Sunday, March 05, 2006

Superstar Cities vs the Creative Class

Lately, there is mucho academic interest in explaining why some cities are successful and others not. What do you mean by success? In this instance, generally market indicators rather than social ones. Economists tend to focus on real estate prices as a summary indicator, while economic development scholars might pay more attention to job growth and income.

Creative productivity
More on this below but an example of the latter is Richard Florida's über-successful 2002 book, The Rise of the Creative Class. Prosperity isn't just jobs but the kind of jobs, on the labor demand side, and the kind of workers, on the supply. And their trajectories. One of the publisher's blurbs goes, "The Creative Class now comprises more than thirty percent of the entire workforce. Their choices have already had a huge economic impact. In the future they will determine how the workplace is organized, what companies will prosper or go bankrupt, and even which cities will thrive or wither."

Regarding determinants, my favorite commentary on Florida's thesis is the 2005 book review in RSUE by Ed Glaeser. Glaeser finds the book "dead on" in almost every respect but ends "up with doubts about his prescriptions for urban planning. Florida makes the reasonable argument that as cities hinge on creative people, they need to attract creative people. So far, so good. Then he argues that this means attracting bohemian types who like funky, socially free areas with cool downtowns and lots of density. Wait a minute. Where does that come from?"

Glaeser continues,

The source of Florida's policy prescriptions seems to be his attempt to argue that there is a difference between his “creative capital” view and the mainstream urban view that human capital generates growth. As mentioned above, I have always argued that skilled cities grow because “the presence of skills in the metropolitan area may increase new idea production and the growth rate of city-specific productivity levels,” but if Florida wants to argue that there is an effect of bohemian, creative types, over and above the effect of human capital, then presumably that should show up in the data.

He then gets Florida's data and runs some regressions:

In fact, a closer look at the data tells us that the Bohemianism effect is driven entirely by two metropolitan areas: Las Vegas, Nevada and Sarasota, Florida.... Excluding those two cities means that the college variable becomes quite significant, and bohemianism becomes irrelevant. Given that I will never believe that either Las Vegas or Sarasota stand as stellar examples of Bohemianism, I will draw another conclusion from these regressions: skilled people are the key to urban success. Sure, creativity matters. The people who have emphasized the connection between human capital and growth always argued that this effect reflected the importance of idea transmission in urban areas. But there is no evidence to suggest that there is anything to this diversity or Bohemianism, once you control for human capital. As such, mayors are better served by focusing on the basic commodities desired by those with skills, than by thinking that there is a quick fix involved in creating a funky, hip, Bohemian downtown.

Speaking of which, today's New York Times Magazine has a real estate theme and includes a profile of Glaeser. In the 14 years since receiving his PhD he's published 60+ refereed articles, 25 or so book chapters, a couple of books, etc. (If my dean reads this, and is tempted to draw ill-informed comparisons, I have to point out that he also collaborates to excess, wears 3-piece suits, and smokes.) The profile does a fair job of summarizing his interest in human capital as an explanation for urban growth, as well as his studies on the influence of regulations on housing prices. What information do prices contain? More than scarce land, Glaeser and his (too many) coauthors tend to attribute price-differentials across cities to local regulation.

(Of course, whether this is overregulation is a separate question since if regs are a good idea and desired -- for safety, amenities, externalities, or whatever -- then prices will reflect the associated demand premium. If they mainly act to constrain or slow construction, the supply effect might dominate. Disintangling the two sides is easier said than done but see this 2005 issue of HUD's Cityscape, especially the survey paper by newish UCLA Law School Dean, Michael Schill.)

And what about the price bubble? Are prices too high, relative to their underlying fundamentals? (UCLA's official forecast says southern California has a big bubble about to pop, but since I also happen to know that these same forecasters -- nice guys all -- still can't explain the price climb of the last few years, I wonder about their ability to explain its fall.)

Which brings me to the interesting paper, "Superstar cities," by Gyourko, Mayer, and Sinai (2004). It claims that certain cities will always enjoy a price premium over others. In contrast to amenity- or productivity-based (e.g., Glaeser et al.) theories of urban success, this study attributes substantial city-specific premiums to their peculiar mix of limited supply and high demand by high-income households. The draft manuscript (version 11) says no quoting, and I respect that, but from a interview with coauthor Christopher Mayer we have this exchange:

Q. What are superstar cities?

A. They are cities with persistently low new-housing supply and high price growth -- an average of one or two percentage points a year more than other cities over decades. In a given year, that sounds small. But over a 60-year period, that extra growth causes prices in superstar cities to increase three times as much as those in the rest of the country.

Q. So why do their prices grow so fast?

A. To be a superstar city, you need two things: limited ability for new construction and big demand. Boston, L.A., New York, Seattle and San Francisco are all good examples.

San Francisco is the extreme example of a superstar city: Since 1940, housing prices have increased 2.1 percent more each year than they have in other cities. As a result, you see increasingly rich people moving in and relatively poor people moving out. These cities are simply attractive places for high-income people to live.

Q. Does that make real estate in these cities immune from a price drop?

A. Not at all. If interest rates go way up, we will see some temporary declines. But there is no evidence that Boston, New York and San Francisco are in a bubble. These cities have appreciated at higher rates than other places for 60 years and will continue to do so.

Prices as planning?
If so, where does that leave us, say, with respect to the now-traditional planning goals of less sprawl and more affordable housing -- that is, for smart growth? (Is housing less affordable? As one might guess from the studies mentioned here, definitely for poor renters. See Quigley and Raphael, 2004.)

Prices are a reduced form indicator and do not tell us anything obvious about their constituent parts -- for example, how to balance off smart (the value of place) vs growth (how much place). The task is to sort these parts out, as the work above attempts to do, then consider and address their determinants and impacts as appropriate given the goals at hand. These papers and books make useful progress on the sorting part and I wish they were better incorporated into the planning literatures. While we are far from having all the critical i's dotted and t's crossed, there is plenty here for planners to work with.

Study questions
Which of these are planning variables? If our job as planners is to improve the human condition, does this mean we should generally pay more attention to the demand for urban life or its supply? How would you expect efforts to control sprawl to affect housing affordability?

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