Jobs – Big City Economics

Republican Plan: Squeeze the States

There is a widespread belief that the Trump Administration has no plan for coping with the Covid-19 pandemic. That critique is far too charitable. The Administration, in concert with its enablers in the Senate, does indeed have a plan.

The plan is to plow through the pandemic, keep the economy running and the stock market up, and let the states and the American people deal with the rising body count however they can. In the time-tested tradition of petty swindlers, Trump and Mitch McConnell are orchestrating a fiscal hustle to force the hands of governors and mayors and pin the blame on them if things go terribly wrong.

Asked about a possible second wave of the pandemic during his May 21 visit to a Ford plant in Michigan, Trump responded: “People say that’s a very distinct possibility, it’s standard. We are going to put out the fires. We’re not going to close the country. We can put out the fires. Whether it is an ember or a flame, we are going to put it out. But we are not closing our country.”

How would he know? As we’ve all learned, it’s the governors and mayors who decide whether extreme restrictions on business and individual activity are necessary to protect public health. Trump takes no responsibility.

Although other developed countries have political jurisdictions equivalent to American states and cities, the United States is unique in how much responsibility for funding basic public services it places upon them. The majority of public spending on everyday needs like education, police, roads, parks, transit and healthcare is the responsibility of American states and cities. But when it’s necessary to respond to a widespread threat to public health, states and cities simply don’t have the budgetary resources or flexibility that the federal government has: they cannot run perpetual deficits, have no central banks of their own, and cannot print their own currency.

That’s why we have to keep an eye on Trump’s accomplice. McConnell is making sure that the states and cities are in no position to suppress their economies as they did in the spring. In stark contrast with his urgency for providing financial aid to business, McConnell is dragging his feet on fiscal aid to states and localities, lecturing on how the need for additional aid needs to be carefully thought through, even suggesting that states consider bankruptcy.

The spring shutdown of many state and city economies put their budgets in a deep hole. New York State recently adopted a FY2021 budget projecting general fund receipts $13.3 billion lower than anticipated February. The state expects its revenue losses to total $60.5 billion through 2024. California, a state widely lauded for its early and decisive measures to contain the pandemic, adopted a FY21 budget that anticipates a drop of $20 billion in tax revenue from the prior year and requires expenditure cuts of $13 billion. New York City adopted a FY21 budget that anticipated $7 billion lower tax revenues and $7 billion reduced spending from its preliminary plan proposed in January.

Democrats are pushing for a “phase four” of federal pandemic relief, the centerpiece of which would be aid to states and localities. But McConnell is in no hurry. Said Roy Blunt (R-Mo.), Chairman of the Senate Rules Committee, back in June: “Optimistically, we might move before the Fourth of July. I do think we will move on phase four before the August break.” There was no movement by McConnell by July 4. It just so happens that most states and cities operate on a July-to-June fiscal year, so if they were to avoid draconian budget cuts in their Fiscal 2021 budgets, they needed to know what kind of federal backstop they’d be receiving before the end of June. Senate Republicans surely knew that, and surely enjoyed the spectacle of big-state governors and big-city mayors taking heat for those cuts. So why rush a phase four to get them off the hook?

The House passed a $3 billion phase-four emergency relief bill on May 15, which included about $1 trillion in aid for state and local governments. Almost two months later, there has been little movement toward a Senate version. It’s been reported, however, that McConnell told Trump he wants to hold the total cost of phase-four relief to $1 trillion, which would almost guarantee that state and local aid is far below the amount needed.

Earlier in the spring there was talk of a “first wave” and “second wave” of the Covid pandemic, following the model of the 1918 flu. Increasingly, it’s becoming obvious that the Covid virus will not exhibit the seasonality of the flu and that the U.S. has never squelched the first wave. But however you prefer to characterize the pattern of contagion, it became obvious by late June that it was out of control in much of the country. States began to walk back their re-opening policies and even the ever cautious Dr. Anthony Fauci began to hint of another round of strict shutdowns.

Without additional federal aid, however, few states and cities will be in a fiscal position to order a second round of economic closures and social distancing, no matter how bad the pandemic gets. McConnell knows that and Trump knows that, which is why he’s so confident there will be no more shutdowns. Even if some additional federal aid is eventually delivered in a phase-four bill in August, McConnell will have already delivered his warning to governors and mayors. So that’s the plan, we’re all warriors in Trump’s reelection push and McConnell will do his best to keep the governors and mayors in line.

