Contributor Post Created with Sketch. Silicon Valley, New York City are Holding Us Back

 

NYCHA_Logo_480x480Big cities, we’re told, are engines of productivity. And that’s mostly true. Regions with capital and a high concentration of technological innovation — places like California’s Silicon Valley — employ people, drive economic growth, do all sorts of good stuff, right?

Well, not so much. And the reasons they’re lagging are interesting. Thanks to Greg Ferenstein, I found this study, from the University of Chicago, that says that it all comes down to… regulation. Land use regulation, at that. From the study:

We study how growth of cities determines the growth of nations. Using a spatial equilibrium model and data on 220 US metropolitan areas from 1964 to 2009, we first estimate the contribution of each U.S. city to national GDP growth. We show that the contribution of a city to aggregate growth can differ significantly from what one might naively infer from the growth of the city’s GDP. Despite some of the strongest rate of local growth, New York, San Francisco and San Jose were only responsible for a small fraction of U.S. growth in this period.

Okay, I don’t know what most of that means, except that last part: America’s economic growth — such that it is — hasn’t really been affected by the engines of Silicon Valley or New York, despite the crowing and strutting of the denizens therein. So which places have made a difference?

By contrast, almost half of aggregate US growth was driven by growth of cities in the South. We then provide a normative analysis of potential growth. We show that the dispersion of the conditional average nominal wage across US cities doubled, indicating that worker productivity is increasingly different across cities. We calculate that this increased wage dispersion lowered aggregate U.S. GDP by 13.5%.

I don’t understand most of that, either, except the first bit. Okay, then. Why? What’s the difference between those places?

Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco, and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%. We conclude that the aggregate gains in output and welfare from spatial reallocation of labor are likely to be substantial in the U.S., and that a major impediment to a more efficient spatial allocation of labor are housing supply constraints. These constraints limit the number of US workers who have access to the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers.

This I get! Rent control, housing regulations, aggressive and intrusive local building ordinances, crackpot “fair” housing schemes, all of these failed and failing progressive shibboleths are directly connected to economic growth, to employment, to jobs, to the “welfare of all US workers.”

It’s easy — well, for me — to get soft and sanguine about certain types of government regulation. I’m no fan of land use regulation and housing schemes, but it never occurred to me that they were as dangerous and detrimental and destructive as this study proves. If high-productivity areas like Silicon Valley are essentially neutered, prevented from powering the larger American economy, then isn’t that a national problem?

All the more reason we need the next chief executive to dismantle the regulatory state. But how do you penalize the regulatory states? Or does the market sort it out?

There are 12 comments.

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  1. A-Squared Coolidge

    Rob Long: I’m no fan of land use regulation and housing schemes, but it never occurred to me that they were as dangerous and detrimental and destructive as this study proves.

    Not understanding how damaging and destructive lefty ideas are is undoubtedly the single biggest problem facing our country and the world.

    • #1
    • September 1, 2015, at 6:54 AM PDT
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  2. Seawriter Contributor

    . . . how do you penalize the regulatory states? Or does the market sort it out?

    I think you answered your own question. Compare Houston to Los Angeles (or even New York City) or Texas to California. Rent control? Houston does not even have zoning. A few years back someone did a series comparing stetting up a business in Cleveland, OH and Houston, TX. Took months to get through the regulatory process in Cleveland. In Houston? One afternoon.

    Even with the oil bust Houston and Texas are still economically healthy. I am in the Houston area and lost my oil industry job in May. I picked up something in a different industry in July.

    Seawriter

    • #2
    • September 1, 2015, at 6:54 AM PDT
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  3. Autistic License Thatcher

    I believe that federal subsidies, as in so many other cases, disguise the failures of local governments as businesses. Cities that lose a lot of their productive population come in for greater federal programs, administered in ways so complex and confusing that the programs effectively produce too much noise to parse their impact on market decisions. A city has to be in a prostrated Detroit condition for small business exodus to be thrown into relief, and even then big government apologists will divorce city decisions from their consequences. Detroit has an income tax if you work there: what kind of business decision is that?

    This doesn’t even begin to reopen the topic of federal agencies using their funding and influence to puppeteer local decision making. In my youth, Massachusetts didn’t want to institute right-on-red laws; the feds threatened to reduce highway funding. In modern times, far more political decisions would be influenced by federal agencies unashamed to pull strings.

