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Moving toward stagnation

Dec 20th 2011, 22:29 by R.A. | WASHINGTON

LET'S talk a little more about production of tradables and American stagnation (how's that for an attention-grabbing lede?). Recently, I mentioned that productivity in the tradable sector is important, because it essentially governs the real incomes an economy can pay. And I noted that over the past two decades, virtually all of America's net job creation has occurred in the non-tradable sector, which seems problematic. It's probably useful to dig into this a bit more.

Mobility within the American economy is quite high. The rate of migration has declined in recent decades, but it is still quite common for households to live in multiple cities around the country over the course of a career. Because there are high levels of mobility within America, economists assume that real wages adjust across the economy so that the marginal resident of a city is indifferent between staying or moving out. Imagine a marginal resident of New York, for instance, who earns a high wage but also pays a lot in rent. If his wage drops or his rent rises (or if rents or wages change elsewhere) so that his purchasing power is reduced relative to what he might earn in, say, Dallas, then we assume he'll probably move to Dallas. And if there's a big gap, then we'd assume that a migratory flow between the two cities would occur until the marginal resident is once again indifferent. This isn't a smooth, frictionless process in the real world, but it's probably not a bad approximation for how things work.

Now, in order for the marginal resident to be indifferent between high-wage San Jose and low-wage Phoenix, the cost of living must be very different in the two places. As it happens, lots of things on the coasts are more expensive than they are across the Sunbelt, but the most striking and important gap is in housing costs. The median value of an owner-occupied home in San Jose is about 3 times that in Phoenix and almost 5 times that in Houston. The reason for this is fairly straightforward. Wages are much higher in the former metro than in the latter two. Population in San Jose should therefore grow until costs there rise to eliminate the gap in real living standards. This could occur through a rise in congestion costs or through population growth substantial enough to bid down nominal wages. As it happens, rich coastal cities tend to tightly restrict growth in housing supply, which quickly translates high demand into high home prices. Housing costs act as a lid of sorts, adjusting so that existing home supply is occupied, with the marginal resident indifferent between staying and going. Again, in practice, this isn't a clean process. Last decade, home prices rocketed up along the coasts, and a stream of households flowed from the coasts to cheaper Sunbelt cities, all part of the mechanics of leveling out big real wage gaps.

While the marginal resident of Phoenix and San Jose is assumed to be indifferent between the two cities, however, there is still a real productivity gap. Housing costs across the Sunbelt have to be low to attract workers because wages are low, and wages are low because the productivity of the tradable sector in these cities is relatively low. That alone, however, shouldn't impact the country's ability to create jobs in the tradable sector. Productivity is lower in many Sunbelt cities, but so are wages.

Why, then, do we see very little net job creation in tradables, and lots in non-tradables? One possibility is that there are transfers across the economy which bid up wages in the non-tradable sector of growing cities. Consider this map:

(You can see the results of a similarly motivated analysis here.) What we see is that federal government spending results in large and persistent net transfers from some states to others. Moreover, very productive states like Massachusetts, New York, Washington, and California subsidise low productivity Sunbelt locales like Arizona and Florida. It's not too hard to imagine how this might work. Sunbelt states are attractive to lots of different people, but retirees are well represented among migrants to the south. Retirees receive a lot of federal money through Social Security, Medicare, and other programmes. This produces net transfers from productive states which help bid up wages in non-tradable sectors—like health services, which is among the nation's fastest growing employment categories—above the level that productivity in the tradable sector would normally permit. At that wage level, it's difficult for firms in the tradable sector of these fast growing cities to profitably employ people; wage rates are above that justified by productivity.

That dynamic alone may go a long way toward explaining America's labour market difficulties, but we can take the analysis a few steps further. There are a number of factors that make productive metropolitan areas an attractive location for firms, but economists increasingly emphasise the role of knowledge spillovers. A number of pieces of data point toward the growing importance of these spillovers. The relationship between large, skilled cities and high levels of productivity appears to be tightening. Research consistently finds an important spatial dimension to measures of idea dispersion. Wage figures also make the point; talented workers are enjoying bigger wage increases within large, skilled cities.

