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The Upside of Lowering Urban Inequality

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Discussions of inequality often focus on income and wealth distribution. But what’s the right geographic unit to look at when we compare income and wealth? Inequality has risen in the U.S. and much of Europe, while it has fallen around the world thanks to rapid growth in developing countries.

But perhaps there’s a third level that deserves more attention: local and urban inequality. Instead of comparing income levels across the country or the world, maybe we should be looking at the disparities between people who live next to each other.

One reason urban inequality is so important is that this is how most people experience the phenomenon on a daily basis -- in cities, rich, middle-class and poor people are in constant contact. Experiments and other studies clearly show that people care about their status relative to reference groups, and one important reference group is the people who live nearby. That makes intuitive sense. If some rich person in Switzerland is buying a mansion, I only perceive it as a statistic on paper, but every time I see someone walk into a restaurant that I can’t afford, it reminds me of my lower economic status.

These effects are visible in aggregate data as well. Economist Ed Glaeser finds a negative correlation between city-level inequality and self-reported happiness.

Does this mean we can make people happier simply by reducing inequality? Not necessarily. Much of the correlation might be due to other factors. But given the similarity between this aggregate result and the outcomes of psychology experiments, it seems fair to conclude that people don't love living in places with big income disparities.

Income Inequality

Another reason we might want to focus more on inequality within cities is that it touches on so many political issues. At the national level, income and wealth disparities are addressed by policies such as minimum wages, taxes and government-provided health care, on which few people have day-to-day input. But at the local level, inequality is affected by housing policy, zoning, transit, public schools, construction regulations, environmental protection and a host of other issues that absorb a lot of people’s time and attention.

One final reason to focus on urban inequality is that addressing the problem might not be nearly as costly as attacking inequality at the national level.

There's a well-known result in economics called the equity-efficiency trad-eoff, which states that if you redistribute income from rich to poor, you also make the country as a whole a bit worse off. In the extreme case, creating a society where everyone makes the same amount of money would also impoverish the nation -- not something anyone wants to do. If that trade-off holds at the local level as well, then fighting urban inequality might not be worth the cost.

But there is reason to believe that urban inequality doesn't force us into the same kind of trade-off as the national kind. First, there's the aggregate evidence. Glaeser showed in his research that there is a clear negative correlation between local Gini coefficients, which measure income distribution, and median family income -- more equal cities also tend to be richer.

That suggests that there are ways to make cities prosper while also making them less unequal. So what are some steps we might take?

The obvious approach is to reshape cities in ways that benefit the poor. Better transit would make it less of a chore for low-income people reach their jobs, making it easier for them to find work and reducing the likelihood that they will have to move in response to shifts in local demand. More development, especially more housing aimed at low-income occupants, would ease the burden of high rents. That's especially important at a time when rents are rising quickly across the country.

Would better transit and more low-income housing development make cities poorer? Probably the opposite. Few would argue that excellent subway systems have impoverished New York, Tokyo or London. And intense development allows urban areas to take advantage of agglomeration effects, which are productivity boosts that economists believe come from denser cities.

In other words, density and transit let us escape the harsh logic of the equity-efficiency trade-off. They are pretty close to being a free lunch.

One underused weapon in this fight is land value taxes, which are property taxes with exemptions for development. And there are a host of other incentives that federal and state governments can use to encourage local governments to build more housing, remove more land-use restrictions and create livable urban space for many more people. These might include affordable housing mandates and incentives, incentives for density, bigger subsidies for urban transit and more. (In some areas, progressives have resisted policies like these, but let's hope this attitude is shifting.)

Another important question is how to help poor and working-class people who are pushed out of their homes when rents in cities go up. Now, being forced to move isn't entirely a negative, since leaving bad neighborhoods is helpful for many low-income people, and since gentrification often improves public services and provides better jobs for those poor people who aren’t displaced. But those who are forced to move -- often by the brutal, inefficient process of eviction -- incur huge costs. It's expensive and time-consuming to move, to build new networks and to commute from cheaper outlying areas. These costs fall disproportionately on lower-income people, who are the first to be squeezed out, thus increasing inequality.

A natural fix is for the government to offer financial assistance to lower-income people who have to abandon their homes as rents rise. These would be similar to the federal Moving to Opportunity program, which gives poor people housing vouchers to help them move to low-poverty areas, except they would be aimed at people in areas with rising rents. The relocation assistance could be funded by local taxes on landlords.

So urban inequality is more important than policy makers seem to realize. The national conversation about inequality can't ignore this key aspect of the problem. Some of the fixes are there; we just have to act on them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net