Picking Up From Last Week: The Importance of Space

You’ve stay tuned. You want to know how to make people more productive. You’re not alone.

Economists have long studied this question. It boils down to getting businesses to invent creative ideas (or monetize other people’s creative ideas). And for this, it turns out location is essential. For example, a great scientist located in a research lab with other great scientists will come up with more new ideas than she would alone. (The reverse is true, too—losing an innovative contributor can reduce productivity. In universities, when a superstar researcher dies, her department colleagues’ publication rates fall by 5-8%).  Even at the city level, research shows scientists create patents (i.e. innovate) at 20% higher rates in cities with twice as many workers.

Higher rates of innovation mean more productivity, and more productivity means higher incomes. That’s why when a city has twice as many workers, it pays wages about 10% higher. And while these effects happen in all industries, it is very strong in the technology sector—3x stronger, in fact, than it is in manufacturing. This helps explain why a high school graduate in Boston makes more 44% more money than a college graduate in Flint, MI.

Economists named the underlying reasons for why bringing people together in one space makes each person more productive agglomeration effects. There are three categories of agglomeration effects economists focus on: 1) labor market density; 2) firm specialization; and 3) spillovers.

1) Dense labor markets are what economists call regions that have lots of workers. When lots of workers are in one place, it is easier for a business to find the best employee for what it does, and vice versa. Think about when you hop on Tinder: would you prefer to swipe around in a small town with 20 single people or a large town with 500 single people? Obviously, you’d prefer the large town. Even though we expect people to pair off 10-10 in the small town and 250-250 in the large town (meaning, overall, competition for mates is the same), you’d expect a higher chance for finding the “right” person for you when there are more people to choose from.

Labor markets are the same way—firms and employees are looking for a “match” that will make them most productive and therefore profit the most (or, if you’re the employee, where you’ll earn the highest wages). Another benefit to dense labor markets is that you don’t have to leave your city if you need to find a new job. If you find a better paying opportunity, or your company fails, you can keep your family in the same house and your kids in the same school because your new job is in your same metro area. Dense labor markets reduce the cost of switching jobs.

2) Firm specialization is when one company does one thing really, really well. Anything else it needs done it will hire another specialized firm to do. For instance, if all the high-tech firms are in San Francisco, it makes sense for a single San Fran law firm to specialize in a niche area like intellectual property antitrust law for semiconductor technology. Then, any software firm needing that type of legal work can go to that specialized law firm. For other legal work, software firms can refer to other specialists. Specialization requires that specialists be close to their clients, though, so they can stay up-to-date on what the clients need. The law firm must be on the ground in San Francisco. Also, no firm can survive scaling up its specialized service if there is not a density of clients who need that niche work in the area.

3) Spillovers refers to how we learn better from people than from books and screens and such. Random watercooler conversations, lunch meetings and rumor mills spread new information, ideas, trends, and solutions through a social network, improving everyone’s productivity. This happens on the micro level in firms—research shows the very layout of a biotech firm can increase the flow of internal knowledge. This also applies at the macro level of cities—workers learn more quickly in dense metropolitan areas.

Given the logic of agglomeration, innovation is incredibly concentrated. One mile can make a difference—locating within 1 mile of another firm in your industry boosts your productivity 1,000% more than if you located 2-5 miles apart. The effects decay rapidly with distance—two firms in the same industry that are over 10 miles apart won’t experience any productivity boost. This may explain why half of new products in 1982 came from just Boston, NYC, San Francisco, or Los Angeles. (That also explains why 90% of innovative jobs are created in those cities).

Innovation in the highest productivity sectors requires even more concentration than other industries. The boost to innovation of locating next to another firm in your industry is 5x stronger for software firms as it is for metal and machinery manufacturers. Advertisement agencies (considered a high-innovation field) in NYC lose 80% of the agglomeration boost if they’re located more than one-third of a mile apart; after half a mile, the boost disappears entirely.

The question for economies thus becomes, “How many people can we bring together in one spot?” The answer is: cities.