Changing technology seems to be driving these changes. New information and communication technologies are increasing the returns to ideas by expanding the markets over which they can be applied. Skilled cities, which help develop and disperse ideas, are therefore becoming more important. It is these ideas that are responsible for much of the value creation in the economy. And if we go back and look at the paper by Michael Spence and Sandile Hlatshwayo on net job creation, we see that while non-tradable sectors have been responsible for nearly all of the economy's employment growth since 1990, the tradable sector has generated the bulk of the economy's increase in value added. We can draw a line between idea creation, value added, and productive metropolitan areas, but this line does not continue on to employment growth.

Now if we focus in on the labour force in a place like Silicon Valley, we see that worker productivity is not uniformly dependent on these spillovers. Some individuals enjoy a slight bump in productivity when they locate to Silicon Valley. Others, however, will find that their productivity level—and their compensation—is hugely dependent on the existence of these spillovers. It seems probable that these relative dependencies on spillovers are related to skill levels and job types. An accountant with a specialisation in the tax difficulties confronted by online businesses is likely to benefit from locating in Silicon Valley, but might be nearly as productive in Phoenix. A computer systems engineer developing new business models based on the cloud may find his productivity and earning power significantly reduced if he is relocated to a metropolitan area with far fewer firms and workers operating at the technological frontier.

As costs rise in Silicon Valley, which type will move away first? It seems clear that the workers most involved in—and most dependent on—these productivity enhancing spillovers will be those for whom the real wage trade-off with cheaper cities is least attractive. Both kinds of workers face a similar drop in costs when they move, but the spillover-dependent worker faces a disproportionate decline in his nominal income.

What this means is that while population is flowing from high productivity to low productivity cities, this is not generating a proportional transfer in productivity. Migrating workers—even those who continue to work in a tradable sector—are those that were least involved in the process of idea creation in their old city, and they therefore contribute little to the development of a new spillover cluster in their new city. There is a relationship between population growth and productivity growth, but it is skill dependent, and the skills upon which it depends are very underrepresented in the migratory flows from the coasts to the Sunbelt. Migration to the Sunbelt is therefore failing to raise productivity in tradable sectors to a level sufficient to justify new hiring at prevailing wage rates.

The picture that emerges is one in which employment growth in high productivity, tradable industries is constrained at the rate of housing supply growth in skilled cities. And that rate is slow; for much of the past decade, Houston approved about ten times more new housing each year than San Jose. Value creation in high productivity cities continues, but a lot of that value is siphoned off through taxes and transfered to residents of low productivity cities, who use it to buy non-tradable services. That dynamic would seem to be the main mechanism through which America has been generating net job growth over the past two decades.

At least in this story, which might well be mistaken. Hopefully other analyses will shed more light on the picture.

Readers' comments

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heated

Your article on Moving towards stagnation, raises some interesting points. Grouping people into 2 classes those who are productive enhancing spillover dependant workers; and those who are unproductive pension/unhealthy government dependant people.
Are you trying to say politely private vs public employees.

People move for many reasons. Better employment prospects and/or better house prices and or better quality of life prospects.
Classifying this as problematic means that these highly innovative companies and jobs should be better dispersed.
States should not squabble about supporting one state over another.
We believe The United States is one country. Hence "United".
IF some states have resources other do not, be them tax created or not, fine, as long as the booty is shared amoungst all party states.
It is when the monies are filtered out of the country, the people of the U.S.A. should cry foul. Understand??

heated

Anjin-San

Most of today's great cities are next to a major River or a freshwater lake, or both. Even ancient cities of Thebes, Babylon, Mohenjo Daro, and 殷墟 are all located next to large rivers (the Nile, the Euphrates, the Indus, and the Yellow River respectively).

Also, agglomeration creates increase in density, which in turn makes different infrastructure solutions feasible. For example, trams are not viable for cities smaller than 200,000 people, and underground railways are not viable for cities smaller than 500,000. Such huge investments are viable on large cities because return on investment is also large. On an individual scale, one puts up with inconvenience of New York or London traffic because one won't find jobs with same pay elsewhere.

