Wednesday, November 19, 2014

How Opportunity Urbanism can save the global economy (Part 1 of 2)

For many years now, economists have lamented the global "new normal" of sluggish growth in the developed economies of the world, including here in America.  I recently outlined a "big picture" view of Opportunity Urbanism and how it applies to this problem, and I'd like to share it with you here in the hopes of getting some good feedback in the comments.  Today is part one where I clarify the problem and frame the situation, and next week in part 2 I'll get to the solutions.

Core problem: income stagnation, declining middle class, lack of broad prosperity

Clarifying and redefining the problem
  • What people really want is a feeling of prosperity (i.e. a high standard of living), the measure of which is really cost-of-living adjusted incomes (COLA incomes), not just nominal incomes (see graph below).

  • By redefining prosperity this way, policy levers expand from just trying to increase incomes to also trying to reduce costs, especially housing costs (the largest driver).
  • Another way of thinking about COLA incomes is discretionary incomes – income left over after the basic costs of living, including housing.  Increasing discretionary incomes not only directly stimulates the economy with increased consumption, but also makes it easier to pursue additional education/skills, start a business, support charities, or save up the down payment for house.  Discretionary income is the fuel of economic growth and opportunity.
The situation today
  • The global marketplace and technology dictate incomes for a given education/skill level, which make it a very difficult lever to increase.  But costs-of-living are strongly driven by local factors that can be controlled.
  • As the basis of the economy shifts from industry to services, proximity to others matters more than ever before.  A factory can be anywhere and ship its products anywhere, but, generally speaking, most services need to be in-person.  This is pushing more and more of the population to agglomerate around major metros, and limited housing supply has driven up home prices and rents in those metros.
  • Economic and technological factors have directed ever more wealth to a relatively small population of elites, creating another driver of proximity as the services spending of those elites is a major part of the economy.  Economic opportunity is driven not just by proximity to others in general, but by proximity to these elites specifically.  This is yet another driver of major metro agglomeration and higher housing prices.
  • This lack of affordable residential space is shrinking family sizes and leading to destabilizing demographic implosions in Europe, Japan, and now the U.S. and China.
To sum up, the core challenge today is enabling affordable proximity.  Because we have mostly failed at that challenge, COLA/discretionary incomes are stagnant or down, reducing peoples’ ability to upgrade education/skills, start a business, or own a home – and resulting in a general malaise and lack of prosperity.

On a related note, The Economist recently published an article about studies regarding one aspect of this phenomenon: The geography of joblessness: The difficulty people have in getting to jobs makes unemployment unnecessarily high

Next week: the drivers of affordable proximity and strategies for increasing it.

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At 10:53 AM, November 21, 2014, Anonymous Neil said...

Sorry you haven't gotten feedback on here yet. I think that, so far, you're on point, so I won't challenge your thinking but will share this very related article:

At 6:53 PM, November 22, 2014, Blogger Tory Gattis said...

Thanks for the link. Interesting stuff. Houston seems to do pretty well on both if I'm interpreting the graphs correctly, although our affordability has certainly dropped the last few years. I general, I think the author might be sort of ignoring Texas because it doesn't fit their thesis - we are both affordable with mobility.


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