Chicago, and Illinois, are in big economic trouble.
- 7th straight year of population decline. Losing 235,000 people in 10 years, 3x the amount of any other state. Last year saw a decline of 79,500 people – second only to much larger New York – and the rate of people leaving is accelerating.
- Illinois has, on average, property taxes 2x the national average. If you owned the “Home Alone” house in suburban Chicago, since the movie was made in 1990 you would have paid $890,000 in property taxes.
- Chicago is the worst residential real estate market of any large city in America. While values have been rising elsewhere since the Great Recession, in the last decade, property values in Chicago have declined 20%.
- Sales tax is 9%, and on some products 10%+, one of the highest rates in the USA. On-line purchases are taxed at 10.25%, for example. Illinois is one of only 7 states to charge sales tax on gasoline. And Illinois has the highest cell phone tax in the country.
- Illinois roadway toll fees are widespread, and among the highest in the USA, with the majority of those funds going NOT to road improvement but rather into the general budget to cover state expenses.
- Illinois is 46th in private sector job growth – and would be 50th except the #1 source of job growth is government jobs. And 40% of the government workforce makes $100k+/year. The total number of jobs in Illinois December, 2019 was 6.2M – unchanged since 2015 – and up only slightly from 5.9M in 2010 – yielding a pathetically low growth rate for jobs of 1/2 of 1% (.5%) per year
- 1/3 of the state budget is pension payments, and pension debt is 26% of state GDP – highest in the country. Lots of retirees, very few new jobs to pay their pensions.
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Gibbon wrote “The Decline and Fall of the Roman Empire” as a treatise to uncover how such a powerful empire could lose its greatness. There is no doubt, Chicago and Illinois were once great. The area was known for great jobs, great infrastructure, great transportation system, great homeownership – and for many decades considered one of the best places to live in America. Back when agriculture and manufacturing dominated the economy. But quite obviously, as the world changed, and the sources of economic value (including jobs) changed, the late, great state of Illinois kept pushing on with “business as usual” instead of changing policies and investments to re-orient for the Information Era.
Things were not destined to become this bleak. Chicago could be Austin today – but obviously it isn’t. Where Austin, and Texas, looked at trends and made investments beyond the old “core” of oil and gas, Chicago and Illinois completely failed to look at trends that indicated a clear need to change. Problems, and the path to solve them, have been obvious for years. It was easy to predict this would happen. But a chronic focus on the short-term, rather than the long-term, combined with a complete unwillingness to change how investments were made caused state and city leaders to consistently ignore warning signs and make one bad decision after another.
Indicators of Decline
- In February, 2006 (yes 15 years ago) I wrote that Illinois was the #1 net job loss market in the country. This factoid highlighted an emerging problem in the underlying economy. The state was still considerably dependent on old-line agriculture/food giants, those businesses were crumbling and unlikely to recover as the economy shifted. Notably Kraft was in its 5th year of what was to be a turnaround (that never happened) and Sara Lee was under incompetent leadership that kept selling businesses to shore up declining revenues and earnings. The state, and city, had failed to develop an infrastructure for investment in start-up companies. There was a total lack of investment money for entrepreneurs from paternalistic large companies such as Motorola and Ameritech. And a lack of money for innovation from banks, venture capital and private equity firms. Existing businesses were aging, cutting jobs and none were focused on investing in new companies to keep the local economy tied to the emerging Information Economy [ link ]
- In February, 2009 Forbes selected Chicago as the 3rd most miserable city in the USA, citing high taxes, no job growth, infrastructure decay, congestion and bad weather. An uproar ensued – but no change. I then noted my 2006 column, and recommended a very serious Disruption in how Chicago was managing its resources. Clearly the “more of the same” strategy trying to defend its past was not working. Unless there was a disruption, Chicago would get worse – not remain the same, and certainly not get better. The signs were clear that from ’06 to ’09 nobody was thinking about the big changes needed [ link ]
- In June, 2010 it was reported that Illinois lost 260,000 jobs between 2000 and 2010 – and that was an indicator of why Chicago and the state were having so many economic problems. I recommended the city and state make significant changes in resource allocation to keep more start-ups local. The University of Illinois was the #4 engineering school in the US, but the vast majority of graduates left to one or the other coasts. Local businesses were not developing new businesses, thus not hiring these top students. Start-ups at the universities, and by recent grads, could not obtain funding, so they fled to where the money was. Economic reliance on stalled companies like Kraft, Sara Lee, Motorola, Lucent, Sears and United had created a Growth Stall that was sure to lead to additional job losses – when the best talent was right there in the state! [link ]