London is not the only city that invests billions on a city-centre railway project. JR East is at this moment building a new interconnection between Tokyo and Ueno stations, building new tracks on top of Tohoku Shinkansen tracks.

Der Perfesser

I commend this well written article. In recent times I have criticized some of the Economist's poorly written articles (obviously written by non-economists), especially those which seem to originate in the London office. (Do London staff have other attractions to the London manager than economic qualifications?)

Yes, this is the sort of article I would like to see a lot more in the Economist. Well analyzed, interesting, and soundly concluded.

Point for improvement? I fail to see the relevance of the discussion on inter-state tax transfers on the thesis of the article (though the chart was interesting), that tradeable productivity differences are the fundamental cause of interstate wage differences. Does the influence of the federal government policies have a significant effect on inter-state wage level differences? I would be interested if a case could be made for this (which the article did not attempt to make).

Also I would have liked to see more sources on interstate tradeable productivity differences and their effects on salaries. But overall a good article. Keep it up!

Nirvana-bound

Let's stop fooling ourselves anymore, Folks. The crux of the problem, facing America (& the West, for that matter), is the abysmally delusional, albeit hidebound & regressive education system, in force there. This combined with the inherent denial of realities, widespread decadence/indolence & cultivated hubris/ pride, are the primary causes of the nation's rapid decline & impending crash.

A large dose of humility & honesty is so wanting..

Heyer

I understand the Bassa-samuelson effect, that productivity growth in the tradable sector (automobiles), leads to wage growth in that sector, which forces firms in the non-tradable sector (hospitality) to similarly increase wages in order to prevent a flight of staff to the tradable sector. But one thing I struggle to understand is why there is such rapid growth in the non-tradable sector.

I was always under the impression that as technologically advanced, more and more sectors can become tradable, for example the recent developments with the of shoring of services (firms employing accountants, IT professionals, Doctors and lawyers in countries with lower wages to do the basic rudimentary repetitive tasks such as tax returns, basic computer coding, x ray examinations, and basic legal documents). So if anything I always thought that the importance of the non-tradable sector would be declining as technology advanced, and as the population in the developed nations also dropped (less people who need a haircut)

So how come, there is such large rapid growth in the non-tradable sector, from what I have read growth is primarily occurring in the education, public and health sectors. Understandably a little can be explained by an aging population, and the increasingly larger role the government is playing in the economy, but that is unlikely to explain bulk of the growth.

So if someone can help me understand, it would be much appreciated.

chernyshevsky in reply to Heyer

That is because many goods in produced in the healthcare field are in fact tradable. The most concrete example is, of course pharmaceutical products: US firm makes a drug then export it to other countries. But think a little deeper. How do doctors know what the drug does? Okay, by reading the label, you say. But now where did the informational content of that label come from? Was that knowledge comes entirely from tests on lab rats? No, of course. Every drug has to pass clinical trials. What are clinical trials? Patients being treated. Thus the value of a something classified as an tradable good, was actually created through supposedly non-tradable service.

Cretinist

Geographers have long noticed that rank size correlation of cities within nation states is pretty consistent. London's vastness is a serious exception to the general pattern and this is usually put down to it being the lead city of an empire rather than of a nation state.

I live in England's former capital which never lorded it over an empire. A sleepy backwater if ever there was one. A bit like Washington DC, really. ;-)

chernyshevsky

Wow, this post is incredibly bad. One eggnog too many? Let me start with a simple fact: old people exist in our society. Regardless of their distribution within our country, they exist, and their medical needs exist. Services to meet those needs must be provided one way or the other unless we choose to renege on promises made to the older generation. What is the optimal arrangement to generate these services then? Say we accept the premise that coastal cities have special qualities that enable people living in them to be more effective at producing tradable goods. Is it better to house grandma and her service providers in San Jose? Or is it better to house them in some exurb in Arizona? Well, duh!

