In a dynamic economy, finance, ideas, people, and other resources flow to their most productive use. It’s an economy of constant disruption and change. Companies rise and fall, begin and end. Workers change jobs, moving if they must. Social mobility is high, and hopefully income growth, too. Misallocation of resources is the enemy of growth and opportunity.
But in his new book, “The Complacent Class,” Tyler Cowen describes modern America as a society that is “more risk averse and more set in our ways, more segregated … sapped …of the pioneer spirit that made America the most productive and innovative economy in the world.”
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A row of Victorian homes known locally as the “Painted Ladies” glow in the early evening sun following a rain shower in San Francisco, California, REUTERS/Robert Galbraith.
One cause of this dynamism decline, Cowen argues, is that it’s so darn expensive for workers to move to dynamic, high productivity cities. In making this case, he cites the research of UC Berkeley economist Enrico Moretti who, as it happens, just released a new paper on the subject with Chang-Tai Hsieh of the University of Chicago. The researchers look at the “spatial misallocation of labor.” The problem here is that strict restrictions to new housing supply — local residents have a huge incentive here — have effectively limited the number of workers who can access high productivity cities and regions such as New York and the San Francisco Bay area.
The shock finding: Labor misallocation from housing constraints “lowered aggregate US growth by more than 50% from 1964 to 2009.”
Of course, a perfectly dynamic economy is impossible, but the research does suggest a potentially high level of self-harm from bad governance. Two possible solutions are offered. First, copy other countries by having federal and state governments “constrain U.S. municipalities’ ability to set land use regulations.” The 2016 Obama budget contained $300 million in funding for grants “designed to provide an incentive to encourage more relaxed land use regulations and increase the overall supply of housing,” as described by the CEA.
A second idea: Vastly improve public transportation. The paper notes how a “vast network of trains and buses allows residents of many cities in southern England … to commute to high [innovation] employers located in downtown London.” This doesn’t mean building a hyperloop, necessarily (as awesome as that would be). It could mean express buses.
There is a counterargument here, that high costs in key coastal cities can result in a broader dispersion of talent. Let me also point to my podcast earlier this year when Joel Kotkin expressed deep skepticism on land use deregulation: “You’re never going to change the San Francisco situation in terms of affordability by having more density. Density is very expensive to build, and it isn’t what people want. ”
