Should everyone crowd into New York and San Francisco?

A recent piece from the excellent Conor Sen has attracted some disputation.  The main claim is that building restrictions aren’t as bad as they might at first seem.  If you keep people out of Manhattan they move to Atlanta, and that produces synergies too:

Here in Atlanta, as in the rest of the Sun Belt, job migration is the driving force of the economy. Corporate relocations and expansions are celebrated here the way billion-dollar tech startups are celebrated in Silicon Valley. The “New South” would not have developed were it not for people looking to flee the crowded and expensive cities of the Northeast.

…Housing constraints in some cities accelerate economic development in emerging parts of the country. They decrease economic inequality between metro areas and lead to economic interdependence that drives civil rights. And they offer some promise to ease the pain of waning communities in the Rust Belt, Appalachia and beyond. A country where the vast majority of talented people move to one or two cities might be an economist’s idea of utopia, but a nightmare to those of us concerned about equality of economic opportunity.

Analytically, the first question is whether the biggest cities would attract too many people in the absence of building restrictions.  To answer that, you have to balance crowding costs vs. synergy benefits.  It can be said that average social returns to living in cities will equalize, even if marginal social returns do not.  Cross-city migration equates the average returns, even in the presence of externalities, just as in the classic “two roads” problem.  If one road is going faster than the other, people will switch, although the “final driver” still is not taking his entire social impact into account.

Note that if urban synergies are constant across scale, equality of the average across two cities will in turn imply equality of the marginal, and an efficient allocation of population across the larger and smaller cities will result.  Building restrictions won’t change that, although they do shift where the equalization margin will be at.

(Building restrictions also may mean NYC space is used inefficiently, even if the distribution of population across cities is more or less optimal.  Building restrictions are not identical to urban entry fees, but rather they shift space allocations at various margins of construction, though to potential movers their “entry fee” aspect may seem most important.  These marginal distortions may interact with the “entry fee” aspects of building restrictions in various ways, muddying the analysis.  Complicated!)

Now maybe synergies aren’t constant across urban scale, but suddenly the costs of building restrictions in Manhattan look lower.  They are defined by the differences in synergies across scale, which may not be such a huge number.  Furthermore synergies might be more important for the Atlantas than for the Manhattan, in which case the building restrictions in Manhattan could be welfare-improving.

(Note that if a city or region has really big firms, the chances that interpersonal synergies will be internalized into initial wage offers will be higher.  And there is a time horizon issue.  Circa the 1920s, Los Angeles synergies may have appeared much lower than those for NYC, but it probably ended up better for the nation as a whole that the racist “entry fee” for movie-making in NYC led to the creation of Hollywood on the West Coast.  Similarly, was it not also a good thing that NYC blew its chances of being the center of the American venture capital market?  If Peter Thiel were here, and communing with Kenneth Arrow, he might see too many risk-averse, conformist entrants into New York and look for a remedy, just as New York was itself once a respite from an overcrowded, restrictionist, religiously conforming Europe.)

OK, that’s scale but what about congestion costs?  They do seem to go up in a non-linear manner with scale, and that lowers the costs of building restrictions in Manhattan.  Manhattan is more likely to be too crowded than is Atlanta, as a first-order approximation.  Of course differential endowments across regions can complicate this, for instance NYC has better mass transit.

Now, to push this all one step further, is Peoria just a smaller Atlanta?  Does it too have synergy benefits?  (Or can we say that too many people stay in Peoria and too few go to NYC + Atlanta?)  Don’t we observe the very largest synergy benefits at small scales, namely going from households of one to two, two to three, etc.?  Might Peoria have the highest synergy gains of them all?  At least in utility terms if not in dollar terms?  Or do we need an ongoing risk of “Peoria brain drain” to induce Peoria residents to acquire the skills that they may or may not end up taking out of Peoria?

In any case, worth a ponder.

Comments

Wasn't there another study recently about how people don't change cities as often as they should? All the people that got displaced from LA to Houston because of Hurricane Katrina and ended up with higher wages?