FormerRepublican

Excellent article. Congratulations!
Canadian economists have pondered these issues for many decades. In Canada, the federal government disburses equalization payments from the 'have' provinces to the 'have not' provinces, basically Ontario and Alberta to the rest of the country. These payments are made to the provincial governments to allow them to offer a level of services roughly equal to the 'have' provinces. The purpose is to reduce, to some extent, the tendency to migrate to large metropolitan areas (Toronto, Vancouver, etc) which enjoy the rents of exploiting the resources of their hinterlands. For example, some of the largest nickel mines in the world are in Sudbury while the headquarters and high level staff are in Toronto.
If these equalization payments did not exist, economic models suggest that most everybody should move to the Toronto metropolitan area.

xPeru

Merry Xmas Free Exchange, just wanted to say thank you for all your blog posts this year. I may not agree with all your opinions, but I appreciate their quality. Best blog in the Economist

E. B. Hansen

I'd love to see a net Federal Tax map above broken down by county or metropolitan area. (I'd love to a map that also accounts for within State transfers via State taxes and spending).

Is the data available? My google-fu is weak and unable to find it.

willstewart

A fascinating insight!

Now how does this apply to the current Eurozone crisis, in which the relatively high-productivity, tradable-goods Germans are refusing to subsidise the less productive Greeks & Italians?

Does not seem to work much better...

Neildsmith

I lived in Florida back in the 90's and worked as an Engineer. The salary was less than I expected and when pressed on the issue my prospective employer said, "You get paid in sunshine."

Stephen Morris

Here we go again.

The factors Ryan cites as contributing to hypothesised metropolitan productivity are also factors which might just as easily contribute to metropolitan rent-seeking:

economists increasingly emphasise the role of knowledge spillovers [including social knowledge, such as membership of social networks vital for rent seeking]. A number of pieces of data point toward the growing importance of these spillovers. The relationship between large, skilled cities and high levels of productivity [or rent seeking] appears to be tightening. Research consistently finds an important spatial dimension to measures of idea dispersion [or lobbying, or other forms of rent seeking]. Wage figures also make the point; talented [articulate lobbyists perhaps??] workers are enjoying bigger wage increases within large, skilled [or rent-seeking] cities.

Again we ask the question:

What is the evidence that cities are more efficient ways of organising economic activity? Specifically, how do we know that the existence of cities arises from superior efficiency in organising economic activity, and not merely from superior efficiency in organising rent-seeking?

The argument in favour of metropolitan productivity boils down to the following:

a) there is clear evidence that agglomeration efficiencies exist;

b) cities are agglomerations;

c) therefore cities exist at their current sizes because of agglomeration efficiencies.

But inefficient cities may persist or cities might grow to inefficient sizes, and purely competitive firms within those cities may still export if:

a) the city as a unit has some rent-seeking power which requires successful firms to remain in the city in order to access those rents; and

b) the purely competitive firms experience "pecuniary diseconomies" which drive up their costs, and consequently the prices they charge to the outside world.

The appropriate analogy is of a franchisor who owns some rent-generating right (for example a patent) and licences that right to franchisees. The franchisees might be in pure competition with one another and might continue to “export” to the outside world, but none can leave the franchise system because they would lose access to the source of the rents. They experience pecuniary diseconomies in the form of their licence fees, and this is passed on to their customers.

In the case of cities, the franchisor is the city. The source of rents is a combination of incumbency and political rents. (Rents in this case are defined in abstract terms as sustained benefits arising from a meta-stable distribution of rights.) The franchisees are firms operating within the city. In the case of political rents, they must stick close to their politician mates to ensure that regulatory regimes and the tax system and government contracts and other government action operates in their favour. The pecuniary diseconomy comes in the form of higher wages paid to the members of the rent-seeking metropolis.

Questions which the agglomeration efficiency school might like to consider are:

1. Why do robust federations appear to have a more distributed population than unitary states? Why does the United Kingdom not have a post-industrial city rivalling London (as Melbourne rivals Sydney). Why do cities like Cheyenne or Las Vegas exist at all?