- I followed up a week later that same June with a column on how Mayor Daley was very popular with voters and local businesses, but he was setting up the city (and state) for failure. There was a focus on keeping the “old guard” happy, and doing so by completely ignoring opportunities for future growth. Offering tax breaks and subsidies to recruit corporate headquarters (like Boeing) created very few jobs, and was a poor use of resources that should be diverted to funding start-up tech and bio-tech companies. And financial machinations, like selling the city’s parking rights, gave a short-term lift to the budget, hiding significant weaknesses, while creating massive long-term problems. Chicago and Illinois politicians were focused on short-term actions to get votes, and ignoring the very real jobs problem that was tanking the economy. [ link ]
- By April, 2014 I was able to clearly demonstrate that my predicted economic stagnation spiral had taken hold in Illinois. Defend & Extend investments to shore up declining companies – like Sears – robbed local governments of funds for job creating programs. And a decade + of no job creation was forcing taxes up – at a remarkable rate – which kept businesses from moving to Illinois; kept them from opening software labs, coding facilities, research centers, pharma and bio-pharma production plants, etc. With no growth, but rising costs, the death spiral had begun and needed immediate attention [ link ]
- In September, 2016 the outward migration from Chicago and Illinois had become a powerful trend. Looking at demographics, the market was aging. Rising costs and no growth had pinched budgets to the limit, while pension costs had become an unsustainable burden on the state’s citizens. Just like Japan was in an aging crisis, Illinois was in an aging crisis. And this was destined to create even more problems for the economic death spiral that began before 2006. [ link ]
- So by January, 2017 the demographic tailspin was clearly creating a vacuum pulling people out of Chicago and Illinois. Fully 4 years ago it was obvious that the predicted trends had taken hold, and nothing short of an incredible disruption would save Chicago from becoming the next Detroit. Using the simplest trend planning tools made it clear that unless there was radical change in investments the Chicago empire was at its end. [ link ]
Lessons for business?
Key lessons?
First, the world is growing and leading businesses will grow. If you’re not growing, you’re dying. Just like GE and Exxon. Second, never plan from past success, but instead plan for the future. You don’t grow value by being operationally excellent, because the world is forever changing and it will make your past business less valuable even if you do run it well. Third, make sure your plans are all built on trends. Let trends be the wind in your sales, or the current under your boat, or whatever analogy you like – just be sure you’re using TRENDS to drive you business planning, product development and solutions generation. Customers buy trends and help for them to achieve the future.
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Thank you for putting everything that I’ve been saying to my family for years, into words that I’ll be able to share with them. “If they care to read them”.
You missed a big section on crime in Chicago helping drive people out.
Mark, it is an unfortunate trend that anytime growth stops crime goes up. People who can afford to leave do so. Those who can’t stay behind, leading to a disproportionate number of criminals in the population. As the unfortunate find it harder and harder to get good paying jobs they also turn to higher levels of criminal activity. A bid spiral.
Chicago going down, Toronto booming should have been your title….. but of course, Canada doesn’t exist….right?
Glad to hear Toronto is doing well. The article focused on Chicago’s woes, rather than a selection of successful cities. From what I hear most all major metro areas in Canada are doing well due to economic policies that keep people in country, and attract more people while businesses grow.
Yes indeed, so what’s the problem with almost all of the cities in the United States? My original point was, Chicago and Toronto are very similar in history, economically and both are Great Lake Cities. Toronto is growing at 125,000 people per year, Chicago is losing 50,000 people per year. Your article would have had more weight if you had compared those two cities and asked the pertinent questions as to why Toronto is so successful and Chicago is such a dismal failure.
The democratic machine run by Madigan and company are running out of steam. Nothing can last forever. Too bad they didn’t run out of steam early. Just people keep voting the same crap in.
Thanks for your comment Joe. There are a LOT of people to blame for the situation in Chicago and Illinois. Certainly Madigan played a big role by allowing the pension to swell without addressing its cost. And a lot of other democrats featherbedded their way into long-term government positions by doing the wrong thing. Corruption has been part of the city and state for so incredibly long. Unfortunately, the Republicans didn’t seem able to stop it either. There just wasn’t the political will to make voters see what was happening and its long-term impact. And Rauner did not have a solution, just pablum. It will take a lot of compromise by a lot of politicians at the city, county and state level to make Illinois competitive again – and even in places where a single party dominates that willingness to compromise seems hard to find. Trying to cross party lines to compromise seems nearly impossible.
