The gateway to the "American dream" may have become the worst place to start a company.
POOR MISS LIBERTY. WHAT WITH all the hoopla over her 100th birthday, it will be tough to stand still for all the sanctimonious talk about New York City as the gateway to opportunity, the port of entry of the American dream. It was true once, of course -- but no more. Now it's the real estate developers who are moving in on Ellis Island. The tired, the poor, the huddled masses? For the most part, they're doing their yearning somewhere else these days.
My family is from New York. Grandfather Max Kotkin left his native Latvia in the years before the First World War, a step or two ahead of the czarist police. Like tens of thousands of other Russian Jews of his generation, he booked passage to a better future by way of America. He landed in New York.
Max was one of the lucky ones in those days. He arrived with a little money from his father's furniture business. And he brought with him, too, the instincts of an entrepreneur. Before long, he had opened up a small grocery store in the then remote region of the East New York section of Brooklyn. A few years later, two cousins convinced him to give up groceries for the garment trade, just then making its transition from custom tailoring to mass manufacturing. By the mid-1920s, the family's Grand Dress Co., located on Manhattan's Lower East Side, was enjoying sales in excess of $3 million -- in those days, a sizable enterprise.
Not everything turned out so well for Max. He and his cousins also dabbled in vaudeville and movie theaters, where they lost much of what they made in schmattas. Still, when Max left this world in 1948, he left behind a comfortable inheritance to my grandmother and a family firmly entrenched in the great American middle class.
However inspiring you might find the story of Max Kotkin and millions others like him, there is one thing you should know: it is a lot less likely to happen today -- in New York, anyway. New York may now be one of the worst big American cities for starting a small retail or manufacturing business. If my grandfather had to contend with modern-day New York, he'd probably catch the next plane to L.A.
New York is no longer an entrepreneurial city. It is proudly -- even arrogantly -- the supreme bastion of corporate giantism. Sixty-one corporations of the Fortune 500 call New York City their home -- that's more than double the number of the next largest contender, Chicago. Compare that with the 1985 INC. 500, where Los Angeles County boasts 22 entries. New York, with about the same population, has 10.
"Manhattan has become the playground of the very large corporation," explains Kurt Barnard, economist for New York's Federation of Apparel Manufacturers, an organization of garment makers in the tradition of Max Kotkin. "The environment in New York for small business is dismal." Statistics give him reason for concern. While the rest of the nation has seen an entrepreneurial explosion, with the number of small businesses jumping by 17% since 1978, New York's growth, according to the Bureau of Labor Statistics, has been less than 5%.
To be fair about it, New York was also a center for big corporations and financial institutions back in my grandfather's time.But where once the giants coexisted with a vibrant economy of independent businesses, today the giants are crowding the little guy out. And nothing so reveals the growing conflict as the escalating commercial rents.
Take the case of Herbert Pobiner, who has owned Newton Pharmacy at Madison near 61st since 1961. Pobiner is accustomed to doing business in a high-rent district -- until recently, he paid his landlord $62,000 a year. But with $1 million in annual sales, that still left Pobiner with enough to pay himself a decent salary and make a tidy profit.
This year, however, Pobiner's landlord decided to up his rent just a bit -- to $185,000 annually. And it's no surprise that the numbers no longer add up. If he were in another business, Pobiner might be able to move elsewhere, but neighborhood pharmacies don't travel well. "If we lose our location, we lose our trade," says the white-haired druggist now facing an early and unwanted retirement. "We've got nowhere to go."
Nor is trendy midtown the only place small firms are being squeezed out. According to Steve Null, Manhattan coordinator for the Coalition for Fair Business Rent, increases at lease renewals averaged 117% outside the Wall Street financial district. And there are scores of Herb Pobiner stories of hikes in the hundreds of percent. All over the city, family-owned shops, many of them in existence for generations, are being wiped out. In their place come national franchises and high-priced boutiques to cater to the affluent professionals and corporate executives and the city's booming tourist trade.
