Dispersal of Urban Networks is Bad

The debate over upzoning has reached Paul Krugman, who is a strong supporter of liberalization (and an opponent of rent control), on the grounds that rich cities like New York and San Francisco are hotbeds of productivity and people should be allowed to move to them in greater numbers. Per Krugman, zoning rules in rich cities force people out, so instead they live in environments where they are less productive and thus earn lower wages, such as the Southern US. Dietrich Vollrath, an economist studying economic growth, makes a different suggestion:

Of course, there is an equivalent solution – move everyone in San Francisco to Houston or Atlanta. The reason SF is the most productive city is not because of some fixed, inherent quality of the location at 37.78 degrees North, 122.41 degrees West. It’s certainly not because of it’s fantastic summer climate. San Fran is the most productive city because it so happened that a unique collection of nerds coalesced there starting in the 1960’s. More nerds were attracted to the bright, shiny things that the original nerds were making, and now I have an iPhone. But here’s the thing about nerds – they are easy to move. You can easily strap one to a dolly and wheel them anywhere you want.

This is the economic equivalent of proposals for population dispersal used in discussions of poverty: urban renewal tends to involve such dispersal, with negative effects on community life, social support networks, and crime. (See for example what I wrote of proposals on the Israel left to disperse black refugees away from South Tel Aviv; while I fingered just one political party, the others seem to believe the same today.) Of course, the people Dietrich characterizes as nerds are not oppressed and are not going to turn to crime because of lack of opportunity, but they will not be as productive in Houston as they are in San Francisco, for similar reasons.

The key to the Bay Area’s success in the tech sector is not that it has people who came from all over the world, who could equally congregate elsewhere. On the contrary, as per a Wired infographic, tech giants tend to hire locally: the top universities feeding Silicon Valley firms are in the Bay Area (including San Jose State, and not just Stanford and Berkeley), and the top university feeding Microsoft is the University of Washington. The Bay Area, and to a lesser extent Boston and Seattle, has a culture that propels people with interests in science and engineering toward programming. New York’s culture is different, and propels them to finance. In addition to different regional cultures, there are also university cultures: Harvard may be in Cambridge, but is far less important as a tech feeder than MIT, with fewer than half as many grads per capita going to Silicon Valley.

Dispersing people away from the Bay Area means dispersing them toward regions in which the business and social networks do not favor the same activities, and do not reward them as much. Houston has a core of nerds working for NASA, who may be interested in working for private tech firms that find themselves priced out of Boston and San Francisco. But those nerds are used to what is presumably a totally different business culture. If these private tech firms are started by local Houstonians, then they will have a business culture familiar to Houstonians, and alien to any San Franciscan they hire.

People in the software sector have specific ideas about how to do things, reinforced by what works in their industry; as a result, their ideas regarding public transit, a mature industry in which immense capital requirements and routinized tasks make the modern startup model inapplicable, are often painful and wrong, as I’ve ranted here, here, and here, and as Jarrett Walker has ranted here, here, here, and here. This also goes in the other direction – a corporate culture built around mature technology is unlikely to create innovative smartphone apps. If Uber were a Washington firm, it would be better at lobbying for regulations that would retroactively legalize it and give it favorable insurance requirements, but then it wouldn’t have invented a new way of hailing cabs in the first place. This is historically related to the growth of the Bay Area as a tech hub in the first place, as explained in Regional Advantage: Boston got there first, but its traditional corporate hierarchies couldn’t innovate at the same rate as the flatter networks of the Bay Area. One of the candidate US Sunbelt cities for poaching the tech cluster in Dietrich’s proposal, Dallas, is the home of Texas Instruments, where the integrated circuit was invented, but it is today a tertiary tech cluster because of this problem of corporate culture.

But all this assumes the tech cluster would even exist in whichever low-cost city it moved to. There is no real reason for it to do so. If high prices lead to an exodus of tech firms from the Bay Area, the community will dissipate rather than relocate. The richest members of it – Google, Apple, Facebook, the major venture capital firms – have the money to stay in the Bay Area, and to pay employees extra to cover rent in San Francisco. It’s the weaker members, typically startups, who are in danger of being priced out, and they are probably going to move to many different cities, depending on personal ties.