Ooff. That’s quite a predicament. Thank you for laying it out so clearly and forcefully. I’m not from Chicago, but I’m depressed! Love your three lessons. It’s powerful to look at city as a system in an environment and consider where the seeds of life and death are planted. A century ago Detroit was about to become one of the world’s most innovative and powerful cities. Trends. Woe to those who ignore them.
Thanks for your great comment Wayne. Your analogy to Detroit is apt!!
i born and raised in chicago and left 20 years ago for all the reasons mentioned and now more reasons to stay away
So first of all, much of what you say is correct. Chicago is losing population, tax base, etc. what you missed is that Chicago is truly a tale of two cities. The north side and down town are BOOMING. Chicago in recent years has seen the most in migration in the country of corporate hq’s, (believe 2019) and was second only to Seattle in new construction a couple years ago. The city has also seen a 4x rise in “wealthy” census districts since 2010. While the city as a whole is having major issues, it’s crazy to see that half the city is actually extremely successful and in really good shape. The city is essentially getting more segregated by class, with an emptying of the middle class and a leftover group of wealthy, educated professionals and a large underclass on the south side. Chicago is an odd case, but for this reason it’s absolutely not Detroit. The trends that exist at the city level just do not exist in terms of different parts of the city. Downtown and the north side are the healthiest they’ve been in 50+ Years, that is just paired with the south side being in the worst shape it’s probably ever been.
Hi Nater. Please note that I never said Chicago is a bad place. I just said it is a city in decline. And it is. Whenever your city (or SMSA) is losing population you are in decline – by definition. And that is reflected in how poorly real estate prices have done for the last 15 years. Prices went up in the pandemic – but nothing like other markets. If you look at the cities that are thriving – like Austin, TX or Las Vegas, NV or Reno, NV you see growth in population, and a commensurate growth in real estate values. Until Chicago takes some drastic action to change its direction – like New York City did in the mid-1980s – it will continue to suffer, even while there are pockets of affluence.
Hi Adam, curious if you have citations for the statistics you place at the beginning of this article? Wondering how 40% of government work force makes $100k+ year when that’s nowhere near what databases websites say (salary.bettergov.org). Just curious of government wages are really that big of an issue in Illinois… High pension costs are definitely a problem and property taxes/real estate are outrageous. The reason I personally left Chicago 5 years ago. State income taxes are flat, and probably a part of the problem of a “tale of two cities” as someone mentioned.
Hello Cody, thanks for commenting. I did have sources for all the stats in the columns I’ve written on Chicago and Illinois. Unfortunately this column is 7 months old, and it appears that somehow the link got dropped. Probably in a technology update. I’ll see if I can find it again. It was from an investigation into jobs and workforce issues in Chicago – and that stat was one of the highlights of the article. The big issue is that Chicago lacks economic growth. It has not replaced the jobs lost in manufacturing with an alternative. Nor has it revitalized its manufacturing. And, as technology made companies like Motorola obsolete, and emerged e-commerce making Sears obsolete, lots of former economic engines have sputtered badly. Thus there is a declining economic base to pay for the government workers, whose jobs, salaries and pensions are locked in and hard to adjust.
https://www.forbes.com/sites/adamandrzejewski/2020/04/27/why-illinois-is-in-trouble–109881-public-employees-with-100000-paychecks-cost-taxpayers-14b/?sh=3dc59de97ee9
Source cited here
Adam
Great comments on the history and recent mistakes made by IBM. I feel the demise goes back to the early ‘90’s. The movement from mainframes and emergence of PC’s doomed IBM. But what was the biggest mistake was touted as a success at the time. I’m referring to Lou Gerstner as he aid in his book on the “turnaround” of IBM: getting rid of the non performing assets. He meant putting most field employees at home with their PC’s and bunny slippers and drastically reducing or eliminating the IBM offices. In the eighties, IBM owned the CEO relationships and market share. This was due to a superior sales force but also the IBM offices where you could find an environment rich with senior sales talent that knew everything about the companies in their local market and could collaborate to develop the best sales strategies and leverage their executive relationships to help IBM. I was at a lunch with Bill Gates in 2001 where he commented that IBM had control of the Fortune 500 market share for 25 years but it was now up for grabs. Putting young IBMers in the offices helped them learn how to leverage the IBM name as outlined in the many books of their first CMO, Buck Rodgers. Leaving them home in their jammies gave up what was IBM’s top advantage. Gerstner didn’t turn around IBM. He pumped up cash in the short term and speeded up the demise of IBM as a result of his getting rid of the offices.
Alex Martignago
The William Everett Group
Interesting viewpoint Alex. Thanks for sharing.