Tuesday, January 16, 2007

Superstar Cities part 2: thoughts and analysis

Continuing Superstar Cities week, today we get into my thoughts and analysis (part 1 was mostly excerpts). I'll note in advance that I can't take credit for all these thoughts/observations. Others have noted some of them before, most notably Joel Kotkin and his observations on ephemeral/boutique cities.

My first and most prominent thought is that I hate the label. Superstar City sounds like a great thing, right? Who doesn't want to be one? But they specifically define it as cities that have cut off the supply of new housing, either from lack of land, or transportation infrastructure (to new suburbs), or political resistance to growth and density. Those are not good things. For example, Portland seems well on its way towards earning the superstar label simply by drawing an urban growth boundry and restricting the new supply of market-demand housing. If Houston wanted to, it could do the same thing: go on an annexation rampage of all open land and then deny permits to develop on it. We still have quite a few high-growth industries and migration, so then we'd quickly become a "superstar." But why would we want to encourage this? A better label would be "closed", "restricted", "constrained", or "limited" cities. Then cities wouldn't be so quick to want to see themselves on the list. But, then again, this paper probably wouldn't be getting so much attention without its provocative title.

Although you might not expect it, there is definitely evidence of this model in Houston. An excerpt:
These patterns are repeated when we compare superstar towns to other towns within their metropolitan areas. “Superstar suburbs” typically have more high-income households and fewer poor ones, and experience a greater rightward shift in their income distributions and more rapid growth in their house prices when the number of high-income households in their MSAs rises. They, too, have higher price-to-rent ratios.
Can you say: Bellaire, West University, River Oaks, and the westside villages? All have run out of land and are in high demand by high-income households.

So let's explore the system of forces involved here. A city fills up. NIMBYs fight any new density, putting even more pressure on home prices. This causes skyrocketing property taxes, and the voter backlash usually guts it (see CA prop 13). With revenue constrained from residential property taxes, city governments lose the incentive to create more of it, and they especially don't want more of any housing that would actually cost them money, like for the poor (who need more services) or families (that have kids that need educating).

Now, the report talks about the poor being driven out by increasing home prices. But if you really look at their data and graphs, you'll notice something: the real displacement is the middle class. The middle class actually own homes they can cash out of (and move away) and sell to upper income families that can afford to move in. The poor mostly rent, and, as the report noted, rents stay relatively more affordable, so they can stick around. In economic theory, landlords should tear down the low-income apartment complexes and replace them with upper-income housing, but city governments, NIMBYs, and the residents themselves tend to pretty actively discourage this - and, in any case, they're not usually in neighborhoods desired by upper-income households. This meshes well with a recent Brookings study noting that middle class neighborhoods have declined substantially as a percentage in cities, while upper-income and poor neighborhoods have increased. Middle-income neighborhoods seem somewhat unstable - they tend to "tip" one direction or the other: either the wealthy move in and gentrify, or the middle class flee as it declines.

The result is that a "superstar city" ends up with a very polarized population of wealthy and poor (usually with service jobs to the rich), and almost nobody in the middle. Employers who need middle class workers leave or outsource those operations elsewhere. That leaves a sizable gap in the social mobility opportunity ladder (both jobs and home ownership). With no middle class jobs to aspire to, the poor are stuck and frustrated, and the wealthy feel guilty. You then get the blue welfare state phenomena to "warehouse" the poor in comfort and assuage rich guilt. This is common in Europe too - note the poor tenement immigrant population of Paris that rioted.

I think you can even see evidence of this in the MA and CA universal health care plans: put the burden of health care for the poor on employers. Most of the middle class employers have already left, but the remaining employers on the margin will leave. The wealthy don't care, and will bear the cost additionally in higher prices by low-end personal services where the employers are now mandated to provide health care to all employees (essentially a giant increase in the minimum wage). It actually works as long as you don't care about attracting mobile mid-level jobs and you have a wealthy population that isn't likely to leave and can absorb the burden (i.e. a close match to the definition of superstar cites, which pretty much cover MA and CA). The downside is it rips even more middle rungs out of the opportunity ladder, further locking in the poor population.

So, if you value upward social mobility and opportunity, superstar cities and employer-sponsored universal health care don't seem... well, very healthy. Thursday night in concluding part 3 we'll explore solutions to this situation (um, assuming I can come up with some between now and then...).