Economists have long noticed that cities tend to have big buildings in the center and progressively smaller buildings toward the edges. This is because there are powerful economic forces shaping cities. After all, if people are more productive closer together, then the center of the city will be the most valuable land. Most jobs therefore cluster in the center of cities because, spatially, this allows the most people to access the most number of jobs with the shortest commute. It brings the most people together in one spot, boosting everyone’s productivity and thus their wages.

While no city conforms perfectly to the monocentric model, it is a good rough description of cities’ shape. Think, for example, of Midtown Manhattan or downtown Boston.

Because the land in the center of cities is most valuable from a labor market perspective, developers tend to build these areas up, placing taller buildings on this land to increase the space available in the city’s most valuable location. Because the logic of labor markets is the main driver of a city’s real estate prices, skyline, and transportation network, it’s therefore sensible to think of a city as really just a big labor market.

All of our cities, every labor market, everyone’s income thus become subject to one iron law of physics—commuting times. The average American metro area commute is about 25 minutes (for the NYC metro region, it’s about 35 minutes). These numbers are remarkably consistent among the world’s cities and across time periods, so we should take it as almost given nobody wants to schlep their ass further than roughly 30 minutes (and maybe 60 minutes at the upper bound). What limits city size: how many jobs it can pack into a space reachable in 30 minute commutes.

If people’s productivity depends on how close together they can cluster without having to commute more than 30 minutes, then our productivity, teacher salaries, hospital care, avocado wealth, and national trove of Buddhist wisdom all depend on how many people we can bring together in our cities. In short, density matters. This is the inescapable logic of agglomeration, bro.

Bro, Why Productivity? The General Idea of Progress

I was sitting in class one day when two Bernie bros behind me started going on about SB 50, the California bill to increase housing in the big cities. They wondered why people couldn’t just live in some other city. Not everyone has to live in LA.

My Bernie Bro brethren were, as you’ll guess from my first post, quite wrong. But their mistake is common, limited to neither the political left or right. Few folks understand the best kept secret of American economic policy: lots of people need to live in LA. And Boston, San Francisco, and New York. How many more? Puga and Duranton (economists) estimate about 30 million more in each city. Why so many?

This will take two posts to explain. First, one about productivity. I’ll cover that today. Second, one about space, which is the new “factor of production” in modern America. We’ll cover that next week.

Okay, so productivity. Why care? Well, do you like being not hungry? Do you like children not dying? Guess what, so did your ancestors, thus starting a 2.5-million-year human quest for productivity advances. The story in brief looks something like this. Humanity has moved through four sweeping economic stages. Each stage got successively better at increasing our capacity to maintain a large population (i.e. humanity’s ability to not die), and later eras were even productive enough to also make living standards more comfortable (i.e. raise the joy of not dying).

In our beginning, we lived as hunter-gatherers. Maybe this was a golden age of communal love and bountiful resources. But probably it wasn’t, given that the total human population was about 4 million people worldwide.

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That’s about how many people live in this single picture of LA today.

Our scarce numbers were not because people liked having intercourse less back in the day.

If anything, seems like we’re shagging considerably less these days.

Instead, it’s because most children didn’t really live that long. Simply put, until you reached the age of 12, there was a good chance you’d die. That’s how Nature kept us in our place at a mere 4-million-person population. (To be intellectually honest, I must also mention that death rates weren’t the only limiting factor. According to Yuval Levin, women also may have had a crazy adaptation that made them less fertile during periods of scarcity, thus limiting birth rates).

We can attribute this sad reality of hunter gatherer communities to their low economic productivity. A community of 100 humans needed as many as 500 square miles to feed themselves.

Things changed about 12,000 years ago. Humans realized they could grow plants and herd animals in settlements. This is the birth of glorious inventions like: the potato! domesticated wheat! white rice!

Pick your favorites, people!

Where before humans could feed 100 humans from a single acre, now they could feed 1,000. Human population during the Agricultural Era grew from 4 million to 100 million. Not bad for just shoving seeds in the dirt.

From 10,000 BCE to about 1790 AD, we got better at shoving those seeds into dirt. With enough food for the population, we forayed into other economically productive activity like math, law, and half-decent scientific thinking. But even during the late agricultural era of the 1700s and early 1800s, people were still desperately poor by today’s standards. So long as (almost) everyone was producing (almost) everything they needed on their own, productivity was low, which translated into low wages. Hourly wages of real construction workers in Britain may not have changed at all between 1200 AD and the 1860s (that’s 1,400 years, bro).

