Brink Lindsey speaks for many economists when he suggests that getting rid of excessive building regulations in cities would raise productivity by allowing more people to move to those cities. I want to push back a bit.
I want to apply the Stevenson-Wolfers theory of modern marriage to modern cities. Their story is that back in the 1950s, marriage was about production complementarity. The man worked in the market, and the woman did housework. However, as women moved out of housework and into market work, marriage became about consumption complementarity. You wanted a partner who shared similar interests and cultural inclinations.
Perhaps the same holds true of cities. There was once a lot of production complementarity from having people in a similar industry close by. Perhaps now, that is not so much the case, and what cities attract are people who like the lifestyle of those cities. Maybe Silicon Valley is an exception where production complementarity still matters, but even there, one hears that San Francisco has become more chic among the techie hipsters.
Why this matters:
1. Moving people from small-town Ohio to New York City might do little or nothing for productivity. Yes, productivity is higher in New York, but the causality could run from consumption externalities + restrictive building codes => high rents and high salaries => high productivity to cover the high salaries. It’s not that New York generates high productivity. It selects for high productivity, because people who are not highly skilled find it difficult to afford to live there.
2. Getting rid of building restrictions would allow highly productive people to live in New York less expensively, increasing their wealth (and perhaps driving up inequality). But it would allow less productive people to live in New York, thereby bringing down average productivity in New York.
Some random comments:
One of my daughters moved from Tucson to New York a few years ago. From a career standpoint, the move was a slight step backwards. From a social standpoint, it was a big step forward. She exemplifies the consumption complementarity story. The sorts of people she wanted to hang out with were much more prevalent in New York.
I was stimulated to think about this when I came across Dean Baker the other day. He was jogging and I was biking, and when I recognized him I doubled back and went with him a few hundred yards. We had a conversation that included this topic. That illustrates that there is still some production complementarity going on. It is not a conversation I would have had living in a different area.
I’m inclined to agree that moving to a city will not suddenly make someone more productive. Indeed, let’s also consider that many people who live outside of cities already *work* in cities, and it’s unclear to me where the productivity boost will come from. I’m familiar with the argument about cities being breeding grounds for innovation because of more ideas bouncing around and fortuitous run-ins with other people which may lead to great things, but I’m skeptical.
Where I think the real value in cities comes from is through increased efficiency, both for people and the provision of public goods. For example, living in a city has enabled me to live a car-free existence and getting around mostly by walking and biking with the occasional public transport. The trade-off of course is much higher housing prices, but presumably this could be at least somewhat ameliorated through deregulation/zoning reform. This greater efficiency, if combined with lower housing costs, could lead to a rise in disposable income.
As for the public sector, the cost of infrastructure such as a road in an urban environment can be spread across more taxpayers, producing overall lower costs (even when factoring in higher maintenance due to more intense usage). Granted, city governments in the US often have high tax burdens, but I’m not convinced this is something intrinsic to cities and rather may reflect the political preferences of their inhabitants as well as traditionally being home to large numbers of poor people requiring high social spending outlays — a trend seemingly now in reversal as cities gentrify.
Anyway, my conclusion is that moving people to cities is still an economic win, but much more through efficiency gains than in enabling workers to produce more stuff.
From where I’m sitting, it’s definitely the productivity story. I did not want to move away from friends and family as a matter of course; in fact I assumed I’d stay there my whole life. But I was offered a job for substantially higher pay in NYC. Once I got here, I found the labor market is in another universe from the DC area one in terms of opportunities. When I suddenly lost the job that brought me up here, I was able to get a new one, at higher pay, within a couple of weeks; and was interviewing at dozens of places in the interim.
The people I know who have moved to major US cities have almost all had similar stories—they were pulled there by opportunity, not aesthetic or consumption considerations.
If so, you would have to guess that city governments would have a way of getting the building codes just right. Too much restriction and your highly productive people go elsewhere. Too little and you attract the less productive riff-raff like me.
Besides, the political pressures that lead city politicians to be restrictive have nothing to do with an interest in making the city more productive and efficient. Isn’t it usually about protecting established interests (the dragons) from more productive competition?
Even in big cities, somebody has to make the fries. In flexible markets those things will work themselves out. I’m in the camp that thinks that fewer restrictions would lead to even greater outcomes.
Nonetheless, it is still an interesting point. It amazes me how San Francisco can still attract talent given the crazy cost of living there. You’d think that the talent would gravitate elsewhere. Maybe it is, but perhaps that kind of thing happens much more slowly than we imagine. For all we know the next Silicon Valley is being built somewhere that eludes us now, but will seem so obvious in hindsight.