Not all, but on average

Seems this also could affect presidential elections. Having some of those SF folks move to Denver makes CO more of a blue lock. Perhaps the NYC -> ATL will make GA blue?

Obviously I'm assuming something about these demographics that might not be true, but that's my intuition.

Yes, Georgia is a little more purple .

http://projects.fivethirtyeight.com/2016-election-forecast/georgia/

not really. look at pvis over last 20 years. georgia isn't "more purple" trump is doing worse putting more seats in play

states not seats

Do you have PVI graph over the last 2 decades? I just did a brief search and didn't find any.

Trump is making almost every state blue or purple. I mean South Carolina is in play, really? This won't last and 2020 will be very different.

Right on. I think that kind of logic can be applied too another problem we are facing: the problem of between class inequality. A country where the vast majority of talented people join one or two classes might be an economist's utopia, but it'd be a nightmare to those concerned about between class inequality. Talent ought to be more equally distributed within classes. And it is only natural that those in the upper classes should be the ones born there. Reinstitute aristocracy for equality's sake.

Yes this is an interesting point, perhaps even more relevant to cities like London which have an outsized share of their countries economy. You have people simultaneously lobbying for low house prices in London while at the same time bemoaning the fact that London is so dominant that they have to move to London to get a decent job. This is the contradiction; if indeed house prices were lower in London (thanks perhaps to deregulation), more people would move there and it would be even more dominant and thus even more vital that people move there for career reasons.

It would be interesting to study the reasons that the Information Superhighway didn't cause housing prices to even out nationally, as was often predicted c. 1993.

My offbeat idea is that it has to do with worries about insider trading. Maybe everybody on Wall Street felt the reason Mike Milken went to prison was because he didn't live in some place sensible like Greenwich, but instead tried to do business over the phone from Beverly Hills

On the other hand, you don't hear all that much about insider trading anymore. But it used to be something that people thought about all the time. For example, my wife and I were staying with a couple in Seattle in 1988.

My wife said to my friend's wife, "What shall we do together tomorrow?"

The poor woman burst into tears and replied, "We can't do anything because we have to jump out of an airplane with Bill Gates and we're going to die!"

Eventually she got the story of the terrified lady that Bill Gates had demanded of his girlfriend that she go skydiving with him. But she replied she wouldn't jump unless another woman jumped with her. So Gates looked over the Microsoft employee roster to find a lowly, ambitious, and married worked and came up with my friend's name.

Within 90 seconds, I was asking my friend to call me immediately if Gates' parachute didn't open so I could sell Microsoft short.

That was just the kind of thing you thought about during the Milken Era.

Remote work is becoming increasingly popular for SF companies because the money that buys a young engineer in Northern California gets you very experienced talent in the Midwest: It's not uncommon now to see large tech companies opening offices in cheaper places too: Google has offices, among other places, in Pittsburgh, Chicago, and Boulder.

This is also happening for lower paying jobs too: A well trained customer support employee makes more than minimum wage, but nowhere near enough to live comfortably anywhere near the home base of those companies. Open an office in Oregon, and you can get plenty of labor that is ready to work, instead of thinking about how they'll afford rent.

What this means though is that ultimately fighting gentrification is a lost cause: In 20 years, it'll be hard for anyone making less than 150K to live in San Francisco. We'll see bartenders, house cleaners and store employees commute for an hour away, and be some kind of underclass. As the city becomes full of finance and techbros, it'll stop being seen as hip, and maybe suddenly Oakland will become the place to be.

cf the trailer park getting zoned out of San Jose. But ultimately that which can't go on won't.

If true, the skydiving story is as bizarre a story as I've ever heard. I presume she didn't die.

The Information Superhighway didn't even out housing prices because personal connections don't travel well on it. When I want to talk finance to someone, I go to New York. I could E-mail them or call them on the phone, but the impact is ten times larger if I make an appointment to see them in their office.

This misses two important aspects of the problem:
1) The high incomes in the constrained cities are mostly economic rents on limited access. A lack of competition in highly skilled and networked labor markets brings higher profits to the firms tapped into them, higher wages to the workers, and higher rents to the real estate owners. This might be where a lot of that missing consumer surplus from the tech boom has gone.