Sometime around 1790, Britain stumbled into the Industrial Era. Like all of us humans, the Brits were really just trying to look fly. But the idea that a machine could produce clothing more efficiently inspired people to use machines to do other stuff more efficiently, too (I’m simplifying economic history a bit here).

Some things never change: The development of weird British fashion, 1790 – 2010.

Meanwhile, lighting coal on fire gave humanity control over energy unlike anything our skinny arms or fat water buffalo could ever offer. World population increased exponentially during the Industrial Era. Incomes began doubling every 50 years between 1820 and 1998 (with even greater growth between 1950 and 1998). As we built more sophisticated factories and applied new technologies, 99% of workers left farming to go do more valuable tasks. 

Those workers shifted into factories, where they perfected mass production of middle class goods. A single factory worker in 1975 could produce twice as many cars as a factory worker in 1946.  The growth of the American factory created millions of well-paid manufacturing jobs and sparked a 3-decade era of prosperity between 1950 and 1980.  Manufacturing became the backbone of the economy, supplying 30% of America’s jobs at its peak.  Detroit became the 3rd-richest city in America in 1950 by producing cars for the auto industry.  Worldwide, the population grew to 2.5 billion humans in 1950.

Then, like hunting-and-gathering and agriculture, industrialized manufacturing slipped into decline. We’ve been hemorrhaging manufacturing jobs for decades (and that’s not just due to offshoring, but offshoring didn’t help). There are half as many jobs in manufacturing in 2012 as there were in 1978. By 2013, Detroit was bankrupt. Like farmers moving from farms to factories, it is time for factory workers to move to the next economic frontier: office towers.

I’ll refer to “office tower jobs” as “innovative service sector jobs.” It’s a clunkier, but more informative term. These jobs include advanced manufacturing, information technology, life sciences, medical devices, robotics, new materials, nanotechnology, entertainment, and finance. What makes these jobs special? First, they’re all we’re making. While manufacturing jobs have fallen in the US, the American economy created 634% more internet sector jobs between 2000 and 2010. That’s is 200x the rate of job growth in the rest of the economy. Jobs in software grew 562%. Jobs in life sciences by 300%.

Second, new innovative service sector jobs create more jobs for the rest of us dopes working in “local economy jobs” like law, medicine, haircutting, and store clerking. Remember, only 30% of workers during the industrial era’s peak actually worked in manufacturing. The rest of Americans supported themselves working jobs that served those manufacturing workers. The local podiatrist to cure the Ford worker’s bunion, the local trusts-and-estates lawyer to write the union rep’s will, the teachers in the local middle school that teach everyone’s kids. So while today only 10% of people work in innovative service jobs, those jobs provide wealth for all of us. We build our economy around that crucial 10% because those are the guys and gals pushing the frontier of productivity in America. Enrico Moretti estimates that for every one innovation service sector job created, five local jobs are also created. By the way, that’s over 3x the amount of jobs a traditional manufacturing job created during the manufacturing era.

Third, innovative service sector jobs raise all of our incomes. To see how, take lawyers. Those guys read caselaw and write briefs about as fast as lawyers did in 1929. But they’ll make $250,000 a year nowadays compared to $8,000 per year in 1929. Why? Because if Google or Amazon or other high-productivity firms want smart workers, they need to bid for them. Law firms, to avoid losing their best workers, must also raise salaries. This happens up and down the education ladder. Productivity in one job or sector immediately increases salaries for all similarly educated workers across all sectors.

This is probably the part where my Bernie friends would be saying, “Not everyone care about productivity, bro. Life isn’t about material gain.” But we do and it is. Take anything you care about—making money for your family, providing your kids a liberal arts education, having hospitals with new cures for grandma, flying for cheap to see old college friends, affording avocados from Mexico. Heck, I bet even teachers are happier that increased productivity in, say, haute finance, has raised teacher salaries through competitive arbitrage. It doesn’t matter what you’re interested in, when humanity is more capable of producing anything, it’s more capable of producing everything. Wealth, health, education. All made more possible through productivity advances. Let’s just call productivity what it really is: getting better at doing stuff as a society.

