Why Los Angeles is fast replacing New York City as the economic capital of America

When New York City native Albert Boyars shipped out with the navy during World War II, his will specified that if Boyars were killed in action he'd be buried under the trolley tracks in Times Square. But today Boyars -- like many involved in New York's small-business community -- finds his company handicapped by conditions fostered by the very city he loves.

Beset by proposed rent increases that would total 350%, Boyars's company, Trans-Lux Corp., last January shut down its popular multiscreen show, The New York Experience, after 15 years of operation and more than 6 million customers. Boyars is now looking for another venue for the show. "We just can't do it here anymore," he says.

Boyars's case is not an exceptional one. Once the center of a vibrant and creative entrepreneurial community, New York's smaller companies are often squeezed out now as a handful of corporations, banks, insurance, and other financial-services companies govern the city's economy. As a result, New York -- long the cultural and financial center of American life -- is rapidly losing its primacy.

Across the country another city tells a radically different story. Los Angeles was long regarded as Tinseltown, a sprawling company town for the Hollywood fantasy factories. But in recent years Los Angeles has developed into a leading center for art, fashion, and advertising -- industries once dominated by New York City.

This shift from New York to Los Angeles reflects what Washington Post senior writer Joel Garreau calls the "edge city" phenomenon: entrepreneurs looking to start companies in suburban settings as opposed to downtown centers. While New York has become ever more dependent on the fading powers of Wall Street and the Fortune 500, Los Angeles's economy thrives on a mix of small, fast-growing companies, a high rate of new business formations, and new jobs. And at a time when manufacturing activities are becoming a driving force for economic growth, southern California boasts the nation's largest and most vigorous industrial economy (see chart page 3).

Propelled by the growth of trade with Asia and increased immigration, southern California is rapidly replacing New York as the new center for international commerce. The port of Los Angeles-Long Beach is now, in terms of the value of goods handled, the nation's largest. Los Angeles's downtown, once deteriorating, now bustles with new construction projects, many of them financed by Japanese and other foreign investors.

"New York's going to remain a great city, but 20 years down the road, things may change," believes Sam Ehrenhalt, commissioner for the New York region of the federal Bureau of Labor Statistics (BLS). "Los Angeles has the raw physical energy and, if they harness that, it will become the true world city."

Until the October 1987 stock-market crash, New York City's economy seemed buoyant even with its weakened small-business sector. But while small business accounted for nearly two-thirds of all new private-sector jobs nationwide between 1978 and 1986, entrepreneurial companies accounted for only about one-fifth of New York's new private-sector jobs from '78 to '87. Almost all of the city's growth came from its large financial firms and those ser-vice businesses, like law and consulting, that feed from the paper economy. "It was easy to become service oriented with all these service giants around," notes Lee Smith, an economic adviser to New York governor Mario Cuomo. "We had this transaction-based economy that helped keep the hotels filled, the printing firms busy, and the lawyers happy."

This success, Smith points out, conditioned New York's political leadership to regard lightly the slow decline of its small-business community. Big business was the future, and the city lavished tax abatements and other breaks on such giants as Chase Manhattan and NBC in order to keep them from leaving their high-rent Manhattan towers. City leaders looked the other way as soaring rents and energy costs strangled many smaller, nonfinancial companies, ranging from photography studios and ethnic restaurants to theater companies.

Perhaps the most severe damage took place in New York's once large industrial sector. For nearly a century the city was an energetic national center for smaller, specialized manufacturing concerns. Over the past decade alone, it has experienced a 30% drop in manufacturing employment, a reversal even more severe than that felt in the Rust Belt. From 1985 to '87, as the nation gained 243,000 new manufacturing jobs, New York City's industrial sector atrophied. Its industrial firms laid off 6% of their employees.

"We seem to have an environment that is not congruent with entrepreneurship and innovation," BLS commissioner Ehrenhalt explains. "This is what New York had in the 1940s and '50s, and now it's just sputtered out. All that small-scale production has been moving out in droves."

