Sunday, October 9th, 2011
Update: Ryan posted a reply to some of the points I raise here. It’s definitely worth reading.
The Gated City is a mini-ebook by Ryan Avent that makes the case for removing restrictions on densification in cities. In addition to being a left-leaning economist, Avent is also a journalist who is an editor at the Economist magazine and a principal contributor to its Free Exchange blog.
Avent’s journalism skills make him one of the more articulate and easy to read economists out there. This book brings Avent’s signature readability to the table and also has the virtue of being brief. This makes the book very much a recommended read. To me though that is as much for his introductory treatment of the economic value of cities as it is about the virtues of density. The primacy of urban regions in our new economic order is something that is hardly a matter of left or right. But I continue to be amazed at how few policy makers actually seem to know or care about this, particularly at the state level. Our governments continue to implement policies that are not just indifferent to the success of our cities, but in many cases outright hostile to them. More reminders of the real state of affairs are clearly needed.
Having read several other reviews of the book, I was expecting big and controversial claims to be made for density. In fact, Avent’s claims for the benefits of increased density are fairly modest. He suggests that removing artificial barriers to urban density might raise the growth rate in GDP by 25 to 50 basis points. That’s not a radical amount, though of course compounded over time adds up. He also doesn’t claim that more density is always better, that we should all live like Manhattanites, or that he professes to know what the optimum level of density is. In fact, he explicitly disavows all of those. He also says that he doesn’t care where people personally choose to live, and, while I would have preferred to see a more forthright statement on policies like urban growth boundaries and such that actively restrict suburban development, Avent does include New Urbanist critics of suburbia as among those who want to more strictly regulate land use.
In short, Avent more or less wants to reduce barriers to densification such as zoning, FAR limits, historic districts, etc. in order to allow the market to determine the optimum level of density. He hypothesizes that this would lead to an increase in density overall, and given that both the goal and practical result of much planning practice is to restrict density, I agree. (See: Planning and Free Market Density). While clearly Avent is sympathetic to urbanism and densification, in this book at least he makes a clear effort to avoid statements that might suggest he wants to force density.
On the whole, I’m personally very supportive of Avent’s goals here, though of course the best course for overcoming the huge structural biases against density is still speculative.
There are a few areas that weren’t clear and that I weren’t quite as sold on. One of them is that in some cases Avent talked about employment density and in other cases residential density. Those might be related in many cases, but I don’t think they are necessarily tightly linked. Most of the economic benefits would appear to occur from employment densification not necessarily residential. For example, until fairly recently, Chicago’s Loop business district was almost exclusively office oriented and had little residential density at all. While adjacent urbanized areas are higher density in terms of people, I don’t believe that’s the only factor supporting the Loop economy, or even the most important. (See: The Big City CBD Advantage and Employment Challenges Facing Small City Downtowns). Fully distinguishing between employment and residential density in terms of impact and policy would have been helpful.
Another is that the book heavily focuses on the supply side of the equation (i.e., the ability to build) as opposed to the demand side. But arguably demand had a bigger role to play in driving up housing costs in places like NYC. It came as no surprise to me that the metros Avent cities most in his dense cities list were New York and San Francisco. Those places are home to the two most successful macro-industries of the last 20 years in terms of wealth generation for their practitioners – finance and high tech. Avent notes increasing income inequality and stagnant wages for the majority. This by itself explains why the middle class is increasingly priced out of these cities. When the Fed pumps $14 trillion into propping up the financial sector in the last handful of years, it’s not unrealistic to expect that to show up in New York area housing prices. No amount of new supply would have been able to keep up with the significant deregulation of finance that occurred in the last two decades (repealing Glass-Steagall, raising the ceilings on the share of national deposits held by a single institution, etc) and Helicopter Ben’s printing presses.
Also, assume we were able to moderate the price of housing in these places somewhat. What would that do for us? Well, NYC and SF would still remain among the most expensive places in America to live. This means that they are going to continue to draw principally those who are able to tap into the particular wealth generating functions of those regions, along with those who particularly value the amenity set of those cities or who are following network path migration. However, the industry groups that are now predominant in those cities are ones that employ almost exclusively high end labor. So what this would mean in my view is that instead of say the top 1% being able to live and work in these places, we extend that down to the top 2% or 3%. That might add more new net economic growth, and even benefit the people who fall into those newly eligible brackets, but a few more near luxe jobs aren’t going to solve the fundamental problem of employing middle class Americans and restoring the engine of upward social mobility. The factories that used to be a big part of the economic life of Silicon Valley are now gone, and they aren’t coming back no matter what building restrictions we remove. Even if we could grow employment there, it would be almost certainly be more jobs for those who, as Joel Kotin put it, “already reside at the apex of society or expect to soon” thanks to their education, skills, or family connections.