2) The migration out of the constrained cities is very heavily weighted toward the low end of the skills/income/education spectrum. This means that the housing constraints in those cities are a significant source of the growing variance in incomes and of economic stress. The stress comes first from trying to remain in a city where rent takes up 60% of your income and is rising, our where it only takes 40% but you are at the mercy of your landlord and their decision to sell out, at which point you will have no similar alternatives*. Then, it comes from picking up and moving to another city in desperation because the costs have finally become too much. The households facing this problem are the most vulnerable. A large percentage of the low education/low income populations of those cities have moved away in the past 20 years.

* The problems created by housing constraints in NYC, San Francisco, etc. are a great example of Mike Munger's "euvoluntary exchange" idea. A tenant depending on rent controls has been put in a position that is not euvoluntary.

'the racist “entry fee” for movie-making in NYC led to the creation of Hollywood on the West Coast'

Honest question - according to a number of histories, Edison's use of patents and the the creation of Motion Picture Patents Company (Edison Trust) is what led to Hollywood's creation, though other factors (lots of sunshine and lack of rain) made Hollywood more desirable than San Francisco, say. This article seems representative of that story, including details like this - 'Edison and his compatriots did not take kindly to the competition. The cartel came after Laemmle hard, suing him 289 times for intellectual property violations. Edison hired detectives to unearth non-licensed equipment on production sets, and the “Wizard of Menlo Park” also conjured up gangs of armed thugs to seize pirate films, evict audiences from outlaw theaters and smash production and exhibition equipment of rivals who defied him. In spite of the pressure, IMP survived, and on April 30, 1912, Laemmle consolidated it with a handful of other independent studios to form the Universal Film Manufacturing Company, the future Universal Pictures.' http://www.history.com/news/the-renegade-roots-of-hollywood-studios

Where does 'racist' come into this story? Searching only finds the same broad history from any number of sources, and not a single one mentions anything connected to racism in terms of NYC (though a number of articles refer to how Hollywood's first big hit was a truly racist film, 'The Birth Of A Nation.')

Of course, as a native of NJ, perhaps Prof. Cowen has a better understanding of Edison's anti-semitism, and its role in how Edison granted permission to be involved in making and showing movies. Admittedly, not a single history article makes any reference to this, but then, until the last few decades, not a single Virginia colonial era historical building site mentioned the roles of slaves in building and maintaining it. Though at least in the case of Adolph Zukor, Edison had no problems allowing him into the movie industry, even if Zukor felt himself too constrained by the Edison Trust, thus also finding his way into the creative intellectual piracy which is what made Hollywood into a name connected to movie making.

An interesting question that I've seen a few feminist historians edge into and then scurry away from in fright is whether if the movie industry had stayed what Tyler calls "racist" women would have been allowed a bigger role in the mid-20th Century film business.

For example, a century ago, Mary Pickford was a movie mogul. She owned a quarter of the big start up United Artists with D.W. Griffith, Charlie Chaplin and Douglas Fairbanks. That seemed pretty natural in Suffragette America.

As Hollywood became less "racist" over the 1920s, however, women got squeezed out of higher level positions. In the late 1920s, Gloria Swanson tried to follow Pickford's example into becoming a power in Hollywood, with the financial backing of her boyfriend Joe Kennedy. But the new, less "racist" (but more sexist) power structure in the movie business shut her down.

The 1950 classic "Sunset Boulevard" by Billy Wilder shows the less "racist" new Hollywood's horror at these crazy man-eating WASP silent movie broads like Swanson and Pickford who got too big for their stockings back before the studio system came fully into control and finally imposed some order and discipline on these out of control dames who wanted to manage their own careers.

http://takimag.com/article/prohibition_twin_sister_of_womens_suffrage_steve_sailer/print#axzz4IIo765Xr

Still no answer as to what made that NYC 'entry fee' racist though, unless it was based on something like Edison's anti-semitism.