Until the stock-market crash, such arguments were dismissed as archaic by those who saw the decline of local manufacturing as part of an inevitable evolution toward a postindustrial economy. And certainly some growth companies involved in financial services, such as the First Manhattan Consulting Group, have continued to thrive despite the hard times. "For us, the Crash has helped, since people needed more [consulting] help," observes company president Jim McCormick, whose 1988 sales reached $20 million, up from $14.6 million the previous year. "Many of our customers, the investment banks and the big [commercial] banks, are here, so this is where we should be headquartered."

But McCormick's experience is atypical. Wall Street, largely responsible for New York's economic recovery in the early 1980s, eliminated 12,000 jobs in the first half of 1988. New York City's economy has started to falter, with job growth falling to almost one-third of the national average. Other key indicators -- such as the office vacancy rate, which is expected to reach 15% -- suggest further weakening.

Meanwhile, other regions have been enjoying robust economic growth. While the financial-services industry has suffered from the Crash and a weaker dollar, industrial and export-oriented regions -- from the Pacific Coast to the Rust Belt -- have experienced strong growth. "Current conditions with the dollar," notes economic forecaster Albert E. Sindlinger, "have made New York the weakest spot in the country. The dependence on financial services and real estate is making it decline fast."

Southern California is among the winners in the move to a lower dollar. With the most small, fast-growth industrial companies in the nation, Los Angeles has emerged as the leading manufacturing region in North America, with well over 900,000 factory workers, almost three times as many as New York. This industrial might, maintains Jerry Jordan, senior vice-president and chief economist for First Interstate Bancorp., puts Los Angeles in the position to reap benefits from the weakened greenback in ways not possible for an increasingly deindustrialized, nonexporting New York.

"In 1987 we started to pass the baton from the consumer and financial sector to the producer sector, with manufacturing providing the dynamism," Jordan explains. "This change tilts toward Los Angeles and away from New York."

Take, for example, Windline Amanet, a fast-growing Los Angeles manufacturer. The company produces a range of products, from marine hardware to industrial and aerospace components -- with a rising proportion, now roughly 10% of output, going overseas. Company president Robert G. Barbour describes Los Angeles's diverse and highly entrepreneurial economy as ideal for small manufacturing concerns.

"This town's an incubator for people like me," says Barbour, who saw 1988 sales of more than $3.5 million, a jump of some 75% from the previous year. "Nothing is too bizarre out here. No matter what you want, let's say 100,000 purple paper clips, you can find 50 suppliers who can do it in this town."

But a dynamic industrial economy means more than growth for entrepreneurs. It also provides important opportunities for minorities and immigrants, a significant factor considering that approximately one out of every eight foreign-born Americans called Los Angeles County home in 1985. In some of the county's manufacturing industries, Hispanics constitute almost half of the work force.

In contrast, the decline of New York City's industrial sector has denied similar opportunities to the city's large minority population. Predominantly black and Hispanic Brooklyn -- just across the East River from glittering Manhattan -- has lost nearly one-third of its manufacturing jobs in just the past 10 years. Although official unemployment rates remain low, the somber reality is that nearly half the city's working-age population are not employed and are not seeking employment. For those seeking jobs today, New York is now among the worst cities in which to land an entry-level manufacturing job.

In contrast, Los Angeles leads the nation in the number of both Hispanic and black-owned businesses. And in a recent study of Asian-owned businesses, Los Angeles recorded a per-capita rate of ownership almost 50% higher than New York.

These immigrants are helping to transform once-provincial Los Angeles into a cosmopolitan cultural center. And Los Angeles exports that culture, boosting sales of locally produced music, film, and television programs to world markets. "Los Angeles represents the lifestyle people want, and the Japanese love L.A. even more than we do," says Sandy Saemann, executive vice-president of LA Gear Inc., a fast-growing retailer of athletic footwear and other accessories now selling in East Asian markets. "Tokyo is more interested in what's going on in L.A. than in New York."

