The Triumph of the City

My review of Ed Glaeser's excellent Triumph of the City is in today's Christchurch Press, but not online. Here it is.

Fixing the City

Anybody wanting to throw the book at Christchurch Council should consider the hardback edition of Professor Edward Glaeser's "Triumph of the City". It has two distinct advantages. First, at a bit over 300 pages, it'll be hefty enough to make for a satisfying throwing experience - neither too heavy to lob, nor so light as to be brushed off. Second, Christchurch's city planners really ought to read it; throwing this particular book at them might improve outcomes.

For the last fifteen years, Professor Glaeser has been figuring out what makes cities work. The Triumph of the City is more than just the culmination of that work; it's a passionate defence of the city as the best mechanism for human flourishing. When we live together in well-functioning cities, we are more productive, healthier, and, perhaps surprisingly, more environmentally friendly.

Cities are our engines of creativity and innovation. Chance interactions among smart, productive people in complementary lines of work that can happen in dense urban environments occasionally create "miracles of human creativity." And, as cities get larger, the process accelerates.

Bigger cities make it easier for entrepreneurs to strike it out on their own; failing in a bigger city gives you more opportunities to transition back to the salaried workforce, so innovators can be more comfortable in taking risks. Bigger cities also make it easier to find new niches in the intersections of different industries. Businesses are willing to locate in big cities, where costs are higher, precisely because cities facilitate productivity.

Glaeser also forces us to take a broader perspective when thinking about local "green city" regulations. Cities are already very green - and especially so where Councils have placed fewer constraints on building up. He points to smart growth regulations in California that have done a great job of preserving local green spaces and increasing property prices, but have helped push people away from California and towards Las Vegas, where the sweltering environment means more electricity use and where more people live in automobile-intensive suburbs. As Glaeser puts it, "we must recognize that if we try to make one neighbourhood greener by stopping new building, we can easily make the world browner, by pushing new development to someplace far less environmentally friendly."

Where cities have myriad paths to success, city failure usually involves bad planning. Sometimes, bad policy comes when Councils grasp at straws in the face of events outside of their control, like Detroit's push for grand infrastructure projects as response to auto industry deline; their white elephant monorail only drained city resources as it rolled above empty streets. But failure can come too for growing cities when regulatory measures slowly strangle entrepreneurial activity and make it too expensive for families to choose to live there. When something bad happens, these cities are not well placed to adjust.

We can take a few lessons for Christchurch, and for New Zealand, from Glaeser's work. If Council continues making it too hard for developers either to build up or to build out, section prices will remain too high and we will continue giving our graduates strong reason to seek higher salaries abroad. For all of Council's protestations against urban sprawl, it has released surprisingly little land for dense development within the city. We were more than a little surprised when we moved here eight years ago that we could not rent an apartment by the beach at New Brighton; zoning had made it illegal to build them. Council's having strangled land supply before the earthquake made it impossible for developers to respond after the earthquake. Building fancy stadiums or light rail systems will be far less important for recovery than fixing infrastructure and getting land use policy right. Other cities would do well to fix their policies before their earthquakes come to visit.

More broadly, while early pundits reckoned that the internet would bring the death of distance, the evidence now suggests that information technology is increasing distance's relative cost: it's making New York better faster than it's helping Auckland. Cities have long exhibited what economists call "agglomeration effects" - the city is greater than the sum of its separate parts were those parts scattered across the country; fast broadband seems to be accentuating these agglomeration effects. We are more likely to phone and email people who live and work near us; US patent data shows innovators are more likely to draw on other patented work that happened to be created near them. While we can all email potential colleagues in New York, we're not likely to find serendipitous meetings with them on FourSquare. If we want our cities to be more than support centres for the dairy industry in the longer term, we need to let them grow.

Leaving the farm

Bill Kaye-Blake says there's not much that can be done about long-term trends towards rural depopulation. And he puts rural New Zealand especially on the wrong side of broader trends:

Technology isn’t going to be the saviour of rural New Zealand. We’ve been hearing for years that new communications technologies (will) allow us all to work from home, the cafe, and the beach. We do that to some extent. A few people do build business empires on the back of broadband. But we also spend lots of time in our offices, seeing and talking with our co-workers. One of the interesting economic geography arguments I’ve seen is that technology is making face-time more valuable. As a result, work that requires us to spend time with each other is becoming more highly paid, and work that can be made routine and parceled out in bits and bytes is becoming less valuable. New Zealand is on the wrong side of that trend, and rural areas even more so.

Let's take the agglomeration economic geography arguments as starting point. Tech is more a complement to big cities than they are a substitute for face to face interactions. Who gets the strongest benefit from this in a world that's mostly free-trading? Big global cities, not Auckland. Our small size makes us, over time, less competitive in sectors that compete with international big-city industries; our comparative advantage then pushes farther towards agricultural production.