Once away from the Bay Area, they’d have to not only contend with a new urban culture, but also deal with it as a small minority. The same factors that cause unassimilated minorities to stay in their ethnic enclaves, even when discrimination is not a factor (ultra-Orthodox Jews own much of the housing in Brooklyn even outside their enclaves), favor clustering of industries. A hundred thousand Bay Area nerds could possibly remake parts of Houston in a way that’s favorable for their economic production; ten thousand could not. They’d have to rely on local venture capital firms, which are almost certainly looking for different business models. They’d have to recruit new workers from universities with student populations with different interests, expectations, and summer internships. In analogy with forced assimilation of ethnic whites in early- and mid-20th century America, they’d assimilate, to a nationwide economy with much lower per capita income than is normal in their sector.

The second assumption is that, if Houston became the next San Francisco, it would eventually accommodate a larger pool of tech workers. This is not necessarily true: Houston has a liberal process for permitting new construction, including of apartments, but only subject to onerous parking minimums and setbacks, which it doesn’t call zoning but which appear on the zoning codes of cities that do have zoning. It makes it easy to build new sprawl, but not so much new density, and eventually, the sprawl is going to lead to long commutes, producing the same rising prices in the deed-restricted and de facto zoned center that are seen in San Francisco and other coastal US cities. Fast-growing exurbs exist at the edge of metro areas everywhere in the US; the reason there’s not much growth in the expensive metro areas is that these exurbs are so far from the center that the commutes are too long for people to bother.

This is worse outside the US. The exact same problems of high costs coming from high rents exist in most other developed countries, only they don’t have fast-growing cities as large as Dallas, Atlanta, or Houston. Stockholm is rent-controlled and, judging by the almost complete absence of high-rises, tightly zoned; there are likely many people who’d move here if market-rate rents were in line with construction costs, but instead they have to live in Norrland, Malmö, and other peripheral areas. Houston’s metro area is not much smaller than the Bay Area’s, but in Europe, the cheaper cities are far smaller than their respective countries’ more expensive cities (often the capitals). The business networks formed in those cities would have to be smaller and less specialized. This is similar to the situation in the US involving New York’s great size, except that smaller Boston, San Francisco, and Washington achieve equivalent or higher incomes, so Houston should not be penalized for not being a hypercity.

The only problem is that Europe has no Houston. Its cheap larger cities, such as Naples and Berlin, have high unemployment and low incomes. Browse per capita income net of rent (see definitions here) by regions of European countries here, and per capita income by US metro area or county here. Houston and Dallas are both richer than the US average, and Atlanta is about 10% poorer. Berlin is 20% poorer than the German average, and 40% poorer than Munich’s region, Upper Bavaria, part of a general pattern of East-West inequality, driving a flight from the former East Germany to the West. In Italy, with its north-south divide, the southern regions, including Naples’ Campania, are about half as rich as Milan’s Lombardy, leading to a similar pattern of more immigration to the north. To tell people to move there and start their own social networks is, in American terms, like to tell people to move to Mississippi. In the smaller European countries we do not see such large income gaps, but we also do not see large metro areas with affordable housing.

Now, those rich capital cities (or non-capital ones, in the case of Milan) usually have rent control, which is how they achieve such high levels of per capita income even after subtracting rents. The people from the provinces who might have moved to them if they were cheaper do not benefit from this rent control, and have to either wait years for an apartment to open up or pay exorbitant rents. This reduces interregional mobility, and is a predictable side effect of a system in which housing is allocated to people based on how long they’ve lived in the city.

