunning large cities, many highly educated households are finding the older architecture, diverse community, and rich array of amenities in central cities attractive. To some degree, employers have followed educated employees back into central cities; or they have found that the density of the central city makes for more productive business activity in the “new economy,” which rewards face-to-face contacts in conjunction with sophisticated telecommunications. Should these recent trends continue, higher gasoline prices may only add one more advantage to the higher density of older central cities.

These trends may leave some suburbs on the fringe as the losers in the current era. The map below illustrates the average commuting time for suburban areas of the Chicago metropolitan area. Many households who buy or rent in suburban areas choose the low housing prices that such areas offer at the expense of longer trips to work. The sudden rise in gasoline prices may have left many such households with larger shocks to household budgets than their more urban counterparts. The Center for Neighborhood Technology in Chicago has constructed neighborhood maps of U.S. metropolitan areas which estimate average household expenditures for commuter travel. For Chicago and most other metropolitan areas, these estimates show that average household energy expenditures climb on the fringes of metropolitan areas. Even as measured as a share of household income, far-suburban households are more severely affected by rising fuel costs.

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Some revisionist interpretations of the 1970s experiences of “urban to rural” turnaround have also been made by analysts such as Paul Gottlieb. And it seems that the turnaround of that period has been overstated by an inherent bias of measurement—the tendency to overstate the population growth of nonmetropolitan counties during periods in which household growth is robust nationally. In such periods, population growth in nonmetropolitan counties can flip their defined status from nonmetro to metro, thereby inflating the measured pace of growth in consistently defined “nonmetro” counties.

Given the experience of the 1970s, it is difficult to draw firm and rapid conclusions concerning whether an era of higher fuel costs will reshape our urban, suburban, and rural landscape and, if so, how. To be sure, higher fuel costs have changed the desirability of work and residential locations. But we also know that households and businesses can adapt to such marked price shocks in other ways than moving. In particular, as today’s fleets of autos and trucks wear out, they will surely be replaced by more fuel-efficient vehicles, thereby allowing many long commutes and delivery trips to resume at moderated cost. Such was the case following the energy price shocks of the 1970s.

Note: Thanks to Vanessa Haleco-Meyer, Bill Sander, and Graham McKee for comments and assistance.

Seventh District Housing Market Update

For several years running, the national pace of investment in housing greatly exceeded historic norms. Accordingly, housing market observers speculated that strong rates of home building and price appreciation would falloff markedly at some point in the near future. Nationally, real residential investment growth averaged 9 percent from 2003-2005; average home prices rose by 6.8 percent in 2003, 10.7 percent in 2004, and 13.1 percent in 2005.

During the first half of last year, the pace of home construction and home price appreciation finally slowed. Since then, home building activity and sales have declined sharply and, by some measures, changes in home prices are now running in negative territory. Since the fourth quarter of 2005, U.S. residential investment has been declining, averaging over 11 percent on an annualized basis. The growth of the OFHEO measure of national average home prices has slowed to 5.9 percent year-over-year for the last quarter of 2006 (new data will be released on May 31).

During the current decade, home prices appreciated in the Midwest as well, though less so than in the nation and much less so than several southern and coastal markets such as San Diego, Las Vegas, and many parts of Florida. For this reason, during the years of strong price appreciation, some observers believed that the Midwest would be spared the eventual price and building falloffs that would unfold in other regions. So far, this does not seem to be the case. Most major residential real estate indicators currently show the Midwest region with comparable or weaker fundamentals than the national average. The chart below illustrates the pace of new home construction starts in the Seventh District states versus the U.S. Measured on a year-over-year basis, home starts in the Midwest have been running below the nation since early 2006.

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For the most part, the weaker Midwest economy lies behind its weaker housing markets versus the national average. The current slowing of the U.S. economy has been accompanied by a marked slowing in manufacturing which has, in turn, softened the housing market in many local Midwest communities. In addition, ongoing structural upheaval in automotive-oriented communities is reflected in several housing market indicators including home purchases, home prices, and in foreclosures of existing properties.

