City Economics

Brendan O'Flaherty

• Publisher: Harvard University Press
• Year: 2005
• ISBN:
  9780674252073
• Topic: Business
• Subtopic: Business General
• Index: Business

This introductory but innovative textbook on the economics of cities is aimed at students of urban and regional policy as well as of undergraduate economics. It deals with standard topics, including automobiles, mass transit, pollution, housing, and education but it also discusses non-standard topics such as segregation, water supply, sewers, garbage, fire prevention, housing codes, homelessness, crime, illicit drugs, and economic development.Its methods of analysis are primarily verbal, geometric, and arithmetic. The author achieves coherence by showing how the analysis of various topics reinforces one another. Thus, buses can tell us something about schools and optimal tolls about land prices. Brendan O'Flaherty looks at almost everything through the lens of Pareto optimality and potential Pareto optimality--how policies affect people and their well-being, not abstract entities such as cities or the economy or growth or the environment. Such traditionalism leads to radical questions, however: Should cities have police and fire departments? Should tax preferences for home ownership be repealed? Should public schools charge for their services? O'Flaherty also gives serious consideration to such heterodox policies as pay-at-the-pump auto insurance, curb rights for buses, land taxes, marginal cost water pricing, and sidewalk zoning.

Chapter 1

Introduction

One summer afternoon we crashed. My wife and I were on vacation, headed from New Jersey to Niagara Falls. But on Interstate 81, two hundred miles from home, I lost control of my car and plowed into a guardrail. There were no injuries, but the car was totaled.

When we climbed out of the automobile, we knew we were facing a lot of problems: what to do with the wreck, how to handle the insurance, how to continue our trip, how to get food, where to sleep. The kind state trooper who arrived on the scene took us to Binghamton, New York, about eight miles away (after writing me a ticket). The remains of the car went there too.

Why Binghamton? Because it was the nearest substantial community, and everything we needed—garages, towing companies, insurance adjusters, car rental companies, motels, restaurants—was there. This would have been even more true if we had been injured and needed medical care. There was nothing on the rural stretch of road where we crashed.

Why were all the services we needed located within a few miles of each other instead of being spread evenly around the countryside?

In Binghamton, we still had problems getting from one place to another (the major car rental companies were all at the airport, eight miles from downtown), and there weren’t any Chinese restaurants near our motel. Why was Binghamton so dispersed, and why weren’t there any Chinese restaurants on the motel strip? Would it have been better if Binghamton had been more compact, and had a greater variety of businesses?

Much of the city itself was unattractive. The garage our car was towed to sat between a decrepit rail spur and a rundown house with a vicious 150-pound dog in the yard. Two nearby garbage containers were almost overflowing, and the puddles around our car were so wide we had to throw two-by-six planks into them so we could reach the car to empty it out. By contrast, the region itself had great natural beauty, with its forested hills surrounding the Susquehanna River Valley. Maybe Binghamton shouldn’t have been there at all—maybe we should have had to go to Scranton or Syracuse, which would have been big enough to support the downtown car rental agencies and Chinese restaurants we needed.

Binghamton was different from the surrounding countryside in another way, too. Fewer than 3 percent of the population in the countryside was African American or Hispanic, but four times that proportion of the people living in Binghamton were. Why did minority people cluster there? Did this segregation make Hispanic and African American people worse off? Did it make European American people better off?

Binghamton is a city because it’s a place people go when they’re looking to make business deals or legal contracts, to buy clothing or marijuana, to watch a live baseball game or hang out at a bar, to attend a community college or university, or to work in an office or a factory or a motel or a store.

This book is about cities throughout the world. Urban agglomerations are a great idea. Concentrating a lot of activity in a small area saves on transportation; allows all sorts of convenience, sharing, and economies of scale; encourages the spread of new ideas; and simply satisfies the human desire to be social. Cities are such a good idea that most of the world’s people now live in places that can reasonably be called “urban”—as opposed to only 16 percent in 1900 (Bairoch 1988, p. 502). Life without cities would be poorer than it is now—not just for city residents but also for anyone who consumes the products and services that are developed and produced in cities, and anyone whose wages are higher because he or she could migrate to a city. These categories include just about everyone in the world today.