2. Why do countries and states with a strong Executive (as in the Westminster system) appear to have more concentrated populations than those with stronger Legislatures (as in the US)? Why does (from memory) 65% of the population of Australia live in the eight principal cities, and (from memory) 45% of the population of Canada live in either the federal capital or the capital or principal city of each province or territory? This is especially odd when industries which enjoy a comparative advantage lie in the regions.

3. Why is it that in those countries and states with a strong Executive, the population tends to live in the actual or de facto centre of Executive government (as in Australia)? Is this just a coincidence of cosmic proportions?

4. Why else do countries with corrupt governments see a drift of population to hellish metropolises, even when the industries which enjoy a comparative advantage lie in the regions?

AnterraCon in reply to Stephen Morris

re; 1,2,3 you might want to look at climate/geography/history for those answers. But:

One striking thing about the US is how it straddles the temperate latitudes essentially talking up the best and most fertile part of 3rd largest continent. It is no accident that California can supports more people than either australia or canada. Admittedly there are parts of the desert or mountain west of the US which are inhospitable but they pale in comparison to the huge fractions of both. Canada and Australia which are essentially incapable of supporting large populations without prodigious cost. It is perfectly reasonable to supply a large city from the resources of say Virginia or Missouri. It would be less easy to stick a St Louis size city bye Uluru or in Newfoundland (there is reason why they call it "the rock", and Labrador "the land god gave Cain").

Both countries only have relatively small areas of land which can be developed to support cities. Canada does have the great plains, yet only in Alberta (where they are at their greatest extent) is there anything like an American settlement pattern, and only in the southern half of the province due to climate. Indeed outside of resource extraction towns like fort mcmurray, Sudbury, Broken Hill, Val D'or population is pretty damn thin on the ground.

However, we do live in an age miracles. Alice springs like las Vegas is a silly idea but thanks to mitgating factors like Uluru and Adult Disneylands, we can will them into existence against every single thread of reason, and build our dreams in the desert. However, the proverbial richness of the great valley or the delta region of mississippi allows the us to place just about any size city anywhere(though that may change soon).

Finally there is the space. You mention London not having a rival in the UK, have you seen how big the UK is ?Would you ask why there is no city the size of New York city other than NYC in the state of New York? Moreover since London has a roman pedigree and new York goes back to the Dutch, why wouldn't they dominate?

Meh. It's late and the IPad is lousy tool for blog posting (hates multiple windows open).

But go back - ad fonts cities exist where they can and The US has more potential city space and city supporting resources than anyone else. Hence they have a more dispersed pattern. Politics has nothing to do with it.

Stephen Morris in reply to AnterraCon

It may be observed that commenter AlterraCon has magnificently failed to answer the question:

What is the evidence that cities are more efficient ways of organising economic activity? Specifically, how do we know that the existence of cities arises from superior efficiency in organising economic activity, and not merely from superior efficiency in organising rent-seeking?

Specifically, AlterraCon:

a) failed to address 3. above at all;

b) mentioned but failed to give a reasoned non-political explanation for the existence of Las Vagas (or Cheyenne);

c) failed to address other examples of capital-dominance (such as, for example, Paris) in more geographically extensive countries;

d) failed to address the persistence of cities such as Sydney which survived with little or no obvious comparative advantage (being cut off from a hinterland by mountain ranges that made early transport extraordinarily difficult, compared with say Newcastle); and

e) (most remarkably of all!) actually acknowledged the incumbency advantage referred to earlier as an determinant of city persistence: Moreover since London has a roman pedigree and new York goes back to the Dutch, why wouldn't they dominate? Why do centres lacking political power not demonstrate such longevity? The rise of some cities (say, Birmingham) in the British industrial revolution came at the expense of earlier centres of importance (say, Boston or even Bristol) but the power centre of London carried on. The same argument could be made for Paris.

Stephen Morris in reply to AnterraCon

Finally there is the space. You mention London not having a rival in the UK, have you seen how big the UK is ?Would you ask why there is no city the size of New York city other than NYC in the state of New York? Moreover since London has a roman pedigree and new York goes back to the Dutch, why wouldn't they dominate?