And to think that the Hollywood of the 30s was less racist is hilarious - 'Depression era films made the lot of African Americans even more demeaning, for the popular romantic vision of the Old South made for an excellent fantasy in the midst of economic hardship. As Jack Kirby writes in Media-Made Dixie, “the most successful genres of the times diverted attention from reality: westerns, monster films... and the magnolia-scented Old Southerners. Another explanation for the Dixie fad is sheer public ignorance of history-- black history and slavery in particular” (65). While these were not the films that best embodied the public’s hope and search for solutions, they did show a happier place, a world where simplicity and security were unfortunately too lovely to have survived. Such nostalgia is obviously shallow, but in terms of race films such as Gone with the Wind were actually damaging. Although the portrayals of happy, grinning servants who knew their places were less blatantly false than Birth of a Nation’s half-human freemen, they were nonetheless assurances to white audiences that a more stable social order had once existed. By admiring an Old South movie, audiences weren’t just comforted by riches and big houses: they also saw a dependable and working racial hierarchy that both kept society running and left everyone happy.' http://xroads.virginia.edu/~ug99/graham/race.html

The site continues with this concerning Louis Armstrong - ' The 1936 Pennies from Heaven shows Armstrong taking a new stereotypical direction. No longer the savage, he plays a hired musician in the “Haunted House Cafe.” New stereotypes abound as Armstrong speaks such lines as “I told them cats you’d do the right thing,” steals chickens, and is frightened by a dancer in a skeleton costume (Gabbard notes in Jammin’ at the Margins that the “timorous black, easily terrified by graveyard images” was another favorite source of comedy for early film audiences). The shift of character matches the shift in film subjects this project discussed earlier, as the film industry produced more movies that were familiar affirmations of American values. Armstrong’s racial roles in later 30s movies do not portray him as a threatening or frightening savage, but rather as the amiable black servant type that audiences hoped still existed in a society whose racial makeup was rapidly shifting.

Armstrong’s largest role was as a racehorse groom named Gabriel in the 1938 film Going Places (view the clip in modem format or ethernet format) . He is stripped of all sexual or racial menace and is confined to singing to the horse. Gabbard speculates that the film was based on earlier animal films, for the driving point of Going Places is that the horse, named Jeepers Creepers, can only be calmed down and ridden when Gabriel sings the song of the same name. The film’s dramatic conclusion even includes Armstrong with his whole band driving in a buggy down the racetrack as Jeepers Creepers competes for a title. The most unsettling aspect of Armstrong’s role, however, is its unremitting demands for servility from the actor. He endlessly completes his sentences with “yessuh,” clowns around with animals in the most childlike way imaginable, and wears shabby clothing. Modern audiences must even endure the indignity of hearing him referred to as “Uncle Tom” instead of his actual name.' http://xroads.virginia.edu/~ug99/graham/roles.html

There's a difference between living in a place for a job and generate income and living in a desirable place as a form of consumption. I don't know if there's a metric for the fraction of city inhabitants not born there with income coming from anywhere else in the world. This individuals are the ones that make prices disconnect from local incomes.

The real answer is that building restrictions don't really matter, because even if you build more and add residents, the extra product will be eaten up by rent.

Unless you have serious land value taxation, economists and policymakers will be perpetually trying to gin up economic growth by adding more people to lower labor costs because any potential demand gets eaten up by rents.

Supply is not an upward curve?

Do constraints on everyone living in a place ultimately hinder development or move it around and limit development elsewhere?

In theory, it should hinder development, due to superlinear scaling of positive effects -

http://kottke.org/11/01/superlinear-scaling-of-cities

http://www.wsj.com/articles/SB10000872396390443477104577551133804551396 -

"Doubling a city's population, the Santa Fe researchers found, more than doubles its creative and economic output, a phenomenon known as "superlinear scaling.""

""Crude" density is achieved by districts packed with taller and taller buildings but doesn't, on its own, generate innovation or economic development."

"By contrast, what the authors call "Jacobs density" sparks street-level interaction and maximizes the "potential informal contact of the average person in a given public space at any given time." It makes networking and informal encounters more likely and also creates a demand for local products and diversity—not just of populations and ethnic groups but of tastes and preferences."