But city life has drawbacks. Throughout most of human history sanitation has been a primary urban problem; living in a city was hazardous to your health. Life expectancy at birth in New York City in 1880 was only about twenty-nine, nearly the same as it was in imperial Rome. But by 1910 New York life expectancy had risen to forty-five (Meeker 1974, p. 392), and by 2000, death rates in cities were generally lower than in rural areas, even in developing countries. This improvement has been achieved only through large investments in sewers and plumbing, water systems, medicine, and nutrition (paid for by the higher wages that workers earn in cities).

Another drawback is that the more activity you have in a small area, the more opportunities people have to get in each others’ way. Cities throughout the world are afflicted with traffic jams, airport congestion, crowded buses, and delayed subways. People fight over where schools will be built, how late bars will stay open, when and where loud music can be played, how tall apartment buildings can be, what provisions will be made for parking, and where fast-food restaurants, gasoline stations, and drug-treatment centers will be located. They kill, rob, mug, and swindle; their houses, factories, stores, and offices catch fire and burn more often than those in rural areas.

These difficulties arise out of the same geographical propinquity that makes cities work. You can’t have one without at least encountering the other—just as you can’t water ski without getting wet, or exercise hard without risking injury. The much lamented anonymity of city life, for instance, is linked to the advantages of agglomeration: part of the lure is that in cities you can transact business with strangers, an advantage you can’t enjoy without being surrounded by a bunch of strangers. If you want to avoid disease, congestion, noise, crime, and racial animosity, you can be a hermit on a mountaintop or hide in the desert, but then you will have to give up all the joys that come from physical encounters, all the help and advice that other people can give you, all the skills that they have, and all the advantages of intelligent organization of production. You will have to make your own clothing, grow your own food, smelt your own metal, build your own computer and write your own software to link it with the Internet, dispose of your own waste, craft your own musical instruments, diagnose and cure your own ailments. You will, in short, live crudely and poorly.

The more that different kinds of people with different talents and backgrounds come together more frequently in a smaller space, the better a city operates as a place to work and play—and the greater the possibilities for contagion, congestion, and hatred. Of course many different policies, some wise and some not, can affect the extent of these problems, just as careful stretching can (probably) reduce an athlete’s probability of injury from a workout. But you can’t enjoy the benefits of city life without doing something about the problems.

Any amelioration of urban problems produces a double dose of benefits. Less crime means not only fewer victims but also more opportunities for people to meet neighbors, go shopping, attend community meetings, and enroll in night school. Improving racial relations means not only fewer instances of discrimination but also more potential partners for everyone in every conceivable kind of transaction. This double dose is one good reason for studying urban economics.

I. Urban Economics

The advantages of getting people to cooperate with one another are greatest in cities, so if you think about economics as the study of how people cooperate, urban economics is economics at its most intense. What makes it more intense is that urban economics is the economics of everyday life—few people see bonds or debentures even occasionally, but almost everyone lives in a house or an apartment, flushes toilets, commutes to work or drives to recreation sites or a summer house, worries about safety, and does some shopping. In urban economics, you can’t avoid the subject of your inquiry.

Urban economics is marked by a strong tension between looking primarily at history and ignoring it altogether. Some aspects of city life change almost by the minute—which neighborhoods have desirable real estate and what sort of people live in them, for instance—while others seem stable over many centuries—the primacy of Paris among French cities, for instance. One of the great puzzles that urban economics confronts is how much of contemporary reality can be explained solely by reference to contemporary facts, and how much can be understood best as the product of the peculiar twists and turns of history. Are cities more like newspapers, which are printed anew every morning, or like family names, which are what they are only because of events in the long-distant past?

The past operates mainly through the force of conventions. Speaking English, using daylight saving time, calling the day after Monday “Tuesday” are practices that people follow not because they are the best possible way of doing things but because everyone else follows them; that’s why we call them conventions (see Lewis 1969 for a rigorous definition). I have no feeling for the Norse god Tia, after whom Tuesday is named, but I use the name when making appointments because the people I want to see use the name “Tuesday” too, even though they don’t venerate Tia either. If they called the third day of the week “Elvis-day” I would too, and I would be just as happy as I am now.

Money is conventional. The green pieces of paper bearing pictures of presidents and treasury secretaries could just as well be blue pieces of paper with pictures of football players and poets. But because other people accept the green pieces, I accept the green pieces too. Similarly with credit cards: businesses accept Visa cards because a lot of people carry them, and a lot of people carry them because businesses accept them. Money makes a lot of transactions easier because everybody accepts it and everybody knows that everyone else accepts it—that’s how money does its job.