    So, were the local decisions really local?

    • #3
    • September 1, 2015, at 7:17 AM PDT
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  4. James Madison Member

    “Or does the market sort it out?”

    It can sort itself out locally unless it is regulated. Regulators hate consequences – the impact of their non-market supply constraints and price increases- so they re-regulate to deny the consequences and this adds more constraints driving up costs.

    Consumers seek alternatives, producers adjust, markets move, and the process starts over again.

    Dodd-Frank set about to reduce risk arising from too-big-to-fail. It suceeded in concentrating banking more. This required more regulation to effect the original purpose of Dodd-Frank. The Dodd-Frank law is elastic (many fill in the blanks to be determined by experts) because legislators understand that regulation is a self-breeding feedback loop. A bad idea needs more bad ideas to keep the Rube Goldberg system intact.

    In our “blue” town, we restrict development and concentrate it as part of urban planning, mass transit, etc. We are a small college town in a rural setting, but we are building high rise condos like we are Cleveland. Some don’t sell that well. But planning rules require large scale, expensive housing projects to break-even. The town pushes for more. To overcome the lack of low or more reasonably priced housing, the town taxes development to subsidize “affordable” housing. This results in clusters of low income housing, often poorly maintained being located in older sections of town with sound neighbors. The ghettos of tomorrow proximate to the high priced single-family housing in once stable neighborhoods. The developers love this because they want high end owners to flee their once safe neighborhoods and move into spiffy, condo high rises. Churn. Regulatory churn.

    Pluralism is important. But, the low, middle and high ends are not happy. And the high rises rise.

    • #4
    • September 1, 2015, at 8:15 AM PDT
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  5. MarciN Member

    Growth comes from small towns.

    Please, government, get out of the way. Let towns spring up all across the country. We would have a renaissance.

    The government owns way more land than it knows what to do with. Let it go.

    • #5
    • September 1, 2015, at 10:03 AM PDT
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  6. Ekosj Inactive

    Despite its conclusions about land use regulation, (which seem to be common sense) I wouldn’t get too jacked-up about this study. Mostly because the study appears to be horse-hockey.

    Without getting into the weeds, lets look at the study’s own ‘evidence’. Table 2 at the back of the study compares the actual empirical measurements with the estimates made by the study.

    In real life, NY, SF and San Jose contributed 19.3% of the total national growth in GDP that occurred between 1964 and 2009. The study estimated they accounted for only 6.1%. So they are a bit off.

    But the killer is the Rust Belt Cities. In real life, the decline of Rust Belt cities like Detriot REDUCED GDP during the period 1964 – 2009 by 28.5 %! But according to the study’s estimates, they really contributed 6.1% of the of the total national growth in GDP that occurred between 1964 and 2004.

    Thats right. This study estimates that Detriot and Cleveland, et al contributed as much to the growth of GDP as did NY and Silicon Valley.

    NY and Silicon Valley + 6.1%

    Rust Belt +6.1%

    Hey…it must be true…Some PhDs at Univ of Chicago said so.

    The actual real life numbers tell a dramatically different story: NY and Silicon Valley + 19.3%

    Rust Belt – 28.5%

    This is all laid out neatly in Table 2 of the study. So the authors know full well how off the mark they are. But, as long as the mathematics is elegant, they don’t care.

    Any study This far removed from reality cannot be trusted. If they conclude its dark out at night and brighter during the day … You’d better poke your head out the window and check!

    So while I like their conclusion about land use regulation, I’d prefer to go elsewhere for evidence to support it.

    • #6
    • September 1, 2015, at 2:26 PM PDT
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  7. Underwood Inactive

    Ekosj: Despite its conclusions about land use regulation, (which seem to be common sense) I wouldn’t get too jacked-up about this study. Mostly because the study appears to be horse-hockey.

    The study may well be nonsense, but for what it’s worth, the discrepancy between the “naive accounting” GDP and the model seems to be the whole point: they’re trying to measure growth in a way that accounts for “a significant increase in the spatial dispersion of wages between 1964 and 2009.”

