Editors' Summary

Brookings-Wharton Papers on Urban Affairs presents new research on urban economics to a broad audience of interested policy analysts and researchers. The papers and comments contained in this volume, the sixth in the series, were presented at a March 3–4, 2005, conference at the Brookings Institution. The papers display a range of issues treated by contemporary urban economists, including a history of the rise and decline of Philadelphia's economic fortunes; the effects of California's Proposition 13 on mobility; an analysis of the effects of the business cycle and Medicaid costs on state appropriations for higher education; interstate migration patterns in the United States; and the role of migration restrictions, economic growth, and foreign direct investment in the development of China's midsize cities.

Philadelphia is the fifth-largest city and center of the sixth-largest metropolitan area in the United States. This relative position represents a considerable decline from the city's preeminent position in earlier times. As Joseph Gyourko documents in his historical survey, Looking Back to Look Forward: Learning from Philadelphia's 350 Years of Urban Development, the city was the largest and economically most important in British North America throughout most of the eighteenth century. New York supplanted Philadelphia as the leading U.S. trading and merchant center in the early nineteenth century, but Philadelphia successfully reinvented itself as a center of highly skilled manufacturing. The city was America's most important source of manufactured textiles in the period from the Revolutionary War through 1850. New technologies and industrialization also permitted Philadelphia to produce metals and machinery, chemicals, and a variety of chemical-related products. The shift from trading to manufacturing was possible because of entrepreneurs' ability to exploit the city's large pool of local capital and skilled artisans as well as the development and pioneering use of steam power in production. Philadelphia had survived a major economic shock—its diminished importance as a trading and merchant center—by reinventing itself and developing a new set of comparative advantages.

Philadelphia's second challenge came with the rise of rail transport in the middle of the nineteenth century. Railroads lowered the value of Philadelphia's central location along the North American coast by sharply reducing shipping costs. Ultimately, however, the city's entrepreneurial class was able to convert this new form of transportation into an important asset, taking advantage of the city's proximity to major coal fields in western Pennsylvania. For the first time since the completion of the Erie Canal, Philadelphia was able to compete with New York in the scale of domestic commerce. It was also in the late nineteenth century, however, that Philadelphia developed a well-earned reputation for political corruption. Vote fraud, bribery, favoritism, and graft became hallmarks of municipal governance.

The most recent peak in Philadelphia's fortunes occurred in 1920. At that time the city faced four new challenges: the rise of the automobile, which favored the suburbs and newer cities over older central cities; the relocation of manufacturing outside central cities; intense racial and social conflict; and much higher mobility, which allowed firms and households to take greater advantage of warmer and lower-cost places. In contrast to its earlier experience, Philadelphia failed to remake itself in response to these challenges. Gyourko examines a number of hypotheses to account for the failure. One key difference between Philadelphia's situation in the late twentieth century and its position in earlier times is the scarcity of relatively highly skilled and well-educated workers. Local access to a talented and flexible labor force allows entrepreneurs to enter and succeed in new lines of business. Growing firms are helped if there is a cost-effective and transparent local business environment. Compared with cities that continue to reinvent themselves, such as Boston and New York, Philadelphia has a poorly educated workforce, a more shortsighted governing class, and political institutions that favor highly parochial and sometimes corrupt interests. The most serious shortcoming is the relative dearth of local human capital. Philadelphia policymakers failed to invest in upgrading the skills of the city's workforce as well as in a...