This is a description of a natural monopoly, there being (according to AlterraCon's hypothesis) room for only one city. If we accept AlterraCon's hypothesis then what is the evidence that the city's income comes from superior productive efficiency rather than monopoly rents from its (assumed) natural monopoly position??

TCDPhilSec in reply to Stephen Morris

"Why do countries and states with a strong Executive (as in the Westminster system) appear to have more concentrated populations than those with stronger Legislatures (as in the US)? Why does (from memory) 65% of the population of Australia live in the eight principal cities, and (from memory) 45% of the population of Canada live in either the federal capital or the capital or principal city of each province or territory? This is especially odd when industries which enjoy a comparative advantage lie in the regions."

Because Canada and Australia are smaller countries than America, with less hospitable climates, different historical patterns of settlement and fewer big cities as a consequence. The USA, on the other hand, is the third-biggest country in the world, with lots of cities to choose from.

This is a weak, weak cherry-pickin' argument.

China has a strong executive branch, right? India has the Westminster system, right? What do their population distributions look like?

Anjin-San in reply to Stephen Morris

@Stephen Morris
Apologies for barging in to an ongoing debate.
"What is the evidence that cities are more efficient ways of organising economic activity? "

Supporting infrastructure for one city of 1 million costs less than ten separate cities of 100,000, unless the ten cities in question are close enough to share the said infrastructure, as done in regions such as the Ruhr, the Midlands, and the Silicon Valley.

"b) mentioned but failed to give a reasoned non-political explanation for the existence of Las Vagas (or Cheyenne);"
That's a simple for Las Vegas; Hoover Dam.

Ultimately, the maximum population of a city is determined by the availability of land and water. For a megalopolis to prosper, available land needs to be constrained (otherwise dispersion becomes more advantageous beyond certain point), while available water needs to be unconstrained. Greater Tokyo provides a unique combination of both, with huge supply of fresh water and just enough coastal plain (30,000 sq.km) to turn the original group of cities into a single megalopolis.

Stephen Morris in reply to TCDPhilSec

The comparison of Canada and Australia with the United States is admittedly not intended to be a robust empirical proof of anything. But Australia and Canada are nevertheless subjectively good comparators against the United States because:

a) they have experienced similar economic development over a similar time frame (ethnic cleansing followed by massive European immigration, an initial agricultural economy, then industrial and post-industrial development); and

b) like the United States they are robust federations (although Australian federalism has suffered a long term decline).

More importantly - tying this back to the original argument - it may be seen that TCDPhilSec is (perhaps unintentionally) acknowledging the natural monopoly status of certain cities.

TCDPhilSec (like AlterraCon earlier) states that:

Canada and Australia are smaller countries than America, with less hospitable climates, different historical patterns of settlement and fewer big cities as a consequence.

Let’s consider the implications of that argument. A smaller national population could – in principle - support the same number of towns and cities, each with a proportionately smaller population. But the model suggested by TCDPhilSec is that a minimum city size is required and that a smaller population will support “fewer big cities as a consequence”.

As noted in an earlier comment, that is a description of natural monopoly. It is analogous to a naturally evolving electricity industry (i.e. with no regulatory intervention) supporting only one transmission firm.

In the case of a monopoly electricity utility we would ask the question: “To what extent are its profits simply a reflection of incumbency rents?” The analogous question arises when considering cities (as discussed here).

Moreover, the other aspects of the relationship are not addressed:

a) why is population in these examples concentrated in cities of any kind when the industries which enjoy a comparative advantage are located in the regions? and

b) why is it that under Westminster systems – with a dominant Executive - the dominating city is the legal or de facto (usually legal) centre of Executive government. We see the same in Britain, but not, for example, in California.

A coincidence?

If one lives and works under Westminster government, the answer is “No.” Anyone experienced in such government will know the vital importance of proximity to the process of political rent-seeking.

It is - as commenter jouris dubbed it above - an example of "water cooler conversations." Jouris used this term to describe “casually bouncing ideas off others”. But those ideas need not be ideas concerning productive efficiency. They can just as easily be (and I speak here from experience in public-private partnerships) ideas on how get the Executive and the senior Civil Service to push through schemes that will transfer rents from the public to the Mates!