Not a true believer in the above, but felt it was worth getting this PoV out there. This is data MR itself blogged on back in the ancient days of '11-'12, so would be remiss otherwise.

Though if we can't solve this question intranationally, I doubt we can solve it internationally.

I'll admit my bias is firmly against the anti-gentrification mob, second or third generation well established in the big cities of the West, who are against intranational migration from provincial "townies", and enthusiastic for the benefits of international migration. Pulling up the drawbridge to your fellow countrypeople, while laying out the welcome mat for outsiders. Disgraceful.

Big liberal Democrat run cities try to drive the masses away with high taxes and regulations, but that just attracts rich liberals, so the cities become even more crowded. To get something for their taxes, the big cities end up building parks and entertainment that liberals like, plus bike lanes and green energy to reduce pollution to make walking and eating outside enjoyable, plus clean up rivers. Things that make more liberals want to move to the cities.

So, the Democrats are driving policy to make life better for rich liberals. I'm shocked. If you think of their goal as creating a theme park for the wealthy Mandarin class, you should get pretty close to predicting their policy positions.

So when Republicans in states like Kansas and Wyoming voted against Medicaid expansion, they were looking out for the interests of their low-income working residents because...

I don't know the specific reasons for those states but my guess is that they couldn't pay for them as many of the states that did expand are seeing now.

Because the higher tax rates necessary to pay for it would make them even less competitive in the world economy.

Working residents? Since when are states allowed to impose work requirements for Medicaid eligibility?

And, like locus, they use it up and move on.

https://pajamasmed.hs.llnwd.net/e12/instapundit/wp-content/uploads/2015/11/democrat_urban_monopolies_11-30-15.png

And the blacks out.

Having recently moved to Peoria (although completely unrelated to housing costs), it was a little jarring to read my new home used as an example like this, but it's probably entirely accurate.

Tyler Cowen thinking like a chess master that he is! It's elephants all the way down as the Hindu meme has it. At some point however diminishing returns sets in for any synergies I imagine.

Actually its Turtles all the way down.

https://en.wikipedia.org/wiki/Turtles_all_the_way_down

Another example of econs in a model not behaving like the people they are supposed to represent.

Some people like crowds, city life. Some people hate that. Most people are in the middle, but given sufficient crowding, would try to leave at some point. So the population density of most cities has diminishing returns. The more people crowding into cities, the less demand for real estate elsewhere, creating the same incentive.

The best way around this is for the elites to monopolize all real estate, and to "enclose" it, so no one else can use it, forcing the non-elites to go to the only places where work and housing is available, which is wherever the elites want that to be.

here is the one problem with that logic when it comes to actual execution. if you leave one state for another, the penalties you might pay with regard to switching health insurance could be too large. Americans are actually less mobile today than they used to be. If you work for a corporation, then you can move because the big company will take care of you. Work as an independent worker or entrepreneur, it's very tough to pick up stakes and move. At the worst case, people that are stuck on government support never move to greener pastures like Americans did back in the 1930s.

Right. Also they don't have good New York style pizza in Atlanta.

(They also don't have good New York style pizza in New York, so.)

What about the aesthetic advantage of fewer people speaking with NYC accents? Worth pondering.

There is no New York accent anymore. We're all bland Midwesterners now.

Trump does not sound like a Midwesterner.

Nor does Sanders

I'm not sure America, or the world, can afford all those "synergies" in Silicon Valley and Manhattan, the boy wonders in their tight riding shorts sucking all the oxygen (not to mention capital) out of business and into more advertising start-ups and the bankers sucking all the oxygen (not to mention capital) out of business and into more speculation in financial and other assets. Rene Girard was right. Send them to Phoenix and Atlanta so they will stop mimicking each other and do something worthwhile. They can always go back for a little networking since that's what all those "synergies" are about anyway. http://www.nytimes.com/2016/08/22/business/economy/bay-area-start-ups-find-low-cost-outposts-in-arizona.html Conor Sen was right but for the wrong reasons.

