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Do Entrepreneurs Need a Middle Class?

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The New York Times and other big city boosters don't know whether to laugh or cry. In large part due to a massive increase in merger activity and property prices, the city is going through yet another of its cyclical booms. Yet as we noted in the Inc. Best Places survey, this has not meant much in the way of new jobs in New York or, for that matter, other fashionable big cities like Chicago, Boston, San Francisco, or New York.

At the same time The Times has made a big pout about New York's "shedding" of its middle class and its growing extreme class divisions. The Bronx, the city's most heavily Latino borough, roughly one in three households lives in poverty, the highest rate of any urban county in the nation. At the other extreme, Manhattan, where the rich are concentrated, the disparities between the classes have been rising steadily. In 1980, it ranked seventeenth among the nation's counties for social inequality; today it ranks first, with the top fifth of wage earners earning 52 times that of the lowest fifth, a disparity roughly comparable to that of Namibia.

Mayor Bloomberg celebrates all this when he calls his city "a luxury product." And he's 's not too far off. A recent Brookings Institution report spelled this out in considerable detail. The study lays out the case that we are becoming more segrated by class today in almost areas, but most particularly in big cities.

And to be sure, the city -- and presumably The Times -- makes money in booms caused by asset inflation. Look at the Real Estate ads and the endless stories relating to high-end consumption. So what if this kind of growth exacerbates class extremes and drives out the middle class? And does it matter for entrepreneurs?

History would argue yes. A place that is too costly for the upwardly mobile middle class is not likely to nurture companies that feed off the energies of ambitious people of all kinds. This is why New York is no longer the entrepreneurial hotbed it was a half century ago; that role has been taken by the suburbs and lower-cost sunbelt cities . Those benefiting from big mergers -- investment bankers, high end consultants, corporate top guns -- can party on until prices crash, but it's not exactly ideal for bootstrapping smaller firms.

In a previous study I did with Jonathan Bowles at the Center for an Urban Future we found that while immigrants started businesses at about the same rate in New York as in Houston or Los Angeles, they had a harder time growing them. Real estate prices and a constant flow of upwardly mobile workers to the suburbs were among the reasons stated.

It may well be that cities, particularly dense high-priced places like New York, can thrive largely as places for high-end business -- lawyers, financial and media corporations -- which will contract most of their work abroad or to less expensive locales around the country. The rest of us will continue, as demographers like Wendell Cox suggest, to head out to suburbs and smaller cities.

This can constitute a kind of urban future, but the historic role of cities as incubators of upward mobility would be largely a thing of the past.

Last updated: Aug 3, 2006




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