Tuesday, November 15, 2016

Housing: Part 187 - The solution to our problems is urban

I've seen several articles suggesting that, instead of expecting workers to move to urban areas for employment, we should be providing more support in areas with stagnant labor markets - jobs programs, social services, etc.  It isn't just people that are struggling.  It is places.  And, depopulating those places doesn't solve that problem.

It's a compelling point of view, and would that it were so.  But, I'm afraid it is unrealistic.

Imagine the previous period of urbanization, when technological advances in agriculture reduced agricultural employment, freeing up those workers for other productive activities and creating the dislocations that always come with growth.  The technological era of mass production meant that the new jobs were in the cities because production was centralized.

It didn't have to be that way.  It was determined by our technological context.  If communications had been the next wave of human innovation, maybe those former workers would have stayed in their little towns and would have worked on semaphores scattered across the countryside.  But, in the world where we lived, centralized mass production arose as the path to progress.

What if we had taken this position during that phase of urbanization?  What if we had agreed that tenements filling Manhattan island had more downside than upside, that the stresses of urban life were worth avoiding, that the way to approach falling agricultural employment across the country was to support those towns and work on policies that would bring jobs to those areas?

Can we all agree that this would have been a disaster?  That the results of this policy would be very similar to the stagnation and frustration that we see across the country today?  The available policy choices for a nation are those choices that fit the technological context that we have.  Ignoring that is costly.  Norway could decide tomorrow that the negative externalities of fossil fuels are too great, and that they can't justify taking income from that sector anymore.  Maybe you agree with that assessment.  But, we can all agree that if they made that choice, Norway would pay a high price for it.  It would be a mighty sacrifice.

Today, the globe is undergoing a new wave of urbanization.  I attribute this to the combination of two factors.  First, the frontier economic growth of developed economies is coming through highly networked and highly skilled information workers.  These workers clearly gain great value from being located in tight geographic clusters.  Whether this is expected or surprising is beside the point.  Their choice of location and the evolving prices associated with those locations are stark empirical confirmation of this development.  The fact that practically all the major new tech. firms are headquartered within a few miles of one another is not an accident.  There is no fear that Goldman Sachs will be moving their headquarters to Cincinnati in order to save on costs.

Second, the transition out of manufacturing, due mostly to automation, but clearly associated with the rise of developing economies, is leading to a transition into new sectors.  These generally are the non-tradable sectors - local services, construction, health care, etc.  These sectors have to be centralized, not because production is centralized, but because they have to be near their customer base - by definition, really.  And, the customer base happens to be this subset of information workers who do happen to be highly centralized.

Again, you can debate the cause as I have outlined it here.  But, the rise of a handful of cities where those centralized sectors are located and the extreme costs workers are willing to accept to be within commuting distance of them, tell an extreme story that must be true, regardless of the details that fill it in.

This wave of urbanization is pressing up against a political framework that has evolved which is not capable of accommodating high density development.  We have put roadblocks in front of the path to progress.  This has not been the product of a conscious public conversation.  Citizens in Pittsburgh and Cleveland didn't vote on referenda where they agreed that the downsides of urbanization are too great, and it would be preferable to take a second-best path toward a different technological solution.  The current equivalent of funding a semaphore network.

In effect, what has happened, just because of an accident of politics, is that the citizens of New York City, and Boston, and San Francisco, and Los Angeles (and London and Toronto and Sydney...) have decided that they like their cities just the way they are, thank you very much.  Modern democratic polities have increasingly evolved to accommodate these demands.  They vote for the pros that come from stability.  And, they happen to capture economic rents that come from stagnation where you get to be grandfathered in to the prime location.  (Of course, the millions of workers from the most economically vulnerable households who have been forced to move out of those cities over the last couple of decades don't get to share those gains.)  Americans in Pittsburgh and Cleveland suffer the externalities.  They are denied the natural salve that would moderate their economic dislocations - the ability for some portion of the community to migrate to places with more opportunities.  This is a human right and a process that is ancient.  It predates humanity itself.  It was, in fact, a factor in the creation of humanity.  More than ever, the free migrations of birds and caribou and butterflies are sacred to us, but not those of our fellow humans.  Sure, we argue about the right to cross that line that runs along the banks of the Rio Grande.  We need to address the line that surrounds San Francisco and New York City.  The first step is seeing the line.

And, consider the families who have been most exposed to the dislocations of today's technological shift.  They are stuck between that line along the Rio Grande and the line around the northeastern and Pacific cities.  Is it any wonder that they are mad about trade and immigration?  If we actually had a universally consistent policy in favor of the right to migrate, they wouldn't be so mad.  They have selectively been forced to take on the negative externalities of these accidental restrictions on freedom.  And the collective response of many of the citizens of those enclaves of economic privilege is to march and protest, to label those people who are locked out of their cities as sorts of heretics because of the forms of their frustration.

