Cities Will Be More Fragile, More Competitive, Than Ever Before

Downtowns across America have emptied during the Covid-19 pandemic, raising questions about their ability to survive the permanent shifts in work locations. At the same time, some cities are struggling with riots, homelessness and high housing costs, described in my recent article Death Of A City: The Portland Story?

Although the end of the Covid-19 pandemic will help all cities, greater competition among cities means that poor governance will have worse impacts. The increased sensitivity of cities to competition was hinted at in that article. The full story is presented here: cities have grown more fragile to downside risks but will benefit more than ever before by good leadership and governance. The increased competition among cities results from the lesser importance of location in the modern economy as a result of long-standing trends as well as the new lessons of the pandemic.

The original economic reason for many cities’ existence was transportation. Locations on the sea were good; estuaries of major rivers were even better. The confluence of rivers was good, and some portage locations also became cities.

Natural resources prompted many cities to develop to serve mining, fishing and agricultural communities.

Even when no specific locations seems better than others, some cities developed to serve surrounding small communities with specialized goods and services. The region needed some city, and on the plains it might not matter specifically where.

Today, however, those motivations are much reduced. Although international trade has risen over the years, the labor needs associated with ports and related commercial activity have dwindled. Similarly, we still use natural resources, but far fewer people work in logging, fishing or mining.

For much work today, the job can be done most anywhere. Designing products, engineering machinery, writing software, answering customer calls, processing financial transactions can be done in any place with good communications links—which is pretty much any city in the United States or in most of the world.

Many service jobs have to be performed where people are—think health care—but if the people were to move from city to another, the service jobs would follow. The particular people might not move, but migration would eventually increase the number of service workers at the growing locations and reduce the number at the dwindling locations.

So although one time there was a need for major cities to be where they are today, now they can be most anywhere. That is, anywhere people want to be. The critical issue for cities going forward will be whether the place is attractive to people who have many cities to choose from.

In recent decades growth occurred where people wanted to live. The jobs followed the people. That boosted cities in Florida, Texas and Arizona to the detriment of cities in the upper Midwest and upper East Coast.

Climate is one factor that cannot be changed (at this time) by one city to improve its competitive position. Northern cities are stuck with the fact that they are cold in the winter, and air conditioning has made southern cities more comfortable. But there are a host of factors that are under local control that will influence people’s location decisions.

Taxes have to be paid wherever one lives, but some taxes are more influential than others. Taxes on investment income, including capital gains, and labor income have relatively strong effects on where people choose to live. Sales and property taxes have much lower impacts on growth. Tax structure partly explains Florida and Texas’s attraction, as well as Washington’s superior growth compared to Oregon. (Florida, Texas and Washington do not tax incomes, including capital gains.)

Housing costs also have a strong impact on locations. Paul Krugman has argued that the largest factor driving people out of East Coast cities to southern locales is housing costs. Although some housing cost differences come from geography, most are due to public policy. Limitations on development have the dominant impact on the supply of new housing. Restrictions tend to boost property values, helping existing homeowners. Younger people who might want to rent an apartment or buy a first home lose out to the middle-aged homeowners. (And lower income people, who are more often renters, lose out to upper-income homeowners.)

Both taxes and housing costs are large drivers of migration, and we needn’t get too caught up in which has the greater impact. Other factors influence growth as well.

Any city one visits turns up people who believe they live in heaven. In the cities that I have most disliked, I met people who loved living there. The dispassionate observer sees various amenities and understands that some people like them a lot, others not so much.

Forecasting the future growth of a particular city requires getting away from chamber of commerce brochures and into actual changes over time. If a place has gorgeous scenery, that probably won’t change. So the person wondering about the future must look at other factors to see if a city or region will do better or worse than its historical path.

Changes in lawlessness and homelessness are two factors that have drawn criticism of Portland, Seattle and San Francisco. With high housing costs, especially in San Francisco and Seattle, and high personal taxes, especially in San Francisco and Portland, these cities may seem doomed. But that’s neither inevitable nor immediate. Inertia slows change considerably.

Migration from one state to another, and from one county to another, has declined in the last few decades. People seem more interested in staying put. Family and friends have always kept many people near their childhood homes. The plain old bother of moving, and for some fear of the unknown, keep people where they are. For these people, poor governance is something to be put up with, not something to flee from.

Although total migration has declined, it still exists and has large impacts. Declining population in, say, Detroit and New Haven is not just a matter of more deaths than births. Migration is the principle reason why some areas have grown in the last decade while others have shrunk.

Economists speak of changes at the margin. Beer purchases increase when its price is lower. That happens despite the many people who don’t drink beer and are thus not influenced by a sale. Nor is the increase in purchases driven by the people who like beer and set their drinking based on diet or lifestyle decisions, with price of negligible impact. But in between these two classes are people who are sensitive to price, and they won’t tolerate prices higher than necessary. They drive brewers to compete on price.

The same holds true of decisions based on quality. Most car buyers know little about which makes are more reliable, but a small number of savvy shoppers tend to drive out of the market the worst cars.

In cities, poor local decisions can deter some would-be migrants from coming, while driving out some who are fed up with conditions. The number of people making decisions based on governance won’t be huge, but they can tip the balance between net gain or net loss.

A decision about where to live is seldom determined by one factor. People are weighing all the issues listed above: family and friends, housing cost, taxes, climate, scenery and others, as well as the quality of local governance. Only for those people on the fence, for whom other factors mostly balance out, are local governance issues very important. But if the governance problem is bad enough, it will outweigh some of the city’s positives.

It may seem preposterous that bad decisions by a large city’s elected officials about crime, housing costs and homelessness would send it tumbling. But take a look at the population data. A number of cities have been declining, while a number of others are growing at rates well above the national average. There are big changes, and the individual decisions that added up to big changes all had a reason.

In 2021, civic leaders across the country are looking forward to the end of the pandemic, of people going back to office buildings, patronizing stores and restaurants. The reduction of Covid-19 will certainly improve every city, even those poorly run.

But the differences between the growing cities and the declining cities will accelerate with the end of the pandemic. Many people now realize that they can work someplace other than where they currently live. Although people have different preferences, the trend will be for growth in cities with pleasant climates, low taxes, inexpensive housing and high safety. Cities on the low end of the spectrum will see declining populations.

This post first appeared on Forbes.com. To see the original, click here.