    An increase in local labor demand caused by a TFP increase will have a large effect on aggregate output if the TFP increase generates an increase in local employment, but the same increase in local TFP in another city can have a much smaller aggregate effect if it largely results in higher nominal wages in the city and only a small increase in local employment.

    • #7
    • September 1, 2015, at 3:47 PM PDT
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  8. Ekosj Inactive

    As a graduate student many moons ago, a professor would have us read pre-publication economics papers and ask us :

    “Is this something deep, insightful, and important? Or is this just a faulty assumption or calculus mistake?”

    Lets see…

    Detroit had very high wages. The demise of Detroit takes those high wages off the table … Increasing the spatial dispersion of wages. And this is a good thing?

    What the heck does ‘Increasing the spatial dispersion of wages’ represent in real life? I imagine the argument is that skilled labor, forced out of a declining Rust Belt, formed the basis of the work force in the Southern cities that allowed them to grow. If those skilled workers were still earning good money in Detroit, those Southern cities wouldn’t have grown. So the authors give Detroit, in effect, an ‘assist.’

    It’s kind of the ‘broken windows’ theory of growth.

    • #8
    • September 1, 2015, at 5:48 PM PDT
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  9. Rob Long Founder
    Rob Long

    Ekosj:Despite its conclusions about land use regulation, (which seem to be common sense) I wouldn’t get too jacked-up about this study.Mostly because the study appears to be horse-hockey.

    Without getting into the weeds, lets look at the study’s own ‘evidence’.Table 2 at the back of the study compares the actual empirical measurements with the estimates made by the study.

    In real life, NY, SF and San Jose contributed 19.3% of the total national growth in GDP that occurred between 1964 and 2009.The study estimated they accounted for only 6.1%.So they are a bit off.

    But the killer is the Rust Belt Cities.In real life, the decline of Rust Belt cities like Detriot REDUCED GDP during the period 1964 – 2009 by 28.5 %!But according to the study’s estimates,they really contributed 6.1% of the of the total national growth in GDP that occurred between 1964 and 2004.

    Thats right.This study estimates that Detriot and Cleveland, et al contributed as much to the growth of GDP as did NY and Silicon Valley.

    NY and Silicon Valley + 6.1%

    Rust Belt+6.1%

    Hey…it must be true…Some PhDs at Univ of Chicago said so.

    The actual real life numbers tell a dramatically different story: NY and Silicon Valley + 19.3%

    Rust Belt– 28.5%

    This is all laid out neatly in Table 2 of the study. So the authors know full well how off the mark they are.But, as long as the mathematics is elegant, they don’t care.

    Any study This far removed from reality cannot be trusted.If they conclude its dark out at night and brighter during the day … You’d better poke your head out the window and check!

    So while I like their conclusion about land use regulation, I’d prefer to go elsewhere for evidence to support it.

    You see, this is why I only read the abstracts of these kinds of things and let the experts do the deep diving. I like to keep it superficial and light. But I like your conclusion: agree with the basic gist; look elsewhere for the evidence.

    • #9
    • September 1, 2015, at 6:50 PM PDT
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  10. Gazpacho Grande' Coolidge

    Don’t have time this morning to read through the study, but GDP includes government spending. Consumption + Investment + Govt Spending + Net Exports.

    It’s not the only way GDP is calculated, but the gov’t chunk of the spending should be a significant factor for some cities. Like a Detroit.

    • #10
    • September 2, 2015, at 3:29 AM PDT
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  11. Underwood Inactive

    Ekosj:As a graduate student many moons ago, a professor would have us read pre-publication economics papers and ask us :

    “Is this something deep, insightful, and important? Or is this just a faulty assumption or calculus mistake?”

    That is a sound maxim.

    I wasn’t being coy — I’m really not defending the study.

    It doesn’t even seem as though academic economists agree about what exactly TFP is supposed to measuring. But it’s novel, so it will be used.

    • #11
    • September 2, 2015, at 2:12 PM PDT
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  12. Underwood Inactive

    Rob Long:

    I like to keep it superficial and light.

    This just won’t do, Rob.

    The Membership looks forward to your explainer post on Total Factor Productivity. (By Friday, please, and be sure to have Claire check your math.)

    • #12
    • September 2, 2015, at 2:27 PM PDT
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