Residential real estate market conditions are highly local. The maps below juxtapose home price appreciation and unemployment rates in Seventh District metropolitan areas. Looking at the top map, unemployment rates in many Michigan communities are notably higher than the general pattern in the other Seventh District metropolitan areas. Retrenchment in domestic automotive assembly operations and suppliers in Michigan has resulted in significant work force upheaval. Automotive-oriented communities in other states of the Seventh District—such as Kokomo, Indiana—have had similar experiences. After Michigan, Indiana is the second most automotive intensive state in the Seventh District.

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The second map (above) displays year-over-year house price appreciation for the same metropolitan areas. To some degree, areas with a slack labor market are experiencing less home price appreciation. This is especially evident in Michigan and Northwest Indiana where the domestic automotive industry troubles are centered.

The linkage in these states between the local economy and the housing market is consistent with available information on home loans. The pace of loan delinquencies and mortgage foreclosures in both of these states are now running higher than both the nation and other states of the Seventh District.

Home price appreciation is stronger in Chicago and in many other metropolitan areas in Illinois and Wisconsin. In the Chicago area, job growth in business services, travel-tourism, and financial services industries have continued to expand. In other metropolitan areas to the west of Indiana and Michigan, manufacturing tends to be concentrated in more buoyant product lines, such as construction and farm machinery or food processing. As a result, home prices are generally holding up better in those areas.

Labor market conditions fare well in many Iowa metropolitan areas. Yet, average home price appreciation there is generally tepid. To some degree, home price appreciation has been very steady in Iowa over many years and the current pace of appreciation does not differ markedly from the norm of the past 15 years (see below).

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Nationally, residential real estate activity continues to adjust downward to align with its rapid expansion of recent years. In particular regions and communities, the extent of adjustment varies with both the stock of existing housing and with local trends in economic growth which drive the demand for housing. Generally, new construction activity and price appreciation have softened in the Seventh District but local conditions can be seen to vary with local economic indicators.

Congestion tolling and privately operated roads—An idea whose time has come?

As our roads become increasingly congested, tolling and privatization of highways will be increasingly important lifelines, especially for large urban economies. The idea that motorists should pay tolls when driving on congested highways has long been advocated by economists. Conceptually, the “public” part of highway transportation is limited to the necessary intervention by public authorities to strategically acquire land for transportation and assure that all have access to travel freely in pursuit of commerce and recreation. However, the individual’s use of a roadway is often “private” in that it imposes congestion costs on other drivers (and some pollution as well). That is, in the motorist’s decision to use a road, the individual driver does not consider the congestion costs imposed on other drivers, thereby leading to the overuse of limited public roadway capacity. As a remedy, congestion tolls bring these individual driving decisions back into line with the greater public good. As the degree of road use (and congestion) varies by time of day and by day of the week, so should the amount of tolls vary accordingly.

After a long hiatus, interest in congestion tolling and privately operated roads has been climbing. European and Asian cities have made innovative headway in congestion fees. Both Stockholm and the City of London have implemented motor vehicle charges for the privilege of access to their central area; so has Singapore. Most recently, New York City has proposed to charge auto motorists $8 for the privilege of driving around Manhattan during peak traffic hours, with higher fees for those driving trucks.

Such actions are largely being spurred by rising congestion—which did not materialize overnight. The Texas Transportation Institute (TTI) creates a “travel time index” that indicates the relative change in travel time from peak traffic to free-flow traffic. In a TTI report, Chicago in 1982 had a travel time index of about 1.2, meaning that given a 40-minute commute during a free-flow period, a person driving during peak hours would drive about 48 minutes (20% longer than it “should” take). This had climbed to 57 percent longer by 2003. In four major cities of the Seventh District, the added time to a commute during peak hours has increased from 14% in 1982 to 46% in 2003.

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Prior to the recent spate of toll programs, some highway authorities experimented with non-price-rationing measures such as “high occupancy vehicle” (HOV) lanes. To curtail congestion, HOV lanes set aside and dedicated freeway lanes to those vehicles, including cars and buses that have multiple occupants. Unfortunately, the results were sometimes disappointing in relieving congestion because HOV lanes merely attracted vehicles that already contained multiple occupants, without prompting a significant number of single-passenger motorists to carpool. So, too, the dedicated HOV lanes, while often uncongested, tended to push even greater congestion onto unrestricted lanes of the highway.