The idea of making do with tight zoning restrictions in some cities by bypassing them and developing alternative networks around the Houstons of the world is attractive, but fatally flawed. San Francisco – and Munich, and Stockholm, and Paris, and the major cities of Switzerland – is productive for reasons that go beyond individual denizens, who can be moved elsewhere freely. This, ironically, goes against the grain of San Francisco’s tech culture, which uses technology to overcome regulatory failures: NextBus and similar apps try to overcome byzantine bus schedules, Uber and Lyft try to avoid taxi medallion restrictions, AirBnB tries to overcome hotel regulations. The tech sector’s thinking is often that bad regulations should be subverted rather than reformed. It works in some cases and fails in others; in the case of zoning, it’s doomed to failure, on every level, from trying to shrink dwelling sizes to fit more people in, to recreating business clusters in cities with less awful zoning rules, as Dietrich proposes. Like Dietrich, I am pessimistic about the ability of the US and most European countries to reform their zoning rules to allow more intense urban development (or about Japan’s ability to allow more immigration), but on the other hand I also don’t think there’s any workaround avoiding a massive political fight about it.

30 comments

  1. Eric

    Better to expand the tech concentration in Austin than to try to build something entirely new in Houston.

  2. Ben Ross

    Great takedown of simplistic analyses of housing prices & migration as pure microeconomics. The simplistic nature of the analysis becomes even clearer if you use as your example of an industry supporting high house prices, DC’s lobbying industry instead of San Francisco’s tech industry.

    I’d like to propose a different model of why housing prices differ between cities. It’s based on the distinction between average and marginal costs. The usual discussion is about average costs. The marginal cost of a new house on the exurban fringe is about the same in all cities with healthy economies. (Maybe not Boston, but certainly SF, NY, DC have exurbs with cheap land.)

    The difference in house price between the city center and the fringe is proportional to how much more attractive it is to live in the center than at the fringe. Average housing prices in Houston, Dallas, and Jacksonville are low because prices downtown aren’t much higher than at the fringe. This demonstrates not that these cities are less productive than San Francisco and Boston, but that their downtowns are less attractive.

    This also explains why housing prices overall are so much higher in Europe than in the US. (Piketty has some good graphs of this.) Their downtowns are nicer.

    • Alon Levy

      I’m less certain about Washington, but in both New York and San Francisco, the cheap exurbs are far. If you start in Oakland and drive east until you qualify, you’re often going to have to hop Altamont Pass and live in Manteca, an hour and a half away from SF in traffic as of right now, at 7 am Pacific Time on a weekday. In New York, there’s fast population growth in Pike and Monroe Counties, located an hour and a half from the city as well, in 10 am traffic, but at least you can drive to Dover and connect to a train and skip the really heavy traffic. Houston is much smaller than New York, and much less geographically constrained than San Francisco, so its booming exurbs are nearer – Conroe is 45 minutes away, in 9 am traffic.

      The point about productivity comes from average nominal incomes, and not from housing prices. The Bay Area is the richest metro area in the US, in terms of both nominal and real incomes. In nominal terms, New York, Washington, and Boston are also very high (in real terms, Washington and Boston stay near the top, but New York drops a bit). It’s not really about desirability – in nominal terms Houston is about as rich as Philly, and is about as far below Boston as Boston is below New York and San Francisco. And the Peninsula suburbs, with their high incomes and insane housing prices, aren’t particularly nice, except on the sort of metrics that necessarily follow average incomes, like crime and schools. In general, you’d expect non-economic desirability to lead to lower incomes, because people would get extra unmeasured benefits from e.g. California’s climate and be willing to take lower pay to enjoy them.

      In Europe, you can see this with how expensive cities are. The central areas of the expensive cities are nice, and the portion of their housing market that’s unregulated is very expensive. But… is Frankfurt really nicer than Berlin? Are the suburbs where La Defense is located really nicer than the center of your average secondary French city? Is Switzerland really massively nicer than its surrounding countries?

      • Ben Ross

        Well, yes, the long-distance drive to the exurban fringe is certainly part of what makes living in the center more attractive.

        My point about productivity was in response to Krugman, not to you. I think your point is correct. Mostly, of course, just like mine. There are plenty of other things going on — you don’t need any fancy urban economics to figure out why houses in Detroit are cheap.

      • Oreg

        Yes, Switzerland really is massively nicer (and richer) than Italy, France, Austria and Germany. But indeed, most people will argue that Berlin is nicer than Frankfurt.