And Los Angeles has begun to challenge New York's last great bastion of power, its financial-services industries. Spurred by the growing presence of foreign (largely Japanese) financial institutions, Los Angeles in recent years has emerged as the undisputed financial center of the West Coast. The growth of new industry and continued rapid immigration has led to an increase in deposits in local financial institutions. Between 1980 and 1985, for instance, total deposits in Los Angeles's banks and S&Ls jumped more than 60%, while those in New York declined.

New York's financial giants are themselves key contributors to this growth, which is already putting Los Angeles within striking distance of the Big Apple's financial assets. Even as they cut back their operations in Manhattan, many prominent investment banks -- including Dean Witter Reynolds Inc. and First Boston Inc. -- have boosted their payrolls in Los Angeles. James D. Farley, vice-chairman of Citicorp, the nation's largest financial-services company, notes that with the inception of interstate banking between New York and California in 1991, this East-to-West trend is likely to continue.

A 39-year Citicorp veteran and member of its board of directors, Farley came to Los Angeles in January 1987 to head up the bank's California and Pacific Basin operations. He sees the city as a financial center eventually rivaling New York. Already, Citicorp has boosted its employment in California to more than 6,000 employees, up from 2,500 in 1982, and Farley expects that by the year 2000 there'll be as many employees in its Los Angeles-based operation as in New York.

"You can't sell New York short -- it's a fantastic place with lots of talent," Farley notes. "But you have to realize that the great growth will be out here. This is where the future will be exciting."

Numerous factors lie behind this newfound appreciation for Los Angeles's prospects. There has been the rapid increase in Asian economic power, something that most directly benefits Los Angeles as the prime entrepôt for Pacific Rim trade. Equally important, there is a growing recognition of the advantages -- in terms of skills, entrepreneurial spirit, and dedication to work -- the new immigrants bring to local economies.

"Immigration is increasingly the key, and Los Angeles has both the immigrants and their trade," notes George Sternlieb, professor and regional growth expert at New Jersey's Rutgers University. "There's nothing wrong with New York that 1 million Chinese wouldn't cure."

Most important of all has been the change in how people look at the economy. Cities once traced their economic power by the number of Fortune 500 companies based there. Today many of those leading headquarters cities -- including New York, Chicago, and Cleveland -- are lagging in economic growth and job creation. Virtually all of the nation's fastest-growing regions are predominately small business-oriented, characterized more by sprawling suburban development than high-rise office towers.

This change in economic-development patterns also suggests that Los Angeles -- which according to recent U.S. Commerce Department surveys should pass New York City in terms of population, employment, and total personal income by the year 2000 -- will never achieve the absolute hegemony over the national political, economic, and cultural scenes that New York enjoyed in its heyday. "We are looking at a more deconcentrated kind of power now," observes Michael Barrone, coauthor of The Almanac of American Politics. "It's a rare thing when a country's leading city can be 2,400 miles from the greatest concentration of population. If it's domination, it will be more diffuse than we've seen before."

And maybe that's how it should be. Los Angeles can't presume to be the center of everything. No city can, but Los Angeles may emerge as the prototype of a new kind of American metropolis -- one that seeks its sustenance not from entrenched institutions, but from the entrepreneurial verve, work ethic, and creativity of its people.


Los Angeles County vs. five boroughs of New York

L.A. N.Y.

Number of 1988 Inc. 100 companies 8 3

Number of 1988 Inc. 500 companies 24 6

Business birthrate 1984-88 2.84% 2.34%

Population (1986) 8,296,000 7,263,000

Population growth (projected to 20.6% 2.6%

2010 from 1986)

L.A. N.Y.

Job growth (projected to

2010 from 1986) 24.5% 2.5%

Job growth 1984-88 12.3% 9.6%

Manufacturing employment 905,545 450,781

Sources: Cognetics Inc., Woods & Poole Economics Inc., U.S. Bureau of Labor Statistics, and U.S. Bureau of the Census