We could choose, like the hypothetical Norwegians, to sacrifice for some higher cause.  What exactly is the cause?  That a few lucky real estate owners get million dollar windfalls while the screws turn ever tighter on renters?  That the highest income workers get an income boost because there is a moat around their cities that prevents potential upstarts from competing?  That the little shady suburb full of $2 million dollar cottages doesn't have to have that 20 unit condo building next to the train station that would just totally ruin the local vibe?  That the 200 unit skyscraper downtown would charge market rates that offend our sensibilities?  (By the way, what a strange phrase - "market rate" - to describe the price of a new building that amounts to about 1/3 actual construction costs and 2/3 fees, kickbacks, taxes, etc.  Interesting how that phrase creates a sort of rhetorical lie that buildings sell for three times their cost because of the market.)

What exactly are we sacrificing for?  There isn't another choice here.  We either sacrifice or we urbanize.  If we deny ourselves the benefits of the natural technological pathway that lies before us, we give those gains up.  There isn't some nearly equivalent alternative.

And, let's not act as boiled frogs here.  There are a few cities where incomes are much higher than in the rest of the country.  This doesn't happen naturally.  There are significant patterns of migration away from those places.  Human beings don't behave this way without coercion - even if that coercion is unappreciated and hidden in a complex set of political restrictions.


  1. Great post.

    I would like the Supreme Court to rule that property zoning is unconstitutional.

    In any event, I think to be effective a ban on property zoning must be universal.

    Otherwise we get what we have now - - - each group pointing fingers at others and blaming them for housing shortages.

    1. An absolutist position on zoning is a political non-starter. Two minutes into the debate, someone will bring up the proverbial hog-rendering plant in the residential neighborhood. Now you're either debating the difference between good and bad zoning, or are dismissed as a crank. Either way it's no shortcut past messy politics.

  2. Great post.

    I would like the Supreme Court to rule that property zoning is unconstitutional.

    In any event, I think to be effective a ban on property zoning must be universal.

    Otherwise we get what we have now - - - each group pointing fingers at others and blaming them for housing shortages.

    1. I think one of the successes attributed to Japan regarding housing is that they moved decision making for zoning up to a higher level, at the regional level instead of the local level, which seems to have helped.

    2. In California there have been some recent signs of progress at the state level, however tentative. http://www.realclearmarkets.com/articles/2016/06/16/housing_reform_is_californias_most_pressing_challenge_102226.html

      I think there's a long road ahead to convince people that state action is going to help, though. Even those personally affected by high housing prices (like a commenter in the above article) bristle at the idea of weakening local control: if you're unwilling to pay the price of admission or don't like your city's zoning laws, "vote with your feet" and move elsewhere.

      What's strange is hearing things like that from people who claim to lean libertarian. Perhaps it's a knee-jerk distrust of centralizing political power--understandable when the issue is framed as moving decision making to a higher level, vs. loosening locally-imposed restrictions on individual rights. (The attack ad about Sacramento politicians green-lighting a high-rise in your neighborhood practically writes itself.) Or perhaps it's a failure to recognize that only a privileged segment of the population with a long resume and a nest egg can realistically vote with their feet--it's like telling everyone else they're free to go jump in a lake.

    3. Great comments, Ed.

      You would think that there would be a natural populist position against the suburban zoning issues, which tend to have a class component. Part of the problem is that the populist voices seem content to obstruct the core city projects with "luxury" units and there isn't a natural local constituency to counter that obstruction with an argument for more building. Even the developers aren't a constituency because they are loaded with fees, taxes, and costs, so that the value of their properties is dependent on perpetual dysfunction.

    4. Ed Swierk:

      I am even deeper into crank-land, when I espouse the decriminalization of push-cart and truck-vending. I might as well wear a "Lu-lu" tee-shirt. You are welcome to join me, btw.

      Here is another one:

      1. Okay, free trade is great.
      2. The US runs huge trade deficits.
      3. Offshore money acquires U.S. assets, notably housing, as capital flow balance trade deficits.
      4. But housing supply is artificially constricted.
      5. Housing prices rise out of sight (this actually is happening in Australian and Canada)
      6. So, to facilitate global free trade, all property zoning must be eliminated, so the supply of housing can answer foreign demand.

      Yes, no local zoning due to globalist imperatives! That's another attack ad that writes itself.

      It was only in 1926 that the Supreme Court upheld property zoning, and then by a split vote. Maybe it can change. I doubt it too.

      Here is another one: We are against rent controls, but for property zoning.

    5. You know, Ben. A version of your point number 6 really is at the core of this issue, and is something that I hope can be conveyed in a way that can be widely appreciated. In a way, the trade deficit is related to employment stagnation in the rust belt. And, you have it right. It is because capital flows here, ends up in the pocket of a Closed Access real estate owner, and then either gets spent on consumption by those lucky owners or gets reinvested into foreign operations of US firms.
      People tend to see this simply as a product of "jobs moving overseas", because you can sort of see that happen when a factory closes down. But, of course that is deceiving. In many places and times, dislocations happen without leaving behind stagnation. The reason it happens now is that the way to access income in our current regime is to buy a ticket to Closed Access. They think that corporations pocket the profits by moving production to lower wage economies, leaving the former workers with none. But, it's actually Closed Access real estate owners, firms, and high income workers who are pocketing those profits. The data is overwhelming on this matter. The trick is telling the story in a way that can be understood.

  3. Kevin: I think your book will be one of the most important of the era. How to tell the story? Sheesh even macroeconomists are not on board. I don't know.