Not everyone sees the upside.

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Why Gentrification Matters

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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So what's wrong with gentrification?

After last week's two-parter on gentrification, that was the question asked most often: Why should we care? What's not to like about rundown houses getting fixed up, retail blooming, property values rising?

That's a complicated question. From the point of view of the gentrifier, all that stuff is great. And at a social level, maybe we shouldn't care: There's no civil right to live in Manhattan or Logan Circle. Having to move to the Maryland or Virginia suburbs is not a personal tragedy. And, of course, homeowners will do so with a six-figure nest egg thanks to those rising home prices.

Nonetheless, we should recognize that for many people, gentrification can be a sort of personal disaster. Why? Because when you don't have much money, you rely heavily on another sort of capital: social capital.

Interested readers can listen to me expand upon this in my American Enterprise Institute vision talk, but here's the nutshell version: Navigating poverty successfully requires people to tap into extended networks that operate something like the "reciprocal altruism" networks of hunter-gatherers. You're in trouble, and I help you out, which means that when I am in trouble, you have an obligation to help me out. All humans do this to some extent, of course. But affluent people in modern societies don't need to rely on these networks so heavily, because they have cash and savings. If your car breaks down, you pay a repair shop instead of tapping your network to find someone who knows how to fix the problem. As I discuss in my talks, these networks can be remarkably resilient ways to handle the challenges of poverty, but they can also create barriers to getting out of poverty.

For many obvious reasons, these sorts of social-capital networks tend to be place-based; they are centered not just on particular regions, but also often on particular neighborhoods. When gentrification happens, it erodes and eventually destroys these place-based networks. Renters are forced to move to new neighborhoods where they don't have this resource, making their lack of money all the more difficult. Of course, they will often eventually form new networks; even so, the transition can be extremely costly.

This is an example of a larger phenomenon that I've discussed before -- one that is both a cost and an accelerant of gentrification. That phenomenon is what economists call spillover effects. Neighborhoods of every income level have a lot of them.

What is a spillover effect? Well, consider the phenomenon of Big Bear Cafe, a local coffee shop you'll find mentioned in many a story about Washington's gentrification, along with plenty of stories that aren't, such as this uncredited cameo in the opening of a New York Times piece about federal prison abuses.

Big Bear Cafe opened in 2007, shortly after I moved to D.C., and for a long time it was practically the driving force behind gentrification in Bloomingdale, where home prices are now soaring toward the million-dollar mark. Real estate ads literally described home locations in terms of their distance from Big Bear. The cafe created value for itself by selling coffee and building a clientele ... but it also changed the surrounding neighborhood, creating value for nearby homeowners. That's a spillover effect.

Spillover effects are why particular types of retail often cluster, like whole streets in New York that used to sell nothing but lighting or seafood, and the many areas you still see dominated by restaurants or bars. You'd think that a store would be better off being the only lighting store on the block, but in fact, the reverse can be true -- people know that this is where to go to get lights, so you get more customers, and while some of yours leave to peruse the merchandise at a neighboring retailer, you also end up making sales to customers who started somewhere else.

Types of neighbors also have spillover effects, both positive and negative. 

Consider retail. One of the most prominent complaints about gentrification, at least in my city, is that all these new stores and restaurants open up -- but they are clearly "for" the gentrifiers, not the longtime residents. It's important to note that this happens relatively late in the gentrification process -- after, say, 30 to 50 percent of the neighborhood has turned over. The reason that happens is obvious: A bar aimed at young professionals needs a certain number of young professionals within easy reach in order to be an economically viable proposition.

But the implication is not necessarily so obvious: More people like me in the neighborhood means more amenities aimed at people like me. And those amenities will in turn attract even more people like me. This is true not just of income levels, but of other characteristics as well (young families? Retirees? Immigrants from a particular place?). And it goes a long way toward explaining why neighborhoods tend to converge toward relatively homogenous demographics.

