“Priced out of Brooklyn”

Is NYC a Microcosm of the U.S.?

I would never had thought so. Manhattan is totally unlike the rest of the nation. I always loved paraphrasing a great line from Spaulding Gray’s Swimming to Cambodia, which pointed out Manhattan’s almost foreign nation status relative to the rest of the country:

Q: Do you live in the United States?

A: No, I live on a small island off the East Coast of America.”

But in a surprising twist, a recent front page column in the NYT raises an interesting and unexpected parallel:  It turns out the wealth dichotomy in the U.S. between the Haves and the Have Nots (or more accurately, the Have Less) is surprisingly similar to those of Manhattanites versus the outer boroughs:

New data compiled by the federal government suggests that New Yorkers who work outside Manhattan are being increasingly squeezed by inflation and slow wage growth – the bookends of economic struggle. And while inflation may vary somewhat from borough to borough, economists say that those variations do not affect the overall trend.

The Consumer Price Index rose 24 percent from 1996 to 2005 nationwide but grew 27.6 percent in every borough of New York. In the last three years, New Yorkers saw fuel prices rise 27 percent, while they grew 19 percent nationwide. And while the housing prices rose 8.4 percent nationwide, they went up 14.7 percent in New York. At the same time, benefits have decreased in many professions.

While Manhattan workers were not impervious to inflation, their wages helped shield its blow. Indeed, the number of families in Manhattan earning more than $200,000 a year rose almost 20 percent from 2002 to 2004 alone, according to the Federal Bureau of Labor Statistics.

In other words, the borough of New York County is very much is like the rest of the nation — assuming you compare it only with the top 1% of earners nationally.

Consider: The real estate wealth, the limited access to exclusive events, museums, restaurants, shows. Manhattan turns out to be exactly like a cross section the country — just limit your gaze to the very most expensive parts.

Meanwhile, people in the outer boroughs are struggling to keep up. Here’s a phrase I never thought I would ever hear: Priced out of Brooklyn.” While we’ve heard similar phrases referring to other regions, where once sleepy bedroom communities see a big real estate price rise as higher paid urban professionals outbid the locals for homes in convenient commuter towns. In the NY area, its not just Great Neck and Manhasset and New Rochelle and Scarsdale — its been happening in Brooklyn, lower Harlem and Queens. The Bronx may very well be next.

Why? Personal Income gains for the rest of NYC — Queens, Bronx, Brooklyn and Staten Island — are actually failing to keep
up with inflation
. This has also been happening nationally for the past 5 years.

Indeed, there’s no reason to assume the middle and blue collar classes in Queens and the Bronx should be any different than comparable workers in the rest of the nation. Energy prices have skyrocketed, as have housing costs, transportation, medical care, education costs, health insurance, and even food. Just because outer borough residents work for wealthy law firms, investment banks, brokerages, advertising agencies, publishers and media companies does not insulate them from the same inflationary forces that are affecting the rest of the country.

What was it exactly that the Times had to say about Manhattan versus the outer boroughs?

“As the pay and purchasing power of Manhattan residents have moved higher and higher, incomes in all four of the boroughs outside Manhattan have trailed inflation over the last few years, in a stark example of the increasing income disparity in New York City. In terms of wages, Manhattan families are doing better on average than those in the rest of the nation, while families in the four other boroughs are doing worse.

In Manhattan, real wages – earnings adjusted for inflation – rose 5.4 percent between the first quarters of 2002 and 2005, led by the finance and information industries, while the national average was flat.

Soaring year-end bonuses seemed to play a major role in the Manhattan increase. Economists generally look on first-quarter results as providing the best indicators of trends.  But in the rest of the city, those wages fell at least 2.9 percent, according to the Bureau of Labor Statistics. The drop was biggest on Staten Island at 8.3 percent, although that figure may be more volatile because that borough has the smallest population in New York City.

