Grow the Merry-Go-Round

Helping people move to cities is the biggest piece of low-hanging fruit in society.

America has seen the rise of winner-take-all cities. The largest economic opportunities are in cities like New York, Los Angeles, and San Francisco. The financial return to living in these cities is increasing — especially if you work in technology or finance.

In the words of Axios reporter Kim Hart: “Economic opportunity for most Americans increasingly hinges on one factor: where you live.”

Cities are like a merry-go-round. To oglers who stand still on the ground, they look like they’re spinning at dizzying speeds. In truth, for people who enjoy the buzz of a city, rotating around the merry-go-round is as fun and social as it gets. It’s kind of like a party. Unfortunately, the merry-go-round never stops. It just spins faster and faster. This means to hop on, you have two options: (1) Pay somebody to give you a metaphorical boost or (2) Run really, really fast, and try to jump on. If you try to jump on and fall, you’ll hurt yourself. But, if you make it on the merry-go-round, you’ll be in the center of the action. You’ll gain social and financial traction by moving with the speed of your surroundings.

Consider three famous lines about New York. The first one is from Jay-Z in Empire State of Mind on the struggle and rarity of “making it” New York: “Eight million stories, out there in it naked. City is a pity, half of y’all won’t make it.”

The second quote, which is from Dorothey Parker, says jumping on the merry-go-round is the hardest part, but once you make it, you’re there to stay. She said, “Yet, as only New Yorkers know, if you can get through the twilight, you’ll live through the night.” 

Finally, the third one from writer E.B. White highlights the miraculous charm of a city where everybody is chasing dreams, destiny, and hope.

“The city is like poetry: it compresses all life, all races and breeds, into a small island and adds music and the accompaniment of internal engines. The island of Manhattan is without any doubt the greatest human concentrate on earth, the poem whose magic is comprehensible to millions of permanent residents but whose full meaning will always remain elusive.” — E.B. White

Each quote illuminates the experience of New York life. Jay-Z’s words highlight the make or break intensity of city life. People move to New York to pursue a grand vision, but pay the price in the high cost of living. The first few years are the hardest, as Parker’s quote reveals. Even if the streets of New York are crowded, the individual is invisible. You’ll never feel lonelier than times when, even though you’re surrounded by thousands of people, you don’t have an emotional connection with any of them. New York is a hard place to find community. But once you find friends and a professional network to support you, the gates of possibility open to you. And finally, as E.B White observed, in most cities, those gates lead to a small number of end states. In Hollywood, movies. In San Francisco, tech. In Boston, academia. But New York is a kaleidoscope of ambition. 

Data supports the allure of cities. One paper founded: “The high-tech sector is increasingly concentrated in a small number of expensive cities, with the top ten cities in ‘Computer Science,’ ‘Semiconductors,’ and ‘Biology and Chemistry,’ accounting for 70%, 79% and 59% of inventors, respectively.”

Likewise, an Axios study found, “The top 25 metro areas (out of a total of 384) accounted for more than half of the U.S.’s $19.5 trillion GDP in 2017.” 

As shown by the chart below, cities like New York and Los Angeles are experiencing the most economic growth. 

Screenshot 2019-10-14 12.28.31.png

And yet, that growth isn’t nearly as fast as it could be. Even if its an imperfect measurement of human flourishing, a society’s wealth is strongly correlated with the happiness of its citizens. Moreover, due to the laws of compounding returns, small increases in the rate of growth bring large benefits over time.

For example, pretend there are two countries: Country A and Country B. Country A grows at 5 percent per year, so it will double its wealth in 14 years. Meanwhile, since Country B grows at 2 percent per year, it will take 35 years to double its wealth. Moreover, if growth rates between the two countries stay the same, the wealth gap between them will expand. 

Land-use restrictions are a major roadblock. Homeowners in major cities make it difficult to build new apartments and office spaces. For example, whenever I return to San Francisco, I’m surprised by its lack of density. Most new building is restricted to only two neighborhoods: SOMA and South Beach. Away from those neighborhoods, the city is filled with two-story, single-family homes because apartment buildings are illegal to build in 78.6% of San Francisco.