Thoughts on the May Jobs Figures

On June 5, the BLS reported that the national unemployment rate in May dropped to 13.3 percent, from 14.7 percent in April, and that nonfarm employment increased by 2.5 million. The stock market staged a huge rally and the media expressed astonishment. I guess I don’t read enough economic forecasts these days because I was surprised everybody was so surprised.

On May 21 I tweeted:

How can the PPP have committed over $600 billion to firms expected to maintain payrolls, and yet unemployment claims are over 38 million? Either many of those unemployment claims will be withdrawn once the PPP money flows through, or the PPP program has been a complete failure.

The May jobs figures answered my question. The Paycheck Protection Program (PPP) has been at least a partial success. From March 21 through May 30 initial claims for unemployment insurance totaled an astonishing 42.2 million, a number equivalent to about 27 percent of total employment at the beginning of March. But in the meantime, Congress passed the CARES Act, a central feature of which was the PPP. The PPP was intended to limit unemployment during the pandemic shutdown through, essentially, a federal subsidy of business payrolls, as well as to help small businesses survive by providing the liquidity to pay other fixed costs.

The PPP was designed as a loan program, but since the loans are 100 percent forgivable it is, in effect, a grant program. As initially legislated, PPP loans are forgivable if the borrowing firm used 75 percent of the loan for payroll and restored its pre-pandemic employment level by June 30. Through the end of May, 4.5 million PPP loans were approved, totaling $510 billion. However, the program only began taking applications on April 3 and administrative problems caused delays and frustration. Then the program ran out of money and Congress had to enact a new phase of emergency aid to refill it. Money didn’t start flowing to firms in a big way until late April. By then some 28 million Americans had filed for unemployment benefits.

The two criteria for loan forgiveness induced firms with PPP loans to rehire employees who had been laid off; many of those employees probably had already filed for unemployment. Undoubtedly, many firms also recalled workers simply because they wanted to continue operations and the PPP loans enabled them to do so. So it was to be expected that many of the initial unemployment claims were precautionary and, as my tweet suggested, eventually evaporated.

The timing of the rehires, as it relates to the reported unemployment rate, was anyone’s guess. The dip in the May unemployment rate, the survey for which was taken the week of May 10, indicates that the rehiring was relatively rapid. What exactly happens to the unemployment rate in June and July is even more speculative, insofar as Congress, on June 3, passed legislation extending the forgiveness deadline to December 31 (and also lowered the amount of the loan that must be used for payroll maintenance to 60 percent.) So firms are under less pressure to restore their employment to pre-pandemic levels by the end of June. It should not be a surprise if the unemployment jumps up again in coming months, nor should it be a surprise if it stabilizes.

That Didn’t Take Long

The ink was barely dry on the Senate’s bill to provide an additional $484 billion of Covid-related economic relief when Mitch McConnell fired the first volley of the next battle. On April 21 he appeared on Fox News host Bill Hemmer’s show and said:

“What I’m saying is we’re going to take a pause here, we’re going to wait at least until May 4th which is the time we’re going to have everyone back in the Senate and clearly weigh, before we provide assistance to states and local governments, who would love for us to borrow money from future generations, to make sure that they have no revenue losses.

“Before we make that decision, we’re going to weigh the impact of what we’ve already added to the national debt and make sure that if we provide additional assistance for state and local governments, it’s only for coronavirus related, coronavirus related matters.

“We’re not interested in solving their pension problems for them, we’re not interested in rescuing them from bad decisions they’ve made in the past. We’re not going to let them take advantage of this pandemic to solve a lot of problems that they created for themselves, and bad decisions they made in the past.”

His office then issued a press release repeating those comments under the heading “Preventing Blue State Bailouts” and the next day he appeared on Hugh Hewitt’s radio show and said:

“I said yesterday we’re going to push the pause button here, because I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated. You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs. There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”

He went so far as to make the suggestion that in lieu of aid, states should consider bankruptcy:

“I would certainly be in favor of allowing states to use the bankruptcy route. It’s saved some cities, and there’s no good reason for it not to be available.”

