Want Economic Growth? Try Urban Density
Here's a big economic and political thesis: The U.S. has run out of frontiers, both literal and figurative. At first, growth was fueled by expansion into the West, use of natural resources and the build-out of national infrastructure. In the early- and mid-20th century, an unprecedented explosion of new technologies -- electricity, automobiles, airplanes and others -- opened up the suburbs, which acted like a new frontier. More recently, the Internet and globalization, especially China, were frontiers that gave the economy yet more room to expand.
But these growth opportunities may now be running out. Information technology is improving our lives by giving us more fun things to do with our leisure time, but it isn't providing the kind of productivity boost gained from previous technological revolutions. And the heyday of expansion into China may be over, given that country’s economic slowdown, its decreasing openness to Western companies and the broader slump in world trade.
So where is the next frontier? It’s possible that -- at least until the next technological revolution or wave of globalization -- there just isn’t one on the immediate horizon. If that’s the case, maybe the U.S. should shift from extensive growth to intensive growth.
Extensive growth is based on greater inputs. More energy, more cheap labor, more land. When you use existing technologies to build more roads and more buildings, that’s extensive growth. Intensive growth, on the other hand, is about getting more output for a given about of input -- doing a lot with a little. One famous example of intensive growth was early modern Dutch agriculture, in which the Netherlands created flooded basins called polders to reclaim land from the sea. Improved production technology, of course, is one of the biggest generators of intensive growth.
The U.S. isn’t as good at intensive growth as it should be. For example, the country uses too much energy to produce each dollar of economic output -- though it is improving. The U.S. has very low urban population density relative to other advanced countries. Though the country is considered highly urbanized, many so-called urban residents actually live in far-flung suburbs. Where Europe and Asia cluster, America sprawls.
Sprawl probably reduces productivity. When people cluster more tightly together, they become more productive -- this is known in economics as an agglomeration externality. This explains why the same person will produce more economic output in New York City than in a small town. Here is a picture of the correlation between city size and productivity:
Source: Organization for Economic Co-operation and Development
Size gives an approximation of density, though some cities sprawl more than others. In fact, density itself is correlated with productivity, even holding size constant. So there is a big opportunity for the U.S. to take better advantage of agglomeration: increase urban density by making it easier for people to move into big cities.
In other words, the U.S.’s next frontier may be its own cities.
Cramming more people into urban areas naturally involves costs -- greater congestion, and pressure on public services and transportation. Urban economists argue back and forth about whether cities are too large or too small. But there is a general realization that local regulations can prevent cities from attaining their full potential.
For example, the University of Utah’s Nathan Seegert finds that with too much regulation, cities fragment, disperse and sprawl into units that are too small to be economically efficient -- that’s what we might be seeing with U.S. suburbs. And economists Kristian Behrens and Frederic Robert-Nicoud say that land-use obstructionism by NIMBYs -- which stands for not in my backyard -- is probably keeping America's flagship cities from attaining their potential.
Land-use regulation isn't the only problem keeping U.S. cities from boosting growth. Sky-high infrastructure costs are another. Building trains in the U.S. is much more expensive than in other rich countries. As a result, the U.S. rail system is stunted, leaving the public dependent on cars -- the ultimate tool of sprawl. Even when the political will for infrastructure expansion is present, the price tag is just too high. A similar cost problem also hurts urban housing development.
So if the U.S. is going to jump-start an era of infill -- a new frontier of urban productivity -- government needs to do several things. First, federal and state governments should roll back overly restrictive land-use regulations. Second, development should be encouraged by means of land-value taxes (which are basically tax credits for development). Third, federal and state governments should put a higher priority on reducing construction and land-acquisition costs for infrastructure and buildings.
The U.S. can't afford to let its cities fragment into sprawling suburbs or degenerate into overpriced refuges for the rich. The U.S. must embrace the new frontier by packing more into its urban areas.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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