I agree with Adam above; productivity definitely plays a role, even if it’s just a result of path dependence. Example: you can be a lawyer in small town Ohio or you can be a lawyer in New York City, but nobody in small town Ohio (or maybe anywhere in Ohio) becomes a securities lawyer who writes covenants for corporate bond issuances. The enhanced opportunities for specialization in cities really do, I think, increase productivity.
I agree that there’s a selection effect, though, at least in high cost cities like the Bos-Wash corridor, Chicago, LA, SF, etc. The selection effect is probably part of the appeal, really. There’s a reason people join country clubs, after all: they like to socialize with people of similar socio-economic strata. Moving to NYC would be far less appealing if it were cheap enough that anyone could live there.
The SF anecdote is not an exception to the Silicon Valley production complementarity story, it’s a confirmation. SF is a 45-minute shuttle ride from Google and FB, and thousands of workers are shuttled back and forth daily. The tech-oriented SoMa area is a 45-minute train ride to or from downtown Palo Alto.
The expansion to SF meant that firms located in either the Peninsula or in SF now have access to workers across the whole area. It’s no coincidence that the tech-oriented area is by both the train stations and the freeways to Silicon Valley.
I’m amazed at how much the peninsula is in its own universe. The tech explosion seems about 95% confined to that slab of land. Oakland (where I live) may as well be Washington D.C. in 1988, all hospitals, gov’t buildings and non-profits. If it weren’t for the increasing number of younger, hipster-y tech workers who opt to live in Oakland, I feel it’d be removed from the tech zeitgeist entirely.
“Perhaps now, that is not so much the case, and what cities attract are people who like the lifestyle of those cities.”
Even if that’s the case, then liberalization of building codes should raise measured real economic output, right? Suppose that a one-bedroom apartment with similar construction costs rents in NYC for $3000 and in Atlanta for $750, but that initially this construction is prevented in NYC due to regulation. If we loosen regulation and thereby redirect resources from building apartments in Atlanta to building apartments in NYC, then maybe we’ll provide 100,000 fewer such units in Atlanta and 100,000 more such units in NYC.
Since a real output index, constructed along standard lines, will weight these quantity changes using prices (if it’s a superlative index, a combination of prices before and after), due to the higher prices in NYC it will show a net increase in real output. And even if the higher rents in NYC are only valuable because of the city’s consumption value, this index will be an accurate measure: producing a greater quantity of a higher-value consumption good is *precisely* one of the things that GDP growth is supposed to reflect.
Indeed, GDP growth is a much more accurate welfare indicator in this case than under the production complementarities story: rents are counted as part of PCE, but if the main point of living in an expensive city is to be in close proximity to a job, then the “NYC premium” component of rents should really be counted as an intermediate input rather than a consumption good. Otherwise, GDP will double-count the benefits from looser regulation, tallying the rise in urban living as a benefit in its own right and also the resulting rise in production, even when the former is only useful to facilitate the latter.
(Maybe this is getting too technical, and focusing too much on the formal definition of real GDP and other real output indices. But I do have an ulterior motive in doing this: while I enjoy your criticism of the “GDP factory” approach to economics, as with the vast majority of GDP critics I’m not sure that you are clear enough on how GDP is actually defined and calculated. I think that greater precision on this front, maddening and formalistic as it might be, is essential to clear thought – we have to define economic concepts like real output somehow, and we might as well do it consistently.)
Won’t work.
Rich white people move to cities specifically to get away from middle class white people. The exclusion of the boring, family-raising people that remind them of their parents is not a bug to them, it’s a feature.
Bingo.
Plus, such cities are able to do with restrictive zoning and sustainability regulations what George Wallace and JB Stoner could only dream about, all without the shame of being labeled as hostile to diversity.
There’s a literature on this. Observationallly equivalent workers are paid higher nominal wages in larger cities. Individuals who move to larger cities experience nominal wage increases. Conventional wisdom in urban economics is that big cities’ net benefits favor production, since individuals would accept lower nominal wages to access better consumption opportunities.
“individuals would accept lower nominal wages to access better consumption opportunities.” Why are nominal wages the metric here? My daughter’s real wage went way down when she moved to New York, as she had to pay twice as much in rent for a smaller apartment. Her nominal wage was slightly higher, but so what? The question becomes why businesses do not relocate out of big cities in order to get cheaper labor. The answer is that many have relocated, but they also have done a lot of capital-labor substitution and a lot of off-shoring. What remains are non-profits (including my daughter’s employer when she moved to NY), tech businesses that cannot find enough hipsters willing to live in small towns, and restaurants to serve the hipsters and the employees of non-profits.