This is already happening too: it's not crazy to see the "Dutch Disease" stuff as just being international markets telling us to put resources into the sector where we have a comparative advantage (dairy, ag production), abandon the ones where we don't, and build non-traded services around the sector where we have the comparative advantage. Our cities would then wind up doing more to provide domestic support services for the ag sector than building innovative non-agricultural products for international markets. And then it's a bit of a race between productivity increases in domestic agriculture pushing down needed labour and relative prices pushing towards intensified agricultural production yielding migration flows to the countryside.

Best counterargument: Peter Thiel is investing heavily in the NZ tech sector, seeing here perhaps a comparative advantage in sane regulatory approaches (albeit one that's eroding).

I still favour strongly increased immigration coupled with fixing urban land use policy to make our cities more internationally competitive. And who knows - maybe some of those migrants would then decide they'd prefer to live out in the countryside. It is ridiculously beautiful out there.

Grow for it!

New Zealand, population 15 million. That's the target for 2060 in a new NZIER working paper making the case for substantial New Zealand population growth.

A population target of 15 million by 2060 (2.5 times that now projected) is not only “feasible”, it is also likely to be sufficient to achieve the benefits from scale. It would allow four main cities with a population of three million or more each. This would foster competition within New Zealand to create conditions amenable to building local firms that can foot it internationally. It would bring New Zealand’s population into close proximity of the Netherlands (but still nowhere near the population density of that country).

There's an awfully good case to be made for growth. Ed Glaeser's recent book makes a compelling argument that ICT is far more a complement to than a substitute for density - it makes everything better, but it makes New York better faster than it improves New Zealand. Australia will continue to benefit from agglomeration effects; stagnation relative to Oz fuels out-migration and worsening outcomes. Bill Kaye-Blake says we're doing fine given our distance - and he's right.

This changes the tone of the policy recommendations. It isn’t about claiming that the institutions (the tax system, the science system, the education system) are messed up and need to be fixed. Instead, it is about recognising that we’re pushing this economy uphill and asking what tools might help.

I think increased immigration should be on the policy agenda as a tool that can help in that context.

New Zealand is shifting immigration priorities to de-emphasize the family route and pull in migrants from higher up the income ladder. TVHE reminds us of the harm we do to poor foreigners abroad by such moves; we also do harm to ourselves to the extent that lower skilled workers are complements to high skilled labour - I'd certainly appreciate lower-cost domestic help.

The best counterargument is that there are potential external costs from lower-skilled immigration if we expect that income correlates with intelligence, intelligence is heritable, and intelligence matters for the long-term quality of policy in a democratic system and for overall productivity. Here's Garett Jones on how IQ matters.

So it's not crazy on the face of it to try to encourage high skilled immigration to New Zealand if we care about outcomes here rather than overall global welfare (I care about the latter, but that's me). But I would note that income will be a poorer proxy for IQ or skill differences if we're looking at individuals in a pooled international cross-section than within countries. Moreover, there's no real "lump of migrants" beyond which we can't accept more people. Why not make it easier for high income, high skilled people to move here while keeping the current family immigration route?

Potential policy moves that encourage immigration, and especially higher-skilled immigration? First on my list would be immediate permanent residence for any foreign student completing a Bachelor's degree at one of the New Zealand universities. This will not only boost foreign student enrolments (helping to cross-subsidize domestic students) but also provide a nice selection mechanism for those who are most likely to really make a contribution. We could also draw in high skilled American migrants by not losing our comparative advantage in civil liberties and sane copyright legislation.

Complementary to increased immigration would be fixing local land use policy that forces up housing prices, but that's also well worth doing for its own sake.

Welcoming our Googly overlords

Folks in New Zealand have been beating up on Google a bit lately. And it makes me sad. Google gives so very very much and asks so little. Can't we just enjoy our surplus and stop the whinging?

First, there was the Google Street View cars that sniffed out wireless modems as it went. Know what? Anybody can do that. They've been able to do that since wireless routers first came around. If you don't have minimal wireless security on your router, which you ought to have given how terribly low the Kiwi data caps are (I'm on a 20GB traffic plan, and that's pretty high as far as NZ goes), then you're basically inviting anybody walking by with a decent cell phone to listen in on all of your internet traffic and maybe to start downloading movies on your bandwidth. You might want to fix that instead of whining about Google.

Second, the tax thing. Bernard Hickey in particular has been rabid on this one. Google earns advertising revenue in New Zealand but pays little tax here. A quotable Hickey quote:

Google is a tapeworm in the Internet that is destroying local media and widening our trade deficit.