In response, the so-called “high occupancy toll” or HOT lanes have sometimes been called into action. HOT lanes are essentially HOV lanes that allow single-occupancy vehicles to motor in them—but for a price.

What has brought us to this state of affairs? Under the best of circumstances, motorists prefer to drive when and where they choose at no charge. But Americans’ penchant for driving has far outrun our financial ability to build roads. Lifestyle changes have tremendously raised the miles traveled in cars by U.S. households. Rising household incomes have lifted the desires for ever larger houses and lots, which are, in turn, often satisfied by homes located quite far from work sites. In addition, owing to the desire for residential privacy, homes are often built on dead-end or nonthrough streets, which has aggravated traffic on the major arterial roads surrounding residential communities.

Also, the rising trend of two-earner households makes it difficult for both earners to simultaneously live near their workplaces. More generally, there are extensive logistics (and driving miles) for today’s American family to coordinate their many trips for work, shopping, education, and recreation. By one estimate (DOT), highway travel miles climbed 23.4% from 1995 to 2005 in comparison to a population increase of 11.4%. To accommodate such rising traffic, road expansion has climbed by only 2.6% over the same period.

Many observers recognize that improved community land use planning could help curtail our appetite for driving. For example, allowing developers to build high-density apartment-type residences around existing commuter rail stations would allow at least one of a household’s commuters to keep a car parked during the workday commute. So, too, stronger community planning efforts to assure that households of modest means can find affordable housing could help curtail the need for very long commutes. In the Chicago area, for example, policy think tanks such as Chicago Metropolis 2020 and the Metropolitan Planning Council spearhead efforts and programs that promote such community planning. Still, however sensible such planning may be, there has been very little of it implemented in many U.S. cities to date, and so, the increased commuting has often overtaken existing roadway capacity.

In past decades, state governments have often tried to keep pace with rising demands for driving and for far-flung housing by building more roads, including freeways. Several forces are now conspiring to slow such construction, especially tight fiscal conditions. The primary source of highway grant assistance to states, the Federal Highway Trust Fund, is replenished from the federal tax on gasoline. But the tax of 18.4 cents per gallon has not been raised since 1993 so that while revenues do rise somewhat along with vehicle miles traveled, they do not keep pace with rising gasoline prices and higher milage automobiles. Meanwhile, the revenue resources of state governments have also been besieged. Many state gasoline taxes are themselves imposed on a stagnant “cents per gallon” basis, and the voting public strongly resists the raising of gasoline taxes—especially as motor fuel prices have put increased pressure on household budgets over the past three years.

This leaves state government officials in a quandary, since the costs for competing public services, especially health care, education, and prisons, are concurrently squeezing state budgetary funds. State and local governments are hard pressed to even maintain existing highways, let alone fund expansions to curtail growing traffic congestion.

In addition to charging tolls, elected officials are also responding by increasingly turning to the private sector to assume responsibilities that include the financing, planning, marketing, construction, operation, and pricing of roads and bridges. Many combinations and arrangements of these functions are being attempted, from simple outsourcing of management and toll collection of highways to the all encompassing long-term leasing of highways as a publicly regulated private business entity.

Increased congestion and financial stress are not the only reasons behind the privatization and tolling of transportation infrastructure. New and improved technologies for payment of highway tolls have recently come to the fore. In contrast to the driver of yesteryear who had no option but to deal with the delay-plagued coin and cash toll booths, today’s driver can often make payment with little or no slowing down. Toll payments can be made online by transponders carried within vehicles or offline by remiote reading of license plates.

Seventh District initiatives lie at the recent epicenter of these movements in the U.S. In particular, the City of Chicago entered into a 99-year lease to a private consortium in 2005, turning over operational responsibility for and revenue returns from an 8-mile stretch of toll highway called the Chicago Skyway. By many accounts, the City benefited greatly from this transaction, while the public interest of drivers was also well served by enhanced operational efficiencies. The City of Chicago used income from the deal to retire existing debt on the Skyway infrastructure, and with the remaining revenue, it also set up a trust fund and purchased a sizable annuity that will help finance the city’s general operating funds well into the future. The driving public now enjoys rapid roadway maintenance and toll collection and eased congestion, albeit with prospective increases in toll fees.