At 12:54 PM, January 17, 2007, Anonymous Anonymous said...

I agree with all of your points, except I think that national health care and better coverage of mental health issues are issues that the national government needs to address, not just California.

See - I sort of like being in Texas, where we get all the advantages of market approaches, etc, as you mention. And then there are times I like being in the US, where we get all the advantages of belonging to a society who also believe in a fair minimum wage, freedom for slaves, environmental protections, space exploration, and other things like that that Texans would have never taken the lead on, but ultimately benefit us as well.

As for cities that don't want to overdevelop, good for them - I hope to visit some day and spend some tourism dollars. For the upwardly mobile, take note - Houston and places like it are a better deal for you - unless you are interested in film, publishing, acting, or technology - in which case, the Valley, NYC, Boston, or LA may still be a better option.

At 10:55 AM, January 18, 2007, Anonymous Neal Meyer said...


While in school, I vividly remember UH economics professor Barton Smith mentioning that rising prices were a signal for an urban area to stop growing. In effect that is what we are seeing in places like San Jose, San Francisco, Boston, and other cities that might qualify as being called "super star" cities.

It would be interesting to see what the kurtosis tails and distribution curves look like with regards to income in various cities, noting the difference between these "super star" cities and those in places like Houston and Dallas.

I wrote some papers when I was an undergrad student on housing price gradients so I already know what they look like. In a fairly healthy housing market, the distribution curve graphs will climb quickly from low prices, then after hitting the median or mean, they will gently slope downwards with a long kurtosis tail as you approach the expensive housing levels. In contrast, a city like San Francisco has housing gradient price graphs which appear block like all the way across the spectrum, and crazily enough actually slope upwards a bit as you get to more expensive price levels before they finally drop down at the highest levels.

In the long run, having your local urban economy not have middle class bread and butter type jobs due to high costs may well be bad for both social stability and for local governments themselves.

I am in London for the next couple of weeks. One thing that has happened over the past few years here is that many City of London finance jobs have moved out to an area known as the Docklands. Some Wall Street firms have also made some tentative steps towards moving their operations away from southern Manhattan and out of NYC. Even such elite jobs may be at risk of being lost if costs get to be too much. I would hate to be the mayor of NYC if Wall Street started packing up en masse during my tenure.

As for mandatory employer based health care, that may even drive away some lower level jobs as well. Without a doubt some poor groups would win under such legislation, as all cities need (and generate) jobs like food service or janitorial jobs. Such legislation might cause some jobs to go underground and become cash based.

More later. This does seems to be one of your more interesting reads.

At 3:57 PM, January 18, 2007, Blogger kjb434 said...

I hope healthcare never becomes nationalized. I don't want California's future pain and the current pain of Vermont, Massachusetts, Tennessee, Canada, and much of Europe to be across the entire US. All it means is higher taxes for us middle class citizens (which somehow get classified as rich) and poor un-available healthcare.

I never like visiting the cities listed as Superstar Cities. They seem so fake and contrived. Nothing natural about them since some overbear government entity had its hand in everything. I like how Houston grows naturally. The lack of planning down to the square foot that exists in many cities keeps Houston more diverse and evenly distributed. There are very few (if any) areas of Houston (within the City and ETJ) that are completely isolated to one level of socio-economic class. And if someone mentions River Oaks, they don't know what they are talking about. If you look just behind the Huntingdon condo tower you'll find apartments that are old and rent from around $450 a month. That's lower middle class living next to millionaires. This is just immediately south of San Felipe and east of Kirby next to River Oaks.

At 10:45 AM, January 25, 2007, Anonymous Mike said...

And then there are times I like being in the US, where we get all the advantages of belonging to a society who also believe in a fair minimum wage, freedom for slaves, environmental protections, space exploration, and other things like that that Texans would have never taken the lead on, but ultimately benefit us as well.

Um, I believe we have taken the lead on space exploration.

Never knew I lived in a society that didn't believe in freedom for slaves. The demographics here have changed quite a bit since 1860. And even then, a sizeable contingent of Texans was anti-slavery, including Sam Houston. Nor were abolitionists ever more than a noisy minority in the North.

Where are you from? This reeks of Northern stereotypes about Texas.


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