Real wages are one of the best indicators of how people are doing financially. Driving the buying power of these wages down, it appears, is inflation. There is also an absence of serious upward pressure on wages in most industries, especially those that employ the lowest earners. The number of both high- and low-wage jobs has grown, but there is little mobility between the two.”

The economics of this is no surprise — recall
we previously looked at the The Disconnect and Economic Classes several times last year. What is intriguing is the newfound interest in the declining middle class in the mainstream media. Over at Slate, Dan Gross has done a few pieces on The Cram Down Decade. Then this weeks NYT article. But the very last place I would have imagined this phenomena to be discussed is the Op/Ed pages of the WSJ. Yet the same day the Times piece was out, Robert Rubin, former U.S. Treasury Secretary (1995 – 99), and a present director of Citigroup, made a cogent analysis on why this is bad for the nation’s economic health:

“The seeming inertial tendency of our economy toward less and less broad-based participation is startling and too little discussed. Median real wages, household incomes and family incomes have increased relatively little over the last 30 years, except during the last five years of the ’90s. Thus, a study showed that in 1979 it took 44 people with average earnings in the bottom half of the population to equal each person in the top 0.1 of 1%, while in 2001, the last year in that study, that number was 160. Our economy is not working for too many of our people, and that is a problem for all of us.”

Of course, the editors at the Journal editorial page managed to omit Rubin’s commentary from the public OpEd online page. But that omission only points the fact that 1) Rubin hit a nerve and B) Idealogues are rarely comfortable with contra-arguments. (Is it any surprise that many reporters at what is arguably the finest newspaper in America are actually embarrassed at the rhetorical excesses published at its Op Ed page?)

Expect to see this issue gaining more traction in the mainstrream media as wages stagnate and inflation remains an issue . . .


UPDATE January 27, 2006, 10:50 am

Two related articles in the NYT today:

Income Gap in New York Is Called Nation’s Highest


Even as Homes Soar in Value, Some Will See Tax Bill Slashed



As Manhattan Booms, Inflation Squeezes Rest of New York
NYT, January 25, 2006

‘We Must Change Policy Direction’
WSJ, January 24, 2006; Page A20

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What's been said:

Discussions found on the web:
  1. Sean commented on Jan 27

    Was struck by how this was yet another example of a fractal in our midst. Don’t know how or if that is relevant, just thought it was interesting… anyhow good post.

  2. George Zachar commented on Jan 27

    Does anyone think the inter zip code income gap is materially different in LA? (Malibu/Compton) Or DC? (Tenleytown/Anacostia)

    How about the different postal codes for, say, London’s Mayfair and Brixton? Or Paris’ first arrondissement and the nearby rows of high rise slums suddenly made world famous by its residents’ pyrotechnics?

  3. Olivier commented on Jan 27

    I live in Paris and what georges says is true: it’s exactly the same here.
    Real estate over-inflation, the core of the city crammed with wealthy people and many of the outer parts of the met area concentrating slums or popular neightbours.
    Surprising thing is the deconexion of real estate with income; especially in popular/slums area where it is spectacular !

  4. B commented on Jan 27

    Wow, GDP sucks. Markets just don’t want to go down. Er, markets didn’t want to go down. S&P Futures just fell of the cliff. But not the NAS where the retards trade. This yoyo stuff looks much like a top. Especially the Nikkei, oil and platinum where price action is really erratic. Nikkei looks like a H & S formation may be forming. Even a healthy market should correct in Japan. You want to see anyone run for the door? If this is a topping, can you imagine trading in Japan? After the bubble mess they have been dealing with, the herd will be trampling each other to get out. It’ll be Pamplona x 10. Monday could be bloody Monday in Japan.

    How can these people rationalize on TV that the world economies could have a great year regardless of what happens here? They ever look at a chart. All global markets are synchronized in their pricing action. If we aren’t buying their stuff, who will? Germany, China, Brazil, Australia, India, Japan, and OPEC are all tied to our consumption. Consumer demand in their countries is nil. Ditto with real estate. Global low rates have led to a global housing boom tied to riches gained by our consumption of their goods.

