

Corbis/Franz-Marc Frei

In the 1990s, Chicago enthusiastically joined the urban renaissance that swept through many of America’s major cities. Emerging from the squalor and decay of the seventies and eighties, Chicago grew for the first time since 1950—by more than 100,000 people over the decade. The unemployment rate in the nation’s third-biggest city was lower than in its two larger rivals, and per-capita income growth was higher. Chicago’s metropolitan area racked up 560,000 new jobs, more than either New York’s or Los Angeles’s in raw numbers and over twice as many on a percentage basis. A rising Chicago spent lavishly to improve itself, investing in a new elevated line to Midway Airport, a major street-beautification program, and new cultural facilities costing hundreds of millions of dollars. The capstone was Millennium Park, a $450 million showplace featuring work by such celebrities as architect Frank Gehry and sculptor Anish Kapoor.

The idea was to portray Chicago as a “global city,” and it was successful, to judge from the responses in the national media. As Millennium Park opened (a few years late) in the mid-2000s, The Economist celebrated Chicago as “a city buzzing with life, humming with prosperity, sparkling with new buildings, new sculptures, new parks, and generally exuding vitality.” The Washington Post dubbed Chicago “the Milan of the Midwest.” Newsweek added, “From a music scene powered by the underground footwork energy of juke to adventurous three-star restaurants, high-stepping fashion, and hot artists, Chicago is not only ‘the city that works,’ in Mayor Daley’s slogan, but also an exciting, excited city in which all these glittery worlds shine.”

But despite the chorus of praise, it’s becoming evident that the city took a serious turn for the worse during the first decade of the new century. The gleaming towers, swank restaurants, and smart shops remain, but Chicago is experiencing a steep decline quite different from that of many other large cities. It is a deeply troubled place, one increasingly falling behind its large urban brethren and presenting a host of challenges for new mayor Rahm Emanuel.

Begin with Chicago’s population decline during the 2000s, an exodus of more than 200,000 people that wiped out the previous decade’s gains. Of the 15 largest cities in the United States in 2010, Chicago was the only one that lost population; indeed, it suffered the second-highest total loss of any city, sandwiched between first-place Detroit and third-place, hurricane-wrecked New Orleans. While New York’s and L.A.’s populations clocked in at record highs in 2010, Chicago’s dropped to a level not seen since 1910. Chicago is also being “Europeanized,” with poorer minorities leaving the center of the city and forced to its inner suburbs: 175,000 of those 200,000 lost people were black.

The demographic disaster extends beyond city limits. Cook County as a whole lost population during the 2000s; among America’s 15 largest counties, the only other one to lose population was Detroit’s Wayne County. The larger Chicago metropolitan area grew just 4 percent—less than half the national average. What little growth Chicagoland had, then, was concentrated in its exurban fringes, belying the popular narrative of a return to the city. And even that meager growth resulted almost entirely from new births and immigrants, rather than domestic migration: over the decade, the Chicago metro area suffered a net loss of more than 550,000 people to other parts of the country.

Chicago’s economy also performed poorly during the first decade of the century. That was a tough decade all over the United States, of course, but the Chicago region lost 7.1 percent of its jobs—the worst performance of any of the country’s ten largest metro areas. Chicago’s vaunted Loop, the second-largest central business district in the nation, did even worse, losing 18.6 percent of its private-sector jobs, according to the Chicago Loop Alliance. Per-capita GDP grew faster in New York and L.A. than in Chicago; today, Chicago’s real per-capita GDP ranks eighth out of the country’s ten largest metros.

Fiscal problems are commonplace these days among local governments, but Chicago’s are particularly grim and far predate the Great Recession. Cook County treasurer Maria Pappas estimates that within the city of Chicago, there’s a stunning $63,525 in total local government liabilities per household. Not all of this is city debt; the region’s byzantine political structure includes many layers of government, including hundreds of local taxing districts. But pensions for city workers alone are $12 billion underfunded. If benefits aren’t reduced, the city will have to increase its contributions to the pension fund by $710 million a year for the next 50 years, according to the Civic Federation. Chicago’s annual budget, too, has been structurally out of balance, running an annual deficit of about $650 million in recent years.