In a 15-block area of working-class Washington Heights, at the northern tip of Manhattan, Ralph Nelson reports that 40 businesses have been driven out by high rents since the first of the year. Nelson's own Melody Lounge has been part of Washington Heights for 18 years. But now, faced with a rent hike from $1,800 to $9,000 a month, Nelson figures he's the next to go.
"The stores that were part of the community -- the shoe stores, the eyeglass stores, women's wear -- they are all getting killed," he says. "We're the people who made the city great. And now they tell us we don't need you anymore."
Local businesspeople certainly don't get the feeling that New York's great financial institutions value them either. A few years ago, giant Chemical Bank surveyed small-business people asking them how well they thought the city's banks were serving their needs. More than half said "fair" or "poor." The big banks' reputation is for treating local shopkeepers and manufacturers with aggressive indifference. Try walking into Chase Manhattan Bank or Citicorp and asking for a $10,000 loan backed by some inventory you're bringing in. They'll tell you to come back when you need $10 million.
"Small business got lost in New York," says Arthur Thompson, senior vice-president at National Westminster Bank USA, a subsidiary of one of England's largest banks, which found a foothold in New York by lending to smaller companies. Thompson says change came as banks were taking the power to write loans away from branch managers in the 1970s and centralized it at the banks' headquarters. "We realized this was a real opening for us, and it has worked out great."
Why does it take a big British bank to serve small-business customers? According to a former high-ranking official with the Comptroller of the Currency, it's because the big banks want it that way.Over the years, he explains, the big money-center banks have used their market power and political clout to "squash competition from small, community-based banks" -- banks that might have grown up to serve the small-business sector.
If banking and retailing are inhospitable environments for independent businesses in New York, manufacturing is even worse.Unlike the industrial cities in the heartland, where auto works and steel plants are common, New York's industry has always been dominated by smaller-scale operations. Think of clothing, printing, graphics, and metal bending. To the more ambitious immigrants like my grandfather, these manufacturing operations offered the opportunity to create significant wealth for themselves and their children. And they provided skilled and semiskilled jobs with good pay for other immigrants on their way up the economic ladder.
Not so much anymore. Today, well over half the million or so manufacturing operations that existed when Max Kotkin died have since disappeared. And since 1981, the city has been losing manufacturing jobs at a rate four times the national average. Even industries that have been growing nationwide are declining in New York. Printing and publishing -- which has long been number two on the list of the city's manufacturing industries, and which is the fastest-growing manufacturing industry in the country -- has shown almost no growth in employment in recent years.
You see it most in the garment industry. For years, these schmatta makers have survived the nation's highest electric rates, some of its highest tax burdens, corruption in the city's trucking unions, and the profound disinterest of New York's big banks. Many have even survived a generation of intense foreign competition. But now rising rents are driving increasing numbers over the brink. In lofts where sewing machines once hummed (and, yes, immigrants once sweated), high-priced offices and plush apartments are beginning to predominate. Largely as a result, the number of garment manufacturers in New York has dropped from 7,200 to about 5,000 since 1973, while employment was down from 180,000 to 112,000. In the same period, by contrast, Los Angeles, the nation's second garment center, increased its employment from 65,000 to 78,000.
The companies going under are hardly marginal players. For 37 years, Jesse Newberger was a pillar of New York's garment trade. In good years, his Allyson Frocks Inc. might gross $10 million. But last year, the landlord announced an effective rent increase of 120%. "We were hanging in there against the imports, but we couldn't beat the rents," explains Newberger, now president of the Apparel Manufacturers Association. "After 37 years, I didn't feel like working for the landlord. We're just being screwed. This city doesn't seem to want manufacturing around anymore."
City boosters are anxious to portray a different picture. The New York Times, among the city's more enthusiastic cheerleaders, carried a front-page story recently, headlined, "New Asian Immigrants, New Garment Center," chronicling the resurgence of the garment trade in New York's Chinatown. Hundreds of new shops have become "a source of employment for hundreds of Asian immigrants," proclaimed the Times. Only at the end of the article was it revealed that because of "the rising cost of real estate, there is little prospect for future growth," in the Chinatown garment trade.