He later suggested that Google's underpayment of tax relative to its NZ advertising revenues could drive future generations offshore. I confess confusion here: it sounds like "Step 1: Punish Google. Step 2: ???? Step 3: Your kids don't migrate overseas to higher paying jobs."

New Zealand's biggest problem isn't a Google-related tax shortfall: it's fixed costs and the absence of agglomeration effects. Even if we set tax and every other policy perfectly, I'd call even odds that we'd still be falling behind other countries because we're tiny and separated from even our closest neighbour by a 3 hour flight. Our biggest city has about a million people. If agglomeration matters as much as we're starting to think it matters, then our best policy move may well be a large and sustained increase in immigration. Given that current policy kicks people out of the country whenever there's a recession, it seems unlikely that we'll get any substantial increase in immigration in the medium term.

Fixed costs kill us. And guess what? Google works to kill fixed costs. Kiwis can share their videos with the world, for free, on Google's YouTube, can blog for free on Google's Blogger platform, can chat with the world on Google Voice (ok, this one's mostly inframarginal given Skype). I'm running some collaborative projects using Google Docs. I find New Zealand suppliers of goods and services using Google. How many international tourists come here because Google has made it so much simpler to plan an international vacation? Before, you'd have had to have gone to a travel agent. Now, a combination of Google Maps and Google searches lets you do it yourself at lower cost and greater confidence in the quality of your results. Google brings New Zealand closer to the rest of the world. And folks want to complain about that they're paying less in tax than they could be? We ought to be giving Google a medal for giving us all so many free services. Would any reasonable estimate of the aggregate consumer surplus created by Google in New Zealand come up with a figure less than hundreds of dollars per capita?

If anything's going to be driving future New Zealanders overseas, it's the opportunity to benefit from the reduction of fixed costs in larger markets. And I think Google's working to lessen that, although the general equilibrium results could be tough to parse out: while it's making New Zealand better, it's also making New York better. If it's making New York better faster than it's making New Zealand better, then the net effect works against us. But that certainly doesn't make the case for policies punishing Google for being active in New Zealand.

I, for one, continue to welcome our Google overlords. And I thank them for hosting this blog, without charge and without advertising, for the last year and a half.

Agglomeration revisited

Ed Glaeser, earlier noted here, has more on agglomeration effects and growth. Glaesar recently edited a volume on agglomeration economics which I've yet to pick up; fortunately, he's now blogging some of it for the New York Times.

Contra the usual story, the internet isn't a substitute for physical location, it's a complement.

If cities serve, as I believe, primarily, to connect people and enable them to learn from one another, than an increasingly information-intensive economy will only make urban density more valuable.
...
Other essays in the volume focus on the changing nature of agglomeration economies. Jed Kolko writes about services, which now dominate most United States urban areas.

Mr. Kolko highlights a fundamental difference between manufacturing and services. For manufacturing firms it doesn’t much matter if suppliers or customers are in the same ZIP code or the same state. Goods are cheap to move. But services seem tied to suppliers and customers that are in the same ZIP code. Since face-to-face contact is so much a part of service provision, they are drawn to the extreme densities of cities.

In the penultimate essay in the book, Giacomo Ponzetto and I ask, “Did the Death of Distance Hurt Detroit and Help New York?”

Improvements in transportation and communication costs made it cost-effective to manufacture in low-cost areas, which led to the decline of older industrial cities like Detroit. But those same changes also increased the returns to innovation, and the free flow of ideas in cities make them natural hubs of innovation. Since the death of distance increased the scope for new innovation, idea-intensive innovating cities were helped by the same forces that hurt goods-producing cities.

Humanity is a social species and our greatest gift is our ability to learn from one another. Cities thrive by enabling that learning, and they have become only more important as knowledge has become more valuable. Understanding what makes cities work is more important than ever.

If this is right, then New Zealand is set for long term decline. Some folks argue that New Zealand's poor performance relative to Australia comes down to the Aussies having taken a different path to reform than the Kiwis. I'd worry more about agglomeration effects. Melbourne alone has roughly as many people as New Zealand. While population differences are a level effect across the countries, increased returns to agglomeration with technological change interacted with population ought be a growth effect.

If Glaeser's argument holds, then even the best policy in the world couldn't help us catch Australia, barring Australia doing anything monumentally stupid. That's not an argument for not trying, but rather for being realistic in expectations and for not damning reforms should they fail to help us catch Australia. It probably also points to dairy and agricultural production becoming more rather than less important relative to the tech sector. My confidence intervals around any of this are too wide for useful prediction, but I put a fair bit of weight on Glaeser having things basically right.