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

Many service jobs have to be performed where people are—think health care—but if the people were to move from one 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.)

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