You Hate Taxes, but You’re Not Moving to Nashville
(Corrects reference to GDP in seventh paragraph.)
How has the Great Recession reshaped America? Does the decline in New York’s financial sector herald the “demise of the luxury city,” as Joel Kotkin has recently suggested? Or instead has this watershed meant “the death of the fringe suburb,” as Christopher Leinberger speculates?
In fact, none of America’s diverse living styles is about to perish. Incomes remain highest in the large, well-educated coastal cities, even though Kotkin is right that they remain challenged by the high cost of government. Population growth remains strongest in the car-oriented cities of the Sun Belt, even though Leinberger and his Brookings Institution colleagues are right to note that exurban population growth has fallen.
The most troubled U.S. locales are the places that just have far too much housing relative to the level of current demand, either because they overbuilt during the recent boom or decades ago during the industrial heyday of the Rust Belt.
In a national election year, when the whole country must come together to select a president, we are reminded that this is a highly diverse country with an astonishing array of cultures and living arrangements. Liberal Boston academics are forced to face the political power of suburban Virginians; conservative Texans confront the electoral clout in Ohio’s inner cities.
Economic theory typically embraces choice, whether in supermarkets or in cities. It is a great thing that Americans can opt to live in dense cities or sprawling suburbs. As long as people pay the social costs of their actions, and are not subsidized by policies that artificially favor one living style over another, then it is splendid that we have plenty of options, some with sunshine and inexpensive mass-produced housing and others with high wages and costly apartments.
The tides of history may occasionally make one form of living appear temporarily triumphant -- as suburbia did, thanks to cheap cars and abundant highways, in the 1960s and 1970s -- but soon enough other forces reassert themselves. After 1980, globalization and new technologies increased the value of ideas and innovation, which in turn led to a rebirth of those older, denser cities that were heavy with human capital.
Which metropolitan areas have managed particularly well during the Great Recession? I examined three measures of economic success: unemployment, housing-price stability and gross domestic product growth. I focus on metropolitan areas that had more than 200,000 people in 2000. Unemployment is available from the Bureau of Labor Statistics for 2012; housing- price data is available from the Federal Housing Finance Agency only for 2011. Figure 1 shows the relationship between unemployment and housing prices in 2011 divided by prices in 2006 (correcting for inflation). For every 10 percentage-point increase in price growth, unemployment falls by 0.8 percentage points.
There is also a reasonably strong correlation between housing-price growth and growth in real per-capita gross domestic product from 2006 to 2010, which is the latest year available from the Bureau of Economic Analysis (shown in Figure 2).
As prices rise 10 percentage points, per-capita GDP gains 2 points. California’s inland cities, like Merced, are particular disasters. Success stories include both idea hubs, like San Jose, California, and Boston, and also energy-intensive areas like Houston and Lafayette, Louisiana.
Education has played an outsized role in explaining urban resilience. Figure 3 shows the link between share of the adult population with a college degree in 2000 and unemployment in February 2012. As the share of adults with college degrees increases 10 percentage points, unemployment (on average) falls by 1.6 percentage points.
GDP and Education
The connection between GDP growth and education is positive, but somewhat weaker. As the share of adults with college degrees in 2000 increases by 10 percentage points, GDP growth increases by 1.1 points. The connection becomes stronger for metropolitan areas with more than 1 million people, as shown in Figure 4, where GDP growth increases by 4.9 percentage points as the share of adults with college degrees in 2000 increases by 10 percentage points. There is a complementary relationship between cities and skills.
To me, these figures don’t suggest the death of the skilled city or the luxury city, either. Places with more education were earning substantially more in 2006, and they have done better at withstanding the recession, as well.
New York itself has done somewhat better than its schooling level suggests, perhaps because the most important skills in New York have always been its more ephemeral human capital -- the talents learned on the trading floor or on the street corner.
But this doesn’t mean the more expensive cities are trouble-free or that they are doing a great job providing homes and economic opportunity for middle-income Americans.
Four years ago, in City Journal, I compared the lifestyles of ordinary Americans in New York and Houston and concluded that Houston was doing a far better job of providing a decent quality of life for people in the middle of the income distribution. New York may be a great place to be a master of the universe, or an immigrant who lacks the wherewithal to buy the multiple cars needed for an exurban existence. But when it comes to ordinary families earning $60,000 to $70,000 a year, Houston delivers.
The Sun Belt metropolises have grown dramatically over the past two decades precisely because they specialize in producing inexpensive lifestyles, especially affordable homes, for middle- income Americans.
Population growth is one measure of urban success that doesn’t seem to track rising incomes or low unemployment levels. Figure 5 shows the correlation between growth in per-capita GDP from 2001 to 2010 and population growth from 2000 to 2010. Population rose more quickly in those areas, like Atlanta and Houston, that had less, not more, per-capita productivity growth.
Why Houston Thrives
On one level, the divergence between population and income growth reminds us of the diversity of America. Boston thrives with high education and income and little new housing construction. Houston thrives, with lower incomes, by providing abundant affordable homes. Neither urban model appears to be headed for the trash heap of history.
Yet there are still lessons from recent urban history, and there are some places that face dramatic danger. Cities such as New York, Boston and San Francisco, where prices have stayed reasonably high, despite the crash, should do more to promote affordable housing, especially by eliminating the barriers to new construction. There is demand in these areas, and they would grow, if only they could build more homes. Their public sectors are expensive, and future leaders will have to adjust to far more austerity than in the recent past.
Cities such as Dallas and Houston are doing well with their low-cost pro-business model, but history has been less kind to less-educated places. They should be investing more in education and in urban amenities that will attract the more skilled.
The biggest challenges are in the places like Merced and Detroit that have too much housing relative to the level of demand. These places have too little education, and lack the industrial strength that holds up Houston. These areas should at least focus on educating their children and creating a more business-friendly environment. Urban decline is slow, even when urban growth is fast, because housing is a durable good that takes decades to disappear. The key is to manage decline, by investing in human capital, in ways that produce hope in the midst of despair.
Read more opinion online from Bloomberg View.
Today’s highlights: the View editors on Greece’s political deadlock and saving the Volcker rule; Clive Crook on France and the EU; William Pesek on Asia’s wealth divide; Peter Orszag on the income swings of high earners; Ali H. Soufan on the USS Cole trial.
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