With the current economic development paradigm for tier one cities emphasizing talent, higher end activities, and “global city” type affairs, I also question whether local leaders would actually want to make it easier for what are basically lower end activities to take place there. Everyone seems to want to keep climbing the value chain, not descending it. If you lower prices, you open the market to more economically marginal people and activities, and thus lower items like per capita income and GDP, unless somehow on a lifecycle basis this somehow changes the overall economic structure of a region (which would probably raise housing prices again….)
Another part of the challenge is that the business models of high tech and finance have evolved to thrive in an environment in which they a) now find themselves in a globally competitive market and b) have to pay for sky high real estate and expensive people in SF and NYC. I’m most familiar with tech. I’ve written before how the onshore tech market has reinvented its business model to focus on lean methodologies, design, being close to the customer, and rapid iterations. When you combine this with innovations in open source frameworks and cloud hosting, the average web company simply doesn’t employ that many people these days, and likely will never scale its labor force by much because the economic model of something like SaaS is almost 1:N – virtually all costs are fixed. (See: More Thoughts on the Programmer Shortage).
So to really boost employment, we’d need more than just cheaper land making labor more available at a reasonable cost. That might provide some boost. But we would also need business model innovation.
One nitpick: the choice of Phoenix as the primary example of a low density city wasn’t one that resonated with me. When I think of Phoenix I think of a retirement or leisure community, not a business center. Texas cities like Houston would have been a better choice. (Avent does mention Houston at times, however).
Avent doesn’t exactly slam sprawlvilles like Houston, but he has a clear affinity for the high end city. I can’t really begin to address this, but a few things come to my mind. Firstly, the amenity gap between cities can be seen partially in terms of life-cycle. While certain things like the collections at the Met can never be reproduced in a place like Houston, that city will only grow more sophisticated and amenity rich over time. Cities almost invariably get rich, then decide they want to use some of that money to buy class. It was true for Chicago, and it’s increasingly true now in places like Houston and Dallas, as well as emerging market cities around the world.
Second, how much of the perceived productivity of places like NYC and SF result from them having excluded all but high end activities in the first place? Houston not only has its energy cluster that has created fantastic wealth there, it has also managed to build a city where workaday businesses can do their thing. If a similar range existed in the Bay Area, it would look a lot less impressive in its stats. While it might make sense that transplanting tech works to Silicon Valley would make them more productive, it’s not clear that would be the case for workers in most other sectors. Whereas in Houston not only can the energy worker be more productive, other types of businesses and workers aren’t chased away. I’m sure he’ll correct me shortly, it strikes me that Houston could in fact be very much what Avent wants to see. It’s home to a powerful macro-industry cluster – energy – but has low enough housing costs that it doesn’t deter people who want to work in that sector from coming to Houston.
Third, Avent does believe increased density pays dividends across the board, so even places like Houston would benefit from raising their densities. And suburban type densities are very easy to raise without fundamentally changing the built form or quality of experience that people have there. So long as somehow this didn’t end up compromising Houston’s low housing costs, presumably even Houston itself would benefit from more density in Avent’s view. I mention this lest I leave the false impression that this book is all about a handful of already very dense places.
One last comment: I did not see rent control mentioned anywhere in the book. This is clearly a factor in the housing markets in both NYC and the city of San Francisco.
My main takeaway was that if we increased housing supply, we could boost the labor force in proximity to some high value economic clusters that are critical to the US economic future. Avent’s belief in the benefits of density are broader, but this is what it stressed. While I agree with the policy goals, I find it difficult to believe that what amounts to some marginal benefit is going to be sufficient to overcome the vast anti-density inertia and structural forces out there. Nor do I believe that this fundamentally solves the economic problems facing the United States, especially boosting employment over the long term, raising middle class wages, and addressing the broken engine of upward social mobility. What Avent’s prescription amounts to is tweaking the dials on the engine to squeeze out a few more horsepower. That’s a worthy goal and a potentially useful action, but only a small part of the solution to the challenges we face.