  3. Chris I

    He seems to completely ignore the truth that high-skilled workers get to choose where they live, and they do so based on the lifestyle they want. You can’t turn Houston into San Francisco, because Houston is an armpit. It’s a flat, sprawling, hot, humid, ugly environment with essentially zero outdoor activities. Oil is the only reason it exists.

    The tech startups are already starting to leave the bay area. Many have moved to Seattle and Portland to escape the high prices. But good luck trying to attract the top talent if you move your startup to Houston.

    • Alon Levy

      I think people are getting too hung up about the choice of Houston. Everything I said about Houston can equally be said of Portland, with the additional problem that Portland is small and tightly zoned.

      Now, Seattle is different. However, Seattle was never really a Bay Area overflow city, not for tech. Microsoft has been based there for 30 years, and far from attracting top Bay Area talent, it hires people locally.

      • EngineerScotty

        Depends on how tight is “tight”.

        Portland (and all Oregon cities) have effective land use regulations against runaway suburban sprawl. Sprawl exists, but on the Oregon side of the Columbia River, the urban footprint has a fairly hard edge (Clark County, WA is another matter). There is lots of apartment construction going on within the inner city–generally stuff with a FAR no more than 4, but dense enough to get the local NIMBYs knickers in a twist.

        Houston’s land use policies have the opposite effect–they discourage density and encourage sprawl.

        The “silicon forest” does attract quite a bit of non-native tech talent, neither Oregon State nor Portland State (the local two universities with engineering programs) seem able to supply enough workers to feed the local tech cluster. Portland’s biggest problem is a lack of financial muscle–other than Phil Knight, most of Portland’s tech firms are small or not-locally-owned.

        • EngineerScotty

          I got distracted–other than Phil Knight, Oregon doesn’t have any local high-power entrepreneurs who have stuck around.

      • Alon Levy

        Well, biotech is very different from software, and doesn’t cluster in Silicon Valley to begin with; it tends to follow medical schools.

        • Anzel

          True, I was mostly arguing against what appeared to be a comment of “there’s nothing in Houston but for oil” (which itself is getting a large share of technical and software work, at least among my friends who graduated from Rice).

          Though wouldn’t you get some software people who get involved with bioinformatics?

          • Alon Levy

            You would. And you’d also get engineers who work in the oil industry. The issue is that the corporate cultures of these industries are presumably very different from what works for Silicon Valley.

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  5. abeboparebop

    I have a decent grasp on the regulatory regimes, but I’m relatively uninformed when it comes to regulations elsewhere in the world.

    This post hints at it, but I wonder if you could point out some good English-language analysis on zoning / housing regulations / rent control in European countries/cities/towns? Obviously, “European” is a broad brush — I’m personally most interested in the Netherlands and Germany, but more broadly in productive/desirable places where the restrictions have the most effect on housing costs (major cities being the obvious case).

    My sense is that there aren’t many places in the world that combine broadly affordable housing with pro-urban development regulations (Houston and its paler imitators have the obvious sprawl problem). Japan seems like the best case.

    Sorry for the lazy request! Ignore if appropriate.

    • Alon Levy

      For a partial, Wikipedia-level survey:

      Vienna has universal rent control, affecting new buildings as well as preexisting ones; for a sympathetic article, see here.

      Paris doesn’t traditionally have rent controls, but is implementing them now. Instead, it has extensive tenant protections and regulations on eviction, so landlords are looking for guarantees that you could afford paying rent no matter what (link 1, link 2). Its zoning regulations are detailed and strict, with height limits that vary based on street width and essentially mandate mid-rise construction, in the 6-12 story range.

      In Stockholm I only know ground-level things, but there’s rent control, with multi-year waiting lists for most people. There’s also some housing dedicated to international visitors to the university, with a waiting list of 18 months; a coworker who’s been here long enough to qualify for it pays a bit more for a family-sized apartment than I’m paying for a small studio. I do not know the zoning regulations here, but the mixture of building sizes is too uniform, and the market-rate rents too high per unit area, for it to be legal to build any taller. There are few high-rises: look at skyline photos or at Google Earth, and compare with Vancouver, which has about the same metro area size (and which has very spiky development – downtown skyscrapers, clusters of high-rises near Expo Line stations, some mid-rise development near Broadway and 4th, and single-family detached elsewhere).