Following Chicago’s lead, the Indiana Finance Authority leased its east–west toll turnpike for $3.8 billion in 2006. In large part, Indiana will use the proceeds to fund and maintain highway infrastructure throughout the state.

Meanwhile, in an effort to reduce rush-hour congestion around the Chicago area, the Illinois Tollway Authority introduced differential time-of-day pricing for only trucks in 2005. This program also doubled tolls for drivers in autos who choose to pay by cash at toll booths rather than by electronic transponder as they drive through rapidly. Revenues from these schemes are being used for repairs and expansion of the tollway system; they are also being used for the capital costs of new and reconfigured “open road” (or no-stop) toll collection system, which enables vehicles to pay tolls while traveling at highway speeds.

As the Illinois Toll Authority and other examples show, privatization and tolling of roads are separable actions. But in some ways they reinforce one another. Turning one’s operations over to private companies may provide one way to overcome the public’s resistance to congestion pricing, especially in contrast to government authorities who may be encumbered or distracted by non-transportation responsibilities or political constraints (i.e., the lack of political will to appropriately price use of the asset). Privatization potentially may also allow the operational authority to change pricing regimes and payment technologies more quickly in response to changing roadway conditions. Also, cost efficiencies and service quality are presumably improved when private agencies are watching the bottom line, though this has not always proved to be the case.

Still, the issues inherent in privatization schemes are contentious with respect to both purported operational efficiencies and sound fiscal management by governments. In awarding operational and pricing autonomy to private companies, it is not always clear whether the public interest is less than optimally served in favor of the profitability of the private operator. In particular, monopoly-type pricing by a private operator may be worse than publicly directed underpricing of congested facilities. Similarly, the data collected from the publicly rather than privately operated system may be more readily available for systemic public land use and transportation planning across entire metropolitan areas. For these reasons, as they enter into such partnership arrangements, elected officials must carefully craft contract terms and then follow up by monitoring the private companies during the terms of the contract.

Other concerns center on the behavior and actions of governments when they first enter into such agreements. Upfront revenue windfalls from the leasing of public infrastructure may cloud the judgment of governments and elected officials. Without proper disclosure and oversight of government by the public, the sale and leasing of transportation infrastructure to private buyers may pander to the near-sighted proclivities of elected officials. To plug current budget holes, or to plump up current spending for self-motivated reasons, public officials may unwisely commit large revenue streams immediately received from the sale or lease, while concurrently widening future budget deficits by eliminating public revenue streams. As always, the voting public and their representative think tanks must be on guard to oversee the terms of public–private partnership arrangements.

Elected officials must also represent and protect the public’s interests in matters of fairness and equity. Lower-income households are those who will be disproportionately burdened to pay for the use of less-congested roadways. In many ex-urban and suburban places, lower-income households must travel long distances to access their workplaces. Equity concerns are often compelling, since these workplace commutes are often lengthened by land use restrictions undertaken in high-income communities that limit the availability of affordable housing near work sites.

In response to equity concerns, some states and localities are adding capacity and subsidies to public transportation—both light rail and buses. When funding is short, as it usually is, governments often earmark part of highway toll revenues to such dedicated purposes.

However, for many households, public transportation is not an option. According to the 2000 U.S. Census, only 4.7 percent of workers currently use public transportation. The table below shows average usage of public transportation for Seventh District states. Public transportation is, of course, more viable in densely populated places, including large cities such as Chicago. Since large cities also coincide with highway congestion and tolling practices, the use of tolls to fund public transportation subsidies will work better there.

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The use of congestion pricing, privatization, and new payments technologies remain in their infancy. Yet, because of the ever-increasing demand for driving, accompanied by little highway expansion and poor land use planning, heavy congestion will soon be a reality in many communities. For this reason, the Federal Reserve Bank will hold a one-day workshop this June to understand how pricing schemes, public–private partnerships, and emerging payment mechanisms can be used to address congestion and efficiency in commuter networks.