It seems we are analyzing the boundary problem, yes? The question is whether the world would be best off if everyone lived in a single city (and making two such cities would be a disaster because the total opportunity for interpersonal connections would be the square root of those to be had in a single city). Let's ignore for the moment the relatively few people left who are required to manage large scale farming, logging, and mining. Those can be distributed 'ex-urban' and rely on proximity to particular land for their productivity.

We can't quite as easily ignore those people who supply those relative few with services - but there are still not too many. Now, are all the smaller cities simply historical contingencies of a time when 80+% of people were farmers or in the extractive industries? It may be true. If that's the case, we are seeing a potential kinetic/static issue; the ideal would be almost everyone in a single city, but the people are already distributed in a way that is now particularly suboptimal. The question is whether we are headed towards a single megapolis or there are other non-linearities besides the productivity of local connections which we will hit on the way towards that cloud-shrouded peak...

If you're an engineer who designs heavy equipment, Peoria is the center of that universe in the U.S. I think it's probably accurate to say that Silicon Valley as a whole isn't nearly as dominant in U.S. tech as Caterpillar alone is in heavy equipment. I think people sometimes lose sight of the fact that there are many industries in the U.S. other than tech, finance, and entertainment and that these 'unsexy' industries are clustered in unexpected places (was TC aware of Caterpillar when he used the Peoria example?) -- or are not clustered at all. It's not just workers who are 'inexplicably' failing to pile into a few fashionable cities, countless industries are stubbornly resisting the siren call as well.

Tulsa, OK is the heat exchanger capital of America. You probably are going there to get a fired heater as well.

Houston is the Upstream and Downstream Oil capital.

Detroit is still where you go for automotive, especially engineering. Even foreign car companies locate their engineering centers there.

Those are just the ones I'm aware of, because I've worked in those businesses.

These days, aren't those engineering centers located in select parts of Oakland County, across the border from where Detroit can tax them? If they were still in Detroit, rather than "Detroit", the city wouldn't have nearly the financial problems that it does.

This is true but irrelevant to the point of geographic specialties.

And another step into unsexy niche industries, if you're into orthopedic manufacturing, there's a lot to be said for Warsaw, Indiana. A college friend of mine has a significant portion of his sense of life satisfaction tied up in the finer points of titanium screws. (Maybe core identity factor #2, somewhere behind devoted husband and father, somewhere ahead of devout Christian and master of the grill.)

The world doesn't need many orthopedic screw specialty engineers. But it might need a lot of intelligent people to produce a few very competent, very satisfied ones. And the demographics of the biggest metro areas are nowhere near internal replacement. If intelligent people can only find meaningful employment in metros where meaningful employment and reproduction are at odds with one another, at what point does division of labor in technical microspecialties suffer?

Side question: when will the term Rust Belt go away? Cities like Buffalo and Pittsburgh are doing well now. They have diversified away from manufacturing and are pleasant places to live.

Is Buffalo doing well? "Better" is not "well". Like most places, the medical-industrial complex has taken over, but does that translate into "well"?

I live in Buffalo, and you're right "better" is not "well". It's livable and growing, but it still has a long way to go in terms of attracting real talent (there's still a largely blue-collar mentality that's holding it back).
Interestingly Rochester (one city over, smaller population) is in deep decline too, but because the residual population is more white-collar (ex-Xerox, Kodak), the prognosis is somewhat better.

Any place that managed to spawn Wegman's can't be all bad.

Ha! Wegmans is a Rochester-based company.

The unemployment rate is lower than the state and the country, young people are moving there, and there is a building boom downtown.
http://www.buffalonews.com/business/local-jobless-rate-falls-to-a-nine-year-low-of-49-percent-in-july-20160823

There is a fentanyl problem but other than that the quality of life is high.

I've recently been to Cleveland and though it has turned the corner and is improving, it is still one of the most depressed cities on the planet. The amount of vacant land there is stunning; houses in working-class neighborhoods look like they haven't been painted in 50 years; the road system is one giant pothole.

The fundamental problem is that apart from Internet and Finance, there has been no "new" developing industry during the last 35 years to venture in a city and create a new economic cluster. The crowding problem is a consequence of growth slowdown.

Never thought about it in that way before. Very intriguing idea.