It also may explain why neighborhoods are getting increasingly homogenous, sorted by everything from politics to profession. There has always been luxury and bargain retail, of course, but I think you can argue that those differences have widened over the last half century. In 1950, restaurant meals were an expensive treat for almost everyone, and housewives of all income levels all shopped at the A&P in 1950. And though the doctor's wife may have had more steak and frozen lobster in her cart while the laborer's wife loaded up on hamburger meat and canned tuna, the variety of foods they consumed was relatively narrow and easily contained within a single, modestly sized store. Except in the very largest cities, she likely bought her clothes in the "better dresses" section of the department stores where the poor shopped in the bargain basement. Her car was a better-upholstered version of what the less affluent were driving. And so on throughout the list of the myriad things we consume: In 1950, by and large the wealthy ate the choicest version of the stuff that the working class ate, but it was still basically the same stuff, purchased in the same sorts of places. 

Today, the housewife may herself be a doctor, and she shops at an entirely different sort of store, one that focuses on expensive, high-end products that are grown in a different way and used to cook very different sorts of food from that of the hourly worker. The fact that she is likely to work outside the home has itself driven much of the change: People now buy on the market things that used to be mostly made at home, substituting prepared food and restaurant meals for home-cooked dinners and dinner parties, so that differences in income make for much wider differences in consumption than used to be possible within the skills of the average housewife -- and also means that there is more demand for local facilities to cater to those differences.

If you want to understand the separation that has come over us, there's no better example than the difference between Trader Joe's and Aldi. They're run on basically the same theory (unsurprising, as Trader Joe's is owned by one of the two Aldi companies). You have a store with a small footprint and a relatively small number of stock-keeping units (one type of item, like a box of Ritz crackers, is one SKU). Most of their products are house-brand items, and they are sold at rock-bottom prices by the simple expedient of refusing to stock anything unless they can make or buy it cheap -- so you get a good price at the expense of not necessarily being able to find everything you want.

But though the business model is essentially the same, the presentation and mix of goods is quite different. You walk into Trader Joe's past a display of flowers and plunge straight into the prepared entrees, followed by the cheese section. At Aldi, you walk past a line of shopping carts that require a cash deposit and proceed through the bargain bins of processed side-dish mixes. You'll be unsurprised to learn that Trader Joe's requires an upscale demographic to even consider opening a store, while Aldi's demographic is closer to Wal-Mart's. It's not that one group of shoppers couldn't find something to buy at the other, but that the mix of goods is now clearly specialized toward two lifestyles that don't have all that much overlap. Meanwhile, the stuff that people buy in common -- such as electronics -- is increasingly purchased on the Web.

Even public services have increasingly diverged, as you can see in many of the battles over gentrification in my city: The newcomers want dog parks and bike lanes, while the longtime residents worry about parking and better programs for seniors at the rec center. There is overlap -- but arguably less overlap than there used to be, especially because the proliferation of social services over the last half century means a lot of facilities, from free clinics to food pantries, that the affluent don't need and aren't eligible for even if they wanted to use them.

It seems very possible that the widening gulf between where different income groups shop means an increasing tendency for neighborhoods to converge upon a very narrow range of incomes, educational attainment and taste. A certain kind of neighbor attracts certain amenities, which in turn attracts more of that kind of neighbor. And where there is limited real estate for retail, the neighbors who have more money to spend will easily dominate those who had less -- in the process pushing them out and destroying the positive spillover effects they enjoyed from having a longstanding network of neighbors like themselves.

I will be accused of prettying up the picture, of course; homogenous neighborhoods can also create negative spillover effects, most notably the crime you see in high-poverty neighborhoods. But that misses the point, which is to talk about the negative effect of gentrification on the people who are displaced. While gentrification may lower crime, it does so for the people who stayed, not the people who left -- who are moving into another low-income neighborhood, except this time possibly without the local knowledge and relationships that enabled them to navigate poverty's difficulties.  

This is not an argument about whether gentrification is good or bad. Like most things, it has its good side and its bad side, and which you think is more important probably depends on who you are. It's just a response to what people asked: Why would anyone think that fixing up houses, revitalizing retail and lowering crime is a bad thing? This is the answer: If your most important resource is your neighborhood network, then anything that makes you move is a very bad thing indeed.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Megan McArdle at

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