To save our cities, ask urban economists
Published in Insights, The New Zealand Initiative’s newsletter, 4 November 2022
Last week, I wrote about why New Zealand’s cities are shrinking – and why that is a cause of concern.
Cities have always been engines of prosperity. Bringing people together makes them more productive. Economists refer to this phenomenon as ‘agglomeration effects’.
In a classic 1994 paper, Ed Glaeser found that urban workers earn a third more than their rural counterparts. The reason? City workers learn from one another and thereby improve their abilities. In economic parlance, cities promote the accumulation of human capital.
This effect is one of the many ways in which cities create opportunity. They also do so because of the competitive environment they create.
When there is only one bakery in a village, the baker will have a great deal of market power. It is a different story in a city where pastries are available at every corner. It also means consumers will have more choices.
Cities make doing business easier. You can conveniently outsource parts of your work when your supplier is nearby. Or, in econ jargon, cities reduce transaction costs.
Well-functioning cities should mean higher real wages for workers and better entertainment options. So why are New Zealand’s cities shrinking?
Our cities just do not seem to be working well and that comes down to poor policy decisions.
Without congestion charging and good transport options, cities lose some of agglomeration’s benefits. Glaeser says cities are where ideas get together and have procreate, making new and better ideas. But if the people with those ideas are stuck in traffic, the magic just does not happen.
When zoning and consenting make it too hard to build in places where people want to live, work and play, land prices inflate in surprising ways. Turning inner suburbs into museum pieces blocks the dynamic change that lets cities thrive. And banning new subdivisions at the city’s fringes makes the land under downtown apartments more expensive than it should be.
Once again, economists explain how to keep urban land markets working. Councils need incentives to zone ample land for development. It is vital to finance infrastructure well. Then zoning will not introduce artificial scarcity. More competitive land markets unleash opportunities.
Urban economists have explained why cities are important. They have also told us how to make them work better.
Now we just need politicians, bureaucrats and city planners to listen to them.