To a large extent, cities work the same way. Binghamton first grew because it was located at the confluence of the Chenango and Susquehanna Rivers, but this fact was of no more concern to us or to the state trooper or to the people who ran the motels than the relationship between Tuesday and Tia. The motels and garages are in Binghamton because people who crash go to Binghamton, and people who crash go to Binghamton because that’s where the motels and garages are.

To be sure, cities are not entirely a product of this kind of circular logic. Neither is money: it’s hard to imagine a society where chocolate fudge sundaes are the medium of exchange or where the major cities are located inside active volcanoes. But especially with large cities, convention plays a major role.

Consider, for instance, New York City and the city of Niagara Falls. Niagara Falls is clearly a more attractive location. No natural phenomenon in New York City is so beautiful as the falls, and New York City has no good sources of cheap electrical power. But New York City is the world’s greatest and richest metropolis, while Niagara Falls is a small depressed city.

History matters. In the late 1700s and early 1800s, water transportation was the cheapest way of moving goods, and so the confluence of the Chenango and Susquehanna Rivers was the obvious place to build a city, Binghamton. It’s still there today.

The Erie Canal, which runs between Albany and Buffalo, New York, is a good example of how important history is in the development of cities. A shallow trench about ten meters wide, the canal is insignificant in the twenty-first century. But if the Erie Canal had not been constructed when it was (between 1817 and 1825), New York City would not today dominate the United States, and Chicago might not be the major city in the Midwest. Only by understanding history can we understand these two cities today.

Before the Erie Canal, New York was just one of four large East Coast cities; Boston, Philadelphia, and Baltimore were the others. The canal set Gotham apart: only New York could connect with the West by water. Farmers from upstate New York, western Pennsylvania, southern Ontario, Ohio, Indiana, and Illinois could all ship their produce to New York more easily than to any other Atlantic port. Grain going to Europe went through New York; so did manufactured goods coming from Europe. New York was the place where goods and grain changed between ocean-going vessels and river-going vessels.

As a result, insurers became concentrated in New York (transportation was risky and you had to insure your shipments on each leg of their journey). With insurance came banks and other financial services. The volume of commerce with Europe made a difference too. By the 1850s New York had become the first and only port in America with regularly scheduled shipping service to Europe. If you shipped through Philadelphia or Boston, your package had to wait until there was enough other cargo for a trip to be worthwhile; if you shipped through New York, you got a definite timetable—and faster service, because more people were shipping through New York.

Once the Erie Canal had made New York preeminent among American cities, preeminence spurred growth on its own. European firms that were going to locate only one office in America chose New York. Writers and artists and journalists gravitated there too. New York was the obvious destination for American railroads, and because the rail connections were superb, manufacturing firms found the New York area congenial too.

The Erie Canal also contributed to the growth of Chicago. Suppose it’s the 1870s and you are a farmer in Iowa looking to ship grain to Europe or the East Coast. If you ship first to St. Louis or Kansas City, you will have to contend with the only railroad that heads east from there. That railroad company knows your grain will be stuck in St. Louis without its service, and so it can get away with charging very high prices. On the other hand, if you ship through Chicago the railroads can’t charge too much, because they know you could put your grain on a boat instead and ship it across the Great Lakes and down the Erie Canal. So Chicago was a better place for shipping grain, and as more and more people realized this, Chicago became even more attractive because the heavy volume of freight made shipping cheaper and faster. And so it is that Chicago and New York—rather than, say, St. Louis and Baltimore—are the major cit...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface
• Acknowledgments
• 1 Introduction
• 2 Why Proximity Is Good
• 3 Cars, Pollution, and Accidents
• 4 Congestion
• 5 Mass Transit
• 6 Land
• 7 Too Many Cars? Too Much Lawn? Too Much Blight?
• 8 Rules
• 9 Water, Sewers, Fire, and Garbage
• 10 Education
• 11 Race and Space
• 12 Race and Policy
• 13 Housing: The Big Picture
• 14 Housing and Poor People
• 15 Homelessness
• 16 Crime
• 17 Drugs, Guns, and Alcohol
• 18 Urban Economic Development
• Epilogue
• Glossary
• Index