Source:  Sonja Trauss

Source: Sonja Trauss

A recent paper found reducing restrictions in three cities — New York, San Jose, and San Francisco — to the level of the average median U.S. city would increase the growth rate of economic output for those cities by 36.3 percent. Notably, this increase in productivity would benefit the rest of the country too. The authors found U.S. GDP in 2009 would have been 3.7 percent higher had these restrictions been lower, meaning the average American would have earned an additional $3,685 that year.

Did you catch that?

Cities aren’t the only ones who benefit from more people on their merry-go-round. As the fruits of innovation spread, the entire country benefits too. Increased innovation doesn’t just benefit cities. It benefits the country as a whole. For example, if the speed of iPhone production increases, people from Indiana to Texas to Florida who buy an iPhone will benefit too. 

If we want to increase prosperity, we need more people on the merry-go-round. When it comes to economic success, the more people, the better. Big cities tend to increase average worker productivity and thus, average worker wages. As William Fischel wrote in Zoning Rules: “An urban area with twice as many workers pays wages that are about 10 percent higher than the wages that similar workers would earn in the smaller area.” In San Francisco, for example, founders of technology startups benefit from the large pool of talent, investors, and journalists. But often, the increases in pay are offset by housing higher prices, which repel people from cities. 

Here’s the central challenge: How do we get people into cities?

There are two solutions: Increase the housing supply and/or improve transportation.

More Housing Means More Affordable Housing

The merry-go-round is plenty big, but it doesn’t have enough seats. Moreover, there are restrictive minimums on seat sizes, which limit how many people can ride on a single seat.

Opportunities are handed to people who secure seats, but the lack of supply makes seats more expensive than they need to be. Sure, some real estate is fancier than others. But once you have a seat, you can see how the game is actually played.

Cities are expensive, and apartment costs are rising fast. Everybody talks about building more apartments. Their arguments follow the basic laws of supply and demand. In Economics 101, students learn we can reduce costs by increasing the supply of a good. So, we can lower the cost of apartments by building more of them.

Tall buildings are the fastest way to increase density. Even if there’s no more space on the ground, there’s unlimited space in the sky. Unfortunately, I don’t think major cities are going to relax housing restrictions and allow taller buildings anytime soon. Outlining problems with zoning laws, economist Albert Hirschman said it best: “We have a case where the weak are oppressed by the incompetent.” 

If we can’t build more seats on the merry-go-round, we’ll have to play with the homes we already have. Luckily, we have two options. We can rearrange the seats into smaller units or increase the number of people who ride on each one.

Urbanist Alain Bertaud offered the following suggestion in a recent interview with Russ Roberts: Reduce restrictions on minimum apartment sizes.

In Paris, people can live in spaces as small as eight square meters. Small living spaces aren’t pleasant, but at least they’re on the merry-go-round. But in New York, these tiny living spaces are against the law. At 80 square feet or 150 square feet for a studio, the minimum apartment size is fairly large, which keeps people out of the city. Here’s Bertaud:

“As fewer and fewer Americans are married, and more and more people are living on their own, the idea of limiting household size, of square footage, is just a recipe for high rents and people living very far from where they work.”

These restrictions worked better when a higher percentage of families occupied apartments. But today, because people are getting married later and young people are moving to cities, an increasing number of apartments are occupied by unmarried tenants who are desperate for space on the merry-go-round.

How Transportation Can Save Us

On a recent Saturday night,  it took my friend more than an hour to travel from Brooklyn to his apartment in Manhattan. Usually, the trip takes 20 minutes. The delays were caused by the infrequent L-Train, which connects Williamsburg and Manhattan. The travel time is so long we joked he traveled to a different time zone.

We can increase urban density without building more or lowering the average apartment size. Improved transportation increases the effective size of a city. According to an article in The New York Times:

“Higher incomes are correlated with lower commute times…Subway delays disproportionately affect lower-income New Yorkers because their already long commutes get even longer and they may have no choice but to wait out even the worst delay…Even if an extreme delay occurs only once every ten or twenty trips, individuals must commit more time to commuting every day to insure against lengthy delays. As an area’s household income declines, the length of extreme subway downtime spells increases.”

Source:  New York Times

Source: New York Times

People who live in cities aren’t just buying space. They’re buying time. Time inequality is a relatively new phenomenon. After World War II, American living was defined by a two-tier system. Cities weren’t sexy places to live. They were littered factories, meatpacking districts, and repulsive industry smells. The wealthy lived in the suburbs and commuted to the city for work. This mechanism was self-regulating. Long commute times were the price one paid for big lawns and extra home space. Though their neighborhoods weren’t as nice, the poor benefited from short commute times, and many even walked to work.