Trump then jumped into the fray, playing both sides of the issue as usual. First he told New York’s Governor Cuomo that he was very open to federal budget aid to states, but several days later tweeted: “Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help? I am open to discussing anything, but just asking?” Apparently, conservative media played up the blue-state bailout angle enough to trigger his usual polarize-for-political profit instinct.

Perhaps the most odious comment came from Florida Senator Rick Scott, who said: “It’s not fair to the taxpayers of Florida. We sit here, we live within our means, and then New York, Illinois, California and other states don’t. And we’re supposed to go bail them out?” Considering that Scott’s Columbia/HCA private hospital chain, which he founded and ran, paid $1.7 billion in settlement fines for Medicare and other fraud, it’s a bit galling to hear him talking about what’s fair to taxpayers and what’s not. Moreover, New York State has the largest “balance of payments” deficit with the federal government while Florida has one of the largest surpluses (California and Illinois are roughly in balance).

Of course, the push back against this nonsense was swift. Cuomo slammed McConnell as “reckless” and “irresponsible,” Connecticut Senator Chris Murphy slammed Scott, and retiring Republican congressman Peter King called McConnell “the Marie Antoinette of the Senate.” Paul Krugman, Eric Levitz, and Paul Waldman piled on. Nancy Pelosi said flatly: “We will have state and local and we will have it in a very significant way.”

After making aid to state and local governments a central demand of their negotiations over the third COVID disaster relief bill, it was surprising and disappointing to many Democrats that Chuck Schumer and Pelosi agreed to a bill that included none. With pressure mounting to refund the small business relief program, the Democratic leadership apparently prioritized other demands, including financial aid to hospitals, aid to states and cities for coronavirus testing programs, and set-asides of small business loan program funds for small financial institutions and businesses, while betting that they could win a subsequent battle for state and local fiscal aid. Indeed, there appears to be significant Republican support for state and local aid, even if many Republican officials are laying low so as to not cross Trump and McConnell. In addition to Peter King, for example, Representative John Katko (R-NY) said that phase four had to protect state and local governments, and Republican Senator Bill Cassidy (R-LA) cosponsored a $500 billion aid bill with Democrat Bob Menendez (D-NJ).

Who CARES

For a brief moment I thought that Mitch McConnell might put aside his Machiavellian politics and do what is right for the country. And for a brief moment maybe he did! When the extent of the economic crisis the country was facing became evident in mid-March, Congress passed a $2 trillion emergency measure in a matter of days with relatively little rancor. McConnell, uncharacteristically, seemed to let Treasury Secretary Mnuchin take the lead in negotiating the deal with the Nancy Pelosi, and ordered his troupes to support the bill, which passed the Senate unanimously.

The broad outlines of the CARES act are surprisingly sensible. Subsidies to small businesses were absolutely essential to keep them alive and to keep their payrolls intact as much as possible. I still think it’s rather remarkable that the Republicans agreed to that in the form of the Paycheck Protection Program (PPP), insofar as 75 percent of the forgivable loans must be used to maintain payrolls. It was also somewhat surprising to me that McConnell and the Republicans went along with a significant increase in unemployment insurance benefits and an expansion of eligibility to free-lancers and contract workers. The corporate bailout portion of the CARES act was ideologically awkward for both parties, but it too was essential. The $1,200 tax refunds to be delivered to a broad swath of the public is a clunky and inefficient way to deliver relief but there was an administrative rationale for delivering emergency payments quickly.

Nevertheless, I can’t let the monumental Republican hypocrisy of all this pass without comment. When Obama took office the global financial system was on the brink and the economy was in free-fall, having contracted at an 8.4 percent annual rate in the previous quarter. Obama asked for a fiscal stimulus package totaling approximately $800 billion. He eventually got it, but without a single Republican vote in the House and only after giving major concessions to get the three Republican votes he needed to avoid filibuster in the Senate. Republicans then lambasted it as the “failed stimulus,” opposed every subsequent attempt to further stimulate the weak economy, and harped relentlessly on the “Obama deficits” right through the 2016 election. Once Trump was elected, McConnell and the Republican Party did an immediate about face on fiscal policy, passing a pro-cyclical tax cut stimulus with nary a flinch about the resulting deficits. When the current economic crisis hit with a Republican President desperate for a reelection advantage, Senate Republicans voted unanimously for the $2.2 trillion measure (the House vote is unknown as the bill was adopted by a “unanimous consent” voice vote.)

