The Triumph of the City

Lately I've been reading Edward Glaeser's The Triumph of the City, which is the talk of the town in urban economics circles.  I haven’t heard of an economist with such best-selling, wide-scoped ideas since the original publication of Freakonomics.  Glaeser contends that cities “our greatest invention – that, despite their reputation as soot-spewing engines of doom, they in fact make us richer, smarter, happier and greener.”

One of Glaeser’s big arguments — one that I repeatedly encounter in interviews with the professor and blog posts he writes — is that governments need to end policies that push people away from cities and encourage suburban development.  Glaeser says:

“The home-mortgage interest deduction essentially acts as a push away from urban apartments and into suburban homes. And let’s just go through this — more than 85 percent of single-family detached houses in this country are owner occupied. More than 85 percent of multi-unit dwellings are rented…Well, if high-density dwellings are typically rented and low-density dwellings are typically owned, then if you’re going to have a huge public push where hundreds of billions of dollars are going to be thrown at promoting home ownership, you’re basically telling cities to go drop dead, right? You’re basically pushing people out of urban apartments and into suburban homes, and I think that’s a mistake.” -- Glaeser, Why Cities Rock, Freakonomics PodCast, 3/18/2011

While I agree with a large amount of Glaeser’s argument that healthy cities spur economic growth and with that provide social, health, and other ancillary benefits, I couldn’t think that Glaeser’s anti-home-mortgage rants were more wrong (if you want to hear his full detailed argument, you’re going to have to read his book).  Eliminating home ownership would have an adverse effect instead of a stimulus effect on the economy.

One of the reasons that the American economy has expanded so rapidly since WWII is credit and leverage.  Yes, this got out of hand with excessive lending and spending during the most recent bubble, but, thinking back to the ‘90s and early 2000s, rules were originally relaxed on this front because of the amazing effects large amounts of available credit had on growth.  Credit allows individuals to pour money into the economy, even if it’s money that they don’t have.  In terms of economic stimulus, there’s no better sure fire way to increase spending and consumption and accelerate growth exponentially as well as credit does.  Our economy is currently detracting because of debt collectors, spending cuts, and a general societal tightening. (Please note: I’m not arguing against bringing in the reigns from a period of excess.  I’m simply explaining why credit flourishes addictively.)

Glaeser’s proposal to end home ownership incentives is intended to further draw populations to cities.  But if, as the Harvard professor insinuates, the 85% who are homeowners begin renting city apartments, our consumption-based economy would falter rather than flourish.  Without homeownership, people lose the most popular source of collateral.  A big complaint of Mortgage Backed Securities was that people were given loans without any source of reliable collateral and that those who re-bought packaged derivatives were in the dark about the risky loan recipients.  If banks lose this source of collateral, they will either return to the irresponsible lending tactics that led to the 2008 market crash or they will retract their loan divisions.  Either scenario would ultimately lead to less available credit (from another recession due to unsustainable lending or from a strong belt tightening), and therefore, would lead to less overall spending.  Right now, our current recession is a perfect example of what happens when credit regresses and that large money source is drained from the economy.

Although, as Glaeser argues, cities do create more innovation and economic growth, an unnoticed externality, or by-product, of Glaeser’s city living incentives – ie cutting suburban incentives – is that collateral would dry up, available credit would shrink, spending and consumption would drop, and all this would lead to slower economic movement.  Yes, cities have the perfect recipe for growth, but eliminating an essential staple of the economy would do more harm to America than the good for which increased city population sizes could re-compensate.

The Triumph of the City