As dire as Chicago’s finances are, those of Illinois are in even worse shape. The primary cause, once again, is pensions, which are underfunded to the tune of $83 billion. Retirees’ future health care is underfunded an additional $43 billion. There’s a lot of regular debt, too—about $44 billion of it. And Illinois, like Chicago, has run large deficits for some time. Despite raising the individual income tax 66 percent and the corporate tax 46 percent in 2011, the state is projected to end the current fiscal year with an accumulated deficit of $5.2 billion. While California has made headlines by issuing IOUs to companies to which it owes money, Illinois has taken an easier route: it just stopped paying its bills, at one point last year racking up 208,000 of them, totaling $4.5 billion. Some businesses have gone unpaid for nine months or even longer. Unsurprisingly, Illinois has the worst credit rating of any state. Unable to pay its bills, it is de facto bankrupt.

What accounts for Chicago’s miserable performance in the 2000s? The fiscal mess is the easiest part to account for: it is the result of poor leadership and powerful interest groups that benefit from the status quo. Public-union clout is literally written into the state constitution, which prohibits the diminution of state employees’ retirement benefits. Tales of abuse abound, such as the recent story of two lobbyists for a local teachers’ union who, though they had never held government jobs, obtained full government pensions by doing a single day of substitute teaching apiece.

If the state and city had honestly funded the obligations they were taking on, their generosity to their workers would be less of a problem. But they didn’t. As City Journal senior editor Steven Malanga has written for RealClearMarkets, Illinois “essentially wanted to be a low-tax (or at least a moderate-tax) state with high services and rich employee pensions.” That’s an obviously unsustainable policy formula. The state has also employed a series of gimmicks to cover up persistent deficits—for example, using borrowed money to shore up its pension system and even to pay for current operations. At the city level, Mayor Richard M. Daley papered over deficits with such tricks as a now-infamous parking-meter lease. The city sold the right to parking revenues for 75 years to get $1.1 billion up front. Just two years into the deal, all but $180 million had been spent.

The debt and obligations begin to explain why jobs are leaving Chicago. It isn’t a matter, as in many cities, of high taxes driving away businesses and residents. Though Chicago has the nation’s highest sales tax, Illinois isn’t a high-tax state; it scores 28th in the Tax Foundation’s ranking of the best state tax climates. But the sheer scale of the state’s debts means that last year’s income-tax hikes are probably just a taste of what’s to come. (Cutting costs is another option, but that may be tricky, since Illinois is surprisingly lean in some areas already; it has the lowest number of state government employees per capita of any state, for example.) The expectation of higher future taxes has cast a cloud over the state’s business climate and contributed to the bleak economic numbers.

But that isn’t the whole story. Many of Chicago’s woes derive from the way it has thrown itself into being a “global city” and the uncomfortable fact that its enthusiasm may be delusional. Most true global cities are a dominant location of a major industry: finance in New York, entertainment in Los Angeles, government in Washington, and so on. That position lets them harvest outsize tax revenues that can be fed back into sustaining the region. Thus New York uses Wall Street money, perhaps to too great an extent, to pay its bills (see “Wall Street Isn’t Enough,” page 12).

Chicago, however, isn’t the epicenter of any important macro-industry, so it lacks this wealth-generation engine. It has some specialties, such as financial derivatives and the design of supertall skyscrapers, but they’re too small to drive the city. The lack of a calling-card industry that can generate huge returns is perhaps one reason Chicago’s per-capita GDP is so low. It also means that there aren’t many people who have to be in Chicago to do business. Plenty of financiers have to settle in New York, lots of software engineers must move to Silicon Valley, but few people will pay any price or bear any burden for the privilege of doing business in Chicago.