In any case we’ve seen a broader budget truce than existed during the last economic crisis. Even the Committee for a Responsible Federal Budget, whose very mission is to act as permanent deficit hawk, issued a statement suggesting that “setting aside short-term deficit concerns in order to avoid a depression” is the right thing to do. Nevertheless, I sense some residual doubt among the general public. “Can we really do this?” The short answer is, “Yes, we can.” From 1943 to 1945 the U.S. deficit averaged 23 percent of GDP and by 1946 federal debt held by the public reached 106 percent of GDP. The country did not spend the following decade bemoaning the fact that we ran huge deficits to win the war, nor did the high debt ratio seem to have a constraining impact on economic growth during the 1950s and 1960s. We currently have about an 85 percent debt/GDP ratio and it will surely reach that 1946 figure before this is all over. But we did it once and we can do it again.

Conventional economic theory holds that excessive government debt can suppress the long-term growth of the economy by “crowding out” private borrowing. However, as John Cochrane points out, the Federal Reserve is currently buying government debt faster than the Treasury is issuing it, so there is no sopping up of private savings or crowding out of private borrowers. Moreover, the Fed remits all of its profits to the Treasury, so interest payments on that debt to the Fed quickly return to the Treasury, costing the taxpayers nothing. The future effects, then, will depending on how long the Fed holds that debt and how much it ultimately sells to private investors or other governments. All of this is starting to sound a lot like Modern Monetary Theory.

Modern Monetary Theory (MMT) is a school of thought that holds that there is no real distinction between fiscal policy and monetary policy for countries that issue fiat money, and that inflation is the only constraint on government deficits financed by central bank money creation. It’s been quietly embraced by Bernie Sanders and loudly embraced by Alexandria Ocasio-Cortez, neither of whom are noted macroeconomists. I’ve been wary of it, possibly because of the biases of my conventional training. I’ve approached it much as Keynes predicted classical economists would judge his theories: “(They)….will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new.” I was in a MMT-is-quite-wrong mode until the Covid crisis descended, when I quickly shifted to a heck, it’s nothing new, let’s do it mode. And I wasn’t the only one.

If inflation is, in fact, the only constraint on federal deficits, it doesn’t seem that we have much to worry about for the time being. Quite the contrary, the deflationary pressures are getting a little scary. Ten-year Treasury bonds are now trading at yields under 600 basis points, the CPI fell by .4 percentage points in March and, in a totally mind-bending development, oil prices went negative. The way things are going, we may be praying we meet MMT’s inflation constraint as soon as possible.

Making Deficits Great Again

After 2010, when Republicans gained control of the House of Representatives and later the Senate, the U.S. essentially pursued a policy of fiscal austerity. President Obama sought to roll back the Bush-era tax cuts for wealthy households and was partially successful during the “fiscal cliff” standoff at the end of 2012. Meanwhile, the Republican Congress steadfastly refused to allow Obama to stimulate the economy with federal spending. As a result, total federal budget outlays (including Social Security) grew at only a 1.9% annual rate from 2010 to 2016, far slower than the 6.5% annual rate of increase during the Bush years.

That American-style austerity was an under-appreciated contributor to the slow recovery from the Great Recession. However, the budget deficits of the U.S. government fell in both absolute dollars and as a percentage of GDP during most of Obama’s tenure, in 2014 and 2015 even reaching a level that produced stability in the ratio of overall debt to GDP. There was some slippage in the deficit at the end of Obama’s tenure, primarily because of a lapse in the economic growth rate in 2016. Responsible fiscal management would have suggested an attempt by Obama’s successor to get the deficit back to parity with the rate of economic growth, which would have required shaving it by about one-third, or by $250 billion.

Of course, after the Republicans held on to both houses of Congress in 2016 and unexpectedly found themselves with a Republican President to work with, there was no reasonable prospect that stabilization of the debt-to-GDP ratio would be made a policy priority. It is undeniable that cutting taxes, regardless of the fiscal implications, is the core policy goal of the modern Republican Party. Two intertwined factors are behind that inversion of Republican political philosophy. First is the widespread acceptance among conservatives of the “starve the beast” strategy for reducing the size of government. The second was the creation of a much more cohesive, purposeful and sophisticated political apparatus by conservative mega-donors to the Republican Party, who out of ideological conviction and personal self-interest orchestrate anti-tax pressure and insist that their elected dependents deliver. The two previous times Republicans took over the White House (Reagan and George W. Bush) they immediately enacted huge tax cuts and the deficits swelled. There was never any chance that, in the unlikely event Trump was actually elected, this time would be any different.