Even if you’re the real purist type and all you care about are Buddhist detachment retreats, remember that there are more Buddhists now in America than in 1900. Why? First, there are more people (duh). Also, we’ve been able to import spiritual knowledge through the exposure we have to foreign cultures and their wisdom traditions. Which, of course, we owe to transportation productivity. None of us can escape the logic of productivity, regardless your personal passions.

So how do we make people more productive? Back in the industrial days, we just mix unskilled labor and capital. Send people with middle school education to the Ford plant and have them bang out cars on an assembly line. Today, we need more than raw materials. We need education plus innovation. I’ll leave education policy to the experts. But what about innovation—how do we get more of that? I’ll give you a hint: it has everything to do with zoning. Stay tuned…

Tiberius Gracchus! How Housing Eats the Republic

Tiberius Gracchus’ legion had survived the Spanish tribesmen but only for the young man’s diplomatic cunning. As he marched back to Rome, Tiberius couldn’t help ruminating on the near catastrophe and its portent of Rome’s growing weakness.

Tiberius’ march would bring him face to face with the rot. Spread across the Italian countryside, free Roman peasants—once tillers of their own land, once the reservoir of the Roman military’s manpower—were visibly wilting under Rome’s plutocratic land use regime. Aristocratic families had been annexing small family plots, slowly monopolizing the essential means of production in the agrarian Roman economy. The gap between rich and poor was widening to unprecedented levels.

Tiberius, the promising war hero, nobleman, and upstart politician, proposed reviving an ancient law preventing the accumulation of land by a single landowner to 500 iugera and distributing any land held beyond 500 iugera to the landless poor. But Tiberius faced stiff political opposition from the wealthy families who benefitted from the current regime.

A political battle ensued. On the cusp of legislative victory, Tiberius was struck down by mob led by his senatorial opposition. They killed him by melee. Rome’s land use was never changed, laying the seeds for the fall of the Republic, and in time, of Rome itself.

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Ouch.

Why couldn’t the two groups compromise if it would have restored the military’s strength, brought domestic tranquility, supported a political regime more conducive to technological productivity, and secured the long-term health of the Republic?  Those seem like the basic goals of any legislature.

Economist Daron Acemoglu (MIT) and political scientist James Robinson (UChicago) offer a theory: Where elites benefit from a legal, political, and economic order that channels the production of society into the hands of a few, the stakes of holding that elite position rise. Because they benefit so greatly from this regime, elites resist any changes to it. As the system clamps down on challenges to the existing order, the returns to being among the incumbent elites rise even further, which incentivizes even more clamping down. The logic is self-reinforcing.

(Acemoglus and Robinson document this pattern across epoch and continent. The Kongo, the Spanish colonization of the Americas, the Soviet Union. Please see their excellent book, Why Nations Fail).­­­­­­­­­­­­

The United States land use regime seems to be an extractive institution. It extracts trillions of dollars from the income of hardworking young families and gives those hard-earned wages to upper-class people who own property. It preserves the relative economic and cultural status of people already living in cities like San Francisco, NYC, Boston and Los Angeles over their fellow citizens spread out among the rest of the republic. And it demonstratively holds back the technological development of the entire nation. All this so that the East Village stays 5 stories tall.

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I wouldn’t compare it to the River Seine.

For the better part of 30 years, economists and land use legal scholars have known that this is happening. But within the last 20 years, the evidence of how much exclusionary zoning is affecting the health of our economy, political system, and social fabric has exploded. For instance, economists have estimated that the real estate in San Francisco, New York City, and Boston are far more expensive than they would be if those cities allowed as many homes to be built as the average American city. Ridiculous prices become a toll on both renters and first-time homebuyers who want to enter those cities. The amount of this “toll” is, per my estimates, several trillions of dollars, paid literally as a ticket-for-entry to the Great American Economy.

