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The World Isn’t Flat Yet: Why Urbanization Still Matters

Thomas Friedman published “The World is Flat ten years ago. In celebration, I’d like to propose that it isn’t.  Yes, globalization is real: The Economist reported in February that by 2020, 80 percent of the global adult population will be connected to the rest of the world via smartphone.  With rumors that Elon Musk’s Hyperloop project may commence construction in 2016, commuting between cities could become less of a challenge. These are leveling forces—and to Friedman, evidence that location is becoming less of a factor to those seeking employment. But certain local characteristics continue to exert force on growth outcomes across the world. Place isn’t losing relevance in the ways Friedman and others predicted it would.

A recent paper from Chang-Tai Hsieh and Enrico Moretti at the National Bureau of Economic Research highlights cities’ impact on economic growth. Urbanization, they argue, leads to aggregate development for whole nations’ economies. In other words, growing cities contribute to national GDP beyond the growth that they report locally. In the U.S., while cities like San Francisco, New York, and San Jose reported some of the highest gains in metro GDP over the past decade, it was smaller, Southern cities that contributed most to national growth.

[pq]Even if the world is flattening, place still matters—a lot.[/pq]

Those less dense areas have one major advantage: elastic housing supply. In these places, contractors can more readily build homes that attract residents (rather than commuting workers) than in a city like New York.  It is easy to forget how much housing investment depends on geography and on local housing regulation. Demand for workers could shoot through the roof in New York tomorrow, and relatively few investors will build homes there because the island of Manhattan is tiny and zoning laws aren’t worth overcoming when you can just commute workers in by public transportation. You know the story. Housing constraints create a major barrier to economic expansion. In these areas, Hsieh and Moretti find, rising labor demand pushed wages and housing values up, but had little effect on local employment.

That’s why these Southern cities—Atlanta, Dallas, Nashville, Charlotte, and others—are worth looking at. They combine the lucky with the reasonable: space to build and the legal framework that brings in investors. In these places, labor demand can be met by local housing because there are relatively few zoning challenges to overcome. Transportation infrastructure costs fall, prices remain stable, and families have the freedom to live (not commute to) where the best job exists.

Right now, as we watch countries like Turkey urbanize at incredible rates, this basic economic principle becomes crucial. (Current urbanization trends also counter the flattened-world hypothesis—people are continuing to migrate across countries to earn a living.) The challenge in Turkey, as Martin Raiser at the Brookings Institution writes, has been to combine rapid migration to cities with high living standards. The foremost way to achieve this is to allow contractors to build. Turkish policy has done a good job here, carefully transferring publicly-held land into legally supported and zoned private property. If consistent with Hsieh and Moretti’s research, this expansion of competition could boost income across the nation. Free the housing market, free employment options.

Let us not forget about Charles Tiebout. When families and individuals can “vote with their feet,” i.e., move to the neighborhoods and cities they believe will best provide them with the best community services and jobs, local governments become better at providing public goods. Opening up the housing market to more private investors can boost income and access to public services.

All this to say, place still matters—a lot. Let’s get that HyperLoop up and running, but when it comes to providing opportunities for Americans, we also need construction. If policy can empower contractors to build, and perhaps even families to relocate to where the best jobs exist, then metropolitan growth means nation-wide growth and urbanization becomes a sustainable societal shift.