So the tax reductions Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan engineered in December were entirely out of the Republican playbook and should have been fully priced in to any economist’s or investor’s forecasts. If there was anything surprising about the tax changes, it was the gratuitous and vindictive targeting of voters in high-cost, coastal Democratic strongholds (by imposing new limits on the mortgage tax deduction and the state and local tax deduction), an unprecedented use of the federal tax code to punish political opponents.

The McConnell-Ryan tax cuts will raise the cumulative federal deficit by $1.268 trillion over 10 years, according to Tax Policy Center estimates. That represents a 14.8% increase over the CBO’s June 2017 baseline estimates.

Then in early February things took an unexpected turn. Instead of pressing for more spending stringency, a smiley McConnell suddenly agreed to a two-year budget deal with Democratic Senate leader Chuck Schumer that called for large increases in both defense and non-defense discretionary spending. The deal, subsequently approved by Congress and signed by the President, is expected to add another $419 billion to the cumulative deficits through 2027.

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A Good Tax

Gina Bellafante, who is usually an acute and sensitive observer of New York’s community life, wrote a somewhat misdirected column about the city’s retailing environment for Sunday’s Times.

The column portrays sympathetically several long-time Manhattan retailers who have been forced to close shop, or might soon, because of the high cost of rental space. And they are sympathetic! However, the column identifies the City’s Commercial Rent Tax (CRT) as a contributor to the rent inflation retailers have faced and hence to the corporate homogenization of the city’s streetscape. There are several problems with this premise, not the least of which is that the CRT probably doesn’t contribute much, if at all, to the high rents for retail space.

The CRT, initially imposed in 1963 and modified a number of times since, effectively imposes a tax of 3.9% on commercial rent payments that exceed $300,000 annually. The tax applies only in Manhattan below 96th Street and phases in beginning at the $250,000 benchmark. The tax raised $816 million in the City’s 2017 fiscal year which, somewhat astonishingly, represented only about 1.5% of its tax revenue.

A savvy newcomer might ask why levy this tax at all, doesn’t it do more or less what a conventional property tax on commercial buildings does? The answer is yes, it does, but its origins and continued usefulness lies in New York State’s constitutional limit on how much property tax revenue municipalities in the state can raise. In New York City’s case, that limit is 2.5% of the 5-year average of the full value of real property within it (with some complicated adjustments). The City has periodically bumped against that cap, so having a revenue source that is similar to a property tax, but which is not subject to the cap, is fiscally useful.

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Cat Tracks to Chicago

Caterpillar, Inc. became the latest corporate giant to join the back-to-the-city movement when it announced, on January 31, that it was scrapping plans to build a new headquarters building in Peoria and instead would relocate its headquarters to the Chicago area. Caterpillar has been headquartered in Peoria since 1925.

The company announced that it would be relocating a limited group of senior executives and support functions to the Chicago area. The company disclosed only that the executives would be moving into leased office space by the end of 2017, but did not specifically state that the space would be in downtown Chicago. The company expects about 300 HQ employees to staff the new offices, some of whom would be relocated from Peoria.

The firm’s CEO, Jim Umpleby, provided an interesting rationale for the relocation: “Caterpillar’s Board of Directors has been discussing the benefits of a more accessible, strategic location for some time. Since 2012, about two-thirds of Caterpillar’s sales and revenues have come from outside the United States. Locating our headquarters closer to a global transportation hub, such as Chicago, means we can meet with our global customers, dealers and employees more easily and frequently.”

Although there are surely additional reasons for the move, Umpleby’s statement is right out of Irwin and Kasarda’s classic paper on air passenger linkages and metropolitan employment growth. Peoria is about 165 miles southwest of Chicago in central Illinois. Unlike Chicago’s O’Hare, Peoria’s General Wayne A. Downing International Airport does not offer nonstop flights to, say, London, Shanghai or Beijing.