Chicago’s history militates against its transforming itself into a global city on the scale of New York, London, or Hong Kong. Yes, its wealth was built by dominating America’s agro-industrial complex—leading the way in such industries as railroads, meatpacking, lumber processing, and grain processing—but that is long gone, and the high-end services jobs that remain to support those sectors aren’t a replacement. Chicago as a whole is less a global city than the unofficial capital of the Midwest, and its economy may still be more tied to that troubled region than it would like to admit. Like the Midwest generally, parts of Chicago suffer from a legacy of deindustrialization: blighted neighborhoods, few jobs, a lack of investment, and persistent poverty. Chicago is also the “business service center of the Midwest, serving regional markets and industries,” Chicago Fed economist Bill Testa wrote in 2007; as a result, “Chicago companies’ prospects for growth are somewhat limited.”

It’s easy to understand why being a global city is the focus of civic leadership. Who wouldn’t want the cachet of being a “command node” of the global economy, as urbanists put it? It’s difficult, too, to think of a different template for Chicago to follow; its structural costs are too high for it easily to emulate Texas cities and become a low-cost location. But just because the challenge is stiff doesn’t mean that it shouldn’t be tackled. Chicago isn’t even trying; rather, it’s doubling down on the global-city square. Senator Mark Kirk wants to make O’Hare the most “Asia-friendly” airport in America and lure flights to central China, for example. A prominent civic leader suggests that the city should avoid branding itself as part of the Midwest. One of Mayor Emanuel’s signature moves to date has been luring the NATO summit to Chicago.

Another reason for Chicago’s troubles is that its business climate is terrible, especially for small firms. When the state pushed through the recent tax increases, certain big businesses had the clout to negotiate better deals for themselves. For example, the financial exchanges threatened to leave town until the state legislature gave them a special tax break, with an extension of a tax break for Sears thrown in for good measure. And so the deck seems to be stacked against the little guys, who get stuck with the bill while the big boys are plied with favors and subsidies.

It also hurts small businesses that Chicago operates under a system called “aldermanic privilege.” Matters handled administratively in many cities require a special ordinance in Chicago, and ordinances affecting a specific council district—called a “ward” in Chicago—can’t be passed unless the city council member for that ward, its “alderman,” signs off. One downside of the system is that, as the Chicago Reader reported, over 95 percent of city council legislation is consumed by “ward housekeeping” tasks. More important is that it hands the 50 aldermen nearly dictatorial control over what happens in their wards, from zoning changes to sidewalk café permits. This dumps political risk onto the shoulders of every would-be entrepreneur, who knows that he must stay on the alderman’s good side to be in business. It’s also a recipe for sleaze: 31 aldermen have been convicted of corruption since 1970.

Red tape is another problem for small businesses. Outrages are legion. Scooter’s Frozen Custard was cited by the city for illegally providing outdoor chairs for customers—after being told by the local alderman that it didn’t need a permit. Logan Square Kitchen, a licensed and inspected shared-kitchen operation for upscale food entrepreneurs, has had to clear numerous regulatory hurdles: each of the companies using its kitchen space had to get and pay for a separate license and reinspection, for example, and after the city retroactively classified the kitchen as a banquet hall, its application for various other licenses was rejected until it provided parking spaces. An entrepreneur who wanted to open a children’s playroom to serve families visiting Northwestern Memorial Hospital was told that he needed to get a Public Place of Amusement license—which he couldn’t get, it turned out, because the proposed playroom was too close to a hospital!

And these are exactly the kind of hip, high-end businesses that the city claims to want. Who else stands a chance if even they get caught in a regulatory quagmire? As Chicagoland Chamber of Commerce CEO Jerry Roper has noted, “unnecessary and burdensome regulation” puts Chicago “at a competitive disadvantage with other cities.” Companies also fear Cook County’s litigation environment, which the U.S. Chamber of Commerce has called the most unfair and unreasonable in the country. It’s not hard to figure out why Chief Executive ranked Illinois 48th on its list of best states in which to do business.

Chicago’s notorious corruption interferes with attempts to fix things. Since 1970, 340 officials in Chicago and Cook County have been convicted of corruption. So have three governors. The corruption has been bipartisan: both Governor George Ryan, a Republican, and Governor Rod Blagojevich, a Democrat, are currently in federal prison. A recent study named Chicago the most corrupt city in the United States.