    Anyone see the prices of commodities since the beginning of the year? Uhh, Stagflation? Inflation? Blow off top? Up 10-15% in a month? The traders say the fed should be done. Well, I wonder. Is this Bernanke’s immersion crisis? Is inflation really under control? The commodity markets and the long bond looks to be telling us long rates are going up. Something that always happens when gold rises this month. Always. Sign of inflation still in the system? The CNBC crowd seems to have it figured out with their rationalizations.

  5. KirkH commented on Jan 27

    If I’m Joe Median and my real wages are dropping and housing looks like the only way left to make any money I’m going to “get in while I can”.

    Maybe this situation contributed to the housing price run up. If it did then the correction will be worse because the now lower median wage can’t support twice the mortgage.

  6. Rahul Virmani commented on Jan 27

    The US is following along the path dictated by the Washington Consensus. This is the end game of policies that have erroded the economies ability to produce things. The association of Civil engineers estimates the that infrastructural shortfall is now US$1.6 trillion (ie: that is what has to be invested into infrastructure just to maintain it).

    Structural trade deficits are the result, and “hollowing out of the productive economy” is hidden by the increasing dependency of financial services.

    Ofcourse the “economy is working for fewer people”.

    What is ironic is that the “American school” of economics is no longer taught in America, but remains popular outside the US (in places like China, and South Korea).

    The economic advantages of dollar hegemony, have also led to the inevitable dependance on debt based growth.

  7. Seth Edenbaum commented on Jan 27

    Brad DeLong sends his readers here so I expect opinions I don’t agree with; but instead I find this:
    “Here’s a phrase I never thought I would ever hear: ‘Priced out of Brooklyn.’ ”
    Wow. And DeLong makes fun of Luskin? Is there some joke here I’m not getting? I’m sorry, but that that’s a serious question.

  8. todd commented on Jan 28

    Does anyone else think the capital gains tax cuts are totally unfair?

    How is it that I get taxed LESS for sitting on my ass and moving some money around with a few keystrokes than if I actually took a real job somewhere?

    I’m sure a lot of you disagree, but I think it is outrageous.

  9. Barry Ritholtz commented on Jan 28

    Capital Gains tax cuts are theoretically designed to encourage risk taking.

    However, one must question how much they were needed, when at the old rates — 20% — enough risk taking was had to generate history’s biggest bubble.

    I would prefer to see more targetted use of tax cuts — i.e., specifically for developing alternative energy technologies. . .

    Thats both a “green” and a “national security” issue.

  10. Harper Capital commented on Jan 29

    Barry, Re:Priced out… NYC is different from other places in that many/most cities have more room for growth into outer areas for modearately priced houses.
    This is called ‘urban sprawl’, but is also a place for people of moderate means to afford the american dream, escape lousy schools, etc.
    I also view the massive rise in housing prices as a one-time jump in the CAP rate because of 1-low interest rates and 2-very favorable cap gains(zero) treatment that encourages turnover to allow capture of unrealized gains. We all know what happens to CAP rates in a rising rate environment……

  11. Barry Ritholtz commented on Jan 29

    Historically, the more desirable locales were further away from the city — grass, open space, large lots, etc.

    The boroughs were for people too poor to afford either the Big City or Suburbia. Thats been changing, as gentrificiation spreads.

    Any place that is geographically challenging — San Francisco (the Bay limits expansion) and NY (an island) has limited land. We may see those priced out forced to commute from greater distances. Eventually, I would imagine that elsewhere — even Chicago and Houston and other non islands — will run into similar effects

  12. Half Sigma commented on Jan 30

    The gap between Manhattan and the outer borgoughs is a really old topic. It was an issue in the movie Saturday Night Fever, for example.

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