Caterpillar’s decision also underscores the complexity of modern global business organization, which defies President Trump’s simplistic approach to trade and protectionism. The firm has 22 “principal” manufacturing facilities in the U.S., but also has plants in Australia, Belgium, Brazil, China, Czech Republic, France, Germany, Hungary, India, Indonesia, Italy, Japan, Mexico, Poland, Russia, Singapore, Sweden, Switzerland, United Kingdom, and Thailand. The firm had 40,900 U.S. employees at year-end 2016, and another 54,500 abroad, including 11,400 in Latin America and 22,800 in Asia/Pacific.

The move also adds a ripple to the narrative of Midwestern industrial belt decline. In this case, the jobs are being lost to a global U.S. city rather than to a foreign country. Caterpillar employs about 12,000 workers in the Peoria area (in a metropolitan labor market of about 175,000 payroll employees) so its footprint there will remain large. However, it is difficult to believe that this is not a continuance of a long-term shift of the firm’s higher-level executive functions to global locations with a higher level of connectivity and a richer pool of human capital.

More Than Detroit

I recently read Thomas J. Sugrue’s The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit. I’m a bit embarrassed that it took so long for me to get around to this outstanding book, but I guess my timing was right as I finished it on election eve.

Sugrue tells what should be a familiar story, but probably isn’t to enough people, with a great deal of nuance and impressive historical research. African Americans from the south migrated to northern industrial cities in great numbers beginning around 1920. In Detroit, as in other cities, they enjoyed some prosperity and upward mobility in the 1920s and 1940s, although that progress was harshly interrupted by the Great Depression. The war years and the immediate postwar period were times of hope and progress, but that came to an unfortunate end as Detroit and other cities deindustrialized and decayed in the 1960s and 1970s. The deindustrialization of center cities was not a conspiracy against the black migrants, but rather it was a historical coincidence with effects so cruel as to seem designed in malice. The ensuing impoverishment of inner-city blacks conttributed to the social unrest of the 1960s and the social disorder of the 1970s.

Sugrue’s research adds to the familiar story by showing that the roots of the urban crisis were sown much earlier than is typically portrayed; no sooner had WWII ended than the auto industry begin dispersing, both to the exurbs and to other non-urban areas of the country. Backed with research that is concrete and detailed, Sugure shows that throughout the 1950s the UAW and other labor groups were resisting industrial deconcentration and automation, but ultimately could do little to influence the corporate decisions that threatened their jobs and disrupted their communities. Of course, many white workers were able to follow their employers to the suburbs and beyond, extending their hold on working class prosperity for a few more decades. The black workers were not even that fortunate, as discrimination in jobs and housing left them stranded in the abandoned city.

Which brings us to the second major theme of Sugure’s book–the unrelenting discrimination and segregation African Americans experienced even in the northern promised lands. I grew up in a predominately white, working class neighborhood of Queens; it eventually transitioned into an exclusively African American and Caribbean neighborhood. The original white residents were on the whole decent people, there was little organized resistance to racial change, and racial transition was by and large accepted passively as a natural and inevitable progression. “White flight” there took place in slow motion over several decades, and when the white residents left they typically “fled” to grandchildren, nursing homes and graveyards. So I’m inclined to see residential segregation as an impersonal force driven by demographic flows and maintained by individual choices. However, the virulent racism and violent hostility to neighborhood integration in 1950s and 1960s Detroit that Sugrue painstakingly documents is revolting and dispiriting, and underscores that much energetic activism was required to maintain the color line. Although he makes an effort to understand the threats white residents perceived to their communities, his heart doesn’t seem in it and truthfully, by the time I reached those passages, this reader’s wasn’t either.

So as I put the book down on election eve and watched the results roll in from Michigan, I had conflicting emotions. I was saddened by the futility of white Michiganers voting against all logic in the desperate hope that Donald Trump and the GOP would save their jobs and communities or care enough about them even to try. But it was also hard to put out of my mind Sugure’s horrifying narrative of racial animosity and to convince myself that the echoes of it didn’t play an important role as well.

What’s Up With Retail?

Early this year Macy’s announced that it was closing 40 of its department stores. In April, Sears Holdings said that it would close 10 Sears and 68 Kmart stores. Then last week, Macy’s announced that it would close about 100 additional stores. Do these retrenchments represent just the normal ebb and flow of company fortunes in a competitive marketplace, or is there something more profound going on in retailing?