But an even greater problem than outright corruption is Chicago’s culture of clout, a system of personal loyalty and influence radiating from city hall. Influencing the mayor, and influencing the influencers on down the line, is how you get things done. There is only one power structure in the city—including not just politicians but the business and social elite and their hangers-on—and it brings to mind the court of Louis XIV: when conflicts do arise, they are palace intrigues. One’s standing is generally not, as in most cities, the result of having an independent power base that others must respect; it is the result of personal favor from on high. One drawback with this system is that it practically demands what columnist Greg Hinz calls a “Big Daddy”–style leader to sustain itself.

Another is that fear of being kicked out of the circle looms large in the minds of important Chicagoans. Beginning in 2007, Mayor Daley launched an ultimately unsuccessful bid for the 2016 Olympics. Later, commentator Ramsin Canon observed that Daley “was able to get everybody that mattered—everybody—on board behind the push. . . . Nobody, from the largest, most conservative institutions to the most active progressive advocacy group, was willing to step out against him.”

These organizations have good reason to fear reprisal for not toeing the line. When Daley signed his disastrous parking-meter deal, an advocacy group called the Active Transportation Alliance issued a critical report. After a furious reaction by the Daley administration, the organization issued a groveling retraction. “I would like to simply state that we should not have published this report,” said executive director Rob Sadowsky. “I am embarrassed that it not only contains factual errors, but that it also paints an incorrect interpretation of the lease’s overall goals.” Sadowsky is no longer in Chicago.

It’s easy to see how fiascoes like the parking-meter lease happen where civic culture is rotten and new ideas can’t get a hearing. Chicago’s location already isolates it somewhat from outside views. Combine that with the culture of clout, and you get a city that’s too often an echo chamber of boosterism lacking a candid assessment of the challenges it faces.

Some of those challenges defy easy solutions: no government can conjure up a calling-card industry, and it isn’t obvious how Chicago could turn around the Midwest. Mayor Emanuel is hobbled by some of the deals of the past—the parking-meter lease, for example, and various union contracts that don’t expire until 2017 and that Daley signed to guarantee labor peace during the city’s failed Olympic bid.

But there’s a lot that Emanuel and Chicago can do, starting with facing the fiscal mess head-on. Emanuel has vowed to balance the budget without gimmicks. He cut spending in his 2012 budget by 5.4 percent. He wants to save money by letting private companies bid to provide city services. He’s found some small savings by better coordination with Cook County. Major surgery remains to be done, however, including a tough renegotiation of union contracts, merging some functions with county government, and some significant restructuring of certain agencies, such as the fire department. By far the most important item for both the city and state is pension reform for existing workers—a politically and legally challenging project, to say the least. To date, only limited reforms have passed: the state changed its retirement age, but only for new hires.

Next is to improve the business climate by reforming governance and rules. This includes curtailing aldermanic privilege, shrinking the overly large city council, and radically pruning regulations. Emanuel has already gotten some votes of confidence from the city’s business community, recently announcing business expansions with more than 8,000 jobs, though they’re mostly from big corporate players.

Chicago also needs something even harder to achieve: wholesale cultural change. It needs to end its obsession with being solely a global city, look for ways to reinvigorate its role as capital of the Midwest, and provide opportunities for its neglected middle and working classes, not just the elites. This means more focus on the basics of good governance and less focus on glamour. Chicago must also forge a culture of greater civic participation and debate. You can’t address your problems if everyone is terrified of stepping out of line and admitting that they exist. Here, at least, Emanuel can set the tone. In March, he publicly admitted that Chicago had suffered a “lost decade,” a promisingly candid assessment, and he has tapped former D.C. transportation chief Gabe Klein to run Chicago’s transportation department, rather than picking a Chicago insider. Continuing to welcome outsiders and dissident voices will help dilute the culture of clout.

Fixing Chicago will be a big, difficult project, but it’s necessary. The city’s sparkling core may continue to shine, and magazines may continue to applaud the global city on Lake Michigan—but without a major change in direction, Chicago can expect to see still more people and jobs fleeing for more hospitable locales.