If the garment industry's worst enemy is the landlord, the politician stands next in line. City Hall's bright idea is that struggling manufacturers should simply move to the outer boroughs, where rents are lower and the streets are less congested. But garment makers also know they'd be lost without ready access to the designers and button makers and thread manufacturers and sales representatives that give the garment district its vitality and efficiency. And they know that the buyer who flies in from Dubuque wants showrooms that are in close proximity, and an easy cab ride away from Broadway and the fancy shops on Madison.
"They think I can pick up and move my business to the South Bronx," scoffs David Stein, owner of Frank Olive's World, a high-fashion hat maker. "My customer needs to choose from my selection for his model, right? You think he's going to schlep to the South Bronx? You think I'm going to take my high-fashion customers there? Forget it. I'd rather leave the city."
Like many independent businesspeople in New York, the garment makers suspect the politicians of working hand in hand with real estate developers and big corporations to drive the little guy from Manhattan. Their latest pitch is for some sort of commercial rent control. But it's an uphill battle. Gov. Mario Cuomo, who is often given to soulful evocations of his father the grocer, hasn't committed himself. Mayor Edward Koch has -- he's against it. His deputy mayor for finance and economic development, Alair Townsend, explained that controls would interfere with the "free market." This is the same mayor, mind you, whose idea of the free market is to support a policy of tax incentives that has provided multimillion-dollar abatements to the likes of Donald Trump, AT&T, and Shearson Lehman Bros.
"It's free enterprise for the little guy, but not for the developers," notes Herb Rothman, chairman and chief executive officer of the New York Small Business Association, with 45,000 members in the five boroughs. "In Mario Cuomo's New York, his father would have been forced out of business."
Business leaders like Rothman are resigned these days to the fact that you can't fight City Hall. And City Hall's attitude is that you can't fight change. The city's promotional literature rationalizes the decline of New York manufacturing as "foreshadowing" the nation's overall industrial decline. It rather blithely points to the recent explosion in service jobs as the city's economic salvation. Roger Vaughan, appointed by Mayor Koch to a commission studying the commercial rent issue, once even went so far as to say that New York's industrial decline gives the city an advantage over California, where industrial growth has come in such industries as microelectronics, which are susceptible to foreign competition. "We don't want all those lousy Silicon Valley jobs," Vaughan explained to me a few years ago.
Roger Vaughan, naturally, has a good job. But millions of other New Yorkers don't, including many of the most-recent arrivals from Puerto Rico and Latin America. Despite the boom in New York's service economy, the unemployment rate is no better than the national average, and less than half of its working-age population has a job -- a rate lower than every city except Cleveland, Detroit, and St. Louis. And despite the fabulous wealth of so many New Yorkers, the city's per capita income still ranks 16th among major American cities.By 1990, one out of every four New Yorkers will be living in poverty. These people do not NY. And for them, New York long ago lost any claim of being America's opportunity city.
If Max were alive today, I think he'd say New York was making a big mistake. It's still the nation's largest port of entry, but it's no longer the gateway to prosperity. And the reason is that it's becoming overly reliant on one industry -- corporate and financial services. Just as cars decimated Detroit and oil is now humbling Houston, New York's single-minded quest for financial services will be its undoing some day soon.
In fact, there is already evidence that world financial leadership is shifting away from the Big Apple.Tokyo is now home to 5 of the world's 10 largest banks and four of the eight largest brokerage houses. Together, Los Angeles and San Francisco already boast greater financial deposits than their East Coast rival. And by the next century, Los Angeles alone should surpass New York in total income, employment, and population.
But New York's service sector is still booming, you say. Not enough. Last year, employment growth in the city slowed to 1.5% in New York, less than half the national average. And when all the data are in, Wharton Econometric Forecasting Associates expects that increases in the gross regional product of metropolitan New York will continue to lag behind the nation, up only 2.3% in 1985 and 2% in 1986.
"We are creating a sort of broker economy," confessed one prominent local economist. "We don't really know how to make New York a dynamic economy anymore."