Well, there seem to be three strong crosswinds impacting the retail sector today, and the large department stores are taking the brunt of them. The three are middle-class income stagnation, globalization and the internet.

Through 2014 (the last year for which data is available), the average real incomes of none of the five household income quintiles had recovered to their pre-recession peaks. However, the recovery of income has been more complete for the higher income groups. While the average income of the lowest quintile of households had recovered to only 88 percent of its pre-recession peak, the average income of the highest income quartile had recovered to 98 percent. The share of total income garnered by the three middle quintiles declined from 46.9 percent to 45.7 percent, while the share of the highest income quintile went from 49.7 to 51.2. Retail chains that cater to higher-income shoppers are reportedly doing well, but for many large chains the three middle groups, with annual household incomes from about $21,000 to $112,000, is where the volume is, and income growth for those households has been slow.

Competition between name-brand retailers and discounters is not new, but in recent decades the out-sourcing of dry-goods production to China, Bangladesh and elsewhere has tilted the playing field in favor of the discounters. Epitomized by the Walmart formula, which combines a cheap foreign supply chain with monopsony buying power and a no-frills “supercenter” shopping experience, the discounters have increasingly pressured the department store chains (as well as smaller chains and independent retailers) that traditionally marketed fashion and quality. Warehouse clubs like Costco have also made inroads among middle-income families whose incomes have stagnated. From 2000 through 2014 the number of department stores nationally declined from about 10,500 to 8,000 while the number of supercenter and warehouse club outlets has grown from about 1,800 to 5,300. Walmart alone operates over 3,400 supercenters. Total retail sales in warehouse clubs and supercenters are now about triple the sales volume of traditional department stores.

Traditional retailers also face intensifying competition from internet sales. In 2015, internet sales topped $432 billion. While that represents only abut 9 percent of all retail sales, e-retailing has captured about 30 percent of the retail sales growth since 2007. As a consequence, in-store retailing has grown at only a 1.2 percent real annual rate over the past eight years, compared to the 8.2 percent growth rate of e-retailing.

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Corporate Eisodos

On August 1st the NY Times ran an article on corporations leaving the suburbs for downtown city locations. Featured in the article are GE’s move to Boston, McDonald’s to Chicago, and Chemours’ decision to stay in Wilmington. The exodus of corporate headquarters to suburban locations shaped metropolitan development in America for half a century, and a reversal of the trend could have equally profound implications.

(Oddly enough, there is no direct English antonym for ‘exodus.’ The English word derives from the Greek ‘exodos’ meaning an exit or departure, and of course is associated with the biblical narrative of the Israelites’ escape from slavery in Egypt. Unfortunately, the English language never got around to expropriating its Greek antonym, eisodos, which mean an entrance or act of entering. Anyway….)

The article is mostly anecdotal so it might be premature to extrapolate an inversion of metropolitan geography from it. Nevertheless, such anecdotes have been accumulating, suggesting something might really be going on.

Two basic explanations are offered for the increasing appeal of urban locations. One is the tax incentives (increasingly?) being offered by municipal governments to companies that are considering downtown relocations. The other is the increased livability of urban areas and corporations’ desire to access a skilled labor force that prefers city living. What’s interesting is that those two reasons represent very different philosophies of urban redevelopment, and are even somewhat contradictory. The first reflects a 1970s-era belief that it’s all about tax competition. The second reflects a Richard Florida-type strategy that if you make cities attractive enough, the creative class will flock to them and corporations will have no choice but to follow suit. The potential contradiction is that if cities give away their tax base to attract business, there won’t be enough of it to make the quality-of-life investments necessary to attract the creative class.

But maybe they aren’t ultimately contradictory. If a virtuous circle takes hold, opposite of the vicious cycle that occurred in the 1960s and 1970s, cities could both lower tax burdens and improve the QOL. There is nothing to suggest that central cities are at an inherent tax disadvantage; economies of scale in metropolitan infrastructure and services might even give cities a structural tax advantage. Maybe we’re reaching that stage of city-suburban competition. In any case, the $7.9 million in grants given to Chemours, cited in the article, came from the state of Delaware, not the City of Wilmington, as the DuPont spinoff was considering a move to Pennsylvania or New Jersey.