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Rent is $15,000 more per person, per year in NYC than Atlanta. They might as well charge this for crossing the GW Bridge into Manhattan. At least then the money would go to the public coffers…

But wait, why do young families, immigrants, and college graduates bother paying that toll? They could just move to Atlanta and pay $15,000 less in rent (and scoop up an extra 200 square feet). The thing is, you have to work in these few cities. The reason has to do with why waiters in Boston make more than college graduates in Flint, MI. It’s the the reason college graduates in New York make 70% more than college graduates in Flint. Agglomeration effects is the technical term, but it just means that the more people that live in a city allows everyone earns more.

Agglomeration effects imply that only a few cities will feature massively productive labor markets, and the rest will be average cities. Our highly productive cities have become San Francisco, New York, Boston, and Los Angeles (sometimes commentators include Seattle). If you’re not in those select cities, you’re outside the agglomeration effects. You’re a loser. That is, unless you buy your ticket. (See above). Then you’re in, and you can make a ton more money.

The effects of land use in America run as deep as there are ways to count them. Inequality is up. The simple fact that Americans in, say, Peoria IL can’t move to Manhattan because housing is too expensive there, has raised inequality by 10%, say economists. Also, the fact that homes in places like San Francisco and Boston are so unnecessarily expensive is why capital is receiving a higher share of income than labor. Yes, that’s right. It’s not that stocks and CEO contracts are fueling the rise of the 1%. Rather, it’s that black families in New York have to pay 50% of their income—and college graduates 20% of the value of their degree—to their capital-owning landlords as a ticket to enter. Across New York’s 6 million or so renters, that “toll” adds up. Of course, it’s not a toll or tax. It’s a payoff to private capital owners, a massive redistribution of income from workers to rich people.

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American wages are down. Economists think that wages for all Americans (literally across the country) would be 8.9% higher if we built more houses in just NYC, San Francisco, and Boston. That means this year, 2020, American workers would have earned over half a trillion dollars more than they did. (That would have been a helpful cushion for the Covid Recession). Also, if we look specifically at those folks who would move to those cities, their wages would rise by 25.7%.

There are also fewer jobs. (Yes, unemployment was a super low 3.8% or whatever before Covid, but it took us 10 years of recovery from ’08 to get there). Of all new “innovative” jobs (i.e. high paying jobs) created in the US, 90% were located in Boston, San Francisco, San Jose, Seattle, and San Diego. If officials had relaxed zoning regulations in NYC, San Francisco, and San Jose, jobs would have increased in New York City by 318%, San Jose by 285%, and of San Francisco by 161%. Think about how the last ten years look under that scenario. In 2015, when coastal elites went hair-on-fire about the rise of Trump, many blamed the stagnating economics of the White Working Class. Had those elites just let those folks move next door, then no Trump. Instead, they sent safaris out to Trump-country to investigate what those curious basket of deplorables could possibly be thinking. (Again, an unnecessary foray if you let them move next-door).

The saddest reality is how this all jeopardizes everyone who can’t move to these dynamic centers of progress. As families get locked into economically stagnant regions like the Rust Belt or Appalachia, they sit like ducks as the clock ticks down until the next massive recession. With low savings and tenuous jobs, they’re ripe targets for long-term unemployment, mortgage foreclosures, evictions. As men lose jobs, women face childbearing alone, which inevitably raises the childhood poverty rate. More single moms and more poverty makes it harder to invest in kids’ futures, keep eyes on the neighborhood, uphold faith in healthy norms, and avoid crime and drugs. Opioids become a substitute for happiness. Charles Murray wrote a whole book about this. So did William Julius Wilson. At the heart of both those books’ documented crises were/are land use policies. You can read Massey and Denton explain how land use regimes explain Wilson’s findings. You can read my paper to understand how land use explains Murray’s.

I could go on all day. But if you want to see where these facts and figures come from, or understand why it is all so important that Americans can move to San Francisco, New York or Boston, read these attached 62 pages. I cite all the studies and back up all the claims. I won’t waste your intellectual time; I tried to only cherry pick the most reputable studies. And the conclusion is clear. There’s no way out of this but up. Build up, build up, build up. Otherwise, we’ll see you in hell, Tiberius.

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