I know two families that moved from New York to Atlanta. Both families hate Atlanta and conceded that the only thing better is lower housing costs and lower taxes. Otherwise, Atlanta is horrible. And the schools are abysmal. One family actually moved back to New York.

The Atlanta city public school system is a mess, but there are a number of very good schools in the northern suburbs.

I have no idea where they moved to, but the Atlanta metro area is huge, with pretty much an area to live in for every type of person. Personally I live in town, and my kid goes to an excellent Atlanta Public school. I have friends who enjoy the burbs. We have great restaurants, parks, museums, theater, etc. Not the scale of NYC of course, but there are a heck of a lot less people here too. But really, we prefer to keep this our secret, and we prefer for you yankees to stay up north ;)

I lived in Atlanta and most of my well to do friends sent their children to private schools, though as harrison says, there are decent public schools north of the city and in places like Buckhead and North Decatur.

The savings on housing and taxes should be more than enough to send your kids to private schools in Atlanta. Those costs are much lower than private schools in NYC as well.

I am pretty sure I have floated this "it evens out" argument here before.

But obviously while population, crowding, and synergy, even out over time even with onerous regulations, they'd do it a bit faster with fewer impediments.

Is this actually interesting to anybody? This is a lot of justification and rationalization for why someone knows better than 300 million market participants. This is standard Hayekian conceit.

If we all went down that road we'd have nothing to talk about here. This place is all about smart asses opining on the state of the world, with the assumption that they know better.

Talk about The Future and Its Enemies.

Technocrat Sen: Criticisms of our technocratic housing regulations do not factor in all positive externalities.
Technocrat Cowen: Lets build an equation and solve for equilibrium.

Where is a dynamist when you need one? Virginia Postrel comments here from time to time. Aren't these guys missing the local knowledge trees for the top-down forest?

"OK, that’s scale but what about congestion costs? They do seem to go up in a non-linear manner with scale"

Except there's some threshold effects where the scale of London justifies building billion dollar subway system that ultimately lowers congestion, but only after it gets really bad. Congestion costs may actually go down with size around the point where the the net value of public transit system flips from being dominated by the large capital cost to being dominated by the small benefit to the marginal rider.

Similarly, there may be a spot on the housing congestion scale where the fixed cost of tearing down an old walk-up building and replacing it with a modern skyscraper becomes advantageous. Right below that point, costs may be rising steeply as bidders fight for the limited number of units in the walkup. Once the threshold is crossed and you can tear it down, it becomes instead a question of building 70 stories instead of 60 depending on marginal demand.

TLDR: There are different regimes for cost/congestion based on natural thresholds for different improvements. Manhattan may be operating in a more favorable regime for congestion than Atlanta, which may have to get worse (or tunnel) to get there.

"Except there’s some threshold effects where the scale of London justifies building billion dollar subway system that ultimately lowers congestion, but only after it gets really bad. "

Yes, but even with a subway system, getting around in places like New York and London is *slow*. New Yorkers are unique in the U.S. in relying more on public transit than driving and also in having the longest average commute times (by a fairly wide margin).

Right, but there's a reason Kevin Erdmann drops NYC in among his closed-access cities. NYC can build commercial and can't build residential with the obvious results.

But yes, the interesting question that I've never really seen answered is whether "Things per square mile" increases faster than "Square miles I can reach in a reasonable timeframe" goes down.

In the "rush hour" limit where transit time is dominated by right of way interactions with other travelers, and travelers have no discretion to shift this trip to some other time, transit time increases exponentially with density: the other travelers are in your way precisely because it's taking them longer to reach their destination.

Well, the point is that past a point, it is net positive to build a new non-conflicting right of way like a train, subway or freeway.

What is not being addressed sufficiently is the composition of the occupants (often referred to as the "citizenry').

Suggestion: Note the difference between the civility and "openness" in the interactions in the areas of ATL & Charlotte and the "defensive" manners in NYC and Boston. Some of it may be due to space, but more to the motivations that account for mobility.

"Cross-city migration equates the average returns..." No it doesn't. It equates marginal returns. If you are at the margin, you would be equally well off moving from New York to Atlanta or moving from Atlanta to New York; but the billionaire fortunes will be made in New York, and the average returns in New York and Atlanta will not be equal.