But now, cities have a three-tier system. Ultra-wealthy people tend to live in the heart of the city, incomes fall as people move towards the outskirts of the city, and average wealth tends to rise again in the suburbs. Factories, manufacturing and distribution centers have moved away from the heart of the city, where space is cheap. Meanwhile, cities have become hubs for creative and knowledge workers.

Now that cities are cool, living arrangements are inverting.

The ultra-wealthy live in city centers. In addition to pricey apartment space, they pay extra for food, childcare, and education for their children. As The Atlantic writer Derek Thompson has shown, that’s why cities are increasingly dominated by three groups: (1) people with no children and (2) white, college graduates with no children, and (3) adults with young children who are younger than six years old.

Source:  Atlantic

Source: Atlantic

Housing prices fall as distance from urban hubs increases. As I said to a visiting friend last weekend, rents fall by roughly a couple hundred dollars with each additional subway stop away from the city. In the New York area, prices rise again once you leave the edges of the city where the white-picket-fence aspect of the American Dream is still alive. Westchester, Fairfield County, and Morris County have some of the nicest homes I’ve ever seen. Similar trends are visible in Chicago, San Francisco, and Washington D.C.

Making trains run faster or on more routes isn’t enough. We also need to make them more reliable. High-variance in travel times threatens the jobs of train commuters. People with access to transportation can effectively parachute onto the merry-go-round even if they don’t live there.

For proof of the benefits of fast transportation, look at China.

When I was in Hong Kong, I stayed in a small home 20 kilometers from the city center. To my surprise, the trains run so often none of the stations show when the next train will arrive. My morning trains to the city were always on time, and they never took more than 25 minutes.

Friction in face-to-face communication is a barrier to economic growth. In mainland China, fast transportation lubricates the economy. Bullet trains reduce the cost of traveling to face-to-face interactions between skilled workers who live in different cities. One study found productivity rises whenever a secondary city on the outskirts of a major one is connected by bullet train to a Chinese economic center.

According to a recent article in The Economist:

“[Bullet trains expand] the viable area of China’s clusters. The Jingjinji region around Beijing has five high-speed train lines today. By 2020 there should be 12 more intercity lines, and another nine by 2030. Towns that are woven into the networks can see their fortunes change almost overnight.”

Likewise, a recent study found that “a new daily flight from Silicon Valley to an international city leads to $23 million of additional venture capital dollars raised by startups in the region. The easier is it so travel somewhere, the easier it is to do business there.  

Fast transportation reduces the tyranny of distance. Contrast China and San Francisco. New York and Chicago are roughly the same distance as Beijing and Shanghai. But the trip between New York and Chicago is served by one train per day that takes 19 hours, while Beijing and Shanghai are connected by 35 trains per day, some of which take as little as 4.5 hours.

At this point, you’re probably thinking: “America needs to build more transportation options and infrastructure.”

Pump the breaks, ladies and gentlemen. Not so fast…

American infrastructure is slow to build and prohibitively expensive. Construction of the first New York City subway (which traveled from City Hall in Lower Manhattan to West 145th Street in Harlem) took four years, six months and 23 days. In comparison, the recently opened Second Avenue Line opened nearly a decade after its official groundbreaking. Costs soared. Today, New York’s subways’ average, inflation-adjusted cost is 20 times as much as it was in the early 1900s.

One mile on the recently opened 2nd Avenue Subway Line cost $2.2 billion to build. By comparison, subways in Paris, Berlin, and Copenhagen cost about $402 million per mile, roughly than 80% less. In Seoul, subway development costs even less — $64 million per mile. To summarize: It’s 35 times more expensive to build a subway in New York than in Seoul.

Increasing dynamism starts with helping people climb on the merry-go-round. Even though it would help, we don’t need to build more homes on the merry-go-round. We can rearrange our existing homes. Decreasing minimum apartment sizes would help people secure a spot. Even though the apartment sizes would be small, the rising prices of apartments prove there’s demand for these small urban dwellings. In addition, fast and reliable transportation can enable commuters. For driven individuals, living on the merry-go-round is best, but working there is enough to gain momentum.

If we want to go fast, we need to grow the merry-go-round.