At a more intense level it is the phenomenon of “lunching distance”. Members of Cabinet don’t go out on a limb to do favours for people they’ve spoken to over the phone. They go out on a limb to do favours for people they know well, with whom they have regular social contact, and who can (informally) assure them of lucrative employment when they eventually leave politics.

So, we come back to the original issue. There are (at least) two models of city formation and persistence:

a) one which identifies agglomeration efficiencies as a cause; and

b) one which identifies rent-seeking as a cause.

Plausibly cities grow and survive as a combination of the two. But in every article Ryan Avent tells us that cities are caused by agglomeration efficiencies.

So to every article I reply:

What is the evidence that cities are more efficient ways of organising economic activity? Specifically, how do we know that the existence of cities arises from superior efficiency in organising economic activity, and not merely from superior efficiency in organising rent-seeking?

Stephen Morris in reply to Anjin-San

In response to Anjin-San’s arguments:

1. “Supporting infrastructure for one city of 1 million costs less than ten separate cities of 100,000, unless the ten cities in question are close enough to share the said infrastructure, as done in regions such as the Ruhr, the Midlands, and the Silicon Valley.”

This is an example of the fallacy described earlier:

a) there is clear evidence that agglomeration efficiencies exist (e.g. shared infrastructure);

b) cities are agglomerations;

c) therefore cities exist at their current sizes because of agglomeration efficiencies.

No-one (certainly not me) is denying that agglomeration efficiencies exist and that they will support agglomeration to some extent. But Ryan’s (and Glaeser’s) argument is: “Cities exist because of their efficiency. All hail the city!”

The problem is that one could make precisely the opposite argument. There are also diseconomies of cities (such as traffic congestion). Using the same logic, one could argue that cities should never exist.

2. “Hoover Dam”. Again this is (perhaps unintentionally) an example of cities as political creations. Hoover Dam didn’t spring up of its own accord. It was a massively expensive project sponsored by the government!

Politicians will certainly respond to political forces, and if those political forces are metropolitan rent-seeking then cities will persist irrespective of their efficiency.

For an illuminating example of government infrastructure planning perpetuating an existing city, see the discussion of Crossrail vs The Varsity Line (here).

Anjin-San in reply to Stephen Morris

@Stephen Morris
"For an illuminating example of government infrastructure planning perpetuating an existing city, see the discussion of Crossrail vs The Varsity Line (here)."
Crossrail costs $15bn, and is expected to carry how many people per year?
How much does Varsity Line cost, and how many people are expected to use them?
Railway is fundamentally a high-density transport, and I sincerely doubt Oxford-Cambridge traffic density could support a dedicated railway line between them.

Regarding political rent-seeking, it could work the other way around too, where political pork would be used to redistribute urban wealth to the rural backwaters. By the quirks of its electoral system, Japanese politics works on this model, because the ROI of political pork is much greater in rural constituencies than urban ones.
So, while most of the political machinations do take place in Tokyo, the fruits of the rent actually got invested far away from it. This model was first developed by Kakuei Tanaka back in 1960s, and has been the modus operandi of Japanese politics ever since.
The irony of this process is that most of the investment took form of motorways and Shinkansen, which provided the means by which the younger generation fled the said rural areas to Tokyo. This led to increasingly ageing and sparse population of the rural constituencies, which improved the ROI of political pork even further...
So, Tokyo grew DESPITE political redistribution of wealth away from it, and not the opposite.

Omricon

A good analysis and a good argument for a federal override of state based housing expansion restrictions on skill cities. More houses equals more jobs.

On the downside, home ownership discourages moving, particularly if you need to move away from an area where unemployment is on the rise and your job isnt needed there anymore (your house will devalue), to where you can get a job and employment is good. You are selling a house with a value going down and trying to buy one with a value going up.

Economically renting really needs to be heavily encouraged in a place like the US to allow quicker, more efficient state to state migration.

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