Quaker City's economic development history holds lessons for Phoenix

Philadelphia and Phoenix have nothing in common — or do they? Robert E. Mittelstaedt, dean of the W. P. Carey School of Business, draws on his years as an engaged Philadelphian to analyze the growing pains of his new home in the desert. He discovers that although the two towns are as different as cheese steaks and tacos, both thrive or falter under the same economic realities. Glittering in the Arizona sun, Phoenix can still take a lesson from the venerable City of Brotherly Love. West or east, it's about managing your assets.

On the surface, the Philadelphia and Phoenix metropolitan areas couldn't be more different. One dates back to the 13 colonies, the other to the early 20th century.

One has cold winters and humid summers, the other pleasant winters and scorching summers. One symbolizes the urban decay of the old North, the other the shining promise of the new West. Yet despite the differences, Phoenix can learn profound lessons from Philadelphia's past mistakes and from its economic revitalization.

Robert E. Mittelstaedt, dean of the W. P. Carey School, views the two regions from a distinctive perspective — one he parlayed during a recent speech before the Economic Club of Phoenix. Before coming to ASU, Mittelstaedt was vice dean and director of the Aresty Institute of Executive Education at the Wharton School, located in the heart of Philadelphia at the University of Pennsylvania.

There Mittelstaedt observed firsthand the economic and governmental missteps that plagued the region, and the actions that brought it back. Phoenix has a vibrant future, Mittelstaedt argues, if it can learn from Philadelphia's example and get smart about managing its assets.

Lesson one from the Philadelphia case is that infighting among municipalities stifles growth and squanders the economic advantage of new business. As Mittelstaedt pointed out in his speech, "Do not be fooled — this is a zero-sum game, with a winner and a loser. Competing through taxes and economic incentives locally is irrational, especially in greater Phoenix. Companies that sell products and services want to be where customers are located."

Mittelstaedt encouraged metro Phoenix leaders to avoid "racing to the bottom by seeing who can give away the largest incentives with questionable returns," and look instead at the entire region. Phoenix does not bleed into other states as does the Philadelphia area, or into dozens of other cities and counties like communities in Southern California.

As a result, the cities that make up the Phoenix metro area can band together to make businesses work for the region rather than one-upping each other with costly incentives to companies that would have stayed anyway. Companies choose to locate in a city if significant business opportunities or resources are available, even if no incentives are offered, he said.

"Rational regional economic development cooperation would mean that no one jurisdiction would offer [companies] any incentive to build a store other than a population, and would charge them fully for costs associated with that access," Mittelstaedt writes. "Corporate executives in businesses that have to have population access laugh all the way to the bank when local governments stumble all over each other giving away their taxpayers' resources to attract a few low-paying jobs."

Shedding misconceptions

Phoenix metro is blinded with misconceptions that prevent its leaders from seeing that they don't have to pay good companies to dance. An appreciation for the region's strengths will help the cities cooperate, Mittelstaedt says. The first, he says, is the "fact" that the Valley mostly offers low-wage jobs.

"The complaining about the low-wage labor force is really exaggerated," he said. "A lot of people move here without a job because they know there are jobs here. Yes, the wages aren't as high as they are in San Francisco and L.A., but the cost of living is lower."

Lower-wage jobs are not necessarily a sign of a weak economy, he asserts. In fact, a low cost of living associated with lower wages fuels economic development. "Low cost of living attracts companies if they know good employees can be found, and employees are attracted because they know there are jobs and low cost of living," he writes. Theoretically, high wages are a good thing, but if a community prices itself out on wages, companies will move to a low-wage area where quality workers can be found. That's what happened to Detroit with the auto industry and Pittsburgh with the steel industry.

A second misconception is that any type of downtown development can cure all economic ailments. Downtown development for development's sake rarely works, he writes. Many cities, Phoenix included, vie for sports stadiums and arenas because they are perceived as anchors to downtown development. However, as Mittelstaedt points out, such venues are filled seldom and for short periods of time, drawing people who find no other reason to return to the neighborhood.

"Purpose-driven development that takes advantage of resources or location to yield economic returns are the projects that work," he said. For example, projects such as the ASU downtown campus and the proposed state university medical school are more likely to spark sustainable revitalization, because the people involved will opt to live and shop in the area, creating a viable downtown.

Yet another misconception is that corporate headquarters are vital to economic development. Philadelphia boasts 16 Fortune 500 headquarters compared to Phoenix's three, but Mittelstaedt says that seats of corporate power are alone insufficient to spark a city's economy.

"I think there is a misperception that having headquarters around makes you a powerful city," he said. "Just because you have a bunch of CEOs in town doesn't guarantee that your city will advance." Economic benefit derives from the location of jobs, not headquarters, he said. If a region makes economic sense, companies will likely maintain operations and workers there, even the headquarters are someplace else.

Houses and jobs: revisiting the chicken and the egg

The greatest misconception, according to Mittelstaedt, is that Phoenix relies too heavily on the real estate industry. In fact, the economic foundation of the metro area is employment — jobs outside of the real estate industry. When real estate bottomed out in the late '80s and early '90s the Valley saw some tough times, he said. "But," he added, "home building today is booming because people are moving here, and they are moving here because the jobs are here."

"For all the carping about our dependence on real estate and home building, those sectors would crater if other jobs were not here to enable people to buy homes and shop in stores," Mittelstaedt writes. "Consider the historical employment in construction in Phoenix as a percentage of the work force. It is higher than other parts of the country, but it is not at the peaks that have occurred prior to the major corrections of the past."

The real estate market in Arizona has created a situation in which it is harder to find local capital for business ventures outside of real estate and construction. Investors like the familiar, Mittelstaedt said, and local investors understand and have experience with real estate. Valley leaders need to do a better job of promoting what the region has to offer if they are to diversify local investment and attract outside capital.

Mittelstaedt adds that Phoenix's economy is already fairly diverse, tracking closely in most areas with Philadelphia. The emergence of the biotech sector, for example, is a shining light. Biotech has been an "amazing feat," Mittelstaedt said. Beginning with virtually nothing, the biotech sector has developed into a phenomenon that has riveted the nation because of the unique public-private partnership and community support it is generating.

"This is a diverse economy we just don't know it or celebrate it," he writes. In fact, says Mittelstaedt the newcomer, even the Valley's most obvious asset — the weather — often gets short shrift. Year-round sunshine may not be the primary reason people move to the Valley, but it is often a deciding factor.

Mittelstaedt says community leaders don't promote the region's best assets, not because they think too small, but because "they don't think they have the ability to dream about anything big and powerful." Wrong.

"Phoenix has a lot going for it," he writes, "We are a very competitive area economically, with talented companies, a strong talent pool with more arriving every day and amazing potential for the future. We just don't seem to promote all these assets hard enough on a national scale. Outsiders often see the things that long-time residents take for granted as extraordinary assets."