This is an elementary error in economic analysis.

" If you are at the margin, you would be equally well off moving from New York to Atlanta or moving from Atlanta to New York; but the billionaire fortunes will be made in New York..."

Apart from these 11 apparently:

http://www.bizjournals.com/atlanta/news/2015/03/02/11-georgians-make-2015-forbes-billionaires-list.html

I don't think the problem is that people aren't moving: it is that employers aren't moving.

Places like Silicon Valley, New York, Boston are also very good at producing high paying jobs but not so much for medium or low paying jobs. But the high paying jobs are necessary to support the high rents in those areas. So what is the chicken and what is the egg, high paying jobs and high rent of lower paying jobs and lower rents? While Boston and San Fransisco have a steady stream of average people moving to other parts of the country it also has a steady stream of in-migration of highly qualified people to take the high paying jobs. Is this so bad?

The high paying jobs thing is due in part to the high cost of living. My wife could double her salary by moving to Silicon Valley, but the cost of living is so much higher, that it's basically a wash when it comes to our actual standard of living (rent would triple or quadruple, we'd have to start paying state income tax, and everything you buy at the store just costs more, etc.). The reason those Silicon Valley companies pay those high salaries in the first place is that almost no one would move there without them because they couldn't afford living there.

I lived in Atlanta in the Eighties, when companies were moving in and the New South was getting rolling. A popular joke was to claim that whenever a Yankee moved to Atlanta, it raised the average IQ at both ends of the trip.

It is Boom Time again. High and mid rise apartments are going up everywhere. The units are small, so storage facilities are sprouting up everywhere too. Also, my opinion, the additional tax receipts do not seem to be improving infrastructure or government functions.

Great wealth creates two things: luxury spending and non-profits.

The luxury spending drives up the cost of middle-class housing.

The non-profits ensure that the welfare sector expands.

If you're a middle-class person who cannot afford formerly middle-class housing due to it being bid up by i-bankers/government contractors/app developers, your kids will end up going to school with the welfare people.

Since that's not acceptable, you move to Atlanta, Dallas, etc.

This is an example of "expert" over specification. We don't know what is optimal for a particular city or group of cities on any dimension. But we do know that competitive rivalry across all dimensions will yield superior outcomes to expert solutions for any set of variables. The key insights of economics are scarcity and the value of competitive rivalry. Which is the real way that societies learn economics.

Zoning can create inefficient land use and push up prices through regulation, but isn't nearly the culprit it's made out to be. A quick proof lies in the realization that no matter how extensive the zoning in places like Mankato MN or Madison WI the average price of a home will never rise more than a fraction of those in Mill Valley CA.
The rather lengthy list of other factors that play into synergies and other city amenities only begin the touch on the complex interactions that drive housing values. The material would create a department of study rather than the content of an article.
Certainly one of the benefits of the prime areas peeking in price is the migration to second and third tier cities. This is also seen at the city level. As a prime neighborhood becomes too expensive, buyers get busy creating improved neighborhoods nearby.

Nope.

Housing Values == expected rents + access to credit
Expected rents == expected wage premium over West Virginia - taxes.

SF is expensive to rent in because you make an extra $30K/year by moving to the Metro, and the rents reflect that.
SF is REALLY expensive to buy into because that number's been going up $2000/year since 2001.

Let's consider these two claims. Price equal rents (why use expected when we have actual?). Not always, as zoning dictates which properties can be rented to what density hence controlling the spigot of supply. Although I do support the notion of a tight correlation. However a lock step relationship between wage and housing price would eliminate the notion of affordability as under this stipulation real estate values would always reflect consumers' ability to purchase. The tremendous spread of affordability from central states to costal havens would rebuke this claim.

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The part I have never understood is how there are impoverished areas so close to nice areas of Manhattan. Why isn't the whole island high rent? And why is Newark such a bombed out wreck? A few miles from lower Manhattan, much closer than the nice Connecticut suburbs.
Why hasn't all of Manhattan and near place been gentrified?

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