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Expensive Urban Real Estate Drives Away People, High-Paying Jobs: Author Avent

Daniel Gross

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Last fall, The Rent is Too Damn High was a political stunt in New York. Now the notion that housing is too expensive in New York, Boston and other cities is being put forward as a significant economic problem for the U.S. That's what Ryan Avent, a sharp young correspondent at The Economist, argues in his new e-book, Gated City, which is available to Kindle readers.

Gated City is really an argument about the economic benefits of density, and the options, choices, cross-fertilization and competition that ensues when more people, ideas and companies live cheek-by-jowl.

As we discuss in the accompanying video, the argument goes like this: The highest-paying jobs, at companies that add the most value and develop the most innovation, tend to be in and around big cities — New York, Boston, San Francisco, Seattle, Los Angeles. But over the past few decades, those areas have become tough places for middle-class (and even well-off) people to live and raise families. Why knock yourself out for a long commute and expensive mortgage in New Jersey when a much larger house, and better quality of life, can be head in Wichita or Phoenix? Then there's the weather. Given the choice, who would endure the pain of East coast winters? That's the calculus millions of people make every year. And it's why there's been a lot of population growth in Florida and Phoenix and Nevada, where land is cheap, the sun shines more frequently and the quality of life is higher. "From the perspective of the people who are moving, that's the right decision," Avent argues. "They get more house for their money."

But Avent argues that what's good for individuals might not be good for the economy as a whole. In the U.S. over the past couple of decades, places with high-paying jobs have grown slowly while places with low-paying jobs have grown rapidly. Texas Gov. Rick Perry's campaign for the presidency is shining a spotlight on the state's impressive jobs growth figures, and on its quite pathetic record on wages and benefits. "The wages that are paid in places like Phoenix and Atlanta and these other Sunbelt cities just aren't as high," Avent says. Of course, the cost of living is much lower in many of these high-growth areas, so companies don't have to pay as much. But on a macroeconomic level, Avent says, "when you have people moving from high wage to low wage areas, that impacts how fast wages grow in the country as a whole."

The economy pays another price for the population flight from expensive coastal cities. Sprawling Sunbelt cities, and towns throughout the country, may match the diversity of New York and Boston. (I found a Mongolian stir-fry joint in Bismarck, North Dakota.) But they can't match the density of the older cities. And Avent argues that density plays an important role in economic development. "Density has always been important for economic growth," he says. "We saw this with the great manufacturing cities of the 20th century."

Now, density works to economic advantage in two ways. First, it makes it easier for workers to find jobs that fit their skills, and it makes it easier for firms to find workers with skills they need. Secondly, "it's easier for ideas to travel between people and companies in cities." The process of firms spinning off new ones, or of workers leaving to start new businesses, happens all over the place. But it tends to happen with greater frequency in denser cities. "Dense places take full advantage of the talent around, and when people leave those places, the country as a whole becomes less innovative and entrepreneurial," Avent says.

Density also tends to promote specialization and competition. Avent has a long passage in the book where he cites the example of how a Vietnamese restaurant — and a cluster of Vietnamese restaurants — can thrive in a densely populated area in a way that would be impossible in less densely populated regions. "Whether it's restaurants or technology services, without competition you're not going to see the pressure to innovate and have a high quality of service," Avent says. "And that translates into economic statistics."

There's a certain amount of urban snobbery at work in the thesis, which I generally share. But the link between density, on the one hand, and the qualities of services and opportunities, is obvious. If you live in the New York area, you can look for a job not just in Manhattan, but in Brooklyn, Connecticut, New Jersey, Westchester and Long Island, all easily accessible by public transport in an hour. The same type of dynamic holds in greater Washington, D.C. By contrast, if you live outside, say, Kansas City, or Las Vegas, the horizons are more circumscribed.

So what's to be done? After all, the spread of population from crowded areas to less crowded areas is a process that has been playing out on this continent for nearly 400 years. But Avent argues that policies have a lot to do with it. Clearly, people want to live in dense areas like San Francisco and New York. "If people didn't want to live there, we wouldn't see real estate prices rising," Avent says. As much as Americans say they like big yards and wide-open spaces, "people signal through prices that they want to invest in cities." The problem is that regulations make it very difficult for the private sector to respond to demand, by building in cities like New York, San Francisco and Boston. His suggestions include zoning changes, more effective public transit and better infrastructure.

Suburbanites and exurbanites who are happy with their lot will no doubt take umbrage at Avent's argument. And there are plenty of counterarguments. Austin, Texas, seems to have developed a culture of innovation and growth without vertical living. As I reported, North Dakota, one of the least dense places in the U.S., boasts a low unemployment rate, plenty of job growth and tons of exports. But this is a smart, sophisticated argument, backed up by plenty of data. And at a $1.99, it's a bargain to boot.

Daniel Gross is economics editor at Yahoo! Finance.

Email him at grossdaniel11@yahoo.com. Follow him on Twitter @grossdm.

His most recent book is Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.