      I know a lot less about Germany and the Netherlands than I should, but Vienna has fairly high incomes (it’s about on a par with Holland), and Paris and Stockholm are in the EU’s top five richest cities, barely behind number-one Munich.

      • abeboparebop

        Thanks very much for the info!

        I found that Vienna article fascinating when it came out. Unfortunately it omits some of the most important numbers — typical rents for old-timers and typical rents for newcomers.

        And given the urban form differences you note, it’s interesting that Stockholm and Vancouver have similar problems with housing affordability. Perhaps it’s more useful to think in terms of the general political economy behind all of the specific urban regulatory regimes, which all tend to favor old-timers and screw newcomers. (This seems to be less true in the sprawl metropolises.)

        • abeboparebop

          Clarification: the article does say that rents in Vienna are much lower than in other major cities in Europe with comparable incomes, and that waiting lists for subsidized housing are ticking up but not incredibly long.

        • Alon Levy

          But Stockholm and Vancouver very much do not have similar problems with housing affordability. The entire notion that Vancouver has unaffordable housing comes from people who are buying, at the peak of a housing bubble. Rents in Vancouver are higher than in your average not very rich city, but are well below rents in California and the major Northeastern cities, and far below Stockholm rents. Without adjusting for PPP, I pay a little bit less here than I did in Vancouver, for de jure slightly more than half as much space and de facto somewhat less, in a worse building.

          Now, Vancouver has weak rent controls, and Stockholm very strong ones, so people who’ve lived here ten years don’t pay what I pay. The affordability issues are the exact opposites of each other. I imagine the homelessness issues are different as well, since Vancouver has a lot of homeless people, coming from its mild winters.

          • abeboparebop

            I hadn’t appreciated how bubbly Vancouver’s housing market is. I just did some Craigslist apartment touring and downtown Vancouver is shockingly cheap. (Currently in Berkeley…)

          • Alon Levy

            It took me a few months to realize this, but Downtown isn’t the expensive part of Vancouver. The expensive neighborhoods tend to be the single-family ones on the West Side, especially near the university. There’s somewhat of a social hierarchy at UBC based on proximity: the professors live the closest, the postdocs live in the urban parts between the university and Downtown, the grad students live in the same parts but probably a bit farther, and the undergrads live all over and commute an hour or more each way.

      • Nathanael Nerode

        Thanks for the link to the article about the Vienna system. I like it. The trouble here is that politically it would be called “socialist!!!” (well, it is, and was implemented by a socialist government) and all the privatize-profits, socialize-losses types would fight it tooth and nail.

        The US is one of the only countries in the world which has never elected a socialist government, and this has been very bad for the US.

    • Nathanael Nerode

      “Instead, it has extensive tenant protections and regulations on eviction, so landlords are looking for guarantees that you could afford paying rent no matter what”

      That’s what most of Europe had prior to the Industrial Revolution. England still has a certain amount of “vested” tenancy.

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    • Alon Levy

      Startups require very few people at the beginning, and those can come from a lot of places. You don’t need to live in an apartment to be individually productive; you only need to live in one if a) you’re working in or managing a large company with many employees who need to live nearby, and b) you want to keep both rents and commutes reasonable.

      If you look at open source platforms, which both start and continue very small as companies, people there live in all sorts of random places. Linus Torvalds lives in a Portland suburb. Authors are much the same: David Foster Wallace lived in Urbana-Champaign when he wrote Infinite Jest. The importance of Silicon Valley and similar secondary clusters to programming is that they’re where small companies migrate as they get bigger.

      • Nathanael Nerode

        The questions of why businesses of a particular industry cluster is a very old one, one of the earliest subjects in economics. Suffice it to say that IT HAPPENS. Back in Industrial Revolution England, each city was known for one product. Even in one city, you’ll find all the restaurants clustered in one place, all the shoe stores in another place, etc. There must be great advantages to this clustering, because it always happens.

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